(1) (Onerous Sale)
G.R. No. L-11827 July 31, 1961
FERNANDO A. GAITE, plaintiff-appellee,
vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO.,
INC., SEGUNDINA VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and
FERNANDO TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-
appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the
claims involved aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by
himself or in a representative capacity, of 11 iron lode mineral claims, known as
the Dawahan Group, situated in the municipality of Jose Panganiban, province
of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier
constituted and appointed plaintiff-appellee Fernando A. Gaite as his true and
lawful attorney-in-fact to enter into a contract with any individual or juridical
person for the exploration and development of the mining claims aforementioned
on a royalty basis of not less than P0.50 per ton of ore that might be extracted
therefrom. On March 19, 1954, Gaite in turn executed a general assignment
(Record on Appeal, pp. 17-19) conveying the development and exploitation of said
mining claims into the Larap Iron Mines, a single proprietorship owned solely by
and belonging to him, on the same royalty basis provided for in Exhibit "3".
Thereafter, Gaite embarked upon the development and exploitation of the mining
claims in question, opening and paving roads within and outside their
boundaries, making other improvements and installing facilities therein for use
in the development of the mines, and in time extracted therefrom what he claim
and estimated to be approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority
granted by him to Gaite to exploit and develop the mining claims in question,
and Gaite assented thereto subject to certain conditions. As a result, a document
entitled "Revocation of Power of Attorney and Contract" was executed on
December 8, 1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the
consideration of P20,000.00, plus 10% of the royalties that Fonacier would
receive from the mining claims, all his rights and interests on all the roads,
improvements, and facilities in or outside said claims, the right to use the
business name "Larap Iron Mines" and its goodwill, and all the records and
documents relative to the mines. In the same document, Gaite transferred to
Fonacier all his rights and interests over the "24,000 tons of iron ore, more or
less" that the former had already extracted from the mineral claims, in
consideration of the sum of P75,000.00, P10,000.00 of which was paid upon the
signing of the agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from
and out of the first letter of credit covering the first shipment of iron ores and of
the first amount derived from the local sale of iron ore made by the Larap Mines
& Smelting Co. Inc., its assigns, administrators, or successors in interests.
To secure the payment of the said balance of P65,000.00, Fonacier promised to
execute in favor of Gaite a surety bond, and pursuant to the promise, Fonacier
delivered to Gaite a surety bond dated December 8, 1954 with himself (Fonacier)
as principal and the Larap Mines and Smelting Co. and its stockholders George
Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and Fernando
Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was
presented to him by Fonacier together with the "Revocation of Power of Attorney
and Contract", Exhibit "A", on December 8, 1954, he refused to sign said Exhibit
"A" unless another bond under written by a bonding company was put up by
defendants to secure the payment of the P65,000.00 balance of their price of the
iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated
December 8, 1954 (Exhibit "B"),was executed by the same parties to the first
bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional
surety, but it provided that the liability of the surety company would attach only
when there had been an actual sale of iron ore by the Larap Mines & Smelting
Co. for an amount of not less then P65,000.00, and that, furthermore, the liability
of said surety company would automatically expire on December 8, 1955. Both
bonds were attached to the "Revocation of Power of Attorney and Contract",
Exhibit "A", and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite
and the two executed and signed the "Revocation of Power of Attorney and
Contract", Exhibit "A", Fonacier entered into a "Contract of Mining Operation",
ceding, transferring, and conveying unto the Larap Mines and Smelting Co., Inc.
the right to develop, exploit, and explore the mining claims in question, together
with the improvements therein and the use of the name "Larap Iron Mines" and
its good will, in consideration of certain royalties. Fonacier likewise transferred,
in the same document, the complete title to the approximately 24,000 tons of
iron ore which he acquired from Gaite, to the Larap & Smelting Co., in
consideration for the signing by the company and its stockholders of the surety
bonds delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the
Far Eastern Surety and Insurance Company, no sale of the approximately 24,000
tons of iron ore had been made by the Larap Mines & Smelting Co., Inc., nor had
the P65,000.00 balance of the price of said ore been paid to Gaite by Fonacier
and his sureties payment of said amount, on the theory that they had lost right
to make use of the period given them when their bond, Exhibit "B" automatically
expired (Exhibits "C" to "C-24"). And when Fonacier and his sureties failed to pay
as demanded by Gaite, the latter filed the present complaint against them in the
Court of First Instance of Manila (Civil Case No. 29310) for the payment of the
P65,000.00 balance of the price of the ore, consequential damages, and
attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that the
obligation sued upon by Gaite was subject to a condition that the amount of
P65,000.00 would be payable out of the first letter of credit covering the first
shipment of iron ore and/or the first amount derived from the local sale of the
iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time of the filing
of the complaint, no sale of the iron ore had been made, hence the condition had
not yet been fulfilled; and that consequently, the obligation was not yet due and
demandable. Defendant Fonacier also contended that only 7,573 tons of the
estimated 24,000 tons of iron ore sold to him by Gaite was actually delivered,
and counterclaimed for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to
two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite
P65,000.00 become due and demandable when the defendants failed to renew
the surety bond underwritten by the Far Eastern Surety and Insurance Co., Inc.
