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INCHAUSTI VS CROMWELL denomination of "prensaje," in addition to the price

expressly agreed upon the said hemp, sums


This is an appeal by the plaintiff from a judgment of the aggregating P31,080.
Court of First Instance of the city of Manila, the Hon.
Simplicio del Rosario presiding, dismissing the complaint X. That the plaintiff firm in estimating the amount due it
upon the merits after trial, without costs. as commissions on sales of hemp made by it for its
principals has always based the said amount on the total
The facts presented to this court are agreed upon by sum collected from the purchasers of the hemp,
both parties, consisting, in so far as they are material to including the charge made in each case under the
a decision of the case, in the following: denomination of "prensaje."

III. That the plaintiff firm for many years past has been XI. That the plaintiff has always paid to the defendant or
and now is engaged in the business of buying and selling to his predecessor in the office of the Collector of Internal
at wholesale hemp, both for its own account and on Revenue the tax collectible under the provisions of
commission. section 139 of Act No. 1189 upon the selling price
expressly agreed upon for all hemp sold by the plaintiff
IV. That it is customary to sell hemp in bales which are firm both for its own account and on commission, but has
made by compressing the loose fiber by means of not, until compelled to do so as hereinafter stated, paid
presses, covering two sides of the bale with matting, and the said tax upon sums received from the purchaser of
fastening it by means of strips of rattan; that the such hemp under the denomination of "prensaje."
operation of bailing hemp is designated among
merchants by the word "prensaje." XII. That of the 29th day of April, 1910, the defendant,
acting in his official capacity as Collector of Internal
V. That in all sales of hemp by the plaintiff firm, whether Revenue of the Philippine Islands, made demand in
for its own account or on commission for others, the price writing upon the plaintiff firm for the payment within the
is quoted to the buyer at so much per picul, no mention period of five (5) days of the sum of P1,370.68 as a tax of
being made of bailing; but with the tacit understanding, one third of one per cent on the sums of money
unless otherwise expressly agreed, that the hemp will be mentioned in Paragraph IX hereof, and which the said
delivered in bales and that, according to the custom defendant claimed to be entitled to receive, under the
prevailing among hemp merchants and dealers in the provisions of the said section 139 of Act No. 1189, upon
Philippine Islands, a charge, the amount of which the said sums of money so collected from purchasers of
depends upon the then prevailing rate, is to be made hemp under the denomination of "prensaje."
against the buyer under the denomination of "prensaje."
That this charge is made in the same manner in all cases, XIII. That on the 4th day of May, 1910, the plaintiff firm
even when the operation of bailing was performed by paid to the defendant under protest the said sum of
the plaintiff or by its principal long before the contract of P1,370.69, and on the same date appealed to the
sale was made. Two specimens of the ordinary form of defendant as Collector of Internal Revenue, against the
account used in these operations are hereunto ruling by which the plaintiff firm was required to make
appended, marked Exhibits A and B, respectively, and said payment, but defendant overruled said protest and
made a part hereof. adversely decided said appeal, and refused and still
refuses to return to plaintiff the said sum of P1,370.68 or
VI. That the amount of the charge made against hemp any part thereof.1awphil.net
buyers by the plaintiff firm and other sellers of hemp
under the denomination of "prensaje" during the period XIV. Upon the facts above set forth t is contended by the
involved in this litigation was P1.75 per bale; that the plaintiff that the tax of P1,370.68 assessed by the
average cost of the rattan and matting used on each defendant upon the aggregate sum of said charges
bale of hemp is fifteen (15) centavos and that the made against said purchasers of hemp by the plaintiff
average total cost of bailing hemp is one (1) peso per during the period in question, under the denomination of
bale. "prensaje" as aforesaid, namely, P411,204.35, is illegal
upon the ground that the said charge does not
VII. That insurance companies in the Philippine Islands, in constitute a part of the selling price of the hemp, but is a
estimating the insurable value of hemp always add to charge made for the service of baling the hemp, and
the quoted price of same the charge made by the seller that the plaintiff firm is therefore entitled to recover of the
under the denomination of "prensaje." defendant the said sum of P1,370.68 paid to him under
protest, together with all interest thereon at the legal rate
VII. That the average weight of a bale of hemp is two (2) since payment, and the costs of this action.
piculs (126.5 kilograms).
Upon the facts above stated it is the contention of the
IX. That between the first day of January, 1905, and the defendant that the said charge made under the
31st day of March, 1910, the plaintiff firm, in accordance denomination of "prensaje" is in truth and in fact a part
with the custom mentioned in paragraph V hereof, of the gross value of the hemp sold and of its actual
collected and received, under the denomination of selling price, and that therefore the tax imposed by
"prensaje," from purchasers of hemp sold by the said firm section 139 of Act No. 1189 lawfully accrued on said
for its own account, in addition to the price expressly sums, that the collection thereof was lawfully and
agreed upon for the said hemp, sums aggregating properly made and that therefore the plaintiff is not
P380,124.35; and between the 1st day of October, 1908, entitled to recover back said sum or any part thereof;
and the 1st day of March, 1910, collected for the and that the defendant should have judgment against
account of the owners of hemp sold by the plaintiff firm plaintiff for his costs.
in Manila on commission, and under the said

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Under these facts we are of the opinion that the Smith vs. N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on Sales,
judgment of the court below was right. It is one of the 98.) Where labor is employed on the materials of the
stipulations in the statement of facts that it is customary seller he can not maintain an action for work and labor.
to sell hemp in bales, and that the price quoted in the (Atkinson vs. Bell, 8 Barn. & C., 277; Lee vs. Griffin, 30 L.J.N.
market for hemp per picul is the price for the hemp S.Q.B., 252; Prescott vs. Locke, 51 N.H., 94.) If the article
baled. The fact is that among large dealers like the ordered by the purchaser is exactly such as the plaintiff
plaintiff in this case it is practically impossible to handle makes and keeps on hand for sale to anyone, and no
hemp without its being baled, and it is admitted by the change or modification of it is made at the defendant's
statement of facts, as well as demonstrated by the request, it is a contract of sale, even though it may be
documentary proof introduced in the case, that if the entirely made after, and in consequence of, the
plaintiff sold a quality of hemp it would be the under defendant's order for it. (Garbutt s. Watson, 5 Barn. &
standing, without words, that such hemp would be Ald., 613; Gardner vs. Joy, 9 Met., 177; Lamb vs. Crafts, 12
delivered in bales, and that the purchase price would Met., 353; Waterman vs. Meigs, 4 Cush., 497., Clark vs.
include the cost and expense of baling. In other words, Nichols, 107 Mass., 547; May vs. Ward, 134 Mass., 127;
it is the fact as stipulated, as well as it would be the fact Abbott vs. Gilchrist, 38 Me., 260; Crocket vs. Scribner, 64
of necessity, that in all dealings in hemp in the general Me., 105; Pitkin vs. Noyes, 48 N. H., 294; Prescott vs. Locke,
market the selling price consists of the value of the hemp 51 N. H., 94; Ellison vs. Brigham, 38 Vt., 64.) It has been
loose plus the cost and expense of putting it into held in Massachusetts that a contract to make is a
marketable form. In the sales made by the plaintiff, contract of sale if the article ordered is already
which are the basis of the controversy here, there were substantially in existence at the time of the order and
n services performed by him for his vendee. There was merely requires some alteration, modification, or
agreement that services should be performed. Indeed, adoption to the buyer's wishes or purposes. (Mixer vs.
at the time of such sales it was not known by the vendee Howarth, 21 Pick., 205.) It is also held in that state that a
whether the hemp was then actually baled or not. All contract for the sale of an article which the vendor in the
that he knew and all that concerned him was that the ordinary course of his business manufactures or procures
hemp should be delivered to him baled. He did not ask for the general market, whether the same is on hand at
the plaintiff to perform services for him, nor did the the time or not, is a contract for the sale of goods to
plaintiff agree to do so. The contract was single and which the statute of frauds applies. But if the goods are
consisted solely in the sale and purchase of hemp. The to be manufactured especially for the purchaser and
purchaser contracted for nothing else and the vendor upon his special order, and not for the general market,
agreed to deliver nothing else. the case is not within the statute. (Goddard vs. Binney,
115 Mass., 450.)
The word "price" signifies the sum stipulated as the
equivalent of the thing sold and also every incident It is clear to our minds that in the case at bar the baling
taken into consideration for the fixing of the price, put to was performed for the general market and was not
the debit of the vendee and agreed to by him. It is quite something done by plaintiff which was a result of any
possible that the plaintiff, in this case in connection with peculiar wording of the particular contract between him
the hemp which he sold, had himself already paid the and his vendee. It is undoubted that the plaintiff
additional expense of baling as a part of the purchase prepared his hemp for the general market. This would be
price which he paid and that he himself had received necessary. One whose exposes goods for sale in the
the hemp baled from his vendor. It is quite possible also market must have them in marketable form. The hemp
that such vendor of the plaintiff may have received the in question would not have been in that condition if it
same hemp from his vendor in baled form, that he paid had not been baled. the baling, therefore, was nothing
the additions cost of baling as a part of the purchase peculiar to the contract between the plaintiff and his
price which he paid. In such case the plaintiff performed vendee. It was precisely the same contract that was
no service whatever for his vendee, nor did the plaintiff's made by every other seller of hemp, engaged as was
vendor perform any service for him. the plaintiff, and resulted simply in the transfer of title to
goods already prepared for the general market. The
The distinction between a contract of sale and one for method of bookkeeping and form of the account
work, labor, and materials is tested by the inquiry rendered is not controlling as to the nature of the
whether the thing transferred is one no in existence and contract made. It is conceded in the case tat a
which never would have existed but for the order of the separate entry and charge would have been made for
party desiring to acquire it, or a thing which would have the baling even if the plaintiff had not been the one who
existed and been the subject of sale to some other baled the hemp but, instead, had received it already
person, even if the order had not been given. (Groves baled from his vendor. This indicates of necessity tat the
vs. Buck, 3 Maule & S., 178; Towers vs. Osborne, 1 Strange, mere fact of entering a separate item for the baling of
506; Benjamin on Sales, 90.) It is clear that in the case at the hemp is formal rather than essential and in no sense
bar the hemp was in existence in baled form before the indicates in this case the real transaction between the
agreements of sale were made, or, at least, would have parties. It is undisputable that, if the plaintiff had brought
been in existence even if none of the individual sales the hemp in question already baled, and that was the
here in question had been consummated. It would have hemp the sale which formed the subject of this
been baled, nevertheless, for sale to someone else, controversy, then the plaintiff would have performed no
since, according to the agreed statement of facts, it is service for his vendee and could not, therefore, lawfully
customary to sell hemp in bales. When a person charge for the rendition of such service. It is,
stipulates for the future sale of articles which he is nevertheless, admitted that in spite of that fact he would
habitually making, and which at the time are not made still have made the double entry in his invoice of sale to
or finished, it is essentially a contract of sale and not a such vendee. This demonstrates the nature of the
contract for labor. It is otherwise when the article is made transaction and discloses, as we have already said, that
pursuant to agreement. (Lamb vs. Crafts, 12 Met., 353; the entry of a separate charge for baling does not

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accurately describe the transaction between the convince the Bureau of Internal Revenue, it brought the
parties. matter to the Court of Tax Appeals, where it also failed.
Said the Court:
Section 139 [Act No. 1189] of the Internal Revenue Law
provides that: To support his contention that his client is an ordinary
contractor . . . counsel presented . . . duplicate copies of
There shall be paid by each merchant and letters, sketches of doors and windows and price
manufacturer a tax at the rate of one-third of one per quotations supposedly sent by the manager of the
centum on the gross value in money of all goods, wares Oriental Sash Factory to four customers who allegedly
and merchandise sold, bartered or exchanged in the made special orders to doors and window from the said
Philippine Islands, and that this tax shall be assessed on factory. The conclusion that counsel would like us to
the actual selling price at which every such merchant or deduce from these few exhibits is that the Oriental Sash
manufacturer disposes of his commodities. Factory does not manufacture ready-made doors, sash
and windows for the public but only upon special order
The operation of baling undoubtedly augments the of its select customers. . . . I cannot believe that petitioner
value of the goods. We agree that there can be no company would take, as in fact it has taken, all the
question that, if the value of the hemp were not trouble and expense of registering a special trade name
augmented to the amount of P1.75 per bale by said for its sash business and then orders company stationery
operation, the purchaser would not pay that sum. If one carrying the bold print "Oriental Sash Factory (Celestino
buys a bale of hemp at a stipulated price of P20, well Co & Company, Prop.) 926 Raon St. Quiapo, Manila, Tel.
knowing that there is an agreement on his part, express No. 33076, Manufacturers of all kinds of doors, windows,
or implied, to pay an additional amount of P1.75 for that sashes, furniture, etc. used season-dried and kiln-dried
bale, he considers the bale of hemp worth P21. 75. It is lumber, of the best quality workmanships" solely for the
agreed, as we have before stated, that hemp is sold in purpose of supplying the needs for doors, windows and
bales. Therefore, baling is performed before the sale. The sash of its special and limited customers. One ill note that
purchaser of hemp owes to the seller nothing whatever petitioner has chosen for its tradename and has offered
by reason of their contract except the value of the hemp itself to the public as a "Factory", which means it is out to
delivered. That value, that sum which the purchaser pays do business, in its chosen lines on a big scale. As a
to the vendee, is the true selling price of the hemp, and general rule, sash factories receive orders for doors and
every item which enters into such price is a part of such windows of special design only in particular cases but
selling price. By force of the custom prevailing among the bulk of their sales is derived from a ready-made doors
hemp dealers in the Philippine Islands, a purchaser of and windows of standard sizes for the average home.
hemp in the market, unless he expressly stipulates that it Moreover, as shown from the investigation of petitioner's
shall be delivered to him in loose form, obligates himself book of accounts, during the period from January 1,
to purchase and pay for baled hemp. Wheher or not 1952 to September 30, 1952, it sold sash, doors and
such agreement is express or implied, whether it is actual windows worth P188,754.69. I find it difficult to believe
or tacit, it has the same force. After such an agreement that this amount which runs to six figures was derived by
has once been made by the purchaser, he has no right petitioner entirely from its few customers who made
to insists thereafter that the seller shall furnish him with special orders for these items.
unbaled hemp. It is undoubted that the vendees, in the
sales referred to in the case at bar, would have no right, Even if we were to believe petitioner's claim that it does
after having made their contracts, to insists on the not manufacture ready-made sash, doors and windows
delivery of loose hemp with the purpose in view for the public and that it makes these articles only
themselves to perform the baling and thus save 75 special order of its customers, that does not make it a
centavos per bale. It is unquestioned that the seller, the contractor within the purview of section 191 of the
plaintiff, would have stood upon his original contract of national Internal Revenue Code. there are no less than
sale, that is, the obligation to deliver baled hemp, and fifty occupations enumerated in the aforesaid section of
would have forced his vendees to accept baled hemp, the national Internal Revenue Code subject to
he himself retaining among his own profits those which percentage tax and after reading carefully each and
accrued from the proceed of baling. every one of them, we cannot find under which the
business of manufacturing sash, doors and windows
We are of the opinion that the judgment appealed from upon special order of customers fall under the category
must be affirmed, without special finding as to costs, and of "road, building, navigation, artesian well, water
it is so ordered. workers and other construction work contractors" are
those who alter or repair buildings, structures, streets,
CELESTINO CO VS COLLECTOR highways, sewers, street railways railroads logging roads,
electric lines or power lines, and includes any other work
Appeal from a decision of the Court of Tax Appeals. for the construction, altering or repairing for which
machinery driven by mechanical power is used. (Payton
Celestino Co & Company is a duly registered general vs. City of Anadardo 64 P. 2d 878, 880, 179 Okl. 68).
copartnership doing business under the trade name of
"Oriental Sash Factory"al. From 1946 to 1951 it paid Having thus eliminated the feasibility off taxing petitioner
percentage taxes of 7 per cent on the gross receipts of as a contractor under 191 of the national Internal
its sash, door and window factory, in accordance with Revenue Code, this leaves us to decide the remaining
section one hundred eighty-six of the National Revenue issue whether or not petitioner could be taxed with lesser
Code imposing taxes on sale of manufactured articles. strain and more accuracy as seller of its manufactured
However in 1952 it began to claim liability only to the articles under section 186 of the same code, as the
contractor's 3 per cent tax (instead of 7 per cent) under respondent Collector of Internal Revenue has in fact
section 191 of the same Code; and having failed to

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been doing the Oriental Sash Factory was established in goods held is stock for sale; they are bought because
1946. they meet the specifications desired by the purchaser.

