Onerous

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

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

Alejo Mabanag for plaintiff-appellee.

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

REYES, J.B.L., J.:

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

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

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

For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to
Gaite to exploit and develop the mining claims in question, and Gaite assented thereto subject to
certain conditions. As a result, a document entitled "Revocation of Power of Attorney and
Contract" was executed on December 8, 1954 (Exhibit "A"),wherein Gaite transferred to
Fonacier, for the consideration of P20,000.00, plus 10% of the royalties that Fonacier would
receive from the mining claims, all his rights and interests on all the roads, improvements, and
facilities in or outside said claims, the right to use the business name "Larap Iron Mines" and its
goodwill, and all the records and documents relative to the mines. In the same document, Gaite
transferred to Fonacier all his rights and interests over the "24,000 tons of iron ore, more or less"
that the former had already extracted from the mineral claims, in consideration of the sum of
P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and
 b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from
and out of the first letter of credit covering the first shipment of iron ores and of the first
amount derived from the local sale of iron ore made by the Larap Mines & Smelting Co.
Inc., its assigns, administrators, or successors in interests.

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

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

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

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

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

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

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

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

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

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

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

The main issues presented by appellants in this appeal are:

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

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

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

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

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

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and

out of the first letter of credit covering the first shipment of iron ore made by the Larap
Mines & Smelting Co., Inc., its assigns, administrators, or successors in interest.

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

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

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

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

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

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

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

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

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

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

(1) . . .

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

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

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

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

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

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

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

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

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

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

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

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

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

Commutative

G.R. No. 127358             March 31, 2005

NOEL BUENAVENTURA, Petitioner,
vs.
COURT OF APPEALS and ISABEL LUCIA SINGH BUENAVENTURA, respondents.

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

G.R. No. 127449             March 31, 2005

NOEL BUENAVENTURA, Petitioner,
vs.
COURT OF APPEALS and ISABEL LUCIA SINGH BUENAVENTURA, Respondents.

DECISION

AZCUNA, J.:

These cases involve a petition for the declaration of nullity of marriage, which was filed by
petitioner Noel Buenaventura on July 12, 1992, on the ground of the alleged psychological
incapacity of his wife, Isabel Singh Buenaventura, herein respondent. After respondent filed her
answer, petitioner, with leave of court, amended his petition by stating that both he and his wife
were psychologically incapacitated to comply with the essential obligations of marriage. In
response, respondent filed an amended answer denying the allegation that she was
psychologically incapacitated.1

On July 31, 1995, the Regional Trial Court promulgated a Decision, the dispositive portion of
which reads:

WHEREFORE, judgment is hereby rendered as follows:

1) Declaring and decreeing the marriage entered into between plaintiff Noel A.
Buenaventura and defendant Isabel Lucia Singh Buenaventura on July 4, 1979, null and
void ab initio;

2) Ordering the plaintiff to pay defendant moral damages in the amount of 2.5 million
pesos and exemplary damages of 1 million pesos with 6% interest from the date of this
decision plus attorney’s fees of P100,000.00;

3) Ordering the plaintiff to pay the defendant expenses of litigation of P50,000.00, plus
costs;

4) Ordering the liquidation of the assets of the conjugal partnership property[,]

particularly the plaintiff’s separation/retirement benefits received from the Far East Bank
[and] Trust Company[,] by ceding, giving and paying to her fifty percent (50%) of the net
amount of P3,675,335.79 or P1,837,667.89 together with 12% interest per annum from
the date of this decision and one-half (1/2) of his outstanding shares of stock with Manila
Memorial Park and Provident Group of Companies;

5) Ordering him to give a regular support in favor of his son Javy Singh Buenaventura in
the amount of P15,000.00 monthly, subject to modification as the necessity arises;

6) Awarding the care and custody of the minor Javy Singh Buenaventura to his mother,
the herein defendant; and

7) Hereby authorizing the defendant to revert back to the use of her maiden family name
Singh.

Let copies of this decision be furnished the appropriate civil registry and registries of
properties.

SO ORDERED.2

Petitioner appealed the above decision to the Court of Appeals. While the case was pending in
the appellate court, respondent filed a motion to increase the P15,000 monthly support pendente
lite of their son Javy Singh Buenaventura. Petitioner filed an opposition thereto, praying that it
be denied or that such incident be set for oral argument.3
On September 2, 1996, the Court of Appeals issued a Resolution increasing the support pendente
lite to P20,000.4 Petitioner filed a motion for reconsideration questioning the said Resolution.5

On October 8, 1996, the appellate court promulgated a Decision dismissing petitioner’s appeal
for lack of merit and affirming in toto the trial court’s decision.6 Petitioner filed a motion for
reconsideration which was denied. From the abovementioned Decision, petitioner filed the
instant Petition for Review on Certiorari.

On November 13, 1996, through another Resolution, the Court of Appeals denied petitioner’s
motion for reconsideration of the September 2, 1996 Resolution, which increased the monthly
support for the son.7 Petitioner filed a Petition for Certiorari to question these two Resolutions.

On July 9, 1997, the Petition for Review on Certiorari8 and the Petition for Certiorari9 were
ordered consolidated by this Court.10

In the Petition for Review on Certiorari petitioner claims that the Court of Appeals decided the
case not in accord with law and jurisprudence, thus:

1. WHEN IT AWARDED DEFENDANT-APPELLEE MORAL DAMAGES IN THE

AMOUNT OF P2.5 MILLION AND EXEMPLARY DAMAGES OF P1 MILLION,
WITH 6% INTEREST FROM THE DATE OF ITS DECISION, WITHOUT ANY
LEGAL AND MORAL BASIS;

2. WHEN IT AWARDED P100,000.00 ATTORNEY’S FEES AND P50,000.00

EXPENSES OF LITIGATION, PLUS COSTS, TO DEFENDANT-APPELLEE,
WITHOUT FACTUAL AND LEGAL BASIS;

3. WHEN IT ORDERED PLAINTIFF-APPELLANT NOEL TO PAY DEFENDANT-

APPELLEE ONE-HALF OR P1,837,667.89 OUT OF HIS RETIREMENT BENEFITS
RECEIVED FROM THE FAR EAST BANK AND TRUST CO., WITH 12%
INTEREST THEREON FROM THE DATE OF ITS DECISION,
NOTWITHSTANDING THAT SAID RETIREMENT BENEFITS ARE GRATUITOUS
AND EXCLUSIVE PROPERTY OF NOEL, AND ALSO TO DELIVER TO
DEFENDANT-APPELLEE ONE-HALF OF HIS SHARES OF STOCK WITH THE
MANILA MEMORIAL PARK AND THE PROVIDENT GROUP OF COMPANIES,
ALTHOUGH SAID SHARES OF STOCK WERE ACQUIRED BY NOEL BEFORE
HIS MARRIAGE TO RESPONDENT ISABEL AND ARE, THEREFORE, AGAIN HIS
EXCLUSIVE PROPERTIES; AND

4. WHEN IT AWARDED EXCLUSIVE CARE AND CUSTODY OVER THE

PARTIES’ MINOR CHILD TO DEFENDANT-APPELLEE WITHOUT ASKING THE
CHILD (WHO WAS ALREADY 13 YEARS OLD AT THAT TIME) HIS CHOICE AS
TO WHOM, BETWEEN HIS TWO PARENTS, HE WOULD LIKE TO HAVE
CUSTODY OVER HIS PERSON.11