(Exhibit "B"), which expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to
defendant Fonacier were actually in existence in the mining claims when these
parties executed the "Revocation of Power of Attorney and Contract", Exhibit "A."
On the first question, the lower court held that the obligation of the defendants
to pay plaintiff the P65,000.00 balance of the price of the approximately 24,000
tons of iron ore was one with a term: i.e., that it would be paid upon the sale of
sufficient iron ore by defendants, such sale to be effected within one year or
before December 8, 1955; that the giving of security was a condition precedent
to Gait's giving of credit to defendants; and that as the latter failed to put up a
good and sufficient security in lieu of the Far Eastern Surety bond (Exhibit "B")
which expired on December 8, 1955, the obligation became due and demandable
under Article 1198 of the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have
approximately 24,000 tons of iron ore at the mining claims in question at the
time of the execution of the contract Exhibit "A."
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering
defendants to pay him, jointly and severally, P65,000.00 with interest at 6% per
annum from December 9, 1955 until payment, plus costs. From this judgment,
defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were presented
for resolution: a motion to declare the appellants Larap Mines & Smelting Co.,
Inc. and George Krakower in contempt, filed by appellant Fonacier, and two
motions to dismiss the appeal as having become academic and a motion for new
trial and/or to take judicial notice of certain documents, filed by appellee Gaite.
The motion for contempt is unmeritorious because the main allegation therein
that the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the
iron ore here in question, which allegedly is "property in litigation", has not been
substantiated; and even if true, does not make these appellants guilty of
contempt, because what is under litigation in this appeal is appellee Gaite's right
to the payment of the balance of the price of the ore, and not the iron ore itself.
As for the several motions presented by appellee Gaite, it is unnecessary to
resolve these motions in view of the results that we have reached in this case,
which we shall hereafter discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant Fonacier
to pay appellee Gaite the P65,000.00 (balance of the price of the iron ore in
question)is one with a period or term and not one with a suspensive condition,
and that the term expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons
in the stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract
Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F.
Fonacier all his rights and interests over the 24,000 tons of iron ore, more or
less, above-referred to together with all his rights and interests to operate the
mine in consideration of the sum of SEVENTY-FIVE THOUSAND PESOS
(P75,000.00) which the latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this
agreement.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from
and out of the first letter of credit covering the first shipment of iron ore made by
the Larap Mines & Smelting Co., Inc., its assigns, administrators, or successors
in interest.
We find the court below to be legally correct in holding that the shipment or local
sale of the iron ore is not a condition precedent (or suspensive) to the payment
of the balance of P65,000.00, but was only a suspensive period or term. What
characterizes a conditional obligation is the fact that its efficacy or obligatory
force (as distinguished from its demandability) is subordinated to the happening
of a future and uncertain event; so that if the suspensive condition does not take
place, the parties would stand as if the conditional obligation had never existed.