The percentage tax imposed in section 191 of our Tax Nobody will say that when a sawmill cuts lumber in
Code is generally a tax on the sales of services, in accordance with the peculiar specifications of a
contradiction with the tax imposed in section 186 of the customer-sizes not previously held in stock for sale to the
same Code which is a tax on the original sales of articles public-it thereby becomes an employee or servant of
by the manufacturer, producer or importer. (Formilleza's the customer,1 not the seller of lumber. The same
Commentaries and Jurisprudence on the National consideration applies to this sash manufacturer.
Internal Revenue Code, Vol. II, p. 744). The fact that the
articles sold are manufactured by the seller does not The Oriental Sash Factory does nothing more than sell
exchange the contract from the purview of section 186 the goods that it mass-produces or habitually makes;
of the National Internal Revenue Code as a sale of sash, panels, mouldings, frames, cutting them to such
articles. sizes and combining them in such forms as its customers
may desire.
There was a strong dissent; but upon careful
consideration of the whole matter are inclines to accept On the other hand, petitioner's idea of being a
the above statement of the facts and the law. The contractor doing construction jobs is untenable. Nobody
important thing to remember is that Celestino Co & would regard the doing of two window panels a
Company habitually makes sash, windows and doors, as construction work in common parlance.2
it has represented in its stationery and advertisements to
the public. That it "manufactures" the same is practically Appellant invokes Article 1467 of the New Civil Code to
admitted by appellant itself. The fact that windows and bolster its contention that in filing orders for windows and
doors are made by it only when customers place their doors according to specifications, it did not sell, but
orders, does not alter the nature of the establishment, for merely contracted for particular pieces of work or
it is obvious that it only accepted such orders as called "merely sold its services".
for the employment of such material-moulding, frames,
panels-as it ordinarily manufactured or was in a position Said article reads as follows:
habitually to manufacture.
A contract for the delivery at a certain price of an article
Perhaps the following paragraph represents in brief the which the vendor in the ordinary course of his business
appellant's position in this Court: manufactures or procures for the general market,
whether the same is on hand at the time or not, is a
Since the petitioner, by clear proof of facts not disputed contract of sale, but if the goods are to be
by the respondent, manufacturers sash, windows and manufactured specially for the customer and upon his
doors only for special customers and upon their special special order, and not for the general market, it is
orders and in accordance with the desired contract for a piece of work.
specifications of the persons ordering the same and not
for the general market: since the doors ordered by Don It is at once apparent that the Oriental Sash Factory did
Toribio Teodoro & Sons, Inc., for instance, are not in not merely sell its services to Don Toribio Teodoro & Co.
existence and which never would have existed but for (To take one instance) because it also sold the materials.
the order of the party desiring it; and since petitioner's The truth of the matter is that it sold materials ordinarily
contractual relation with his customers is that of a manufactured by it — sash, panels, mouldings — to
contract for a piece of work or since petitioner is Teodoro & Co., although in such form or combination as
engaged in the sale of services, it follows that the suited the fancy of the purchaser. Such new form does
petitioner should be taxed under section 191 of the Tax not divest the Oriental Sash Factory of its character as
Code and NOT under section 185 of the same Code." manufacturer. Neither does it take the transaction out of
(Appellant's brief, p. 11-12). the category of sales under Article 1467 above quoted,
because although the Factory does not, in the ordinary
But the argument rests on a false foundation. Any builder course of its business, manufacture and keep on stock
or homeowner, with sufficient money, may order doors of the kind sold to Teodoro, it could stock and/or
windows or doors of the kind manufactured by this probably had in stock the sash, mouldings and panels it
appellant. Therefore it is not true that it serves special used therefor (some of them at least).
customers only or confines its services to them alone.
And anyone who sees, and likes, the doors ordered by In our opinion when this Factory accepts a job that
Don Toribio Teodoro & Sons Inc. may purchase from requires the use of extraordinary or additional
appellant doors of the same kind, provided he pays the equipment, or involves services not generally performed
price. Surely, the appellant will not refuse, for it can easily by it-it thereby contracts for a piece of work — filing
duplicate or even mass-produce the same doors-it is special orders within the meaning of Article 1467. The
mechanically equipped to do so. orders herein exhibited were not shown to be special.
They were merely orders for work — nothing is shown to
That the doors and windows must meet desired call them special requiring extraordinary service of the
specifications is neither here nor there. If these factory.
specifications do not happen to be of the kind habitually
manufactured by appellant — special forms for sash, The thought occurs to us that if, as alleged-all the work
mouldings of panels — it would not accept the order — of appellant is only to fill orders previously made, such
and no sale is made. If they do, the transaction would orders should not be called special work, but regular
be no different from a purchasers of manufactured work. Would a factory do business performing only
special, extraordinary or peculiar merchandise?

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technical evaluation of the system in relation to the
Anyway, supposing for the moment that the transactions contract with petitioner. In his report, Sapico
were not sales, they were neither lease of services nor enumerated the defects of the system and concluded
contract jobs by a contractor. But as the doors and that it was "not capable of maintaining the desired room
windows had been admittedly "manufactured" by the temperature of 76ºF - 2ºF (Exhibit C)"5 .
Oriental Sash Factory, such transactions could be, and
should be taxed as "transfers" thereof under section 186 On the basis of this report, private respondent filed on
of the National Revenue Code. May 8, 1971 an action for damages against petitioner
with the then Court of First Instance of Rizal (Civil Case
The appealed decision is consequently affirmed. So No. 14712). The complaint alleged that the air-
ordered. conditioning system installed by petitioner did not
comply with the agreed plans and specifications.
ENGINEERING MACHINERY CORP VS CA Hence, private respondent prayed for the amount of
P210,000.00 representing the rectification cost,
Is a contract for the fabrication and installation of a P100,000.00 as damages and P15,000.00 as attorney's
central air-conditioning system in a building, one of "sale" fees.
or "for a piece of work"? What is the prescriptive period
for filing actions for breach of the terms of such Petitioner moved to dismiss the complaint, alleging that
contract? the prescriptive period of six months had set in pursuant
to Articles 1566 and 1567, in relation to Article 1571 of the
These are the legal questions brought before this Court Civil Code, regarding the responsibility of a vendor for
in this Petition for review on certiorari under Rule 45 of the any hidden faults or defects in the thing sold.
Rules of Court, to set aside the Decision1 of the Court of
Appeals2 in CA-G.R. No. 58276-R promulgated on Private respondent countered that the contract dated
November 28, 1978 (affirming in toto the decision3 dated September 10, 1962 was not a contract for sale but a
April 15, 1974 of the then Court of First Instance of Rizal, contract for a piece of work under Article 1713 of the
Branch II4 , in Civil Case No. 14712, which ordered Civil Code. Thus, in accordance with Article 1144 (1) of
petitioner to pay private respondent the amount the same Code, the complaint was timely brought within
needed to rectify the faults and deficiencies of the air- the ten-year prescriptive period.
conditioning system installed by petitioner in private
respondent's building, plus damages, attorney's fees and In its reply, petitioner argued that Article 1571 of the Civil
costs). Code providing for a six-month prescriptive period is
applicable to a contract for a piece of work by virtue of
By a resolution of the First Division of this Court dated Article 1714, which provides that such a contract shall be
November 13, 1995, this case was transferred to the Third. governed by the pertinent provisions on warranty of title
After deliberating on the various submissions of the and against hidden defects and the payment of price in
parties, including the petition, record on appeal, private a contract of sale6 .
respondent's comment and briefs for the petitioner and
the private respondent, the Court assigned the writing of The trial court denied the motion to dismiss. In its answer
this Decision to the undersigned, who took his oath as a to the complaint, petitioner reiterated its claim of
member of the Court on October 10, 1995. prescription as an affirmative defense. It alleged that
whatever defects might have been discovered in the
The Facts air-conditioning system could have been caused by a
variety of factors, including ordinary wear and tear and
Pursuant to the contract dated September 10, 1962 lack of proper and regular maintenance. It pointed out
between petitioner and private respondent, the former that during the one-year period that private respondent
undertook to fabricate, furnish and install the air- withheld final payment, the system was subjected to
conditioning system in the latter's building along Buendia "very rigid inspection and testing and corrections or
Avenue, Makati in consideration of P210,000.00. modifications effected" by petitioner. It interposed a
Petitioner was to furnish the materials, labor, tools and all compulsory counterclaim suggesting that the complaint
services required in order to so fabricate and install said was filed "to offset the adverse effects" of the judgment
system. The system was completed in 1963 and in Civil Case No. 71494, Court of First Instance of Manila,
accepted by private respondent, who paid in full the involving the same parties, wherein private respondent
contract price. was adjudged to pay petitioner the balance of the
unpaid contract price for the air-conditioning system
On September 2, 1965, private respondent sold the installed in another building of private respondent,
building to the National Investment and Development amounting to P138,482.25.
Corporation (NIDC). The latter took possession of the
building but on account of NIDC's noncompliance with Thereafter, private respondent filed an ex-parte motion
the terms and conditions of the deed of sale, private for preliminary attachment on the strength of petitioner's
respondent was able to secure judicial rescission thereof. own statement to the effect that it had sold its business
The ownership of the building having been decreed and was no longer doing business in Manila. The trial
back to private respondent, he re-acquired possession court granted the motion and, upon private
sometime in 1971. It was then that he learned from some respondent's posting of a bond of F'50,000.00, ordered
NIDC, employees of the defects of the air-conditioning the issuance of a writ of attachment.
system of the building.
In due course, the trial court rendered a decision finding
Acting on this information, private respondent that petitioner failed to install certain parts and
commissioned Engineer David R. Sapico to render a accessories called for by the contract, and deviated

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from the plans of the system, thus reducing its reassessment of facts found by the lower courts is
operational effectiveness to the extent that 35 window- allowed are when the conclusion is a finding grounded
type units had to be installed in the building to achieve entirely on speculation, surmises or conjectures; when
a fairly desirable room temperature. On the question of the inference made is manifestly absurd, mistaken or
prescription, the trial court ruled that the complaint was impossible; when there is grave abuse of discretion in the
filed within the ten-year court prescriptive period appreciation of facts; when the judgment is premised on
although the contract was one for a piece of work, a misapprehension of facts; when the findings went
because it involved the "installation of an air- beyond the issues of the case and the same are contrary
conditioning system which the defendant itself to the admissions of both appellant and appellee. After
manufactured, fabricated, designed and installed." a careful study of the case at bench, we find none of
the above grounds present to justify the re-evaluation of
Petitioner appealed to the Court of Appeals, which the findings of fact made by the courts below.8
affirmed the decision of the trial court. Hence, it
instituted the instant petition. We see no valid reason to discard the factual
conclusions of the appellate court. . . . (I)t is not the
The Submissions of the Parties function of this Court to assess and evaluate all over
again the evidence, testimonial and documentary,
In the instant Petition, petitioner raised three issues. First, adduced by the parties, particularly where, such as
it contended that private respondent's acceptance of here, the findings of both the trial court and the
the work and his payment of the contract price appellate court on the matter coincide.9 (Emphasis
extinguished any liability with respect to the defects in supplied)
the air-conditioning system. Second, it claimed that the
Court of Appeals erred when it held that the defects in Hence, the first two issues will not be resolved as they
the installation were not apparent at the time of delivery raise questions of fact.
and acceptance of the work considering that private
respondent was not an expert who could recognize such Thus, the only question left to be resolved is that of
defects. Third, it insisted that, assuming arguendo that prescription. In their submissions, the parties argued
there were indeed hidden defects, private respondent's lengthily on the nature of the contract entered into by
complaint was barred by prescription under Article 1571 them, viz., whether it was one of sale or for a piece of
of the Civil Code, which provides for a six-month work.
prescriptive period.
Article 1713 of the Civil Code defines a contract for a
Private respondent, on the other hand, averred that the piece of work thus:
issues raised by petitioner, like the question of whether
there was an acceptance of the work by the owner and By the contract for a piece of work the contractor binds
whether the hidden defects in the installation could himself to execute a piece of work for the employer, in
have been discovered by simple inspection, involve consideration of a certain price or compensation. The
questions of fact which have been passed upon by the contractor may either employ only his labor or skill, or
appellate court. also furnish the material.

The Court's Ruling A contract for a piece of work, labor and materials may
be distinguished from a contract of sale by the inquiry as
The Supreme Court reviews only errors of law in petitions to whether the thing transferred is one not in existence
for review on certiorari under Rule 45. It is not the function and which would never have existed but for the order,
of this Court to re-examine the findings of fact of the of the person desiring it10 . In such case, the contract is
appellate court unless said findings are not supported by one for a piece of work, not a sale. On the other hand, if
the evidence on record or the judgment is based on a the thing subject of the contract would have existed and
misapprehension of facts7 of Appeals erred when it held been the subject of a sale to some other person even if
that the defects in the installation were not apparent at the order had not been given, then the contract is one
the time of delivery and acceptance of the work of sale11 .
considering that private respondent was not an expert
who could recognize such defects. Third. it insisted that, Thus, Mr. Justice Vitug12 explains that -
assuming arguendo that there were indeed hidden
defects, private respondent's complaint was barred by A contract for the delivery at a certain price of an article
prescription under Article 1571 of the Civil Code, which which the vendor in the ordinary course of his business
provides for a six-month prescriptive period. manufactures or procures for the general market,
whether the same is on hand at the time or not is a
Private respondent, on the other hand, averred that the contract of sale, but if the goods are to be
issues raised by petitioner, like the question of whether manufactured specially for the customer and upon his
here was an acceptance of the work by the owner and special order, and not for the general market, it is a
whether the hidden defects in the installation could contract for a piece of work (Art. 1467, Civil Code). The
have been discovered by simple inspection, involve mere fact alone that certain articles are made upon
questions of fact which have been passed upon by the previous orders of customers will not argue against the
appellate court. imposition of the sales tax if such articles are ordinarily
manufactured by the taxpayer for sale to the public
The Court has consistently held that the factual findings (Celestino Co. vs. Collector, 99 Phil. 841).
of the trial court, as well as the Court of Appeals, are final
and conclusive and may not be reviewed on appeal. To Tolentino, the distinction between the two contracts
Among the exceptional circumstances where a depends on the intention of the parties. Thus, if the

6
parties intended that at some future date an object has (redhibitory action) or to demand a proportionate
to be delivered, without considering the work or labor of reduction of the price (accion quanti manoris), with
the party bound to deliver, the contract is one of sale. damages in either case14 .
But if one of the parties accepts the undertaking on the
basis of some plan, taking into account the work he will In Villostas vs. Court of Appeals15 , we held that, "while it
employ personally or through another, there is a is true that Article 1571 of the Civil Code provides for a
contract for a piece of work13 . prescriptive period of six months for a redhibitory action,
a cursory reading of the ten preceding articles to which
Clearly, the contract in question is one for a piece of it refers will reveal that said rule may be applied only in
work. It is not petitioner's line of business to manufacture case of implied warranties"; and where there is an
air-conditioning systems to be sold "off-the-shelf." Its express warranty in the contract, as in the case at
business and particular field of expertise is the fabrication bench, the prescriptive period is the one specified in the
and installation of such systems as ordered by customers express warranty, and in the absence of such period,
and in accordance with the particular plans and "the general rule on rescission of contract, which is four
specifications provided by the customers. Naturally, the years (Article 1389, Civil Code) shall apply"16 .
price or compensation for the system manufactured and
installed will depend greatly on the particular plans and Consistent with the above discussion, it would appear
specifications agreed upon with the customers. that this suit is barred by prescription because the
complaint was filed more than four years after the
The obligations of a contractor for a piece of work are execution of the contract and the completion of the air-
set forth in Articles 1714 and 1715 of the Civil Code, which conditioning system.
provide:
However, a close scrutiny of the complaint filed in the
Art. 1714. If the contractor agrees to produce the trial court reveals that the original action is not really for
work from material furnished by him, he shall deliver the enforcement of the warranties against hidden defects,
thing produced to the employer and transfer dominion but one for breach of the contract itself. It alleged17 that
over the thing. This contract shall be governed by the the petitioner, "in the installation of the air conditioning
following articles as well as by the pertinent provisions on system did not comply with the specifications provided"
warranty of title and against hidden defects and the in the written agreement between the parties, "and an
payment of price in a contract of sale. evaluation of the air-conditioning system as installed by
the defendant showed the following defects and
Art. 1715. The contractor shall execute the work in violations of the specifications of the agreement, to wit:
such a manner that it has the qualities agreed upon and
has no defects which destroy or lessen its value or fitness GROUND FLOOR:
for its ordinary or stipulated use. Should the work be not
of such quality, the employer may require that the "A. RIGHT WING:
contractor remove the defect or execute another work.
If the contractor fails or refuses to comply with this Equipped with Worthington Compressor, Model 2VC4
obligation, the employer may have the defect removed directly driven by an Hp Elin electric motor 1750 rmp, 3
or another work executed, at the contractor's cost. phase, 60 cycles, 220 volts, complete with starter
evaporative condenser, circulating water pump, air
The provisions on warranty against hidden defects, handling unit air ducts.
referred to in Art. 1714 above-quoted, are found in
Articles 1561 and 1566, which read as follows: Defects Noted:

Art. 1561. The vendor shall be responsible for 1. Deteriorated evaporative condenser panels,
warranty against the hidden defects which the thing sold coils are full of scales and heavy corrosion is very evident.
may have, should they render it unfit for the use for which
it is intended, or should they diminish its fitness for such 2. Defective gauges of compressors;
use to such an extent that, had the vendee been aware
thereof, he would not have acquired it or would have 3. No belt guard on motor;
given a lower price for it; but said vendor shall not be
answerable for patent defects or those which may be 4. Main switch has no cover;
visible, or for those which are not visible if the vendee is
an expert who, by reason of his trade or profession, 5. Desired room temperature not attained;
should have known them.
Aside from the above defects, the following were noted
xxx xxx xxx not installed although provided in the specifications.

Art. 1566. The vendor is responsible to the vendee 1. Face by-pass damper of G.I. sheets No. 16. This
for any hidden faults or defects in the thing sold, even damper regulates the flow of cooled air depending on
though he was not aware thereof. room condition.