In the Petition for Certiorari, petitioner advances the following contentions:

 THE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION WHEN IT
REFUSED TO SET RESPONDENT’S MOTION FOR INCREASED SUPPORT FOR
THE PARTIES’ SON FOR HEARING.12

THERE WAS NO NEED FOR THE COURT OF APPEALS TO INCREASE JAVY’S

MONTHLY SUPPORT OF P15,000.00 BEING GIVEN BY PETITIONER EVEN AT
PRESENT PRICES.13

IN RESOLVING RESPONDENT’S MOTION FOR THE INCREASE OF JAVY’S

SUPPORT, THE COURT OF APPEALS SHOULD HAVE EXAMINED THE LIST OF
EXPENSES SUBMITTED BY RESPONDENT IN THE LIGHT OF PETITIONER’S
OBJECTIONS THERETO, INSTEAD OF MERELY ASSUMING THAT JAVY IS
ENTITLED TO A P5,000 INCREASE IN SUPPORT AS SAID AMOUNT IS "TOO
MINIMAL."14

LIKEWISE, THE COURT OF APPEALS SHOULD HAVE GIVEN PETITIONER AN

OPPORTUNITY TO PROVE HIS PRESENT INCOME TO SHOW THAT HE
CANNOT AFFORD TO INCREASE JAVY’S SUPPORT.15

With regard to the first issue in the main case, the Court of Appeals articulated:

On Assignment of Error C, the trial court, after findings of fact ascertained from the
testimonies not only of the parties particularly the defendant-appellee but likewise, those
of the two psychologists, awarded damages on the basis of Articles 21, 2217 and 2229 of
the Civil Code of the Philippines.

Thus, the lower court found that plaintiff-appellant deceived the defendant-appellee into
marrying him by professing true love instead of revealing to her that he was under heavy
parental pressure to marry and that because of pride he married defendant-appellee; that
he was not ready to enter into marriage as in fact his career was and always would be his
first priority; that he was unable to relate not only to defendant-appellee as a husband but
also to his son, Javy, as a father; that he had no inclination to make the marriage work
such that in times of trouble, he chose the easiest way out, that of leaving defendant–
appellee and their son; that he had no desire to keep defendant-appellee and their son as
proved by his reluctance and later, refusal to reconcile after their separation; that the
aforementioned caused defendant-appellee to suffer mental anguish, anxiety, besmirched
reputation, sleepless nights not only in those years the parties were together but also after
and throughout their separation.

Plaintiff-appellant assails the trial court’s decision on the ground that unlike those arising
from a breach in ordinary contracts, damages arising as a consequence of marriage may
not be awarded. While it is correct that there is, as yet, no decided case by the Supreme
Court where damages by reason of the performance or non-performance of marital
obligations were awarded, it does not follow that no such award for damages may be
made.
 Defendant-appellee, in her amended answer, specifically prayed for moral and exemplary
damages in the total amount of 7 million pesos. The lower court, in the exercise of its
discretion, found full justification of awarding at least half of what was originally prayed
for. We find no reason to disturb the ruling of the trial court.16

The award by the trial court of moral damages is based on Articles 2217 and 21 of the Civil
Code, which read as follows:

ART. 2217. Moral damages include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendant’s wrongful act or omission.

ART. 21. Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.

The trial court referred to Article 21 because Article 2219 17 of the Civil Code enumerates the
cases in which moral damages may be recovered and it mentions Article 21 as one of the
instances. It must be noted that Article 21 states that the individual must willfully cause loss or
injury to another. There is a need that the act is willful and hence done in complete freedom. In
granting moral damages, therefore, the trial court and the Court of Appeals could not but have
assumed that the acts on which the moral damages were based were done willfully and freely,
otherwise the grant of moral damages would have no leg to stand on.

On the other hand, the trial court declared the marriage of the parties null and void based on
Article 36 of the Family Code, due to psychological incapacity of the petitioner, Noel
Buenaventura. Article 36 of the Family Code states:

A marriage contracted by any party who, at the time of the celebration, was
psychologically incapacitated to comply with the essential marital obligations of
marriage, shall likewise be void even if such incapacity becomes manifest only after its
solemnization.

Psychological incapacity has been defined, thus:

. . . no less than a mental (not physical) incapacity that causes a party to be truly
incognitive of the basic marital covenants that concomitantly must be assumed and
discharged by the parties to the marriage which, as so expressed by Article 68 of the
Family Code, include their mutual obligations to live together, observe love, respect and
fidelity and render help and support. There is hardly any doubt that the intendment of the
law has been to confine the meaning of "psychological incapacity" to the most serious
cases of personality disorders clearly demonstrative of an utter insensitivity or inability
to give meaning and significance to the marriage. . . .18
The Court of Appeals and the trial court considered the acts of the petitioner after the marriage as
proof of his psychological incapacity, and therefore a product of his incapacity or inability to
comply with the essential obligations of marriage. Nevertheless, said courts considered these acts
as willful and hence as grounds for granting moral damages. It is contradictory to characterize
acts as a product of psychological incapacity, and hence beyond the control of the party because
of an innate inability, while at the same time considering the same set of acts as willful. By
declaring the petitioner as psychologically incapacitated, the possibility of awarding moral
damages on the same set of facts was negated. The award of moral damages should be
predicated, not on the mere act of entering into the marriage, but on specific evidence that it was
done deliberately and with malice by a party who had knowledge of his or her disability and yet
willfully concealed the same. No such evidence appears to have been adduced in this case.

For the same reason, since psychological incapacity means that one is truly incognitive of the
basic marital covenants that one must assume and discharge as a consequence of marriage, it
removes the basis for the contention that the petitioner purposely deceived the private
respondent. If the private respondent was deceived, it was not due to a willful act on the part of
the petitioner. Therefore, the award of moral damages was without basis in law and in fact.

Since the grant of moral damages was not proper, it follows that the grant of exemplary damages
cannot stand since the Civil Code provides that exemplary damages are imposed in addition to
moral, temperate, liquidated or compensatory damages.19

With respect to the grant of attorney’s fees and expenses of litigation the trial court explained,
thus:

Regarding Attorney’s fees, Art. 2208 of the Civil Code authorizes an award of attorney’s
fees and expenses of litigation, other than judicial costs, when as in this case the
plaintiff’s act or omission has compelled the defendant to litigate and to incur expenses of
litigation to protect her interest (par. 2), and where the Court deems it just and equitable
that attorney’s fees and expenses of litigation should be recovered. (par. 11)20

The Court of Appeals reasoned as follows:

On Assignment of Error D, as the award of moral and exemplary damages is fully

justified, the award of attorney’s fees and costs of litigation by the trial court is likewise
fully justified.21

The acts or omissions of petitioner which led the lower court to deduce his psychological
incapacity, and his act in filing the complaint for the annulment of his marriage cannot be
considered as unduly compelling the private respondent to litigate, since both are grounded on
petitioner’s psychological incapacity, which as explained above is a mental incapacity causing an
utter inability to comply with the obligations of marriage. Hence, neither can be a ground for
attorney’s fees and litigation expenses. Furthermore, since the award of moral and exemplary
damages is no longer justified, the award of attorney’s fees and expenses of litigation is left
without basis.
Anent the retirement benefits received from the Far East Bank and Trust Co. and the shares of
stock in the Manila Memorial Park and the Provident Group of Companies, the trial court said:

The third issue that must be resolved by the Court is what to do with the assets of the
conjugal partnership in the event of declaration of annulment of the marriage. The
Honorable Supreme Court has held that the declaration of nullity of marriage carries ipso
facto a judgment for the liquidation of property (Domingo v. Court of Appeals, et al.,
G.R. No. 104818, Sept. 17, 1993, 226 SCRA, pp. 572 – 573, 586). Thus, speaking
through Justice Flerida Ruth P. Romero, it was ruled in this case:

When a marriage is declared void ab initio, the law states that the final judgment
therein shall provide for the liquidation, partition and distribution of the properties
of the spouses, the custody and support of the common children and the delivery
of their presumptive legitimes, unless such matters had been adjudicated in the
previous proceedings.

