G.R. No.

118114 December 7, 1995

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

PADILLA, J.:

This is a petition for review on certiorari of the decision  of the Court of Appeals, 2nd Division, in CA-G.R. No. 36177, which affirmed the
1

decision  of the Regional Trial Court of Himamaylan, Negros Occidental holding that private respondent Edy de los Reyes had acquired
2

ownership of Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros Occidental based on a document entitled "Declaration of
Heirship and Waiver of Rights", and ordering the dispossession of petitioner as leasehold tenant of the land for failure to pay rentals.

The facts of the case are as follows:

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

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

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

. . . Cosme Pido died in the Municipality of Hinigaran, Negros Occidental, he died intestate and without any known
debts and obligations which the said parcel of land is (sic) held liable.

That Cosme Pido was survived by his/her legitimate heirs, namely: LAURENCIANA PIDO, wife, ELY, ERVIN,
ELMER, and ELECHOR all surnamed PIDO; children;

That invoking the provision of Section 1, Rule 74 of the Rules of Court, the above-mentioned heirs do hereby declare
unto [sic] ourselves the only heirs of the late Cosme Pido and that we hereby adjudicate unto ourselves the above-
mentioned parcel of land in equal shares.

Now, therefore, We LAURENCIANA  , ELY, ELMER, ERVIN and ELECHOR all surnamed PIDO, do hereby waive,
3

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

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

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

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

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

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

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

WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff, Edy de los Reyes, and
against the defendant, Teodoro Acap, ordering the following, to wit:

1. Declaring forfeiture of defendant's preferred right to issuance of a Certificate of Land Transfer under Presidential
Decree No. 27 and his farmholdings;

2. Ordering the defendant Teodoro Acap to deliver possession of said farm to plaintiff, and;

3. Ordering the defendant to pay P5,000.00 as attorney's fees, the sum of P1,000.00 as expenses of litigation and the
amount of P10,000.00 as actual damages. 5

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

There is no doubt that defendant is a registered tenant of Cosme Pido. However, when the latter died their tenancy
relations changed since ownership of said land was passed on to his heirs who, by executing a Deed of Sale, which
defendant admitted in his affidavit, likewise passed on their ownership of Lot 1130 to herein plaintiff (private
respondent). As owner hereof, plaintiff has the right to demand payment of rental and the tenant is obligated to pay
rentals due from the time demand is made. . . . 6

xxx xxx xxx

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

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

The Court of Appeals brushed aside petitioner's argument that the Declaration of Heirship and Waiver of Rights (Exhibit "D"), the
document relied upon by private respondent to prove his ownership to the lot, was excluded by the lower court in its order dated 27
August 1990. The order indeed noted that the document was not identified by Cosme Pido's heirs and was not registered with the
Registry of Deeds of Negros Occidental. According to respondent court, however, since the Declaration of Heirship and Waiver of
Rights appears to have been duly notarized, no further proof of its due execution was necessary. Like the trial court, respondent court
was also convinced that the said document stands as  prima facie proof of appellee's (private respondent's) ownership of the land in
dispute.

With respect to its non-registration, respondent court noted that petitioner had actual knowledge of the subject saleof the land in dispute
to private respondent because as early as 1983, he (petitioner) already knew of private respondent's claim over the said land but which
he thereafter denied, and that in 1982, he (petitioner) actually paid rent to private respondent. Otherwise stated, respondent court
considered this fact of rental payment in 1982 as estoppel on petitioner's part to thereafter refute private respondent's claim of
ownership over the said land. Under these circumstances, respondent court ruled that indeed there was deliberate refusal by petitioner
to pay rent for a continued period of five years that merited forfeiture of his otherwise preferred right to the issuance of a certificate of
land transfer.

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

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

1. WHETHER OR NOT THE SUBJECT DECLARATION OF HEIRSHIP AND WAIVER OF RIGHTS IS A

RECOGNIZED MODE OF ACQUIRING OWNERSHIP BY PRIVATE RESPONDENT OVER THE LOT IN
QUESTION.

2. WHETHER OR NOT THE SAID DOCUMENT CAN BE CONSIDERED A DEED OF SALE IN FAVOR OF PRIVATE
RESPONDENT OF THE LOT IN QUESTION.

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

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

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

We find the petition impressed with merit.

In the first place, an asserted right or claim to ownership or a real right over a thing arising from a juridical act, however justified, is
not  per se sufficient to give rise to ownership over the res. That right or title must be completed by fulfilling certain conditions imposed
by law. Hence, ownership and real rights are acquired only pursuant to a legal mode or process. While title is the juridical justification,
mode is the actual process of acquisition or transfer of ownership over a thing in question. 8

Under Article 712 of the Civil Code, the modes of acquiring ownership are generally classified into two (2) classes, namely, the original
mode (i.e., through occupation, acquisitive prescription, law or intellectual creation) and the derivative mode  (i.e., through
succession mortis causa  or tradition as a result of certain contracts, such as sale, barter, donation, assignment or mutuum).

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

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

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

Hence, there is a marked difference between a sale of hereditary rights and a waiver  of hereditary rights. The first presumes the
existence of a contract or deed of sale between the parties.  The second is, technically speaking, a mode of extinction of ownership
11

where there is an abdication or intentional relinquishment of a known right with knowledge of its existence and intention to relinquish
it, in favor of other persons who are co-heirs in the succession.  Private respondent, being then a stranger to the succession of Cosme
12

Pido, cannot conclusively claim ownership over the subject lot on the sole basis of the waiver document which neither recites the
elements of either a sale,  or a donation,  or any other derivative mode of acquiring ownership.
13 14

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

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

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

It is to be noted that while the existence of said adverse claim was duly proven, there is no evidence whatsoever that a deed of sale
was executed between Cosme Pido's heirs and private respondent transferring the rights of Pido's heirs to the land in favor of private
respondent. Private respondent's right or interest therefore in the tenanted lot remains an adverse claim which cannot by itself be
sufficient to cancel the OCT to the land and title the same in private respondent's name.

Consequently, while the transaction between Pido's heirs and private respondent may be binding on both parties, the right of
petitioner as a registered tenant to the land cannot be perfunctorily forfeited on a mere allegation of private respondent's
ownership without the corresponding proof thereof.

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

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

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

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

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

SO ORDERED.
[ GR No. 116650, May 23, 1995 ]

TOYOTA SHAW v. CA +

DECISION

314 Phil. 201

DAVIDE, JR., J.:

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

4 June 1989

AGREEMENTS BETWEEN MR.

SOSA & POPONG BERNARDO
OF TOYOTA SHAW, INC.

1. all necessary documents will be submitted to TOYOTA SHAW, INC.  (POPONG BERNARDO) a week after, upon arrival of Mr.
Sosa from the Province (Marinduque) where the unit will be used on the 19th of June.

2.  the downpayment of P100,000.00 will be paid by Mr. Sosa on June 15, 1989

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

Very truly yours,

(Sgd.) POPONG BERNARDO.

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

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

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

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

a) downpayment - P53,148.00 
b) insurance - P13,970.00 
c) BLT registration fee - P 1,067.00 
CHMO fee - P 2,715.00 
service fee - P 500.00 
accessories - P29,000.00 

and that the "BALANCE TO BE FINANCED" is "P274,137.00." The spaces provided for "Delivery Terms" were not filled-up. It also
contains the following pertinent provisions:

CONDITIONS OF SALES
 1. This sale is subject to availability of unit.

2. Stated Price is subject to change without prior notice.  Price prevailing and in effect at time of selling will apply.....

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

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

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

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

Thereafter, Sosa sent two letters to Toyota.  In the first letter, dated 27 June 1989 and signed by him, he demanded the refund, within
five days from receipt, of the downpayment of P100,000.00 plus interest from the time he paid it and the payment of damages with a
warning that in case of Toyota's failure to do so he would be constrained to take legal action.[6] The second, dated 4 November 1989
and signed by M.O. Caballes, Sosa's counsel, demanded one million pesos representing interest and damages, again, with a warning
that legal action would be taken if payment was not made within three days.[7] Toyota's counsel answered through a letter dated 27
November 1989[8] refusing to accede to the demands of Sosa. But even before this answer was made and received by Sosa, the latter
filed on 20 November 1989 with Branch 38 of the Regional Trial Court (RTC) of Marinduque a complaint against Toyota for damages
under Articles 19 and 21 of the Civil Code in the total amount of P1,230,000.00.[9] He alleges,inter alia, that:

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

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

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

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

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

WHEREFORE, viewed from the above findings, judgment is hereby rendered in favor of the plaintiff and against the defendant:

1. ordering the defendant to pay to the plaintiff the sum of P75,000.00 for moral damages;

2. ordering the defendant to pay the plaintiff the sum of P10,000.00 for exemplary damages;

3. ordering the defendant to pay the sum of P30,000.00 attorney's fees plus P2,000.00 lawyer's transportation fare per trip in
attending to the hearing of this case;

4. ordering the defendant to pay the plaintiff the sum of P2,000.00 transportation fare per trip of the plaintiff in attending the
hearing of this case; and

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

SO ORDERED.

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

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

We find merit in the petition.

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

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

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

A contract of sale may be absolute or conditional.

and Article 1475 specifically provides when it is deemed perfected:

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

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

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

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

Moreover, Exhibit "A" shows the absence of a meeting of minds between Toyota and Sosa.  For one thing, Sosa did not even sign it. 
For another, Sosa was well aware from its title, written in bold letters, viz.,

AGREEMENTS BETWEEN MR
SOSA & POPONG BERNARDO
OF TOYOTA SHAW, INC.

that he was not dealing with Toyota but with Popong Bernardo and that the latter did not misrepresent that he had the authority to sell
any Toyota vehicle. He knew that Bernardo was only a sales representative of Toyota and hence a mere agent of the latter. It was
incumbent upon Sosa to act with ordinary prudence and reasonable diligence to know the extent of Bernardo's authority as an
agent[20] in respect of contracts to sell Toyota's vehicles.  A person dealing with an agent is put upon inquiry and must discover upon his
peril the authority of the agent.[21]

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

preparation, conception, or generation, which is the period of negotiation and bargaining, ending at the moment of
(a)
agreement of the parties;
(b) perfection or birth of the contract, which is the moment when the parties come to agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract.[22]
The second phase of the generation or negotiation stage in this case was the execution of the VSP.  It must be emphasized that
thereunder, the downpayment of the purchase price was P53,148.00 while the balance to be paid on installment should be financed by
B.A. Finance Corporation.  It is, of course, to be assumed that B.A. Finance Corp. was acceptable to Toyota, otherwise it should not
have mentioned B.A. Finance in the VSP.

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

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

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

On June 17, 1989 at around 9:30 o'clock in the morning, defendant's sales representative, Mr. Popong Bernardo, called plaintiff's house
and informed the plaintiff's son that the vehicle will not be ready for pick-up at 10:00 a.m. of June 17, 1989 but at 2:00 p.m. of that day
instead.  Plaintiff and his son went to defendant's office on June 17, 1989 at 2:00 p.m. in order to pick-up the vehicle but the defendant,
for reasons known only to its representatives, refused and/or failed to release the vehicle to the plaintiff.  Plaintiff demanded for an
explanation, but nothing was given; . . . (Italics supplied)[25]

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

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

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

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

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

No pronouncement as to costs.

SO ORDERED.
G.R. No. 143513            November 14, 2001

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, petitioner, 

vs.
COURT OF APPEALS and FIRESTONE CERAMICS, INC., respondents.

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

G.R. No. 143590                        November 14, 2001

NATIONAL DEVELOPMENT CORPORATION, petitioner, 

vs.
FIRESTONE CERAMICS, INC., respondents.

BELLOSILLO, J.:

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

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

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

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

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

The contracts of lease conspicuously contain an identically worded provision requiring FIRESTONE to construct buildings and other
improvements within the leased premises worth several hundred thousands of pesos.6

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

Apprehensive that its interest in the property would be disregarded, FIRESTONE instituted an action for specific performance to compel
NDC to sell the leased property in its favor. FIRESTONE averred that it was pre-empting the impending sale of the NDC compound to
petitioner PUP in violation of its leasehold rights over the 2.60-hectare8property and the warehouses thereon which would expire in
1999. FIRESTONE likewise prayed for the issuance of a writ of preliminary injunction to enjoin NDC from disposing of the property
pending the settlement of the controversy.9

In support of its complaint, FIRESTONE adduced in evidence a letter of Antonio A. Henson dated 15 July 1988 addressed to Mr. Jake
C. Lagonera, Director and Special Assistant to Executive Secretary Catalino Macaraeg, reviewing a proposed memorandum order
submitted to then President Corazon C. Aquino transferring the whole NDC compound, including the leased property, in favor of
petitioner PUP. Attached to the letter was a draft of the proposed memorandum order as well as a summary of existing leases on the
subject property. The survey listed FIRESTONE as lessee of a portion of the property, placed at 29,00010 square meters, whose
contract with NDC was set to expire on 31 December 198911 renewable for another ten (10) years at the option of the lessee. The report
expressly recognized FIRESTONE's right of first refusal to purchase the leased property "should the lessor decide to sell the same."12
Meanwhile, on 21 February 1989 PUP moved to intervene and asserted its interest in the subject property, arguing that a
"purchaser pendente lite of property which is subject of a litigation is entitled to intervene in the proceedings."13 PUP referred
to Memorandum Order No. 214 issued by then President Aquino ordering the transfer of the whole NDC compound to the National
Government, which in turn would convey the aforementioned property in favor of PUP at acquisition cost. The issuance was supposedly
made in recognition of PUP's status as the "Poor Man's University" as well as its serious need to extend its campus in order to
accommodate the growing student population. The order of conveyance of the 10.31-hectare property would automatically result in the
cancellation of NDC's total obligation in favor of the National Government in the amount of P57,193,201.64.

Convinced that PUP was a necessary party to the controversy that ought to be joined as party defendant in order to avoid multiplicity of
suits, the trial court granted PUP's motion to intervene. FIRESTONE moved for reconsideration but was denied. On certiorari, the Court
of Appeals affirmed the order of the trial court. FIRESTONE came to us on review but in a Resolution dated 11 July 1990 we upheld
PUP's inclusion as party-defendant in the present controversy.

Following the denial of its petition, FIRESTONE amended its complaint to include PUP and Executive Secretary Catalino Macaraeg, Jr.,
as party-defendants, and sought the annulment of Memorandum Order No. 214. FIRESTONE alleged that although Memorandum
Order No. 214 was issued "subject to such liens/leases existing [on the subject property]," PUP disregarded and violated its existing
lease by increasing the rental rate at P200,000.00 a month while demanding that it vacated the premises immediately.14 FIRESTONE
prayed that in the event Memorandum Order No. 214 was not declared unconstitutional, the property should be sold in its favor at the
price for which it was sold to PUP - P554.74 per square meter or for a total purchase price of P14,423,240.00.15

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

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

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

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

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

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

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

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

On the last day of the extended period PUP filed its Petition for Review on Certiorari assailing the Decision of the Court of Appeals of 6
December 1999 as well as the Resolution of 6 June 2000 denying reconsideration thereof. PUP raised two issues: (a) whether the
courts a quo erred when they "conjectured" that the transfer of the leased property from NDC to PUP amounted to a sale; and, (b)
whether FIRESTONE can rightfully invoke its right of first refusal. Petitioner posited that if we were to place our imprimatur on the
decisions of the courts a quo, "public welfare or specifically the constitutional priority accorded to education" would greatly be
prejudiced.24
Paradoxically, our paramount interest in education does not license us, or any party for that matter, to destroy the sanctity of binding
obligations. Education may be prioritized for legislative or budgetary purposes, but we doubt if such importance can be used to
confiscate private property such as FIRESTONE's right of first refusal.

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

Accordingly, on 26 July 2000 we issued a Resolution dismissing PUP's Petition for Review for having been filed out of time. PUP
moved for reconsideration imploring a resolution or decision on the merits of its petition. Strangely, about the same time, several
articles came out in the newspapers assailing the denial of the petition. The daily papers reported that we unreasonably dismissed
PUP's petition on technical grounds, affirming in the process the decision of the trial court to sell the disputed property to the prejudice
of the government in the amount of P1,000,000,000.00.26 Counsel for petitioner PUP, alleged that the trial court and the Court of
Appeals "have decided a question of substance in a way definitely not in accord with law or jurisprudence."27

At the outset, let it be noted that the amount of P1,000,000,000.00 as reported in the papers was way too exaggerated, if not fantastic.
We stress that NDC itself sold the whole 10.31-hectare property to PUP at only P57,193,201.64 which represents NDC's obligation to
the national government that was, in exchange, written off. The price offered per square meter of the property was pegged at P554.74.
FIRESTONE's leased premises would therefore be worth only P14,423,240.00. From any angle, this amount is certainly far below the
ballyhooed price of P1,000,000,000.00.

On 4 October 2000 we granted PUP's Motion for Reconsideration to give it a chance to ventilate its right, if any it still had in the leased
premises, thereby paving the way for a reinstatement of its Petition for Review.28 In its appeal, PUP took to task the courts a quo for
supposedly "substituting or decreeing its mind or consent for that of the parties (referring to NDC and PUP) in determining whether or
not a contract of sale was perfected." PUP also argued that inasmuch as "it is the parties alone whose minds must meet in reference to
the subject matter and cause," it concluded that it was error for the lower courts to have decreed the existence of a sale of the NDC
compound thus allowing FIRESTONE to exercise its right of first refusal.

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

In due course both petitions were consolidated.30

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

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

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

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

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

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

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

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

Furthermore, the cancellation of NDC's liabilities in favor of the National Government in the amount of P57,193,201.64 constituted the
"consideration" for the sale. As correctly observed by the Court of Appeals-
 The defendants-appellants' interpretation that there was a mere transfer, and not a sale, apart from being specious sophistry
and a mere play of words, is too strained and hairsplitting. For it is axiomatic that every sale imposes upon the vendor the
obligation to transfer ownership as an essential element of the contract. Transfer of title or an agreement to transfer title for a
price paid, or promised to be paid, is the very essence of sale (Kerr & Co. v. Lingad, 38 SCRA 524; Schmid & Oberly, Inc., v.
RJL Martinez Fishing Corp., 166 SCRA 493). At whatever legal angle we view it, therefore, the inescapable fact remains that
all the requisites of a valid sale were attendant in the transaction between co-defendants-appellants NDC and PUP concerning
the realities subject of the present suit.36

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

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

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

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

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

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

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

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

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

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

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

SO ORDERED
G.R. No. 166862             December 20, 2006

MANILA METAL CONTAINER CORPORATION, petitioner, 

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

DECISION

CALLEJO, SR., J.:

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

The Antecedents

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

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

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

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

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

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

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

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

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

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

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

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

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

35. PNB approved the repurchase price of P1,574,560.47 for which it accepted P725,000.00 from Manila Metal. PNB cannot
take advantage of its own delay and long inaction in demanding a higher amount based on unilateral computation of interest
rate without the consent of Manila Metal.

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

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

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

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

Petitioner prayed that, after due proceedings, judgment be rendered in its favor, thus:

a) Declaring the Amended Real Estate Mortgage (Annex "A") null and void and without any legal force and effect.

b) Declaring defendant's acts of extra-judicially foreclosing the mortgage over plaintiff's property and setting it for auction sale
null and void.

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

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

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

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

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

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

1. Whether or not the June 4, 1985 letter of the defendant approving/accepting plaintiff's offer to purchase the property is still
valid and legally enforceable.

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

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

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

On March 18, 1993, petitioner offered to repurchase the property for P3,500,000.00.28 The offer was however rejected by respondent
PNB, in a letter dated April 13, 1993. According to it, the prevailing market value of the property was approximately P30,000,000.00,
and as a matter of policy, it could not sell the property for less than its market value.29 On June 21, 1993, petitioner offered to purchase
the property for P4,250,000.00 in cash.30 The offer was again rejected by respondent PNB on September 13, 1993.31

On May 31, 1994, the trial court rendered judgment dismissing the amended complaint and respondent PNB's counterclaim. It ordered
respondent PNB to refund the P725,000.00 deposit petitioner had made.32 The trial court ruled that there was no perfected contract of
sale between the parties; hence, petitioner had no cause of action for specific performance against respondent. The trial court declared
that respondent had rejected petitioner's offer to repurchase the property. Petitioner, in turn, rejected the terms and conditions
contained in the June 4, 1985 letter of the SAMD. While petitioner had offered to repurchase the property per its letter of July 14, 1988,
the amount of P643,422.34 was way below the P1,206,389.53 which respondent PNB had demanded. It further declared that
the P725,000.00 remitted by petitioner to respondent PNB on June 4, 1985 was a "deposit," and not a downpayment or earnest money.

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

THE LOWER COURT ERRED IN RULING THAT DEFENDANT-APPELLEE'S LETTER DATED 4 JUNE 1985
APPROVING/ACCEPTING PLAINTIFF-APPELLANT'S OFFER TO PURCHASE THE SUBJECT PROPERTY IS NOT VALID
AND ENFORCEABLE.

II

THE LOWER COURT ERRED IN RULING THAT THERE WAS NO PERFECTED CONTRACT OF SALE BETWEEN
PLAINTIFF-APPELLANT AND DEFENDANT-APPELLEE.

III

THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLLANT WAIVED ITS RIGHT TO PURCHASE THE
SUBJECT PROPERTY WHEN IT FAILED TO CONFORM WITH CONDITIONS SET FORTH BY DEFENDANT-APPELLEE IN
ITS LETTER DATED 4 JUNE 1985.

IV

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT IT WAS THE DEFENDANT-APPELLEE WHICH
RENDERED IT DIFFICULT IF NOT IMPOSSIBLE FOR PLAINTIFF-APPELLANT TO COMPLETE THE BALANCE OF THEIR
PURCHASE PRICE.

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT THERE WAS NO VALID RESCISSION OR
CANCELLATION OF SUBJECT CONTRACT OF REPURCHASE.

VI

THE LOWER COURT ERRED IN DECLARING THAT PLAINTIFF FAILED AND REFUSED TO SUBMIT THE AMENDED
REPURCHASE OFFER.

VII

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

VIII

THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT ACTUAL, MORAL AND EXEMPLARY
DAMAGES, ATTOTRNEY'S FEES AND LITIGATION EXPENSES.33

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

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

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

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

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

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

I. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THERE IS NO PERFECTED
CONTRACT OF SALE BETWEEN THE PETITIONER AND RESPONDENT.

II. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE AMOUNT OF
PHP725,000.00 PAID BY THE PETITIONER IS NOT AN EARNEST MONEY.

III. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE FAILURE OF THE
PETITIONER-APPELLANT TO SIGNIFY ITS CONFORMITY TO THE TERMS CONTAINED IN PNB'S JUNE 4, 1985 LETTER
MEANS THAT THERE WAS NO VALID AND LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE PARTIES.

IV. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW THAT NON-PAYMENT OF THE PETITIONER-
APPELLANT OF THE BALANCE OF THE OFFERED PRICE IN THE LETTER OF PNB DATED JUNE 4, 1985, WITHIN
SIXTY (60) DAYS FROM NOTICE OF APPROVAL CONSTITUTES NO VALID AND LEGALLY ENFORCEABLE CONTRACT
OF SALE BETWEEN THE PARTIES.

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

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

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

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

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

Petitioner's letters dated March 18, 1993 and June 21, 1993 to respondent during the pendency of the case in the RTC were merely to
compromise the pending lawsuit, they did not constitute separate offers to repurchase the property. Such offer to compromise should
not be taken against it, in accordance with Section 27, Rule 130 of the Revised Rules of Court.

For its part, respondent contends that the parties never graduated from the "negotiation stage" as they could not agree on the amount
of the repurchase price of the property. All that transpired was an exchange of proposals and counter-proposals, nothing more. It insists
that a definite agreement on the amount and manner of payment of the price are essential elements in the formation of a binding and
enforceable contract of sale. There was no such agreement in this case. Primarily, the concept of "suspensive condition" signifies a
future and uncertain event upon the fulfillment of which the obligation becomes effective. It clearly presupposes the existence of a valid
and binding agreement, the effectivity of which is subordinated to its fulfillment. Since there is no perfected contract in the first place,
there is no basis for the application of the principles governing "suspensive conditions."

According to respondent, the Statement of Account prepared by SAMD as of June 25, 1984 cannot be classified as a counter-offer; it is
simply a recital of its total monetary claims against petitioner. Moreover, the amount stated therein could not likewise be considered as
the counter-offer since as admitted by petitioner, it was only recommendation which was subject to approval of the PNB Board of
Directors.

Neither can the receipt by the SAMD of P725,000.00 be regarded as evidence of a perfected sale contract. As gleaned from the
parties' Stipulation of Facts during the proceedings in the court a quo, the amount is merely an acknowledgment of the receipt
of P725,000.00 as deposit to repurchase the property. The deposit of P725,000.00 was accepted by respondent on the condition that
the purchase price would still be approved by its Board of Directors. Respondent maintains that its acceptance of the amount was
qualified by that condition, thus not absolute. Pending such approval, it cannot be legally claimed that respondent is already bound by
any contract of sale with petitioner.

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

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

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

The Ruling of the Court

The ruling of the appellate court that there was no perfected contract of sale between the parties on June 4, 1985 is correct.

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to
render some service.41 Under Article 1318 of the New Civil Code, there is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

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

(3) Cause of the obligation which is established.

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

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

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

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

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

A negotiation is formally initiated by an offer, which, however, must be certain.50 At any time prior to the perfection of the contract, either
negotiating party may stop the negotiation. At this stage, the offer may be withdrawn; the withdrawal is effective immediately after its
manifestation. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must
be plain, unequivocal, unconditional and without variance of any sort from the proposal. In Adelfa Properties, Inc. v. Court of
Appeals,51 the Court ruled that:

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

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

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

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

2. Within six months from date of approval of our request, we will pay another FOUR HUNDRED FIFTY THOUSAND PESOS
(P450,000.00); and
 3. The remaining balance together with the interest and other expenses that will be incurred will be paid within the last six
months of the one year grave period requested for.57

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

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

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

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

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

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

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

ART. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of
the perfection of the contract.

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

8. On June 8, 1984, the Special Assets Management Department (SAMD) of PNB prepared an updated Statement of Account
showing MMCC's total liability to PNB as of June 25, 1984 to be P1,574,560.47 and recommended this amount as the
repurchase price of the subject property.

9. On June 25, 1984, MMCC paid P725,000.00 to PNB as deposit to repurchase the property. The deposit of P725,000 was
accepted by PNB on the condition that the purchase price is still subject to the approval of the PNB Board.62

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

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

1. That the selling price shall be the total Bank's claim as of documentation date (pls. see attached statement of account as of
5-31-85), payable in cash (P725,000.00 already deposited) within sixty (60) days from notice of approval;

2. The Bank sells only whatever rights, interests and participation it may have in the property and you are charged with full
knowledge of the nature and extent of said rights, interests and participation and waive your right to warranty against eviction.

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

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

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

6. That the sale shall be subject to such other terms and conditions that the Legal Department may impose to protect the
interest of the Bank.64
It appears that although respondent requested petitioner to conform to its amended counter-offer, petitioner refused and instead
requested respondent to reconsider its amended counter-offer. Petitioner's request was ultimately rejected and respondent offered to
refund its P725,000.00 deposit.

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

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

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

SO ORDERED.
G.R. No. 108346       July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, 

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

PANGANIBAN, J.:

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

The Case

Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court of Appeals (CA) in CA-GR CV No. 32991 dated
October 9, 1992, as well as its Resolution3 dated December 29, 1992 denying petitioner's motion for reconsideration.4

The dispositive portion of the assailed Decision reads:

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

The Facts

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

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

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

'x x x      x x x      x x x

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

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

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

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

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

'x x x      x x x      x x x

'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the sum of EIGHT
HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage obligations on the
property with the Bank of the Philippine Islands in the amount of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, in accordance with the terms and conditions of the Deed of Real Estate
Mortgage dated _____, signed and executed by Mr. David A. Raymundo with the said Bank, acknowledged before
Notary Public for Makati, _____, as Doc. No. _____, Page No. _____, Book No. _____, Series of 1986 of his Notarial
Register.
 'WHEREAS, while my application for the assumption of the mortgage obligations on the property is not yet approved
by the mortgagee Bank, I have agreed to pay the mortgage obligations on the property with the Bank in the name of
Mr. David A. Raymundo, in accordance with the terms and conditions of the said Deed of Real Estate Mortgage,
including all interests and other charges for late payment.

'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of attesting and
confirming our private understanding concerning the said mortgage obligations to be assumed.

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

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

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

'3. That I am executing the Undertaking for purposes of binding myself, my heirs, successors and assigns, to strictly
and faithfully comply with the terms and conditions of the mortgage obligations with the Bank of the Philippine
Islands, and the covenants, stipulations and provisions of this Undertaking.

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

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

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

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

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

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

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

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

"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of the intended saleof the subject
property allegedly due to the latter's failure to comply with the terms and conditions of the Deed of Sale with Assumption of
Mortgage and the Undertaking (Exh. '5', pp. 225-226, Record)."6

Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for specific performance, nullity of
cancellation, writ of possession and damages. This was docketed as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch
149. The case was tried and heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this Court), who dismissed
the Complaint in a Decision dated November 14, 1990.7 Thereafter, petitioners filed a Motion for Reconsideration.8

Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador S. A. Abad Santos was assigned
to the sala she vacated. In an Order dated May 15, 1991,9 Judge Abad Santos granted petitioner's Motion for Reconsideration and
directed the parties to proceed with the sale. He instructed petitioners to pay the balance of P1.8 million to private respondents who, in
turn, were ordered to execute a deed of absolute sale and to surrender possession of the disputed property to petitioners.

Private respondents appealed to the CA.

Ruling of the Court of Appeal

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

"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the consideration of this sale, the VENDEE
(Velarde)' would assume to pay the mortgage obligation on the subject property in the amount of P 1.8 million in favor of BPI in
the name of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde includes the downpayment of
P800,000.00 and the balance of Pl.8 million, and the balance of Pl.8 million cannot be paid in cash, Vendee Velarde, as part of
the consideration of the sale, had to assume the mortgage obligation on the subject property. In other words, the assumption
of the mortgage obligation is part of the obligation of Velarde, as vendee, under the contract. Velarde further agreed 'to strictly
and faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage signed and executed by the
VENDOR in favor of BPI x x x as if the same were originally signed and executed by the Vendee. (p. 2, thereof, p. 12, Record).
This was reiterated by Velarde in the document entitled 'Undertaking' wherein the latter agreed to continue paying said loan in
accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of Raymundo. Moreover, it was
stipulated that in the event of violation by Velarde of any terms and conditions of said deed of real estate mortgage, the
downpayment of P800,000.00 plus all payments made with BPI or the mortgage loan would be forfeited and the [D]eed of
[S]ale with [A]ssumption of [M]ortgage would thereby be Cancelled automatically and of no force and effect (pars. 2 & 3,
thereof, pp 13-14, Record).

"From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumption by Velarde of the
mortgage obligation of Raymundo in the amount of Pl.8 million. This would mean that Velarde had to make payments to BPI
under the [D]eed of [R]eal [E]state [M]ortgage the name of Raymundo. The application with BPI for the approval of the
assumption of mortgage would mean that, in case of approval, payment of the mortgage obligation will now be in the name of
Velarde. And in the event said application is disapproved, Velarde had to pay in full. This is alleged and admitted in Paragraph
5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing on September 15, 1997 (p. 47, t.s.n.,
September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the non-payment of the mortgage
obligation would result in a violation of the contract. And, upon Velarde's failure to pay the agreed price, the[n] Raymundo may
choose either of two (2) actions - (1) demand fulfillment of the contract, or (2) demand its rescission (Article 1191, Civil Code).

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

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

Hence, this appeal. 11

The Issues

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

"I.

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

"II

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

"III

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

The Court's Ruling

The Petition is partially meritorious.

First Issue:
 Breach of Contract

Petitioner aver that their nonpayment of private respondents' mortgage obligation did not constitute a breach of contract, considering
that their request to assume the obligation had been disapproved by the mortgagee bank. Accordingly, payment of the monthly
amortizations ceased to be their obligation and, instead, it devolved upon private respondents again.

However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the purchase price. As
admitted by both parties, their agreement mandated that petitioners should pay the purchase price balance of P1.8 million to private
respondents in case the request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when petitioners
received notice of the bank's disapproval of their application to assume respondents' mortgage, they should have paid the balance of
the P1.8 million loan.

Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only upon the fulfillment of certain
conditions not originally agreed upon in the contract of sale. Such conditional offer to pay cannot take the place of actual payment as
would discharge the obligation of a buyer under a contract of sale.

In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate things, and the buyer to pay
therefor a price certain in money or its equivalent.13

Private respondents had already performed their obligation through the execution of the Deed of Sale, which effectively transferred
ownership of the property to petitioner through constructive delivery. Prior physical delivery or possession is not legally required, and
the execution of the Deed of Sale is deemed equivalent to delivery.14

Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price in the manner agreed upon.
Worse, they wanted private respondents to perform obligations beyond those stipulated in the contract before fulfilling their own
obligation to pay the full purchase price.

Second Issue

Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as the former had
signified their willingness to pay the balance of the purchase price only a little over a month from the time they were notified of the
disapproval of their application for assumption of mortgage. Petitioners also aver that the breach of the contract was not substantial as
would warrant a rescission. They cite several cases15 in which this Court declared that rescission of a contract would not be permitted
for a slight or casual breach. Finally, they argue that they have substantially performed their obligation in good faith, considering that
they have already made the initial payment of P800,000 and three (3) monthly mortgage payments.

As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the mortgage obligations, as their
nonperformance of their reciprocal obligation to pay the purchase price under the contract of sale. Private respondents' right to rescind
the contract finds basis in Article 1191 of the Civil Code, which explicitly provides as follows:

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

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

The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other
party who violates the reciprocity between them.16 The breach contemplated in the said provision is the obligor's failure to comply with
an existing obligation.17 When the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the
absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission.18

In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of petitioners to
comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in
the contract of sale, a violation that consequently gave rise to private respondent's right to rescind the same in accordance with law.

True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became due; however, this was
not equivalent to actual payment as would constitute a faithful compliance of their reciprocal obligation. Moreover, the offer to pay was
conditioned on the performance by private respondents of additional burdens that had not been agreed upon in the original contract.
Thus, it cannot be said that the breach committed by petitioners was merely slight or casual as would preclude the exercise of the right
to rescind.

Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumstances in those cases are not analogous to
those in the present one. In Song Fo there was, on the part of the buyer, only a delay of twenty (20) days to pay for the goods
delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the seller.

In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which was actually paid.

In Tan,  the alleged breach was private respondent's delay of only a few days, which was for the purpose of clearing the title to the
property; there was no reference whatsoever to the nonpayment of the contract price.

In the instant case, the breach committed did not merely consist of a slight delay in payment or an irregularity; such breach would not
normally defeat the intention of the parties to the contract. Here, petitioners not only failed to pay the P1.8 million balance, but they also
imposed upon private respondents new obligations as preconditions to the performance of their own obligation. In effect, the qualified
offer to pay was a repudiation of an existing obligation, which was legally due and demandable under the contract of sale. Hence,
private respondents were left with the legal option of seeking rescission to protect their own interest.
Mutual Restitution

Required in Rescission

As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of the
terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the
contract does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to bring back the
parties to their original situation prior to the inception of the contract. Accordingly, the initial payment of P800,000 and the
corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners
should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission
can return whatever he may be obliged to restore.20 To rescind is to declare a contract void at its inception and to put an end to it as
though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from
the beginning and restore the parties to their relative positions as if no contract has been made.21

Third Issue

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue raised by petitioners. Suffice it to
say that the three conditions appearing on the January 7, 1987 letter of petitioners to private respondents were not part of the original
contract. By that time, it was already incumbent upon the former to pay the balance of the sale price. They had no right to demand
preconditions to the fulfillment of their obligation, which had become due.

WHEREFORE, the assailed Decision is hereby AFFIRMED  with the MODIFICATION  that private respondents are ordered to return to
petitioners the amount of P874,150, which the latter paid as a consequence of the rescinded contract, with legal interest thereon from
January 8, 1987, the date of rescission. No pronouncement as to costs.

SO ORDERED. 1â
G.R. No. 137290               July 31, 2000

SAN MIGUEL PROPERTIES PHILIPPINES, INC., petitioner, 

vs.
SPOUSES ALFREDO HUANG and GRACE HUANG, respondents.

DECISION

MENDOZA, J.:

This is a petition for review of the decision, dated April 8, 1997, of the Court of Appeals which reversed the decision of the Regional
1 

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

The facts are not in dispute.

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

On February 21, 1994, the properties were offered for sale for ₱52,140,000.00 in cash. The offer was made to Atty. Helena M. Dauz
who was acting for respondent spouses as undisclosed principals. In a letter dated March 24, 1994, Atty. Dauz signified her clients’
2 

interest in purchasing the properties for the amount for which they were offered by petitioner, under the following terms: the sum of
₱500,000.00 would be given as earnest money and the balance would be paid in eight equal monthly installments from May to
December, 1994. However, petitioner refused the counter-offer.

On March 29, 1994, Atty. Dauz wrote another letter proposing the following terms for the purchase of the properties, viz:
3 

This is to express our interest to buy your-above-mentioned property with an area of 1, 738 sq. meters. For this purpose, we are
enclosing herewith the sum of ₱1,000,000.00 representing earnest-deposit money, subject to the following conditions.

1. We will be given the exclusive option to purchase the property within the 30 days from date of your acceptance of this offer.

2. During said period, we will negotiate on the terms and conditions of the purchase; SMPPI will secure the necessary
Management and Board approvals; and we initiate the documentation if there is mutual agreement between us.

3. In the event that we do not come to an agreement on this transaction, the said amount of ₱1,000,000.00 shall be refundable
to us in full upon demand. . . .

Isidro A. Sobrecarey, petitioner’s vice-president and operations manager for corporate real estate, indicated his conformity to the offer
by affixing his signature to the letter and accepted the "earnest-deposit" of ₱1 million. Upon request of respondent spouses, Sobrecarey
ordered the removal of the "FOR SALE" sign from the properties.

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

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

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

granted.

On July 7, 1994, petitioner, through its president and chief executive officer, Federico Gonzales, wrote Atty. Dauz informing her that
because the parties failed to agree on the terms and conditions of the sale despite the extension granted by petitioner, the latter was
returning the amount of ₱1 million given as "earnest-deposit." 5

On July 20, 1994, respondent spouses, through counsel, wrote petitioner demanding the execution within five days of a deed of sale
covering the properties. Respondents attempted to return the "earnest-deposit" but petitioner refused on the ground that respondents’
option to purchase had already expired.

On August 16, 1994, respondent spouses filed a complaint for specific performance against petitioner before the Regional Trial Court,
Branch 133, Pasig City where it was docketed as Civil Case No. 64660.