That the parties to the contract Exhibit "A" did not intend any such state of things
to prevail is supported by several circumstances:
1) The words of the contract express no contingency in the buyer's obligation to
pay: "The balance of Sixty-Five Thousand Pesos (P65,000.00) will be paid out of
the first letter of credit covering the first shipment of iron ores . . ." etc. There is
no uncertainty that the payment will have to be made sooner or later; what is
undetermined is merely the exact date at which it will be made. By the very terms
of the contract, therefore, the existence of the obligation to pay is recognized; only
its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does each
one of the parties assume a correlative obligation (the seller to deliver and
transfer ownership of the thing sold and the buyer to pay the price),but each
party anticipates performance by the other from the very start. While in a sale
the obligation of one party can be lawfully subordinated to an uncertain event,
so that the other understands that he assumes the risk of receiving nothing for
what he gives (as in the case of a sale of hopes or expectations, emptio spei), it is
not in the usual course of business to do so; hence, the contingent character of
the obligation must clearly appear. Nothing is found in the record to evidence
that Gaite desired or assumed to run the risk of losing his right over the ore
without getting paid for it, or that Fonacier understood that Gaite assumed any
such risk. This is proved by the fact that Gaite insisted on a bond a to guarantee
payment of the P65,000.00, an not only upon a bond by Fonacier, the Larap
Mines & Smelting Co., and the company's stockholders, but also on one by a
surety company; and the fact that appellants did put up such bonds indicates
that they admitted the definite existence of their obligation to pay the balance of
P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or
shipment of the ore as a condition precedent, would be tantamount to leaving
the payment at the discretion of the debtor, for the sale or shipment could not be
made unless the appellants took steps to sell the ore. Appellants would thus be
able to postpone payment indefinitely. The desireability of avoiding such a
construction of the contract Exhibit "A" needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract
the parties indented a suspensive condition or a suspensive period (dies ad quem)
for the payment of the P65,000.00, the rules of interpretation would incline the
scales in favor of "the greater reciprocity of interests", since sale is essentially
onerous. The Civil Code of the Philippines, Article 1378, paragraph 1, in fine,
provides:
If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.
and there can be no question that greater reciprocity obtains if the buyer'
obligation is deemed to be actually existing, with only its maturity (due date)
postponed or deferred, that if such obligation were viewed as non-existent or not
binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier
was a sale on credit, and not an aleatory contract where the transferor, Gaite,
would assume the risk of not being paid at all; and that the previous sale or
shipment of the ore was not a suspensive condition for the payment of the
balance of the agreed price, but was intended merely to fix the future date of the
payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier and
his sureties, still have the right to insist that Gaite should wait for the sale or
shipment of the ore before receiving payment; or, in other words, whether or not
they are entitled to take full advantage of the period granted them for making the
payment.
We agree with the court below that the appellant have forfeited the right court
below that the appellants have forfeited the right to compel Gaite to wait for the
sale of the ore before receiving payment of the balance of P65,000.00, because of
their failure to renew the bond of the Far Eastern Surety Company or else replace
it with an equivalent guarantee. The expiration of the bonding company's
undertaking on December 8, 1955 substantially reduced the security of the
vendor's rights as creditor for the unpaid P65,000.00, a security that Gaite
considered essential and upon which he had insisted when he executed the deed
of sale of the ore to Fonacier (Exhibit "A"). The case squarely comes under
paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines:
"ART. 1198. The debtor shall lose every right to make use of the period:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or securities which
he has promised.
(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory.
Appellants' failure to renew or extend the surety company's bond upon its
expiration plainly impaired the securities given to the creditor (appellee Gaite),
unless immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's acceptance of the surety
company's bond with full knowledge that on its face it would automatically expire
within one year was a waiver of its renewal after the expiration date. No such
waiver could have been intended, for Gaite stood to lose and had nothing to gain
barely; and if there was any, it could be rationally explained only if the appellants
had agreed to sell the ore and pay Gaite before the surety company's bond expired
on December 8, 1955. But in the latter case the defendants-appellants' obligation
to pay became absolute after one year from the transfer of the ore to Fonacier by
virtue of the deed Exhibit "A.".
All the alternatives, therefore, lead to the same result: that Gaite acted within his
rights in demanding payment and instituting this action one year from and after
the contract (Exhibit "A") was executed, either because the appellant debtors had
impaired the securities originally given and thereby forfeited any further time
within which to pay; or because the term of payment was originally of no more
than one year, and the balance of P65,000.00 became due and payable
thereafter.
Coming now to the second issue in this appeal, which is whether there were really
24,000 tons of iron ore in the stockpiles sold by appellee Gaite to appellant
Fonacier, and whether, if there had been a short-delivery as claimed by
appellants, they are entitled to the payment of damages, we must, at the outset,
stress two things: first, that this is a case of a sale of a specific mass of fungible
goods for a single price or a lump sum, the quantity of "24,000 tons of iron ore,
more or less," stated in the contract Exhibit "A," being a mere estimate by the
parties of the total tonnage weight of the mass; and second, that the evidence
shows that neither of the parties had actually measured of weighed the mass, so
that they both tried to arrive at the total quantity by making an estimate of the
volume thereof in cubic meters and then multiplying it by the estimated weight
per ton of each cubic meter.