The parties here were legally married on July 4, 1979, and therefore, all property
acquired during the marriage, whether the acquisition appears to have been made,
contracted or registered in the name of one or both spouses, is presumed to be conjugal
unless the contrary is proved (Art. 116, New Family Code; Art. 160, Civil Code). Art.
117 of the Family Code enumerates what are conjugal partnership properties. Among
others they are the following:

1) Those acquired by onerous title during the marriage at the expense of the
common fund, whether the acquisition be for the partnership, or for only one of
the spouses;

2) Those obtained from the labor, industry, work or profession of either or both of
the spouses;

3) The fruits, natural, industrial, or civil, due or received during the marriage from
the common property, as well as the net fruits from the exclusive property of each
spouse. . . .

Applying the foregoing legal provisions, and without prejudice to requiring an inventory
of what are the parties’ conjugal properties and what are the exclusive properties of each
spouse, it was disclosed during the proceedings in this case that the plaintiff who worked
first as Branch Manager and later as Vice-President of Far East Bank & Trust Co.
received separation/retirement package from the said bank in the amount
of P3,701,500.00 which after certain deductions amounting to P26,164.21 gave him a net
amount of P3,675,335.79 and actually paid to him on January 9, 1995 (Exhs. 6, 7, 8, 9,
10, 11). Not having shown debts or obligations other than those deducted from the said
retirement/separation pay, under Art. 129 of the Family Code "The net remainder of the
conjugal partnership properties shall constitute the profits, which shall be divided equally
between husband and wife, unless a different proportion or division was agreed upon in
the marriage settlement or unless there has been a voluntary waiver or forfeiture of such
 share as provided in this Code." In this particular case, however, there had been no
marriage settlement between the parties, nor had there been any voluntary waiver or valid
forfeiture of the defendant wife’s share in the conjugal partnership properties. The
previous cession and transfer by the plaintiff of his one-half (1/2) share in their residential
house and lot covered by T.C.T. No. S-35680 of the Registry of Deeds of Parañaque,
Metro Manila, in favor of the defendant as stipulated in their Compromise Agreement
dated July 12, 1993, and approved by the Court in its Partial Decision dated August 6,
1993, was actually intended to be in full settlement of any and all demands for past
support. In reality, the defendant wife had allowed some concession in favor of the
plaintiff husband, for were the law strictly to be followed, in the process of liquidation of
the conjugal assets, the conjugal dwelling and the lot on which it is situated shall, unless
otherwise agreed upon by the parties, be adjudicated to the spouse with whom their only
child has chosen to remain (Art. 129, par. 9). Here, what was done was one-half (1/2)
portion of the house was ceded to defendant so that she will not claim anymore for past
unpaid support, while the other half was transferred to their only child as his presumptive
legitime.

Consequently, nothing yet has been given to the defendant wife by way of her share in
the conjugal properties, and it is but just, lawful and fair, that she be given one-half (1/2)
share of the separation/retirement benefits received by the plaintiff the same being part of
their conjugal partnership properties having been obtained or derived from the labor,
industry, work or profession of said defendant husband in accordance with Art. 117, par.
2 of the Family Code. For the same reason, she is entitled to one-half (1/2) of the
outstanding shares of stock of the plaintiff husband with the Manila Memorial Park and
the Provident Group of Companies.22

The Court of Appeals articulated on this matter as follows:

On Assignment of Error E, plaintiff-appellant assails the order of the trial court for him to
give one-half of his separation/retirement benefits from Far East Bank & Trust Company
and half of his outstanding shares in Manila Memorial Park and Provident Group of
Companies to the defendant-appellee as the latter’s share in the conjugal partnership.

On August 6, 1993, the trial court rendered a Partial Decision approving the Compromise
Agreement entered into by the parties. In the same Compromise Agreement, the parties
had agreed that henceforth, their conjugal partnership is dissolved. Thereafter, no steps
were taken for the liquidation of the conjugal partnership.

Finding that defendant-appellee is entitled to at least half of the separation/retirement

benefits which plaintiff-appellant received from Far East Bank & Trust Company upon
his retirement as Vice-President of said company for the reason that the benefits accrued
from plaintiff–appellant’s service for the bank for a number of years, most of which
while he was married to defendant-appellee, the trial court adjudicated the same. The
same is true with the outstanding shares of plaintiff-appellant in Manila Memorial Park
and Provident Group of Companies. As these were acquired by the plaintiff-appellant at
the time he was married to defendant-appellee, the latter is entitled to one-half thereof as
 her share in the conjugal partnership. We find no reason to disturb the ruling of the trial
court.23

Since the present case does not involve the annulment of a bigamous marriage, the provisions of
Article 50 in relation to Articles 41, 42 and 43 of the Family Code, providing for the dissolution
of the absolute community or conjugal partnership of gains, as the case may be, do not apply.
Rather, the general rule applies, which is that in case a marriage is declared void ab initio, the
property regime applicable and to be liquidated, partitioned and distributed is that of equal co-
ownership.

In Valdes v. Regional Trial Court, Branch 102, Quezon City,24 this Court expounded on the
consequences of a void marriage on the property relations of the spouses and specified the
applicable provisions of law:

The trial court correctly applied the law. In a void marriage, regardless of the cause
thereof, the property relations of the parties during the period of cohabitation is governed
by the provisions of Article 147 or Article 148, such as the case may be, of the Family
Code. Article 147 is a remake of Article 144 of the Civil Code as interpreted and so
applied in previous cases; it provides:

ART. 147. When a man and a woman who are capacitated to marry each other,
live exclusively with each other as husband and wife without the benefit of
marriage or under a void marriage, their wages and salaries shall be owned by
them in equal shares and the property acquired by both of them through their
work or industry shall be governed by the rules on co-ownership.

In the absence of proof to the contrary, properties acquired while they lived
together shall be presumed to have been obtained by their joint efforts, work or
industry, and shall be owned by them in equal shares. For purposes of this Article,
a party who did not participate in the acquisition by the other party of any
property shall be deemed to have contributed jointly in the acquisition thereof if
the former's efforts consisted in the care and maintenance of the family and of the
household.

Neither party can encumber or dispose by acts inter vivos of his or her share in the
property acquired during cohabitation and owned in common, without the consent
of the other, until after the termination of their cohabitation.