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

On December 12, 1994, the trial court granted petitioner’s motion and dismissed the action. Respondents filed a motion for
reconsideration, but it was denied by the trial court. They then appealed to the Court of Appeals which, on April 8, 1997, rendered a
decision reversing the judgment of the trial court. The appellate court held that all the requisites of a perfected contract of sale had been
6 

complied with as the offer made on March 29, 1994, in connection with which the earnest money in the amount of ₱1 million was
tendered by respondents, had already been accepted by petitioner. The court cited Art. 1482 of the Civil Code which provides that
"[w]henever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the
contract." The fact the parties had not agreed on the mode of payment did not affect the contract as such is not an essential element for
its validity. In addition, the court found that Sobrecarey had authority to act in behalf of petitioner for the sale of the properties.
7

Petitioner moved for reconsideration of the trial court’s decision, but its motion was denied. Hence, this petition.

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

Respondents were required to comment within ten (10) days from notice. However, despite 13 extensions totalling 142 days which the
Court had given to them, respondents failed to file their comment. They were thus considered to have waived the filing of a comment.

The petition is meritorious.

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

With regard to the alleged payment and acceptance of earnest money, the Court holds that respondents did not give the ₱1 million as
"earnest money" as provided by Art. 1482 of the Civil Code. They presented the amount merely as a deposit of what would eventually
become the earnest money or downpayment should a contract of sale be made by them. The amount was thus given not as a part of
the purchase price and as proof of the perfection of the contract of sale but only as a guarantee that respondents would not back out of
the sale. Respondents in fact described the amount as an "earnest-deposit." In Spouses Doromal, Sr. v. Court of Appeals, it was held:
9 

. . . While the ₱5,000 might have indeed been paid to Carlos in October, 1967, there is nothing to show that the same was in the
concept of the earnest money contemplated in Art. 1482 of the Civil Code, invoked by petitioner, as signifying perfection of the
sale. Viewed in the backdrop of the factual milieu thereof extant in the record, We are more inclined to believe that the said ₱5,000.00
were paid in the concept of earnest money as the term was understood under the Old Civil Code, that is, as a guarantee that the buyer
would not back out, considering that it is not clear that there was already a definite agreement as to the price then and that petitioners
were decided to buy 6/7 only of the property should respondent Javellana refuse to agree to part with her 1/7 share. 10

In the present case, the ₱1 million "earnest-deposit" could not have been given as earnest money as contemplated in Art. 1482
because, at the time when petitioner accepted the terms of respondents’ offer of March 29, 1994, their contract had not yet been
perfected. This is evident from the following conditions attached by respondents to their letter, to wit: (1) that they be given the exclusive
option to purchase the property within 30 days from acceptance of the offer; (2) that during the option period, the parties would
negotiate the terms and conditions of the purchase; and (3) petitioner would secure the necessary approvals while respondents would
handle the documentation.

The first condition for an option period of 30 days sufficiently shows that a sale was never perfected.  As petitioner correctly points out,
1âwphi1

acceptance of this condition did not give rise to a perfected sale but merely to an option or an accepted unilateral promise on the part of
respondents to buy the subject properties within 30 days from the date of acceptance of the offer. Such option giving respondents the
exclusive right to buy the properties within the period agreed upon is separate and distinct from the contract of sale which the parties
may enter. All that respondents had was just the option to buy the properties which privilege was not, however, exercised by them
11 

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

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

Equally compelling as proof of the absence of a perfected sale is the second condition that, during the option period, the parties would
negotiate the terms and conditions of the purchase. The stages of a contract of sale are as follows: (1) negotiation, covering the period
from the time the prospective contracting parties indicate interest in the contract to the time the contract is perfected; (2) perfection,
which takes place upon the concurrence of the essential elements of the sale which are the meeting of the minds of the parties as to
the object of the contract and upon the price; and (3) consummation, which begins when the parties perform their respective
undertakings under the contract of sale, culminating in the extinguishment thereof. In the present case, the parties never got past the
12 

negotiation stage. The alleged "indubitable evidence" of a perfected sale cited by the appellate court was nothing more than offers and
13 

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

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

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

to a failure to agree on the price. In Velasco v. Court of Appeals, the parties to a proposed sale had already agreed on the object of
16  17 

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

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

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

WHEREFORE, the decision of the Court of Appeals is REVERSED and respondents’ complaint is DISMISSED.

SO ORDERED.
G.R. No. 154493             December 6, 2006

REYNALDO VILLANUEVA, petitioner, 
vs.
PHILIPPINE NATIONAL BANK (PNB), respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

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

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

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

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

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

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

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

C O N F O R M E:

PRICE OF P2,883,300.00 (downpayment of P600,000.00 and the balance payable in two (2) years at quarterly
amortizations.) 11

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

This is a deposit made to show the sincerity of my purchase offer with the understanding that it shall be returned without
interest if my offer is not favorably considered or be forfeited if my offer is approved but I fail/refuse to push through the
purchase.13

Also, on July 24, 1990, P380,000.00 was debited from Villanueva’s Savings Account No. 43612 and credited to SAMD.14

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

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

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

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

2. To pay the plaintiff P1,000,000.00 as moral damages; P500,000.00 as attorney’s fees, plus litigation expenses and costs of
the suit.

SO ORDERED.17
The RTC anchored its judgment on the finding that there existed a perfected contract of sale between PNB and Villanueva. It found:

The following facts are either admitted or undisputed:

xxx

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

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

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

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

SO ORDERED.21

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

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

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

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

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

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

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

The Court sustains the CA on both issues.

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

To determine whether there was mutual consent between the parties herein, it is necessary to retrace each offer and acceptance they
made.

Respondent began with an invitation to bid issued in April 1989 covering several of its acquired assets in Calumpang, General Santos
City, including Lot No. 19 for which the floor price was P2,268,000.00. The offer was subject to the condition that sealed bids,
accompanied by a 10% deposit in manager’s or cashier’s check, be submitted not later than 10 o’clock in the morning of April 27, 1989.

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

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

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

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

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

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

Moreover, there is merit in the ruling of the CA that the July 11, 1990 marginal note was a further counter-offer which did not lead to the
perfection of a contract of sale between the parties. Petitioner’s own June 28, 1990 offer quoted the price of P3,677,000.00 for two lots
but was silent on the term of payment. Respondent’s July 6, 1990 counter-offer quoted the price of P2,833,300.00 and was also silent
on the term of payment. Up to that point, the term or schedule of payment was not on the negotiation table. Thus, when petitioner
suddenly introduced a term of payment in his July 11, 1990 counter-offer, he interjected into the negotiations a new substantial matter
on which the parties had no prior discussion and over which they must yet agree.31 Petitioner’s July 11, 1990 counter-offer, therefore,
did not usher the parties beyond the negotiation stage of contract making towards its perfection. He made a counter-offer that required
acceptance by respondent.

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

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

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

To begin with, PNB-General Santos Branch, which accepted petitioner’s P380,000.00 payment, and PNB-SAMD, which accepted
his P200,000.00 payment, had no authority to bind respondent to a contract of sale with petitioner.33 Petitioner is well aware of this. To
recall, petitioner sent his June 28, 1990 offer to PNB-General Santos Branch. Said branch did not act on his offer except to endorse it to
Guevarra. Thereafter, petitioner transacted directly with Guevarra. Petitioner then cannot pretend that PNB-General Santos Branch had
authority to accept his July 11, 1990 counter-offer by merely accepting his P380,000.00 payment.

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

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

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

In sum, the amounts paid by petitioner were not in the nature of downpayment or earnest money but were mere deposits or proof of his
interest in the purchase of Lot No. 19. Acceptance of said amounts by respondent does not presuppose perfection of any contract.36

It must be noted that petitioner has expressly admitted that he had withdrawn the entire amount of P580,000.00 deposit from PNB-
General Santos Branch.37

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

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

No costs.

SO ORDERED.
G.R. No. 126444 December 4, 1998

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

MARTINEZ, J.:

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

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

On July 5, 1988, plaintiffs-appellees (petitioners) filed this action against defendants-appellants (respondents). In the
complaint, plaintiffs-appellees (petitioners) alleged that their deceased mother never sold, conveyed, transferred or
disposed of the property in question to any person or entity much less to Regalado Mondejar save the donation made
to the Municipality of Talacogon in 1956; that at the time of the alleged sale to Regalado Mondejar by Trinidad
Quijada, the land still belongs to the Municipality of Talacogon, hence, the supposed sale is null and void.

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

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

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

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

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

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

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

4) ordering Defendants to remove their improvements constructed on the

questioned lot;

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

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

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

SO ORDERED. 2

On appeal, the Court of Appeals reversed and set aside the judgment a quo  ruling that the sale made by Trinidad Quijada to
3

respondent Mondejar was valid as the former retained an inchoate interest on the lots by virtue of the automatic reversion
clause in the deed of donation.  Thereafter, petitioners filed a motion for reconsideration. When the CA denied their
4

motion,  petitioners instituted a petition for review to this Court arguing principally that the sale of the subject property made
5

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

We affirm the decision of the respondent court.

The donation made on April 5, 1956 by Trinidad Quijada and her brother and sisters  was subject to the condition that the
7

donated property shall be "used solely and exclusively as a part of the campus of the proposed Provincial High School in
Talacogon."  The donation further provides that should "the proposed Provincial High School be discontinued or if the same
8

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

policy was validly imposed in the donation.  10

When the Municipality's acceptance of the donation was made known to the donor, the former became the new owner of the
donated property — donation being a mode of acquiring and transmitting ownership   — notwithstanding the condition
11

imposed by the donee. The donation is perfected once the acceptance by the donee is made known to the donor.  According,
12

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

In this case, that resolutory condition is the construction of the school. It has been ruled that when a person donates land to
another on the condition that the latter would build upon the land a school, the condition imposed is not a condition
precedent or a suspensive condition but a resolutory one.   Thus, at the time of the sales made in 1962 towards 1968, the
13

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

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

As to laches, petitioners' action is not yet barred thereby. Laches presupposes failure or neglect for an unreasonable and
unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier;   "it is 14

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

a) Conduct on the part of the defendant, or of one under whom he claims,

giving rise to the situation complained of;

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

defendant's conduct and after he has an opportunity to sue;

c) Lack of knowledge or notice on the part of the defendant that the

complainant would assert the right on which he bases his suit; and,

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

complainant.  16

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

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

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

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

ownership which occurs upon the actual or constructive delivery of the thing sold.   A perfected contract of sale cannot be
20

challenged on the ground of non-ownership on the part of the seller at the time of its perfection; hence, the sale is still valid.
The consummation, however, of the perfected contract is another matter. It occurs upon the constructive or actual delivery of
the subject matter to the buyer when the seller or her successors-in-interest subsequently acquires ownership thereof. Such
circumstance happened in this case when petitioners — who are Trinidad Quijada's heirs and successors-in-interest —
became the owners of the subject property upon the reversion of the ownership of the land to them. Consequently, ownership
is transferred to respondent Mondejar and those who claim their right from him. Article 1434 of the New Civil Code supports
the ruling that the seller's "title passes by operation of law to the buyer."   This rule applies not only when the subject matter
21

of the contract of sale is goods,  but also to other kinds of property, including real property. 
22 23

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

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

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

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

be ruled that the former acted in "gross and evident bad faith" in refusing to satisfy the latter's claims considering that private
respondents were under an honest belief that they have a legal right over the property by virtue of the deed of sale. Moral
damages cannot likewise be justified as none of the circumstances enumerated under Articles 2219.   and 2220   of the New
27 28

Civil Code concur in this case

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

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

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

GONZAGA-REYES, J.:

This Petition for Review on Certiorari seeks the reversal of the Decision of the Court of Appeals  in CA G.R. CV No. 147457 entitled
1 

"ALONZO MACHUCA versus ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, LEA ZULUETA-LAFORTEZA, MICHAEL Z.
LAFORTEZA, and DENNIS Z. LAFORTEZA".

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

The property involved consists of a house and lot located at No. 7757 Sherwood Street, Marcelo Green Village, Parañaque,
Metro Manila, covered by Transfer Certificate of Title (TCT) No. (220656) 8941 of the Registered of Deeds of Parañaque
(Exhibit "D", Plaintiff, record, pp. 331-332). The subject property is registered in the name of the late Francisco Q. Laforteza,
although it is conjugal in nature (Exhibit "8", Defendants, record pp. 331-386).

On August 2, 1988, defendant Lea Zulueta-Laforteza executed a Special Power of Attorney in favor of defendants Roberto Z.
Laforteza and Gonzalo Z. Laforteza, Jr., appointing both as her Attorney-in-fact authorizing them jointly to sell the subject
property and sign any document for the settlement of the estate of the late Francisco Q. Laforteza (Exh. "A", Plaintiff, record,
pp. 323-325).

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

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

In the exercise of the above authority, on January 20, 1989, the heirs of the late Francisco Q. Laforteza represented by
Roberto Z. Laforteza and Gonzalo Z. Laforteza, Jr. entered into a Memorandum of Agreement (Contract to Sell) with the
plaintiff  over the subject property for the sum of SIX HUNDRED THIRTY THOUSAND PESOS (P630,000.00) payable as
2 

follows:

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

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

Significantly, the fourth paragraph of the Memorandum of Agreement (Contract to Sell) dated January 20, 1989 (Exh.
"E", supra.) contained a provision as follows:

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

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

On September 18, 1998  , defendant heirs, through their counsel wrote a letter (Exh. 1, Defendants, record, p. 370) to the
3 

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

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

On November 15, 1989, plaintiff informed the defendant heirs, through defendant Roberto Z. Laforteza, that he already had
the balance of SIX HUNDRED THOUSAND PESOS (P600,000.00) covered by United Coconut Planters Bank Manager's
Check No. 000814 dated November 15, 1989 (TSN, August 25, 1992, p. 11; Exhs. "H", record, pp. 343-344; "M", records p.
350; and "N", record, p. 351). However, the defendants, refused to accept the balance (TSN, August 24, 1992, p. 14; Exhs.
"M-1", Plaintiff, record, p. 350; and "N-1", Plaintiff, record, p. 351). Defendant Roberto Z. Laforteza had told him that the
subject property was no longer for sale (TSN, October 20, 1992, p. 19; Exh. "J", record, p. 347).
On November 20, 1998  , defendants informed plaintiff that they were canceling the Memorandum of Agreement (Contract to
4 

Sell) in view of the plaintiff's failure to comply with his contractual obligations (Exh. "3").

Thereafter, plaintiff reiterated his request to tender payment of the balance of SIX HUNDRED THOUSAND PESOS
(P600,000.00). Defendants, however, insisted on the rescission of the Memorandum of Agreement. Thereafter, plaintiff filed
the instant action for specific performance. The lower court rendered judgment on July 6, 1994 in favor of the plaintiff, the
dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff Alonzo Machuca and against the defendant heirs of
the late Francisco Q. Laforteza, ordering the said defendants.

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

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

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

SO ORDERED. (Rollo, pp. 74-75).  5

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

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

SO ORDERED.  6

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

I. WHETHER THE TRIAL AND APPELLATE COURTS CORRECTLY CONSTRUED THE MEMORANDUM OF
AGREEMENT AS IMPOSING RECIPROCAL OBLIGATIONS.

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

III. WHETHER THE RESPONDENT IS UNDER ESTOPPEL FROM RAISING THE ALLEGED DEFECT IN THE
SPECIAL POWER OF ATTORNEY DATED 30 OCTOBER 1989 EXECUTED BY DENNIS LAFORTEZA.

IV. SUPPOSING EX GRATIA ARGUMENTI  THE MEMORANDUM OF AGREEMENT IMPOSES RECIPROCAL

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

V. WHETHER THE PETITIONERS ARE IN BAD FAITH SO TO AS MAKE THEM LIABLE FOR MORAL
DAMAGES?  8

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

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

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

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

The petitioners also claim that the Court of Appeals erred in ruling that they were not ready to comply with their obligation to
execute the extrajudicial settlement. The Power of Attorney to execute a Deed of Sale made by Dennis Z. Laforteza was
sufficient and necessarily included the power to execute an extrajudicial settlement. At any rate, the respondent is estopped
from claiming that the petitioners were not ready to comply with their obligation for he acknowledged the petitioners' ability to
do so when he requested for an extension of time within which to pay the purchase price. Had he truly believed that the
petitioners were not ready, he would not have needed to ask for said extension.
Finally, the petitioners allege that the respondent's uncorroborated testimony that third persons offered a higher price for the
property is hearsay and should not be given any evidentiary weight. Thus, the order of the lower court awarding moral
damages was without any legal basis.

The appeal is bereft of merit.

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

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

2. The above-mentioned sum of PESOS: SIX HUNDRED THIRTY THOUSAND (P630,000.00) shall be paid in the
following manner:

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

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

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

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

A contract of sale is a consensual contract and is perfected at the moment there is a meeting of the minds upon the thing
which is the object of the contract and upon the price.  From that moment the parties may reciprocally demand performance
10 

subject to the provisions of the law governing the form of contracts.  The elements of a valid contract of sale under Article
11 

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

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

The six-month period during which the respondent would be in possession of the property as lessee, was clearly not a period
within which to exercise an option. An option is a contract granting a privilege to buy or sell within an agreed time and at a
determined price. An option contract is a separate and distinct contract from that which the parties may enter into upon the
consummation of the option.  An option must be supported by consideration. An option contract is governed by the second
13  14 

paragraph of Article 1479 of the Civil Code  , which reads:

15 

Art. 1479. . . .

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

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

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

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

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

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

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

the purchase price and proof of the perfection of the contract.  18

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

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

actual or constructive delivery thereof.  The mere fact that the obligation of the respondent to pay the balance of the purchase price
21 

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

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

We rule in the negative.

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

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

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

In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time
agreed upon the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the
period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After
the demand, the court may not grant him a new term.  25

It is not disputed that the petitioners did not make a judicial or notarial demand for rescission.  The November 20, 1989 letter of the
1avvphi1

petitioners informing the respondent of the automatic rescission of the agreement did not amount to a demand for rescission, as it was
not notarized.  It was also made five days after the respondent's attempt to make the payment of the purchase price. This offer to pay
26 

prior to the demand for rescission is sufficient to defeat the petitioners' right under article 1592 of the Civil Code.  Besides, the
27 

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

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

Petitioners' insistence that the respondent should have consignated the amount is not determinative of whether respondent's action for
specific performance will lie. Petitioners themselves point out that the effect of cansignation is to extinguish the obligation. It releases
the debtor from responsibility therefor.  The failure of the respondent to consignate the P600,000.00 is not tantamount to a breach of
30 

the contract for by the fact of tendering payment, he was willing and able to comply with his obligation.

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

Article 2220 which provides that moral damages may be awarded in case of breach of contract where the defendant acted in
bad faith. The amount awarded depends on the discretion of the court based on the circumstances of each
case.  Under the circumstances, the award given by the Court of Appeals amounting to P50,000.00 appears to us to be fair
32 

and reasonable.

ACCORDINGLY, the decision of the Court of Appeals in CA G.R. CV No. 47457 is AFFIRMED and the instant petition is hereby
DENIED.

No pronouncement as to costs.

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

ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S. Cortes), petitioner, 
vs.
HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT CORPORATION, respondents.

DECISION

YNARES-SANTIAGO, J.:

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

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

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

2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00] PESOS, Phil. Currency shall be payable
within ONE (1) YEAR from date of execution of this instrument, payment of which shall be secured by an irrevocable standby
letter of credit to be issued by any reputable local banking institution acceptable to the Vendor.

xxxx

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

Said Deed was retained by Cortes for notarization.

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

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

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

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

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

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

SO ORDERED.7

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

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

SO ORDERED.8

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

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

Article 1191 of the Civil Code, states:

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

xxxx

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

ART. 1169

xxxx

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

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

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

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

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

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

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

A Yes, sir.12

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

ATTY. ANTARAN

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

A Upon full payment.

xxxx

ATTY. SARTE

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

A Yes, sir.13
By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly agreed to deliver the TCTs to the Corporation in order
to effect said transfer. Hence, the phrase "execution of this instrument" 14 as appearing in the Deed of Absolute Sale, and which event
would give rise to the Corporation's obligation to pay in full the amount of P2,200,000.00, can not be construed as referring solely to the
signing of the deed. The meaning of "execution" in the instant case is not limited to the signing of a contract but includes as well the
performance or implementation or accomplishment of the parties' agreement.15 With the transfer of titles as the corresponding reciprocal
obligation of payment, Cortes' obligation is not only to affix his signature in the Deed, but to set into motion the process that would
facilitate the transfer of title of the lots, i.e., to have the Deed notarized and to surrender the original copy thereof to the Corporation
together with the TCTs.

Having established the true agreement of the parties, the Court must now determine whether Cortes delivered the TCTs and the
original Deed to the Corporation. The Court of Appeals found that Cortes never surrendered said documents to the Corporation. Cortes
testified that he delivered the same to Manny Sanchez, the son of the broker, and that Manny told him that her mother, Marcosa
Sanchez, delivered the same to the Corporation.

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

A Yes, sir.

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

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

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

A That is the son of the broker.

xxxx

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

A Marcosa Sanchez

xxxx

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

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

x x x x.16

ATTY. ANTARAN

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

xxxx

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

A Yes, sir.

COURT

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

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

ATTY. ANTARAN

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

A I have not seen any receipt.

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

A Yes, sir.18

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

Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he allegedly gave you the title to the
property in question, is it true?
 A I did not receive the title.

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

A I do not know anything about that.19

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

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

We find no merit in Cortes' contention that the failure of the Corporation to act on the proposed settlement at the pre-trial must be
construed against the latter. Cortes argued that with his counsel's offer to surrender the original Deed and the TCTs, the Corporation
should have consigned the balance of the down payment. This argument would have been correct if Cortes actually surrendered the
Deed and the TCTs to the Corporation. With such delivery, the Corporation would have been placed in default if it chose not to pay in
full the required down payment. Under Article 1169 of the Civil Code, from the moment one of the parties fulfills his obligation, delay by
the other begins. Since Cortes did not perform his part, the provision of the contract requiring the Corporation to pay in full the down
payment never acquired obligatory force. Moreover, the Corporation could not be faulted for not automatically heeding to the offer of
Cortes. For one, its complaint has a prayer for damages which it may not want to waive by agreeing to the offer of Cortes' counsel. For
another, the previous representation of Cortes that the TCTs were already delivered to the Corporation when no such delivery was in
fact made, is enough reason for the Corporation to be more cautious in dealing with him.

The Court of Appeals therefore correctly ordered the parties to perform their respective obligation in the contract of sale, i.e., for Cortes
to, among others, deliver the necessary documents to the Corporation and for the latter to pay in full, not only the down payment, but
the entire purchase price. And since the Corporation did not question the Court of Appeal's decision and even prayed for its affirmance,
its payment should rightfully consist not only of the amount of P987,000.00, representing the balance of the P2,200,000.00 down
payment, but the total amount of P2,487,000.00, the remaining balance in the P3,700,000.00 purchase price.

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

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

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

Alejo Mabanag for plaintiff-appellee.

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

REYES, J.B.L., J.:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The main issues presented by appellants in this appeal are:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(1) . . .

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

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

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

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

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

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

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

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

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

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

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

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

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

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with costs against appellants.
G.R. No. 126376               November 20, 2003

SPOUSES BERNARDO BUENAVENTURA and CONSOLACION JOAQUIN, SPOUSES JUANITO EDRA and NORA JOAQUIN,
SPOUSES RUFINO VALDOZ and EMMA JOAQUIN, and NATIVIDAD JOAQUIN, petitioners, 
vs.
COURT OF APPEALS, SPOUSES LEONARDO JOAQUIN and FELICIANA LANDRITO, SPOUSES FIDEL JOAQUIN and
CONCHITA BERNARDO, SPOUSES TOMAS JOAQUIN and SOLEDAD ALCORAN, SPOUSES ARTEMIO JOAQUIN and
SOCORRO ANGELES, SPOUSES ALEXANDER MENDOZA and CLARITA JOAQUIN, SPOUSES TELESFORO CARREON and
FELICITAS JOAQUIN, SPOUSES DANILO VALDOZ and FE JOAQUIN, and SPOUSES GAVINO JOAQUIN and LEA
ASIS, respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review on certiorari to annul the Decision dated 26 June 1996 of the Court of Appeals in CA-G.R. CV No. 41996.
1  2 

The Court of Appeals affirmed the Decision dated 18 February 1993 rendered by Branch 65 of the Regional Trial Court of Makati ("trial
3 

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

The Facts

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

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

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

1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan (LRC) Psd-256395 executed on 11 July 1978, in favor of
defendant Felicitas Joaquin, for a consideration of ₱6,000.00 (Exh. "C"), pursuant to which TCT No. [36113/T-172] was issued
in her name (Exh. "C-1");

2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC) Psd-256394 executed on 7 June 1979, in favor of
defendant Clarita Joaquin, for a consideration of ₱1[2],000.00 (Exh. "D"), pursuant to which TCT No. S-109772 was issued in
her name (Exh. "D-1");

3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC) Psd-256394 executed on 12 May 1988, in favor of
defendant spouses Fidel Joaquin and Conchita Bernardo, for a consideration of ₱54,[3]00.00 (Exh. "E"), pursuant to which
TCT No. 155329 was issued to them (Exh. "E-1");

4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC) Psd-256394 executed on 12 May 1988, in favor of
defendant spouses Artemio Joaquin and Socorro Angeles, for a consideration of ₱[54,3]00.00 (Exh. "F"), pursuant to which
TCT No. 155330 was issued to them (Exh. "F-1"); and

5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision plan (LRC) Psd-256395 executed on 9 September
1988, in favor of Tomas Joaquin, for a consideration of ₱20,000.00 (Exh. "G"), pursuant to which TCT No. 157203 was issued
in her name (Exh. "G-1").

6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC) Psd-256395 executed on 7 October 1988, in favor of
Gavino Joaquin, for a consideration of ₱25,000.00 (Exh. "K"), pursuant to which TCT No. 157779 was issued in his name
(Exh. "K-1").]

In seeking the declaration of nullity of the aforesaid deeds of sale and certificates of title, plaintiffs, in their complaint, aver:

- XX-

The deeds of sale, Annexes "C," "D," "E," "F," and "G," [and "K"] are simulated as they are, are NULL AND VOID AB INITIO because –

a) Firstly, there was no actual valid consideration for the deeds of sale xxx over the properties in litis;

b) Secondly, assuming that there was consideration in the sums reflected in the questioned deeds, the properties are more
than three-fold times more valuable than the measly sums appearing therein;

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

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

- XXI -
Necessarily, and as an inevitable consequence, Transfer Certificates of Title Nos. 36113/T-172, S-109772, 155329, 155330, 157203
[and 157779] issued by the Registrar of Deeds over the properties in litis xxx are NULL AND VOID AB INITIO.

Defendants, on the other hand aver (1) that plaintiffs do not have a cause of action against them as well as the requisite standing and
interest to assail their titles over the properties in litis; (2) that the sales were with sufficient considerations and made by defendants
parents voluntarily, in good faith, and with full knowledge of the consequences of their deeds of sale; and (3) that the certificates of title
were issued with sufficient factual and legal basis. (Emphasis in the original)
4 

The Ruling of the Trial Court

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

filing an Answer with their co-defendants, Gavino Joaquin and Lea Asis filed a Motion to Dismiss. In granting the dismissal to Gavino
6

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

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

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

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

All the foregoing considered, this case is DISMISSED.

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

No costs.

SO ORDERED. 8

The Ruling of the Court of Appeals

The Court of Appeals affirmed the decision of the trial court.  The appellate court ruled:
1âwphi1

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

Upon this point, there is no question that plaintiffs-appellants, like their defendant brothers and sisters, are compulsory heirs of
defendant spouses, Leonardo Joaquin and Feliciana Landrito, who are their parents. However, their right to the properties of their
defendant parents, as compulsory heirs, is merely inchoate and vests only upon the latter’s death. While still alive, defendant parents
are free to dispose of their properties, provided that such dispositions are not made in fraud of creditors.

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

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

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

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

WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs against plaintiffs-appellants.

SO ORDERED. 9

Hence, the instant petition.

Issues

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

1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE IN QUESTION HAD NO VALID
CONSIDERATION.
 2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN ASSUMING THAT THERE WAS A
CONSIDERATION, THE SAME IS GROSSLY INADEQUATE.

3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE DEEDS OF SALE DO NOT EXPRESS THE TRUE
INTENT OF THE PARTIES.

4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE WAS PART AND PARCEL OF A
CONSPIRACY AIMED AT UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF THE SPOUSES LEONARDO
JOAQUIN AND FELICIANA LANDRITO OF THEIR INTEREST OVER THE SUBJECT PROPERTIES.

5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS HAVE A GOOD, SUFFICIENT AND VALID
CAUSE OF ACTION AGAINST THE PRIVATE RESPONDENTS. 10

The Ruling of the Court

We find the petition without merit.

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

Whether Petitioners have a legal interest over the properties subject of the Deeds of Sale

Petitioners’ Complaint betrays their motive for filing this case. In their Complaint, petitioners asserted that the "purported sale of the
properties in litis was the result of a deliberate conspiracy designed to unjustly deprive the rest of the compulsory heirs (plaintiffs herein)
of their legitime." Petitioners’ strategy was to have the Deeds of Sale declared void so that ownership of the lots would eventually revert
to their respondent parents. If their parents die still owning the lots, petitioners and their respondent siblings will then co-own their
parents’ estate by hereditary succession. 11

It is evident from the records that petitioners are interested in the properties subject of the Deeds of Sale, but they have failed to show
any legal right to the properties. The trial and appellate courts should have dismissed the action for this reason alone. An action must
be prosecuted in the name of the real party-in-interest. 12

[T]he question as to "real party-in-interest" is whether he is "the party who would be benefitted or injured by the judgment, or the ‘party
entitled to the avails of the suit.’"

xxx

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

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

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

Whether the Deeds of Sale are void for lack of consideration

Petitioners assert that their respondent siblings did not actually pay the prices stated in the Deeds of Sale to their respondent father.
Thus, petitioners ask the court to declare the Deeds of Sale void.

A contract of sale is not a real contract, but a consensual contract. As a consensual contract, a contract of sale becomes a binding and
valid contract upon the meeting of the minds as to price. If there is a meeting of the minds of the parties as to the price, the contract of
sale is valid, despite the manner of payment, or even the breach of that manner of payment. If the real price is not stated in the
contract, then the contract of sale is valid but subject to reformation. If there is no meeting of the minds of the parties as to the price,
because the price stipulated in the contract is simulated, then the contract is void. Article 1471 of the Civil Code states that if the price
14 

in a contract of sale is simulated, the sale is void.

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

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

simulation of price credible. Petitioners’ failure to prove absolute simulation of price is magnified by their lack of knowledge of their
respondent siblings’ financial capacity to buy the questioned lots. On the other hand, the Deeds of Sale which petitioners presented as
17 

evidence plainly showed the cost of each lot sold. Not only did respondents’ minds meet as to the purchase price, but the real price was
also stated in the Deeds of Sale. As of the filing of the complaint, respondent siblings have also fully paid the price to their respondent
father.
18
Whether the Deeds of Sale are void for gross inadequacy of price

Petitioners ask that assuming that there is consideration, the same is grossly inadequate as to invalidate the Deeds of Sale.

Articles 1355 of the Civil Code states:

Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud,
mistake or undue influence. (Emphasis supplied)

Article 1470 of the Civil Code further provides:

Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as may indicate a defect in the consent, or that the
parties really intended a donation or some other act or contract. (Emphasis supplied)

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

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

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

case, the trial court found that the lots were sold for a valid consideration, and that the defendant children actually paid the purchase
price stipulated in their respective Deeds of Sale. Actual payment of the purchase price by the buyer to the seller is a factual finding that
is now conclusive upon us.

WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.

SO ORDERED.
G.R. No. 124242             January 21, 2005

SAN LORENZO DEVELOPMENT CORPORATION, petitioner, 

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

DECISION

TINGA, J.:

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

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

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

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

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

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

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

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

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

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

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

SLDC in its Complaint-in-Intervention alleged that on 11 February 1989, the Spouses Lu executed in its favor an Option to Buy the lots
subject of the complaint. Accordingly, it paid an option money in the amount of three hundred sixteen thousand one hundred sixty
pesos (₱316,160.00) out of the total consideration for the purchase of the two lots of one million two hundred sixty-four thousand six
hundred forty pesos (₱1,264,640.00). After the Spouses Lu received a total amount of six hundred thirty-two thousand three hundred
twenty pesos (₱632,320.00) they executed on 3 May 1989 a Deed of Absolute Sale with Mortgage in its favor. SLDC added that the
certificates of title over the property were delivered to it by the spouses clean and free from any adverse claims and/or notice of lis
pendens. SLDC further alleged that it only learned of the filing of the complaint sometime in the early part of January 1990 which
prompted it to file the motion to intervene without delay. Claiming that it was a buyer in good faith, SLDC argued that it had no
obligation to look beyond the titles submitted to it by the Spouses Lu particularly because Babasanta’s claims were not annotated on
the certificates of title at the time the lands were sold to it.
After a protracted trial, the RTC rendered its Decision on 30 July 1993 upholding the sale of the property to SLDC. It ordered the
Spouses Lu to pay Babasanta the sum of two hundred thousand pesos (₱200,000.00) with legal interest plus the further sum of fifty
thousand pesos (₱50,000.00) as and for attorney’s fees. On the complaint-in-intervention, the trial court ordered the Register of Deeds
of Laguna, Calamba Branch to cancel the notice of lis pendens annotated on the original of the TCT No. T-39022 (T-7218) and No. T-
39023 (T-7219).

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

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

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

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

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

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

Hence, this petition.

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

THE COURT OF APPEALS ERRED IN HOLDING THAT SAN LORENZO WAS NOT A BUYER IN GOOD FAITH BECAUSE WHEN
THE SELLER PACITA ZAVALLA LU OBTAINED FROM IT THE CASH ADVANCE OF ₱200,000.00, SAN LORENZO WAS PUT ON
INQUIRY OF A PRIOR TRANSACTION ON THE PROPERTY.

THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE ESTABLISHED FACT THAT THE ALLEGED FIRST BUYER,
RESPONDENT BABASANTA, WAS NOT IN POSSESSION OF THE DISPUTED PROPERTY WHEN SAN LORENZO BOUGHT AND
TOOK POSSESSION OF THE PROPERTY AND NO ADVERSE CLAIM, LIEN, ENCUMBRANCE OR LIS PENDENS WAS
ANNOTATED ON THE TITLES.

THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE FACT THAT RESPONDENT BABASANTA HAS SUBMITTED
NO EVIDENCE SHOWING THAT SAN LORENZO WAS AWARE OF HIS RIGHTS OR INTERESTS IN THE DISPUTED PROPERTY.

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

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

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

Meanwhile, in an Urgent Ex-Parte Manifestation dated 27 August 1999, the Spouses Lu informed the Court that due to financial
constraints they have no more interest to pursue their rights in the instant case and submit themselves to the decision of the Court of
Appeals.16

On the other hand, respondent Babasanta argued that SLDC could not have acquired ownership of the property because it failed to
comply with the requirement of registration of the sale in good faith. He emphasized that at the time SLDC registered the sale in its
favor on 30 June 1990, there was already a notice of lis pendens annotated on the titles of the property made as early as 2 June 1989.
Hence, petitioner’s registration of the sale did not confer upon it any right. Babasanta further asserted that petitioner’s bad faith in the
acquisition of the property is evident from the fact that it failed to make necessary inquiry regarding the purpose of the issuance of the
two hundred thousand pesos (₱200,000.00) manager’s check in his favor.

The core issue presented for resolution in the instant petition is who between SLDC and Babasanta has a better right over the two
parcels of land subject of the instant case in view of the successive transactions executed by the Spouses Lu.

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

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

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

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

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

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

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

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

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

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

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

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

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

However, it must be stressed that the juridical relationship between the parties in a double sale is primarily governed by Article 1544
which lays down the rules of preference between the two purchasers of the same property. It provides:

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

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry
of Property.

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

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

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

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

We do not hold so.

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

A purchaser in good faith is one who buys property of another without  notice that some other person has a right to, or interest in, such
property and pays a full and fair price for the same at the time of such purchase, or before he has notice  of the claim or interest of some
other person in the property.40 Following the foregoing definition, we rule that SLDC qualifies as a buyer in good faith since there is no
evidence extant in the records that it had knowledge of the prior transaction in favor of Babasanta. At the time of the sale of the property
to SLDC, the vendors were still the registered owners of the property and were in fact in possession of the lands.  Time and again, this
l^vvphi1.net

Court has ruled that a person dealing with the owner of registered land is not bound to go beyond the certificate of title as he is charged
with notice of burdens on the property which are noted on the face of the register or on the certificate of title.41 In assailing knowledge of
the transaction between him and the Spouses Lu, Babasanta apparently relies on the principle of constructive notice incorporated in
Section 52 of the Property Registration Decree (P.D. No. 1529) which reads, thus:

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

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

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

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

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

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

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

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

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

SO ORDERED.
G.R. No. 133879            November 21, 2001

EQUATORIAL REALTY DEVELOPMENT, INC., petitioner, 

vs.
MAYFAIR THEATER, INC., respondent.

PANGANIBAN, J.:

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

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

The Case

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

"WHEREFORE, the motion to dismiss filed by defendant Mayfair is hereby GRANTED, and the complaint filed by plaintiff
Equatorial is hereby DISMISSED."3

Also questioned is the May 29, 1998 RTC Order4 denying petitioner's Motion for Reconsideration.

The Facts

The main factual antecedents of the present Petition are matters of record, because it arose out of an earlier case decided by this Court
on November 21, 1996, entitled Equatorial Realty Development, Inc. v. Mayfair Theater, Inc.5(henceforth referred to as the "mother
case"), docketed as G.R No. 106063.

Carmelo & Bauermann, Inc. ("Camelo" ) used to own a parcel of land, together with two 2-storey buildings constructed thereon, located
at Claro M. Recto Avenue, Manila, and covered by TCT No. 18529 issued in its name by the Register of Deeds of Manila.

On June 1, 1967, Carmelo entered into a Contract of Lease with Mayfair Theater Inc. ("Mayfair") for a period of 20 years. The lease
covered a portion of the second floor and mezzanine of a two-storey building with about 1,610 square meters of floor area, which
respondent used as a movie house known as Maxim Theater.

Two years later, on March 31, 1969, Mayfair entered into a second Contract of Lease with Carmelo for the lease of another portion of
the latter's property — namely, a part of the second floor of the two-storey building, with a floor area of about 1,064 square meters; and
two store spaces on the ground floor and the mezzanine, with a combined floor area of about 300 square meters. In that space, Mayfair
put up another movie house known as Miramar Theater. The Contract of Lease was likewise for a period of 20 years.

Both leases contained a provision granting Mayfair a right of first refusal to purchase the subject properties. However, on July 30, 1978
— within the 20-year-lease term — the subject properties were sold by Carmelo to Equatorial Realty Development, Inc. ("Equatorial")
for the total sum of P11,300,000, without their first being offered to Mayfair.

As a result of the sale of the subject properties to Equatorial, Mayfair filed a Complaint before the Regional Trial Court of Manila
(Branch 7) for (a) the annulment of the Deed of Absolute Sale between Carmelo and Equatorial, (b) specific performance, and (c)
damages. After trial on the merits, the lower court rendered a Decision in favor of Carmelo and Equatorial. This case, entitled "Mayfair"
Theater, Inc. v. Carmelo and Bauermann, Inc., et al.," was docketed as Civil Case No. 118019.

On appeal (docketed as CA-GR CV No. 32918), the Court of Appeals (CA) completely reversed and set aside the judgment of the lower
court.