This provision shall not apply if the contrary has been 2. No fresh air intake provision were provided
stipulated, and the vendor was not aware of the hidden which is very necessary for efficient comfort cooling..
faults or defects in the thing sold.
3. No motor to regulate the face and by-pass
The remedy against violations of the warranty against damper.
hidden defects is either to withdraw from the contract

7
4. Liquid level indicator for refrigerant not The trial court, after evaluating the evidence presented,
provided. held that, indeed, petitioner failed to install items and
parts required in the contract and substituted some
5. Suitable heat exchanger is not installed. This is an other items which were not in accordance with the
important component to increase refrigeration specifications18 , thus:
efficiency.
From all of the foregoing, the Court is persuaded to
6. Modulating thermostat not provided. believe the plaintiff that not only had the defendant
failed to install items and parts provided for in the
7. Water treatment device for evaporative specifications of the air-conditioning system be installed,
condenser was not provided. like face and by-pass dampers and modulating
thermostat and many others, but also that there are
8. Liquid receiver not provided by sight glass. items, parts and accessories which were used and
installed on the air-conditioning system which were not
B. LEFT WING: in full accord with contract specifications. These
omissions to install the equipments, parts and accessories
Worthington Compressor Model 2VC4 is installed called for in the specifications of the contract, as well as
complete with 15 Hp electric motor, 3 phase, 220 volts 60 the deviations made in putting into the air-conditioning
cycles with starter. system equipments, parts and accessories not in full
accord with the contract specification naturally resulted
Defects Noted: to adversely affect the operational effectiveness of the
air-conditioning system which necessitated the
Same as right wing. except No. 4, All other defects on installation of thirty-five window type of air-conditioning
right wing are common to the left wing. units distributed among the different floor levels in order
to be able to obtain a fairly desirable room temperature
SECOND FLOOR: (Common up to EIGHT FLOORS) for the tenants and actual occupants of the building.
The Court opines and so holds that the failure of the
Compressors installed are MELCO with 7.5 Hp V-belt defendant to follow the contract specifications and said
driven by 1800 RPM, -220 volts, 60 cycles, 3 phase, Thrige omissions and deviations having resulted in the
electric motor with starters. operational ineffectiveness of the system installed makes
the defendant liable to the plaintiff in the amount
As stated in the specifications under, Section No. IV, the necessary to rectify to put the air conditioning system in
MELCO compressors do not satisfy the conditions stated its proper operational condition to make it serve the
therein due to the following: purpose for which the plaintiff entered into the contract
with the defendant.
1. MELCO Compressors are not provided with
automatic capacity unloader. The respondent Court affirmed the trial court's decision
thereby making the latter's findings also its own.
2. Not provided with oil pressure safety control.
Having concluded that the original complaint is one for
3. Particular compressors do not have provision for damages arising from breach of a written contract - and
renewal sleeves. not a suit to enforce warranties against hidden defects -
we here - with declare that the governing law is Article
Out of the total 15 MELCO compressors installed to serve 1715 (supra). However, inasmuch as this provision does
the 2nd floor up to 8th floors, only six (6) units are in not contain a specific prescriptive period, the general
operation and the rest were already replaced. Of the law on prescription, which is Article 1144 of the Civil
remaining six (6) units, several of them have been Code, will apply. Said provision states, inter alia, that
replaced with bigger crankshafts. actions "upon a written contract" prescribe in ten (10)
years. Since the governing contract was executed on
NINTH FLOOR: September 10, 1962 and the complaint was filed on May
8, 1971, it is clear that the action has not prescribed.
Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220
volts, 60 cycles, 1750 rpm, Higgs motors with starters. What about petitioner's contention that "acceptance of
the work by the employer relieves the contractor of
Defects Noted are similar to ground floor. liability for any defect in the work"? This was answered by
respondent Court19 as follows:
GENERAL REMARKS:
As the breach of contract which gave rise to the instant
Under Section III, Design conditions of specification for air case consisted in appellant's omission to install the
conditioning work, and taking into account "A" & "B" equipments (sic), parts and accessories not in
same, the present systems are not capable of accordance with the plan and specifications provided
maintaining the desired temperature of 76 = 2ºF (sic). for in the contract and the deviations made in putting
into the air conditioning system parts and accessories
The present tenant have installed 35 window type air not in accordance with the contract specifications, it is
conditioning units distributed among the different floor evident that the defect in the installation was not
levels. Temperature measurements conducted on apparent at the time of the delivery and acceptance of
March 29. 1971, revealed that 78ºF room (sic) is only the work, considering further that plaintiff is not an expert
maintained due to the additional window type units. to recognize the same. From the very nature of things, it
is impossible to determine by the simple inspection of air

8
conditioning system installed in an 8-floor building defendant Toy Master Manufacturing, Inc. ordering the
whether it has been furnished and installed as per latter to pay the former:
agreed specifications.
1. The amount of Two Hundred Eight Thousand Four
Verily, the mere fact that the private respondent Hundred Four (P208,404.00) Pesos with legal interest
accepted the work does not, ipso facto, relieve the thereon from July 5, 1989, until fully paid; and
petitioner from liability for deviations from and violations
of the written contract, as the law gives him ten (10) 2. The amount of Twenty Thousand (P20,000.00) Pesos as
years within which to file an action based on breach attorney's fees and the costs of this suit.
thereof.
The counterclaim on the other hand is hereby dismissed
WHEREFORE, the petition is hereby DENIED and the for lack of merit."10
assailed Decision is AFFIRMED. No costs.
Respondent Sio sought recourse in the Court of Appeals.
SO ORDERED. In its April 30, 1993 decision, the appellate court affirmed
the trial court decision. Respondent then filed a Motion
DINO VS CA for Reconsideration and a Supplemental Motion for
Reconsideration alleging therein that the petitioners'
Though people say, "better late than never", the law action for collection of sum of money based on a
frowns upon those who assert their rights past the breach of warranty had already prescribed. On January
eleventh hour. For failing to timely institute their action, 24, 1994, the respondent court reversed its decision and
the petitioners are forever barred from claiming a sum of dismissed petitioners' Complaint for having been filed
money from the respondent. beyond the prescriptive period. The amended decision
read in part, viz:
This is a petition for review on certiorari to annul and set
aside the amended decision of the respondent court "Even if there is failure to raise the affirmative defense of
dated January 24, 1994 reversing its April 30, 1993 prescription in a motion to dismiss or in an appropriate
decision and dismissing the plaintiff-petitioners' pleading (answer, amended or supplemental answer)
Complaint on the ground of prescription.The following and an amendment would no longer be feasible, still
undisputed facts gave rise to the case at bar: prescription, if apparent on the face of the complaint
may be favorably considered (Spouses Matias B. Aznar,
Petitioners spouses Dino, doing business under the trade III, et al. vs. Hon. Juanito A. Bernad, etc., supra, G.R.
name "Candy Claire Fashion Garment" are engaged in 81190, May 9, 1988). The rule in Gicano vs. Gegato
the business of manufacturing and selling shirts.1 (supra) was reiterated in Severo v. Court of Appeals,
Respondent Sio is part owner and general manager of a (G.R. No. 84051, May 19, 1989).
manufacturing corporation doing business under the
trade name "Universal Toy Master Manufacturing."2 WHEREFORE the Motion For Reconsideration is granted.
The judgment of this Court is set aside and judgment is
Petitioners and respondent Sio entered into a contract hereby rendered REVERSING the judgment of the trial
whereby the latter would manufacture for the petitioners court and dismissing plaintiff's complaint."11
20,000 pieces of vinyl frogs and 20,000 pieces of vinyl
mooseheads at P7.00 per piece in accordance with the Hence, this petition with the following assignment of
sample approved by the petitioners. These frogs and errors:
mooseheads were to be attached to the shirts
petitioners would manufacture and sell.3 I.

Respondent Sio delivered in several installments the The respondent Court of Appeals seriously erred in
40,000 pieces of frogs and mooseheads. The last delivery dismissing the complaint of the Petitioners on the ground
was made on September 28, 1988. Petitioner fully paid that the action had prescribed.
the agreed price.4 Subsequently, petitioners returned to
respondent 29,772 pieces of frogs and mooseheads for II.
failing to comply with the approved sample.5 The return
was made on different dates: the initial one on The respondent Court of Appeals seriously erred in
December 12, 1988 consisting of 1,720 pieces,6 the holding that the defense of prescription would still be
second on January 11, 1989,7 and the last on January considered despite the fact that it was not raised in the
17, 1989.8 answer, if apparent on the face of the complaint.

Petitioners then demanded from the respondent a We first determine the nature of the action filed in the
refund of the purchase price of the returned goods in the trial court to resolve the issue of prescription. Petitioners
amount of P208,404.00. As respondent Sio refused to claim that the Complaint they filed in the trial court on
pay,9 petitioners filed on July 24, 1989 an action for July 24, 1989 was one for the collection of a sum of
collection of a sum of money in the Regional Trial Court money. Respondent contends that it was an action for
of Manila, Branch 38. breach of warranty as the sum of money petitioners
sought to collect was actually a refund of the purchase
The trial court ruled in favor of the petitioners, viz: price they paid for the alleged defective goods they
bought from the respondent.
"WHEREFORE, judgment is hereby rendered in favor of
the plaintiffs Vicente and Inocencia Dino and against We uphold the respondent's contention.

9
The following provisions of the New Civil Code are allege that they did not readily see these hidden defects
apropos: upon their acceptance. A hidden defect is one which is
unknown or could not have been known to the
"Art. 1467. A contract for the delivery at a certain price vendee.15 Petitioners then returned to the respondent
of an article which the vendor in the ordinary course of 29,772 defective pieces of vinyl products and
his business manufactures or procures for the general demanded a refund of their purchase price in the
market, whether the same is on hand at the time or not, amount of P208,404.00. Having failed to collect this
is a contract of sale, but if the goods are to be amount, they filed an action for collection of a sum of
manufactured specially for the customer and upon his money.
special order, and not for the general market, it is a
contract for a piece of work." Article 1567 provides for the remedies available to the
vendee in case of hidden defects, viz:
"Art. 1713. By the contract for a piece of work the
contractor binds himself to execute a piece of work for "Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565
the employer, in consideration of a certain price or and 1566, the vendee may elect between withdrawing
compensation. The contractor may either employ only from the contract and demanding a proportionate
his labor or skill, or also furnish the material." reduction of the price, with damages in either case."

As this Court ruled in Engineering & Machinery By returning the 29,772 pieces of vinyl products to
Corporation v. Court of Appeals, et al.,12 "a contract for respondent and asking for a return of their purchase
a piece of work, labor and materials may be price, petitioners were in effect "withdrawing from the
distinguished from a contract of sale by the inquiry as to contract" as provided in Art. 1567. The prescriptive period
whether the thing transferred is one not in existence and for this kind of action is provided in Art. 1571 of the New
which would never have existed but for the order of the Civil Code, viz:
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 "Art. 1571. Actions arising from the provisions of the
subject of the contract would have existed and been preceding ten articles shall be barred after six months
the subject of a sale to some other person even if the from the delivery of the thing sold." (Emphasis supplied)
order had not been given then the contract is one of
sale."13 The contract between the petitioners and There is no dispute that respondent made the last
respondent stipulated that respondent would delivery of the vinyl products to petitioners on September
manufacture upon order of the petitioners 20,000 pieces 28, 1988. It is also settled that the action to recover the
of vinyl frogs and 20,000 pieces of vinyl mooseheads purchase price of the goods petitioners returned to the
according to the samples specified and approved by respondent was filed on July 24, 1989,16 more than nine
the petitioners. Respondent Sio did not ordinarily months from the date of last delivery. Petitioners having
manufacture these products, but only upon order of the filed the action three months after the six-month period
petitioners and at the price agreed upon.14 Clearly, the for filing actions for breach of warranty against hidden
contract executed by and between the petitioners and defects stated in Art. 1571,17 the appellate court
the respondent was a contract for a piece of work. At dismissed the action.
any rate, whether the agreement between the parties
was one of a contract of sale or a piece of work, the Petitioners fault the ruling on the ground that it was too
provisions on warranty of title against hidden defects in late in the day for respondent to raise the defense of
a contract of sale apply to the case at bar, viz: prescription. The law then applicable to the case at bar,
Rule 9, Sec. 2 of the Rules of Court, provides:
"Art. 1714. If the contractor agrees to produce the work
from material furnished by him, he shall deliver the thing "Defenses and objections not pleaded either in a motion
produced to the employer and transfer dominion over to dismiss or in the answer are deemed waived; except
the thing. This contract shall be governed by the the failure to state a cause of action . . . "
following articles as well as by the pertinent provisions on
warranty of title and against hidden defects and the Thus, they claim that since the respondent failed to raise
payment of price in a contract of sale." the defense of prescription in a motion to dismiss or in its
answer, it is deemed waived and cannot be raised for
"Art. 1561. The vendor shall be responsible for warranty the first time on appeal in a motion for reconsideration
against the hidden defects which the thing sold may of the appellate court's decision.
have, should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use to As a rule, the defense of prescription cannot be raised
such an extent that, had the vendee been aware for the first time on appeal. Thus, we held in Ramos v.
thereof, he would not have acquired it or would have Osorio,18 viz:
given a lower price for it; but said vendor shall not be
answerable for patent defects or those which may be "It is settled law in this jurisdiction that the defense of
visible, or for those which are not visible if the vendee is prescription is waivable, and that if it was not raised as a
an expert who, by reason of his trade or profession, defense in the trial court, it cannot be considered on
should have known them." appeal, the general rule being that the appellate court
is not authorized to consider and resolve any question
Petitioners aver that they discovered the defects in not properly raised in the lower court (Subido vs. Lacson,
respondent's products when customers in their 55 O.G. 8281, 8285; Moran, Comments on the Rules of
(petitioners') shirt business came back to them Court, Vol. I, p. 784, 1947 Edition)."
complaining that the frog and moosehead figures
attached to the shirts they bought were torn. Petitioners

10
However, this is not a hard and fast rule. In Gicano v. of prescription in their Opposition to the Supplemental
Gegato,19 we held: Motion for Reconsideration filed in the appellate court
and in their Petition for Review in this Court.
". . .(T)rial courts have authority and discretion to dimiss
an action on the ground of prescription when the parties' This Court's application of the Osorio and Gicano
pleadings or other facts on record show it to be indeed doctrines to the case at bar is confirmed and now
time-barred; (Francisco v. Robles, Feb, 15, 1954; Sison v. enshrined in Rule 9, Sec. 1 of the 1997 Rules of Civil
McQuaid, 50 O.G. 97; Bambao v. Lednicky, Jan. 28, 1961; Procedure, viz:
Cordova v. Cordova, Jan. 14, 1958; Convets, Inc. v. NDC,
Feb. 28, 1958; 32 SCRA 529; Sinaon v. Sorongan, 136 "Section 1. Defense and objections not pleaded. -
SCRA 408); and it may do so on the basis of a motion to Defenses and objections not pleaded whether in a
dismiss (Sec. 1,f, Rule 16, Rules of Court), or an answer motion to dismiss or in the answer are deemed waived.
which sets up such ground as an affirmative defense However, when it appears from the pleadings that the
(Sec. 5, Rule 16), or even if the ground is alleged after court has no jurisdiction over the subject matter, that
judgment on the merits, as in a motion for there is another action pending between the same
reconsideration (Ferrer v. Ericta, 84 SCRA 705); or even if parties for the same cause, or that the action is barred
the defense has not been asserted at all, as where no by a prior judgment or by statute of limitations, the court
statement thereof is found in the pleadings (Garcia v. shall dismiss the claim." (Emphasis supplied)
Mathis, 100 SCRA 250; PNB v. Pacific Commission House,
27 SCRA 766; Chua Lamco v. Dioso, et al., 97 Phil. 821); WHEREFORE, the petition is DENIED and the impugned
or where a defendant has been declared in default decision of the Court of Appeals dated January 24, 1994
(PNB v. Perez, 16 SCRA 270). What is essential only, to is AFFIRMED. No costs.
repeat, is that the facts demonstrating the lapse of the
prescriptive period be otherwise sufficiently and SO ORDERED.
satisfactorily apparent on the record; either in the
averments of the plaintiff's complaint, or otherwise CIR VS CA AND ATENEO
established by the evidence." (emphasis supplied)
In conducting researches and studies of social
In Aldovino, et al. v. Alunan, et al.,20 the Court en banc organizations and cultural values thru its Institute of
reiterated the Garcia v. Mathis doctrine cited in the Philippine Culture, is the Ateneo de Manila University
Gicano case that when the plaintiff's own complaint performing the work of an independent contractor and
shows clearly that the action has prescribed, the action thus taxable within the purview of then Section 205 of the
may be dismissed even if the defense of prescription was National Internal Revenue Code levying a three percent
not invoked by the defendant. contractor's tax? This question is answer by the Court in
the negative as it resolves this petition assailing the
It is apparent in the records that respondent made the Decision 1 of the Respondent Court of Appeals 2 in CA-
last delivery of vinyl products to the petitioners on G.R. SP No. 31790 promulgated on April 27, 1994 affirming
September 28, 1988. Petitioners admit this in their that of the Court of Tax Appeals. 3
Memorandum submitted to the trial court and reiterate
it in their Petition for Review.21 It is also apparent in the The Antecedent Facts
Complaint that petitioners instituted their action on July
24, 1989. The issue for resolution is whether or not the The antecedents as found by the Court of Appeals are
respondent Court of Appeals could dismiss the reproduced hereinbelow, the same being largely
petitioners' action if the defense of prescription was undisputed by the parties.
raised for the first time on appeal but is apparent in the
records. Private respondent is a non-stock, non-profit educational
institution with auxiliary units and branches all over the
Following the Gicano doctrine that allows dismissal of an Philippines. One such auxiliary unit is the Institute of
action on the ground of prescription even after Philippine Culture (IPC), which has no legal personality
judgment on the merits, or even if the defense was not separate and distinct from that of private respondent.
raised at all so long as the relevant dates are clear on The IPC is a Philippine unit engaged in social science
the record, we rule that the action filed by the petitioners studies of Philippine society and culture. Occasionally, it
has prescribed. The dates of delivery and institution of accepts sponsorships for its research activities from
the action are undisputed. There are no new issues of international organizations, private foundations and
fact arising in connection with the question of government agencies.
prescription, thus carving out the case at bar as an
exception from the general rule that prescription if not On July 8, 1983, private respondent received from
impleaded in the answer is deemed waived.22 petitioner Commissioner of Internal Revenue a demand
letter dated June 3, 1983, assessing private respondent
Even if the defense of prescription was raised for the first the sum of P174,043.97 for alleged deficiency
time on appeal in respondent's Supplemental Motion for contractor's tax, and an assessment dated June 27, 1983
Reconsideration of the appellate court's decision, this in the sum of P1,141,837 for alleged deficiency income
does not militate against the due process right of the tax, both for the fiscal year ended March 31, 1978.
petitioners. On appeal, there was no new issue of fact Denying said tax liabilities, private respondent sent
that arose in connection with the question of petitioner a letter-protest and subsequently filed with the
prescription, thus it cannot be said that petitioners were latter a memorandum contesting the validity of the
not given the opportunity to present evidence in the trial assessments.
court to meet a factual issue. Equally important,
petitioners had the opportunity to oppose the defense

11
On March 17, 1988, petitioner rendered a letter-decision Petitioner contends that the respondent court erred in
canceling the assessment for deficiency income tax but holding that private respondent is not an "independent
modifying the assessment for deficiency contractor's tax contractor" within the purview of Section 205 of the Tax
by increasing the amount due to P193,475.55. Code. To petitioner, the term "independent contractor",
Unsatisfied, private respondent requested for a as defined by the Code, encompasses all kinds of
reconsideration or reinvestigation of the modified services rendered for a fee and that the only exceptions
assessment. At the same time, it filed in the respondent are the following:
court a petition for review of the said letter-decision of
the petitioner. While the petition was pending before the a. Persons, association and corporations under
respondent court, petitioner issued a final decision contract for embroidery and apparel for export and
dated August 3, 1988 reducing the assessment for gross receipts of or from pioneer industry registered with
deficiency contractor's tax from P193,475.55 to the Board of Investment under R.A. No. 5186;
P46,516.41, exclusive of surcharge and interest.
b. Individuals occupation tax under Section 12 of
On July 12, 1993, the respondent court rendered the the Local Tax Code (under the old Section 182 [b] of the
questioned decision which dispositively reads: Tax Code); and