When only one of the parties to a void marriage is in good faith, the share of the
party in bad faith in the co-ownership shall be forfeited in favor of their common
children. In case of default of or waiver by any or all of the common children or
their descendants, each vacant share shall belong to the respective surviving
descendants. In the absence of descendants, such share shall belong to the
innocent party. In all cases, the forfeiture shall take place upon termination of the
cohabitation.
This peculiar kind of co-ownership applies when a man and a woman, suffering no legal
impediment to marry each other, so exclusively live together as husband and wife under a
void marriage or without the benefit of marriage. The term "capacitated" in the provision
(in the first paragraph of the law) refers to the legal capacity of a party to contract
marriage, i.e., any "male or female of the age of eighteen years or upwards not under any
of the impediments mentioned in Articles 37 and 38" of the Code.

Under this property regime, property acquired by both spouses through

their work and industry shall be governed by the rules on equal co-ownership. Any
property acquired during the union is prima facie presumed to have been obtained
through their joint efforts. A party who did not participate in the acquisition of the
property shall still be considered as having contributed thereto jointly if said party's
"efforts consisted in the care and maintenance of the family household." Unlike the
conjugal partnership of gains, the fruits of the couple's separate property are not included
in the co-ownership.

Article 147 of the Family Code, in substance and to the above extent, has clarified Article
144 of the Civil Code; in addition, the law now expressly provides that —

(a) Neither party can dispose or encumber by act[s] inter vivos [of] his or her share in co-
ownership property, without the consent of the other, during the period of cohabitation;
and

(b) In the case of a void marriage, any party in bad faith shall forfeit his or her share in
the co-ownership in favor of their common children; in default thereof or waiver by any
or all of the common children, each vacant share shall belong to the respective surviving
descendants, or still in default thereof, to the innocent party. The forfeiture shall take
place upon the termination of the cohabitation or declaration of nullity of the marriage.

In deciding to take further cognizance of the issue on the settlement of the parties'
common property, the trial court acted neither imprudently nor precipitately; a court
which had jurisdiction to declare the marriage a nullity must be deemed likewise clothed
with authority to resolve incidental and consequential matters. Nor did it commit a
reversible error in ruling that petitioner and private respondent own the "family home"
and all their common property in equal shares, as well as in concluding that, in the
liquidation and partition of the property owned in common by them, the provisions on co-
ownership under the Civil Code, not Articles 50, 51 and 52, in relation to Articles 102
and 129, of the Family Code, should aptly prevail. The rules set up to govern the
liquidation of either the absolute community or the conjugal partnership of gains, the
property regimes recognized for valid and voidable marriages (in the latter case until the
contract is annulled), are irrelevant to the liquidation of the co-ownership that exists
between common-law spouses. The first paragraph of Article 50 of the Family Code,
applying paragraphs (2), (3), (4) and (5) of Article 43, relates only, by its explicit terms,
to voidable marriages and, exceptionally, to void marriages under Article 40 of the Code,
 i.e., the declaration of nullity of a subsequent marriage contracted by a spouse of a prior
void marriage before the latter is judicially declared void. The latter is a special rule that
somehow recognizes the philosophy and an old doctrine that void marriages are
inexistent from the very beginning and no judicial decree is necessary to establish their
nullity. In now requiring for purposes of remarriage, the declaration of nullity by final
judgment of the previously contracted void marriage, the present law aims to do away
with any continuing uncertainty on the status of the second marriage. It is not then
illogical for the provisions of Article 43, in relation to Articles 41 and 42, of the Family
Code, on the effects of the termination of a subsequent marriage contracted during the
subsistence of a previous marriage to be made applicable pro hac vice. In all other cases,
it is not to be assumed that the law has also meant to have coincident property relations,
on the one hand, between spouses in valid and voidable marriages (before annulment)
and, on the other, between common-law spouses or spouses of void marriages, leaving to
ordain, in the latter case, the ordinary rules on co-ownership subject to the provision of
Article 147 and Article 148 of the Family Code. It must be stressed, nevertheless, even as
it may merely state the obvious, that the provisions of the Family Code on the "family
home," i.e., the provisions found in Title V, Chapter 2, of the Family Code, remain in
force and effect regardless of the property regime of the spouses.25

Since the properties ordered to be distributed by the court a quo were found, both by the trial
court and the Court of Appeals, to have been acquired during the union of the parties, the same
would be covered by the co-ownership. No fruits of a separate property of one of the parties
appear to have been included or involved in said distribution. The liquidation, partition and
distribution of the properties owned in common by the parties herein as ordered by the court a
quo should, therefore, be sustained, but on the basis of co-ownership and not of the regime of
conjugal partnership of gains.

As to the issue on custody of the parties over their only child, Javy Singh Buenaventura, it is now
moot since he is about to turn twenty-five years of age on May 27, 200526 and has, therefore,
attained the age of majority.

With regard to the issues on support raised in the Petition for Certiorari, these would also now
be moot, owing to the fact that the son, Javy Singh Buenaventura, as previously stated, has
attained the age of majority.

WHEREFORE, the Decision of the Court of Appeals dated October 8, 1996 and its Resolution
dated December 10, 1996 which are contested in the Petition for Review (G.R. No. 127449), are
hereby MODIFIED, in that the award of moral and exemplary damages, attorney’s fees,
expenses of litigation and costs are deleted. The order giving respondent one-half of the
retirement benefits of petitioner from Far East Bank and Trust Co. and one-half of petitioner’s
shares of stock in Manila Memorial Park and in the Provident Group of Companies is sustained
but on the basis of the liquidation, partition and distribution of the co-ownership and not of
the regime of conjugal partnership of gains. The rest of said Decision and Resolution are
AFFIRMED.
The Petition for Review on Certiorari (G.R. No. 127358) contesting the Court of Appeals’
Resolutions of September 2, 1996 and November 13, 1996 which increased the support pendente
lite in favor of the parties’ son, Javy Singh Buenaventura, is now MOOT and ACADEMIC and
is, accordingly, DISMISSED.

No costs.

SO ORDERED.

Contract for piece of work

G.R. No. L-8506             August 31, 1956

CELESTINO CO & COMPANY, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

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

BENGZON, J.:

Appeal from a decision of the Court of Tax Appeals.

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

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

Even if we were to believe petitioner's claim that it does not manufacture ready-made
sash, doors and windows for the public and that it makes these articles only special order
of its customers, that does not make it a contractor within the purview of section 191 of
the national Internal Revenue Code. there are no less than fifty occupations enumerated
in the aforesaid section of the national Internal Revenue Code subject to percentage tax
and after reading carefully each and every one of them, we cannot find under which the
business of manufacturing sash, doors and windows upon special order of customers fall
under the category of "road, building, navigation, artesian well, water workers and other
construction work contractors" are those who alter or repair buildings, structures, streets,
highways, sewers, street railways railroads logging roads, electric lines or power lines,
and includes any other work for the construction, altering or repairing for which
machinery driven by mechanical power is used. (Payton vs. City of Anadardo 64 P. 2d
878, 880, 179 Okl. 68).
 Having thus eliminated the feasibility off taxing petitioner as a contractor under 191 of
the national Internal Revenue Code, this leaves us to decide the remaining issue whether
or not petitioner could be taxed with lesser strain and more accuracy as seller of its
manufactured articles under section 186 of the same code, as the respondent Collector of
Internal Revenue has in fact been doing the Oriental Sash Factory was established in
1946.

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

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

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

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

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

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

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

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

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

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

Said article reads as follows:

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

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

In our opinion when this Factory accepts a job that requires the use of extraordinary or additional
equipment, or involves services not generally performed by it-it thereby contracts for a piece of
work — filing special orders within the meaning of Article 1467. The orders herein exhibited
were not shown to be special. They were merely orders for work — nothing is shown to call
them special requiring extraordinary service of the factory.
The thought occurs to us that if, as alleged-all the work of appellant is only to fill orders
previously made, such orders should not be called special work, but regular work. Would a
factory do business performing only special, extraordinary or peculiar merchandise?