The sale between the parties is a sale of a specific mass or iron ore because no
provision was made in their contract for the measuring or weighing of the ore
sold in order to complete or perfect the sale, nor was the price of P75,000,00
agreed upon by the parties based upon any such measurement.(see Art. 1480,
second par., New Civil Code). The subject matter of the sale is, therefore, a
determinate object, the mass, and not the actual number of units or tons
contained therein, so that all that was required of the seller Gaite was to deliver
in good faith to his buyer all of the ore found in the mass, notwithstanding that
the quantity delivered is less than the amount estimated by them (Mobile
Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872,
applying art. 2459 of the Louisiana Civil Code). There is no charge in this case
that Gaite did not deliver to appellants all the ore found in the stockpiles in the
mining claims in questions; Gaite had, therefore, complied with his promise to
deliver, and appellants in turn are bound to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook to
buy, not a definite mass, but approximately 24,000 tons of ore, so that any
substantial difference in this quantity delivered would entitle the buyers to
recover damages for the short-delivery, was there really a short-delivery in this
case?
We think not. As already stated, neither of the parties had actually measured or
weighed the whole mass of ore cubic meter by cubic meter, or ton by ton. Both
parties predicate their respective claims only upon an estimated number of cubic
meters of ore multiplied by the average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the
stockpiles of ore that he sold to Fonacier, while appellants contend that by actual
measurement, their witness Cirpriano Manlañgit found the total volume of ore in
the stockpiles to be only 6.609 cubic meters. As to the average weight in tons per
cubic meter, the parties are again in disagreement, with appellants claiming the
correct tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite
claims that the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the
tonnage factor of iron ore in this case to be that made by Leopoldo F. Abad, chief
of the Mines and Metallurgical Division of the Bureau of Mines, a government
pensionado to the States and a mining engineering graduate of the Universities
of Nevada and California, with almost 22 years of experience in the Bureau of
Mines. This witness placed the tonnage factor of every cubic meter of iron ore at
between 3 metric tons as minimum to 5 metric tons as maximum. This estimate,
in turn, closely corresponds to the average tonnage factor of 3.3 adopted in his
corrected report (Exhibits "FF" and FF-1") by engineer Nemesio Gamatero, who
was sent by the Bureau of Mines to the mining claims involved at the request of
appellant Krakower, precisely to make an official estimate of the amount of iron
ore in Gaite's stockpiles after the dispute arose.

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

There was, consequently, no short-delivery in this case as would entitle

appellants to the payment of damages, nor could Gaite have been guilty of any
fraud in making any misrepresentation to appellants as to the total quantity of
ore in the stockpiles of the mining claims in question, as charged by appellants,
since Gaite's estimate appears to be substantially correct.

WHEREFORE, finding no error in the decision appealed from, we hereby affirm

the same, with costs against appellants.Republic of the Philippines

(2) Commutative Sale
[G.R. No. 126376. November 20, 2003]
SPOUSES BERNARDO BUENAVENTURA and CONSOLACION JOAQUIN,
SPOUSES JUANITO EDRA and NORA JOAQUIN, SPOUSES RUFINO VALDOZ
and EMMA JOAQUIN, and NATIVIDAD JOAQUIN, petitioners, vs. COURT OF
APPEALS, SPOUSES LEONARDO JOAQUIN and FELICIANA LANDRITO,
SPOUSES FIDEL JOAQUIN and CONCHITA BERNARDO, SPOUSES TOMAS
JOAQUIN and SOLEDAD ALCORAN, SPOUSES ARTEMIO JOAQUIN and
SOCORRO ANGELES, SPOUSES ALEXANDER MENDOZA and CLARITA
JOAQUIN, SPOUSES TELESFORO CARREON and FELICITAS JOAQUIN,
SPOUSES DANILO VALDOZ and FE JOAQUIN, and SPOUSES GAVINO JOAQUIN
and LEA ASIS, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari[1] to annul the Decision[2] dated 26
June 1996 of the Court of Appeals in CA-G.R. CV No. 41996. The Court of
Appeals affirmed the Decision[3] dated 18 February 1993 rendered by Branch 65
of the Regional Trial Court of Makati (trial court) in Civil Case No. 89-5174. The
trial court dismissed the case after it found that the parties executed the Deeds
of Sale for valid consideration and that the plaintiffs did not have a cause of
action against the defendants.
The Facts
The Court of Appeals summarized the facts of the case as follows:
Defendant spouses Leonardo Joaquin and Feliciana Landrito are the parents of
plaintiffs Consolacion, Nora, Emma and Natividad as well as of defendants Fidel,
Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all surnamed JOAQUIN. The
married Joaquin children are joined in this action by their respective spouses.