WHEREFORE, in view of the foregoing, respondent's c. Regional or area headquarters established in


decision is SET ASIDE. The deficiency contractor's tax the Philippines by multinational corporations, including
assessment in the amount of P46,516.41 exclusive of their alien executives, and which headquarters do not
surcharge and interest for the fiscal year ended March earn or derive income from the Philippines and which
31, 1978 is hereby CANCELED. No pronouncement as to act as supervisory, communication and coordinating
cost. centers for their affiliates, subsidiaries or branches in the
Asia Pacific Region (Section 205 of the Tax Code).
SO ORDERED.
Petitioner thus submits that since private respondent falls
Not in accord with said decision, petitioner has come to under the definition of an "independent contractor" and
this Court via the present petition for review raising the is not among the aforementioned exceptions, private
following issues: respondent is therefore subject to the 3% contractor's tax
imposed under the same Code. 4
1) WHETHER OR NOT PRIVATE RESPONDENT FALLS
UNDER THE PURVIEW OF INDEPENDENT CONTRACTOR The Court of Appeals disagreed with the Petitioner
PURSUANT TO SECTION 205 OF THE TAX CODE; and Commissioner of Internal Revenue and affirmed the
assailed decision of the Court of Tax Appeals. Unfazed,
2) WHETHER OR NOT PRIVATE RESPONDENT IS petitioner now asks us to reverse the CA through this
SUBJECT TO 3% CONTRACTOR'S TAX UNDER SECTION 205 petition for review.
OF THE TAX CODE.
The Issues
The pertinent portions of Section 205 of the National
Internal Revenue Code, as amended, provide: Petitioner submits before us the following issues:

Sec. 205. Contractor, proprietors or operators of 1) Whether or not private respondent falls under
dockyards, and others. — A contractor's tax of three per the purview of independent contractor pursuant to
centum of the gross receipts is hereby imposed on the Section 205 of the Tax Code.
following:
2) Whether or not private respondent is subject to
xxx xxx xxx 3% contractor's tax under Section 205 of the Tax Code. 5

(16) Business agents and other independent In fine, these may be reduced to a single issue: Is Ateneo
contractors except persons, associations and de Manila University, through its auxiliary unit or branch
corporations under contract for embroidery and — the Institute of Philippine Culture — performing the
apparel for export, as well as their agents and work of an independent contractor and, thus, subject to
contractors and except gross receipts of or from a the three percent contractor's tax levied by then Section
pioneer industry registered with the Board of Investments 205 of the National Internal Revenue Code?
under Republic Act No. 5186:
The Court's Ruling
xxx xxx xxx
The petition is unmeritorious.
The term "independent contractors" include persons
(juridical or natural) not enumerated above (but not Interpretation of Tax Laws
including individuals subject to the occupation tax under
Section 12 of the Local Tax Code) whose activity consists The parts of then Section 205 of the National Internal
essentially of the sale of all kinds of services for a fee Revenue Code germane to the case before us read:
regardless of whether or not the performance of the
service calls for the exercise or use of the physical or Sec. 205. Contractors, proprietors or operators of
mental faculties of such contractors or their employees. dockyards, and others. — A contractor's tax of three per
centum of the gross receipts is hereby imposed on the
xxx xxx xxx following:

12
xxx xxx xxx construing statutes applies with peculiar strictness to tax
laws and the provisions of a taxing act are not to be
(16) Business agents and other independent extended by implication." 8 Parenthetically, in answering
contractors, except persons, associations and the question of who is subject to tax statutes, it is basic
corporations under contract for embroidery and that "in case of doubt, such statutes are to be construed
apparel for export, as well as their agents and most strongly against the government and in favor of the
contractors, and except gross receipts of or from a subjects or citizens because burdens are not to be
pioneer industry registered with the Board of Investments imposed nor presumed to be imposed beyond what
under the provisions of Republic Act No. 5186; statutes expressly and clearly import." 9

xxx xxx xxx To fall under its coverage, Section 205 of the National
Internal Revenue Code requires that the independent
The term "independent contractors" include persons contractor be engaged in the business of selling its
(juridical or natural) not enumerated above (but not services. Hence, to impose the three percent
including individuals subject to the occupation tax under contractor's tax on Ateneo's Institute of Philippine
Section 12 of the Local Tax Code) whose activity consists Culture, it should be sufficiently proven that the private
essentially of the sale of all kinds of services for a fee respondent is indeed selling its services for a fee in pursuit
regardless of whether or not the performance of the of an independent business. And it is only after private
service calls for the exercise or use of the physical or respondent has been found clearly to be subject to the
mental faculties of such contractors or their employees. provisions of Sec. 205 that the question of exemption
therefrom would arise. Only after such coverage is
The term "independent contractor" shall not include shown does the rule of construction — that tax
regional or area headquarters established in the exemptions are to be strictly construed against the
Philippines by multinational corporations, including their taxpayer — come into play, contrary to petitioner's
alien executives, and which headquarters do not earn position. This is the main line of reasoning of the Court of
or derive income from the Philippines and which act as Tax Appeals in its decision, 10 which was affirmed by the
supervisory, communications and coordinating centers CA.
for their affiliates, subsidiaries or branches in the Asia-
Pacific Region. The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine
The term "gross receipts" means all amounts received by Culture
the prime or principal contractor as the total contract
price, undiminished by amount paid to the After reviewing the records of this case, we find no
subcontractor, shall be excluded from the taxable gross evidence that Ateneo's Institute of Philippine Culture
receipts of the subcontractor. ever sold its services for a fee to anyone or was ever
engaged in a business apart from and independently of
Petitioner Commissioner of Internal Revenue contends the academic purposes of the university.
that Private Respondent Ateneo de Manila University
"falls within the definition" of an independent contractor Stressing that "it is not the Ateneo de Manila University per
and "is not one of those mentioned as excepted"; hence, se which is being taxed," Petitioner Commissioner of
it is properly a subject of the three percent contractor's Internal Revenue contends that "the tax is due on its
tax levied by the foregoing provision of law. 6 Petitioner activity of conducting researches for a fee. The tax is due
states that the "term 'independent contractor' is not on the gross receipts made in favor of IPC pursuant to
specifically defined so as to delimit the scope thereof, so the contracts the latter entered to conduct researches
much so that any person who . . . renders physical and for the benefit primarily of its clients. The tax is imposed
mental service for a fee, is now indubitably considered on the exercise of a taxable activity. . . . [T]he sale of
an independent contractor liable to 3% contractor's tax." services of private respondent is made under a contract
7 According to petitioner, Ateneo has the burden of and the various contracts entered into between private
proof to show its exemption from the coverage of the respondent and its clients are almost of the same terms,
law. showing, among others, the compensation and terms of
payment." 11 (Emphasis supplied.)
We disagree. Petitioner Commissioner of Internal
Revenue erred in applying the principles of tax In theory, the Commissioner of Internal Revenue may be
exemption without first applying the well-settled doctrine correct. However, the records do not show that Ateneo's
of strict interpretation in the imposition of taxes. It is IPC in fact contracted to sell its research services for a
obviously both illogical and impractical to determine fee. Clearly then, as found by the Court of Appeals and
who are exempted without first determining who are the Court of Tax Appeals, petitioner's theory is
covered by the aforesaid provision. The Commissioner inapplicable to the established factual milieu obtaining
should have determined first if private respondent was in the instant case.
covered by Section 205, applying the rule of strict
interpretation of laws imposing taxes and other burdens In the first place, the petitioner has presented no
on the populace, before asking Ateneo to prove its evidence to prove its bare contention that, indeed,
exemption therefrom. The Court takes this occasion to contracts for sale of services were ever entered into by
reiterate the hornbook doctrine in the interpretation of the private respondent. As appropriately pointed out by
tax laws that "(a) statute will not be construed as the latter:
imposing a tax unless it does so clearly, expressly, and
unambiguously . . . (A) tax cannot be imposed without An examination of the Commissioner's Written Formal
clear and express words for that purpose. Accordingly, Offer of Evidence in the Court of Tax Appeals shows that
the general rule of requiring adherence to the letter in

13
only the following documentary evidence was
presented: Then, too, granting arguendo that IPC made profits from
the sponsored research projects, the fact still remains
Exhibit 1 BIR letter of authority no. 331844 that there is no proof that part of such earnings or profits
was ever distributed as dividends to any stockholder, as
2 Examiner's Field Audit Report in fact none was so distributed because they accrued to
the benefit of the private respondent which is a non-
3 Adjustments to Sales/Receipts profit educational institution. 14

4 Letter-decision of BIR Commissioner Bienvenido Therefore, it is clear that the funds received by Ateneo's
A. Tan Jr. Institute of Philippine Culture are not given in the
concept of a fee or price in exchange for the
None of the foregoing evidence even comes close to performance of a service or delivery of an object.
purport to be contracts between private respondent Rather, the amounts are in the nature of an endowment
and third parties. 12 or donation given by IPC's benefactors solely for the
purpose of sponsoring or funding the research with no
Moreover, the Court of Tax Appeals accurately and strings attached. As found by the two courts below, such
correctly declared that the " funds received by the sponsorships are subject to IPC's terms and conditions.
Ateneo de Manila University are technically not a fee. No proprietary or commercial research is done, and IPC
They may however fall as gifts or donations which are retains the ownership of the results of the research,
tax-exempt" as shown by private respondent's including the absolute right to publish the same. The
compliance with the requirement of Section 123 of the copyrights over the results of the research are owned by
National Internal Revenue Code providing for the Ateneo and, consequently, no portion thereof may be
exemption of such gifts to an educational institution. 13 reproduced without its permission. 15 The amounts given
to IPC, therefore, may not be deemed, it bears stressing
Respondent Court of Appeals elucidated on the ruling as fees or gross receipts that can be subjected to the
of the Court of Tax Appeals: three percent contractor's tax.

To our mind, private respondent hardly fits into the It is also well to stress that the questioned transactions of
definition of an "independent contractor". Ateneo's Institute of Philippine Culture cannot be
deemed either as a contract of sale or a contract of a
For one, the established facts show that IPC, as a unit of piece of work. "By the contract of sale, one of the
the private respondent, is not engaged in business. contracting parties obligates himself to transfer the
Undisputedly, private respondent is mandated by law to ownership of and to deliver a determinate thing, and the
undertake research activities to maintain its university other to pay therefor a price certain in money or its
status. In fact, the research activities being carried out equivalent." 16 By its very nature, a contract of sale
by the IPC is focused not on business or profit but on requires a transfer of ownership. Thus, Article 1458 of the
social sciences studies of Philippine society and culture. Civil Code "expressly makes the obligation to transfer
Since it can only finance a limited number of IPC's ownership as an essential element of the contract of
research projects, private respondent occasionally sale, following modern codes, such as the German and
accepts sponsorship for unfunded IPC research projects the Swiss. Even in the absence of this express
from international organizations, private foundations requirement, however, most writers, including Sanchez
and governmental agencies. However, such Roman, Gayoso, Valverde, Ruggiero, Colin and
sponsorships are subject to private respondent's terms Capitant, have considered such transfer of ownership as
and conditions, among which are, that the research is the primary purpose of sale. Perez and Alguer follow the
confined to topics consistent with the private same view, stating that the delivery of the thing does not
respondent's academic agenda; that no proprietary or mean a mere physical transfer, but is a means of
commercial purpose research is done; and that private transmitting ownership. Transfer of title or an agreement
respondent retains not only the absolute right to publish to transfer it for a price paid or promised to be paid is the
but also the ownership of the results of the research essence of sale." 17 In the case of a contract for a piece
conducted by the IPC. Quite clearly, the of work, "the contractor binds himself to execute a piece
aforementioned terms and conditions belie the of work for the employer, in consideration of a certain
allegation that private respondent is a contractor or is price or compensation. . . . If the contractor agrees to
engaged in business. produce the work from materials furnished by him, he
shall deliver the thing produced to the employer and
For another, it bears stressing that private respondent is transfer dominion over the thing, . . ." 18 Ineludably,
a non-stock, non-profit educational corporation. The whether the contract be one of sale or one for a piece
fact that it accepted sponsorship for IPC's unfunded of work, a transfer of ownership is involved and a party
projects is merely incidental. For, the main function of the necessarily walks away with an object. 19 In the case at
IPC is to undertake research projects under the bench, it is clear from the evidence on record that there
academic agenda of the private respondent. Moreover was no sale either of objects or services because, as
the records do not show that in accepting sponsorship adverted to earlier, there was no transfer of ownership
of research work, IPC realized profits from such work. On over the research data obtained or the results of
the contrary, the evidence shows that for about 30 years, research projects undertaken by the Institute of
IPC had continuously operated at a loss, which means Philippine Culture.
that sponsored funds are less than actual expenses for its
research projects. That IPC has been operating at a loss Furthermore, it is clear that the research activity of the
loudly bespeaks of the fact that education and not profit Institute of Philippine Culture is done in pursuance of
is the motive for undertaking the research projects. maintaining Ateneo's university status and not in the

14
course of an independent business of selling such disbursements for the period 1972 to 1985. 23 In fact, it
research with profit in mind. This is clear from a reading was Ateneo de Manila University itself that had funded
of the regulations governing universities: the research projects of the institute, and it was only
when Ateneo could no longer produce the needed
31. In addition to the legal requisites an institution funds that the institute sought funding from outside. The
must meet, among others, the following requirements testimony of Ateneo's Director for Accounting Services,
before an application for university status shall be Ms. Leonor Wijangco, provides significant insight on the
considered: academic and nonprofit nature of the institute's
research activities done in furtherance of the university's
xxx xxx xxx purposes, as follows:

(e) The institution must undertake research and Q Now it was testified to earlier by Miss Thelma
operate with a competent qualified staff at least three Padero (Office Manager of the Institute of Philippine
graduate departments in accordance with the rules and Culture) that as far as grants from sponsored research it
standards for graduate education. One of the is possible that the grant sometimes is less than the actual
departments shall be science and technology. The cost. Will you please tell us in this case when the actual
competence of the staff shall be judged by their cost is a lot less than the grant who shoulders the
effective teaching, scholarly publications and research additional cost?
activities published in its school journal as well as their
leadership activities in the profession. A The University.

(f) The institution must show evidence of adequate Q Now, why is this done by the University?
and stable financial resources and support, a
reasonable portion of which should be devoted to A Because of our faculty development program
institutional development and research. (emphasis as a university, because a university has to have its own
supplied) research institute. 24

xxx xxx xxx So, why is it that Ateneo continues to operate and
conduct researches through its Institute of Philippine
32. University status may be withdrawn, after due Culture when it undisputedly loses not an insignificant
notice and hearing, for failure to maintain satisfactorily amount in the process? The plain and simple answer is
the standards and requirements therefor. 20 that private respondent is not a contractor selling its
services for a fee but an academic institution
Petitioner's contention that it is the Institute of Philippine conducting these researches pursuant to its
Culture that is being taxed and not the Ateneo is commitments to education and, ultimately, to public
patently erroneous because the former is not an service. For the institute to have tenaciously continued
independent juridical entity that is separate and distinct operating for so long despite its accumulation of
form the latter. significant losses, we can only agree with both the Court
of Tax Appeals and the Court of Appeals that "education
Factual Findings and Conclusions of the Court of Tax and not profit is [IPC's] motive for undertaking the
Appeals Affirmed by the Court of Appeals Generally research
Conclusive projects." 25

In addition, we reiterate that the "Court of Tax Appeals is WHEREFORE, premises considered, the petition is DENIED
a highly specialized body specifically created for the and the assailed Decision of the Court of Appeals is
purpose of reviewing tax cases. Through its expertise, it is hereby AFFIRMED in full.
undeniably competent to determine the issue of
whether" 21 Ateneo de Manila University may be SO ORDERED.
deemed a subject of the three percent contractor's tax
"through the evidence presented before it." QUIROGA VS PARSONS HARDWARE AND CO
Consequently, "as a matter of principle, this Court will not
set aside the conclusion reached by . . . the Court of Tax On January 24, 1911, in this city of manila, a contract in
Appeals which is, by the very nature of its function, the following tenor was entered into by and between
dedicated exclusively to the study and consideration of the plaintiff, as party of the first part, and J. Parsons (to
tax problems and has necessarily developed an whose rights and obligations the present defendant later
expertise on the subject unless there has been an abuse subrogated itself), as party of the second part:
or improvident exercise of authority . . ." 22 This point
becomes more evident in the case before us where the CONTRACT EXECUTED BY AND BETWEEN ANDRES
findings and conclusions of both the Court of Tax QUIROGA AND J. PARSONS, BOTH MERCHANTS
Appeals and the Court of Appeals appear untainted by ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE OF
any abuse of authority, much less grave abuse of "QUIROGA" BEDS IN THE VISAYAN ISLANDS.
discretion. Thus, we find the decision of the latter
affirming that of the former free from any palpable error. ARTICLE 1. Don Andres Quiroga grants the
exclusive right to sell his beds in the Visayan Islands to J.
Public Service, Not Profit, is the Motive Parsons under the following conditions:

The records show that the Institute of Philippine Culture (A) Mr. Quiroga shall furnish beds of his manufacture
conducted its research activities at a huge deficit of to Mr. Parsons for the latter's establishment in Iloilo, and
P1,624,014.00 as shown in its statements of fund and shall invoice them at the same price he has fixed for