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

The appealed decision is consequently affirmed. So ordered.

G.R. No. L-27044 June 30, 1975

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

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

ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner,

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

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

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

ESGUERRA, J.:

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

As found by the Court of Tax Appeals, and as established by the evidence on record, the
facts of this case are as follows:
Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation, is
an engineering and machinery firm. As operator of an integrated engineering shop, it is
engaged, among others, in the design and installation of central type air conditioning
system, pumping plants and steel fabrications. (Vol. I pp. 12-16 T.S.N. August 23, 1960)

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

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

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

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

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

For ALL THE FOREGOING CONSIDERATIONS, the decision of respondent

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

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

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

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

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

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

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

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

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

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

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

2. In holding respondent company liable to the 3% contractor's tax imposed by

Section 191 of the Tax Code instead of the 30% sales tax prescribed in Section
185(m) in relation to Section 194(x) both of the same Code;
 3. In holding that the respondent company is subject only to the 30%
compensating tax under Section 190 of the Tax Code and not to the 30% advance
sales tax imposed by section 183 (b), in relation to section 185(m) both of the
same Code, on its importations of parts and accessories of air conditioning units;

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

5. In holding the respondent company liable for P174,141.62 as compensating tax

and 25% surcharge instead of P740,587.86 as deficiency advance sales tax,
deficiency manufacturers tax and 25% and 50% surcharge for the period from
June 1, 1948 to December 31, 1956.

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

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

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

xxx xxx xxx

(x) "Manufacturer" includes every person who by physical or chemical process

alters the exterior texture or form or inner substance of any raw material or
manufactured or partially manufactured products in such manner as to prepare it
for a special use or uses to which it could not have been put in its original
condition, or who by any such process alters the quality of any such material or
manufactured or partially manufactured product so as to reduce it to marketable
shape, or prepare it for any of the uses of industry, or who by any such process
combines any such raw material or manufactured or partially manufactured
products with other materials or products of the same or of different kinds and in
such manner that the finished product of such process of manufacture can be put
to special use or uses to which such raw material or manufactured or partially
manufactured products in their original condition could not have been put, and
who in addition alters such raw material or manufactured or partially
manufactured products, or combines the same to produce such finished products
for the purpose of their sale or distribution to others and not for his own use or
consumption.
In answer to the above contention, Engineering claims that it is not a manufacturer and setter of
air-conditioning units and spare parts or accessories thereof subject to tax under Section 185(m)
of the Tax Code, but a contractor engaged in the design, supply and installation of the central
type of air-conditioning system subject to the 3% tax imposed by Section 191 of the same Code,
which is essentially a tax on the sale of services or labor of a contractor rather than on the sale of
articles subject to the tax referred to in Sections 184, 185 and 186 of the Code.

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

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

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

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

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

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

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

Engineering, in a nutshell, fabricates, assembles, supplies and installs in the

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

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

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

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

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

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

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

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

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

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

Q — Aside from the general components, which go into air

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

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

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

Applying the facts of the aforementioned case to the present case, We see that the supply of air
conditioning units to Engineer's various customers, whether the said machineries were in hand or
not, was especially made for each customer and installed in his building upon his special order.
The air conditioning units installed in a central type of air conditioning system would not have
existed but for the order of the party desiring to acquire it and if it existed without the special
order of Engineering's customer, the said air conditioning units were not intended for sale to the
general public. Therefore, We have but to affirm the conclusion of the Court of Tax Appeals that
Engineering is a contractor rather than a manufacturer, subject to the contractors tax prescribed
by Section 191 of the Code and not to the advance sales tax imposed by Section 185(m) in
relation to Section 194 of the same Code. Since it has been proved to Our satisfaction that
Engineering imported air conditioning units, parts or accessories thereof for use in its
construction business and these items were never sold, resold, bartered or exchanged,
Engineering should be held liable to pay taxes prescribed under Section 1905 of the Code. This
compensating tax is not a tax on the importation of goods but a tax on the use of imported goods
not subject to sales tax. Engineering, therefore, should be held liable to the payment of 30%
compensating tax in accordance with Section 190 of the Tax Code in relation to Section 185(m)
of the same, but without the 50% mark up provided in Section 183(b).

II

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

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

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

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

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

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

When invoicing, your invoices should be exactly as detailed in the customer's

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

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

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

It will be noted that the Universal Transcontinental Corporation is not following

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

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

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

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

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

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

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

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

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

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

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

At first blush it would seem that the contention of petitioner that it is not subject
to the delinquency, surcharge of 25% is sound, valid and tenable. However, a
serious study and critical analysis of the historical provisions of Section 190 of
the Tax Code dealing on compensating tax in relation to Section 183(a) of the
same Code, will show that the contention of petitioner is without merit. The
original text of Section 190 of Commonwealth Act 466, otherwise known as the
National Internal Revenue Code, as amended by Commonwealth Act No. 503,
effective on October 1, 1939, does not provide for the filing of a compensation tax
return and payment of the 25 % surcharge for late payment thereof. Under the
original text of Section 190 of the Tax Code as amended by Commonwealth Act
No. 503, the contention of the petitioner that it is not subject to the 25% surcharge
appears to be legally tenable. However, Section 190 of the Tax Code was
subsequently amended by the Republic Acts Nos. 253, 361, 1511 and 1612
effective October 1, 1946, July 1, 1948, June 9, 1949, June 16, 1956 and August
24, 1956 respectively, which invariably provides among others, the following:
 ... If any article withdrawn from the customhouse or the post office
without payment of the compensating tax is subsequently used by
the importer for other purposes, corresponding entry should be
made in the books of accounts if any are kept or a written notice
thereof sent to the Collector of Internal Revenue and payment of
the corresponding compensating tax made within 30 days from the
date of such entry or notice and if tax is not paid within such
period the amount of the tax shall be increased by 25% the
increment to be a part of the tax.

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

III

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

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

of taxes. —

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

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

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

SO ORDERED.
Agency to Sell

G.R. No. L-11491            August 23, 1918

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

Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.

Crossfield & O'Brien for appellee.

AVANCEÑA, J.:

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

CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J.

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

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

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

(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within a period
of sixty days from the date of their shipment.
 (C) The expenses for transportation and shipment shall be borne by M. Quiroga, and the
freight, insurance, and cost of unloading from the vessel at the point where the beds are
received, shall be paid by Mr. Parsons.

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

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

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

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

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

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

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

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

It would be enough to hold, as we do, that the contract by and between the defendant and the
plaintiff is one of purchase and sale, in order to show that it was not one made on the basis of a
commission on sales, as the plaintiff claims it was, for these contracts are incompatible with each
other. But, besides, examining the clauses of this contract, none of them is found that
substantially supports the plaintiff's contention. Not a single one of these clauses necessarily
conveys the idea of an agency. The words commission on sales used in clause (A) of article 1
mean nothing else, as stated in the contract itself, than a mere discount on the invoice price. The
word agency, also used in articles 2 and 3, only expresses that the defendant was the only one
that could sell the plaintiff's beds in the Visayan Islands. With regard to the remaining clauses,
the least that can be said is that they are not incompatible with the contract of purchase and sale.