The controversy reached this Court via G.R No. 106063. In this mother case, it denied the Petition for Review in this wise:

"WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-G.R. CV No.
32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty Development, Inc. and
Carmelo & Bauermann, Inc. is hereby deemed rescinded; Carmelo & Bauermann is ordered to return to petitioner Equatorial
Realty Development the purchase price. The latter is directed to execute the deeds and documents necessary to return
ownership to Carmelo & Bauermann of the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to
buy the aforesaid lots for P11,300,000.00."6

The foregoing Decision of this Court became final and executory on March 17, 1997. On April 25, 1997, Mayfair filed a Motion for
Execution, which the trial court granted.

However, Carmelo could no longer be located. Thus, following the order of execution of the trial court, Mayfair deposited with the clerk
of court a quo its payment to Carmelo in the sum of P11,300,000 less; P847,000 as withholding tax. The lower court issued a Deed of
Reconveyance in favor of Carmelo and a Deed of Sale in favor of Mayfair. On the basis of these documents, the Registry of Deeds of
Manila canceled Equatorial's titles and issued new Certificates of Title7 in the name of Mayfair.
Ruling on Equatorial's Petition for Certiorari and Petition contesting the foregoing manner of execution, the CA in its Resolution of
November 20, 1998, explained that Mayfair had no right to deduct the P847,000 as withholding tax. Since Carmelo could no longer be
located, the appellate court ordered Mayfair to deposit the said sum with the Office of the Clerk of Court, Manila, to complete the full
amount of P11,300,000 to be turned over to Equatorial.

Equatorial questioned the legality of the above CA ruling before this Court in G.R No. 136221 entitled "Equatorial Realty Development,
Inc. v. Mayfair Theater, Inc." In a Decision promulgated on May 12, 2000,8 this Court directed the trial court to follow strictly the Decision
in GR. No. 106063, the mother case. It explained its ruling in these words:

"We agree that Carmelo and Bauermann is obliged to return the entire amount of eleven million three hundred thousand pesos
(P11,300,000.00) to Equatorial. On the other hand, Mayfair may not deduct from the purchase price the amount of eight
hundred forty-seven thousand pesos (P847,000.00) as withholding tax. The duty to withhold taxes due, if any, is imposed on
the seller Carmelo and Bauermann, Inc."9

Meanwhile, on September 18, 1997 — barely five months after Mayfair had submitted its Motion for Execution before the RTC of
Manila, Branch 7 — Equatorial filed with the Regional Trial Court of Manila, Branch 8, an action for the collection of a sum of money
against Mayfair, claiming payment of rentals or reasonable compensation for the defendant's use of the subject premises after its lease
contracts had expired. This action was the progenitor of the present case.

In its Complaint, Equatorial alleged among other things that the Lease Contract covering the premises occupied by Maxim Theater
expired on May 31, 1987, while the Lease Contract covering the premises occupied by Miramar Theater lapsed on March 31,
1989.10 Representing itself as the owner of the subject premises by reason of the Contract of Sale on July 30, 1978, it claimed rentals
arising from Mayfair's occupation thereof.

Ruling of the RTC Manila, Branch 8

As earlier stated, the trial court dismissed the Complaint via the herein assailed Order and denied the Motion for Reconsideration filed
by Equatorial.11

The lower court debunked the claim of petitioner for unpaid back rentals, holding that the rescission of the Deed of Absolute Sale in the
mother case did not confer on Equatorial any vested or residual proprietary rights, even in expectancy.

In granting the Motion to Dismiss, the court a quo held that the critical issue was whether Equatorial was the owner of the subject
property and could thus enjoy the fruits or rentals therefrom. It declared the rescinded Deed of Absolute Sale as avoid at its inception as
though it did not happen."

The trial court ratiocinated as follows:

"The meaning of rescind in the aforequoted decision is to set aside. In the case of Ocampo v. Court of Appeals, G.R. No.
97442, June 30, 1994, the Supreme Court held that, 'to rescind is to declare a contract void in its inception and to put an end
as though it never were. It is not merely to terminate it and release parties from further obligations to each other but to
abrogate it from the beginning and restore parties to relative positions which they would have occupied had no contract ever
been made.'

"Relative to the foregoing definition, the Deed of Absolute Sale between Equatorial and Carmelo dated July 31, 1978 is void at
its inception as though it did not happen.

"The argument of Equatorial that this complaint for back rentals as 'reasonable compensation for use of the subject
property after expiration of the lease contracts presumes that the Deed of Absolute Sale dated July 30, 1978 from whence the
fountain of Equatorial's all rights flows is still valid and existing.

xxx           xxx           xxx

"The subject Deed of Absolute Sale having been rescinded by the Supreme Court, Equatorial is not the owner and does not
have any right to demand backrentals from the subject property. . .12

The trial court added: "The Supreme Court in the Equatorial case, G.R No. 106063, has categorically stated that the Deed of Absolute
Sale dated July 31, 1978 has been rescinded subjecting the present complaint to res judicata."13

Hence, the present recourse.14

Issues

Petitioner submits, for the consideration of this Court, the following issues:15

"A

The basis of the dismissal of the Complaint by the Regional Trial Court not only disregards basic concepts and principles in
the law on contracts and in civil law, especially those on rescission and its corresponding legal effects, but also ignores the
dispositive portion of the Decision of the Supreme Court in G.R. No. 106063 entitled 'Equatorial Realty Development, Inc. &
Carmelo & Bauermann, Inc. vs. Mayfair Theater, Inc.'

"B.

The Regional Trial Court erred in holding that the Deed of Absolute Sale in favor of petitioner by Carmelo & Bauermann, Inc.,
dated July 31, 1978, over the premises used and occupied by respondent, having been 'deemed rescinded' by the Supreme
Court in G.R. No. 106063, is 'void at its inception as though it did not happen.'
 "C.

The Regional Trial Court likewise erred in holding that the aforesaid Deed of Absolute Sale, dated July 31, 1978, having been
'deemed rescinded' by the Supreme Court in G.R. No. 106063, petitioner 'is not the owner and does not have any right to
demand backrentals from the subject property,' and that the rescission of the Deed of Absolute Sale by the Supreme Court
does not confer to petitioner 'any vested right nor any residual proprietary rights even in expectancy.'

"D.

The issue upon which the Regional Trial Court dismissed the civil case, as stated in its Order of March 11, 1998, was not
raised by respondent in its Motion to Dismiss.

"E.

The sole ground upon which the Regional Trial Court dismissed Civil Case No. 97-85141 is not one of the grounds of a Motion
to Dismiss under Sec. 1 of Rule 16 of the 1997 Rules of Civil Procedure."

Basically, the issues can be summarized into two: (1) the substantive issue of whether Equatorial is entitled to back rentals; and (2) the
procedural issue of whether the court a quo's dismissal of Civil Case No. 97-85141 was based on one of the grounds raised by
respondent in its Motion to Dismiss and covered by Rule 16 of the Rules of Court.

This Court's Ruling

The Petition is not meritorious.

First Issue:
Ownership of Subject Properties

We hold that under the peculiar facts and circumstances of the case at bar, as found by this Court en banc in its Decision promulgated
in 1996 in the mother case, no right of ownership was transferred from Carmelo to Equatorial in view of a patent failure to deliver the
property to the buyer.

Rental — a Civil
Fruit of Ownership

To better understand the peculiarity of the instant case, let us begin with some basic parameters. Rent is a civil fruit16 that belongs to the
owner of the property producing it17 by right of accession.18 Consequently and ordinarily, the rentals that fell due from the time of the
perfection of the sale to petitioner until its rescission by final judgment should belong to the owner of the property during that period.

By a contract of sale, "one of the contracting parties obligates himself to transfer ownership of and to deliver a determinate thing and
the other to pay therefor a price certain in money or its equivalent."19

Ownership of the thing sold is a real right,20 which the buyer acquires only upon delivery of the thing to him "in any of the ways specified
in articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the
vendee."21 This right is transferred, not merely by contract, but also by tradition or delivery.22 Non nudis pactis sed traditione dominia
rerum transferantur. And there is said to be delivery if and when the thing sold "is placed in the control and possession of the
vendee."23 Thus, it has been held that while the execution of a public instrument of sale is recognized by law as equivalent to the
delivery of the thing sold,24 such constructive or symbolic delivery, being merely presumptive, is deemed negated by the failure of the
vendee to take actual possession of the land sold.25

Delivery has been described as a composite act, a thing in which both parties must join and the minds of both parties concur. It is an
act by which one party parts with the title to and the possession of the property, and the other acquires the right to and the possession
of the same. In its natural sense, delivery means something in addition to the delivery of property or title; it means transfer of
possession.26 In the Law on Sales, delivery may be either actual or constructive, but both forms of delivery contemplate "the absolute
giving up of the control and custody of the property on the part of the vendor, and the assumption of the same by the vendee."27

Possession Never
Acquired by Petitioner

Let us now apply the foregoing discussion to the present issue. From the peculiar facts of this case, it is clear that petitioner never
took actual control and possession of the property sold, in view of respondent's timely objection to the sale and the continued actual
possession of the property. The objection took the form of a court action impugning the sale which, as we know, was rescinded by a
judgment rendered by this Court in the mother case. It has been held that the execution of a contract of sale as a form of constructive
delivery is a legal fiction. It holds true only when there is no impediment that may prevent the passing of the property from the hands of
the vendor into those of the vendee.28 When there is such impediment, "fiction yields to reality — the delivery has not been effected."29

Hence, respondent's opposition to the transfer of the property by way of sale to Equatorial was a legally sufficient impediment that
effectively prevented the passing of the property into the latter's hands.

This was the same impediment contemplated in Vda. de Sarmiento v. Lesaca,30 in which the Court held as follows:

"The question that now arises is: Is there any stipulation in the sale in question from which we can infer that the vendor did not
intend to deliver outright the possession of the lands to the vendee? We find none. On the contrary, it can be clearly seen
therein that the vendor intended to place the vendee in actual possession of the lands immediately as can be inferred from the
stipulation that the vendee 'takes actual possession thereof . . . with full rights to dispose, enjoy and make use thereof in such
manner and form as would be most advantageous to herself.' The possession referred to in the contract evidently refers to
actual possession and not merely symbolical inferable from the mere execution of the document.
 "Has the vendor complied with this express commitment? she did not. As provided in Article 1462, the thing sold shall be
deemed delivered when the vendee is placed in the control and possession thereof, which situation does not here obtain
because from the execution of the sale up to the present the vendee was never able to take possession of the lands due to the
insistent refusal of Martin Deloso to surrender them claiming ownership thereof. And although it is postulated in the same
article that the execution of a public document is equivalent to delivery, this legal fiction only holds true when there is no
impediment that may prevent the passing of the property from the hands of the vendor into those of the vendee. x x x."31

The execution of a public instrument gives rise, therefore, only to a prima facie presumption of delivery. Such presumption is destroyed
when the instrument itself expresses or implies that delivery was not intended; or when by other means it is shown that such delivery
was not effected, because a third person was actually in possession of the thing. In the latter case, the sale cannot be considered
consummated.

However, the point may be raised that under Article 1164 of the Civil Code, Equatorial as buyer acquired a right to the fruits of the thing
sold from the time the obligation to deliver the property to petitioner arose.32 That time arose upon the perfection of the Contract of Sale
on July 30, 1978, from which moment the laws provide that the parties to a sale may reciprocally demand performance.33 Does this
mean that despite the judgment rescinding the sale, the right to the fruits34 belonged to, and remained enforceable by, Equatorial?

Article 1385 of the Civil Code answers this question in the negative, because "[r]escission creates the obligation to return the things
which were the object of the contract, together with their fruits, and the price with its interest; x x x" Not only the land and building sold,
but also the rental payments paid, if any, had to be returned by the buyer.

Another point. The Decision in the mother case stated that "Equatorial x x x has received rents" from Mayfair "during all the years that
this controversy has been litigated." The Separate Opinion of Justice Teodoro Padilla in the mother case also said that Equatorial was
"deriving rental income" from the disputed property. Even herein ponente'sSeparate Concurring Opinion in the mother case recognized
these rentals. The question now is: Do all these statements concede actual delivery?

The answer is "No." The fact that Mayfair paid rentals to Equatorial during the litigation should not be interpreted to mean either actual
delivery or ipso facto recognition of Equatorial's title.

The CA Records of the mother case 35 show that Equatorial — as alleged buyer of the disputed properties and as alleged successor-in-
interest of Carmelo's rights as lessor — submitted two ejectment suits against Mayfair. Filed in the Metropolitan Trial Court of Manila,
the first was docketed as Civil Case No. 121570 on July 9, 1987; and the second, as Civil Case No. 131944 on May 28, 1990. Mayfair
eventually won them both. However, to be able to maintain physical possession of the premises while awaiting the outcome of the
mother case, it had no choice but to pay the rentals.

The rental payments made by Mayfair should not be construed as a recognition of Equatorial as the new owner. They were made
merely to avoid imminent eviction. It is in this context that one should understand the aforequoted factual statements in the ponencia in
the mother case, as well as the Separate Opinion of Mr. Justice Padilla and the Separate Concurring Opinion of the herein ponente.

At bottom, it may be conceded that, theoretically, a rescissible contract is valid until rescinded. However, this generalprinciple is not
decisive to the issue of whether Equatorial ever acquired the right to collect rentals. What is decisive is the civil law rule that ownership
is acquired, not by mere agreement, but by tradition or delivery. Under the factual environment of this controversy as found by this
Court in the mother case, Equatorial was never put in actual and effective control or possession of the property because of Mayfair's
timely objection.

As pointed out by Justice Holmes, general propositions do not decide specific cases. Rather, "laws are interpreted in the context of the
peculiar factual situation of each case. Each case has its own flesh and blood and cannot be decided on the basis of isolated clinical
classroom principles."36

In short, the sale to Equatorial may have been valid from inception, but it was judicially rescinded before it could be consummated.
Petitioner never acquired ownership, not because the sale was void, as erroneously claimed by the trial court, but because the sale was
not consummated by a legally effective delivery of the property sold.

Benefits Precluded by
Petitioner's Bad Faith

Furthermore, assuming for the sake of argument that there was valid delivery, petitioner is not entitled to any benefits from the
"rescinded" Deed of Absolute Sale because of its bad faith. This being the law of the mother case decided in 1996, it may no longer be
changed because it has long become final and executory. Petitioner's bad faith is set forth in the following pertinent portions of the
mother case:

"First and foremost is that the petitioners acted in bad faith to render Paragraph 8 'inutile.'

xxx           xxx           xxx

"Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible. We agree with
respondent Appellate Court that the records bear out the fact that Equatorial was aware of the lease contracts because its
lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot tenably claim to be a purchaser in good
faith, and, therefore, rescission lies.

xxx           xxx           xxx

"As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad faith, since it was
knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact, as correctly observed by the Court of
Appeals, Equatorial admitted that its lawyers had studied the contract of lease prior to the sale. Equatorial's knowledge of the
stipulations therein should have cautioned it to look further into the agreement to determine if it involved stipulations that would
prejudice its own interests.
 xxx           xxx           xxx

"On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full knowledge that
Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial took unconscientious advantage of
Mayfair."37 (Italics supplied)

Thus, petitioner was and still is entitled solely to he return of the purchase price it paid to Carmelo; no more, no less. This Court has
firmly ruled in the mother case that neither of them is entitled to any consideration of equity, as both "took unconscientious advantage of
Mayfair."38

In the mother case, this Court categorically denied the payment of interest, a fruit of ownership. By the same token, rentals, another
fruit of ownership, cannot be granted without mocking this Court's en banc Decision, which has long become final.

Petitioner's claim of reasonable compensation for respondent's use and occupation of the subject property from the time the lease
expired cannot be countenanced. If it suffered any loss, petitioner must bear it in silence, since it had wrought that loss upon
itself.  Otherwise, bad faith would be rewarded instead of punished. @lawphil.net

We uphold the trial court's disposition, not for the reason it gave, but for (a) the patent failure to deliver the property and (b) petitioner's
bad faith, as above discussed.

Second Issue: itc-alf

Ground in Motion to Dismiss

Procedurally, petitioner claims that the trial court deviated from the accepted and usual course of judicial proceedings when it dismissed
Civil Case No. 97-85141 on a ground not raised in respondent's Motion to Dismiss. Worse, it allegedly based its dismissal on a ground
not provided for in a motion to dismiss as enunciated in the Rules of Court. @lawphil.net

We are not convinced A review of respondent's Motion to Dismiss Civil Case No. 97-85141 shows that there were two grounds invoked,
as follows:

"(A)

Plaintiff is guilty of forum-shopping.itc-alf

"(B)

Plaintiff's cause of action, if any, is barred by prior judgment."39

The court a quo ruled, inter alia, that the cause of action of petitioner plaintiff in the case below) had been barred by a prior judgment of
this Court in G.R No. 106063, the mother case.

Although it erred in its interpretation of the said Decision when it argued that the rescinded Deed of Absolute Sale was avoid," we hold,
nonetheless, that petitioner's cause of action is indeed barred by a prior judgment of this Court. As already discussed, our Decision in
G.R No. 106063 shows that petitioner is not entitled to back rentals, because it never became the owner of the disputed properties due
to a failure of delivery. And even assuming arguendo that there was a valid delivery, petitioner's bad faith negates its entitlement to the
civil fruits of ownership, like interest and rentals.

Under the doctrine of res judicata or bar by prior judgment, a matter that has been adjudicated by a court of competent jurisdiction must
be deemed to have been finally and conclusively settled if it arises in any subsequent litigation between the same parties and for the
same cause.40 Thus, "[a] final judgment on the merits rendered by a court of competent jurisdiction is conclusive as to the rights of the
parties and their privies and constitutes an absolute bar to subsequent actions involving the same claim, demand, or cause of
action."41 Res judicata is based on the ground that the "party to be affected, or some other with whom he is in privity, has litigated the
same matter in a former action in a court of competent jurisdiction, and should not be permitted to litigate it again.42

It frees the parties from undergoing all over again the rigors of unnecessary suits and repetitive trials. At the same time, it prevents the
clogging of court dockets. Equally important, it stabilizes rights and promotes the rule of law. @lawphil.net

We find no need to repeat the foregoing disquisitions on the first issue to show satisfaction of the elements of res judicata. Suffice it to
say that, clearly, our ruling in the mother case bars petitioner from claiming back rentals from respondent. Although the court a
quo erred when it declared "void from inception" the Deed of Absolute Sale between Carmelo and petitioner, our foregoing discussion
supports the grant of the Motion to Dismiss on the ground that our prior judgment in G.R No. 106063 has already resolved the issue of
back rentals.

On the basis of the evidence presented during the hearing of Mayfair's Motion to Dismiss, the trial court found that the issue of
ownership of the subject property has been decided by this Court in favor of Mayfair. We quote the RTC:

"The Supreme Court in the Equatorial case, G.R. No. 106063 has categorically stated that the Deed of Absolute Sale dated
July 31, 1978 has been rescinded subjecting the present complaint to res judicata."43(Emphasis in the original)

Hence, the trial court decided the Motion to Dismiss on the basis of res judicata, even if it erred in interpreting the meaning of
"rescinded" as equivalent to "void" In short, it ruled on the ground raised; namely, bar by prior judgment. By granting the Motion,
it disposed correctly, even if its legal reason for nullifying the sale was wrong. The correct reasons are given in this Decision.

WHEREFORE, the Petition is hereby DENIED. Costs against petitioner. itc-alf

SO ORDERED.
Concurring Opinion

MELO, J., concurring:

While I express my conformity to the ponencia of our distinguished colleague, Mr. Justice Artemio V. Panganiban, I would just like to
make the following observations:

1. The issue in this case was squarely resolved in our 1996 En Banc decision in the main case. What petitioner is asking us to
do now is to reverse or modify a judgment which is accurate in every respect, conformable to law and jurisprudence, and
faithful to principles of fairness and justice.

2. Petitioner's submissions are deceiving. It is trying to collect unjustified and unbelievably increased rentals by provoking a
purely academic discussion, as far as respondent is concerned, of a non-applicable provision of the Civil Code on contracts.

3. To grant the petition is to reward bad faith, for petitioner has deprived respondent of the latter's property rights for twenty-
three (23) years and has forced it to defend its interests in case after case during that lengthy period. Petitioner now tries to
inflict further injury in the fantastic and groundless amount of P115,947,867.00. To remand this case to the lower court in order
to determine the back rentals allegedly due to petitioner Equatorial Realty Development Corporation, Inc. is to encourage
continuation of crafty tactics and to allow the further dissipation of scarce judicial time and resources.

The instant petition arose from a complaint for back rentals, increased rentals and interests filed by petitioner Equatorial Realty
Development, Inc. (Equatorial) against respondent Mayfair Theater, Inc. (Mayfair). It has to be adjudicated in the context of three earlier
petitions decided by this Court.

A dispute between the two parties over the ownership of a commercial lot and building along Claro M. Recto Avenue in Manila has led
to 23 years of protracted litigation, including the filing of 4 petitions with the Court, namely, G.R. No. L-106063, decided on November
21, 1996 (264 SCRA 483); G.R. No. 103311 decided on March 4, 1992; G.R. No. 136221, decided on May 12, 2000; and the present
petition, G.R. No. 133879.

The case at bar is a classic illustration of how a dubious interpretation of the dispositive portion of the 1996 decision for petitioner could
lead to 5 more years of bitter litigation after the initial 18 years of legal proceedings over the first case.

Lease contracts over the subject property were executed on June 1, 1967 and March 31, 1969 by original owner Carmelo and
Bauermann, Inc. (Carmelo) in favor of herein respondent Mayfair. The leases expired on May 31, 1987 and March 31, 1989,
respectively. The lease contracts embodied provisions giving Mayfair a right-of-first-refusal should Carmelo sell the property.

In an act characterized as bad faith by this Court, the property, in violation of the right of first refusal, was sold by Carmelo to herein
petitioner Equatorial, on July 31, 1978 for P11,300,000.00. On September 13, 1978, Mayfair filed the first case for annulment of the
contract of sale, specific performance of the right-of-first-refusal provision, and damages. The Regional Trial Court (RTC) of Manila
decided the case in favor of Equatorial on February 7, 1991. Counterclaims for compensation arising from the use of the premises were
awarded to Equatorial by the 1991 RTC decision.

On June 23, 1992, the Court of Appeals reversed the RTC decision, thus leading to the first petition, G.R. No. 106063, filed against
Mayfair by both Equatorial and Carmelo.

On November 21, 1996, this Court En Banc rendered its decision (264 SCRA 483 [1996]), disposing:

WHEREFORE, the petition for review of the decision of the Court of Appeals dated June 23, 1992, in CA-G.R. CV No. 32918,
is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty Development, Inc. and Carmelo &
Bauermann, Inc. is hereby rescinded; petitioner Carmelo & Bauermann is ordered to return to petitioner Equatorial Realty
Development the purchase price. The latter is directed to execute the deeds and documents necessary to return ownership to
Carmelo & Bauermann of the disputed lots. Carmelo and Bauermann is ordered to allow Mayfair Theater, Inc. to buy the
aforesaid lots for P11,300,000.00.

In the Court of Appeals decision (CA-G.R. CV No. 32918, June 23, 1992) in the main case, raised to this Court, Mayfair was ordered to
directly pay P11,300,000.00 to Equatorial whereupon Equatorial would execute the deeds and documents necessary for the transfer of
ownership to Mayfair and the registration of the property in its name. The execution of documents and the transfer of the property were
directly between Equatorial and Mayfair. Our decision in 1996 (G.R. No. 106063) affirmed the appellate decision. However, while the
1978 deed of sale questioned by Mayfair was rescinded, we ordered Carmelo to first return to Equatorial the purchase price of the
property, whereupon Equatorial would return ownership to Carmelo, after which Mayfair would buy the lot for P11,300,000.00 from
Carmelo.

When the case was remanded to the RTC for execution of the decision, it was ascertained that Carmelo and Bauermann, Inc. was no
longer in existence. The Sheriff could not enforce the portions of the judgment calling for acts to be performed by Carmelo. Mayfair,
therefore, deposited the amount of P11,300,000.00 with the RTC for payment to Equatorial, hoping that the latter would faithfully
comply with this Court's decision. In this regard, it may be mentioned that buyer Mayfair also paid P847,000.00 in taxes which the
vendors should have paid. The RTC ordered the execution of deeds of transfer, the cancellation of Equatorial's titles to the property,
and the issuance of new titles in favor of Mayfair. Accordingly, the property was registered in the name of Mayfair and titles issued in its
favor.

Equatorial, however, saw an opening for further litigation. It questioned the method employed by the RTC to execute the Court's
judgment, arguing that the directives involving Carmelo's participation were ignored by the trial court. The litigation over the alleged
incorrectness of the execution eventually led to the second petition earlier mentioned — G.R. No. 136221.

It may be mentioned at this point that on July 9, 1987, while the right-of-first-refusal and cancellation case was pending, Equatorial filed
an action for ejectment against Mayfair. Because the issue of ownership was still pending in the case for rescission of deed of sale
including the enforcement of the right-of-first-refusal provision, the ejectment case was dismissed. Appeals to the RTC and the Court of
Appeals were denied.
On March 26, 1990, still another ejectment case was filed by Equatorial. In decisions which reached all the way to this Court in G.R. No.
103311, the cases for ejectment did not prosper. Mayfair won the cases on March 4, 1992.

The three cases decided by the Court in these litigations between Equatorial and Mayfair, all of them in favor of Mayfair, are
antecedents of the present and fourth petition. Equatorial has been adjudged as having unlawfully and in bad faith acquired property
that should have belonged to Mayfair since 1978. Ownership and title have been unquestionably transferred to Mayfair.

Seemingly, Equatorial now seeks to profit from its bad faith. While the case involving the allegedly incorrect execution of the 1996
decision on cancellation of the deed of sale in G.R. No. 106063 was being litigated, Equatorial filed on September 18, 1997 with the
RTC of Manila two complaints for payment of back and increased rentals arising from the use by Mayfair of the lot, building, and other
fixed improvements. From the time the property was sold by Carmelo to Equatorial, lessee Mayfair had been paying to Equatorial the
rentals fixed in the 1967 and 1969 lease contracts with the original owner. This was during the pendency of the complaint for annulment
of the contract of sale, specific performance of the right-of-first-refusal provision, and damages.

As found in our 1998 decision in G.R. No. 106063, the disputed property should have actually belonged to Mayfair at the time.
However, to avoid the ejectment cases, which Equatorial nonetheless later filed, Mayfair was forced to pay rentals to Equatorial. It paid
the rentals based on the rates fixed by Carmelo in the lease contracts.

Equatorial, claiming the 1967 and 1969 rentals to be inadequate, claimed increased amounts as reasonable compensation. Because
the amounts fixed by the lease contract with Carmelo but paid to Equatorial were only at the rate of P17,966.21 monthly while
Equatorial wanted P210,000.00 every month plus legal interests, the suit was for the payment of P115,947,867.68 as of June 19, 1997.

Citing the 1996 decision in G.R. No. 106063, Mayfair contended that it owned the property under the decision. It stated that the sale by
Carmelo to Equatorial had been cancelled, and, as owner, Mayfair owed no increased rentals to Equatorial based on said decision.

The present case on back rentals could not be conclusively decided because the execution and finality of the issue of ownership were
being contested for 5 years in the petition on the proper execution filed in G.R. No. 136221. This petition had to wait for the resolution of
G.R. No. 136221.

In its decision dated May 12, 2000, in G.R. No. 136221 (First Division, per Mr. Justice Pardo; Davide, Jr., C.J., Kapunan, and Ynares-
Santiago, JJ., concurring), this Court reiterated the judgment in G.R. No. 106063. It emphasized that the 1996 decision awarding the
property to Mayfair was clear. It stated that the decision having attained finality, there was nothing left for the parties to do but to adhere
to the mandates of the decision.

In the dispositive portion, however, the Court ordered the trial court "to carry out the execution following strictly the terms" of the 1996
decision. However, as earlier stated, this could not be done because Carmelo had ceased to exist. There was no longer any Carmelo
which could return the P11,300,000.00 consideration of the 1978 sale to Equatorial as ordered in the dispositive portion of the 1996
decision. Equatorial could not and would not also execute the deeds returning the property to Carmelo, as directed in the decision.
Neither could the defunct Carmelo sell the property to Mayfair at the sale price in 1978 when the right of first refusal was violated.

Mayfair had to file a motion for partial reconsideration, emphasizing that it was impossible for a corporation which has gone out of
existence to obey the specific orders of this Court. A resolution was, therefore, rendered on June 25, 2001 putting an end to the
controversy over the proper implementation of the 1996 judgment.

This June 25, 2001 Resolution in G.R. No. 136221 validated the issuance of new titles in the name of the adjudicated owner, Mayfair.
The Court ordered the direct release to Equatorial of the P11,300,000.00 deposited in court for the account of the defunct Carmelo.

In the follow-up Resolution of the First Division in G.R. No. 136221 dated June 25, 2001, the Court, after describing the case as a
Promethean one involving the execution of a decision which has been long final, and after calling the efforts to stave off execution as a
travesty of justice, instructed the trial court:

1. To execute the Court's Decision strictly in accordance with the ruling in G.R. No. 106063 by validating the acts of the sheriff
of Manila and the titles in the name of Mayfair Theater, Inc. issued by the Register of Deeds of Manila consistent therewith;

2. In case of failure of Carmelo and Bauermann to accept the amount of P11,300,000.00 deposited by Mayfair Theater, Inc.
with the Clerk of Court, Regional Trial Court, Manila, to authorize the Clerk of Court to RELEASE the amount of
P11,300,000.00 deposited with the court for the account of Carmelo and Bauermann, Inc. to petitioner;

3. To devolve upon the trial court the determination of other issues that may remain unresolved among the parties, relating to
the execution of this Court's final decision in G.R. No. 106063.

In light of the Court's judgments in G.R. No. 106063 and G.R. No. 136221, the present petition in G.R. No. 133879 for back rentals
should now be finally resolved, applying the rulings in those earlier decisions.

Indubitably, the 1978 deed of sale executed by Carmelo in favor of Equatorial over the disputed property has been set aside by this
Court. Equatorial was declared a buyer in bad faith. The contract was characterized as a fraudulent sale and the entirety of the
indivisible property sold to Equatorial was the property we ordered to be conveyed to Mayfair for the same price paid by Equatorial to
Carmelo.

It is also beyond question that the method of execution of the 1996 decision by the RTC, the direct payment by Mayfair to Equatorial,
bypassing and detouring the defunct Carmelo corporation, has been validated by this Court. There are no longer any procedural
obstacles to the full implementation of the decision.

And finally, the property sold to Equatorial in violation of Mayfair's right of first refusal is now indisputably possessed by, and owned and
titled in the name of, respondent Mayfair.
Parenthetically, the issue on the payment of back and increased rentals, plus interests, was actually settled in the 1996 decision in G.R.
No. 106063. It could not be enforced at the time only because of the controversy unfortunately raised by Equatorial over the proper
execution of the 1996 decision.

It is now time to reiterate the 1996 decision on interests and settle the dispute between Mayfair and Equatorial once and for all.

Thus, we reiterate that:

On the question of interest payments on the principal amount of P11,300.000.00, it must be borne in mind that both Carmelo
and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a contract entered into with Mayfair. It sold the
property to Equatorial with purpose and intent to withhold any notice or knowledge of the sale coming to the attention of
Mayfair. All the circumstances point to a calculated and contrived plan of non-compliance with the agreement of first refusal.

On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full knowledge the
Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial took unconscientious advantage of
Mayfair.

Neither may Carmelo and Equatorial avail of consideration based on equity which might warrant the grant of interests. The
vendor received as payment from the vendee what, at the time, was a full and fair price for the property. It has used the
P11,300,000.00 all these years earning income or interest from the amount. Equatorial, on the other hand, has received rents
and otherwise profited from the use of the property turned over to it by Carmelo. In fact, during all the years that this
controversy was being litigated. Mayfair paid rentals regularly to the buyer who had an inferior right to purchase the property.
Mayfair is under no obligation to pay any interests arising from this judgment to either Carmelo or Equatorial (264 SCRA 483,
pp. 511-512).

Worthy quoting too is the concurring opinion in our 1996 decision of Mr. Justice Teodoro R. Padilla as follows:

The equities of the case support the foregoing legal disposition. During the intervening years between 1 August 1978 and this
date, Equatorial (after acquiring the C.M. Recto property for the price of P11,300,000.00) had been leasing the property and
deriving rental income therefrom. In fact, one of the lessees in the property was Mayfair. Carmelo had, in turn, been using the
proceeds of the sale, investment-wise and/or operation wise in its own business.

It may appear, at first blush, that Mayfair is unduly favored by the solution submitted by this opinion, because the price of
P11,300,000.00 which it has to pay Carmelo in the exercise of its right of first refusal, has been subjected to the inroads of inflation so
that its purchasing power today is less than when the same amount was paid by Equatorial to Carmelo. But then it cannot be
overlooked that it was Carmelo's breach of Mayfair's right of first refusal that prevented Mayfair from paying the price of P11,300,000.00
to Carmelo at about the same time the amount was paid by Equatorial to Carmelo. Moreover, it cannot be ignored that Mayfair had also
incurred consequential or "opportunity" losses by reason of its failure to acquire and use the property under its right of first refusal. In
fine, any loss in purchasing power of the price of P11,300,000.00 is for Carmelo to incur or absorb on account of its bad faith in
breaching Mayfair's contractual right of first refusal to the subject property. (ibid., pp. 511-512).

It can be seen from the above ruling that the issue of rentals and interests was fully discussed and passed upon in 1996. Equatorial
profited from the use of the building for all the years when it had no right or, as stated in our decision, had an inferior right over the
property. Mayfair, which had the superior right, continued to pay rent but it was the rate fixed in the lease contract with Carmelo. We
see no reason for us to now deviate from the reasoning given in our main decision. The decision has been final and executory for five
(5) years and petitioner has failed to present any valid and reasonable ground to reconsider, modify or reverse it. Let that which has
been fairly adjudicated remain final.

My second observation relates to the clever but, to my mind, deceptive argument foisted by Equatorial on the Court.

Equatorial relies on the Civil Code provision on rescissible contracts to bolster its claim. Its argument is that a rescissible contract
remains valid and binding upon the parties thereto until the same is rescinded in an appropriate judicial proceeding.

Equatorial conveniently fails to state that the July 31, 1978 Deed of Absolute Sale was between Equatorial and Carmelo only.
Respondent Mayfair was not a party to the contract. The deed of sale was surreptitiously entered into between Carmelo and Equatorial
behind the back and in violation of the rights of Mayfair. Why should the innocent and wronged party now be made to bear the
consequences of an unlawful contract to which it was not privy? Insofar as Equatorial and Carmelo are concerned, their 1978 contract
may have validly transferred ownership from one to the other. But not as far as Mayfair is concerned.

Mayfair starts its arguments with a discussion of Article 1381 of the Civil Code that contracts entered into in fraud of creditors are
rescissible. There is merit in Mayfair's contention that the legal effects are not restricted to the contracting parties only. On the contrary,
the rescission is for the benefit of a third party, a stranger to the contract. Mayfair correctly states that as far as the injured third party is
concerned, the fraudulent contract, once rescinded, is non-existent or void from its inception. Hence, from Mayfair's standpoint, the
deed of absolute sale which should not have been executed in the first place by reason of Mayfair's superior right to purchase the
property and which deed was cancelled for that reason by this Court, is legally non-existent. There must be a restoration of things to the
condition prior to the celebration of the contract (Respondent relies on Almeda vs. J. M. & Company, 43072-R, December 16, 1975, as
cited in the Philippine Law Dictionary; IV Arturo M. Tolentino, Civil Code of the Philippines, 570, 1990 Ed., citing Manresa; IV Edgardo
L. Paras, Civil Code of the Philippines, 717-718, 1994 Ed.).

It is hard not to agree with the explanations of Mayfair, to wit:

4.22. As a consequence of the rescission of the Deed of Absolute Sale, it was as if Equatorial never bought and became the
lessor of the subject properties. Thus, the court a quo did not err in ruling that Equatorial is not the owner and does not have
any right to demand back rentals from [the] subject property.

4.23. Tolentino, supra, at 577-578 further explains that the effects of rescission in an accion pauliana retroact to the date when
the credit or right being enforced was acquired.
 "While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the fraudulent alienation,
the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely
declaratory, with retroactive effect to the date when the credit was constituted. . ." (emphasis supplied)

4.24. The clear rationale behind this is to prevent conniving parties, such as Equatorial and Carmelo, from benefiting in any
manner from their unlawful act of entering into a contract in fraud of innocent parties with superior rights like Mayfair. Thus, to
allow Equatorial to further collect rentals from Mayfair is to allow the former to profit from its own act of bad faith. Ex dolo malo
non oritur actio. (Respondent's Comment, pp. 338-339, Rollo).

This brings me to my third and final observation in this case. This Court emphasized in the main case that the contract of sale between
Equatorial and Carmelo was characterized by bad faith. The Court described the sale as "fraudulent" in its 1996 decision. It stated that
the damages which Mayfair suffered are in terms of actual injury and lost opportunities, emphasizing that Mayfair should not be given
an empty or vacuous victory. Moreover, altogether too many suits have been filed in this case. Four separate petitions have come
before us, necessitating full length decisions in at least 3 of them. The 1996 decision stressed that the Court has always been against
multiplicity of suits.

There was bad faith from the execution of the deed of sale because Equatorial and Carmelo affirmatively operated with furtive design or
with some motive of self-interest or ill-will or for ulterior purposes (Air France vs. Carrascoso, 18 SCRA 166 [1966]). There was breach
of a known duty by the two parties to the unlawful contract arising from motives of interests or ill-will calculated to cause damage to
another (Lopez vs. Pan American World Airways, 123 Phil. 264 [1966]).

The presence of bad faith is clear from the records. Our resolution of this issue in 1996 (G.R. 106063) is res judicata.

We stated:

First and foremost is that the petitioners (referring to Equatorial and Carmelo) acted in bad faith to render Paragraph 8 "inutile".

xxx           xxx           xxx

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible. We agree with
respondent Appellate Court that the records bear out the fact that Equatorial was aware of the lease contracts because its
lawyers had, prior to the sale, studied the said contracts. As such Equatorial cannot tenably claim to be a purchaser in good
faith and, therefore, rescission lies.

xxx           xxx           xxx

As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad faith, since it was
knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact, as correctly observed by the Court of
Appeals, Equatorial admitted that its lawyers had studied the contract of lease prior to the sale. Equatorial's knowledge of the
stipulations therein should have cautioned it to look further into the agreement to determine if it involved stipulations that would
prejudice its own interests.

xxx           xxx           xxx

On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full knowledge that
Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial took unconscientious advantage of
Mayfair (264 SCRA 506, 507-511).

We ruled that because of bad faith, neither may Carmelo and Equatorial avail themselves of considerations based on equity which
might warrant the grant of interests and, in this case, unconscionably increased rentals.

Verily, if Mayfair were a natural person it could very well have asked for moral damages instead of facing a lengthy and expensive suit
to pay rentals many times higher than those stipulated in the contract of lease. Under the Civil Code, Mayfair is the victim in a breach of
contract where Carmelo and Equatorial acted fraudulently and in bad faith.