15
sales, in Manila, and, in the invoices, shall make and exception of the obligation on the part of the defendant
allowance of a discount of 25 per cent of the invoiced to order the beds by the dozen and in no other manner,
prices, as commission on the sale; and Mr. Parsons shall none of the obligations imputed to the defendant in the
order the beds by the dozen, whether of the same or of two causes of action are expressly set forth in the
different styles. contract. But the plaintiff alleged that the defendant
was his agent for the sale of his beds in Iloilo, and that
(B) Mr. Parsons binds himself to pay Mr. Quiroga for said obligations are implied in a contract of commercial
the beds received, within a period of sixty days from the agency. The whole question, therefore, reduced itself to
date of their shipment. a determination as to whether the defendant, by reason
of the contract hereinbefore transcribed, was a
(C) The expenses for transportation and shipment purchaser or an agent of the plaintiff for the sale of his
shall be borne by M. Quiroga, and the freight, insurance, beds.
and cost of unloading from the vessel at the point where
the beds are received, shall be paid by Mr. Parsons. In order to classify a contract, due regard must be given
to its essential clauses. In the contract in question, what
(D) If, before an invoice falls due, Mr. Quiroga was essential, as constituting its cause and subject
should request its payment, said payment when made matter, is that the plaintiff was to furnish the defendant
shall be considered as a prompt payment, and as such with the beds which the latter might order, at the price
a deduction of 2 per cent shall be made from the stipulated, and that the defendant was to pay the price
amount of the invoice. in the manner stipulated. The price agreed upon was the
one determined by the plaintiff for the sale of these beds
The same discount shall be made on the amount of any in Manila, with a discount of from 20 to 25 per cent,
invoice which Mr. Parsons may deem convenient to pay according to their class. Payment was to be made at the
in cash. end of sixty days, or before, at the plaintiff's request, or in
cash, if the defendant so preferred, and in these last two
(E) Mr. Quiroga binds himself to give notice at least cases an additional discount was to be allowed for
fifteen days before hand of any alteration in price which prompt payment. These are precisely the essential
he may plan to make in respect to his beds, and agrees features of a contract of purchase and sale. There was
that if on the date when such alteration takes effect he the obligation on the part of the plaintiff to supply the
should have any order pending to be served to Mr. beds, and, on the part of the defendant, to pay their
Parsons, such order shall enjoy the advantage of the price. These features exclude the legal conception of an
alteration if the price thereby be lowered, but shall not agency or order to sell whereby the mandatory or agent
be affected by said alteration if the price thereby be received the thing to sell it, and does not pay its price,
increased, for, in this latter case, Mr. Quiroga assumed but delivers to the principal the price he obtains from the
the obligation to invoice the beds at the price at which sale of the thing to a third person, and if he does not
the order was given. succeed in selling it, he returns it. By virtue of the contract
between the plaintiff and the defendant, the latter, on
(F) Mr. Parsons binds himself not to sell any other receiving the beds, was necessarily obliged to pay their
kind except the "Quiroga" beds. price within the term fixed, without any other
consideration and regardless as to whether he had or
ART. 2. In compensation for the expenses of had not sold the beds.
advertisement which, for the benefit of both contracting
parties, Mr. Parsons may find himself obliged to make, Mr. It would be enough to hold, as we do, that the contract
Quiroga assumes the obligation to offer and give the by and between the defendant and the plaintiff is one
preference to Mr. Parsons in case anyone should apply of purchase and sale, in order to show that it was not one
for the exclusive agency for any island not comprised made on the basis of a commission on sales, as the
with the Visayan group. plaintiff claims it was, for these contracts are
incompatible with each other. But, besides, examining
ART. 3. Mr. Parsons may sell, or establish branches of his the clauses of this contract, none of them is found that
agency for the sale of "Quiroga" beds in all the towns of substantially supports the plaintiff's contention. Not a
the Archipelago where there are no exclusive agents, single one of these clauses necessarily conveys the idea
and shall immediately report such action to Mr. Quiroga of an agency. The words commission on sales used in
for his approval. clause (A) of article 1 mean nothing else, as stated in the
contract itself, than a mere discount on the invoice
ART. 4. This contract is made for an unlimited period, price. The word agency, also used in articles 2 and 3,
and may be terminated by either of the contracting only expresses that the defendant was the only one that
parties on a previous notice of ninety days to the other could sell the plaintiff's beds in the Visayan Islands. With
party. regard to the remaining clauses, the least that can be
said is that they are not incompatible with the contract
Of the three causes of action alleged by the plaintiff in of purchase and sale.
his complaint, only two of them constitute the subject
matter of this appeal and both substantially amount to The plaintiff calls attention to the testimony of Ernesto
the averment that the defendant violated the following Vidal, a former vice-president of the defendant
obligations: not to sell the beds at higher prices than corporation and who established and managed the
those of the invoices; to have an open establishment in latter's business in Iloilo. It appears that this witness, prior
Iloilo; itself to conduct the agency; to keep the beds on to the time of his testimony, had serious trouble with the
public exhibition, and to pay for the advertisement defendant, had maintained a civil suit against it, and
expenses for the same; and to order the beds by the had even accused one of its partners, Guillermo Parsons,
dozen and in no other manner. As may be seen, with the of falsification. He testified that it was he who drafted the

16
contract Exhibit A, and, when questioned as to what was The judgment appealed from is affirmed, with costs
his purpose in contracting with the plaintiff, replied that against the appellant. So ordered.
it was to be an agent for his beds and to collect a
commission on sales. However, according to the PUYAT AND SONS INC VS ARCO AMUSEMENT CO
defendant's evidence, it was Mariano Lopez Santos, a
director of the corporation, who prepared Exhibit A. But, This is a petition for the issuance of a writ of certiorari to
even supposing that Ernesto Vidal has stated the truth, the Court of Appeals for the purpose of reviewing its
his statement as to what was his idea in contracting with Amusement Company (formerly known as Teatro Arco),
the plaintiff is of no importance, inasmuch as the plaintiff-appellant, vs. Gonzalo Puyat and Sons. Inc.,
agreements contained in Exhibit A which he claims to defendant-appellee."
have drafted, constitute, as we have said, a contract of
purchase and sale, and not one of commercial agency. It appears that the respondent herein brought an action
This only means that Ernesto Vidal was mistaken in his against the herein petitioner in the Court of First Instance
classification of the contract. But it must be understood of Manila to secure a reimbursement of certain amounts
that a contract is what the law defines it to be, and not allegedly overpaid by it on account of the purchase
what it is called by the contracting parties. price of sound reproducing equipment and machinery
ordered by the petitioner from the Starr Piano Company
The plaintiff also endeavored to prove that the of Richmond, Indiana, U.S.A. The facts of the case as
defendant had returned beds that it could not sell; that, found by the trial court and confirmed by the appellate
without previous notice, it forwarded to the defendant court, which are admitted by the respondent, are as
the beds that it wanted; and that the defendant follows:
received its commission for the beds sold by the plaintiff
directly to persons in Iloilo. But all this, at the most only In the year 1929, the "Teatro Arco", a corporation duly
shows that, on the part of both of them, there was organized under the laws of the Philippine Islands, with its
mutual tolerance in the performance of the contract in office in Manila, was engaged in the business of
disregard of its terms; and it gives no right to have the operating cinematographs. In 1930, its name was
contract considered, not as the parties stipulated it, but changed to Arco Amusement Company. C. S. Salmon
as they performed it. Only the acts of the contracting was the president, while A. B. Coulette was the business
parties, subsequent to, and in connection with, the manager. About the same time, Gonzalo Puyat & Sons,
execution of the contract, must be considered for the Inc., another corporation doing business in the Philippine
purpose of interpreting the contract, when such Islands, with office in Manila, in addition to its other
interpretation is necessary, but not when, as in the instant business, was acting as exclusive agents in the
case, its essential agreements are clearly set forth and Philippines for the Starr Piano Company of Richmond,
plainly show that the contract belongs to a certain kind Indiana, U.S. A. It would seem that this last company
and not to another. Furthermore, the return made was of dealt in cinematographer equipment and machinery,
certain brass beds, and was not effected in exchange and the Arco Amusement Company desiring to equipt
for the price paid for them, but was for other beds of its cinematograph with sound reproducing devices,
another kind; and for the letter Exhibit L-1, requested the approached Gonzalo Puyat & Sons, Inc., thru its then
plaintiff's prior consent with respect to said beds, which president and acting manager, Gil Puyat, and an
shows that it was not considered that the defendant had employee named Santos. After some negotiations, it
a right, by virtue of the contract, to make this return. As was agreed between the parties, that is to say, Salmon
regards the shipment of beds without previous notice, it and Coulette on one side, representing the plaintiff, and
is insinuated in the record that these brass beds were Gil Puyat on the other, representing the defendant, that
precisely the ones so shipped, and that, for this very the latter would, on behalf of the plaintiff, order sound
reason, the plaintiff agreed to their return. And with reproducing equipment from the Starr Piano Company
respect to the so-called commissions, we have said that and that the plaintiff would pay the defendant, in
they merely constituted a discount on the invoice price, addition to the price of the equipment, a 10 per cent
and the reason for applying this benefit to the beds sold commission, plus all expenses, such as, freight, insurance,
directly by the plaintiff to persons in Iloilo was because, banking charges, cables, etc. At the expense of the
as the defendant obligated itself in the contract to incur plaintiff, the defendant sent a cable, Exhibit "3", to the
the expenses of advertisement of the plaintiff's beds, Starr Piano Company, inquiring about the equipment
such sales were to be considered as a result of that desired and making the said company to quote its price
advertisement. without discount. A reply was received by Gonzalo Puyat
& Sons, Inc., with the price, evidently the list price of
In respect to the defendant's obligation to order by the $1,700 f.o.b. factory Richmond, Indiana. The defendant
dozen, the only one expressly imposed by the contract, did not show the plaintiff the cable of inquiry nor the
the effect of its breach would only entitle the plaintiff to reply but merely informed the plaintiff of the price of
disregard the orders which the defendant might place $1,700. Being agreeable to this price, the plaintiff, by
under other conditions; but if the plaintiff consents to fill means of Exhibit "1", which is a letter signed by C. S.
them, he waives his right and cannot complain for Salmon dated November 19, 1929, formally authorized
having acted thus at his own free will. the order. The equipment arrived about the end of the
year 1929, and upon delivery of the same to the plaintiff
For the foregoing reasons, we are of opinion that the and the presentation of necessary papers, the price of
contract by and between the plaintiff and the $1.700, plus the 10 per cent commission agreed upon
defendant was one of purchase and sale, and that the and plus all the expenses and charges, was duly paid by
obligations the breach of which is alleged as a cause of the plaintiff to the defendant.
action are not imposed upon the defendant, either by
agreement or by law. Sometime the following year, and after some
negotiations between the same parties, plaintiff and

17
defendants, another order for sound reproducing mediante dolo, el consentimiento de la recurrida en
equipment was placed by the plaintiff with the cuanto al precio de $1,700 y $1,600 de las maquinarias
defendant, on the same terms as the first order. This y equipos en cuestion, y condenar a la recurrente ha
agreement or order was confirmed by the plaintiff by its obtenido de la Starr Piano Company of Richmond,
letter Exhibit "2", without date, that is to say, that the Indiana.
plaintiff would pay for the equipment the amount of
$1,600, which was supposed to be the price quoted by We sustain the theory of the trial court that the contract
the Starr Piano Company, plus 10 per cent commission, between the petitioner and the respondent was one of
plus all expenses incurred. The equipment under the purchase and sale, and not one of agency, for the
second order arrived in due time, and the defendant reasons now to be stated.
was duly paid the price of $1,600 with its 10 per cent
commission, and $160, for all expenses and charges. This In the first place, the contract is the law between the
amount of $160 does not represent actual out-of-pocket parties and should include all the things they are
expenses paid by the defendant, but a mere flat charge supposed to have been agreed upon. What does not
and rough estimate made by the defendant equivalent appear on the face of the contract should be regarded
to 10 per cent of the price of $1,600 of the equipment. merely as "dealer's" or "trader's talk", which can not bind
either party. (Nolbrook v. Conner, 56 So., 576, 11 Am.
About three years later, in connection with a civil case in Rep., 212; Bank v. Brosscell, 120 III., 161; Bank v. Palmer,
Vigan, filed by one Fidel Reyes against the defendant 47 III., 92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill,
herein Gonzalo Puyat & Sons, Inc., the officials of the 173 Mass., 411.) The letters, Exhibits 1 and 2, by which the
Arco Amusement Company discovered that the price respondent accepted the prices of $1,700 and $1,600,
quoted to them by the defendant with regard to their respectively, for the sound reproducing equipment
two orders mentioned was not the net price but rather subject of its contract with the petitioner, are clear in
the list price, and that the defendants had obtained a their terms and admit no other interpretation that the
discount from the Starr Piano Company. Moreover, by respondent in question at the prices indicated which are
reading reviews and literature on prices of machinery fixed and determinate. The respondent admitted in its
and cinematograph equipment, said officials of the complaint filed with the Court of First Instance of Manila
plaintiff were convinced that the prices charged them that the petitioner agreed to sell to it the first sound
by the defendant were much too high including the reproducing equipment and machinery. The third
charges for out-of-pocket expense. For these reasons, paragraph of the respondent's cause of action states:
they sought to obtain a reduction from the defendant or
rather a reimbursement, and failing in this they brought 3. That on or about November 19, 1929, the herein
the present action. plaintiff (respondent) and defendant (petitioner)
entered into an agreement, under and by virtue of
The trial court held that the contract between the which the herein defendant was to secure from the
petitioner and the respondent was one of outright United States, and sell and deliver to the herein plaintiff,
purchase and sale, and absolved that petitioner from certain sound reproducing equipment and machinery,
the complaint. The appellate court, however, — by a for which the said defendant, under and by virtue of said
division of four, with one justice dissenting — held that the agreement, was to receive the actual cost price plus ten
relation between petitioner and respondent was that of per cent (10%), and was also to be reimbursed for all out
agent and principal, the petitioner acting as agent of of pocket expenses in connection with the purchase
the respondent in the purchase of the equipment in and delivery of such equipment, such as costs of
question, and sentenced the petitioner to pay the telegrams, freight, and similar expenses. (Emphasis ours.)
respondent alleged overpayments in the total sum of
$1,335.52 or P2,671.04, together with legal interest We agree with the trial judge that "whatever unforseen
thereon from the date of the filing of the complaint until events might have taken place unfavorable to the
said amount is fully paid, as well as to pay the costs of defendant (petitioner), such as change in prices,
the suit in both instances. The appellate court further mistake in their quotation, loss of the goods not covered
argued that even if the contract between the petitioner by insurance or failure of the Starr Piano Company to
and the respondent was one of purchase and sale, the properly fill the orders as per specifications, the plaintiff
petitioner was guilty of fraud in concealing the true price (respondent) might still legally hold the defendant
and hence would still be liable to reimburse the (petitioner) to the prices fixed of $1,700 and $1,600." This
respondent for the overpayments made by the latter. is incompatible with the pretended relation of agency
between the petitioner and the respondent, because in
The petitioner now claims that the following errors have agency, the agent is exempted from all liability in the
been incurred by the appellate court: discharge of his commission provided he acts in
accordance with the instructions received from his
I. El Tribunal de Apelaciones incurrio en error de derecho principal (section 254, Code of Commerce), and the
al declarar que, segun hechos, entre la recurrente y la principal must indemnify the agent for all damages
recurrida existia una relacion implicita de mandataria a which the latter may incur in carrying out the agency
mandante en la transaccion de que se trata, en vez de without fault or imprudence on his part (article 1729, Civil
la de vendedora a compradora como ha declarado el Code).
Juzgado de Primera Instncia de Manila, presidido
entonces por el hoy Magistrado Honorable Marcelino While the latters, Exhibits 1 and 2, state that the petitioner
Montemayor. was to receive ten per cent (10%) commission, this does
not necessarily make the petitioner an agent of the
II. El Tribunal de Apelaciones incurrio en error de derecho respondent, as this provision is only an additional price
al declarar que, suponiendo que dicha relacion fuerra which the respondent bound itself to pay, and which
de vendedora a compradora, la recurrente obtuvo, stipulation is not incompatible with the contract of

18
purchase and sale. (See Quiroga vs. Parsons Hardware every concealment is fraud; and short of fraud, it were
Co., 38 Phil., 501.) better that, within certain limits, business acumen permit
of the loosening of the sleeves and of the sharpening of
In the second place, to hold the petitioner an agent of the intellect of men and women in the business world.
the respondent in the purchase of equipment and
machinery from the Starr Piano Company of Richmond, The writ of certiorari should be, as it is hereby, granted.
Indiana, is incompatible with the admitted fact that the The decision of the appellate court is accordingly
petitioner is the exclusive agent of the same company in reversed and the petitioner is absolved from the
the Philippines. It is out of the ordinary for one to be the respondent's complaint in G. R. No. 1023, entitled "Arco
agent of both the vendor and the purchaser. The facts Amusement Company (formerly known as Teatro Arco),
and circumstances indicated do not point to anything plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc.,
but plain ordinary transaction where the respondent defendants-appellee," without pronouncement
enters into a contract of purchase and sale with the regarding costs. So ordered.
petitioner, the latter as exclusive agent of the Starr Piano
Company in the United States. KER AND CO LTD VS LINGAD

It follows that the petitioner as vendor is not bound to Petitioner Ker & Co., Ltd. would have us reverse a
reimburse the respondent as vendee for any difference decision of the Court of Tax Appeals, holding it liable as
between the cost price and the sales price which a commercial broker under Section 194 (t) of the
represents the profit realized by the vendor out of the National Internal Revenue Code. Its plea,
transaction. This is the very essence of commerce notwithstanding the vigorous effort of its counsel, is not
without which merchants or middleman would not exist. sufficiently persuasive. An obstacle, well-nigh
insuperable stands in the way. The decision under review
The respondents contends that it merely agreed to pay conforms to and is in accordance with the controlling
the cost price as distinguished from the list price, plus ten doctrine announced in the recent case of Commissioner
per cent (10%) commission and all out-of-pocket of Internal Revenue v. Constantino.1 The decisive test, as
expenses incurred by the petitioner. The distinction therein set forth, is the retention of the ownership of the
which the respondents seeks to draw between the cost goods delivered to the possession of the dealer, like
price and the list price we consider to be spacious. It is herein petitioner, for resale to customers, the price and
to be observed that the twenty-five per cent (25%) terms remaining subject to the control of the firm
discount granted by the Starr piano Company to the consigning such goods. The facts, as found by
petitioner is available only to the latter as the former's respondent Court, to which we defer, unmistakably
exclusive agent in the Philippines. The respondent could indicate that such a situation does exist. The juridical
not have secured this discount from the Starr Piano consequences must inevitably follow. We affirm.
Company and neither was the petitioner willing to waive
that discount in favor of the respondent. As a matter of It was shown that petitioner was assessed by the then
fact, no reason is advanced by the respondent why the Commissioner of Internal Revenue Melecio R. Domingo
petitioner should waive the 25 per cent discount granted the sum of P20,272.33 as the commercial broker's
it by the Starr Piano Company in exchange for the 10 percentage tax, surcharge, and compromise penalty for
percent commission offered by the respondent. the period from July 1, 1949 to December 31, 1953. There
Moreover, the petitioner was not duty bound to reveal was a request on the part of petitioner for the
the private arrangement it had with the Starr Piano cancellation of such assessment, which request was
Company relative to such discount to its prospective turned down. As a result, it filed a petition for review with
customers, and the respondent was not even aware of the Court of Tax Appeals. In its answer, the then
such an arrangement. The respondent, therefore, could Commissioner Domingo maintained his stand that
not have offered to pay a 10 per cent commission to the petitioner should be taxed in such amount as a
petitioner provided it was given the benefit of the 25 per commercial broker. In the decision now under review,
cent discount enjoyed by the petitioner. It is well known promulgated on October 19, 1962, the Court of Tax
that local dealers acting as agents of foreign Appeals held petitioner taxable except as to the
manufacturers, aside from obtaining a discount from the compromise penalty of P500.00, the amount due from it
home office, sometimes add to the list price when they being fixed at P19,772.33.
resell to local purchasers. It was apparently to guard
against an exhorbitant additional price that the Such liability arose from a contract of petitioner with the
respondent sought to limit it to 10 per cent, and the United States Rubber International, the former being
respondent is estopped from questioning that additional referred to as the Distributor and the latter specifically
price. If the respondent later on discovers itself at the designated as the Company. The contract was to apply
short end of a bad bargain, it alone must bear the to transactions between the former and petitioner, as
blame, and it cannot rescind the contract, much less Distributor, from July 1, 1948 to continue in force until
compel a reimbursement of the excess price, on that terminated by either party giving to the other sixty days'
ground alone. The respondent could not secure notice.2 The shipments would cover products "for
equipment and machinery manufactured by the Starr consumption in Cebu, Bohol, Leyte, Samar, Jolo, Negros
Piano Company except from the petitioner alone; it Oriental, and Mindanao except [the] province of
willingly paid the price quoted; it received the Davao", petitioner, as Distributor, being precluded from
equipment and machinery as represented; and that was disposing such products elsewhere than in the above
the end of the matter as far as the respondent was places unless written consent would first be obtained
concerned. The fact that the petitioner obtained more from the Company.3 Petitioner, as Distributor, is required
or less profit than the respondent calculated before to exert every effort to have the shipment of the
entering into the contract or reducing the price agreed products in the maximum quantity and to promote in
upon between the petitioner and the respondent. Not every way the sale thereof.4 The prices, discounts, terms