The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the
defendant corporation and who established and managed the latter's business in Iloilo. It appears
that this witness, prior to the time of his testimony, had serious trouble with the defendant, had
maintained a civil suit against it, and had even accused one of its partners, Guillermo Parsons, of
falsification. He testified that it was he who drafted the contract Exhibit A, and, when questioned
as to what was his purpose in contracting with the plaintiff, replied that it was to be an agent for
his beds and to collect a commission on sales. However, according to the defendant's evidence, it
was Mariano Lopez Santos, a director of the corporation, who prepared Exhibit A. But, even
supposing that Ernesto Vidal has stated the truth, his statement as to what was his idea in
contracting with the plaintiff is of no importance, inasmuch as the agreements contained in
Exhibit A which he claims to have drafted, constitute, as we have said, a contract of purchase
and sale, and not one of commercial agency. This only means that Ernesto Vidal was mistaken in
his classification of the contract. But it must be understood that a contract is what the law defines
it to be, and not what it is called by the contracting parties.

The plaintiff also endeavored to prove that the defendant had returned beds that it could not sell;
that, without previous notice, it forwarded to the defendant the beds that it wanted; and that the
defendant received its commission for the beds sold by the plaintiff directly to persons in Iloilo.
But all this, at the most only shows that, on the part of both of them, there was mutual tolerance
in the performance of the contract in disregard of its terms; and it gives no right to have the
contract considered, not as the parties stipulated it, but as they performed it. Only the acts of the
contracting parties, subsequent to, and in connection with, the execution of the contract, must be
considered for the purpose of interpreting the contract, when such interpretation is necessary, but
not when, as in the instant case, its essential agreements are clearly set forth and plainly show
that the contract belongs to a certain kind and not to another. Furthermore, the return made was
of certain brass beds, and was not effected in exchange for the price paid for them, but was for
other beds of another kind; and for the letter Exhibit L-1, requested the plaintiff's prior consent
with respect to said beds, which shows that it was not considered that the defendant had a right,
by virtue of the contract, to make this return. As regards the shipment of beds without previous
notice, it is insinuated in the record that these brass beds were precisely the ones so shipped, and
that, for this very reason, the plaintiff agreed to their return. And with respect to the so-called
commissions, we have said that they merely constituted a discount on the invoice price, and the
reason for applying this benefit to the beds sold directly by the plaintiff to persons in Iloilo was
because, as the defendant obligated itself in the contract to incur the expenses of advertisement
of the plaintiff's beds, such sales were to be considered as a result of that advertisement.

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

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

G.R. No. L-47538             June 20, 1941

GONZALO PUYAT & SONS, INC., petitioner,

vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro Arco), respondent.

Feria & Lao for petitioner.

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

LAUREL, J.:

This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the purpose
of reviewing its Amusement Company (formerly known as Teatro Arco), plaintiff-appellant, vs.
Gonzalo Puyat and Sons. Inc., defendant-appellee."
It appears that the respondent herein brought an action against the herein petitioner in the Court
of First Instance of Manila to secure a reimbursement of certain amounts allegedly overpaid by it
on account of the purchase price of sound reproducing equipment and machinery ordered by the
petitioner from the Starr Piano Company of Richmond, Indiana, U.S.A. The facts of the case as
found by the trial court and confirmed by the appellate court, which are admitted by the
respondent, are as follows:

In the year 1929, the "Teatro Arco", a corporation duly organized under the laws of the
Philippine Islands, with its office in Manila, was engaged in the business of operating
cinematographs. In 1930, its name was changed to Arco Amusement Company. C. S.
Salmon was the president, while A. B. Coulette was the business manager. About the
same time, Gonzalo Puyat & Sons, Inc., another corporation doing business in the
Philippine Islands, with office in Manila, in addition to its other business, was acting as
exclusive agents in the Philippines for the Starr Piano Company of Richmond, Indiana,
U.S. A. It would seem that this last company dealt in cinematographer equipment and
machinery, and the Arco Amusement Company desiring to equipt its cinematograph with
sound reproducing devices, approached Gonzalo Puyat & Sons, Inc., thru its then
president and acting manager, Gil Puyat, and an employee named Santos. After some
negotiations, it was agreed between the parties, that is to say, Salmon and Coulette on one
side, representing the plaintiff, and Gil Puyat on the other, representing the defendant,
that the latter would, on behalf of the plaintiff, order sound reproducing equipment from
the Starr Piano Company and that the plaintiff would pay the defendant, in addition to the
price of the equipment, a 10 per cent commission, plus all expenses, such as, freight,
insurance, banking charges, cables, etc. At the expense of the plaintiff, the defendant sent
a cable, Exhibit "3", to the Starr Piano Company, inquiring about the equipment desired
and making the said company to quote its price without discount. A reply was received
by Gonzalo Puyat & Sons, Inc., with the price, evidently the list price of $1,700 f.o.b.
factory Richmond, Indiana. The defendant did not show the plaintiff the cable of inquiry
nor the reply but merely informed the plaintiff of the price of $1,700. Being agreeable to
this price, the plaintiff, by means of Exhibit "1", which is a letter signed by C. S. Salmon
dated November 19, 1929, formally authorized the order. The equipment arrived about
the end of the year 1929, and upon delivery of the same to the plaintiff and the
presentation of necessary papers, the price of $1.700, plus the 10 per cent commission
agreed upon and plus all the expenses and charges, was duly paid by the plaintiff to the
defendant.

Sometime the following year, and after some negotiations between the same parties,
plaintiff and defendants, another order for sound reproducing equipment was placed by
the plaintiff with the defendant, on the same terms as the first order. This agreement or
order was confirmed by the plaintiff by its letter Exhibit "2", without date, that is to say,
that the plaintiff would pay for the equipment the amount of $1,600, which was supposed
to be the price quoted by the Starr Piano Company, plus 10 per cent commission, plus all
expenses incurred. The equipment under the second order arrived in due time, and the
defendant was duly paid the price of $1,600 with its 10 per cent commission, and $160,
for all expenses and charges. This amount of $160 does not represent actual out-of-pocket
 expenses paid by the defendant, but a mere flat charge and rough estimate made by the
defendant equivalent to 10 per cent of the price of $1,600 of the equipment.

About three years later, in connection with a civil case in Vigan, filed by one Fidel Reyes
against the defendant herein Gonzalo Puyat & Sons, Inc., the officials of the Arco
Amusement Company discovered that the price quoted to them by the defendant with
regard to their two orders mentioned was not the net price but rather the list price, and
that the defendants had obtained a discount from the Starr Piano Company. Moreover, by
reading reviews and literature on prices of machinery and cinematograph equipment, said
officials of the plaintiff were convinced that the prices charged them by the defendant
were much too high including the charges for out-of-pocket expense. For these reasons,
they sought to obtain a reduction from the defendant or rather a reimbursement, and
failing in this they brought the present action.

The trial court held that the contract between the petitioner and the respondent was one of
outright purchase and sale, and absolved that petitioner from the complaint. The appellate court,
however, — by a division of four, with one justice dissenting — held that the relation between
petitioner and respondent was that of agent and principal, the petitioner acting as agent of the
respondent in the purchase of the equipment in question, and sentenced the petitioner to pay the
respondent alleged overpayments in the total sum of $1,335.52 or P2,671.04, together with legal
interest thereon from the date of the filing of the complaint until said amount is fully paid, as
well as to pay the costs of the suit in both instances. The appellate court further argued that even
if the contract between the petitioner and the respondent was one of purchase and sale, the
petitioner was guilty of fraud in concealing the true price and hence would still be liable to
reimburse the respondent for the overpayments made by the latter.