Considering the judgments in our 3 earlier decisions, Mayfair is under no obligation to pay any interests, whether based on law or
equity, to Carmelo or Equatorial. Mayfair is the wronged entity, the one which has suffered injury since 1978 or for the 23 years it was
deprived of the property.

Equatorial has received rentals and other benefits from the use of the property during these 23 years, rents and benefits which would
have accrued to Mayfair if its rights had not been violated.

There is no obligation on the part of respondent Mayfair to pay any increased, additional, back or future rentals or interests of any kind
to petitioner Equatorial under the circumstances of this case.

I, therefore, concur with the majority opinion in denying due course and dismissing the petition.

Puno and Mendoza, JJ., concur.

Dissenting Opinion

VITUG, J., dissenting:

Civil Law, in its usual sophistication, classifies defective contracts (unlike the seemingly generic treatment in Common Law), into, first,
the rescissible contracts,1 which are the least infirm; followed by, second, the voidable contracts;2 then, third, the unenforceable
contracts;3 and, finally, fourth, the worst of all or the void contracts.4 In terms of their efficaciousness, rescissible contracts are regarded,
among the four, as being the closest to perfectly executed contracts. A rescissible contract contains all the requisites of a valid contract
and are considered legally binding, but by reason of injury or damage to either of the contracting parties or to third persons, such as
creditors, it is susceptible to rescission at the instance of the party who may be prejudiced thereby. A rescissible contract is valid,
binding and effective until it is rescinded. The proper way by which it can be assailed is by an action for rescission based on any of the
causes expressly specified by law.5

The remedy of rescission in the case of rescissible contracts under Article 1381 is not to be confused with the remedy of rescission, or
more properly termed "resolution," of reciprocal obligations under Article 1191 of the Civil Code. While both remedies presuppose the
existence of a juridical relation that, once rescinded, would require mutual restitution, it is basically, however, in this aspect alone when
the two concepts coincide.

Resolution under Article 1191 would totally release each of the obligors from compliance with their respective covenants. It might be
worthwhile to note that in some cases, notably Ocampo vs. Court of Appeals,6 and Velarde vs. Court of Appeals,7 where the Court
referred to rescission as being likened to contracts which are deemed "void at inception," the focal issue is the breach of the obligation
involved that would allow resolution pursuant to Article 1191 of the Civil Code. The obvious reason is that when parties are reciprocally
bound, the refusal or failure of one of them to comply with his part of the bargain should allow the other party to resolve their juridical
relationship rather than to leave the matter in a state of continuing uncertainty. The result of the resolution, when decreed, renders the
reciprocal obligations inoperative "at inception."

Upon the other hand, the rescission of a rescissible contract under Article 1381, taken in conjunction with Article 1385, is a relief which
the law grants for the protection of a contracting party or a third person from injury and damage that the contract may cause, or to
protect some incompatible and preferent right created by the contract.8Rescissible contracts are not void ab initio, and the principle,
"quod nullum est nullum producit effectum," in void and inexistent contracts is inapplicable. Until set aside in an appropriate action
rescissible contracts are respected as being legally valid, binding and in force. It would be wrong to say that rescissible contracts
produce no legal effects whatsoever and that no acquisition or loss of rights could meanwhile occur and be attributed to the terminated
contract. The effects of the rescission, prospective in nature, can come about only upon its proper declaration as such.

Thus when the Court9 held the contract to be "deemed rescinded" in G.R. No. 106063, the Court did not mean a "declaration of nullity"
of the questioned contract. The agreement between petitioner and Carmelo being efficacious until rescinded, validly transferred
ownership over the property to petitioner from the time the deed of sale was executed in a public instrument on 30 July 1978 up to the
time that the decision in G.R. No. 106063 became final on 17 March 1997. It was only from the latter date that the contract had ceased
to be efficacious. The fact that the subject property was in the hands of a lessee, or for that matter of any possessor with a juridical title
derived from an owner, would not preclude a conferment of ownership upon the purchaser nor be an impediment from the transfer of
ownership from the seller to the buyer. Petitioner, being the owner of the property (and none other) until the judicial rescission of the
sale in its favor, was entitled to all incidents of ownership inclusive of, among its other elements, the right to the fruits of the property.
Rentals or rental value over that disputed property from 30 July 1978 up to 17 March 1997 should then properly pertain to petitioner. In
this respect, the much abused terms of "good faith" or "bad faith " play no role; ownership, unlike other concepts, is never described as
being either in good faith or in bad faith.

With all due respect, I am thus unable to join in this instance my colleagues in the majority.

Kapunan and De Leon, Jr., JJ., concur.

Dissenting Opinion

SANDOVAL-GUTIERREZ, J., dissenting:

"Stare decisis et non quieta movere — follow past precedents and do not disturb what has been settled. Adherence to this principle is
imperative if this Court is to maintain stability in jurisprudence.

I regret that I am unable to agree with the majority opinion.

The principal issue in this case is whether a rescissible contract is void and ineffective from its inception. This issue is not a novel one.
Neither is it difficult to resolve as it involves the application of elementary principles in the law on contracts, specifically on rescissible
contracts, as distinguished from void or inexistent contracts.

The facts are simple.

On June 1, 1967, respondent Mayfair Theater, Inc. (Mayfair) leased portions of the ground, mezzanine and second floors of a two
storey commercial building located along C.M. Recto Avenue Manila. The building together with the land on which it was constructed
was then owned by Carmelo & Bauermann, Inc. (Carmelo). Respondent used these premises as "Maxim Theater." The lease was for a
period of twenty (20) years.

On March 31, 1969, Mayfair leased from Carmelo another portion of the second floor, as well as two (2) store spaces on the ground
and mezzanine floors of the same building. Respondent Mayfair used the premises as a movie theater known as "Miramar Theater."

Both leases contained the following identical provisions:

"That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive option to
purchase the same.

In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is bound and
obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall recognize this
lease and be bound by all the terms and conditions thereof.

On July 31, 1978, Carmelo entered into a Deed of Absolute Sale whereby it sold the subject land and two-storey building to petitioner
Equatorial Realty Development, Inc. (Equatorial) for P11,300,000.00. Having acquired from Carmelo ownership of the subject property,
Equatorial received rents from Mayfair for sometime.
Subsequently, Mayfair, claiming it had been denied its right to purchase the leased property in accordance with the provisions of its
lease contracts with Carmelo, filed with the Regional Trial Court, Branch 7, Manila, a suit for specific performance and annulment of
sale with prayer to enforce its "exclusive option to purchase" the property. The dispute between Mayfair, on the one hand, and Carmelo
and Equatorial on the other, reached this Court in G.R. No. 106063, "Equatorial Realty Development, Inc. & Carmelo & Bauermann,
Inc. vs. Mayfair Theater, Inc."1 On November 21, 1996, this Court rendered a Decision, the dispositive portion of which reads:

"WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-G.R. CV No.
32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty-Development, Inc. and
Carmelo & Bauermann, Inc. is hereby deemed rescinded; Carmelo & Bauermann is ordered to return to petitioner Equatorial
Realty Development the purchase price. The latter is directed to execute the deeds and documents necessary to return
ownership to Carmelo & Bauermann of the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to
buy the aforesaid lots for P11,300,000.00.

SO ORDERED."

The Decision of this Court in G.R. No. 106063 became final and executory on March 17, 1997.

On April 25, 1997, Mayfair filed with the trial court a motion for execution which was granted.

However, Carmelo could no longer be located. Thus, Mayfair deposited with the trial court its payment to Carmelo in the sum of
P11,300,000.00 less P847,000.00 as withholding tax.

The Clerk of Court of the Manila Regional Trial Court, as sheriff, executed a deed of re-conveyance in favor of Carmelo and a deed of
sale in favor of Mayfair. On the basis of these documents, the Registry of Deeds of Manila cancelled Equatorial's titles and issued new
Certificates of Title2 in the name of Mayfair.

In G.R. No. 136221,3 "Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.," this Court instructed the trial court to execute
strictly this Court's Decision in G.R. No. 106063.

On September 18, 1997, or after the execution of this Court's Decision in G.R. No. 106063, Equatorial filed with the Regional Trial
Court of Manila, Branch 8, an action for collection of a sum of money against Mayfair, docketed as Civil Case No. 97-85141. Equatorial
prayed that the trial court render judgment ordering Mayfair to pay:

(1) the sum of P11,548,941.76 plus legal interest, representing the total amount of unpaid monthly rentals/reasonable
compensation from June 1, 1987 (Maxim Theater) and March 31,1989 (Miramar Theater) to July 31, 1997;

(2) the sums of P849,567.12 and P458,853.44 a month, plus legal interest, as rental/reasonable compensation for the use and
occupation of the subject property from August 1, 1997 to May 31, 1998 (Maxim Theater) and March 31, 1998 (Miramar
Theater);

(3) the sum of P500,000.00 as and for attorney's fees, plus other expenses of litigation; and

(4) the costs of the suit.4

On October 14, 1997, before filing its answer, Mayfair filed a "Motion to Dismiss" Civil Case No. 97-85141 on the following grounds:

"(A)

PLAINTIFF IS GUILTY OF FORUM SHOPPING.

(B)

PLAINTIFF'S CAUSE OF ACTION, IF ANY, IS BARRED BY PRIOR JUDGMENT."5

On March 11, 1998, the court a quo issued an order dismissing Civil Case No. 97-85141 on the ground that since this Court, in G.R.
No. 106063, rescinded the Deed of Absolute Sale between Carmelo and Equatorial, the contract is void at its
inception.6 Correspondingly, Equatorial is not the owner of the subject property and, therefore, does not have any right to demand from
Mayfair payment of rentals or reasonable compensation for its use and occupation of the premises.

Equatorial filed a motion for reconsideration but was denied.

Hence, the present petition.

At this stage, I beg to disagree with the ruling of the majority that (1) Equatorial did not acquire ownership of the disputed property from
Carmelo because of lack of delivery; and that (2) Equatorial is not entitled to the payment of rentals because of its bad faith.

Firmly incorporated in our Law on Sales is the principle that ownership is transferred to the vendee by means of delivery, actual or
constructive.7 There is actual delivery when the thing sold is placed in the control and possession of the vendee.8 Upon the other hand,
there is constructive delivery when the delivery of the thing sold is represented by other signs or acts indicative thereof. Article 1498 of
the Civil Code is in point. It provides that "When the sale is made through a public instrument, the execution thereof shall be equivalent
to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be
inferred."9

Contrary to the majority opinion, the facts and circumstances of the instant case clearly indicate that there was indeed actual and
constructive delivery of the disputed property from Carmelo to Equatorial.
Let me substantiate my claim.

First, I must take exception to the majority's statement that this Court found in G.R. No. 10606310 that, "no right of ownership was
transferred from Carmelo to Equatorial in view of a patent failure to deliver the property to the buyer."11

A perusal of the Decision dated November 21, 1996 would reveal otherwise.

To say that this Court found no transfer of ownership between Equatorial and Carmelo is very inaccurate. For one, this Court, in
disposing of G.R. No. 106063, explicitly ordered Equatorial to "execute the deeds and documents necessary to return ownership to
Carmelo & Bauermann of the disputed lots."12 I suppose this Court would not have made such an order if it did not recognize the
transfer of ownership from Carmelo to Equatorial under the contract of sale. For why would the Court order Equatorial to execute the
deeds and documents necessary to return ownershipto Carmelo if, all along, it believed that ownership remained with Carmelo?

Furthermore, is Court explicitly stated in the Decision that Equatorial received rentals from Mayfair during the pendency of the case. Let
me quote the pertinent portion of the Decision, thus:

". . . Equatorial, on the other hand, has received rents and otherwise profited from the use of the property turned over to it
by Carmelo. In fact, during all the years that this controversy was being litigated, Mayfair paid rentals regularly to the buyer
(Equatorial) who had an inferior right to purchase the property. Mayfair is under no obligation to pay any interests arising from
this judgment to either Carmelo or Equatorial."13

Justice Teodoro R. Padilla, in his Separate Opinion, made the following similar observations:

"The equities of the case support the foregoing legal disposition. During the intervening years between 1 August 1978 and this
date, Equatorial (after acquiring the C.M. Recto property for the price of P11,300,000.00) had been leasing the property and
deriving rental income therefrom. In fact, one of the lessees in the property was Mayfair. Carmelo had, in turn, been using the
proceeds of the sale, investment-wise and/or operation-wise in its own business."14

Obviously, this Court acknowledged the delivery of the property from Carmelo to Equatorial. As aptly described by Justice Panganiban
himself, the sale between Carmelo and Equatorial had not only been "perfected" but also "consummated".15

That actual possession of the property was turned over by Carmelo to Equatorial is clear from the fact that the latter received rents from
Mayfair. Significantly, receiving rentals is an exercise of actual possession. Possession, as defined in the Civil Code, is the holding of a
thing or the enjoyment of a right.16 It may either be by material occupation or by merely subjecting the thing or right to the action of our
will.17 Possession may therefore be exercised through one's self or through another.18 It is not necessary that the person in possession
should himself be the occupant of the property, the occupancy can be held by another in the name of the one who claims possession.
In the case at bench, Equatorial exercised possession over the disputed property through Mayfair. When Mayfair paid its monthly
rentals to Equatorial, the said lessee recognized the superior right of Equatorial to the possession of the property. And even if Mayfair
did not recognize Equatorial's superior right over the disputed property, the fact remains that Equatorial was then enjoying the fruits of
its possession.

At this juncture, it will be of aid to lay down the degrees of possession. The first degree is the mere holding, or possession without title
whatsoever, and in violation of the right of the owner. Here, both the possessor and the public know that the possession is wrongful. An
example of this is the possession of a thief or a usurper of land. The second is possession with juridical title, but not that of ownership.
This is possession peaceably acquired, such that of a tenant, depositary, or pledge. The third is possession with a just title, or a title
sufficient to transfer ownership, but not from the true owner. An example is the possession of a vendee of a piece of land from one who
pretends to be the owner but is in fact not the owner thereof. And the fourth is possession with a just title from the true owner. This is
possession that springs from ownership.19 Undoubtedly, Mayfair's possession is by virtue of juridical title under the contract of lease,
while that of Equatorial is by virtue of its right of ownership under the contract of sale.

Second, granting arguendo that there was indeed no actual delivery, would Mayfair's alleged "timely objection to the sale and continued
actual possession of the property" constitute an "impediment" that may prevent the passing of the property from Carmelo to Equatorial?
20

I believe the answer is no.

The fact that Mayfair has remained in "actual possession of the property," after the perfection of the contract of sale between Carmelo
and Equatorial up to the finality of this Court's Decision in G.R. No. 106063 (and even up to the present), could not prevent the
consummation of such contract. As I have previously intimated, Mayfair's possession is not under a claim of ownership. It cannot in any
way clash with the ownership accruing to Equatorial by virtue of the sale. The principle has always been that the one who possesses as
a mere holder acknowledges in another a superior right or right of ownership. A tenant possesses the thing leased as a mere holder, so
does the usufructuary of the thing in usufruct; and the borrower of the thing loaned in commodatum. None of these holders asserts a
claim of ownership in himself over the thing. Similarly, Mayfair does not claim ownership, but only possession as a lessee with the prior
right to purchase the property.

In G.R. No. 106063, Mayfair's main concern in its action for specific performance was the recognition of its right of first refusal. Hence,
the most that Mayfair could secure from the institution of its suit was to be allowed to exercise its right to buy the property upon
rescission of the contract of sale. Not until Mayfair actually exercised what it was allowed to do by this Court in G.R. No. 106063,
specifically to buy the disputed property for P11,300,000.00, would it have any right of ownership. How then, at that early stage, could
Mayfair's action be an impediment in the consummation of the contract between Carmelo and Equatorial?

Pertinently, it does not always follow that, because a transaction is prohibited or illegal, title, as between the parties to the transaction,
does not pass from the seller, donor, or transferor to the vendee, donee or transferee.21

And third, conformably to the foregoing disquisition, I maintain that Equatorial has the right to be paid whatever monthly rentals during
the period that the contract of sale was in existence minus the rents already paid. In Guzman v. Court of Appeals,22 this Court decreed
that upon the purchase of the leased property and proper notice by the vendee, the lessee must pay the agreed monthly rentals to the
new owner since, by virtue of the sale the vendee steps into the shoes of the original lessor to whom the lessee bound himself to pay.
His belief that the subject property should have been sold to him does not justify the unilateral withholding of rental payments due to the
new owner of the property.23 It must be stressed that under Article 1658 of the Civil Code, there are only two instances wherein the
lessee may suspend payment of rent, namely: in case the lessor fails to make the necessary repairs or to maintain the lessee in
peaceful and adequate enjoyment of the property leased.24 In this case, the fact remains that Mayfair occupied the leased property. It
derived benefit from such occupation, thus, it should pay the corresponding rentals due. Nemo cum alterius detrimento locupletari
potest. No one shall enrich himself at the expense of another.25

Neither should the presence of bad faith prevent the award of rent to Equatorial. While Equatorial committed bad faith in entering into
the contract with Camelo, it has been equitably punished when this Court rendered the contract rescissible. That such bad faith was the
very reason why the contract was declared rescissible is evident from the Decision itself.26 To utilize it again, this time, to deprive
Equatorial of its entitlement to the rent corresponding to the period during which the contract was supposed to validly exist, would not
only be unjust, it would also disturb the very nature of a rescissible contract.

Let me elucidate on the matter.

Articles 1380 through 1389 of the Civil Code deal with rescissible contracts. A rescissible contract is one that is validly entered into, but
is subsequently terminated or rescinded for causes provided for by law.

This is the clear implication of Article 1380 of the same Code which provides:

"Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law."

Rescission has been defined as follows:

"Rescission is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of
damages caused to them by a contract, even if this should be valid, by means of the restoration of things to their condition at
the moment prior to the celebration of said contract. It is a relief for the protection of one of the contracting parties and third
persons from all injury and damage the contract may cause, or to protect some incompatible and preferential right created by
the contract. It implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone. It sets aside
the act or contract for justifiable reasons of equity."27

Necessarily, therefore, a rescissible contract remains valid and binding upon the parties thereto until the same is rescinded in an
appropriate judicial proceeding.

On the other hand, a void contract, which is treated in Articles 1409 through 1422 of the Civil Code, is inexistent and produces no legal
effect whatsoever. The contracting parties are not bound thereby and such contract is not subject to ratification.

In dismissing petitioner Equatorial's complaint in Civil Case No. 97-85141, the trial court was apparently of the impression that a
rescissible contract has the same effect as a void contract, thus:

"However, the words in the dispositive portion of the Supreme Court "is hereby deemed rescinded" does not allow any other
meaning. The said Deed of Absolute Sale is void at its inception.

xxx           xxx           xxx

The subject Deed of Absolute Sale having been rescinded by the Supreme Court, Equatorial is not the owner and does not
have any right to demand back rentals from subject property. The law states that only an owner can enjoy the fruits of a certain
property or jus utendi which includes the right to receive from subject property what it produces, . . ."

The trial court erred. In G.R. No. 106063 (involving Mayfair's suit for specific performance), this Court clearly characterized the Deed of
Absolute Sale between Carmelo and petitioner Equatorial as a rescissible contract. We stated therein that:

"Since Equatorial is a buys in bad faith. this finding renders the sale to it of the property in question rescissible. We agree with
respondent Appellate Court that the records bear out the fact that Equatorial was aware of the lease contracts because its
lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot tenably claim to be a purchaser in good
faith, and therefore, rescission lies."

This Court did not declare the Deed of Absolute Sale between Carmelo and Equatorial void but merely rescissible. Consequently, the
contract was, at inception, valid and naturally, it validly transferred ownership of the subject property to Equatorial. It bears emphasis
that Equatorial was not automatically divested of its ownership. Rather, as clearly directed in the dispositive portion of our Decision,
Carmelo should return the purchase price to Equatorial which, in turn, must execute such deeds and documents necessary to enable
Carmelo to reacquire its ownership of the property.

As mentioned earlier, Mayfair deposited with the Regional Trial Court, Branch 7, Manila, the purchase price of P10,452,000.00
(P11,300,000.00 less P847,000.00 as withholding tax). In turn, the Clerk of Court executed the deed of sale of the subject property in
favor of Mayfair.

In the meantime, Mayfair has continued to occupy and use the premises, the reason why Equatorial filed against it Civil Case No. 97-
85141 for sum of money representing rentals and reasonable compensation.

At this point, I must reiterate that Equatorial purchased the subject property from Carmelo and became its owner on July 31, 1978.
While the contract of sale was "deemed rescinded" by this Court in G.R. No. 106063, nevertheless the sale had remained valid and
binding between the contracting parties until March 17, 1997 when the Decision in G.R. No. 106063 became final. Consequently, being
the owner, Equatorial has the right to demand from Mayfair payment of rentals corresponding to the period from July 31, 1978 up to
March 17, 1997.

Records show that the rentals and reasonable compensation which Equatorial demands from Mayfair are those which accrued from the
year 1987 to 1998. As earlier stated, prior thereto, Mayfair had been paying the rents to Equatorial.
In line with this Court's finding that Equatorial was the owner of the disputed property from July 31, 1978 to March 17, 1997, it is,
therefore, entitled to the payment of rentals accruing to such period.

Consequently, whether or not Mayfair paid Equatorial the rentals specified in the lease contracts from June 1, 1987  to March 17,
1997 is for the trial court to resolve.

One last word. In effect, the majority have enunciated that:

1. A lessor, in a contract of sale, cannot transfer ownership of his property, occupied by the lessee, to the buyer because there
can be no delivery of such property to the latter; and

2. Not only a possessor, but also an owner, can be in bad faith.

I cannot subscribe to such doctrines.

WHEREFORE, I vote to GRANT the petition.

G.R. No. L-6584             October 16, 1911

INCHAUSTI AND CO., plaintiff-appellant, 

vs.
ELLIS CROMWELL, Collector of Internal Revenue, defendant-appellee.

Haussermann, Cohn & Fisher, for appellant.

Acting Attorney-General Harvey, for appellee.

MORELAND, J.:

This is an appeal by the plaintiff from a judgment of the Court of First Instance of the city of Manila, the Hon. Simplicio del Rosario
presiding, dismissing the complaint upon the merits after trial, without costs.

The facts presented to this court are agreed upon by both parties, consisting, in so far as they are material to a decision of the case, in
the following:

III. That the plaintiff firm for many years past has been and now is engaged in the business of buying and selling at wholesale
hemp, both for its own account and on commission.

IV. That it is customary to sell hemp in bales which are made by compressing the loose fiber by means of presses, covering
two sides of the bale with matting, and fastening it by means of strips of rattan; that the operation of bailing hemp is designated
among merchants by the word "prensaje."

V. That in all sales of hemp by the plaintiff firm, whether for its own account or on commission for others, the price is quoted to
the buyer at so much per picul, no mention being made of bailing; but with the tacit understanding, unless otherwise expressly
agreed, that the hemp will be delivered in bales and that, according to the custom prevailing among hemp merchants and
dealers in the Philippine Islands, a charge, the amount of which depends upon the then prevailing rate, is to be made against
the buyer under the denomination of "prensaje." That this charge is made in the same manner in all cases, even when the
operation of bailing was performed by the plaintiff or by its principal long before the contract of sale was made. Two specimens
of the ordinary form of account used in these operations are hereunto appended, marked Exhibits A and B, respectively, and
made a part hereof.

VI. That the amount of the charge made against hemp buyers by the plaintiff firm and other sellers of hemp under the
denomination of "prensaje" during the period involved in this litigation was P1.75 per bale; that the average cost of the rattan
and matting used on each bale of hemp is fifteen (15) centavos and that the average total cost of bailing hemp is one (1) peso
per bale.

VII. That insurance companies in the Philippine Islands, in estimating the insurable value of hemp always add to the quoted
price of same the charge made by the seller under the denomination of "prensaje."

VII. That the average weight of a bale of hemp is two (2) piculs (126.5 kilograms).

IX. That between the first day of January, 1905, and the 31st day of March, 1910, the plaintiff firm, in accordance with the
custom mentioned in paragraph V hereof, collected and received, under the denomination of "prensaje," from purchasers of
hemp sold by the said firm for its own account, in addition to the price expressly agreed upon for the said hemp, sums
aggregating P380,124.35; and between the 1st day of October, 1908, and the 1st day of March, 1910, collected for the
account of the owners of hemp sold by the plaintiff firm in Manila on commission, and under the said denomination of
"prensaje," in addition to the price expressly agreed upon the said hemp, sums aggregating P31,080.

X. That the plaintiff firm in estimating the amount due it as commissions on sales of hemp made by it for its principals has
always based the said amount on the total sum collected from the purchasers of the hemp, including the charge made in each
case under the denomination of "prensaje."

XI. That the plaintiff has always paid to the defendant or to his predecessor in the office of the Collector of Internal Revenue
the tax collectible under the provisions of section 139 of Act No. 1189 upon the selling price expressly agreed upon for all
hemp sold by the plaintiff firm both for its own account and on commission, but has not, until compelled to do so as hereinafter
stated, paid the said tax upon sums received from the purchaser of such hemp under the denomination of "prensaje."

XII. That of the 29th day of April, 1910, the defendant, acting in his official capacity as Collector of Internal Revenue of the
Philippine Islands, made demand in writing upon the plaintiff firm for the payment within the period of five (5) days of the sum
of P1,370.68 as a tax of one third of one per cent on the sums of money mentioned in Paragraph IX hereof, and which the said
defendant claimed to be entitled to receive, under the provisions of the said section 139 of Act No. 1189, upon the said sums
of money so collected from purchasers of hemp under the denomination of "prensaje."

XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the defendant under protest the said sum of P1,370.69, and on
the same date appealed to the defendant as Collector of Internal Revenue, against the ruling by which the plaintiff firm was
required to make said payment, but defendant overruled said protest and adversely decided said appeal, and refused and still
refuses to return to plaintiff the said sum of P1,370.68 or any part thereof.
1awphil.net

XIV. Upon the facts above set forth t is contended by the plaintiff that the tax of P1,370.68 assessed by the defendant upon
the aggregate sum of said charges made against said purchasers of hemp by the plaintiff during the period in question, under
the denomination of "prensaje" as aforesaid, namely, P411,204.35, is illegal upon the ground that the said charge does not
constitute a part of the selling price of the hemp, but is a charge made for the service of baling the hemp, and that the plaintiff
 firm is therefore entitled to recover of the defendant the said sum of P1,370.68 paid to him under protest, together with all
interest thereon at the legal rate since payment, and the costs of this action.

Upon the facts above stated it is the contention of the defendant that the said charge made under the denomination of
"prensaje" is in truth and in fact a part of the gross value of the hemp sold and of its actual selling price, and that therefore the
tax imposed by section 139 of Act No. 1189 lawfully accrued on said sums, that the collection thereof was lawfully and
properly made and that therefore the plaintiff is not entitled to recover back said sum or any part thereof; and that the
defendant should have judgment against plaintiff for his costs.

Under these facts we are of the opinion that the judgment of the court below was right. It is one of the stipulations in the statement of
facts that it is customary to sell hemp in bales, and that the price quoted in the market for hemp per picul is the price for the hemp
baled. The fact is that among large dealers like the plaintiff in this case it is practically impossible to handle hemp without its being
baled, and it is admitted by the statement of facts, as well as demonstrated by the documentary proof introduced in the case, that if the
plaintiff sold a quality of hemp it would be the under standing, without words, that such hemp would be delivered in bales, and that the
purchase price would include the cost and expense of baling. In other words, it is the fact as stipulated, as well as it would be the fact of
necessity, that in all dealings in hemp in the general market the selling price consists of the value of the hemp loose plus the cost and
expense of putting it into marketable form. In the sales made by the plaintiff, which are the basis of the controversy here, there were n
services performed by him for his vendee. There was agreement that services should be performed. Indeed, at the time of such sales it
was not known by the vendee whether the hemp was then actually baled or not. All that he knew and all that concerned him was that
the hemp should be delivered to him baled. He did not ask the plaintiff to perform services for him, nor did the plaintiff agree to do so.
The contract was single and consisted solely in the sale and purchase of hemp. The purchaser contracted for nothing else and the
vendor agreed to deliver nothing else.

The word "price" signifies the sum stipulated as the equivalent of the thing sold and also every incident taken into consideration for the
fixing of the price, put to the debit of the vendee and agreed to by him. It is quite possible that the plaintiff, in this case in connection
with the hemp which he sold, had himself already paid the additional expense of baling as a part of the purchase price which he paid
and that he himself had received the hemp baled from his vendor. It is quite possible also that such vendor of the plaintiff may have
received the same hemp from his vendor in baled form, that he paid the additions cost of baling as a part of the purchase price which
he paid. In such case the plaintiff performed no service whatever for his vendee, nor did the plaintiff's vendor perform any service for
him.

The distinction between a contract of sale and one for work, labor, and materials is tested by the inquiry whether the thing transferred is
one no in existence and which never would have existed but for the order of the party desiring to acquire it, or a thing which would have
existed and been the subject of sale to some other person, even if the order had not been given. (Groves vs. Buck, 3 Maule & S., 178;
Towers vs. Osborne, 1 Strange, 506; Benjamin on Sales, 90.) It is clear that in the case at bar the hemp was in existence in baled form
before the agreements of sale were made, or, at least, would have been in existence even if none of the individual sales here in
question had been consummated. It would have been baled, nevertheless, for sale to someone else, since, according to the agreed
statement of facts, it is customary to sell hemp in bales. When a person stipulates for the future sale of articles which he is habitually
making, and which at the time are not made or finished, it is essentially a contract of sale and not a contract for labor. It is otherwise
when the article is made pursuant to agreement. (Lamb vs. Crafts, 12 Met., 353; Smith vs. N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on
Sales, 98.) Where labor is employed on the materials of the seller he can not maintain an action for work and labor. (Atkinson vs. Bell, 8
Barn. & C., 277; Lee vs. Griffin, 30 L.J.N. S.Q.B., 252; Prescott vs. Locke, 51 N.H., 94.) If the article ordered by the purchaser is exactly
such as the plaintiff makes and keeps on hand for sale to anyone, and no change or modification of it is made at the defendant's
request, it is a contract of sale, even though it may be entirely made after, and in consequence of, the defendant's order for it. (Garbutt
s. Watson, 5 Barn. & Ald., 613; Gardner vs. Joy, 9 Met., 177; Lamb vs. Crafts, 12 Met., 353; Waterman vs. Meigs, 4 Cush., 497.,
Clark vs. Nichols, 107 Mass., 547; May vs. Ward, 134 Mass., 127; Abbott vs.Gilchrist, 38 Me., 260; Crocket vs. Scribner, 64 Me., 105;
Pitkin vs. Noyes, 48 N. H., 294; Prescott vs. Locke, 51 N. H., 94; Ellison vs. Brigham, 38 Vt., 64.) It has been held in Massachusetts
that a contract to make is a contract of sale if the article ordered is already substantially in existence at the time of the order and merely
requires some alteration, modification, or adoption to the buyer's wishes or purposes. (Mixer vs. Howarth, 21 Pick., 205.) It is also held
in that state that a contract for the sale of an article which the vendor in the ordinary course of his business manufactures or procures
for the general market, whether the same is on hand at the time or not, is a contract for the sale of goods to which the statute of frauds
applies. But if the goods are to be manufactured especially for the purchaser and upon his special order, and not for the general
market, the case is not within the statute. (Goddard vs. Binney, 115 Mass., 450.)

It is clear to our minds that in the case at bar the baling was performed for the general market and was not something done by plaintiff
which was a result of any peculiar wording of the particular contract between him and his vendee. It is undoubted that the plaintiff
prepared his hemp for the general market. This would be necessary. One whose exposes goods for sale in the market must have them
in marketable form. The hemp in question would not have been in that condition if it had not been baled. the baling, therefore, was
nothing peculiar to the contract between the plaintiff and his vendee. It was precisely the same contract that was made by every other
seller of hemp, engaged as was the plaintiff, and resulted simply in the transfer of title to goods already prepared for the general
market. The method of bookkeeping and form of the account rendered is not controlling as to the nature of the contract made. It is
conceded in the case tat a separate entry and charge would have been made for the baling even if the plaintiff had not been the one
who baled the hemp but, instead, had received it already baled from his vendor. This indicates of necessity tat the mere fact of entering
a separate item for the baling of the hemp is formal rather than essential and in no sense indicates in this case the real transaction
between the parties. It is undisputable that, if the plaintiff had brought the hemp in question already baled, and that was the hemp the
sale which formed the subject of this controversy, then the plaintiff would have performed no service for his vendee and could not,
therefore, lawfully charge for the rendition of such service. It is, nevertheless, admitted that in spite of that fact he would still have made
the double entry in his invoice of sale to such vendee. This demonstrates the nature of the transaction and discloses, as we have
already said, that the entry of a separate charge for baling does not accurately describe the transaction between the parties.

Section 139 [Act No. 1189] of the Internal Revenue Law provides that:

There shall be paid by each merchant and manufacturer a tax at the rate of one-third of one per centum on the gross value in
money of all goods, wares and merchandise sold, bartered or exchanged in the Philippine Islands, and that this tax shall be
assessed on the actual selling price at which every such merchant or manufacturer disposes of his commodities.

The operation of baling undoubtedly augments the value of the goods. We agree that there can be no question that, if the value of the
hemp were not augmented to the amount of P1.75 per bale by said operation, the purchaser would not pay that sum. If one buys a bale
of hemp at a stipulated price of P20, well knowing that there is an agreement on his part, express or implied, to pay an additional
amount of P1.75 for that bale, he considers the bale of hemp worth P21. 75. It is agreed, as we have before stated, that hemp is sold in
bales. Therefore, baling is performed before the sale. The purchaser of hemp owes to the seller nothing whatever by reason of their
contract except the value of the hemp delivered. That value, that sum which the purchaser pays to the vendee, is the true selling price
of the hemp, and every item which enters into such price is a part of such selling price. By force of the custom prevailing among hemp
dealers in the Philippine Islands, a purchaser of hemp in the market, unless he expressly stipulates that it shall be delivered to him in
loose form, obligates himself to purchase and pay for baled hemp. Wheher or not such agreement is express or implied, whether it is
actual or tacit, it has the same force. After such an agreement has once been made by the purchaser, he has no right to insists
thereafter that the seller shall furnish him with unbaled hemp. It is undoubted that the vendees, in the sales referred to in the case at
bar, would have no right, after having made their contracts, to insists on the delivery of loose hemp with the purpose in view themselves
to perform the baling and thus save 75 centavos per bale. It is unquestioned that the seller, the plaintiff, would have stood upon his
original contract of sale, that is, the obligation to deliver baled hemp, and would have forced his vendees to accept baled hemp, he
himself retaining among his own profits those which accrued from the proceed of baling.

We are of the opinion that the judgment appealed from must be affirmed, without special finding as to costs, and it is so ordered.
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. 52267             January 24, 1996

ENGINEERING & MACHINERY CORPORATION, petitioner, 

vs.
COURT OF APPEALS and PONCIANO L. ALMEDA, respondent.

DECISION

PANGANIBAN, J.:

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

These are the legal questions brought before this Court in this Petition for review on certiorari under Rule 45 of the Rules of Court, to
set aside the Decision of the Court of Appeals in CA-G.R. No. 58276-R promulgated on November 28, 1978 (affirming in toto  the
1  2 

decision dated April 15, 1974 of the then Court of First Instance of Rizal, Branch II , in Civil Case No. 14712, which ordered petitioner to
3  4 

pay private respondent the amount needed to rectify the faults and deficiencies of the air-conditioning system installed by petitioner in
private respondent's building, plus damages, attorney's fees and costs).

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

The Facts

Pursuant to the contract dated September 10, 1962 between petitioner and private respondent, the former undertook to fabricate,
furnish and install the air-conditioning system in the latter's building along Buendia Avenue, Makati in consideration of P210,000.00.
Petitioner was to furnish the materials, labor, tools and all services required in order to so fabricate and install said system. The system
was completed in 1963 and accepted by private respondent, who paid in full the contract price.

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

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

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

Petitioner moved to dismiss the complaint, alleging that the prescriptive period of six months had set in pursuant to Articles 1566 and
1567, in relation to Article 1571 of the Civil Code, regarding the responsibility of a vendor for any hidden faults or defects in the thing
sold.

Private respondent countered that the contract dated September 10, 1962 was not a contract for sale but a contract for a piece of work
under Article 1713 of the Civil Code. Thus, in accordance with Article 1144 (1) of the same Code, the complaint was timely brought
within the ten-year prescriptive period.

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

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

Thereafter, private respondent filed an ex-parte motion for preliminary attachment on the strength of petitioner's own statement to the
effect that it had sold its business and was no longer doing business in Manila. The trial court granted the motion and, upon private
respondent's posting of a bond of F'50,000.00, ordered the issuance of a writ of attachment.

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

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

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

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

The Court's Ruling

The Supreme Court reviews only errors of law in petitions for review on certiorari under Rule 45. It is not the function of this Court to re-
examine the findings of fact of the appellate court unless said findings are not supported by the evidence on record or the judgment is
based on a misapprehension of facts of Appeals erred when it held that the defects in the installation were not apparent at the time of
7 

delivery and acceptance of the work considering that private respondent was not an expert who could recognize such defects. Third. it
insisted that, assuming arguendothat there were indeed hidden defects, private respondent's complaint was barred by prescription
under Article 1571 of the Civil Code, which provides for a six-month prescriptive period.

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

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

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

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

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

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

By the contract for a piece of work the contractor binds himself to execute a piece of work for the employer, in consideration of
a certain price or compensation. The contractor may either employ only his labor or skill, or also furnish the material.

A contract for a piece of work, labor and materials may be distinguished from a contract of sale by the inquiry as to whether the thing
transferred is one not in existence and which would never have existed but for the order, of the person desiring it . In such case, the
10 

contract is one for a piece of work, not a sale. On the other hand, if the thing subject of the contract would have existed and been the
subject of a sale to some other person even if the order had not been given, then the contract is one of sale . 11 

Thus, Mr. Justice Vitug explains that -

12 

A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures
or procures for the general market, whether the same is on hand at the time or not is a contract of sale, but if the goods are to
be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a
piece of work (Art. 1467, Civil Code). The mere fact alone that certain articles are made upon previous orders of customers will
not argue against the imposition of the sales tax if such articles are ordinarily manufactured by the taxpayer for sale to the
public (Celestino Co. vs. Collector, 99 Phil. 841).

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

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

The obligations of a contractor for a piece of work are set forth in Articles 1714 and 1715 of the Civil Code, which provide:
 Art. 1714. If the contractor agrees to produce the work from material furnished by him, he shall deliver the thing produced to
the employer and transfer dominion over the thing. This contract shall be governed by the following articles as well as by the
pertinent provisions on warranty of title and against hidden defects and the payment of price in a contract of sale.

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

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

Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they
render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be
answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who,
by reason of his trade or profession, should have known them.

xxx       xxx       xxx

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

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

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

In Villostas vs.  Court of Appeals , we held that, "while it is true that Article 1571 of the Civil Code provides for a prescriptive period of
15 

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

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

However, a close scrutiny of the complaint filed in the trial court reveals that the original action is not really for enforcement of the
warranties against hidden defects, but one for breach of the contract itself. It alleged that the petitioner, "in the installation of the air
17 

conditioning system did not comply with the specifications provided" in the written agreement between the parties, "and an evaluation of
the air-conditioning system as installed by the defendant showed the following defects and violations of the specifications of the
agreement, to wit:

GROUND FLOOR:

"A. RIGHT WING:

Equipped with Worthington Compressor, Model 2VC4 directly driven by an Hp Elin electric motor 1750 rmp, 3 phase, 60
cycles, 220 volts, complete with starter evaporative condenser, circulating water pump, air handling unit air ducts.