19
of payment, terms of delivery and other conditions of tell-tale covenant: "Upon the termination or any
sale were subject to change in the discretion of the cancellation of this agreement all goods held on
Company.5 consignment shall be held by the Distributor for the
account of the Company, without expense to the
Then came this crucial stipulation: "The Company shall Company, until such time as provision can be made by
from time to time consign to the Distributor and the the Company for disposition." 13
Distributor will receive, accept and/or hold upon
consignment the products specified under the terms of The issue with the Court of Tax Appeals, as with us now, is
this agreement in such quantities as in the judgment of whether the relationship thus created is one of vendor
the Company may be necessary for the successful and vendee or of broker and principal. Not that there
solicitation and maintenance of business in the territory, would have been the slightest doubt were it not for the
and the Distributor agrees that responsibility for the final categorical denial in the contract that petitioner was not
sole of all goods delivered shall rest with him. All goods constituted as "the agent or legal representative of the
on consignment shall remain the property of the Company for any purpose whatsoever." It would be,
Company until sold by the Distributor to the purchaser or however, to impart to such an express disclaimer a
purchasers, but all sales made by the Distributor shall be meaning it should not possess to ignore what is manifestly
in his name, in which the sale price of all goods sold less the role assigned to petitioner considering the instrument
the discount given to the Distributor by the Company in as a whole. That would be to lose sight altogether of
accordance with the provision of paragraph 13 of this what has been agreed upon. The Court of Tax Appeals
agreement, whether or not such sale price shall have was not misled in the language of the decision now on
been collected by the Distributor from the purchaser or appeal: "That the petitioner Ker & Co., Ltd. is, by
purchasers, shall immediately be paid and remitted by contractual stipulation, an agent of U.S. Rubber
the Distributor to the Company. It is further agreed that International is borne out by the facts that petitioner can
this agreement does not constitute Distributor the agent dispose of the products of the Company only to certain
or legal representative 4 of the Company for any persons or entities and within stipulated limits, unless
purpose whatsoever. Distributor is not granted any right excepted by the contract or by the Rubber Company
or authority to assume or to create any obligation or (Par. 2); that it merely receives, accepts and/or holds
responsibility, express or implied, in behalf of or in the upon consignment the products, which remain
name of the Company, or to bind the Company in any properties of the latter company (Par. 8); that every
manner or thing whatsoever."6 effort shall be made by petitioner to promote in every
way the sale of the products (Par. 3); that sales made by
All specifications for the goods ordered were subject to petitioner are subject to approval by the company (Par.
acceptance by the Company with petitioner, as 12); that on dates determined by the rubber company,
Distributor, required to accept such goods shipped as petitioner shall render a detailed report showing sales
well as to clear the same through customs and to during the month (Par. 14); that the rubber company
arrange for delivery in its warehouse in Cebu City. shall invoice the sales as of the dates of inventory and
Moreover, orders are to be filled in whole or in part from sales report (Par. 14); that the rubber company agrees
the stocks carried by the Company's neighboring to keep the consigned goods fully insured under
branches, subsidiaries or other sources of Company's insurance policies payable to it in case of loss (Par. 15);
brands.7 Shipments were to be invoiced at prices to be that upon request of the rubber company at any time,
agreed upon, with the customs duties being paid by petitioner shall render an inventory of the existing stock
petitioner, as Distributor, for account of the Company.8 which may be checked by an authorized representative
Moreover, all resale prices, lists, discounts and general of the former (Par. 15); and that upon termination or
terms and conditions of local resale were to be subject cancellation of the Agreement, all goods held on
to the approval of the Company and to change from consignment shall be held by petitioner for the account
time to time in its discretion.9 The dealer, as Distributor, is of the rubber company until their disposition is provided
allowed a discount of ten percent on the net amount of for by the latter (Par. 19). All these circumstances are
sales of merchandise made under such agreement. 10 irreconcilably antagonistic to the idea of an
On a date to be determined by the Company, the independent merchant." 14 Hence its conclusion:
petitioner, as Distributor, was required to report to it data "However, upon analysis of the contract, as a whole,
showing in detail all sales during the month immediately together with the actual conduct of the parties in
preceding, specifying therein the quantities, sizes and respect thereto, we have arrived at the conclusion that
types together with such information as may be required the relationship between them is one of brokerage or
for accounting purposes, with the Company rendering agency." 15 We find ourselves in agreement,
an invoice on sales as described to be dated as of the notwithstanding the able brief filed on behalf of
date of inventory and sales report. As Distributor, petitioner by its counsel. As noted at the outset, we
petitioner had to make payment on such invoice or cannot heed petitioner's plea for reversal.
invoices on due date with the Company being
privileged at its option to terminate and cancel the 1. According to the National Internal Revenue
agreement forthwith upon the failure to comply with this Code, a commercial broker "includes all persons, other
obligation. 11 The Company, at its own expense, was to than importers, manufacturers, producers, or bona fide
keep the consigned stock fully insured against loss or employees, who, for compensation or profit, sell or bring
damage by fire or as a result of fire, the policy of such about sales or purchases of merchandise for other
insurance to be payable to it in the event of loss. persons or bring proposed buyers and sellers together, or
Petitioner, as Distributor, assumed full responsibility with negotiate freights or other business for owners of vessels
reference to the stock and its safety at all times; and or other means of transportation, or for the shippers, or
upon request of the Company at any time, it was to consignors or consignees of freight carried by vessels or
render inventory of the existing stock which could be other means of transportation. The term includes
subject to change. 12 There was furthermore this equally commission merchants." 16 The controlling decision as to

20
the test to be followed as to who falls within the above what was contemplated by the parties. A reading
definition of a commercial broker is that of Commissioner thereof discloses that the relationship arising therefrom
of Internal Revenue v. Constantino. 17 In the language was not one of seller and purchaser. If it were thus
of Justice J. B. L. Reyes, who penned the opinion: "Since intended, then it would not have included covenants
the company retained ownership of the goods, even as which in their totality would negate the concept of a firm
it delivered possession unto the dealer for resale to acquiring as vendee goods from another. Instead, the
customers, the price and terms of which were subject to stipulations were so worded as to lead to no other
the company's control, the relationship between the conclusion than that the control by the United States
company and the dealer is one of agency, ... ." 18 An Rubber International over the goods in question is, in the
excerpt from Salisbury v. Brooks 19 cited in support of language of the Constantino opinion, "pervasive". The
such a view follows: " 'The difficulty in distinguishing insistence on a relationship opposed to that apparent
between contracts of sale and the creation of an from the language employed might even yield the
agency to sell has led to the establishment of rules by the impression that such a mode of construction was
application of which this difficulty may be solved. The resorted to in order that the applicability of a taxing
decisions say the transfer of title or agreement to transfer statute might be rendered nugatory. Certainly, such a
it for a price paid or promised is the essence of sale. If result is to be avoided.
such transfer puts the transferee in the attitude or
position of an owner and makes him liable to the Nor is it to be lost sight of that on a matter left to the
transferor as a debtor for the agreed price, and not discretion of the Court of Tax Appeals which has
merely as an agent who must account for the proceeds developed an expertise in view of its function being
of a resale, the transaction is a sale; while the essence of limited solely to the interpretation of revenue laws, this
an agency to sell is the delivery to an agent, not as his Court is not prepared to substitute its own judgment
property, but as the property of the principal, who unless a grave abuse of discretion is manifest. It would be
remains the owner and has the right to control sales, fix to frustrate the objective for which administrative
the price, and terms, demand and receive the proceeds tribunals are created if the judiciary, absent such a
less the agent's commission upon sales made.' " 20 The showing, is to ignore their appraisal on a matter that
opinion relied on the work of Mechem on Sales as well forms the staple of their specialized competence. While
as Mechem on Agency. Williston and Tiedman both of it is to be admitted that counsel for petitioner did
whom wrote treatises on Sales, were likewise referred to. scrutinize with care the decision under review with a view
to exposing what was considered its flaws, it cannot be
Equally relevant is this portion of the Salisbury opinion: "It said that there was such a failure to apply what the law
is difficult to understand or appreciate the necessity or commands as to call for its reversal. Instead, what
presence of these mutual requirements and obligations cannot be denied is that the Court of Tax Appeals
on any theory other than that of a contract of agency. reached a result to which the Court in the recent
Salisbury was to furnish the mill and put the timber owned Constantino decision gave the imprimatur of its
by him into a marketable condition in the form of lumber; approval.
Brooks was to furnish the funds necessary for that
purpose, sell the manufactured product, and account WHEREFORE, the Court of Tax Appeals decision of
therefor to Salisbury upon the specific terms of the October 19, 1962 is affirmed. With costs against
agreement, less the compensation fixed by the parties in petitioner.
lieu of interest on the money advanced and for services
as agent. These requirements and stipulations are in tent SCHMID AND OBERY VS RJL MARTINEZ
with any other conception of the contract. If it
constitutes an agreement to sell, they are meaningless. Petitioner seeks reversal of the decision and the
But they cannot be ignored. They were placed there for resolution of the Court of Appeals, ordering Schmid &
some purpose, doubtless as the result of definite Oberly Inc. (hereafter to be referred to simply as
antecedent negotiations therefore, consummated by "SCHMID") to refund the purchase price paid by RJL
the final written expression of the agreement." 21 Hence Martinez Fishing Corporation (hereafter to be referred to
the Constantino opinion could categorically affirm that simply as "RJL MARTINEZ") to D. Nagata Co., Ltd. of Japan
the mere disclaimer in a contract that an entity like (hereafter to be referred to simply as NAGATA CO.") for
petitioner is not "the agent or legal representative for any twelve (12) defective "Nagata"-brand generators, plus
purpose whatsoever" does not suffice to yield the consequential damages, and attorneys fees.
conclusion that it is an independent merchant if the
control over the goods for resale of the goods consigned The facts as found by the Court of Appeals, are as
is pervasive in character. The Court of Tax Appeals follows:
decision now under review pays fealty to such an
applicable doctrine. The findings of facts by the trial court (Decision, pp. 21-
28, Record on Appeal) shows: that the plaintiff RJL
2. No merit therefore attaches to the first error Martinez Fishing Corporation is engaged in deep-sea
imputed by petitioner to the Court of Tax Appeals. fishing, and in the course of its business, needed
Neither did such Court fail to appreciate in its true electrical generators for the operation of its business;
significance the act and conduct pursued in the that the defendant sells electrical generators with the
implementation of the contract by both the United brand of "Nagata", a Japanese product; that the
States Rubber International and petitioner, as was supplier is the manufacturer, the D. Nagata Co. Ltd., of
contended in the second assignment of error. Petitioner Japan, that the defendant Schmid & Oberly Inc.
ought to have been aware that there was no need for advertised the 12 Nagata generators for sale; that the
such an inquiry. The terms of the contract, as noted, plaintiff purchased 12 brand new Nagata generators, as
speak quite clearly. There is lacking that degree of advertised by herein defendant; that through an
ambiguity sufficient to give rise to serious doubt as to irrevocable line of credit, the D. Nagata Co., Ltd.,

21
shipped to the plaintiff 12 electric generators, and the generators. 'These are the facts surrounding this
latter paid the amount of the purchase price; that the 12 particular transaction:
generators were found to be factory defective; that the
plaintiff informed the defendant herein that it shall return As RJL MARTINEZ was canvassing for generators, SC gave
the 12 generators as in fact three of the 12 were actually RJL MARTINEZ its Quotation dated August 19, 1975
returned to the defendant; that the plaintiff sued the [Exhibit 'A"] for twelve (12) "Nagata'-brand generators
defendant on the warranty; asking for rescission of the with the following specifications:
contract; that the defendant be ordered to accept the
generators and be ordered to pay back the purchase "NAGATA" Single phase AC Alternators, 110/220 V, 60
money; and that the plaintiff asked for damages. cycles, 1800 rpm, unity power factor, rectifier type and
(Record on Appeal, pp. 27-28) [CA Decision, pp. 34; radio suppressor,, 5KVA (5KW) $546.75 @
Rollo, pp. 47-48.]
It was stipulated that payment would be made by
On the basis thereof, the Court of Appeals affirmed the confirming an irrevocable letter of credit in favor of
decision of the trial court ordering petitioner to refund to NAGATA CO. Furthermore, among the General
private respondent the purchase price for the twelve Conditions of Sale appearing on the dorsal side of the
(12) generators and to accept delivery of the same and Quotation is the following:
to pay s and attorney's fees, with a slight modification as
to the amount to be refunded. In its resolution of the Buyer will, upon request, promptly open irrevocable
motion for reconsideration, the Court of Appeals further Letter of Credit in favor of seller, in the amount stated on
modified the trial courts decision as to the award of the face of this memorandum, specifying shipment from
consequential damages. any Foreign port to Manila or any safe Philippine port,
permitting partial shipments and providing that in the
Ordinarily, the Court will not disturb the findings of fact of event the shippers are unable to ship within the specified
the Court of Appeals in petitions to review the latter's period due to strikes, lack of shipping space or other
decisions under Rule 45 of the Revised Rules of Court, the circumstances beyond their reasonable control, Buyer
scope of the Court's inquiry being limited to a review of agrees to extend the said Letter of Credit for later
the imputed errors of law [Chan v. Court of Appeals, G.R. shipment. The Letter of Credit shall otherwise be subject
No. L-27488, June 30, 1970, 33 SCRA 77; Tiongco v. De la to the conditions stated in this memorandum of
Merced, G.R. No. L-24426, July 25, 1974, 58 SCRA 89; contract. [Emphasis supplied.]
Corona v. Court of Appeals, G.R. No. 62482, April 28,
1983, 121 SCRA 865; Baniqued v. Court of Appeals, G.R. Agreeing with the terms of the Quotation, RJL MARTINEZ
No. opened a letter of credit in favor of NAGATA CO.
L-47531, January 30, 1984, 127 SCRA 596.] However, Accordingly, on November 20,1975, SCHMID transmitted
when, as in this case, it is the petitioner's position that the to NAGATA CO. an order [Exhibit "4"] for the twelve (12)
appealed judgment is premised on a misapprehension generators to be shipped directly to RJL MARTINEZ.
of NAGATA CO. thereafter sent RJL MARTINEZ the bill of
facts, * the Court is compelled to review the Court of lading and its own invoice (Exhibit "B") and, in
Appeal's factual findings [De la Cruz v. Sosing, 94 Phil. 26 accordance with the order, shipped the generators
(1953); Castillo v. Court of Appeals, G.R. No. I,48290, directly to RJL MARTINEZ. The invoice states that "one (1)
September 29, 1983, 124 SCRA 808.] case of 'NAGATA' AC Generators" consisting of twelve
sets was—bought by order and for account risk of Messrs.
Considering the sketchiness of the respondent court's RJL Martinez Fishing Corporation.
narration of facts, whether or not the Court of Appeals
indeed misapprehended the facts could not be For its efforts, SCHMID received from NAGATA CO. a
determined without a thorough review of the records. commission of $1,752.00 for the sale of the twelve
generators to RJL MARTINEZ. [Exhibits "9", "9-A", "9-B" and
Thus, after a careful scrutiny of the records, the Court has "9-C".]
found the appellate court's narration of facts
incomplete. It failed to include certain material facts. All fifteen (15) generators subject of the two transactions
burned out after continuous use. RJL MARTINEZ informed
The facts are actually as follows: SCHMID about this development. In turn, SCHMID
brought the matter to the attention of NAGATA CO. In
RJL MARTINEZ is engaged in the business of deep-sea July 1976, NAGATA CO. sent two technical
fishing. As RJL MARTINEZ needed electric generators for representatives who made an ocular inspection and
some of its boats and SCHMIID sold electric generators conducted tests on some of the burned out generators,
of different brands, negotiations between them for the which by then had been delivered to the premises of
acquisition thereof took place. The parties had two SCHMID.
separate transactions over "Nagata"-brand generators.
The tests revealed that the generators were overrated.
The first transaction was the sale of three (3) generators. As indicated both in the quotation and in the invoice,
In this transaction, it is not disputed that SCHMID was the the capacity of a generator was supposed to be 5 KVA
vendor of the generators. The company supplied the (kilovolt amperes). However, it turned out that the actual
generators from its stockroom; it was also SCHMID which capacity was only 4 KVA.
invoiced the sale.
SCHMID replaced the three (3) generators subject of the
The second transaction, which gave rise to the present first sale with generators of a different brand.
controversy, involves twelve (12) "Nagata"-brand

22
As for the twelve (12) generators subject of the second ART. 458. By the contract of sale one of the
transaction, the Japanese technicians advised RJL contracting parties obligates himself to transfer the
MARTINEZ to ship three (3) generators to Japan, which ownership of and to deliver a determinate thing, and the
the company did. These three (3) generators were other to pay therefor a price certain in money or its
repaired by NAGATA CO. itself and thereafter returned equivalent.
to RJL MARTINEZ; the remaining nine (9) were neither
repaired nor replaced. NAGATA CO., however, wrote It has been said that the essence of the contract of sale
SCHMID suggesting that the latter check the generators, is transfer of title or agreement to transfer it for a price
request for spare parts for replacement free of charge, paid or promised [Commissioner of Internal Revenue v.
and send to NAGATA CO. SCHMID's warranty claim Constantino, G.R. No. L-25926, February 27, 1970, 31
including the labor cost for repairs [Exhibit "I".] In its reply SCRA 779, 785, citing Salisbury v. Brooks, 94 SE 117,118-
letter, SCHMID indicated that it was not agreeable to 19.] "If such transfer puts the transferee in the attitude or
these terms [Exhibit "10".] position of an owner and makes him liable to the
transferor as a debtor for the agreed price, and not
As not all of the generators were replaced or repaired, merely as an agent who must account for the proceeds
RJL MARTINEZ formally demanded that it be refunded of a resale, the transaction is, a sale." [Ibid.]
the cost of the generators and paid damages. SCHMID
in its reply maintained that it was not the seller of the On the other hand, there is no statutory definition of
twelve (12) generators and thus refused to refund the "indent" in this jurisdiction. However, the Rules and
purchase price therefor. Hence, on February 14, 1977, Regulations to Implement Presidential Decree No. 1789
RJL MARTINEZ brought suit against SCHMID on the theory (the Omnibus Investments Code) lumps "indentors"
that the latter was the vendor of the twelve (12) together with "commercial brokers" and "commission
generators and, as such vendor, was liable under its merchants" in this manner:
warranty against hidden defects.
... A foreign firm which does business through the
Both the trial court and the Court of Appeals upheld the middlemen acting in their own names, such as indentors,
contention of RJL MARTINEZ that SCHMID was the vendor commercial brokers or commission merchants, shall not
in the second transaction and was liable under its be deemed doing business in the Philippines. But such
warranty. Accordingly, the courts a quo rendered indentors, commercial brokers or commission merchants
judgment in favor of RJL MARTINEZ. Hence, the instant shall be the ones deemed to be doing business in the
recourse to this Court. Philippines [Part I, Rule I, Section 1, par. g (1).]