The petitioner now claims that the following errors have been incurred by the appellate court:

I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun hechos,

entre la recurrente y la recurrida existia una relacion implicita de mandataria a mandante
en la transaccion de que se trata, en vez de la de vendedora a compradora como ha
declarado el Juzgado de Primera Instncia de Manila, presidido entonces por el hoy
Magistrado Honorable Marcelino Montemayor.

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

que dicha relacion fuerra de vendedora a compradora, la recurrente obtuvo, mediante
dolo, el consentimiento de la recurrida en cuanto al precio de $1,700 y $1,600 de las
maquinarias y equipos en cuestion, y condenar a la recurrente ha obtenido de la Starr
Piano Company of Richmond, Indiana.

We sustain the theory of the trial court that the contract between the petitioner and the
respondent was one of purchase and sale, and not one of agency, for the reasons now to be
stated.

In the first place, the contract is the law between the parties and should include all the things they
are supposed to have been agreed upon. What does not appear on the face of the contract should
be regarded merely as "dealer's" or "trader's talk", which can not bind either party. (Nolbrook v.
Conner, 56 So., 576, 11 Am. Rep., 212; Bank v. Brosscell, 120 III., 161; Bank v. Palmer, 47 III.,
92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.) The letters, Exhibits 1 and
2, by which the respondent accepted the prices of $1,700 and $1,600, respectively, for the sound
reproducing equipment subject of its contract with the petitioner, are clear in their terms and
admit no other interpretation that the respondent in question at the prices indicated which are
fixed and determinate. The respondent admitted in its complaint filed with the Court of First
Instance of Manila that the petitioner agreed to sell to it the first sound reproducing equipment
and machinery. The third paragraph of the respondent's cause of action states:

3. That on or about November 19, 1929, the herein plaintiff (respondent) and defendant
(petitioner) entered into an agreement, under and by virtue of which the herein defendant
was to secure from the United States, and sell and deliver to the herein plaintiff, certain
sound reproducing equipment and machinery, for which the said defendant, under and by
virtue of said agreement, was to receive the actual cost price plus ten per cent (10%), and
was also to be reimbursed for all out of pocket expenses in connection with the purchase
and delivery of such equipment, such as costs of telegrams, freight, and similar expenses.
(Emphasis ours.)

We agree with the trial judge that "whatever unforseen events might have taken place
unfavorable to the defendant (petitioner), such as change in prices, mistake in their quotation,
loss of the goods not covered by insurance or failure of the Starr Piano Company to properly fill
the orders as per specifications, the plaintiff (respondent) might still legally hold the defendant
(petitioner) to the prices fixed of $1,700 and $1,600." This is incompatible with the pretended
relation of agency between the petitioner and the respondent, because in agency, the agent is
exempted from all liability in the discharge of his commission provided he acts in accordance
with the instructions received from his principal (section 254, Code of Commerce), and the
principal must indemnify the agent for all damages which the latter may incur in carrying out the
agency without fault or imprudence on his part (article 1729, Civil Code).

While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten per cent (10%)
commission, this does not necessarily make the petitioner an agent of the respondent, as this
provision is only an additional price which the respondent bound itself to pay, and which
stipulation is not incompatible with the contract of purchase and sale. (See Quiroga vs. Parsons
Hardware Co., 38 Phil., 501.)

In the second place, to hold the petitioner an agent of the respondent in the purchase of
equipment and machinery from the Starr Piano Company of Richmond, Indiana, is incompatible
with the admitted fact that the petitioner is the exclusive agent of the same company in the
Philippines. It is out of the ordinary for one to be the agent of both the vendor and the purchaser.
The facts and circumstances indicated do not point to anything but plain ordinary transaction
where the respondent enters into a contract of purchase and sale with the petitioner, the latter as
exclusive agent of the Starr Piano Company in the United States.

It follows that the petitioner as vendor is not bound to reimburse the respondent as vendee for
any difference between the cost price and the sales price which represents the profit realized by
the vendor out of the transaction. This is the very essence of commerce without which merchants
or middleman would not exist.

The respondents contends that it merely agreed to pay the cost price as distinguished from the list
price, plus ten per cent (10%) commission and all out-of-pocket expenses incurred by the
petitioner. The distinction which the respondents seeks to draw between the cost price and the
list price we consider to be spacious. It is to be observed that the twenty-five per cent (25%)
discount granted by the Starr piano Company to the petitioner is available only to the latter as the
former's exclusive agent in the Philippines. The respondent could not have secured this discount
from the Starr Piano Company and neither was the petitioner willing to waive that discount in
favor of the respondent. As a matter of fact, no reason is advanced by the respondent why the
petitioner should waive the 25 per cent discount granted it by the Starr Piano Company in
exchange for the 10 percent commission offered by the respondent. Moreover, the petitioner was
not duty bound to reveal the private arrangement it had with the Starr Piano Company relative to
such discount to its prospective customers, and the respondent was not even aware of such an
arrangement. The respondent, therefore, could not have offered to pay a 10 per cent commission
to the petitioner provided it was given the benefit of the 25 per cent discount enjoyed by the
petitioner. It is well known that local dealers acting as agents of foreign manufacturers, aside
from obtaining a discount from the home office, sometimes add to the list price when they resell
to local purchasers. It was apparently to guard against an exhorbitant additional price that the
respondent sought to limit it to 10 per cent, and the respondent is estopped from questioning that
additional price. If the respondent later on discovers itself at the short end of a bad bargain, it
alone must bear the blame, and it cannot rescind the contract, much less compel a reimbursement
of the excess price, on that ground alone. The respondent could not secure equipment and
machinery manufactured by the Starr Piano Company except from the petitioner alone; it
willingly paid the price quoted; it received the equipment and machinery as represented; and that
was the end of the matter as far as the respondent was concerned. The fact that the petitioner
obtained more or less profit than the respondent calculated before entering into the contract or
reducing the price agreed upon between the petitioner and the respondent. Not every
concealment is fraud; and short of fraud, it were better that, within certain limits, business
acumen permit of the loosening of the sleeves and of the sharpening of the intellect of men and
women in the business world.

The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court is
accordingly reversed and the petitioner is absolved from the respondent's complaint in G. R. No.
1023, entitled "Arco Amusement Company (formerly known as Teatro Arco), plaintiff-appellant,
vs. Gonzalo Puyat & Sons, Inc., defendants-appellee," without pronouncement regarding costs.
So ordered.
Dacion en Pago

[G.R. No. 149420. October 8, 2003.]

SONNY LO, Petitioner, v. KJS ECO-FORMWORK SYSTEM PHIL., INC., Respondent.