Defects Noted:

1. Deteriorated evaporative condenser panels, coils are full of scales and heavy corrosion is very evident.

2. Defective gauges of compressors;

3. No belt guard on motor;

4. Main switch has no cover;

5. Desired room temperature not attained;

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

1. Face by-pass damper of G.I. sheets No. 16. This damper regulates the flow of cooled air depending on room condition.

2. No fresh air intake provision were provided which is very necessary for efficient comfort cooling..

3. No motor to regulate the face and by-pass damper.

4. Liquid level indicator for refrigerant not provided.

5. Suitable heat exchanger is not installed. This is an important component to increase refrigeration efficiency.
 6. Modulating thermostat not provided.

7. Water treatment device for evaporative condenser was not provided.

8. Liquid receiver not provided by sight glass.

B. LEFT WING:

Worthington Compressor Model 2VC4 is installed complete with 15 Hp electric motor, 3 phase, 220 volts 60 cycles with
starter.

Defects Noted:

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

SECOND FLOOR: (Common up to EIGHT FLOORS)

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

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

1. MELCO Compressors are not provided with automatic capacity unloader.

2. Not provided with oil pressure safety control.

3. Particular compressors do not have provision for renewal sleeves.

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

NINTH FLOOR:

Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60 cycles, 1750 rpm, Higgs motors with starters.

Defects Noted are similar to ground floor.

GENERAL REMARKS:

Under Section III, Design conditions of specification for air conditioning work, and taking into account "A" & "B" same, the
present systems are not capable of maintaining the desired temperature of 76 = 2ºF (sic).

The present tenant have installed 35 window type air conditioning units distributed among the different floor levels.
Temperature measurements conducted on March 29. 1971, revealed that 78ºF room (sic) is only maintained due to the
additional window type units.

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

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

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

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

What about petitioner's contention that "acceptance of the work by the employer relieves the contractor of liability for any defect in the
work"? This was answered by respondent Court as follows:
19 
 As the breach of contract which gave rise to the instant case consisted in appellant's omission to install the equipments (sic),
parts and accessories not in accordance with the plan and specifications provided for in the contract and the deviations made
in putting into the air conditioning system parts and accessories not in accordance with the contract specifications, it is evident
that the defect in the installation was not apparent at the time of the delivery and acceptance of the work, considering further
that plaintiff is not an expert to recognize the same. From the very nature of things, it is impossible to determine by the simple
inspection of air conditioning system installed in an 8-floor building whether it has been furnished and installed as per agreed
specifications.

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

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

SO ORDERED.
G.R. No. 113564            June 20, 2001

INOCENCIA YU DINO and her HUSBAND doing business under the trade name "CANDY CLAIRE FASHION
GARMENTS", petitioners, 
vs.
COURT OF APPEALS and ROMAN SIO, doing business under the name "UNIVERSAL TOY MASTER
MANUFACTURING", respondents.

PUNO, J.:

Though people say, "better late than never", the law frowns upon those who assert their rights past the eleventh hour. For failing to
timely institute their action, the petitioners are forever barred from claiming a sum of money from the respondent.

This is a petition for review on certiorari to annul and set aside the amended decision of the respondent court dated January 24, 1994
reversing its April 30, 1993 decision and dismissing the plaintiff-petitioners' Complaint on the ground of prescription.The following
undisputed facts gave rise to the case at bar:

Petitioners spouses Dino, doing business under the trade name "Candy Claire Fashion Garment" are engaged in the business of
manufacturing and selling shirts.1 Respondent Sio is part owner and general manager of a manufacturing corporation doing business
under the trade name "Universal Toy Master Manufacturing."2

Petitioners and respondent Sio entered into a contract whereby the latter would manufacture for the petitioners 20,000 pieces of vinyl
frogs and 20,000 pieces of vinyl mooseheads at P7.00 per piece in accordance with the sample approved by the petitioners. These
frogs and mooseheads were to be attached to the shirts petitioners would manufacture and sell.3

Respondent Sio delivered in several installments the 40,000 pieces of frogs and mooseheads. The last delivery was made on
September 28, 1988. Petitioner fully paid the agreed price.4 Subsequently, petitioners returned to respondent 29,772 pieces of frogs
and mooseheads for failing to comply with the approved sample.5 The return was made on different dates: the initial one on December
12, 1988 consisting of 1,720 pieces,6 the second on January 11, 1989,7 and the last on January 17, 1989.8

Petitioners then demanded from the respondent a refund of the purchase price of the returned goods in the amount of P208,404.00. As
respondent Sio refused to pay,9 petitioners filed on July 24, 1989 an action for collection of a sum of money in the Regional Trial Court
of Manila, Branch 38.

The trial court ruled in favor of the petitioners, viz:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs Vicente and Inocencia Dino and against defendant Toy
Master Manufacturing, Inc. ordering the latter to pay the former:

1. The amount of Two Hundred Eight Thousand Four Hundred Four (P208,404.00) Pesos with legal interest thereon from July
5, 1989, until fully paid; and

2. The amount of Twenty Thousand (P20,000.00) Pesos as attorney's fees and the costs of this suit.

The counterclaim on the other hand is hereby dismissed for lack of merit."10

Respondent Sio sought recourse in the Court of Appeals. In its April 30, 1993 decision, the appellate court affirmed the trial court
decision. Respondent then filed a Motion for Reconsideration and a Supplemental Motion for Reconsideration alleging therein that the
petitioners' action for collection of sum of money based on a breach of warranty had already prescribed. On January 24, 1994, the
respondent court reversed its decision and dismissed petitioners' Complaint for having been filed beyond the prescriptive period. The
amended decision read in part, viz:

"Even if there is failure to raise the affirmative defense of prescription in a motion to dismiss or in an appropriate pleading
(answer, amended or supplemental answer) and an amendment would no longer be feasible, still prescription, if apparent on
the face of the complaint may be favorably considered (Spouses Matias B. Aznar, III, et al. vs. Hon. Juanito A. Bernad,
etc., supra, G.R. 81190, May 9, 1988). The rule in Gicano vs. Gegato (supra) was reiterated in Severo v. Court of Appeals,
(G.R. No. 84051, May 19, 1989).

WHEREFORE the Motion For Reconsideration is granted. The judgment of this Court is set aside and judgment is hereby
rendered REVERSING the judgment of the trial court and dismissing plaintiff's complaint."11

Hence, this petition with the following assignment of errors:

I.

The respondent Court of Appeals seriously erred in dismissing the complaint of the Petitioners on the ground that the action
had prescribed.

II.

The respondent Court of Appeals seriously erred in holding that the defense of prescription would still be considered despite
the fact that it was not raised in the answer, if apparent on the face of the complaint.

We first determine the nature of the action filed in the trial court to resolve the issue of prescription. Petitioners claim that the Complaint
they filed in the trial court on July 24, 1989 was one for the collection of a sum of money. Respondent contends that it was an action for
breach of warranty as the sum of money petitioners sought to collect was actually a refund of the purchase price they paid for the
alleged defective goods they bought from the respondent.
We uphold the respondent's contention.

The following provisions of the New Civil Code are apropos:

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

"Art. 1713. By the contract for a piece of work the contractor binds himself to execute a piece of work for the employer, in
consideration of a certain price or compensation. The contractor may either employ only his labor or skill, or also furnish the
material."

As this Court ruled in Engineering & Machinery Corporation v. Court of Appeals, et al.,12 "a contract for a piece of work, labor and
materials may be distinguished from a contract of sale by the inquiry as to whether the thing transferred is one not in existence and
which would never have existed but for the order of the person desiring it. In such case, the contract is one for a piece of work, not a
sale. On the other hand, if the thing subject of the contract would have existed and been the subject of a sale to some other person
even if the order had not been given then the contract is one of sale."13 The contract between the petitioners and respondent stipulated
that respondent would manufacture upon order of the petitioners 20,000 pieces of vinyl frogs and 20,000 pieces of vinyl mooseheads
according to the samples specified and approved by the petitioners. Respondent Sio did not ordinarily manufacture these products, but
only upon order of the petitioners and at the price agreed upon.14 Clearly, the contract executed by and between the petitioners and the
respondent was a contract for a piece of work. At any rate, whether the agreement between the parties was one of a contract of sale or
a piece of work, the provisions on warranty of title against hidden defects in a contract of sale apply to the case at bar, viz:

"Art. 1714. If the contractor agrees to produce the work from material furnished by him, he shall deliver the thing produced to
the employer and transfer dominion over the thing. This contract shall be governed by the following articles as well as by the
pertinent provisions on warranty of title and against hidden defects and the payment of price in a contract of sale."

"Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should
they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that,
had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor
shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an
expert who, by reason of his trade or profession, should have known them."

Petitioners aver that they discovered the defects in respondent's products when customers in their (petitioners') shirt business came
back to them complaining that the frog and moosehead figures attached to the shirts they bought were torn. Petitioners allege that they
did not readily see these hidden defects upon their acceptance. A hidden defect is one which is unknown or could not have been known
to the vendee.15 Petitioners then returned to the respondent 29,772 defective pieces of vinyl products and demanded a refund of their
purchase price in the amount of P208,404.00. Having failed to collect this amount, they filed an action for collection of a sum of money.

Article 1567 provides for the remedies available to the vendee in case of hidden defects, viz:

"Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between withdrawing from the
contract and demanding a proportionate reduction of the price, with damages in either case."

By returning the 29,772 pieces of vinyl products to respondent and asking for a return of their purchase price, petitioners were in effect
"withdrawing from the contract" as provided in Art. 1567. The prescriptive period for this kind of action is provided in Art. 1571 of the
New Civil Code, viz:

"Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six months from the delivery of
the thing sold." (Emphasis supplied)

There is no dispute that respondent made the last delivery of the vinyl products to petitioners on September 28, 1988. It is also settled
that the action to recover the purchase price of the goods petitioners returned to the respondent was filed on July 24, 1989,16 more than
nine months from the date of last delivery. Petitioners having filed the action three months after the six-month period for filing actions for
breach of warranty against hidden defects stated in Art. 1571,17 the appellate court dismissed the action.

Petitioners fault the ruling on the ground that it was too late in the day for respondent to raise the defense of prescription. The law then
applicable to the case at bar, Rule 9, Sec. 2 of the Rules of Court, provides:

"Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived; except the failure to
state a cause of action . . . "

Thus, they claim that since the respondent failed to raise the defense of prescription in a motion to dismiss or in its answer, it is deemed
waived and cannot be raised for the first time on appeal in a motion for reconsideration of the appellate court's decision.

As a rule, the defense of prescription cannot be raised for the first time on appeal. Thus, we held in Ramos v. Osorio,18 viz:

"It is settled law in this jurisdiction that the defense of prescription is waivable, and that if it was not raised as a defense in the
trial court, it cannot be considered on appeal, the general rule being that the appellate court is not authorized to consider and
resolve any question not properly raised in the lower court (Subido vs. Lacson, 55 O.G. 8281, 8285; Moran, Comments on the
Rules of Court, Vol. I, p. 784, 1947 Edition)."

However, this is not a hard and fast rule. In Gicano v. Gegato,19 we held:

". . .(T)rial courts have authority and discretion to dimiss an action on the ground of prescription when the parties' pleadings or
other facts on record show it to be indeed time-barred; (Francisco v. Robles, Feb, 15, 1954; Sison v. McQuaid, 50 O.G. 97;
Bambao v. Lednicky, Jan. 28, 1961; Cordova v. Cordova, Jan. 14, 1958; Convets, Inc. v. NDC, Feb. 28, 1958; 32 SCRA 529;
 Sinaon v. Sorongan, 136 SCRA 408); and it may do so on the basis of a motion to dismiss (Sec. 1,f, Rule 16, Rules of Court),
or an answer which sets up such ground as an affirmative defense (Sec. 5, Rule 16), or even if the ground is alleged after
judgment on the merits, as in a motion for reconsideration (Ferrer v. Ericta, 84 SCRA 705); or even if the defense has not
been asserted at all, as where no statement thereof is found in the pleadings (Garcia v. Mathis, 100 SCRA 250; PNB v. Pacific
Commission House, 27 SCRA 766; Chua Lamco v. Dioso, et al., 97 Phil. 821); or where a defendant has been declared in
default (PNB v. Perez, 16 SCRA 270). What is essential only, to repeat, is that the facts demonstrating the lapse of the
prescriptive period be otherwise sufficiently and satisfactorily apparent on the record; either in the averments of the plaintiff's
complaint, or otherwise established by the evidence." (emphasis supplied)

In Aldovino, et al. v. Alunan, et al.,20 the Court en banc reiterated the Garcia v. Mathis doctrine cited in the Gicano case that when the
plaintiff's own complaint shows clearly that the action has prescribed, the action may be dismissed even if the defense of prescription
was not invoked by the defendant.

It is apparent in the records that respondent made the last delivery of vinyl products to the petitioners on September 28, 1988.
Petitioners admit this in their Memorandum submitted to the trial court and reiterate it in their Petition for Review.21 It is also apparent in
the Complaint that petitioners instituted their action on July 24, 1989. The issue for resolution is whether or not the respondent Court of
Appeals could dismiss the petitioners' action if the defense of prescription was raised for the first time on appeal but is apparent in the
records.

Following the Gicano doctrine that allows dismissal of an action on the ground of prescription even after judgment on the merits, or
even if the defense was not raised at all so long as the relevant dates are clear on the record, we rule that the action filed by the
petitioners has prescribed. The dates of delivery and institution of the action are undisputed. There are no new issues of fact arising in
connection with the question of prescription, thus carving out the case at bar as an exception from the general rule that prescription if
not impleaded in the answer is deemed waived.22

Even if the defense of prescription was raised for the first time on appeal in respondent's Supplemental Motion for Reconsideration of
the appellate court's decision, this does not militate against the due process right of the petitioners. On appeal, there was no new issue
of fact that arose in connection with the question of prescription, thus it cannot be said that petitioners were not given the opportunity to
present evidence in the trial court to meet a factual issue. Equally important, petitioners had the opportunity to oppose the defense of
prescription in their Opposition to the Supplemental Motion for Reconsideration filed in the appellate court and in their Petition for
Review in this Court.

This Court's application of the Osorio and Gicano doctrines to the case at bar is confirmed and now enshrined in Rule 9, Sec. 1 of the
1997 Rules of Civil Procedure, viz:

"Section 1. Defense and objections not pleaded. - Defenses and objections not pleaded whether in a motion to dismiss or in
the answer are deemed waived. However, when it appears from the pleadings that the court has no jurisdiction over the
subject matter, that there is another action pending between the same parties for the same cause, or that the action is barred
by a prior judgment or by statute of limitations, the court shall dismiss the claim." (Emphasis supplied)

WHEREFORE, the petition is DENIED and the impugned decision of the Court of Appeals dated January 24, 1994 is AFFIRMED. No
costs.

SO ORDERED.
G.R. No. 115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY, respondents.

PANGANIBAN, J.:

In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine Culture, is the Ateneo de
Manila University performing the work of an independent contractor and thus taxable within the purview of then Section 205 of the
National Internal Revenue Code levying a three percent contractor's tax? This question is answer by the Court in the negative as it
resolves this petition assailing the Decision   of the Respondent Court of Appeals   in CA-G.R. SP No. 31790 promulgated on April 27,
1 2

1994 affirming that of the Court of Tax Appeals. 3

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed by the parties.

Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality separate
and distinct from that of private respondent. The IPC is a Philippine unit engaged in social science studies of
Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international
organizations, private foundations and government agencies.

On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a demand letter
dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor's tax, and
an assessment dated June 27, 1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal
year ended March 31, 1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest and
subsequently filed with the latter a memorandum contesting the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency income tax but
modifying the assessment for deficiency contractor's tax by increasing the amount due to P193,475.55. Unsatisfied,
private respondent requested for a reconsideration or reinvestigation of the modified assessment. At the same time, it
filed in the respondent court a petition for review of the said letter-decision of the petitioner. While the petition was
pending before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest.

On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads:

WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency
contractor's tax assessment in the amount of P46,516.41 exclusive of surcharge and interest for
the fiscal year ended March 31, 1978 is hereby CANCELED. No pronouncement as to cost.

SO ORDERED.

Not in accord with said decision, petitioner has come to this Court via the present petition for review raising the following
issues:

1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF

INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX

UNDER SECTION 205 OF THE TAX CODE.

The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:

Sec. 205. Contractor, proprietors or operators of dockyards, and others. — A contractor's tax of threeper centum of
the gross receipts is hereby imposed on the following:

x x x           x x x          x x x

(16) Business agents and other independent contractors except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors and except gross receipts of or from a pioneer industry registered with the Board of
Investments under Republic Act No. 5186:

x x x           x x x          x x x

The term "independent contractors" include persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code)
whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether
or not the performance of the service calls for the exercise or use of the physical or mental faculties
of such contractors or their employees.

xxx xxx xxx

 Petitioner contends that the respondent court erred in holding that private respondent is not an "independent
contractor" within the purview of Section 205 of the Tax Code. To petitioner, the term "independent contractor", as
defined by the Code, encompasses all kinds of services rendered for a fee and that the only exceptions are the
following:

a. Persons, association and corporations under contract for embroidery and apparel for export and gross receipts of
or from pioneer industry registered with the Board of Investment under R.A. No. 5186;

b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b] of the Tax Code);
and

c. Regional or area headquarters established in the Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory,
communication and coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region
(Section 205 of the Tax Code).

Petitioner thus submits that since private respondent falls under the definition of an "independent contractor" and is
not among the aforementioned exceptions, private respondent is therefore subject to the 3% contractor's tax imposed
under the same Code.  4

The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed decision of the Court
of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for review.

The Issues

Petitioner submits before us the following issues:

1) Whether or not private respondent falls under the purview of independent contractor pursuant to Section 205 of the
Tax Code.

2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax Code.  5

In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch — the Institute of
Philippine Culture — performing the work of an independent contractor and, thus, subject to the three percent contractor's tax levied by
then Section 205 of the National Internal Revenue Code?

The Court's Ruling

The petition is unmeritorious.

Interpretation of Tax Laws

The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:

Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of threeper centum of
the gross receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors, except persons, associations and corporations under
contract for embroidery and apparel for export, as well as their agents and contractors, and except gross receipts of
or from a pioneer industry registered with the Board of Investments under the provisions of Republic Act No. 5186;

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including
individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially
of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the
exercise or use of the physical or mental faculties of such contractors or their employees.

The term "independent contractor" shall not include regional or area headquarters established in the Philippines by
multinational corporations, including their alien executives, and which headquarters do not earn or derive income
from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region.

The term "gross receipts" means all amounts received by the prime or principal contractor as the total contract price,
undiminished by amount paid to the subcontractor, shall be excluded from the taxable gross receipts of the
subcontractor.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls within the definition"
of an independent contractor and "is not one of those mentioned as excepted"; hence, it is properly a subject of the three percent
contractor's tax levied by the foregoing provision of law.   Petitioner states that the "term 'independent contractor' is not specifically
6

defined so as to delimit the scope thereof, so much so that any person who . . . renders physical and mental service for a fee, is now
indubitably considered an independent contractor liable to 3% contractor's tax."   According to petitioner, Ateneo has the burden of
7

proof to show its exemption from the coverage of the law.

We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the
well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are
exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if
private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on
the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine
in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously . . .  (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax lawsand the provisions of a taxing act
are not to be extended by implication."   Parenthetically, in answering the question of who is subject to tax statutes, it is basic that "in
8

case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import."  9

To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor be engaged in
the business of selling its services. Hence, to impose the three percent contractor's tax on Ateneo's Institute of Philippine Culture, it
should be sufficiently proven that the private respondent is indeed selling its services for a fee in pursuit of an independent business.
And it is only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that the question of exemption
therefrom would arise. Only after such coverage is shown does the rule of construction — that tax exemptions are to be strictly
construed against the taxpayer — come into play, contrary to petitioner's position. This is the main line of reasoning of the Court of Tax
Appeals in its decision,   which was affirmed by the CA.
10

The Ateneo de Manila University Did Not Contract

for the Sale of the Service of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its services for a fee
to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university.

Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner Commissioner of Internal Revenue
contends that "the tax is due on its activity of conducting researches for a fee. The tax is due on the gross receipts made in favor of IPC
pursuant to the contracts the latter entered to conduct researches for the benefit primarily of its clients. The tax is imposed on the
exercise of a taxable activity. . . . [T]he sale of services of private respondent is made under a contract and the various contracts
entered into between private respondent and its clients are almost of the same terms, showing, among others, the compensation and
terms of payment."  (Emphasis supplied.)
11

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that Ateneo's IPC in fact
contracted to sell its research services for a fee. Clearly then, as found by the Court of Appeals and the Court of Tax Appeals,
petitioner's theory is inapplicable to the established factual milieu obtaining in the instant case.

In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed, contracts for sale of services were
ever entered into by the private respondent. As appropriately pointed out by the latter:

An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals shows that only
the following documentary evidence was presented:

Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field Audit Report

3 Adjustments to Sales/Receipts

4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.

None of the foregoing evidence even comes close to purport to be contracts between private respondent and third
parties.  12

Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the Ateneo de Manila University are
technically not a fee. They may however fall as gifts or donations which are tax-exempt" as shown by private respondent's compliance
with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational
institution. 
13

Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:

To our mind, private respondent hardly fits into the definition of an "independent contractor".

For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in business.
Undisputedly, private respondent is mandated by law to undertake research activities to maintain its university status.
In fact, the research activities being carried out by the IPC is focused not on business or profit but on social sciences
studies of Philippine society and culture. Since it can only finance a limited number of IPC's research projects, private
respondent occasionally accepts sponsorship for unfunded IPC research projects from international organizations,
private foundations and governmental agencies.  However, such sponsorships are subject to private respondent's
terms and conditions, among which are, that the research is confined to topics consistent with the private
respondent's academic agenda; that no proprietary or commercial purpose research is done;  and that private
respondent retains not only the absolute right to publish but also the ownership of the results of the research
conducted by the IPC.  Quite clearly, the aforementioned terms and conditions belie the allegation that private
respondent is a contractor or is engaged in business.

For another, it bears stressing that private respondent is a non-stock, non-profit educational corporation. The fact that
it accepted sponsorship for IPC's unfunded projects is merely incidental. For, the main function of the IPC is to
undertake research projects under the academic agenda of the private respondent. Moreover the records do not
 show that in accepting sponsorship of research work, IPC realized profits from such work. On the contrary, the
evidence shows that for about 30 years, IPC had continuously operated at a loss, which means that sponsored funds
are less than actual expenses for its research projects. That IPC has been operating at a loss loudly bespeaks of the
fact that education and not profit is the motive for undertaking the research projects.

Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact still remains that
there is no proof that part of such earnings or profits was ever distributed as dividends to any stockholder, as in fact
none was so distributed because they accrued to the benefit of the private respondent which is a non-profit
educational institution. 
14

Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of a fee or price in
exchange for the performance of a service or delivery of an object. Rather, the amounts are in the nature of an endowment or donation
given by IPC's benefactors solely for the purpose of sponsoring or funding the research with no strings attached. As found by the two
courts below, such sponsorships are subject to IPC's terms and conditions. No proprietary or commercial research is done, and IPC
retains the ownership of the results of the research, including the absolute right to publish the same. The copyrights over the results of
the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced without its permission.   The amounts given to IPC, therefore, may
15

not be deemed, it bears stressing as fees or gross receipts that can be subjected to the three percent contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a contract
of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent."   By its very
16

nature, a contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code "expressly makes the obligation to
transfer ownership as an essential element of the contract of sale, following modern codes, such as the German and the Swiss. Even in
the absence of this express requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and
Capitant, have considered such transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating
that the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting ownership. Transfer of title or an
agreement to transfer it for a price paid or promised to be paid is the essence of sale."   In the case of a contract for a piece of work,
17

"the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. . . . If the
contractor agrees to produce the work from materials furnished by him, he shall deliver the thing produced to the employer and transfer
dominion over the thing, . . ."   Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of ownership is
18

involved and a party necessarily walks away with an object.   In the case at bench, it is clear from the evidence on record that there
19

was no sale either of objects or services because, as adverted to earlier, there was no transfer of ownership over the research data
obtained or the results of research projects undertaken by the Institute of Philippine Culture.

Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of maintaining Ateneo's
university status and not in the course of an independent business of selling such research with profit in mind. This is clear from a
reading of the regulations governing universities:

31. In addition to the legal requisites an institution must meet, among others, the following requirements before an
application for university status shall be considered:

xxx xxx xxx

(e) The institution must undertake research and operate with a competent qualified staff at least three graduate
departments in accordance with the rules and standards for graduate education. One of the departments shall be
science and technology. The competence of the staff shall be judged by their effective teaching, scholarly
publications and research activities published in its school journal as well as their leadership activities in the
profession.

(f) The institution must show evidence of adequate and stable financial resources and support, a reasonable portion
of which should be devoted to institutional development and research. (emphasis supplied)

xxx xxx xxx

32. University status may be withdrawn, after due notice and hearing, for failure to maintain satisfactorily the
standards and requirements therefor.  20

Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently erroneous because
the former is not an independent juridical entity that is separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally Conclusive

In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax
cases. Through its expertise, it is undeniably competent to determine the issue of whether"   Ateneo de Manila University may be
21

deemed a subject of the three percent contractor's tax "through the evidence presented before it." Consequently, "as a matter of
principle, this Court will not set aside the conclusion reached by . . . the Court of Tax Appeals which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless
there has been an abuse or improvident exercise of authority . . ."   This point becomes more evident in the case before us where the
22

findings and conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of authority, much
less grave abuse of discretion. Thus, we find the decision of the latter affirming that of the former free from any palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of P1,624,014.00 as shown in
its statements of fund and disbursements for the period 1972 to 1985.   In fact, it was Ateneo de Manila University itself that had funded
23

the research projects of the institute, and it was only when Ateneo could no longer produce the needed funds that the institute sought
funding from outside. The testimony of Ateneo's Director for Accounting Services, Ms. Leonor Wijangco, provides significant insight on
the academic and nonprofit nature of the institute's research activities done in furtherance of the university's purposes, as follows:
 Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of Philippine Culture) that as
far as grants from sponsored research it is possible that the grant sometimes is less than the actual cost. Will you
please tell us in this case when the actual cost is a lot less than the grant who shoulders the additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university has to have its own research
institute. 
24

So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine Culture when it undisputedly
loses not an insignificant amount in the process? The plain and simple answer is that private respondent is not a contractor selling its
services for a fee but an academic institution conducting these researches pursuant to its commitments to education and, ultimately, to
public service. For the institute to have tenaciously continued operating for so long despite its accumulation of significant losses, we can
only agree with both the Court of Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive for undertaking
the research
projects." 
25

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is hereby AFFIRMED in
full.

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

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

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

Crossfield & O'Brien for appellee.

AVANCEÑA, J.:

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

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

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

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

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

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

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

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

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

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

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

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

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

Of the three causes of action alleged by the plaintiff in his complaint, only two of them constitute the subject matter of this appeal and
both substantially amount to the averment that the defendant violated the following obligations: not to sell the beds at higher prices than
those of the invoices; to have an open establishment in Iloilo; itself to conduct the agency; to keep the beds on public exhibition, and to
pay for the advertisement expenses for the same; and to order the beds by the dozen and in no other manner. As may be seen, with
the exception of the obligation on the part of the defendant to order the beds by the dozen and in no other manner, none of the
obligations imputed to the defendant in the two causes of action are expressly set forth in the contract. But the plaintiff alleged that the
defendant was his agent for the sale of his beds in Iloilo, and that said obligations are implied in a contract of commercial agency. The
whole question, therefore, reduced itself to a determination as to whether the defendant, by reason of the contract hereinbefore
transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds.

In order to classify a contract, due regard must be given to its essential clauses. In the contract in question, what was essential, as
constituting its cause and subject matter, is that the plaintiff was to furnish the defendant with the beds which the latter might order, at
the price stipulated, and that the defendant was to pay the price in the manner stipulated. The price agreed upon was the one
determined by the plaintiff for the sale of these beds in Manila, with a discount of from 20 to 25 per cent, according to their class.
Payment was to be made at the end of sixty days, or before, at the plaintiff's request, or in cash, if the defendant so preferred, and in
these last two cases an additional discount was to be allowed for prompt payment. These are precisely the essential features of a
contract of purchase and sale. There was the obligation on the part of the plaintiff to supply the beds, and, on the part of the defendant,
to pay their price. These features exclude the legal conception of an agency or order to sell whereby the mandatory or agent received
the thing to sell it, and does not pay its price, but delivers to the principal the price he obtains from the sale of the thing to a third person,
and if he does not succeed in selling it, he returns it. By virtue of the contract between the plaintiff and the defendant, the latter, on
receiving the beds, was necessarily obliged to pay their price within the term fixed, without any other consideration and regardless as to
whether he had or had not sold the beds.
It would be enough to hold, as we do, that the contract by and between the defendant and the plaintiff is one of purchase and sale, in
order to show that it was not one made on the basis of a commission on sales, as the plaintiff claims it was, for these contracts are
incompatible with each other. But, besides, examining the clauses of this contract, none of them is found that substantially supports the
plaintiff's contention. Not a single one of these clauses necessarily conveys the idea of an agency. The words commission on
sales  used in clause (A) of article 1 mean nothing else, as stated in the contract itself, than a mere discount on the invoice price. The
word agency, also used in articles 2 and 3, only expresses that the defendant was the only one that could sell the plaintiff's beds in the
Visayan Islands. With regard to the remaining clauses, the least that can be said is that they are not incompatible with the contract of
purchase and sale.

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

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

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

For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and the defendant was one of purchase and
sale, and that the obligations the breach of which is alleged as a cause of action are not imposed upon the defendant, either by
agreement or by law.

The judgment appealed from is affirmed, with costs against the appellant. So ordered.
G.R. No. L-47538             June 20, 1941

GONZALO PUYAT & SONS, INC., petitioner, 

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

Feria & Lao for petitioner.

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

LAUREL, J.:

This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the purpose of reviewing its Amusement Company
(formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat and Sons. Inc., defendant-appellee."

It appears that the respondent herein brought an action against the herein petitioner in the Court of First Instance of Manila to secure a
reimbursement of certain amounts allegedly overpaid by it on account of the purchase price of sound reproducing equipment and
machinery ordered by the petitioner from the Starr Piano Company of Richmond, Indiana, U.S.A. The facts of the case as found by the
trial court and confirmed by the appellate court, which are admitted by the respondent, are as follows:

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

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

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

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

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

I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun hechos, entre la recurrente y la recurrida
existia una relacion implicita de mandataria a mandante en la transaccion de que se trata, en vez de la de vendedora a
compradora como ha declarado el Juzgado de Primera Instncia de Manila, presidido entonces por el hoy Magistrado
Honorable Marcelino Montemayor.

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

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

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

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

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

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

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

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

The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court is accordingly reversed and the petitioner is
absolved from the respondent's complaint in G. R. No. 1023, entitled "Arco Amusement Company (formerly known as Teatro Arco),
plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc., defendants-appellee," without pronouncement regarding costs. So ordered.
G.R. No. L-20871 April 30, 1971

KER & CO., LTD., petitioner, 

vs.
JOSE B. LINGAD, as Acting Commissioner of Internal Revenue, respondent.

Ross, Selph and Carrascoso for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Atty. Balbino Gatdula, Jr. for respondent.

FERNANDO, J.:

Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals, holding it liable as a commercial broker under
Section 194 (t) of the National Internal Revenue Code. Its plea, notwithstanding the vigorous effort of its counsel, is not sufficiently
persuasive. An obstacle, well-nigh insuperable stands in the way. The decision under review conforms to and is in accordance with the
controlling doctrine announced in the recent case of Commissioner of Internal Revenue v. Constantino.  The decisive test, as therein
1

set forth, is the retention of the ownership of the goods delivered to the possession of the dealer, like herein petitioner, for resale to
customers, the price and terms remaining subject to the control of the firm consigning such goods. The facts, as found by respondent
Court, to which we defer, unmistakably indicate that such a situation does exist. The juridical consequences must inevitably follow. We
affirm.

It was shown that petitioner was assessed by the then Commissioner of Internal Revenue Melecio R. Domingo the sum of P20,272.33
as the commercial broker's percentage tax, surcharge, and compromise penalty for the period from July 1, 1949 to December 31, 1953.
There was a request on the part of petitioner for the cancellation of such assessment, which request was turned down. As a result, it
filed a petition for review with the Court of Tax Appeals. In its answer, the then Commissioner Domingo maintained his stand that
petitioner should be taxed in such amount as a commercial broker. In the decision now under review, promulgated on October 19,
1962, the Court of Tax Appeals held petitioner taxable except as to the compromise penalty of P500.00, the amount due from it being
fixed at P19,772.33.

Such liability arose from a contract of petitioner with the United States Rubber International, the former being referred to as the
Distributor and the latter specifically designated as the Company. The contract was to apply to transactions between the former and
petitioner, as Distributor, from July 1, 1948 to continue in force until terminated by either party giving to the other sixty days' notice.  The
2

shipments would cover products "for consumption in Cebu, Bohol, Leyte, Samar, Jolo, Negros Oriental, and Mindanao except [the]
province of Davao", petitioner, as Distributor, being precluded from disposing such products elsewhere than in the above places unless
written consent would first be obtained from the Company.  Petitioner, as Distributor, is required to exert every effort to have the
3

shipment of the products in the maximum quantity and to promote in every way the sale thereof.  The prices, discounts, terms of
4

payment, terms of delivery and other conditions of sale were subject to change in the discretion of the Company. 5

Then came this crucial stipulation: "The Company shall from time to time consign to the Distributor and the Distributor will receive,
accept and/or hold upon consignment the products specified under the terms of this agreement in such quantities as in the judgment of
the Company may be necessary for the successful solicitation and maintenance of business in the territory, and the Distributor agrees
that responsibility for the final sole of all goods delivered shall rest with him. All goods on consignment shall remain the property of the
Company until sold by the Distributor to the purchaser or purchasers, but all sales made by the Distributor shall be in his name, in which
the sale price of all goods sold less the discount given to the Distributor by the Company in accordance with the provision of paragraph
13 of this agreement, whether or not such sale price shall have been collected by the Distributor from the purchaser or purchasers,
shall immediately be paid and remitted by the Distributor to the Company. It is further agreed that this agreement does not constitute
Distributor the agent or legal representative 4 of the Company for any purpose whatsoever. Distributor is not granted any right or
authority to assume or to create any obligation or responsibility, express or implied, in behalf of or in the name of the Company, or to
bind the Company in any manner or thing whatsoever." 6

All specifications for the goods ordered were subject to acceptance by the Company with petitioner, as Distributor, required to accept
such goods shipped as well as to clear the same through customs and to arrange for delivery in its warehouse in Cebu City. Moreover,
orders are to be filled in whole or in part from the stocks carried by the Company's neighboring branches, subsidiaries or other sources
of Company's brands.  Shipments were to be invoiced at prices to be agreed upon, with the customs duties being paid by petitioner, as
7

Distributor, for account of the Company.  Moreover, all resale prices, lists, discounts and general terms and conditions of local resale
8

were to be subject to the approval of the Company and to change from time to time in its discretion.  The dealer, as Distributor, is
9

allowed a discount of ten percent on the net amount of sales of merchandise made under such agreement.   On a date to be
10

determined by the Company, the petitioner, as Distributor, was required to report to it data showing in detail all sales during the month
immediately preceding, specifying therein the quantities, sizes and types together with such information as may be required for
accounting purposes, with the Company rendering an invoice on sales as described to be dated as of the date of inventory and sales
report. As Distributor, petitioner had to make payment on such invoice or invoices on due date with the Company being privileged at its
option to terminate and cancel the agreement forthwith upon the failure to comply with this obligation.   The Company, at its own
11

expense, was to keep the consigned stock fully insured against loss or damage by fire or as a result of fire, the policy of such insurance
to be payable to it in the event of loss. Petitioner, as Distributor, assumed full responsibility with reference to the stock and its safety at
all times; and upon request of the Company at any time, it was to render inventory of the existing stock which could be subject to
change.   There was furthermore this equally tell-tale covenant: "Upon the termination or any cancellation of this agreement all goods
12

held on consignment shall be held by the Distributor for the account of the Company, without expense to the Company, until such time
as provision can be made by the Company for disposition."  13

The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus created is one of vendor and vendee or of
broker and principal. Not that there would have been the slightest doubt were it not for the categorical denial in the contract that
petitioner was not constituted as "the agent or legal representative of the Company for any purpose whatsoever." It would be, however,
to impart to such an express disclaimer a meaning it should not possess to ignore what is manifestly the role assigned to petitioner
considering the instrument as a whole. That would be to lose sight altogether of what has been agreed upon. The Court of Tax Appeals
was not misled in the language of the decision now on appeal: "That the petitioner Ker & Co., Ltd. is, by contractual stipulation, an
agent of U.S. Rubber International is borne out by the facts that petitioner can dispose of the products of the Company only to certain
persons or entities and within stipulated limits, unless excepted by the contract or by the Rubber Company (Par. 2); that it merely
receives, accepts and/or holds upon consignment the products, which remain properties of the latter company (Par. 8); that every effort
shall be made by petitioner to promote in every way the sale of the products (Par. 3); that sales made by petitioner are subject to
approval by the company (Par. 12); that on dates determined by the rubber company, petitioner shall render a detailed report showing
sales during the month (Par. 14); that the rubber company shall invoice the sales as of the dates of inventory and sales report (Par. 14);
that the rubber company agrees to keep the consigned goods fully insured under insurance policies payable to it in case of loss (Par.
15); that upon request of the rubber company at any time, petitioner shall render an inventory of the existing stock which may be
checked by an authorized representative of the former (Par. 15); and that upon termination or cancellation of the Agreement, all goods
held on consignment shall be held by petitioner for the account of the rubber company until their disposition is provided for by the latter
(Par. 19). All these circumstances are irreconcilably antagonistic to the idea of an independent merchant."   Hence its conclusion:
14

"However, upon analysis of the contract, as a whole, together with the actual conduct of the parties in respect thereto, we have arrived
at the conclusion that the relationship between them is one of brokerage or agency."   We find ourselves in agreement, notwithstanding
15

the able brief filed on behalf of petitioner by its counsel. As noted at the outset, we cannot heed petitioner's plea for reversal.