In this petition for review, SCHMID seeks reversal on the Therefore, an indentor is a middlemen in the same class
following grounds: as commercial brokers and commission merchants. To
get an Idea of what an indentor is, a look at the
(i) Schmid was merely the indentor in the sale [of definition of those in his class may prove helpful.
the twelve (12) generators] between Nagata Co., the
exporter and RJL Martinez, the importer; A broker is generally defined as one who is engaged, for
others, on a commission, negotiating contracts relative
(ii) as mere indentor, Schmid is not liable for the to property with the custody of which he has no
seller's implied warranty against hidden defects, Schmid concern; the negotiator between other parties, never
not having personally assumed any such warranty. acting in his own name but in the name of those who
employed him; he is strictly a middleman and for some
(iii) in any event, conformably with Article 1563 of purpose the agent of both parties. (1 9 Cyc 186;
the Civil Code, there was no implied warranty against Henderson vs. The State, 50 Ind., 234; Black's Law
hidden defects in the sale of these twelve (12) Dictionary.) A broker is one whose occupation it is to
generators because these were sold under their trade bring parties together to bargain, or to bargain for them,
name "Nagata"; and in matters of trade, commerce or navigation. Mechem
on Agency, sec. 13; Wharton on Agency, sec. 695.)
(iv) Schmid, accordingly, is not liable for the Judge Storey, in his work on Agency, defines a broker as
reimbursement claimed by RJL Martinez nor for the an agent employed to make bargains and contracts
latter's unsubstantiated claim of PI 10.33 operational between other persons, in matters of trade, commerce
losses a day nor for exemplary damages, attorney's fees or navigation, for compensation commonly called
and costs. [Petition, p. 6.] brokerage. (Storey on Agency, sec. 28.) [Behn Meyer
and Co., Ltd. v. Nolting and Garcia, 35 Phil. 274, 279-80
1. As may be expected, the basic issue confronting this (1916).]
Court is whether the second transaction between the
parties was a sale or an indent transaction. SCHMID A commission merchant is one engaged in the purchase
maintains that it was the latter; RJL MARTINEZ claims that or sale for another of personal property which, for this
it was a sale. purpose, is placed in his possession and at his disposal.
He maintains a relation not only with his principal and the
At the outset, it must be understood that a contract is purchasers or vendors, but also with the property which
what the law defines it to be, considering its essential is subject matter of the transaction. [Pacific Commercial
elements, and not what it is caged by the contracting Co. v. Yatco, 68 Phil. 398, 401 (1939).]
parties [Quiroga v. Parsons Hardware Co., 38 Phil. 501
(1918).] Thus, the chief feature of a commercial broker and a
commercial merchant is that in effecting a sale, they are
The Civil Code defines a contract of sale, thus: merely intermediaries or middle-men, and act in a

23
certain sense as the agent of both parties to the
transaction. Second, it is asserted that the acts of SCHMID after it was
informed of the defect in the generators were indicative
Webster defines an indent as "a purchase order for of its awareness that it was the vendor and
goods especially when sent from a foreign country." acknowledgment of its liability as such vendor. Attention
[Webster's Ninth New Collegiate Dictionary 612 (1986).] It is called to these facts: When RJL MARTINEZ complained
would appear that there are three parties to an indent to SCHMID that the generators were defective, SCHMID
transaction, namely, the buyer, the indentor, and the immediately asked RJL MARTINEZ to send the defective
supplier who is usually a non-resident manufacturer generators to its shop to determine what was wrong.
residing in the country where the goods are to be SCHMID likewise informed NAGATA CO. about the
bought [Commissioner of Internal Revenue v. complaint of RJL MARTINEZ. When the Japanese
Cadwallader Pacific Company, G.R. No. L-20343, technicians arrived, SCHMID made available its
September 29, 1976, 73 SCRA 59.] An indentor may technicians, its shop and its testing equipment. After the
therefore be best described as one who, for generators were found to have factory defects, SCHMID
compensation, acts as a middleman in bringing about a facilitated the shipment of three (3) generators to Japan
purchase and sale of goods between a foreign supplier and, after their repair, back to the Philippines
and a local purchaser. [Memorandum for the Respondent, p. 8.]

Coming now to the case at bar, the admissions of the Third, it is argued that the contents of the letter from
parties and the facts appearing on record more than NAGATA CO. to SCHMID regarding the repair of the
suffice to warrant the conclusion that SCHMID was not a generators indicated that the latter was "within the
vendor, but was merely an indentor, in the second purview of a seller." [Ibid.]
transaction.
Fourth, it is argued that if SCHMID is considered as a mere
In its complaint, RJL MARTINEZ admitted that the agent of NAGATA CO., a foreign corporation not
generators were purchased "through indent order" licensed to do business in the Philippines, then the
[Record on Appeal, p. 6.] In the same vein, it admitted officers and employees of the former may be penalized
in its demand letter previously sent to SCHMID that for violation of the old Corporation Law which provided:
twelve (12) of en (15) Nagata-brand generators "were
purchased through your company (SCHMID), by indent Sec. 69 ... Any officer or agent of the corporation or any
order and three (3) by direct purchase." [Exhibit "D".] The person transacting business for any foreign corporation
evidence also show that RJL MARTINEZ paid directly not having the license prescribed shall be punished by
NAGATA CO, for the generators, and that the latter imprisonment for not less than six months nor more than
company itself invoiced the sale [Exhibit "B"], and two years or by a fine 'of not less than two hundred pesos
shipped the generators directly to the former. The only nor more than one thousand pesos or both such
participation of SCHMID was to act as an intermediary or imprisonment and fine, in the discretion of the Court.
middleman between NAGATA CO. and RJL MARTINEZ,
by procuring an order from RJL MARTINEZ and forwarding The facts do not bear out these contentions.
the same to NAGATA CO. for which the company
received a commission from NAGATA CO. [Exhibits "9", The first contention disregards the circumstances
"9-A", "9-B" and "9-C".] surrounding the second transaction as distinguished from
those surrounding the first transaction, as noted above.
The above transaction is significantly different from the
first transaction wherein SCHMID delivered the goods Neither does the solicitous manner by which SCHMID
from its own stock (which it had itself imported from responded to RJL MARTINEZ's complaint prove that the
NAGATA CO.), issued its own invoice, and collected former was the seller of the generators. As aptly stated
payment directly from the purchaser. by counsel, no indentor will just fold its hands when a
client complains about the goods it has bought upon the
These facts notwithstanding, RJL MARTINEZ insists that indentor's mediation. In its desire to promote the product
SCHMID was the vendor of the twelve generators on the of the seller and to retain the goodwill of the buyer, a
following grounds: prudent indentor desirous of maintaining his business
would have to act considerably. towards his clients.
First, it is contended that the Quotation and the General
Conditions of Sale on the dorsal side thereof do not Note that in contrast to its act of replacing the three (3)
necessarily lead to the conclusion that NAGATA CO., generators subject of the first transaction, SCHMID did
and not SCHMID, was the real seller in the case of the not replace any of the twelve (12) generators, but
twelve (12) generators in that: merely rendered assistance to both RJL TINES and
NAGATA CO. so that the latter could repair the
(i) the signing of the quotation, which was under defective generators.
SCHMID's letter-head, perfected the contract of sale
(impliedly, as between the signatories thereto—i.e., RJL The proposal of NAGATA CO. rejected by SCHMID that
MARTINEZ and SCHMID); the latter undertake the repair of the nine (9) other
defective generators, with the former supplying the
(ii) the qualification that the letter of credit shall be replacement parts free of charge and subsequently
in favor of NAGATA CO. constituted simply the manner reimbursing the latter for labor costs [Exhibit "I"], cannot
of payment requested by SCHMID (implying that support the conclusion that SCHMID is vendor of the
SCHMID, as seller, merely chose to waive direct generators of the second transaction or was acting
payment, stipulating delivery of payment instead to "within the purview of a seller."
NAGATA CO. as supplier);

24
Finally, the afore-quoted penal provision in the the warranty are known, it would not be possible to
Corporation Law finds no application to SCHMID and its determine whether there has been a breach thereof.
officers and employees relative to the transactions in the
instant case. What the law seeks to prevent, through said Moreover, a closer examination of the statements
provision, is the circumvention by foreign corporations of allegedly made by the representative of SCHMID reveals
licensing requirements through the device of employing that they merely constituted an expression of opinion
local representatives. An indentor, acting in his own which cannot by any means be construed as a warranty
name, is not, however, covered by the above-quoted [See Art. 1546, Civil Code.]
provision. In fact, the provision of the Rules and
Regulations implementing the Omnibus Investments We quote from Balagtas' testimony:
Code quoted above, which was copied from the Rules
implementing Republic Act No. 5455, recognizes the Atty. CATRAL:
distinct role of an indentor, such that when a foreign
corporation does business through such indentor, the Q Did you not say at the start of your cross examination,
foreign corporation is not deemed doing business in the Mr. Balagtas, that the only participation you had in the
Philippines. acquisition of those twelve (12) units [of] generators was
your having issued a purchase order to your own
In view of the above considerations, this Court rules that company for the purchase of the units?
SCHMID was merely acting as an indentor in the
purchase and sale of the twelve (12) generators subject ATTY. AQUINO:
of the second transaction. Not being the vendor,
SCHMID cannot be held liable for the implied warranty Misleading, your Honor.
for hidden defects under the Civil Code [Art. 1561, et
seq.] Atty. CATRAL:

2. However, even as SCHMID was merely an indentor, I am asking the witness.


there was nothing to prevent it from voluntarily
warranting that twelve (12) generators subject of the COURT:
second transaction are free from any hidden defects. In
other words, SCHMID may be held answerable for some He has the right to ask that question because he is on
other contractual obligation, if indeed it had so bound cross. Moreover, if I remember, he mentioned something
itself. As stated above, an indentor is to some extent an like that. Witness may answer.
agent of both the vendor and the vendee. As such
agent, therefore, he may expressly obligate himself to A Yes, sir. Before I submitted that, we negotiated with
undertake the obligations of his principal (See Art. 1897, Schmid and Oberly the beat generators they can
Civil Code.) recommend because we are looking for generators. The
representative of Schmid and Oberly said that Nagata is
The Court's inquiry, therefore, shifts to a determination of very good. That is why I recommended that to the
whether or not SCHMID expressly bound itself to warrant management. [t.s.n., October 14, 1977, pp. 23-25.]
that the twelve (12) generators are free of any hidden
defects. At any rate, when asked where SCHMID's warranty was
contained, Balagtas testified initially that it was in the
Again, we consider the facts. receipts covering the sale. (At this point, it may be stated
that the invoice [Exhibit "B-l"] was issued by NAGATA CO.
The Quotation (Exhibit A is in writing. It is the repository of and nowhere is it stated therein that SCHMID warranted
the contract between RJL MARTINEZ and SCHMID. the generators against defects.) When confronted with
Notably, nowhere is it stated therein that SCHMID did a copy of the invoice issued by NAGATA CO., he
bind itself to answer for the defects of the things sold. changed his assertion and claimed that what he meant
There being no allegation nor any proof that the was that the date of the commencement of the period
Quotation does not express the true intent and of SCHMID's warranty would be based on the date of the
agreement of the contracting parties, extrinsic parol invoice. On further examination, he again changed his
evidence of warranty will be to no avail [See Rule 123, mind and asserted that the warranty was given verbally
Sec. 22.] [TSN, October 14, 1977, pp. 19-22.] But then again, as
stated earlier, the witness failed to disclose the nature or
The trial court, however, relied on the testimony of terms and conditions of the warranty allegedly given by
Patrocinio Balagtas, the head of the Electrical SCHMID.
Department of RJL MARTINEZ, to support the finding that
SCHMID did warrant the twelve (12) generators against On the other hand, Hernan Adad SCHMID's General
defects. Manager, was categorical that the company does not
warrant goods bought on indent and that the company
Upon careful examination of Balagtas' testimony, what is warrants only the goods bought directly from it, like the
at once apparent is that Balagtas failed to disclose the three generators earlier bought by RJL MARTINEZ itself
nature or terms and conditions of the warranty allegedly [TSN, December 19, 1977, pp. 63-64.] It must be recalled
given by SC Was it a warranty that the generators would that SCHMID readily replaced the three generators from
be fit for the fishing business of the buyer? Was it a its own stock. In the face of these conflicting testimonies,
warranty that the generators to be delivered would this Court is of the view that RJL has failed to prove that
meet the specifications indicated in the Quotation? SCHMID had given a warranty on the twelve (12)
Considering the different kinds of warranties that may be generators subject of the second transaction. Even
contracted, unless the nature or terms and conditions of assuming that a warranty was given, there is no way to

25
determine whether there has been a breach thereof, petitioner a letter dated January 23, 1990 informing it
considering that its nature or terms and conditions have that SLDR No. 1214M had been "sold and endorsed" to it
not been shown. but that it had been refused further withdrawals of sugar
from petitioner's warehouse despite the fact that only
3. In view of the foregoing, it becomes unnecessary to 2,000 bags had been withdrawn.[5] CSC thus inquired
pass upon the other issues. when it would be allowed to withdraw the remaining
23,000 bags.
WHEREFORE, finding the Court of Appeals to have
committed a reversible error, the petition is GRANTED On January 31, 1990, petitioner replied that it could not
and the appealed Decision and Resolution of the Court allow any further withdrawals of sugar against SLDR No.
of Appeals are REVERSED. The complaint of RJL Martinez 1214M because STM had already dwithdrawn all the
Fishing Corporation is hereby DISMISSED. No costs. sugar covered by the cleared checks.[6]

SO ORDERED. On March 2, 1990, CSC sent petitioner a letter


demanding the release of the balance of 23,000 bags.
VICTORIAS MILLING CO VS CA
Seven days later, petitioner reiterated that all the sugar
Before us is a petition for review on certiorari under Rule corresponding to the amount of STM's cleared checks
45 of the Rules of Court assailing the decision of the Court had been fully withdrawn and hence, there would be no
of Appeals dated February 24, 1994, in CA-G.R. CV No. more deliveries of the commodity to STM's account.
31717, as well as the respondent court's resolution of Petitioner also noted that CSC had represented itself to
September 30, 1994 modifying said decision. Both be STM's agent as it had withdrawn the 2,000 bags
decision and resolution amended the judgment dated against SLDR No. 1214M "for and in behalf" of STM.
February 13, 1991, of the Regional Trial Court of Makati
City, Branch 147, in Civil Case No. 90-118. On April 27, 1990, CSC filed a complaint for specific
performance, docketed as Civil Case No. 90-1118.
The facts of this case as found by both the trial and Defendants were Teresita Ng Sy (doing business under
appellate courts are as follows: the name of St. Therese Merchandising) and herein
petitioner. Since the former could not be served with
St. Therese Merchandising (hereafter STM) regularly summons, the case proceeded only against the latter.
bought sugar from petitioner Victorias Milling Co., Inc., During the trial, it was discovered that Teresita Ng Go
(VMC). In the course of their dealings, petitioner issued who testified for CSC was the same Teresita Ng Sy who
several Shipping List/Delivery Receipts (SLDRs) to STM as could not be reached through summons.[7] CSC,
proof of purchases. Among these was SLDR No. 1214M, however, did not bother to pursue its case against her,
which gave rise to the instant case. Dated October 16, but instead used her as its witness.
1989, SLDR No. 1214M covers 25,000 bags of sugar. Each
bag contained 50 kilograms and priced at P638.00 per CSC's complaint alleged that STM had fully paid
bag as "per sales order VMC Marketing No. 042 dated petitioner for the sugar covered by SLDR No. 1214M.
October 16, 1989."[1] The transaction it covered was a Therefore, the latter had no justification for refusing
"direct sale."[2] The SLDR also contains an additional note delivery of the sugar. CSC prayed that petitioner be
which reads: "subject for (sic) availability of a (sic) stock ordered to deliver the 23,000 bags covered by SLDR No.
at NAWACO (warehouse)."[3] 1214M and sought the award of P1,104,000.00 in
unrealized profits, P3,000,000.00 as exemplary damages,
On October 25, 1989, STM sold to private respondent P2,200,000.00 as attorney's fees and litigation expenses.
Consolidated Sugar Corporation (CSC) its rights in SLDR
No. 1214M for P 14,750,000.00. CSC issued one check Petitioner's primary defense a quo was that it was an
dated October 25, 1989 and three checks postdated unpaid seller for the 23,000 bags.[8] Since STM had
November 13, 1989 in payment. That same day, CSC already drawn in full all the sugar corresponding to the
wrote petitioner that it had been authorized by STM to amount of its cleared checks, it could no longer
withdraw the sugar covered by SLDR No. 1214M. authorize further delivery of sugar to CSC. Petitioner also
Enclosed in the letter were a copy of SLDR No. 1214M contended that it had no privity of contract with CSC.
and a letter of authority from STM authorizing CSC "to
withdraw for and in our behalf the refined sugar covered Petitioner explained that the SLDRs, which it had issued,
by Shipping List/Delivery Receipt-Refined Sugar (SDR) were not documents of title, but mere delivery receipts
No. 1214 dated October 16, 1989 in the total quantity of issued pursuant to a series of transactions entered into
25,000 bags."[4] between it and STM. The SLDRs prescribed delivery of the
sugar to the party specified therein and did not authorize
On October 27, 1989, STM issued 16 checks in the total the transfer of said party's rights and interests.
amount of P31,900,000.00 with petitioner as payee. The
latter, in turn, issued Official Receipt No. 33743 dated Petitioner also alleged that CSC did not pay for the SLDR
October 27, 1989 acknowledging receipt of the said and was actually STM's co-conspirator to defraud it
checks in payment of 50,000 bags. Aside from SLDR No. through a misrepresentation that CSC was an innocent
1214M, said checks also covered SLDR No. 1213. purchaser for value and in good faith. Petitioner then
prayed that CSC be ordered to pay it the following sums:
Private respondent CSC surrendered SLDR No. 1214M to P10,000,000.00 as moral damages; P10,000,000.00 as
the petitioner's NAWACO warehouse and was allowed exemplary damages; and P1,500,000.00 as attorney's
to withdraw sugar. However, after 2,000 bags had been fees. Petitioner also prayed that cross-defendant STM be
released, petitioner refused to allow further withdrawals ordered to pay it P10,000,000.00 in exemplary damages,
of sugar against SLDR No. 1214M. CSC then sent and P1,500,000.00 as attorney's fees.