DECISION

YNARES-SANTIAGO, J.:

Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of
steel scaffoldings, while petitioner Sonny L. Lo, doing business under the name and style San’s
Enterprises, is a building contractor. On February 22, 1990, petitioner ordered scaffolding
equipments from respondent worth P540,425.80. 1 He paid a downpayment in the amount of
P150,000.00. The balance was made payable in ten monthly installments.chanrob1es virtua1 1aw
1ibrary

Respondent delivered the scaffoldings to petitioner. 2 Petitioner was able to pay the first two
monthly installments. His business, however, encountered financial difficulties and he was
unable to settle his obligation to respondent despite oral and written demands made against him.
3
On October 11, 1990, petitioner and respondent executed a Deed of Assignment, 4 whereby
petitioner assigned to respondent his receivables in the amount of P335,462.14 from Jomero
Realty Corporation. Pertinent portions of the Deed provide:chanrob1es virtual 1aw library

WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house located
at Greenmeadow Avenue, Quezon City owned by Jomero Realty Corporation;

WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR

purchased on account scaffolding equipments from the ASSIGNEE payable to the latter;

WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE for the
purchase of the aforementioned scaffoldings now in the amount of Three Hundred Thirty Five
Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14);

NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five
Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14), Philippine Currency which
represents part of the ASSIGNOR’s collectible from Jomero Realty Corp., said ASSIGNOR
hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles amounting to the said
amount of P335,462.14;

And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the full
power and authority to demand, collect, receive, compound, compromise and give acquittance
for the same or any part thereof, and in the name and stead of the said ASSIGNOR;

And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its successors
and assigns that said debt is justly owing and due to the ASSIGNOR for Jomero Realty
Corporation and that said ASSIGNOR has not done and will not cause anything to be done to
diminish or discharge said debt, or delay or to prevent the ASSIGNEE, its successors or assigns,
from collecting the same;

And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his
heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request of said
ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such further
acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover
whatever collectibles said ASSIGNOR has in accordance with the true intent and meaning of
these presents. . . . 5 (Italics supplied)

However, when respondent tried to collect the said credit from Jomero Realty Corporation, the
latter refused to honor the Deed of Assignment because it claimed that petitioner was also
indebted to it. 6 On November 26, 1990, respondent sent a letter 7 to petitioner demanding
payment of his obligation, but petitioner refused to pay claiming that his obligation had been
extinguished when they executed the Deed of Assignment.

Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money
against the petitioner before the Regional Trial Court of Makati, Branch 147, which was
docketed as Civil Case No. 91-074. 8
During the trial, petitioner argued that his obligation was extinguished with the execution of the
Deed of Assignment of credit. Respondent, for its part, presented the testimony of its employee,
Almeda Bañaga, who testified that Jomero Realty refused to honor the assignment of credit
because it claimed that petitioner had an outstanding indebtedness to it.chanrob1es virtua1 1aw
1ibrary

On August 25, 1994, the trial court rendered a decision 9 dismissing the complaint on the ground
that the assignment of credit extinguished the obligation. The decretal portion thereof
provides:chanrob1es virtual 1aw library

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the
defendant and against the plaintiff, dismissing the complaint and ordering the plaintiff to pay the
defendant attorney’s fees in the amount of P25,000.00.

Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court
rendered a decision, 10 the dispositive portion of which reads:chanrob1es virtual 1aw library

WHEREFORE, finding merit in this appeal, the court REVERSES the appealed Decision and
enters judgment ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-
FORMWORK SYSTEM PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four
Hundred Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum from January
10, 1991 (filing of the Complaint) until fully paid and attorney’s fees equivalent to 10% of the
amount due and costs of the suit.

SO ORDERED. 11

In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to the
respondent, the Court of Appeals held that (1) petitioner failed to comply with his warranty
under the Deed; (2) the object of the Deed did not exist at the time of the transaction, rendering it
void pursuant to Article 1409 of the Civil Code; and (3) petitioner violated the terms of the Deed
of Assignment when he failed to execute and do all acts and deeds as shall be necessary to
effectually enable the respondent to recover the collectibles. 12

Petitioner filed a motion for reconsideration of the said decision, which was denied by the Court
of Appeals. 13

In this petition for review, petitioner assigns the following errors:chanrob1es virtual 1aw library

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN

DECLARING THE DEED OF ASSIGNMENT (EXH. "4") AS NULL AND VOID FOR LACK
OF OBJECT ON THE BASIS OF A MERE HEARSAY CLAIM.

II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF
ASSIGNMENT (EXH. "4") DID NOT EXTINGUISH PETITIONER’S OBLIGATION ON
THE WRONG NOTION THAT PETITIONER FAILED TO COMPLY WITH HIS
WARRANTY THEREUNDER.

III

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF

THE TRIAL COURT AND IN ORDERING PAYMENT OF INTERESTS AND
ATTORNEY’S FEES. 14

The petition is without merit.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as the
assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the
consent of the debtor, transfers his credit and accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same extent as the assignor could enforce it against
the debtor. 15chanrob1es virtua1 1aw 1ibrary

Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another
thing to the creditor who accepts it as equivalent of payment of an outstanding debt. 16 In order
that there be a valid dation in payment, the following are the requisites: (1) There must be the
performance of the prestation in lieu of payment (animo solvendi) which may consist in the
delivery of a corporeal thing or a real right or a credit against the third person; (2) There must be
some difference between the prestation due and that which is given in substitution (aliud pro
alio); (3) There must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different from that due.
17 The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really
buying the thing or property of the debtor, payment for which is to be charged against the
debtor’s debt. As such, the vendor in good faith shall be responsible, for the existence and
legality of the credit at the time of the sale but not for the solvency of the debtor, in specified
circumstances. 18

Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal
property, 19 produced the effects of a dation in payment which may extinguish the obligation. 20
However, as in any other contract of sale, the vendor or assignor is bound by certain warranties.
More specifically, the first paragraph of Article 1628 of the Civil Code provides:chanrob1es
virtual 1aw library

The vendor in good faith shall be responsible for the existence: and legality of the credit at the
time of the sale, unless it should have been sold as doubtful; but not for the solvency of the
debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale
and of common knowledge.
From the above provision, Petitioner, as vendor or assignor, is bound to warrant the existence
and legality of the credit at the time of the sale or assignment. When Jomero claimed that it was
no longer indebted to petitioner since the latter also had an unpaid obligation to it, it essentially
meant that its obligation to petitioner has been extinguished by compensation. 21 In other words,
respondent alleged the non-existence of the credit and asserted its claim to petitioner’s warranty
under the assignment. Therefore, it behooved on petitioner to make good its warranty and paid
the obligation.

Furthermore, we find that petitioner breached his obligation under the Deed of Assignment, to
wit:chanrob1es virtual 1aw library

And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his
heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request of said
ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such further
acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover
whatever collectibles said ASSIGNOR has in accordance with the true intent and meaning of
these presents. 22 (Emphasis ours)

Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured
the performance thereof in case the same is later found to be inexistent. He should be held liable
to pay to respondent the amount of his indebtedness.

Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the
sum of P335,462.14 with legal interest thereon. However, we find that the award by the Court of
Appeals of attorney’s fees is without factual basis. No evidence or testimony was presented to
substantiate this claim. Attorney’s fees, being in the nature of actual damages, must be duly
substantiated by competent proof.

WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19,
2001 in CA-G.R. CV No. 47713, ordering petitioner to pay respondent the sum of P335,462.14
with legal interest of 6% per annum from January 10, 1991 until fully paid is AFFIRMED with
MODIFICATION. Upon finality of this Decision, the rate of legal interest shall be 12% per
annum, inasmuch as the obligation shall thereafter become equivalent to a forbearance of credit.
23 The award of attorney’s fees is DELETE for lack of evidentiary basis.chanrob1es virtua1 1aw
1ibrary

SO ORDERED.