1. According to the National Internal Revenue Code, a commercial broker "includes all persons, other than importers, manufacturers,
producers, or bona fide employees, who, for compensation or profit, sell or bring about sales or purchases of merchandise for other
persons or bring proposed buyers and sellers together, or negotiate freights or other business for owners of vessels or other means of
transportation, or for the shippers, or consignors or consignees of freight carried by vessels or other means of transportation. The term
includes commission merchants."   The controlling decision as to the test to be followed as to who falls within the above definition of a
16

commercial broker is that of Commissioner of Internal Revenue v. Constantino.   In the language of Justice J. B. L. Reyes, who penned
17

the opinion: "Since the company retained ownership of the goods, even as it delivered possession unto the dealer for resale to
customers, the price and terms of which were subject to the company's control, the relationship between the company and the dealer is
one of agency, ... ."   An excerpt from Salisbury v. Brooks   cited in support of such a view follows: " 'The difficulty in distinguishing
18 19

between contracts of sale and the creation of an agency to sell has led to the establishment of rules by the application of which this
difficulty may be solved. The decisions say the transfer of title or agreement to transfer it for a price paid or promised is the essence of
sale. If such transfer puts the transferee in the attitude or position of an owner and makes him liable to the transferor as a debtor for the
agreed price, and not merely as an agent who must account for the proceeds of a resale, the transaction is a sale; while the essence of
an agency to sell is the delivery to an agent, not as his property, but as the property of the principal, who remains the owner and has
the right to control sales, fix the price, and terms, demand and receive the proceeds less the agent's commission upon sales made.'
"   The opinion relied on the work of Mechem on Sales as well as Mechem on Agency. Williston and Tiedman both of whom wrote
20

treatises on Sales, were likewise referred to.

Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or appreciate the necessity or presence of these
mutual requirements and obligations on any theory other than that of a contract of agency. Salisbury was to furnish the mill and put the
timber owned by him into a marketable condition in the form of lumber; Brooks was to furnish the funds necessary for that purpose, sell
the manufactured product, and account therefor to Salisbury upon the specific terms of the agreement, less the compensation fixed by
the parties in lieu of interest on the money advanced and for services as agent. These requirements and stipulations are in tent with
any other conception of the contract. If it constitutes an agreement to sell, they are meaningless. But they cannot be ignored. They were
placed there for some purpose, doubtless as the result of definite antecedent negotiations therefore, consummated by the final written
expression of the agreement."   Hence the Constantino opinion could categorically affirm that the mere disclaimer in a contract that an
21

entity like petitioner is not "the agent or legal representative for any purpose whatsoever" does not suffice to yield the conclusion that it
is an independent merchant if the control over the goods for resale of the goods consigned is pervasive in character. The Court of Tax
Appeals decision now under review pays fealty to such an applicable doctrine.

2. No merit therefore attaches to the first error imputed by petitioner to the Court of Tax Appeals. Neither did such Court fail to
appreciate in its true significance the act and conduct pursued in the implementation of the contract by both the United States Rubber
International and petitioner, as was contended in the second assignment of error. Petitioner ought to have been aware that there was
no need for such an inquiry. The terms of the contract, as noted, speak quite clearly. There is lacking that degree of ambiguity sufficient
to give rise to serious doubt as to what was contemplated by the parties. A reading thereof discloses that the relationship arising
therefrom was not one of seller and purchaser. If it were thus intended, then it would not have included covenants which in their totality
would negate the concept of a firm acquiring as vendee goods from another. Instead, the stipulations were so worded as to lead to no
other conclusion than that the control by the United States Rubber International over the goods in question is, in the language of the
Constantino opinion, "pervasive". The insistence on a relationship opposed to that apparent from the language employed might even
yield the impression that such a mode of construction was resorted to in order that the applicability of a taxing statute might be rendered
nugatory. Certainly, such a result is to be avoided.

Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax Appeals which has developed an expertise in view of
its function being limited solely to the interpretation of revenue laws, this Court is not prepared to substitute its own judgment unless a
grave abuse of discretion is manifest. It would be to frustrate the objective for which administrative tribunals are created if the judiciary,
absent such a showing, is to ignore their appraisal on a matter that forms the staple of their specialized competence. While it is to be
admitted that counsel for petitioner did scrutinize with care the decision under review with a view to exposing what was considered its
flaws, it cannot be said that there was such a failure to apply what the law commands as to call for its reversal. Instead, what cannot be
denied is that the Court of Tax Appeals reached a result to which the Court in the recent Constantino decision gave the imprimatur of its
approval.

WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With costs against petitioner.
G.R. No. 75198 October 18, 1988

SCHMID & OBERLY, INC., petitioner, 

vs.
RJL MARTINEZ FISHING CORPORATION, respondent.

Sycip Salazar Hernandez & Gatmaitan Law Office for petitioner.

Siguion Reyna, Montecillo & Ongsiako Law Office for respondent.

CORTES, J.:

Petitioner seeks reversal of the decision and the resolution of the Court of Appeals, ordering Schmid & Oberly Inc. (hereafter to be referred to simply as "SCHMID") to refund the purchase price paid by RJL Martinez Fishing
Corporation (hereafter to be referred to simply as "RJL MARTINEZ") to D. Nagata Co., Ltd. of Japan (hereafter to be referred to simply as NAGATA CO.") for twelve (12) defective "Nagata"-brand generators, plus
consequential damages, and attorneys fees.

The facts as found by the Court of Appeals, are as follows:

The findings of facts by the trial court (Decision, pp. 21-28, Record on Appeal) shows: that the plaintiff RJL Martinez
Fishing Corporation is engaged in deep-sea fishing, and in the course of its business, needed electrical generators
for the operation of its business; that the defendant sells electrical generators with the brand of "Nagata", a Japanese
product; that the supplier is the manufacturer, the D. Nagata Co. Ltd., of Japan, that the defendant Schmid & Oberly
Inc. advertised the 12 Nagata generators for sale; that the plaintiff purchased 12 brand new Nagata generators, as
advertised by herein defendant; that through an irrevocable line of credit, the D. Nagata Co., Ltd., shipped to the
plaintiff 12 electric generators, and the latter paid the amount of the purchase price; that the 12 generators were
found to be factory defective; that the plaintiff informed the defendant herein that it shall return the 12 generators as in
fact three of the 12 were actually returned to the defendant; that the plaintiff sued the defendant on the warranty;
asking for rescission of the contract; that the defendant be ordered to accept the generators and be ordered to pay
back the purchase money; and that the plaintiff asked for damages. (Record on Appeal, pp. 27-28) [CA Decision, pp.
34; Rollo, pp. 47-48.]

On the basis thereof, the Court of Appeals affirmed the decision of the trial court ordering petitioner to refund to private respondent the
purchase price for the twelve (12) generators and to accept delivery of the same and to pay s and attorney's fees, with a slight
modification as to the amount to be refunded. In its resolution of the motion for reconsideration, the Court of Appeals further modified
the trial courts decision as to the award of consequential damages.

Ordinarily, the Court will not disturb the findings of fact of the Court of Appeals in petitions to review the latter's decisions under Rule 45
of the Revised Rules of Court, the scope of the Court's inquiry being limited to a review of the imputed errors of law [Chan v. Court of
Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA 77; Tiongco v. De la Merced, G.R. No. L-24426, July 25, 1974, 58 SCRA 89;
Corona v. Court of Appeals, G.R. No. 62482, April 28, 1983, 121 SCRA 865; Baniqued v. Court of Appeals, G.R. No. 
L-47531, January 30, 1984, 127 SCRA 596.] However, when, as in this case, it is the petitioner's position that the appealed judgment is
premised on a misapprehension of
facts, * the Court is compelled to review the Court of Appeal's factual findings [De la Cruz v. Sosing, 94 Phil. 26 (1953); Castillo v. Court of Appeals, G.R. No. I,48290, September 29, 1983, 124 SCRA 808.]

Considering the sketchiness of the respondent court's narration of facts, whether or not the Court of Appeals indeed misapprehended
the facts could not be determined without a thorough review of the records.

Thus, after a careful scrutiny of the records, the Court has found the appellate court's narration of facts incomplete. It failed to include
certain material facts.

The facts are actually as follows:

RJL MARTINEZ is engaged in the business of deep-sea fishing. As RJL MARTINEZ needed electric generators for some of its boats
and SCHMIID sold electric generators of different brands, negotiations between them for the acquisition thereof took place. The parties
had two separate transactions over "Nagata"-brand generators.

The first transaction was the sale of three (3) generators. In this transaction, it is not disputed that SCHMID was the vendor of the
generators. The company supplied the generators from its stockroom; it was also SCHMID which invoiced the sale.

The second transaction, which gave rise to the present controversy, involves twelve (12) "Nagata"-brand generators. 'These are the
facts surrounding this particular transaction:

As RJL MARTINEZ was canvassing for generators, SC gave RJL MARTINEZ its Quotation dated August 19, 1975 [Exhibit 'A"] for
twelve (12) "Nagata'-brand generators with the following specifications:

"NAGATA" Single phase AC Alternators, 110/220 V, 60 cycles, 1800 rpm, unity power factor, rectifier type and radio
suppressor,, 5KVA (5KW) $546.75 @

It was stipulated that payment would be made by confirming an irrevocable letter of credit in favor of NAGATA CO. Furthermore, among
the General Conditions of Sale appearing on the dorsal side of the Quotation is the following:

Buyer will, upon request, promptly open irrevocable Letter of Credit in favor of seller, in the amount stated on the face
of this memorandum, specifying shipment from any Foreign port to Manila or any safe Philippine port, permitting
partial shipments and providing that in the event the shippers are unable to ship within the specified period due to
strikes, lack of shipping space or other circumstances beyond their reasonable control, Buyer agrees to extend the
 said Letter of Credit for later shipment. The Letter of Credit shall otherwise be subject to the conditions stated in this
memorandum of contract. [Emphasis supplied.]

Agreeing with the terms of the Quotation, RJL MARTINEZ opened a letter of credit in favor of NAGATA CO. Accordingly, on November
20,1975, SCHMID transmitted to NAGATA CO. an order [Exhibit "4"] for the twelve (12) generators to be shipped directly to RJL
MARTINEZ. NAGATA CO. thereafter sent RJL MARTINEZ the bill of lading and its own invoice (Exhibit "B") and, in accordance with
the order, shipped the generators directly to RJL MARTINEZ. The invoice states that "one (1) case of 'NAGATA' AC Generators"
consisting of twelve sets was—bought by order and for account risk of Messrs. RJL Martinez Fishing Corporation.

For its efforts, SCHMID received from NAGATA CO. a commission of $1,752.00 for the sale of the twelve generators to RJL
MARTINEZ. [Exhibits "9", "9-A", "9-B" and "9-C".]

All fifteen (15) generators subject of the two transactions burned out after continuous use. RJL MARTINEZ informed SCHMID about
this development. In turn, SCHMID brought the matter to the attention of NAGATA CO. In July 1976, NAGATA CO. sent two technical
representatives who made an ocular inspection and conducted tests on some of the burned out generators, which by then had been
delivered to the premises of SCHMID.

The tests revealed that the generators were overrated. As indicated both in the quotation and in the invoice, the capacity of a generator
was supposed to be 5 KVA (kilovolt amperes). However, it turned out that the actual capacity was only 4 KVA.

SCHMID replaced the three (3) generators subject of the first sale with generators of a different brand.

As for the twelve (12) generators subject of the second transaction, the Japanese technicians advised RJL MARTINEZ to ship three (3)
generators to Japan, which the company did. These three (3) generators were repaired by NAGATA CO. itself and thereafter returned
to RJL MARTINEZ; the remaining nine (9) were neither repaired nor replaced. NAGATA CO., however, wrote SCHMID suggesting that
the latter check the generators, request for spare parts for replacement free of charge, and send to NAGATA CO. SCHMID's warranty
claim including the labor cost for repairs [Exhibit "I".] In its reply letter, SCHMID indicated that it was not agreeable to these terms
[Exhibit "10".]

As not all of the generators were replaced or repaired, RJL MARTINEZ formally demanded that it be refunded the cost of the
generators and paid damages. SCHMID in its reply maintained that it was not the seller of the twelve (12) generators and thus refused
to refund the purchase price therefor. Hence, on February 14, 1977, RJL MARTINEZ brought suit against SCHMID on the theory that
the latter was the vendor of the twelve (12) generators and, as such vendor, was liable under its warranty against hidden defects.

Both the trial court and the Court of Appeals upheld the contention of RJL MARTINEZ that SCHMID was the vendor in the second
transaction and was liable under its warranty. Accordingly, the courts a quo rendered judgment in favor of RJL MARTINEZ. Hence, the
instant recourse to this Court.

In this petition for review, SCHMID seeks reversal on the following grounds:

(i) Schmid was merely the indentor in the sale [of the twelve (12) generators] between Nagata Co., the exporter and
RJL Martinez, the importer;

(ii) as mere indentor, Schmid is not liable for the seller's implied warranty against hidden defects, Schmid not having
personally assumed any such warranty.

(iii) in any event, conformably with Article 1563 of the Civil Code, there was no implied warranty against hidden
defects in the sale of these twelve (12) generators because these were sold under their trade name "Nagata"; and

(iv) Schmid, accordingly, is not liable for the reimbursement claimed by RJL Martinez nor for the latter's
unsubstantiated claim of PI 10.33 operational losses a day nor for exemplary damages, attorney's fees and costs.
[Petition, p. 6.]

1. As may be expected, the basic issue confronting this Court is whether the second transaction between the parties was a sale or an
indent transaction. SCHMID maintains that it was the latter; RJL MARTINEZ claims that it was a sale.

At the outset, it must be understood that a contract is what the law defines it to be, considering its essential elements, and not what it is
caged by the contracting parties [Quiroga v. Parsons Hardware Co., 38 Phil. 501 (1918).]

The Civil Code defines a contract of sale, thus:

ART. 458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

It has been said that the essence of the contract of sale is transfer of title or agreement to transfer it for a price paid or promised
[Commissioner of Internal Revenue v. Constantino, G.R. No. L-25926, February 27, 1970, 31 SCRA 779, 785, citing Salisbury v.
Brooks, 94 SE 117,118-19.] "If such transfer puts the transferee in the attitude or position of an owner and makes him liable to the
transferor as a debtor for the agreed price, and not merely as an agent who must account for the proceeds of a resale, the transaction
is, a sale." [Ibid.]

On the other hand, there is no statutory definition of "indent" in this jurisdiction. However, the Rules and Regulations to Implement
Presidential Decree No. 1789 (the Omnibus Investments Code) lumps "indentors" together with "commercial brokers" and "commission
merchants" in this manner:

... A foreign firm which does business through the middlemen acting in their own names, such as indentors,
commercial brokers or commission merchants, shall not be deemed doing business in the Philippines. But such
 indentors, commercial brokers or commission merchants shall be the ones deemed to be doing business in the
Philippines [Part I, Rule I, Section 1, par. g (1).]

Therefore, an indentor is a middlemen in the same class as commercial brokers and commission merchants. To get an Idea of what an
indentor is, a look at the definition of those in his class may prove helpful.

A broker is generally defined as one who is engaged, for others, on a commission, negotiating contracts relative to
property with the custody of which he has no concern; the negotiator between other parties, never acting in his own
name but in the name of those who employed him; he is strictly a middleman and for some purpose the agent of both
parties. (1 9 Cyc 186; Henderson vs. The State, 50 Ind., 234; Black's Law Dictionary.) A broker is one whose
occupation it is to bring parties together to bargain, or to bargain for them, in matters of trade, commerce or
navigation. Mechem on Agency, sec. 13; Wharton on Agency, sec. 695.) Judge Storey, in his work on Agency,
defines a broker as an agent employed to make bargains and contracts between other persons, in matters of trade,
commerce or navigation, for compensation commonly called brokerage. (Storey on Agency, sec. 28.) [Behn Meyer
and Co., Ltd. v. Nolting and Garcia, 35 Phil. 274, 279-80 (1916).]

A commission merchant is one engaged in the purchase or sale for another of personal property which, for this
purpose, is placed in his possession and at his disposal. He maintains a relation not only with his principal and the
purchasers or vendors, but also with the property which is subject matter of the transaction. [Pacific Commercial Co.
v. Yatco, 68 Phil. 398, 401 (1939).]

Thus, the chief feature of a commercial broker and a commercial merchant is that in effecting a sale, they are merely intermediaries or
middle-men, and act in a certain sense as the agent of both parties to the transaction.

Webster defines an indent as "a purchase order for goods especially when sent from a foreign country." [Webster's Ninth New
Collegiate Dictionary 612 (1986).] It would appear that there are three parties to an indent transaction, namely, the buyer, the indentor,
and the supplier who is usually a non-resident manufacturer residing in the country where the goods are to be bought [Commissioner of
Internal Revenue v. Cadwallader Pacific Company, G.R. No. L-20343, September 29, 1976, 73 SCRA 59.] An indentor may therefore
be best described as one who, for compensation, acts as a middleman in bringing about a purchase and sale of goods between a
foreign supplier and a local purchaser.

Coming now to the case at bar, the admissions of the parties and the facts appearing on record more than suffice to warrant the
conclusion that SCHMID was not a vendor, but was merely an indentor, in the second transaction.

In its complaint, RJL MARTINEZ admitted that the generators were purchased "through indent order" [Record on Appeal, p. 6.] In the
same vein, it admitted in its demand letter previously sent to SCHMID that twelve (12) of en (15) Nagata-brand generators "were
purchased through your company (SCHMID), by indent order and three (3) by direct purchase." [Exhibit "D".] The evidence also show
that RJL MARTINEZ paid directly NAGATA CO, for the generators, and that the latter company itself invoiced the sale [Exhibit "B"], and
shipped the generators directly to the former. The only participation of SCHMID was to act as an intermediary or middleman between
NAGATA CO. and RJL MARTINEZ, by procuring an order from RJL MARTINEZ and forwarding the same to NAGATA CO. for which
the company received a commission from NAGATA CO. [Exhibits "9", "9-A", "9-B" and "9-C".]

The above transaction is significantly different from the first transaction wherein SCHMID delivered the goods from its own stock (which
it had itself imported from NAGATA CO.), issued its own invoice, and collected payment directly from the purchaser.

These facts notwithstanding, RJL MARTINEZ insists that SCHMID was the vendor of the twelve generators on the following grounds:

First, it is contended that the Quotation and the General Conditions of Sale on the dorsal side thereof do not necessarily lead to the
conclusion that NAGATA CO., and not SCHMID, was the real seller in the case of the twelve (12) generators in that:

(i) the signing of the quotation, which was under SCHMID's letter-head, perfected the contract of sale (impliedly, as
between the signatories thereto—i.e., RJL MARTINEZ and SCHMID);

(ii) the qualification that the letter of credit shall be in favor of NAGATA CO. constituted simply the manner of payment
requested by SCHMID (implying that SCHMID, as seller, merely chose to waive direct payment, stipulating delivery of
payment instead to NAGATA CO. as supplier);

Second, it is asserted that the acts of SCHMID after it was informed of the defect in the generators were indicative of its awareness that
it was the vendor and acknowledgment of its liability as such vendor. Attention is called to these facts: When RJL MARTINEZ
complained to SCHMID that the generators were defective, SCHMID immediately asked RJL MARTINEZ to send the defective
generators to its shop to determine what was wrong. SCHMID likewise informed NAGATA CO. about the complaint of RJL MARTINEZ.
When the Japanese technicians arrived, SCHMID made available its technicians, its shop and its testing equipment. After the
generators were found to have factory defects, SCHMID facilitated the shipment of three (3) generators to Japan and, after their repair,
back to the Philippines [Memorandum for the Respondent, p. 8.]

Third, it is argued that the contents of the letter from NAGATA CO. to SCHMID regarding the repair of the generators indicated that the
latter was "within the purview of a seller." [Ibid.]

Fourth, it is argued that if SCHMID is considered as a mere agent of NAGATA CO., a foreign corporation not licensed to do business in
the Philippines, then the officers and employees of the former may be penalized for violation of the old Corporation Law which provided:

Sec. 69 ... Any officer or agent of the corporation or any person transacting business for any foreign corporation not
having the license prescribed shall be punished by imprisonment for not less than six months nor more than two
years or by a fine 'of not less than two hundred pesos nor more than one thousand pesos or both such imprisonment
and fine, in the discretion of the Court.

The facts do not bear out these contentions.

The first contention disregards the circumstances surrounding the second transaction as distinguished from those surrounding the first
transaction, as noted above.

Neither does the solicitous manner by which SCHMID responded to RJL MARTINEZ's complaint prove that the former was the seller of
the generators. As aptly stated by counsel, no indentor will just fold its hands when a client complains about the goods it has bought
upon the indentor's mediation. In its desire to promote the product of the seller and to retain the goodwill of the buyer, a prudent
indentor desirous of maintaining his business would have to act considerably. towards his clients.

Note that in contrast to its act of replacing the three (3) generators subject of the first transaction, SCHMID did not replace any of the
twelve (12) generators, but merely rendered assistance to both RJL TINES and NAGATA CO. so that the latter could repair the
defective generators.

The proposal of NAGATA CO. rejected by SCHMID that the latter undertake the repair of the nine (9) other defective generators, with
the former supplying the replacement parts free of charge and subsequently reimbursing the latter for labor costs [Exhibit "I"], cannot
support the conclusion that SCHMID is vendor of the generators of the second transaction or was acting "within the purview of a seller."

Finally, the afore-quoted penal provision in the Corporation Law finds no application to SCHMID and its officers and employees relative
to the transactions in the instant case. What the law seeks to prevent, through said provision, is the circumvention by foreign
corporations of licensing requirements through the device of employing local representatives. An indentor, acting in his own name, is
not, however, covered by the above-quoted provision. In fact, the provision of the Rules and Regulations implementing the Omnibus
Investments Code quoted above, which was copied from the Rules implementing Republic Act No. 5455, recognizes the distinct role of
an indentor, such that when a foreign corporation does business through such indentor, the foreign corporation is not deemed doing
business in the Philippines.

In view of the above considerations, this Court rules that SCHMID was merely acting as an indentor in the purchase and sale of the
twelve (12) generators subject of the second transaction. Not being the vendor, SCHMID cannot be held liable for the implied warranty
for hidden defects under the Civil Code [Art. 1561, et seq.]

2. However, even as SCHMID was merely an indentor, there was nothing to prevent it from voluntarily warranting that twelve (12)
generators subject of the second transaction are free from any hidden defects. In other words, SCHMID may be held answerable for
some other contractual obligation, if indeed it had so bound itself. As stated above, an indentor is to some extent an agent of both the
vendor and the vendee. As such agent, therefore, he may expressly obligate himself to undertake the obligations of his principal (See
Art. 1897, Civil Code.)

The Court's inquiry, therefore, shifts to a determination of whether or not SCHMID expressly bound itself to warrant that the twelve (12)
generators are free of any hidden defects.

Again, we consider the facts.

The Quotation (Exhibit A is in writing. It is the repository of the contract between RJL MARTINEZ and SCHMID. Notably, nowhere is it
stated therein that SCHMID did bind itself to answer for the defects of the things sold. There being no allegation nor any proof that the
Quotation does not express the true intent and agreement of the contracting parties, extrinsic parol evidence of warranty will be to no
avail [See Rule 123, Sec. 22.]

The trial court, however, relied on the testimony of Patrocinio Balagtas, the head of the Electrical Department of RJL MARTINEZ, to
support the finding that SCHMID did warrant the twelve (12) generators against defects.

Upon careful examination of Balagtas' testimony, what is at once apparent is that Balagtas failed to disclose the nature or terms and
conditions of the warranty allegedly given by SC Was it a warranty that the generators would be fit for the fishing business of the buyer?
Was it a warranty that the generators to be delivered would meet the specifications indicated in the Quotation? Considering the different
kinds of warranties that may be contracted, unless the nature or terms and conditions of the warranty are known, it would not be
possible to determine whether there has been a breach thereof.

Moreover, a closer examination of the statements allegedly made by the representative of SCHMID reveals that they merely constituted
an expression of opinion which cannot by any means be construed as a warranty [See Art. 1546, Civil Code.]

We quote from Balagtas' testimony:

Atty. CATRAL:

Q Did you not say at the start of your cross examination, Mr. Balagtas, that the only participation
you had in the acquisition of those twelve (12) units [of] generators was your having issued a
purchase order to your own company for the purchase of the units?

ATTY. AQUINO:

Misleading, your Honor.

Atty. CATRAL:

I am asking the witness.

COURT:

He has the right to ask that question because he is on cross. Moreover, if I remember, he
mentioned something like that. Witness may answer.
 A Yes, sir. Before I submitted that, we negotiated with Schmid and Oberly the beat generators they
can recommend because we are looking for generators. The representative of Schmid and Oberly
said that Nagata is very good. That is why I recommended that to the management. [t.s.n., October
14, 1977, pp. 23-25.]

At any rate, when asked where SCHMID's warranty was contained, Balagtas testified initially that it was in the receipts covering the
sale. (At this point, it may be stated that the invoice [Exhibit "B-l"] was issued by NAGATA CO. and nowhere is it stated therein that
SCHMID warranted the generators against defects.) When confronted with a copy of the invoice issued by NAGATA CO., he changed
his assertion and claimed that what he meant was that the date of the commencement of the period of SCHMID's warranty would be
based on the date of the invoice. On further examination, he again changed his mind and asserted that the warranty was given verbally
[TSN, October 14, 1977, pp. 19-22.] But then again, as stated earlier, the witness failed to disclose the nature or terms and conditions
of the warranty allegedly given by SCHMID.

On the other hand, Hernan Adad SCHMID's General Manager, was categorical that the company does not warrant goods bought on
indent and that the company warrants only the goods bought directly from it, like the three generators earlier bought by RJL MARTINEZ
itself [TSN, December 19, 1977, pp. 63-64.] It must be recalled that SCHMID readily replaced the three generators from its own stock.
In the face of these conflicting testimonies, this Court is of the view that RJL has failed to prove that SCHMID had given a warranty on
the twelve (12) generators subject of the second transaction. Even assuming that a warranty was given, there is no way to determine
whether there has been a breach thereof, considering that its nature or terms and conditions have not been shown.

3. In view of the foregoing, it becomes unnecessary to pass upon the other issues.

WHEREFORE, finding the Court of Appeals to have committed a reversible error, the petition is GRANTED and the appealed Decision
and Resolution of the Court of Appeals are REVERSED. The complaint of RJL Martinez Fishing Corporation is hereby DISMISSED. No
costs.

SO ORDERED.
G.R. No. 117356               June 19, 2000

VICTORIAS MILLING CO., INC., petitioner, 

vs.
COURT OF APPEALS and CONSOLIDATED SUGAR CORPORATION, respondents.

DECISION

QUISUMBING, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision of the Court of Appeals dated
February 24, 1994, in CA-G.R. CV No. 31717, as well as the respondent court's resolution of September 30, 1994 modifying said
decision. Both decision and resolution amended the judgment dated February 13, 1991, of the Regional Trial Court of Makati City,
Branch 147, in Civil Case No. 90-118.

The facts of this case as found by both the trial and appellate courts are as follows:

St. Therese Merchandising (hereafter STM) regularly bought sugar from petitioner Victorias Milling Co., Inc., (VMC). In the course of
their dealings, petitioner issued several Shipping List/Delivery Receipts (SLDRs) to STM as proof of purchases. Among these was
SLDR No. 1214M, which gave rise to the instant case. Dated October 16, 1989, SLDR No. 1214M covers 25,000 bags of sugar. Each
bag contained 50 kilograms and priced at P638.00 per bag as "per sales order VMC Marketing No. 042 dated October 16, 1989." The 1 

transaction it covered was a "direct sale." The SLDR also contains an additional note which reads: "subject for (sic) availability of a (sic)
2

stock at NAWACO (warehouse)." 3

On October 25, 1989, STM sold to private respondent Consolidated Sugar Corporation (CSC) its rights in SLDR No. 1214M for P
14,750,000.00. CSC issued one check dated October 25, 1989 and three checks postdated November 13, 1989 in payment. That same
day, CSC wrote petitioner that it had been authorized by STM to withdraw the sugar covered by SLDR No. 1214M. Enclosed in the
letter were a copy of SLDR No. 1214M and a letter of authority from STM authorizing CSC "to withdraw for and in our behalf the refined
sugar covered by Shipping List/Delivery Receipt-Refined Sugar (SDR) No. 1214 dated October 16, 1989 in the total quantity of 25,000
bags."4

On October 27, 1989, STM issued 16 checks in the total amount of P31,900,000.00 with petitioner as payee. The latter, in turn, issued
Official Receipt No. 33743 dated October 27, 1989 acknowledging receipt of the said checks in payment of 50,000 bags. Aside from
SLDR No. 1214M, said checks also covered SLDR No. 1213.

Private respondent CSC surrendered SLDR No. 1214M to the petitioner's NAWACO warehouse and was allowed to withdraw sugar.
However, after 2,000 bags had been released, petitioner refused to allow further withdrawals of sugar against SLDR No. 1214M. CSC
then sent petitioner a letter dated January 23, 1990 informing it that SLDR No. 1214M had been "sold and endorsed" to it but that it had
been refused further withdrawals of sugar from petitioner's warehouse despite the fact that only 2,000 bags had been withdrawn. CSC 5 

thus inquired when it would be allowed to withdraw the remaining 23,000 bags.

On January 31, 1990, petitioner replied that it could not allow any further withdrawals of sugar against SLDR No. 1214M because STM
had already dwithdrawn all the sugar covered by the cleared checks. 6

On March 2, 1990, CSC sent petitioner a letter demanding the release of the balance of 23,000 bags.

Seven days later, petitioner reiterated that all the sugar corresponding to the amount of STM's cleared checks had been fully withdrawn
and hence, there would be no more deliveries of the commodity to STM's account. Petitioner also noted that CSC had represented
itself to be STM's agent as it had withdrawn the 2,000 bags against SLDR No. 1214M "for and in behalf" of STM.

On April 27, 1990, CSC filed a complaint for specific performance, docketed as Civil Case No. 90-1118. Defendants were Teresita Ng
Sy (doing business under the name of St. Therese Merchandising) and herein petitioner. Since the former could not be served with
summons, the case proceeded only against the latter. During the trial, it was discovered that Teresita Ng Go who testified for CSC was
the same Teresita Ng Sy who could not be reached through summons. CSC, however, did not bother to pursue its case against her, but
7 

instead used her as its witness.

CSC's complaint alleged that STM had fully paid petitioner for the sugar covered by SLDR No. 1214M. Therefore, the latter had no
justification for refusing delivery of the sugar. CSC prayed that petitioner be ordered to deliver the 23,000 bags covered by SLDR No.
1214M and sought the award of P1,104,000.00 in unrealized profits, P3,000,000.00 as exemplary damages, P2,200,000.00 as
attorney's fees and litigation expenses.

Petitioner's primary defense a quo was that it was an unpaid seller for the 23,000 bags. Since STM had already drawn in full all the
8 

sugar corresponding to the amount of its cleared checks, it could no longer authorize further delivery of sugar to CSC. Petitioner also
contended that it had no privity of contract with CSC.

Petitioner explained that the SLDRs, which it had issued, were not documents of title, but mere delivery receipts issued pursuant to a
series of transactions entered into between it and STM. The SLDRs prescribed delivery of the sugar to the party specified therein and
did not authorize the transfer of said party's rights and interests.

Petitioner also alleged that CSC did not pay for the SLDR and was actually STM's co-conspirator to defraud it through a
misrepresentation that CSC was an innocent purchaser for value and in good faith. Petitioner then prayed that CSC be ordered to pay it
the following sums: P10,000,000.00 as moral damages; P10,000,000.00 as exemplary damages; and P1,500,000.00 as attorney's fees.
Petitioner also prayed that cross-defendant STM be ordered to pay it P10,000,000.00 in exemplary damages, and P1,500,000.00 as
attorney's fees.

Since no settlement was reached at pre-trial, the trial court heard the case on the merits.

As earlier stated, the trial court rendered its judgment favoring private respondent CSC, as follows:
"WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against defendant Victorias
Milling Company:

"1) Ordering defendant Victorias Milling Company to deliver to the plaintiff 23,000 bags of refined sugar due under SLDR No.
1214;

"2) Ordering defendant Victorias Milling Company to pay the amount of P920,000.00 as unrealized profits, the amount of
P800,000.00 as exemplary damages and the amount of P1,357,000.00, which is 10% of the acquisition value of the
undelivered bags of refined sugar in the amount of P13,570,000.00, as attorney's fees, plus the costs.

"SO ORDERED." 9

It made the following observations:

"[T]he testimony of plaintiff's witness Teresita Ng Go, that she had fully paid the purchase price of P15,950,000.00 of the 25,000 bags
of sugar bought by her covered by SLDR No. 1214 as well as the purchase price of P15,950,000.00 for the 25,000 bags of sugar
bought by her covered by SLDR No. 1213 on the same date, October 16, 1989 (date of the two SLDRs) is duly supported by Exhibits C
to C-15 inclusive which are post-dated checks dated October 27, 1989 issued by St. Therese Merchandising in favor of Victorias Milling
Company at the time it purchased the 50,000 bags of sugar covered by SLDR No. 1213 and 1214. Said checks appear to have been
honored and duly credited to the account of Victorias Milling Company because on October 27, 1989 Victorias Milling Company issued
official receipt no. 34734 in favor of St. Therese Merchandising for the amount of P31,900,000.00 (Exhibits B and B-1). The testimony
of Teresita Ng Go is further supported by Exhibit F, which is a computer printout of defendant Victorias Milling Company showing the
quantity and value of the purchases made by St. Therese Merchandising, the SLDR no. issued to cover the purchase, the official
reciept no. and the status of payment. It is clear in Exhibit 'F' that with respect to the sugar covered by SLDR No. 1214 the same has
been fully paid as indicated by the word 'cleared' appearing under the column of 'status of payment.'

"On the other hand, the claim of defendant Victorias Milling Company that the purchase price of the 25,000 bags of sugar purchased by
St. Therese Merchandising covered by SLDR No. 1214 has not been fully paid is supported only by the testimony of Arnulfo Caintic,
witness for defendant Victorias Milling Company. The Court notes that the testimony of Arnulfo Caintic is merely a sweeping barren
assertion that the purchase price has not been fully paid and is not corroborated by any positive evidence. There is an insinuation by
Arnulfo Caintic in his testimony that the postdated checks issued by the buyer in payment of the purchased price were dishonored.
However, said witness failed to present in Court any dishonored check or any replacement check. Said witness likewise failed to
present any bank record showing that the checks issued by the buyer, Teresita Ng Go, in payment of the purchase price of the sugar
covered by SLDR No. 1214 were dishonored." 10

Petitioner appealed the trial court’s decision to the Court of Appeals.

On appeal, petitioner averred that the dealings between it and STM were part of a series of transactions involving only one account or
one general contract of sale. Pursuant to this contract, STM or any of its authorized agents could withdraw bags of sugar only against
cleared checks of STM. SLDR No. 21214M was only one of 22 SLDRs issued to STM and since the latter had already withdrawn its full
quota of sugar under the said SLDR, CSC was already precluded from seeking delivery of the 23,000 bags of sugar.

Private respondent CSC countered that the sugar purchases involving SLDR No. 1214M were separate and independent transactions
and that the details of the series of purchases were contained in a single statement with a consolidated summary of cleared check
payments and sugar stock withdrawals because this a more convenient system than issuing separate statements for each purchase.

The appellate court considered the following issues: (a) Whether or not the transaction between petitioner and STM involving SLDR No.
1214M was a separate, independent, and single transaction; (b) Whether or not CSC had the capacity to sue on its own on SLDR No.
1214M; and (c) Whether or not CSC as buyer from STM of the rights to 25,000 bags of sugar covered by SLDR No. 1214M could
compel petitioner to deliver 23,000 bags allegedly unwithdrawn.

On February 24, 1994, the Court of Appeals rendered its decision modifying the trial court's judgment, to wit:

"WHEREFORE, the Court hereby MODIFIES the assailed judgment and orders defendant-appellant to:

"1) Deliver to plaintiff-appellee 12,586 bags of sugar covered by SLDR No. 1214M;

"2) Pay to plaintiff-appellee P792,918.00 which is 10% of the value of the undelivered bags of refined sugar, as attorneys fees;

"3) Pay the costs of suit.

"SO ORDERED." 11

Both parties then seasonably filed separate motions for reconsideration.

In its resolution dated September 30, 1994, the appellate court modified its decision to read:

"WHEREFORE, the Court hereby modifies the assailed judgment and orders defendant-appellant to:

"(1) Deliver to plaintiff-appellee 23,000 bags of refined sugar under SLDR No. 1214M;

"(2) Pay costs of suit.

"SO ORDERED." 12

The appellate court explained the rationale for the modification as follows:
"There is merit in plaintiff-appellee's position.

"Exhibit ‘F' We relied upon in fixing the number of bags of sugar which remained undelivered as 12,586 cannot be made the basis for
such a finding. The rule is explicit that courts should consider the evidence only for the purpose for which it was offered. (People v.
Abalos, et al, 1 CA Rep 783). The rationale for this is to afford the party against whom the evidence is presented to object thereto if he
deems it necessary. Plaintiff-appellee is, therefore, correct in its argument that Exhibit ‘F' which was offered to prove that checks in the
total amount of P15,950,000.00 had been cleared. (Formal Offer of Evidence for Plaintiff, Records p. 58)  cannot be used to prove the
proposition that 12,586 bags of sugar remained undelivered.

"Testimonial evidence (Testimonies of Teresita Ng [TSN, 10 October 1990, p. 33] and Marianito L. Santos [TSN, 17 October 1990, pp.
16, 18, and 36]) presented by plaintiff-appellee was to the effect that it had withdrawn only 2,000 bags of sugar from SLDR after which
it was not allowed to withdraw anymore. Documentary evidence (Exhibit I, Id., p. 78, Exhibit K, Id., p. 80)  show that plaintiff-appellee
had sent demand letters to defendant-appellant asking the latter to allow it to withdraw the remaining 23,000 bags of sugar from SLDR
1214M. Defendant-appellant, on the other hand, alleged that sugar delivery to the STM corresponded only to the value of cleared
checks; and that all sugar corresponded to cleared checks had been withdrawn. Defendant-appellant did not rebut plaintiff-appellee's
assertions. It did not present evidence to show how many bags of sugar had been withdrawn against SLDR No. 1214M, precisely
because of its theory that all sales in question were a series of one single transaction and withdrawal of sugar depended on the clearing
of checks paid therefor.

"After a second look at the evidence, We see no reason to overturn the findings of the trial court on this point." 13

Hence, the instant petition, positing the following errors as grounds for review:

"1. The Court of Appeals erred in not holding that STM's and private respondent's specially informing petitioner that
respondent was authorized by buyer STM to withdraw sugar against SLDR No. 1214M "for and in our (STM) behalf,"
(emphasis in the original) private respondent's withdrawing 2,000 bags of sugar for STM, and STM's empowering other
persons as its agents to withdraw sugar against the same SLDR No. 1214M, rendered respondent like the other persons, an
agent of STM as held in Rallos v. Felix Go Chan & Realty Corp.,  81 SCRA 252, and precluded it from subsequently claiming
and proving being an assignee of SLDR No. 1214M and from suing by itself for its enforcement because it was conclusively
presumed to be an agent (Sec. 2, Rule 131, Rules of Court) and estopped from doing so. (Art. 1431, Civil Code).

"2. The Court of Appeals erred in manifestly and arbitrarily ignoring and disregarding certain relevant and undisputed facts
which, had they been considered, would have shown that petitioner was not liable, except for 69 bags of sugar, and which
would justify review of its conclusion of facts by this Honorable Court.