26
Said witness likewise failed to present any bank record
Since no settlement was reached at pre-trial, the trial showing that the checks issued by the buyer, Teresita Ng
court heard the case on the merits. Go, in payment of the purchase price of the sugar
covered by SLDR No. 1214 were dishonored."[10]
As earlier stated, the trial court rendered its judgment
favoring private respondent CSC, as follows: Petitioner appealed the trial courts decision to the Court
of Appeals.
"WHEREFORE, in view of the foregoing, the Court hereby
renders judgment in favor of the plaintiff and against On appeal, petitioner averred that the dealings
defendant Victorias Milling Company: between it and STM were part of a series of transactions
involving only one account or one general contract of
"1) Ordering defendant Victorias Milling Company to sale. Pursuant to this contract, STM or any of its
deliver to the plaintiff 23,000 bags of refined sugar due authorized agents could withdraw bags of sugar only
under SLDR No. 1214; against cleared checks of STM. SLDR No. 21214M was
only one of 22 SLDRs issued to STM and since the latter
"2) Ordering defendant Victorias Milling Company to had already withdrawn its full quota of sugar under the
pay the amount of P920,000.00 as unrealized profits, the said SLDR, CSC was already precluded from seeking
amount of P800,000.00 as exemplary damages and the delivery of the 23,000 bags of sugar.
amount of P1,357,000.00, which is 10% of the acquisition
value of the undelivered bags of refined sugar in the Private respondent CSC countered that the sugar
amount of P13,570,000.00, as attorney's fees, plus the purchases involving SLDR No. 1214M were separate and
costs. independent transactions and that the details of the
series of purchases were contained in a single statement
"SO ORDERED."[9] with a consolidated summary of cleared check
payments and sugar stock withdrawals because this a
It made the following observations: more convenient system than issuing separate
statements for each purchase.
"[T]he testimony of plaintiff's witness Teresita Ng Go, that
she had fully paid the purchase price of P15,950,000.00 The appellate court considered the following issues: (a)
of the 25,000 bags of sugar bought by her covered by Whether or not the transaction between petitioner and
SLDR No. 1214 as well as the purchase price of STM involving SLDR No. 1214M was a separate,
P15,950,000.00 for the 25,000 bags of sugar bought by independent, and single transaction; (b) Whether or not
her covered by SLDR No. 1213 on the same date, CSC had the capacity to sue on its own on SLDR No.
October 16, 1989 (date of the two SLDRs) is duly 1214M; and (c) Whether or not CSC as buyer from STM of
supported by Exhibits C to C-15 inclusive which are post- the rights to 25,000 bags of sugar covered by SLDR No.
dated checks dated October 27, 1989 issued by St. 1214M could compel petitioner to deliver 23,000 bags
Therese Merchandising in favor of Victorias Milling allegedly unwithdrawn.
Company at the time it purchased the 50,000 bags of
sugar covered by SLDR No. 1213 and 1214. Said checks On February 24, 1994, the Court of Appeals rendered its
appear to have been honored and duly credited to the decision modifying the trial court's judgment, to wit:
account of Victorias Milling Company because on
October 27, 1989 Victorias Milling Company issued "WHEREFORE, the Court hereby MODIFIES the assailed
official receipt no. 34734 in favor of St. Therese judgment and orders defendant-appellant to:
Merchandising for the amount of P31,900,000.00 (Exhibits
B and B-1). The testimony of Teresita Ng Go is further "1) Deliver to plaintiff-appellee 12,586 bags of sugar
supported by Exhibit F, which is a computer printout of covered by SLDR No. 1214M;
defendant Victorias Milling Company showing the
quantity and value of the purchases made by St. Therese " 2) Pay to plaintiff-appellee P792,918.00 which is 10% of
Merchandising, the SLDR no. issued to cover the the value of the undelivered bags of refined sugar, as
purchase, the official reciept no. and the status of attorneys fees;
payment. It is clear in Exhibit 'F' that with respect to the
sugar covered by SLDR No. 1214 the same has been fully "3) Pay the costs of suit.
paid as indicated by the word 'cleared' appearing
under the column of 'status of payment.' "SO ORDERED."[11]

"On the other hand, the claim of defendant Victorias Both parties then seasonably filed separate motions for
Milling Company that the purchase price of the 25,000 reconsideration.
bags of sugar purchased by St. Therese Merchandising
covered by SLDR No. 1214 has not been fully paid is In its resolution dated September 30, 1994, the appellate
supported only by the testimony of Arnulfo Caintic, court modified its decision to read:
witness for defendant Victorias Milling Company. The
Court notes that the testimony of Arnulfo Caintic is "WHEREFORE, the Court hereby modifies the assailed
merely a sweeping barren assertion that the purchase judgment and orders defendant-appellant to:
price has not been fully paid and is not corroborated by
any positive evidence. There is an insinuation by Arnulfo "(1) Deliver to plaintiff-appellee 23,000 bags of refined
Caintic in his testimony that the postdated checks issued sugar under SLDR No. 1214M;
by the buyer in payment of the purchased price were
dishonored. However, said witness failed to present in "(2) Pay costs of suit.
Court any dishonored check or any replacement check.

27
"SO ORDERED."[12] undisputed facts which, had they been considered,
would have shown that petitioner was not liable, except
The appellate court explained the rationale for the for 69 bags of sugar, and which would justify review of its
modification as follows: conclusion of facts by this Honorable Court.

"There is merit in plaintiff-appellee's position. " 3. The Court of Appeals misapplied the law on
compensation under Arts. 1279, 1285 and 1626 of the
"Exhibit F' We relied upon in fixing the number of bags of Civil Code when it ruled that compensation applied only
sugar which remained undelivered as 12,586 cannot be to credits from one SLDR or contract and not to those
made the basis for such a finding. The rule is explicit that from two or more distinct contracts between the same
courts should consider the evidence only for the purpose parties; and erred in denying petitioner's right to setoff all
for which it was offered. (People v. Abalos, et al, 1 CA its credits arising prior to notice of assignment from other
Rep 783). The rationale for this is to afford the party sales or SLDRs against private respondent's claim as
against whom the evidence is presented to object assignee under SLDR No. 1214M, so as to extinguish or
thereto if he deems it necessary. Plaintiff-appellee is, reduce its liability to 69 bags, because the law on
therefore, correct in its argument that Exhibit F' which compensation applies precisely to two or more distinct
was offered to prove that checks in the total amount of contracts between the same parties (emphasis in the
P15,950,000.00 had been cleared. (Formal Offer of original).
Evidence for Plaintiff, Records p. 58) cannot be used to
prove the proposition that 12,586 bags of sugar "4. The Court of Appeals erred in concluding that the
remained undelivered. settlement or liquidation of accounts in Exh. F between
petitioner and STM, respondent's admission of its
"Testimonial evidence (Testimonies of Teresita Ng [TSN, 10 balance, and STM's acquiescence thereto by silence for
October 1990, p. 33] and Marianito L. Santos [TSN, 17 almost one year did not render Exh. `F' an account
October 1990, pp. 16, 18, and 36]) presented by plaintiff- stated and its balance binding.
appellee was to the effect that it had withdrawn only
2,000 bags of sugar from SLDR after which it was not "5. The Court of Appeals erred in not holding that the
allowed to withdraw anymore. Documentary evidence conditions of the assigned SLDR No. 1214, namely, (a) its
(Exhibit I, Id., p. 78, Exhibit K, Id., p. 80) show that plaintiff- subject matter being generic, and (b) the sale of sugar
appellee had sent demand letters to defendant- being subject to its availability at the Nawaco
appellant asking the latter to allow it to withdraw the warehouse, made the sale conditional and prevented
remaining 23,000 bags of sugar from SLDR 1214M. STM or private respondent from acquiring title to the
Defendant-appellant, on the other hand, alleged that sugar; and the non-availability of sugar freed petitioner
sugar delivery to the STM corresponded only to the value from further obligation.
of cleared checks; and that all sugar corresponded to
cleared checks had been withdrawn. Defendant- "6. The Court of Appeals erred in not holding that the
appellant did not rebut plaintiff-appellee's assertions. It "clean hands" doctrine precluded respondent from
did not present evidence to show how many bags of seeking judicial reliefs (sic) from petitioner, its only
sugar had been withdrawn against SLDR No. 1214M, remedy being against its assignor."[14]
precisely because of its theory that all sales in question
were a series of one single transaction and withdrawal of Simply stated, the issues now to be resolved are:
sugar depended on the clearing of checks paid
therefor. (1)....Whether or not the Court of Appeals erred in not
ruling that CSC was an agent of STM and hence,
"After a second look at the evidence, We see no reason estopped to sue upon SLDR No. 1214M as an assignee.
to overturn the findings of the trial court on this point."[13]
(2)....Whether or not the Court of Appeals erred in
Hence, the instant petition, positing the following errors applying the law on compensation to the transaction
as grounds for review: under SLDR No. 1214M so as to preclude petitioner from
offsetting its credits on the other SLDRs.
"1. The Court of Appeals erred in not holding that STM's
and private respondent's specially informing petitioner (3)....Whether or not the Court of Appeals erred in not
that respondent was authorized by buyer STM to ruling that the sale of sugar under SLDR No. 1214M was a
withdraw sugar against SLDR No. 1214M "for and in our conditional sale or a contract to sell and hence freed
(STM) behalf," (emphasis in the original) private petitioner from further obligations.
respondent's withdrawing 2,000 bags of sugar for STM,
and STM's empowering other persons as its agents to (4)....Whether or not the Court of Appeals committed an
withdraw sugar against the same SLDR No. 1214M, error of law in not applying the "clean hands doctrine" to
rendered respondent like the other persons, an agent of preclude CSC from seeking judicial relief.
STM as held in Rallos v. Felix Go Chan & Realty Corp., 81
SCRA 252, and precluded it from subsequently claiming The issues will be discussed in seriatim.
and proving being an assignee of SLDR No. 1214M and
from suing by itself for its enforcement because it was Anent the first issue, we find from the records that
conclusively presumed to be an agent (Sec. 2, Rule 131, petitioner raised this issue for the first time on appeal. It is
Rules of Court) and estopped from doing so. (Art. 1431, settled that an issue which was not raised during the trial
Civil Code). in the court below could not be raised for the first time
on appeal as to do so would be offensive to the basic
" 2. The Court of Appeals erred in manifestly and rules of fair play, justice, and due process.[15]
arbitrarily ignoring and disregarding certain relevant and

28
Nonetheless, the Court of Appeals opted to address this an agent of STM. Private respondent CSC was not
issue, hence, now a matter for our consideration. subject to STM's control. The question of whether a
contract is one of sale or agency depends on the
Petitioner heavily relies upon STM's letter of authority intention of the parties as gathered from the whole
allowing CSC to withdraw sugar against SLDR No. 1214M scope and effect of the language employed.[25] That
to show that the latter was STM's agent. The pertinent the authorization given to CSC contained the phrase "for
portion of said letter reads: and in our (STM's) behalf" did not establish an agency.
Ultimately, what is decisive is the intention of the
"This is to authorize Consolidated Sugar Corporation or its parties.[26] That no agency was meant to be established
representative to withdraw for and in our behalf (stress by the CSC and STM is clearly shown by CSC's
supplied) the refined sugar covered by Shipping communication to petitioner that SLDR No. 1214M had
List/Delivery Receipt = Refined Sugar (SDR) No. 1214 been "sold and endorsed" to it.[27] The use of the words
dated October 16, 1989 in the total quantity of 25, 000 "sold and endorsed" means that STM and CSC intended
bags."[16] a contract of sale, and not an agency. Hence, on this
score, no error was committed by the respondent
The Civil Code defines a contract of agency as follows: appellate court when it held that CSC was not STM's
agent and could independently sue petitioner.
"Art. 1868. By the contract of agency a person binds
himself to render some service or to do something in On the second issue, proceeding from the theory that
representation or on behalf of another, with the consent the transactions entered into between petitioner and
or authority of the latter." STM are but serial parts of one account, petitioner insists
that its debt has been offset by its claim for STM's unpaid
It is clear from Article 1868 that the basis of agency is purchases, pursuant to Article 1279 of the Civil Code.[28]
representation.[17] On the part of the principal, there However, the trial court found, and the Court of Appeals
must be an actual intention to appoint[18] or an concurred, that the purchase of sugar covered by SLDR
intention naturally inferable from his words or actions;[19] No. 1214M was a separate and independent
and on the part of the agent, there must be an intention transaction; it was not a serial part of a single transaction
to accept the appointment and act on it,[20] and in the or of one account contrary to petitioner's insistence.
absence of such intent, there is generally no agency.[21] Evidence on record shows, without being rebutted, that
One factor which most clearly distinguishes agency from petitioner had been paid for the sugar purchased under
other legal concepts is control; one person - the agent - SLDR No. 1214M. Petitioner clearly had the obligation to
agrees to act under the control or direction of another - deliver said commodity to STM or its assignee. Since said
the principal. Indeed, the very word "agency" has come sugar had been fully paid for, petitioner and CSC, as
to connote control by the principal.[22] The control assignee of STM, were not mutually creditors and debtors
factor, more than any other, has caused the courts to of each other. No reversible error could thereby be
put contracts between principal and agent in a imputed to respondent appellate court when, it refused
separate category.[23] The Court of Appeals, in finding to apply Article 1279 of the Civil Code to the present
that CSC, was not an agent of STM, opined: case.

"This Court has ruled that where the relation of agency is Regarding the third issue, petitioner contends that the
dependent upon the acts of the parties, the law makes sale of sugar under SLDR No. 1214M is a conditional sale
no presumption of agency, and it is always a fact to be or a contract to sell, with title to the sugar still remaining
proved, with the burden of proof resting upon the with the vendor. Noteworthy, SLDR No. 1214M contains
persons alleging the agency, to show not only the fact the following terms and conditions:
of its existence, but also its nature and extent (Antonio
vs. Enriquez [CA], 51 O.G. 3536]. Here, defendant- "It is understood and agreed that by payment by
appellant failed to sufficiently establish the existence of buyer/trader of refined sugar and/or receipt of this
an agency relation between plaintiff-appellee and STM. document by the buyer/trader personally or through a
The fact alone that it (STM) had authorized withdrawal of representative, title to refined sugar is transferred to
sugar by plaintiff-appellee "for and in our (STM's) behalf" buyer/trader and delivery to him/it is deemed effected
should not be eyed as pointing to the existence of an and completed (stress supplied) and buyer/trader
agency relation ...It should be viewed in the context of assumes full responsibility therefore"[29]
all the circumstances obtaining. Although it would seem
STM represented plaintiff-appellee as being its agent by The aforequoted terms and conditions clearly show that
the use of the phrase "for and in our (STM's) behalf" the petitioner transferred title to the sugar to the buyer or his
matter was cleared when on 23 January 1990, plaintiff- assignee upon payment of the purchase price. Said
appellee informed defendant-appellant that SLDFR No. terms clearly establish a contract of sale, not a contract
1214M had been "sold and endorsed" to it by STM (Exhibit to sell. Petitioner is now estopped from alleging the
I, Records, p. 78). Further, plaintiff-appellee has shown contrary. The contract is the law between the
that the 25, 000 bags of sugar covered by the SLDR No. contracting parties.[30] And where the terms and
1214M were sold and transferred by STM to it ...A conditions so stipulated are not contrary to law, morals,
conclusion that there was a valid sale and transfer to good customs, public policy or public order, the
plaintiff-appellee may, therefore, be made thus contract is valid and must be upheld.[31] Having
capacitating plaintiff-appellee to sue in its own name, transferred title to the sugar in question, petitioner is now
without need of joining its imputed principal STM as co- obliged to deliver it to the purchaser or its assignee.
plaintiff."[24]
As to the fourth issue, petitioner submits that STM and
In the instant case, it appears plain to us that private private respondent CSC have entered into a conspiracy
respondent CSC was a buyer of the SLDFR form, and not to defraud it of its sugar. This conspiracy is allegedly

29
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.

30

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