"3. The Court of Appeals misapplied the law on compensation under Arts. 1279, 1285 and 1626 of the Civil Code when it ruled
that compensation applied only to credits from one SLDR or contract and not to those from two or more distinct
contracts between the same parties; and erred in denying petitioner's right to setoff all its credits arising prior to notice of
assignment from other sales or SLDRs against private respondent's claim as assignee under SLDR No. 1214M, so as to
extinguish or reduce its liability to 69 bags, because the law on compensation applies precisely to two or more distinct
contracts between the same parties (emphasis in the original).

"4. The Court of Appeals erred in concluding that the settlement or liquidation of accounts in Exh. ‘F’ between petitioner and
STM, respondent's admission of its balance, and STM's acquiescence thereto by silence for almost one year did not render
Exh. `F' an account stated and its balance binding.

"5. The Court of Appeals erred in not holding that the conditions of the assigned SLDR No. 1214, namely, (a) its subject matter
being generic, and (b) the sale of sugar being subject to its availability at the Nawaco warehouse, made the sale conditional
and prevented STM or private respondent from acquiring title to the sugar; and the non-availability of sugar freed petitioner
from further obligation.

"6. The Court of Appeals erred in not holding that the "clean hands" doctrine precluded respondent from seeking judicial reliefs
(sic) from petitioner, its only remedy being against its assignor."
14

Simply stated, the issues now to be resolved are:

(1)....Whether or not the Court of Appeals erred in not ruling that CSC was an agent of STM and hence, estopped to sue upon
SLDR No. 1214M as an assignee.

(2)....Whether or not the Court of Appeals erred in applying the law on compensation to the transaction under SLDR No.
1214M so as to preclude petitioner from offsetting its credits on the other SLDRs.

(3)....Whether or not the Court of Appeals erred in not ruling that the sale of sugar under SLDR No. 1214M was a conditional
sale or a contract to sell and hence freed petitioner from further obligations.

(4)....Whether or not the Court of Appeals committed an error of law in not applying the "clean hands doctrine" to preclude
CSC from seeking judicial relief.

The issues will be discussed in seriatim.

Anent the first issue, we find from the records that petitioner raised this issue for the first time on appeal.  It is settled that an issue
1avvphi1

which was not raised during the trial in the court below could not be raised for the first time on appeal as to do so would be offensive to
the basic rules of fair play, justice, and due process. Nonetheless, the Court of Appeals opted to address this issue, hence, now a
15 

matter for our consideration.

Petitioner heavily relies upon STM's letter of authority allowing CSC to withdraw sugar against SLDR No. 1214M to show that the latter
was STM's agent. The pertinent portion of said letter reads:
"This is to authorize Consolidated Sugar Corporation or its representative to withdraw for and in our behalf (stress supplied) the refined
sugar covered by Shipping List/Delivery Receipt = Refined Sugar (SDR) No. 1214 dated October 16, 1989 in the total quantity of 25,
000 bags." 16

The Civil Code defines a contract of agency as follows:

"Art. 1868. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of
another, with the consent or authority of the latter."

It is clear from Article 1868 that the basis of agency is representation. On the part of the principal, there must be an actual intention to
17 

appoint or an intention naturally inferable from his words or actions; and on the part of the agent, there must be an intention to accept
18  19 

the appointment and act on it, and in the absence of such intent, there is generally no agency. One factor which most clearly
20  21 

distinguishes agency from other legal concepts is control; one person - the agent - agrees to act under the control or direction of
another - the principal. Indeed, the very word "agency" has come to connote control by the principal. The control factor, more than any
22 

other, has caused the courts to put contracts between principal and agent in a separate category. The Court of Appeals, in finding that
23 

CSC, was not an agent of STM, opined:

"This Court has ruled that where the relation of agency is dependent upon the acts of the parties, the law makes no presumption of
agency, and it is always a fact to be proved, with the burden of proof resting upon the persons alleging the agency, to show not only the
fact of its existence, but also its nature and extent (Antonio vs. Enriquez  [CA], 51 O.G. 3536]. Here, defendant-appellant failed to
sufficiently establish the existence of an agency relation between plaintiff-appellee and STM. The fact alone that it (STM) had
authorized withdrawal of sugar by plaintiff-appellee "for and in our (STM's) behalf" should not be eyed as pointing to the existence of an
agency relation ...It should be viewed in the context of all the circumstances obtaining. Although it would seem STM represented
plaintiff-appellee as being its agent by the use of the phrase "for and in our (STM's) behalf" the matter was cleared when on 23 January
1990, plaintiff-appellee informed defendant-appellant that SLDFR No. 1214M had been "sold and endorsed" to it by STM (Exhibit I,
Records, p. 78). Further, plaintiff-appellee has shown that the 25, 000 bags of sugar covered by the SLDR No. 1214M were sold and
transferred by STM to it ...A conclusion that there was a valid sale and transfer to plaintiff-appellee may, therefore, be made thus
capacitating plaintiff-appellee to sue in its own name, without need of joining its imputed principal STM as co-plaintiff."24

In the instant case, it appears plain to us that private respondent CSC was a buyer of the SLDFR form, and not an agent of STM.
Private respondent CSC was not subject to STM's control. The question of whether a contract is one of sale or agency depends on the
intention of the parties as gathered from the whole scope and effect of the language employed. That the authorization given to CSC
25 

contained the phrase "for and in our (STM's) behalf" did not establish an agency. Ultimately, what is decisive is the intention of the
parties. That no agency was meant to be established by the CSC and STM is clearly shown by CSC's communication to petitioner that
26 

SLDR No. 1214M had been "sold and endorsed" to it. The use of the words "sold and endorsed" means that STM and CSC intended a
27 

contract of sale, and not an agency. Hence, on this score, no error was committed by the respondent appellate court when it held that
CSC was not STM's agent and could independently sue petitioner.

On the second issue,  proceeding from the theory that the transactions entered into between petitioner and STM are but serial parts of
one account, petitioner insists that its debt has been offset by its claim for STM's unpaid purchases, pursuant to Article 1279 of the Civil
Code. However, the trial court found, and the Court of Appeals concurred, that the purchase of sugar covered by SLDR No. 1214M
28 

was a separate and independent transaction; it was not a serial part of a single transaction or of one account contrary to petitioner's
insistence. Evidence on record shows, without being rebutted, that petitioner had been paid for the sugar purchased under SLDR No.
1214M. Petitioner clearly had the obligation to deliver said commodity to STM or its assignee. Since said sugar had been fully paid for,
petitioner and CSC, as assignee of STM, were not mutually creditors and debtors of each other. No reversible error could thereby be
imputed to respondent appellate court when, it refused to apply Article 1279 of the Civil Code to the present case.

Regarding the third issue,  petitioner contends that the sale of sugar under SLDR No. 1214M is a conditional sale or a contract to sell,
with title to the sugar still remaining with the vendor. Noteworthy, SLDR No. 1214M contains the following terms and conditions:

"It is understood and agreed that by payment by buyer/trader of refined sugar and/or receipt of this document by the buyer/trader
personally or through a representative, title to refined sugar is transferred to buyer/trader and delivery to him/it is deemed effected and
completed (stress supplied) and buyer/trader assumes full responsibility therefore…" 29

The aforequoted terms and conditions clearly show that petitioner transferred title to the sugar to the buyer or his assignee upon
payment of the purchase price. Said terms clearly establish a contract of sale, not a contract to sell. Petitioner is now estopped from
alleging the contrary. The contract is the law between the contracting parties. And where the terms and conditions so stipulated are not
30 

contrary to law, morals, good customs, public policy or public order, the contract is valid and must be upheld. Having transferred title to
31 

the sugar in question, petitioner is now obliged to deliver it to the purchaser or its assignee.

As to the fourth issue,  petitioner submits that STM and private respondent CSC have entered into a conspiracy to defraud it of its
sugar. This conspiracy is allegedly evidenced by: (a) the fact that STM's selling price to CSC was below its purchasing price; (b) CSC's
refusal to pursue its case against Teresita Ng Go; and (c) the authority given by the latter to other persons to withdraw sugar against
SLDR No. 1214M after she had sold her rights under said SLDR to CSC. Petitioner prays that the doctrine of "clean hands" should be
applied to preclude CSC from seeking judicial relief. However, despite careful scrutiny, we find here the records bare of convincing
evidence whatsoever to support the petitioner's allegations of fraud. We are now constrained to deem this matter purely speculative,
bereft of concrete proof.

WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner.

SO ORDERED.
G.R. No. L-46658             May 13, 1991

PHILIPPINE NATIONAL BANK, petitioner, 

vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of First Instance of Rizal, Branch XXI and
TAYABAS CEMENT COMPANY, INC., respondents.

The Chief Legal Counsel for petitioner.

Ortille Law Office for private respondent.

FERNAN, C.J.:

In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to annul and set aside the orders dated March 4, 1977 and
May 31, 1977 rendered in Civil Case No. 24422  of the Court of First Instance of Rizal, Branch XXI, respectively granting private
1

respondent Tayabas Cement Company, Inc.'s application for a writ of preliminary injunction to enjoin the foreclosure sale of certain
properties in Quezon City and Negros Occidental and denying petitioner's motion for reconsideration thereof.

In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), obtained a loan of P580,000.00 from petitioner bank
to purchase 60% of the subscribed capital stock, and thereby acquire the controlling interest of private respondent Tayabas Cement
Company, Inc. (TCC).  As security for said loan, the spouses Arroyo executed a real estate mortgage over a parcel of land covered by
2

Transfer Certificate of Title No. 55323 of the Register of Deeds of Quezon City known as the La Vista property.

Thereafter, TCC filed with petitioner bank an application and agreement for the establishment of an eight (8) year deferred letter of
credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a cement plant
machinery and equipment.

Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka Kaisha, Ltd. for the account of TCC, the
Arroyo spouses executed the following documents to secure this loan accommodation: Surety Agreement dated August 5, 1964  and 3

Covenant dated August 6, 1964. 4

The imported cement plant machinery and equipment arrived from Japan and were released to TCC under a trust receipt agreement.
Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding drawings against the L/C as scheduled. TCC, however, failed to remit
and/or pay the corresponding amount covered by the drawings. Thus, on May 19, 1968, pursuant to the trust receipt agreement, PNB
notified TCC of its intention to repossess, as it later did, the imported machinery and equipment for failure of TCC to settle its
obligations under the L/C.5

In the meantime, the personal accounts of the spouses Arroyo, which included another loan of P160,000.00 secured by a real estate
mortgage over parcels of agricultural land known as Hacienda Bacon located in Isabela, Negros Occidental, had likewise become due.
The spouses Arroyo having failed to satisfy their obligations with PNB, the latter decided to foreclose the real estate mortgages
executed by the spouses Arroyo in its favor.

On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extra-judicial foreclosure under Act 3138, as amended by
Act 4118 and under Presidential Decree No. 385 of the real estate mortgage over the properties known as the La Vista property
covered by TCT No. 55323.  PNB likewise filed a similar petition with the City Sheriff of Bacolod, Negros Occidental with respect to the
6

mortgaged properties located at Isabela, Negros Occidental and covered by OCT No. RT 1615.

The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At the auction sale, PNB was the highest bidder with
a bid price of P1,000,001.00. However, when said property was about to be awarded to PNB, the representative of the mortgagor-
spouses objected and demanded from the PNB the difference between the bid price of P1,000,001.00 and the indebtedness of
P499,060.25 of the Arroyo spouses on their personal account. It was the contention of the spouses Arroyo's representative that the
foreclosure proceedings referred only to the personal account of the mortgagor spouses without reference to the account of TCC.

To remedy the situation, PNB filed a supplemental petition on August 13, 1975 requesting the Sheriff's Office to proceed with the sale
of the subject real properties to satisfy not only the amount of P499,060.25 owed by the spouses Arroyos on their personal account but
also the amount of P35,019,901.49 exclusive of interest, commission charges and other expenses owed by said spouses as sureties of
TCC.  Said petition was opposed by the spouses Arroyo and the other bidder, Jose L. Araneta.
7

On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca issued a resolution finding that the questions
raised by the parties required the reception and evaluation of evidence, hence, proper for adjudication by the courts of law. Since said
questions were prejudicial to the holding of the foreclosure sale, she ruled that her "Office, therefore, cannot properly proceed with the
foreclosure sale unless and until there be a court ruling on the aforementioned issues." 8

Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch V a petition for mandamus against said Diana
9

Dungca in her capacity as City Sheriff of Quezon City to compel her to proceed with the foreclosure sale of the mortgaged properties
covered by TCT No. 55323 in order to satisfy both the personal obligation of the spouses Arroyo as well as their liabilities as sureties of
TCC. 10

On September 6, 1976, the petition was granted and Dungca was directed to proceed with the foreclosure sale of the mortgaged
properties covered by TCT No. 55323 pursuant to Act No. 3135 and to issue the corresponding Sheriff's Certificate of Sale. 11

Before the decision could attain finality, TCC filed on September 14, 1976 before the Court of First Instance of Rizal, Pasig, Branch XXI
a complaint  against PNB, Dungca, and the Provincial Sheriff of Negros Occidental and Ex-Officio Sheriff of Bacolod City seeking, inter
12

alia, the issuance of a writ of preliminary injunction to restrain the foreclosure of the mortgages over the La Vista property and Hacienda
Bacon as well as a declaration that its obligation with PNB had been fully paid by reason of the latter's repossession of the imported
machinery and equipment. 13
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a restraining order  and on March 4, 1977, granted a writ
14

of preliminary injunction.  PNB's motion for reconsideration was denied, hence this petition.
15

Petitioner PNB advances four grounds for the setting aside of the writ of preliminary injunction, namely: a) that it contravenes P.D. No.
385 which prohibits the issuance of a restraining order against a government financial institution in any action taken by such institution
in compliance with the mandatory foreclosure provided in Section 1 thereof; b) that the writ countermands a final decision of a co-equal
and coordinate court; c) that the writ seeks to prohibit the performance of acts beyond the court's territorial jurisdiction; and, d) private
respondent TCC has not shown any clear legal right or necessity to the relief of preliminary injunction.

Private respondent TCC counters with the argument that P.D. No. 385 does not apply to the case at bar, firstly because no foreclosure
proceedings have been instituted against it by PNB and secondly, because its account under the L/C has been fully satisfied with the
repossession of the imported machinery and equipment by PNB.

The resolution of the instant controversy lies primarily on the question of whether or not TCC's liability has been extinguished by the
repossession of PNB of the imported cement plant machinery and equipment.

We rule for the petitioner PNB. It must be remembered that PNB took possession of the imported cement plant machinery and
equipment pursuant to the trust receipt agreement executed by and between PNB and TCC giving the former the unqualified right to
the possession and disposal of all property shipped under the Letter of Credit until such time as all the liabilities and obligations under
said letter had been discharged.  In the case of Vintola vs. Insular Bank of Asia and America  wherein the same argument was
16 17

advanced by the Vintolas as entrustees of imported seashells under a trust receipt transaction, we said:

Further, the VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch as, through no fault of
their own, they were unable to dispose of the seashells, and that they have relinquished possession thereof to the IBAA, as
owner of the goods, by depositing them with the Court.

The foregoing submission overlooks the nature and mercantile usage of the transaction involved. A letter of credit-trust receipt
arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan
covered by the Letter of Credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan
feature represented by the letter of credit, and a security feature which is in the covering trust receipt.

x x x           x x x          x x x

A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods.  It
1âwphi1

secures an indebtedness and there can be no such thing as security interest that secures no obligation. As defined in our
laws:

(h) "Security interest" means a property interest in goods, documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to
be absolute, whenever such title is in substance taken or retained for security only.

x x x           x x x          x x x

Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely the holder of a
security title for the advances it had made to the VINTOLAS. The goods the VINTOLAS had purchased through IBAA
financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not convert the IBAA
into an investor; the latter remained a lender and creditor.

x x x           x x x          x x x

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that because they have
surrendered the goods to IBAA and subsequently deposited them in the custody of the court, they are absolutely relieved of
their obligation to pay their loan because of their inability to dispose of the goods. The fact that they were unable to sell the
seashells in question does not affect IBAA's right to recover the advances it had made under the Letter of Credit.

PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under
the Letter of Credit, said possession by itself cannot be considered payment of the loan secured thereby. Payment would legally result
only after PNB had foreclosed on said securities, sold the same and applied the proceeds thereof to TCC's loan obligation. Mere
possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of
the mortgagor on the property and includes the sale itself. 18

Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated to the creditor in
satisfaction of a debt in money and the same is governed by sales.  Dation in payment is the delivery and transmission of ownership of
19

a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.  As aforesaid, the repossession of
20

the machinery and equipment in question was merely to secure the payment of TCC's loan obligation and not for the purpose of
transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was ever accomplished.

Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses Arroyo as sureties of TCC. A
surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the
latter, and their liabilities are interwoven as to be inseparable.  As sureties, the Arroyo spouses are primarily liable as original
21

promissors and are bound immediately to pay the creditor the amount outstanding. 22

Under Presidential Decree No. 385 which took effect on January 31, 1974, government financial institutions like herein petitioner PNB
are required to foreclose on the collaterals and/or securities for any loan, credit or accommodation whenever the arrearages on such
account amount to at least twenty percent (20%) of the total outstanding obligations, including interests and charges, as appearing in
the books of account of the financial institution concerned.  It is further provided therein that "no restraining order, temporary or
23

permanent injunction shall be issued by the court against any government financial institution in any action taken by such institution in
compliance with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary or permanent
injunction is sought by the borrower(s) or any third party or parties . . ."
24

It is not disputed that the foreclosure proceedings instituted by PNB against the Arroyo spouses were in compliance with the mandate
of P.D. 385. This being the case, the respondent judge acted in excess of his jurisdiction in issuing the injunction specifically proscribed
under said decree.

Another reason for striking down the writ of preliminary injunction complained of is that it interfered with the order of a co-equal and
coordinate court. Since Branch V of the CFI of Rizal had already acquired jurisdiction over the question of foreclosure of mortgage over
the La Vista property and rendered judgment in relation thereto, then it retained jurisdiction to the exclusion of all other coordinate
courts over its judgment, including all incidents relative to the control and conduct of its ministerial officers, namely the sheriff
thereof.  The foreclosure sale having been ordered by Branch V of the CFI of Rizal, TCC should not have filed injunction proceedings
25

with Branch XXI of the same CFI, but instead should have first sought relief by proper motion and application from the former court
which had exclusive jurisdiction over the foreclosure proceeding. 26

This doctrine of non-interference is premised on the principle that a judgment of a court of competent jurisdiction may not be opened,
modified or vacated by any court of concurrent jurisdiction.27

Furthermore, we find the issuance of the preliminary injunction directed against the Provincial Sheriff of Negros Occidental and ex-
officio Sheriff of Bacolod City a jurisdictional faux pas as the Courts of First Instance, now Regional Trial Courts, can only enforce their
writs of injunction within their respective designated territories.
28

WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby set aside. Costs against private respondent.
G.R. No. 149420             October 8, 2003

SONNY LO, petitioner, 
vs.
KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.

DECISION

YNARES-SANTIAGO, J.:

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

made payable in ten monthly installments.

Respondent delivered the scaffoldings to petitioner. Petitioner was able to pay the first two monthly installments. His business,
2 
1a\^/phi1.net

however, encountered financial difficulties and he was unable to settle his obligation to respondent despite oral and written demands
made against him. 3

On October 11, 1990, petitioner and respondent executed a Deed of Assignment, whereby petitioner assigned to respondent his
4 

receivables in the amount of P335,462.14 from Jomero Realty Corporation. Pertinent portions of the Deed provide:

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

WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR purchased on account scaffolding equipments
from the ASSIGNEE payable to the latter;

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

NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five Thousand Four Hundred Sixty Two and 14/100
Pesos (P335,462.14), Philippine Currency which represents part of the 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. xxx (Italics supplied)
5 

However, when respondent tried to collect the said credit from Jomero Realty Corporation, the latter refused to honor the Deed of
Assignment because it claimed that petitioner was also indebted to it. On November 26, 1990, respondent sent a letter to petitioner
6  7 

demanding payment of his obligation, but petitioner refused to pay claiming that his obligation had been extinguished when they
executed the Deed of Assignment.

Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money against the petitioner before the
Regional Trial Court of Makati, Branch 147, which was docketed as Civil Case No. 91-074. 8

During the trial, petitioner argued that his obligation was extinguished with the execution of the Deed of Assignment of credit.
Respondent, for its part, presented the testimony of its employee, Almeda Bañaga, who testified that Jomero Realty refused to honor
the assignment of credit because it claimed that petitioner had an outstanding indebtedness to it.

On August 25, 1994, the trial court rendered a decision dismissing the complaint on the ground that the assignment of credit
9 

extinguished the obligation. The decretal portion thereof provides:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the defendant and against the plaintiff,
dismissing the complaint and ordering the plaintiff to pay the defendant attorney’s fees in the amount of P25,000.00. 1a\^/phi1.net

Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court rendered a decision, the dispositive 10 

portion of which reads:

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:

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. 15

Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. In order that there be a valid dation  in payment, the following are the requisites: (1)
16 

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. The undertaking really partakes in one sense of the
17 

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, produced the effects of a
19 

dation in payment which may extinguish the obligation. However, as in any other contract of sale, the vendor or assignor is bound by
20 

certain warranties. More specifically, the first paragraph of Article 1628 of the Civil Code provides:

The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale, unless it should have
been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency was
prior to the sale and of common knowledge.

From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and legality of the credit at the time of the
sale or assignment. When Jomero claimed that it was no longer indebted to petitioner since the latter also had an unpaid obligation to
it, it essentially meant that its obligation to petitioner has been extinguished by compensation. In other words, respondent alleged the
21 

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:

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

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

Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the sum of P335,462.14 with legal interest
thereon. However, we find that the award by the Court of Appeals of 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. The award of attorney’s fees is DELETED for lack of
23 

evidentiary basis. SO ORDERED.

G.R. No. 166704             December 20, 2006

AGRIFINA AQUINTEY, petitioner, 
vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review under Rule 45 of the Revised Rules on Civil Procedure of the Decision1 of the Court of Appeals in CA-
G.R. CV No. 78075, which affirmed with modification the Decision2 of the Regional Trial Court (RTC), Branch 61, Baguio City, and the
Resolution3 of the appellate court denying reconsideration thereof.

The Antecedents

On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a complaint for sum of money and damages against
the respondents, spouses Felicidad and Rico Tibong. Agrifina alleged that Felicidad had secured loans from her on several occasions,
at monthly interest rates of 6% to 7%. Despite demands, the spouses Tibong failed to pay their outstanding loan, amounting
to P773,000.00 exclusive of interests. The complaint contained the following prayer:

WHEREFORE, premises considered, it is most respectfully prayed of this Honorable Court, after due notice and hearing, to
render judgment ordering defendants to pay plaintiff the following:

a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS (P773,000.00) representing the principal obligation
of the defendants with the stipulated interests of six (6%) percent per month from May 11, 1999 to date and or those
that are stipulated on the contracts as mentioned from paragraph two (2) of the complaint.

b). FIFTEEN PERCENT (15%) of the total accumulated obligations as attorney's fees.

c). Actual expenses representing the filing fee and other charges and expenses to be incurred during the prosecution
of this case.

Further prays for such other relief and remedies just and equitable under the premises.4

Agrifina appended a copy of the Counter-Affidavit executed by Felicidad in I.S. No. 93-334, as well as copies of the promissory notes
and acknowledgment receipts executed by Felicidad covering the loaned amounts.5

In their Answer with Counterclaim,6 spouses Tibong admitted that they had secured loans from Agrifina. The proceeds of the loan were
then re-lent to other borrowers at higher interest rates. They, likewise, alleged that they had executed deeds of assignment in favor of
Agrifina, and that their debtors had executed promissory notes in Agrifina's favor. According to the spouses Tibong, this resulted in a
novation of the original obligation to Agrifina. They insisted that by virtue of these documents, Agrifina became the new collector of their
debtors; and the obligation to pay the balance of their loans had been extinguished.

The spouses Tibong specifically denied the material averments in paragraphs 2 and 2.1 of the complaint. While they did not state the
total amount of their loans, they declared that they did not receive anything from Agrifina without any written receipt.7 They prayed for
that the complaint be dismissed.

In their Pre-Trial Brief, the spouses Tibong maintained that they have never obtained any loan from Agrifina without the benefit of a
written document.8

On August 17, 2000, the trial court issued a Pre-Trial Order where the following issues of the case were defined:

Whether or not plaintiff is entitled to her claim of P773,000.00;

Whether or not plaintiff is entitled to stipulated interests in the promissory notes; and

Whether or not the parties are entitled to their claim for damages.9

The Case for Petitioner

Agrifina and Felicidad were classmates at the University of Pangasinan. Felicidad's husband, Rico, also happened to be a distant
relative of Agrifina. Upon Felicidad's prodding, Agrifina agreed to lend money to Felicidad. According to Felicidad, Agrifina would be
earning interests higher than those given by the bank for her money. Felicidad told Agrifina that since she (Felicidad) was engaged in
the sale of dry goods at the GP Shopping Arcade, she would use the money to buy bonnels and thread.10 Thus, Agrifina lent a total sum
of P773,000.00 to Felicidad, and each loan transaction was covered by either a promissory note or an acknowledgment
receipt.11 Agrifina stated that she had lost the receipts signed by Felicidad for the following amounts: P100,000.00, P34,000.00
and P2,000.00.12 The particulars of the transactions are as follows:
 Amount Date Obtained Interest Per Mo. Due Date
P 100,000.00 May 11, 1989 6% August 11, 1989
4,000.00 June 8, 1989 - -
50,000.00 June 13, 1989 6% On demand
60,000.00 Aug. 16, 1989 7% January 1990
205,000.00 Oct. 13, 1989 7% January 1990
128,000.00 Oct. 19, 1989 7% January 1990
2,000.00 Nov. 12, 1989 6% April 28, 1990
10,000.00 June 13, 1990 - -
80,000.00 Jan. 4, 1990 - -
34,000.00 - 6% October 19, 1989
100,000.00 July 14, 1989 5% October 198913

According to Agrifina, Felicidad was able to pay only her loans amounting to P122,600.00.14

In July 1990, Felicidad gave to Agrifina City Trust Bank Check No. 126804 dated August 25, 1990 in the amount of P50,000.00 as
partial payment.15 However, the check was dishonored for having been drawn against insufficient funds.16 Agrifina then filed a criminal
case against Felicidad in the Office of the City Prosecutor. An Information for violation of Batas Pambansa Bilang 22 was filed against
Felicidad, docketed as Criminal Case No. 11181-R. After trial, the court ordered Felicidad to pay P50,000.00. Felicidad complied and
paid the face value of the check.17

In the meantime, Agrifina learned that Felicidad had re-loaned the amounts to other borrowers.18 Agrifina sought the assistance of Atty.
Torres G. A-ayo who advised her to require Felicidad to execute deeds of assignment over Felicidad's debtors. The lawyer also
suggested that Felicidad's debtors execute promissory notes in Agrifina's favor, to "turn over" their loans from Felicidad. This
arrangement would facilitate collection of Felicidad's account. Agrifina agreed to the proposal.19 Agrifina, Felicidad, and the latter's
debtors had a conference20 where Atty. A-ayo explained that Agrifina could apply her collections as payments of Felicidad's account.21

From August 7, 1990 to October, 1990, Felicidad executed deeds of assignment of credits (obligations)22 duly notarized by Atty. A-ayo,
in which Felicidad transferred and assigned to Agrifina the total amount of P546,459.00 due from her debtors.23 In the said deeds,
Felicidad confirmed that her debtors were no longer indebted to her for their respective loans. For her part, Agrifina conformed to the
deeds of assignment relative to the loans of Virginia Morada and Corazon Dalisay.24 She was furnished copies of the deeds as well as
the promissory notes.25

The following debtors of Felicidad executed promissory notes where they obliged themselves to pay directly to Agrifina:

Debtors Account Date of Instrument Date Payable

Juliet & Tommy Tibong P50,000.00 August 7, 1990 November 4, 1990 and February 4,
1991
Corazon Dalisay 8,000.00 August 7, 1990 No date
Rita Chomacog 4,480.00 August 8, 1990 September 23, 1990
Antoinette Manuel 12,000.00 October 19, 1990 March 30, 1991
Rosemarie Bandas 8,000.00 August 8, 1990 February 3, 1991
Fely Cirilo 63,600.00 September 13, 1990 No date
Virginia Morada 62,379.00 August 9, 1990 February 9, 1991
Carmelita Casuga 59,000.00 August 28, 1990 February 28, 1991
Merlinda Gelacio 17,200.00 August 29, 1990 November 29, 199026
Total P284,659.00

Agrifina narrated that Felicidad showed to her the way to the debtors' houses to enable her to collect from them. One of the debtors,
Helen Cabang, did not execute any promissory note but conformed to the Deed of Assignment of Credit which Felicidad executed in
favor of Agrifina.27 Eliza Abance conformed to the deed of assignment for and in behalf of her sister, Fely Cirilo.28 Edna Papat-iw was not
able to affix her signature on the deed of assignment nor sign the promissory note because she was in Taipei, Taiwan.29

Following the execution of the deeds of assignment and promissory notes, Agrifina was able to collect the total amount of P301,000.00
from Felicidad's debtors.30 In April 1990, she tried to collect the balance of Felicidad's account, but the latter told her to wait until her
debtors had money.31 When Felicidad reneged on her promise, Agrifina filed a complaint in the Office of the Barangay Captain for the
collection of P773,000.00. However, no settlement was arrived at.32

The Case for Respondents

Felicidad testified that she and her friend Agrifina had been engaged in the money-lending business.33 Agrifina would lend her money
with monthly interest,34 and she, in turn, would re-lend the money to borrowers at a higher interest rate. Their business relationship
turned sour when Agrifina started complaining that she (Felicidad) was actually earning more than Agrifina.35 Before the respective
maturity dates of her debtors' loans, Agrifina asked her to pay her account since Agrifina needed money to buy a house and lot in
Manila. However, she told Agrifina that she could not pay yet, as her debtors' loan payments were not yet due.36 Agrifina then came to
her store every afternoon to collect from her, and persuaded her to go to Atty. Torres G. A-ayo for legal advice.37 The lawyer suggested
that she indorse the accounts of her debtors to Agrifina so that the latter would be the one to collect from her debtors and she would no
longer have any obligation to Agrifina.38 She then executed deeds of assignment in favor of Agrifina covering the sums of money due
from her debtors. She signed the deeds prepared by Atty. A-ayo in the presence of Agrifina.39 Some of the debtors signed the
promissory notes which were likewise prepared by the lawyer. Thereafter, Agrifina personally collected from Felicidad's
debtors.40 Felicidad further narrated that she received P250,000.00 from one of her debtors, Rey Rivera, and remitted the payment to
Agrifina.41
Agrifina testified, on rebuttal, that she did not enter into a re-lending business with Felicidad. When she asked Felicidad to consolidate
her loans in one document, the latter told her to seek the assistance of Atty. A-ayo.42 The lawyer suggested that Felicidad assign her
credits in order to help her collect her loans.43 She agreed to the deeds of assignment to help Felicidad collect from the debtors.44

On January 20, 2003, the trial court rendered its Decision45 in favor of Agrifina. The fallo of the decision reads:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendants ordering the latter to pay the plaintiffs
(sic) the following amounts:

1. P472,000 as actual obligation with the stipulated interest of 6% per month from May 11, 1999 until the said obligation is fully
paid. However, the amount of P50,000 shall be deducted from the total accumulated interest for the same was already paid by
the defendant as admitted by the plaintiff in her complaint,

2. P25,000 as attorney's fees,

3. [T]o pay the costs.

SO ORDERED.46

The trial court ruled that Felicidad's obligation had not been novated by the deeds of assignment and the promissory notes executed by
Felicidad's borrowers. It explained that the documents did not contain any express agreement to novate and extinguish Felicidad's
obligation. It declared that the deeds and notes were separate contracts which could stand alone from the original indebtedness of
Felicidad. Considering, however, Agrifina's admission that she was able to collect from Felicidad's debtors the total amount
of P301,000.00, this should be deducted from the latter's accountability.47 Hence, the balance, exclusive of interests, amounted
to P472,000.00.

On appeal, the CA affirmed with modification the decision of the RTC and stated that, based on the promissory notes and
acknowledgment receipts signed by Felicidad, the appellants secured loans from the appellee in the total principal amount of
only P637,000.00, not P773,000.00 as declared by the trial court. The CA found that, other than Agrifina's bare testimony that she had
lost the promissory notes and acknowledgment receipts, she failed to present competent documentary evidence to substantiate her
claim that Felicidad had, likewise, borrowed the amounts of P100,000.00, P34,000.00, and P2,000.00. Of the P637,000.00 total
account, P585,659.00 was covered by the deeds of assignment and promissory notes; hence, the balance of Felicidad's account
amounted to only P51,341.00. The fallo of the decision reads:

WHEREFORE, in view of the foregoing, the decision dated January 20, 2003 of the RTC, Baguio City, Branch 61 in Civil Case
No. 4370-R is hereby MODIFIED. Defendants-appellants are hereby ordered to pay the balance of the total indebtedness in
the amount of P51,341.00 plus the stipulated interest of 6% per month from May 11, 1999 until the finality of this decision.

SO ORDERED.48

The appellate court sustained the trial court's ruling that Felicidad's obligation to Agrifina had not been novated by the deeds of
assignment and promissory notes executed in the latter's favor. Although Agrifina was subrogated as a new creditor in lieu of Felicidad,
Felicidad's obligation to Agrifina under the loan transaction remained; there was no intention on their part to novate the original
obligation. Nonetheless, the appellate court held that the legal effects of the deeds of assignment could not be totally disregarded. The
assignments of credits were onerous, hence, had the effect of payment, pro tanto, of the outstanding obligation. The fact that Agrifina
never repudiated or rescinded such assignments only shows that she had accepted and conformed to it. Consequently, she cannot
collect both from Felicidad and her individual debtors without running afoul to the principle of unjust enrichment. Agrifina's primary
recourse then is against Felicidad's individual debtors on the basis of the deeds of assignment and promissory notes.

The CA further declared that the deeds of assignment executed by Felicidad had the effect of payment of her outstanding obligation to
Agrifina in the amount of P585,659.00. It ruled that, since an assignment of credit is in the nature of a sale, the assignors remained
liable for the warranties as they are responsible for the existence and legality of the credit at the time of the assignment.

Both parties moved to have the decision reconsidered,49 but the appellate court denied both motions on December 21, 2004.50

Agrifina, now petitioner, filed the instant petition, contending that

1. The Honorable Court of Appeals erred in ruling that the deeds of assignment in favor of petitioner has the effect of payment
of the original obligation even as it ruled out that the original obligation and the assigned credit are distinct and separate and
can stand independently from each other;

2. The Honorable Court of Appeals erred in passing upon issues raised for the first time on appeal; and

3. The Honorable Court of Appeals erred in resolving fact not in issue.51

Petitioner avers that the appellate court erred in ruling that respondents' original obligation amounted to only P637,000.00 (instead
of P773,000.00) simply because she lost the promissory notes/receipts which evidenced the loans executed by respondent Felicidad
Tibong. She insists that the issue of whether Felicidad owed her less than P773,000.00 was not raised by respondents during pre-trial
and in their appellate brief; the appellate court was thus proscribed from taking cognizance of the issue.

Petitioner avers that respondents failed to deny, in their verified answer, that they had secured the P773,000.00 loan; hence,
respondents are deemed to have admitted the allegation in the complaint that the loans secured by respondent from her amounted
to P773,000.00. As gleaned from the trial court's pre-trial order, the main issue is whether or not she should be made to pay this
amount.

Petitioner further maintains that the CA erred in deducting the total amount of P585,659.00 covered by the deeds of assignment
executed by Felicidad and the promissory notes executed by the latter's debtors, and that the balance of respondents' account was
only P51,341.00. Moreover, the appellate court's ruling that there was no novation runs counter to its holding that the primary recourse
was against Felicidad's debtors. Petitioner avers that of the 11 deeds of assignment and promissory notes, only two bore her
signature.52 She insists that she is not bound by the deeds which she did not sign. By assigning the obligation to pay petitioner their loan
accounts, Felicidad's debtors merely assumed the latter's obligation and became co-debtors to petitioner. Respondents were not
released from their obligation under their loan transactions, and she had the option to demand payment from them or their debtors.
Citing the ruling of this Court in Magdalena Estates, Inc. v. Rodriguez,53 petitioner insists that the first debtor is not released from
responsibility upon reaching an agreement with the creditor. The payment by a third person of the first debtor's obligation does not
constitute novation, and the creditor can still enforce the obligation against the original debtor. Petitioner also cites the ruling of this
Court in Guerrero v. Court of Appeals.54

In their Comment on the petition, respondents aver that by virtue of respondent Felicidad's execution of the deeds of assignment, and
the original debtors' execution of the promissory notes (along with their conformity to the deeds of assignment with petitioner's consent),
their loan accounts with petitioner amounting to P585,659.00 had been effectively extinguished. Respondents point out that this is in
accordance with Article 1291, paragraph 2, of the Civil Code. Thus, the original debtors of respondents had been substituted as
petitioner's new debtors.

Respondents counter that petitioner had been subrogated to their right to collect the loan accounts of their debtors. In fact, petitioner,
as the new creditor of respondents' former debtors had been able to collect the latter's loan accounts which amounted to P301,000.00.
The sums received by respondents' debtors were the same loans which they obliged to pay to petitioner under the promissory notes
executed in petitioner's favor.

Respondents aver that their obligation to petitioner cannot stand or exist separately from the original debtors' obligation to petitioner as
the new creditor. If allowed to collect from them as well as from their original debtors, petitioner would be enriching herself at the
expense of respondents. Thus, despite the fact that petitioner had collected P172,600.00 from respondents and P301,000.00 from the
original debtors, petitioner still sought to collect P773,000.00 from them in the RTC. Under the deeds of assignment executed by
Felicidad and the original debtors' promissory notes, the original debtors' accounts were assigned to petitioner who would be the new
creditor. In fine, respondents are no longer liable to petitioner for the balance of their loan account inclusive of interests. Respondents
also insist that petitioner failed to prove that she (petitioner) was merely authorized to collect the accounts of the original debtors so as
to to facilitate the payment of respondents' loan obligation.

The Issues

The threshold issues are: (1) whether respondent Felicidad Tibong borrowed P773,000.00 from petitioner; and (2) whether the
obligation of respondents to pay the balance of their loans, including interest, was partially extinguished by the execution of the deeds
of assignment in favor of petitioner, relative to the loans of Edna Papat-iw, Helen Cabang, Antoinette Manuel, and Fely Cirilo in the total
amount of P371,000.00.

The Ruling of the Court

We have carefully reviewed the brief of respondents as appellants in the CA, and find that, indeed, they had raised the issue of whether
they received P773,000.00 by way of loans from petitioner. They averred that, as gleaned from the documentary evidence of petitioner
in the RTC, the total amount they borrowed was only P673,000.00. They asserted that petitioner failed to adduce concrete evidence
that they received P773,000.00 from her.55

We agree, however, with petitioner that the appellate court erred in reversing the finding of the RTC simply because petitioner failed to
present any document or receipt signed by Felicidad.

Section 10, Rule 8 of the Rules of Civil Procedure requires a defendant to "specify each material allegation of fact the truth of which he
does not admit and, whenever practicable, x x x set forth the substance of the matters upon which he relies to support his denial.56

Section 11, Rule 8 of the same Rules provides that allegations of the complaint not specifically denied are deemed admitted.57

The purpose of requiring the defendant to make a specific denial is to make him disclose the matters alleged in the complaint which he
succinctly intends to disprove at the trial, together with the matter which he relied upon to support the denial. The parties are compelled
to lay their cards on the table.58

A denial is not made specific simply because it is so qualified by the defendant. A general denial does not become specific by the use
of the word "specifically." When matters of whether the defendant alleges having no knowledge or information sufficient to form a belief
are plainly and necessarily within the defendant's knowledge, an alleged "ignorance or lack of information" will not be considered as a
specific denial. Section 11, Rule 8 of the Rules also provides that material averments in the complaint other than those as to the
amount of unliquidated damages shall be deemed admitted when not specifically denied.59 Thus, the answer should be so definite and
certain in its allegations that the pleader's adversary should not be left in doubt as to what is admitted, what is denied, and what is
covered by denials of knowledge as sufficient to form a belief.60

In the present case, petitioner alleged the following in her complaint:

2. That defendants are indebted to the plaintiff in the principal amount of SEVEN HUNDRED SEVENTY-THREE THOUSAND
PESOS (P773,000.00) Philippine Currency with a stipulated interest which are broken down as follows. The said principal
amounts was admitted by the defendants in their counter-affidavit submitted before the court. Such affidavit is hereby attached
as Annex "A;"61

xxxx

H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00) with interest at six (6%) per cent per month and payable on
October 19, 1989, however[,] the receipt for the meantime cannot be recovered as it was misplaced by the plaintiff but the
letter of defendant FELICIDAD TIBONG is hereby attached as Annex "H" for the appreciation of the Honorable court;
 I) The sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) with interest at five (5%) percent per month, obtained on
July 14, 1989 and payable on October 14, 1989. Such receipt was lost but admitted by the defendants in their counter-affidavit
as attached [to] this complaint and marked as Annex "A" mentioned in paragraph one (1); x x x62

In their Answer, respondents admitted that they had secured loans from petitioner. While the allegations in paragraph 2 of the complaint
were specifically denied, respondents merely averred that petitioner and respondent Felicidad entered into an agreement for the
lending of money to interested borrowers at a higher interest rate. Respondents failed to declare the exact amount of the loans they
had secured from petitioner. They also failed to deny the allegation in paragraph 2 of the complaint that respondent Felicidad signed
and submitted a counter-affidavit in I.S. No. 93-334 where she admitted having secured loans from petitioner in the amount
of P773,000.00. Respondents, likewise, failed to deny the allegation in paragraph 2(h) of the complaint that respondents had secured
a P34,000.00 loan payable on October 19, 1989, evidenced by a receipt which petitioner had misplaced. Although respondents
specifically denied in paragraph 2.11 of their Answer the allegations in paragraph 2(I) of the complaint, they merely alleged that "they
have not received sums of money from the plaintiff without any receipt therefor."

Respondents, likewise, failed to specifically deny another allegation in the complaint that they had secured a P100,000.00 loan from
petitioner on July 14, 1989; that the loan was payable on October 14, 1989; and evidenced by a receipt which petitioner claimed to
have lost. Neither did respondents deny the allegation that respondents admitted their loan of P100,000.00 in the counter-affidavit of
respondent Felicidad, which was appended to the complaint as Annex "A." In fine, respondents had admitted the existence of
their P773,000.00 loan from petitioner.

We agree with the finding of the CA that petitioner had no right to collect from respondents the total amount of P301,000.00, which
includes more than P178,980.00 which respondent Felicidad collected from Tibong, Dalisay, Morada, Chomacog, Cabang, Casuga,
Gelacio, and Manuel. Petitioner cannot again collect the same amount from respondents; otherwise, she would be enriching herself at
their expense. Neither can petitioner collect from respondents more than P103,500.00 which she had already collected from Nimo,
Cantas, Rivera, Donguis, Fernandez and Ramirez.

There is no longer a need for the Court to still resolve the issue of whether respondents' obligation to pay the balance of their loan
account to petitioner was partially extinguished by the promissory notes executed by Juliet Tibong, Corazon Dalisay, Rita Chomacog,
Carmelita Casuga, Merlinda Gelacio and Antoinette Manuel because, as admitted by petitioner, she was able to collect the amounts
under the notes from said debtors and applied them to respondents' accounts.

Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the ways by which obligations are extinguished.
Obligations may be modified by changing their object or principal creditor or by substituting the person of the debtor.63 The burden to
prove the defense that an obligation has been extinguished by novation falls on the debtor.64 The nature of novation was extensively
explained in Iloilo Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr.,65 as follows:

Novation may either be extinctive or modificatory, much being dependent on the nature of the change and the intention of the
parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is implied, the
acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the
emergence of the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total
on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they
can stand together, each one having an independent existence; if they cannot and are irreconciliable, the subsequent
obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a
new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the
birth of a valid new obligation. Novation is merely modificatory where the change brought about by any subsequent agreement
is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay); in this instance, the
new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of
its provisions.66 (Citations Omitted)

Novation which consists in substituting a new debtor (delegado) in the place of the original one (delegante) may be made even without
the knowledge or against the will of the latter but not without the consent of the creditor. Substitution of the person of the debtor may be
effected by delegacion, meaning, the debtor offers, and the creditor (delegatario), accepts a third person who consents to the
substitution and assumes the obligation. Thus, the consent of those three persons is necessary.67 In this kind of novation, it is not
enough to extend the juridical relation to a third person; it is necessary that the old debtor be released from the obligation, and the third
person or new debtor take his place in the relation.68 Without such release, there is no novation; the third person who has assumed the
obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and the new debtor
are considered obligated jointly.69

In Di Franco v. Steinbaum,70 the appellate court ruled that as to the consideration necessary to support a contract of novation, the rule is
the same as in other contracts. The consideration need not be pecuniary or even beneficial to the person promising. It is sufficient if it
be a loss of an inconvenience, such as the relinquishment of a right or the discharge of a debt, the postponement of a remedy, the
discontinuance of a suit, or forbearance to sue.

In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court of Appeals ruled that the theory of novation is that the new debtor
contracts with the old debtor that he will pay the debt, and also to the same effect with the creditor, while the latter agrees to
accept the new debtor for the old. A novation is not made by showing that the substituted debtor agreed to pay the debt; it must
appear that he agreed with the creditor to do so. Moreover, the agreement must be based on the consideration of the creditor's
agreement to look to the new debtor instead of the old. It is not essential that acceptance of the terms of the novation and release
of the debtor be shown by express agreement. Facts and circumstances surrounding the transaction and the subsequent conduct of
the parties may show acceptance as clearly as an express agreement, albeit implied.72

We find in this case that the CA correctly found that respondents' obligation to pay the balance of their account with petitioner was
extinguished, pro tanto, by the deeds of assignment of credit executed by respondent Felicidad in favor of petitioner.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as
sale, dation in payment, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to
another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the
debtor.73 It may be in the form of sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a
release from his debt, assigns to his creditor a credit he has against a third person.74

In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion en pago is the delivery and transmission of ownership of a thing by
the debtor to the creditor as an accepted equivalent of the performance of the obligation. It is a special mode of payment where the
debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really
partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is
to be charged against the debtor's obligation. As such, the essential elements of a contract of sale, namely, consent, object certain, and
cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of
the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the
contract of sale, while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be it
sale or novation, to have the effect of totally extinguishing the debt or obligation.76

The requisites for dacion en pago are: (1) there must be a performance of the prestation in lieu of payment (animo solvendi) which may
consist in the delivery of a corporeal thing or a real right or a credit against the third person; (2) there must be some difference between
the prestation due and that which is given in substitution (aliud pro alio); and (3) there must be an agreement between the creditor and
debtor that the obligation is immediately extinguished by reason of the performance of a prestation different from that due.77

All the requisites for a valid dation in payment are present in this case. As gleaned from the deeds, respondent Felicidad assigned to
petitioner her credits "to make good" the balance of her obligation. Felicidad testified that she executed the deeds to enable her to
make partial payments of her account, since she could not comply with petitioner's frenetic demands to pay the account in cash.
Petitioner and respondent Felicidad agreed to relieve the latter of her obligation to pay the balance of her account, and for petitioner to
collect the same from respondent's debtors.

Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to affix their conformity to the deeds. In an assignment of
credit, however, the consent of the debtor is not essential for its perfection; the knowledge thereof or lack of it affecting only the
efficaciousness or inefficaciousness of any payment that might have been made. The assignment binds the debtor upon acquiring
knowledge of the assignment but he is entitled, even then, to raise against the assignee the same defenses he could set up against the
assignor78 necessary in order that assignment may fully produce legal effects. Thus, the duty to pay does not depend on the consent of
the debtor. The purpose of the notice is only to inform that debtor from the date of the assignment. Payment should be made to the
assignee and not to the original creditor.

The transfer of rights takes place upon perfection of the contract, and ownership of the right, including all appurtenant accessory rights,
is acquired by the assignee79 who steps into the shoes of the original creditor as subrogee of the latter80 from that amount, the
ownership of the right is acquired by the assignee. The law does not require any formal notice to bind the debtor to the assignee, all
that the law requires is knowledge of the assignment. Even if the debtor had not been notified, but came to know of the assignment by
whatever means, the debtor is bound by it. If the document of assignment is public, it is evidence even against a third person of the
facts which gave rise to its execution and of the date of the latter. The transfer of the credit must therefore be held valid and effective
from the moment it is made to appear in such instrument, and third persons must recognize it as such, in view of the authenticity of the
document, which precludes all suspicion of fraud with respect to the date of the transfer or assignment of the credit.81

As gleaned from the deeds executed by respondent Felicidad relative to the accounts of her other debtors, petitioner was authorized to
collect the amounts of P6,000.00 from Cabang, and P63,600.00 from Cirilo. They obliged themselves to pay petitioner. Respondent
Felicidad, likewise, unequivocably declared that Cabang and Cirilo no longer had any obligation to her.

Equally significant is the fact that, since 1990, when respondent Felicidad executed the deeds, petitioner no longer attempted to collect
from respondents the balance of their accounts. It was only in 1999, or after nine (9) years had elapsed that petitioner attempted to
collect from respondents. In the meantime, petitioner had collected from respondents' debtors the amount of P301,000.00.

While it is true that respondent Felicidad likewise authorized petitioner in the deeds to collect the debtors' accounts, and for the latter to
pay the same directly, it cannot thereby be considered that respondent merely authorized petitioner to collect the accounts of
respondents' debtors and for her to apply her collections in partial payments of their accounts. It bears stressing that petitioner, as
assignee, acquired all the rights and remedies passed by Felicidad, as assignee, at the time of the assignment.82 Such rights and
remedies include the right to collect her debtors' obligations to her.

Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that case, the Court ruled that the mere fact that novation
does not follow as a matter of course when the creditor receives a guaranty or accepts payments from a third person who has agreed to
assume the obligation when there is no agreement that the first debtor would be released from responsibility. Thus, the creditor can still
enforce the obligation against the original debtor.

In the present case, petitioner and respondent Felicidad agreed that the amounts due from respondents' debtors were intended to
"make good in part" the account of respondents. Case law is that, an assignment will, ordinarily, be interpreted or construed in
accordance with the rules of construction governing contracts generally, the primary object being always to ascertain and carry out the
intention of the parties. This intention is to be derived from a consideration of the whole instrument, all parts of which should be given
effect, and is to be sought in the words and language employed.83

Indeed, the Court must not go beyond the rational scope of the words used in construing an assignment, words should be construed
according to their ordinary meaning, unless something in the assignment indicates that they are being used in a special sense. So, if
the words are free from ambiguity and expressed plainly the purpose of the instrument, there is no occasion for interpretation; but
where necessary, words must be interpreted in the light of the particular subject matter.84 And surrounding circumstances may be
considered in order to understand more perfectly the intention of the parties. Thus, the object to be accomplished through the
assignment, and the relations and conduct of the parties may be considered in construing the document.

Although it has been said that an ambiguous or uncertain assignment should be construed most strictly against the assignor, the
general rule is that any ambiguity or uncertainty in the meaning of an assignment will be resolved against the party who prepared it;
hence, if the assignment was prepared by the assignee, it will be construed most strictly against him or her.85 One who chooses the
words by which a right is given ought to be held to the strict interpretation of them, rather than the other who only accepts them.86
Considering all the foregoing, we find that respondents still have a balance on their account to petitioner in the principal amount
of P33,841.00, the difference between their loan of P773,000.00 less P585,659.00, the payment of respondents' other debtors
amounting to P103,500.00, and the P50,000.00 payment made by respondents.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision and Resolution of the Court of Appeals
are AFFIRMED with MODIFICATION in that the balance of the principal account of the respondents to the petitioner is P33,841.00. No
costs.

SO ORDERED.
A.C. No. 6955             July 27, 2006

MAR YUSON, complainant, 
vs.
ATTY. JEREMIAS R. VITAN, respondent.

DECISION

PANGANIBAN,  C.J.:

Once again this Court exhorts members of the bar to live up to the strictures of the Lawyers' Oath, the Code of Professional
Responsibility, and the Canons of Professional Ethics. Otherwise, they shall be sanctioned by this Court.

The Case

Before us is a Letter-Complaint1 for the disbarment of Atty. Jeremias R. Vitan, filed by Mar Yuson with the Commission on Bar
Discipline (CBD) of the Integrated Bar of the Philippines (IBP). Respondent was accused of taking advantage of complainant's
generosity and credulity.

On August 5, 2004, IBP-CBD directed Atty. Vitan to submit his Answer within 15 days from receipt of the Order;2otherwise, he would be
considered in default and the case heard ex parte.

Because respondent failed to submit his Answer within the given period, the CBD considered his failure and non-appearance as a
waiver of his right to participate in the proceedings.3 Thus, the hearing scheduled for August 11, 2005, pushed through, with the original
copies of the checks he had issued presented by complainant as evidence. Afterwards, the CBD issued an Order submitting the case
for Resolution.4 On August 23, 2005, Commissioner Milagros V. San Juan rendered her Report and Recommendation.5

Respondent denied having received a copy of the Complaint against him and alleged that it was only on August 24, 2005, that he
received the Order submitting the case for resolution. Thus, he filed an Urgent Motion to Revive/Re-open and with Leave to Admit
Attached Answer.6

In its Resolution No. XVII-2005-101 dated October 22, 2005, the IBP Board of Directors adopted and approved, with modification, the
investigating commissioner's Report and Recommendation. Upon respondent was imposed the penalty of suspension from the practice
of law for two years, after the board found that he had taken advantage of complainant through deceit and dishonesty. The lawyer was
further ordered to give back the money he had received from complainant.

The Facts

Complainant Mar Yuson was a taxi driver with eight children. In October 2002, he received a sum of money by way of inheritance.
According to him, he and his wife intended to use the money to purchase a taxi, repair their dilapidated house, and hold a debut party
for their daughter.7

They were able to purchase a secondhand taxi, and Atty. Vitan helped him with all the legal matters concerning this purchase.
Regrettably, their other plans were put on hold, because the lawyer borrowed P100,000 from them in December 2002. It was agreed
that the loan would be repaid before the end of the following year,8 in time for the debut on November 24, 2003.9

To guarantee payment, respondent executed in favor of complainant several postdated checks to cover the loaned amount. Those
checks, however, turned out to be worthless, because they had been drawn against the lawyer's closed account in the Bank of
Commerce in Escolta, Manila. The six dishonored checks were presented during the hearing before the IBP commissioner.10

Complainant maintained that he had repeatedly tried to recover the debt, only to be turned away empty-handed each time. He
conceded, though, that respondent had given an undisclosed amount covered by the checks dated January and February 2003.11 The
amounts covered by the dishonored checks remained unpaid.

This development prompted complainant to seek the aid of the IBP National Committee on Legal Aid (NCLA) in obtaining payment. On
November 14, 2003, the IBP-NCLA, through Deputy Director Rosalie J. de la Cruz, sent him a letter.12 It informed him of the impending
administrative case and advised him to confer with complainant, presumably to settle the matter. Upon receipt13 of the letter, he again
gave assurances that he would pay the loan in time for the debut.14

When the date passed without any payment, complainant demanded a collateral to secure the loan. Thus, in his favor, Atty. Vitan
executed a document denominated as a Deed of Absolute Sale, covering the latter's parcel of land located in Sta. Maria, Bulacan.
According to complainant, their intention was to transfer the title of the property to him temporarily, so that he could either sell or
mortgage15 it. It was further agreed that, if it was mortgaged, respondent would redeem it as partial or full payment of the loan.16

Curiously, however, the parties executed a second Deed of Absolute Sale,17 this time in favor of Atty. Vitan, with complainant as vendor.
The purpose of this particular document was not explained by either party.

On April 12, 2004, complainant was able to mortgage18 the property for P30,000.19 Contrary to their earlier agreement, respondent did
not redeem it from the mortgagee and, instead, simply sent complainant a letter20 dated July 7, 2004, promising to pay on or before July
12, 2004. As this promise was not fulfilled, the mortgagee demanded payment from complainant and thereby allegedly exposed the
latter to shame and ridicule.21

On July 19, 2004, IBP-NCLA sent another letter22 on behalf of complainant. Respondent was informed that an administrative case would
be filed against him, unless he settled his obligations by July 30, 2004, the date given by complainant.

On August 30, 2004, the IBP-NCLA received the reply23 dated July 30, 2004, submitted by Atty. Vitan who explained that he had
already settled his obligation. He maintained that he had in fact executed, in complainant's favor, a Deed of Absolute Sale over his 203-
square-meter residential property in Sta. Maria, Bulacan. He clarified that "[their] understanding was that [complainant] ha[d] the option
to use, mortgage or sell [the property] and return to me the excess of the proceeds after obtaining his money represented by my six (6)
dishonored checks."24Interestingly, respondent attached the Deed of Absolute Sale in which he was the vendee and complainant the
vendor.25 It appears that this was the second Deed of Absolute Sale, also referred to in the Complaint.26

Only after the IBP investigating commissioner had rendered her Report and Recommendation27 did Atty. Vitan submit his Answer to the
Letter-Complaint. He called the second document a "Counter Deed of Sale," executed as a "sort of collateral/security for the account of
[his] liaison officer [Evelyn Estur]."28 He admitted having given several postdated checks amounting to P100,000, supposedly to
guarantee the indebtedness of Estur to complainant. Atty. Vitan argued for the first time that it was she who had incurred the debts, and
that he had acted only as a "character reference and/or guarantor."29 He maintained that he had given in to the one-sided transactions,
because he was "completely spellbound by complainant's seeming sincerity and kindness."30 To corroborate his statements, he
attached Estur's Affidavit.31

Report of the Investigating Commissioner

In her Report and Recommendation, Commissioner San Juan recommended that Atty. Vitan be suspended until his restitution of the
amount he had borrowed. She held that respondent, having taken advantage of complainant and thus shown dishonesty and
untrustworthiness, did not deserve to retain his membership in the bar.

On November 24, 2005, the Supreme Court received the IBP Resolution adopting, with modification, the Report and Recommendation
of the investigating commissioner.

The Court's Ruling

We agree with the findings of the IBP Board of Governors, but reduce the period of suspension to six months.

Respondent's Administrative Liability

Lawyers are instruments for the administration of justice. They are expected to maintain not only legal proficiency but also a high
standard of ethics, honesty, integrity and fair dealing. In this way, the people's faith and confidence in the judicial system is ensured.32

In the present case, Atty. Vitan undoubtedly owed money to complainant. In a letter33 to IBP Deputy Director de la Cruz, respondent
admitted having incurred the P100,000 loan. It was only in his Answer34 that the lawyer suddenly denied that he had personally incurred
this obligation. This time, he pointed to his employee, Estur, as the true debtor. We find his version of the facts implausible.

First, the story involving a certain Evelyn Estur was clearly a mere afterthought, conjured simply to escape his liability. If it were true that
it was she who owed the money, he should have mentioned this alleged fact in his letter to the IBP NCLA deputy director. Instead,
respondent was completely silent about Estur and merely asserted that he had already settled his debt with complainant.

Second, the promise of Atty. Vitan to settle his obligations on particular dates is contained in two handwritten notes signed by him and
worded as follows:

"I undertake to settle the financial obligations of P100,000 – plus before the end of the year."35

"Mar:

"We will settle on July 12, 2004, on or before said date."36

The wordings of these promissory notes disclose that he had a personal obligation to complainant, without any mention of Estur at all. If
it were true that Atty. Vitan had executed those notes for the account of his liaison officer, he should have used words to that effect. As
a lawyer, he was aware that the preparation of promissory notes was not a "mere formality;" it had legal consequences. It is quite far-
fetched for a lawyer to assume the role of guarantor, without saying so in the notes.

A lawyer may be disciplined for evading the payment of a debt validly incurred.37 In this case, the failure of Atty. Vitan to pay his debt for
over three years despite repeated demands puts in question his standing as a member of the bar. Worse, he made several promises to
pay his debt promptly, but reneged on all of them. He even started to hide from complainant according to the latter .38

Failure to honor just debts, particularly from clients, constitutes dishonest conduct that does not speak well of a member of the bar.39 It
is vital that a lawyer's conduct be kept beyond reproach and above suspicion at all times. Rule 1.01 of the Code of Professional
Responsibility clearly provides that lawyers must not engage in unlawful, immoral or deceitful conduct. They must comport themselves
in a manner that will secure and preserve the respect and confidence of the public for the legal profession.40

Atty. Vitan contends that his obligation was already extinguished, because he had allegedly sold his Bulacan property to
complainant.41 Basically, respondent is asserting that what had transpired was a dation in payment. Governed by the law on sales, it is a
transaction that takes place when a piece of property is alienated to the creditor in satisfaction of a debt in money.42 It involves delivery
and transmission of ownership of a thing -- by the debtor to the creditor -- as an accepted equivalent of the performance of the
obligation.43

Going over the records of this case, we find the contention of Atty. Vitan undeserving of credence. The records reveal that he did not
really intend to sell and relinquish ownership over his property in Sta. Maria, Bulacan, notwithstanding the execution of a Deed of
Absolute Sale in favor of complainant. The second Deed of Absolute Sale, which reconveyed the property to respondent, is proof that
he had no such intention. This second Deed, which he referred to as his "safety net,"44 betrays his intention to counteract the effects of
the first one .

In a manner of speaking, Atty. Vitan was taking back with his right hand what he had given with his left. The second Deed of Absolute
Sale returned the parties right back where they started, as if there were no sale in favor of complainant to begin with. In effect, on the
basis of the second Deed of Sale, respondent took back and asserted his ownership over the property despite having allegedly sold it.
Thus, he fails to convince us that there was a bona fide dation in payment or sale that took place between the parties; that is, that there
was an extinguishment of obligation.

It appears that the true intention of the parties was to use the Bulacan property to facilitate payment. They only made it appear that the
title had been transferred to complainant to authorize him to sell or mortgage the property.45Atty. Vitan himself admitted in his letter
dated July 30, 2004, that their intention was to convert the property into cash, so that payment could be obtained by complainant and
the excess returned to respondent.46 The records, however, do not show that the proceeds derived were sufficient to discharge the
obligation of the lawyer fully; thus, he is still liable to the extent of the deficiency.

We hasten to add, however, that this administrative case is not the proper venue for us to determine the extent of the remaining liability.
This Court will not act as a collection agency from faltering debtors, when the amount of the indebtedness is indefinite and disputed.47

Nevertheless, the records satisfactorily reveal the failure of respondent to live up to his duties as a lawyer in consonance with the
strictures of the Lawyer's Oath, the Code of Professional Responsibility, and the Canons of Professional Ethics, thereby degrading not
only his person but his profession as well. So far, we find that his lack of sincerity in fulfilling his obligations is revealed by his acts of
issuing promissory notes and reneging on them; executing a simulated Deed of Absolute Sale; and breaking his promise to redeem the
property from the mortgagee.

The repeated failure of Atty. Vitan to fulfill his promise puts in question his integrity and character. Indeed, not only his integrity as an
individual but, more important, his stature as a member of the bar is affected by his acts of welching on his promises and misleading
complainant. Canon 1 and Rule 1.01 of the Code of Professional Responsibility explicitly state thus:

"CANON 1 — A lawyer shall uphold the constitution, obey the laws of the land and promote respect for law and legal
processes.

"Rule 1.01 — A lawyer shall not engage in unlawful, dishonest, immoral or deceitful conduct."

Any wrongdoing, whether professional or nonprofessional, indicating unfitness for the profession justifies disciplinary action.48

There is yet another reason to find Atty. Vitan administratively liable. In his letter of July 30, 2004, was an admission that the personal
checks he issued in favor of complainant had all been dishonored.49 Whether those checks were issued for the account of respondent or
of Estur is not important. The fact remains that the lawyer knowingly issued worthless checks and thus revealed his disposition to
defraud complainant.

The act of a lawyer in issuing a check without sufficient funds to cover them -- or, worse, drawn against a closed account --constitutes
such willful dishonesty and unethical conduct as to undermine the public confidence in the law and in lawyers.50 The act also manifests
a low regard for the Oath taken by the lawyer upon joining the profession, whose image should be held in high esteem, not seriously
and irreparably tarnished.51

Moreover, the inimical effect of the issuance of worthless checks has been recognized by this Court in an earlier case, from which we
quote:

"[T]he effect [of issuance of worthless checks] transcends the private interests of the parties directly involved in the transaction
and touches the interests of the community at large. The mischief it creates is not only a wrong to the payee or holder, but also
an injury to the public since the circulation of valueless commercial papers can very well pollute the channels of trade and
commerce, injure the banking system and eventually hurt the welfare of society and the public interest."52

We have also held that the deliberate failure to pay just debts and the issuance of worthless checks constitute gross misconduct,53 for
which a lawyer may be sanctioned with one year's suspension from the practice of law,54 or a suspension of six months upon partial
payment of the obligation.55

In the instant case, complainant himself admits that respondent had already paid the amounts covered by the January and February
checks.56 Thus, there has been a partial payment that justifies a modification of IBP's recommended penalty.

WHEREFORE, Atty. Jeremias R. Vitan is hereby found guilty of gross misconduct and SUSPENDED from the practice of law for six (6)
months, effective upon his receipt of this Decision, with the warning that a repetition of the same or any other misconduct will be dealt
with more severely.

Let a copy of this Decision be entered in respondent's record as a member of the Bar, and notice served on the Integrated Bar of the
Philippines and on the Office of the Court Administrator for circulation to all courts in the country.

SO ORDERED.
G.R. No. 82508 September 29, 1989

FILINVEST CREDIT CORPORATION, petitioner, 

vs.
THE COURT OF APPEALS, JOSE SY BANG and ILUMINADA TAN SY BANG,*respondents.

Labaquis, Loyola, Angara and Associates for petitioner.

Alfredo 1. Raya for private respondents.

SARMIENTO, J.:

This is a petition for review on certiorari of the decision,   dated March 17, 1988, of the Court of Appeals which affirmed with
1

modification the decision   of the Regional Trial Court of Quezon, Branch LIX, Lucena City. The controversy stemmed from the following
2

facts: The private respondents, the spouses Jose Sy Bang and Iluminada Tan, were engaged in the sale of gravel produced from
crushed rocks and used for construction purposes. In order to increase their production, they engaged the services of Mr. Ruben
Mercurio, the proprietor of Gemini Motor Sales in Lucena City, to look for a rock crusher which they could buy. Mr. Mercurio referred the
private respondents to the Rizal Consolidated Corporation which then had for sale one such machinery described as:

ONE UNIT LIPPMAN PORTABLE CRUSHING PLANT (RECONDITIONED) [sic]

JAW CRUSHER-10xl6 DOUBLE ROLL CRUSHER 16x16

3 UNITS PRODUCT CONVEYOR

75 HP ELECTRIC MOTOR

8 PCS. BRAND NEW TIRES CHASSIS NO. 19696 GOOD RUNNING CONDITION  3

Oscar Sy Bang, a brother of private respondent Jose Sy Bang, went to inspect the machine at the Rizal Consolidated's plant site.
Apparently satisfied with the machine, the private respondents signified their intent to purchase the same. They were however
confronted with a problem-the rock crusher carried a cash price tag of P 550,000.00. Bent on acquiring the machinery, the private
respondents applied for financial assistance from the petitioner, Filinvest Credit Corporation. The petitioner agreed to extend to the
private respondents financial aid on the following conditions: that the machinery be purchased in the petitioner's name; that it be leased
(with option to purchase upon the termination of the lease period) to the private respondents; and that the private respondents execute
a real estate mortgage in favor of the petitioner as security for the amount advanced by the latter. Accordingly, on May 18,1981, a
contract of lease of machinery (with option to purchase) was entered into by the parties whereby the private respondents agreed to
lease from the petitioner the rock crusher for two years starting from July 5, 1 981 payable as follows:

P10,000.00 - first 3 months

23,000.00 - next 6 months

24,800.00 - next 15 months

The contract likewise stipulated that at the end of the two-year period, the machine would be owned by the private respondents. Thus,
the private respondents issued in favor of the petitioner a check for P150,550.00, as initial rental (or guaranty deposit), and twenty-four
(24) postdated checks corresponding to the 24 monthly rentals. In addition, to guarantee their compliance with the lease contract, the
private respondents executed a real estate mortgage over two parcels of land in favor of the petitioner. The rock crusher was delivered
to the private respondents on June 9, 1981. Three months from the date of delivery, or on September 7, 1981, however, the private
respondents, claiming that they had only tested the machine that month, sent a letter-complaint to the petitioner, alleging that contrary
to the 20 to 40 tons per hour capacity of the machine as stated in the lease contract, the machine could only process 5 tons of rocks
and stones per hour. They then demanded that the petitioner make good the stipulation in the lease contract. They followed that up with
similar written complaints to the petitioner, but the latter did not, however, act on them. Subsequently, the private respondents stopped
payment on the remaining checks they had issued to the petitioner.  5

As a consequence of the non-payment by the private respondents of the rentals on the rock crusher as they fell due despite the
repeated written demands, the petitioner extrajudicially foreclosed the real estate mortgage.   On April 18, 1983, the private
6

respondents received a Sheriff s Notice of Auction Sale informing them that their mortgaged properties were going to be sold at a public
auction on May 25, 1983 at 10:00 o'clock in the morning at the Office of the Provincial Sheriff in Lucena City to satisfy their
indebtedness to the petitioner.   To thwart the impending auction of their properties, the private respondents filed before the Regional
7

Trial Court of Quezon, on May 4, 1983,   a complaint against the petitioner, for the rescission of the contract of lease, annullment of the
8

real estate mortgage, and for injunction and damages, with prayer for the issuance of a writ of preliminary injunction.  On May 23, 1983,
9

three days before the scheduled auction sale, the trial court issued a temporary restraining order commanding the Provincial Sheriff of
Quezon, and the petitioner, to refrain and desist from proceeding with the public auction.   Two years later, on September 4, 1985, the
10

trial court rendered a decision in favor of the private respondents, the dispositive portion of which reads:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

1. making the injunction permanent;

2. rescinding the contract of lease of the machinery and equipment and ordering the plaintiffs to return to the
defendant corporation the machinery subject of the lease contract, and the defendant corporation to return to plaintiffs
the sum of P470,950.00 it received from the latter as guaranty deposit and rentals with legal interest thereon until the
amount is fully restituted;
 3. annulling the real estate mortgage constituted over the properties of the plaintiffs covered by Transfer Certificate of
Title Nos. T32480 and T-5779 of the Registry of Deeds of Lucena City;

4. ordering the defendant corporation to pay plaintiffs P30,000.00 as attorney's fees and the costs of the suit.

SO ORDERED.  11

Dissatisfied with the trial court's decision, the petitioner elevated the case to the respondent Court of Appeals.

On March 17, 1988, the appellate court, finding no error in the appealed judgment, affirmed the same in toto.  Hence, this petition.
12

Before us, the petitioner reasserts that the private respondents' cause of action is not against it (the petitioner), but against either the
Rizal Consolidated Corporation, the original owner-seller of the subject rock crusher, or Gemini Motors Sales which served as a conduit
facilitator of the purchase of the said machine. The petitioner argues that it is a financing institution engaged in quasi-banking activities,
primarily the lending of money to entrepreneurs such as the private respondents and the general public, but certainly not the leasing or
selling of heavy machineries like the subject rock crusher. The petitioner denies being the seller of the rock crusher and only admits
having financed its acquisition by the private respondents. Further, the petitioner absolves itself of any liability arising out of the lease
contract it signed with the private respondents due to the waiver of warranty made by the latter. The petitioner likewise maintains that
the private respondents being presumed to be knowledgeable about machineries, should be held responsible for the detection of
defects in the machine they had acquired, and on account of that, they are estopped from claiming any breach of warranty. Finally, the
petitioner interposed the defense of prescription, invoking Article 1571 of the Civil Code, which provides:

Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six months, from the delivery of the thing
sold.

We find the petitioner's first contention untenable. While it is accepted that the petitioner is a financing institution, it is not, however,
immune from any recourse by the private respondents. Notwithstanding the testimony of private respondent Jose Sy Bang that he did
not purchase the rock crusher from the petitioner, the fact that the rock crusher was purchased from Rizal Consolidated Corporation in
the name and with the funds of the petitioner proves beyond doubt that the ownership thereof was effectively transferred to it. It is
precisely this ownership which enabled the petitioner to enter into the "Contract of Lease of Machinery and Equipment" with the private
respondents.

Be that as it may, the real intention of the parties should prevail. The nomenclature of the agreement cannot change its true essence,
i.e., a sale on installments. It is basic that a contract is what the law defines it and the parties intend it to be, not what it is called by the
parties.   It is apparent here thatthe intent of the parties to the subject contract is for the so-called rentals to be the installment
13

payments. Upon the completion of the payments, then the rock crusher, subject matter of the contract, would become the property of
the private respondents. This form of agreement has been criticized as a lease only in name. Thus in Vda. de Jose v. Barrueco   we 14

stated:

Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain in that form, for one reason
or another, have frequently resorted to the device of making contracts in the form of leases either with options to the buyer to purchase
for a small consideration at the end of term, provided the so-called rent has been duly paid, or with stipulations that if the rent
throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such transactions are leases only in name. The so-
called rent must necessarily be regarded as payment of the price in installments since the due payment of the agreed amount results,
by the terms of bargain, in the transfer of title to the lessee.  15

The importance of the criticism is heightened in the light of Article 1484 of the new Civil Code which provides for the remedies of an
unpaid seller of movables on installment basis.

Article 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may
exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee's failure to pay
cover two or more installments. In this case, he shall have no further action against the purchaser to recover any
unpaid balance of the price. Any agreement to the contrary shall be void.

Under the aforequoted provision, the seller of movables in installments, in case the buyer fails to pay two or more installments may
elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser of the obligation; (2) cancel the sale; or (3)
foreclose the mortgage on the purchased property if one was constituted thereon. It is now settled that the said remedies are alternative
and not cumulative and therefore, the exercise of one bars the exercise of the others.

Indubitably, the device contract of lease with option to buy is at times resorted to as a means to circumvent Article 1484, particularly
paragraph (3) thereof.Through the set-up, the vendor, by retaining ownership over the property in the guise of being the lessor, retains,
likewise, the right to repossess the same, without going through the process of foreclosure, in the event the vendee-lessee defaults in
the payment of the installments. There arises therefore no need to constitute a chattel mortgage over the movable sold. More important,
the vendor, after repossessing the property and, in effect, canceling the contract of sale, gets to keep all the installments-cum-rentals
already paid. It is thus for these reasons that Article 1485 of the new Civil Code provides that:

Article 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with
option to buy, when the lessor has deprived the lessee of possession or enjoyment of the thing. (Emphasis ours.)

Unfortunately, even with the foregoing findings, we however fail to find any reason to hold the petitioner liable for the rock crusher's
failure to produce in accordance with its described capacity. According to the petitioner, it was the private respondents who chose,
inspected, and tested the subject machinery. It was only after they had inspected and tested the machine, and found it to their
satisfaction, that the private respondents sought financial aid from the petitioner. These allegations of t

he petitioner had never been rebutted by the private respondents. In fact, they were even admitted by the private respondents in the
contract they signed. Thus:

LESSEE'S SELECTION, INSPECTION AND VERIFICATION.-The LESSEE hereby confirms and acknowledges that he has
independently inspected and verified the leased property and has selected and received the same from the Dealer of his own choosing
in good order and excellent running and operating condition and on the basis of such verification, etc. the LESSEE has agreed to enter
into this Contract." 
16

Moreover, considering that between the parties, it is the private respondents, by reason of their business, who are presumed to be
more knowledgeable, if not experts, on the machinery subject of the contract, they should not therefore be heard now to complain of
any alleged deficiency of the said machinery. It is their failure or neglect to exercise the caution and prudence of an expert, or, at least,
of a prudent man, in the selection, testing, and inspection of the rock crusher that gave rise to their difficulty and to this conflict. A well-
established principle in law is that between two parties, he, who by his negligence caused the loss, shall bear the same.

At any rate, even if the private respondents could not be adjudged as negligent, they still are precluded from imputing any liability on
the petitioner. One of the stipulations in the contract they entered into with the petitioner is an express waiver of warranties in favor of
the latter. By so signing the agreement, the private respondents absolved the petitioner from any liability arising from any defect or
deficiency of the machinery they bought. The stipulation on the machine's production capacity being "typewritten" and that of the waiver
being "printed" does not militate against the latter's effectivity. As such, whether "a capacity of 20 to 40 tons per hour" is a condition or a
description is of no moment. What stands is that the private respondents had expressly exempted the petitioner from any warranty
whatsoever. Their Contract of Lease Of Machinery And Equipment states:

WARRANTY-LESSEE absolutely releases the lessor from any liability whatsoever as to any and all matters in relation to warranty in
accordance with the provisions hereinafter stipulated.  17

Taking into account that due to the nature of its business and its mode of providing financial assistance to clients, the petitioner deals in
goods over which it has no sufficient know-how or expertise, and the selection of a particular item is left to the client concerned, the
latter, therefore, shoulders the responsibility of protecting himself against product defects. This is where the waiver of warranties is of
paramount importance. Common sense dictates that a buyer inspects a product before purchasing it (under the principle of caveat
emptor or "buyer beware") and does not return it for defects discovered later on, particularly if the return of the product is not covered
by or stipulated in a contract or warranty. In the case at bar, to declare the waiver as non-effective, as the lower courts did, would impair
the obligation of contracts. Certainly, the waiver in question could not be considered a mere surplusage in the contract between the
parties. Moreover, nowhere is it shown in the records of the case that the private respondent has argued for its nullity or illegality. In any
event, we find no ambiguity in the language of the waiver or the release of warranty. There is therefore no room for any interpretation
as to its effect or applicability vis-a- vis the deficient output of the rock crusher. Suffice it to say that the private respondents have validly
excused the petitioner from any warranty on the rock crusher. Hence, they should bear the loss for any defect found therein.

WHEREFORE, the Petition is GRANTED; the Decision of the Court of Appeals dated March 17, 1988 is hereby REVERSED AND SET
ASIDE, and another one rendered DISMISSING the complaint. Costs against the private respondents.