Sought to be declared null and void ab initio are certain deeds of sale of real
property executed by defendant parents Leonardo Joaquin and Feliciana
Landrito in favor of their co-defendant children and the corresponding certificates
of title issued in their names, to wit:
1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan (LRC) Psd-
256395 executed on 11 July 1978, in favor of defendant Felicitas Joaquin, for a
consideration of P6,000.00 (Exh. C), pursuant to which TCT No. [36113/T-172]
was issued in her name (Exh. C-1);
2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC) Psd-
256394 executed on 7 June 1979, in favor of defendant Clarita Joaquin, for a
consideration of P1[2],000.00 (Exh. D), pursuant to which TCT No. S-109772 was
issued in her name (Exh. D-1);
3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC) Psd-
256394 executed on 12 May 1988, in favor of defendant spouses Fidel Joaquin
and Conchita Bernardo, for a consideration of P54,[3]00.00 (Exh. E), pursuant
to which TCT No. 155329 was issued to them (Exh. E-1);
4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC) Psd-
256394 executed on 12 May 1988, in favor of defendant spouses Artemio Joaquin
and Socorro Angeles, for a consideration of P[54,3]00.00 (Exh. F), pursuant to
which TCT No. 155330 was issued to them (Exh. F-1); and
5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision plan (LRC)
Psd-256395 executed on 9 September 1988, in favor of Tomas Joaquin, for a
consideration of P20,000.00 (Exh. G), pursuant to which TCT No. 157203 was
issued in her name (Exh. G-1).
[6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC) Psd-
256395 executed on 7 October 1988, in favor of Gavino Joaquin, for a
consideration of P25,000.00 (Exh. K), pursuant to which TCT No. 157779 was
issued in his name (Exh. K-1).]
In seeking the declaration of nullity of the aforesaid deeds of sale and certificates
of title, plaintiffs, in their complaint, aver:
- XX-
The deeds of sale, Annexes C, D, E, F, and G, [and K] are simulated as they are,
are NULL AND VOID AB INITIO because
a) Firstly, there was no actual valid consideration for the deeds of sale xxx over
the properties in litis;
b) Secondly, assuming that there was consideration in the sums reflected in the
questioned deeds, the properties are more than three-fold times more valuable
than the measly sums appearing therein;
c) Thirdly, the deeds of sale do not reflect and express the true intent of the
parties (vendors and vendees); and

d) Fourthly, the purported sale of the properties in litis was the result of a
deliberate conspiracy designed to unjustly deprive the rest of the compulsory
heirs (plaintiffs herein) of their legitime.
- XXI -
Necessarily, and as an inevitable consequence, Transfer Certificates of Title Nos.
36113/T-172, S-109772, 155329, 155330, 157203 [and 157779] issued by the
Registrar of Deeds over the properties in litis xxx are NULL AND VOID AB INITIO.
Defendants, on the other hand aver (1) that plaintiffs do not have a cause of
action against them as well as the requisite standing and interest to assail their
titles over the properties in litis; (2) that the sales were with sufficient
considerations and made by defendants parents voluntarily, in good faith, and
with full knowledge of the consequences of their deeds of sale; and (3) that the
certificates of title were issued with sufficient factual and legal basis.[4]
(Emphasis in the original)
The Ruling of the Trial Court
Before the trial, the trial court ordered the dismissal of the case against defendant
spouses Gavino Joaquin and Lea Asis.[5] Instead of filing an Answer with their
co-defendants, Gavino Joaquin and Lea Asis filed a Motion to Dismiss.[6] In
granting the dismissal to Gavino Joaquin and Lea Asis, the trial court noted that
compulsory heirs have the right to a legitime but such right is contingent since
said right commences only from the moment of death of the decedent pursuant
to Article 777 of the Civil Code of the Philippines.[7]
After trial, the trial court ruled in favor of the defendants and dismissed the
complaint. The trial court stated:
In the first place, the testimony of the defendants, particularly that of the xxx
father will show that the Deeds of Sale were all executed for valuable
consideration. This assertion must prevail over the negative allegation of
plaintiffs.
And then there is the argument that plaintiffs do not have a valid cause of action
against defendants since there can be no legitime to speak of prior to the death
of their parents. The court finds this contention tenable. In determining the
legitime, the value of the property left at the death of the testator shall be
considered (Art. 908 of the New Civil Code). Hence, the legitime of a compulsory
heir is computed as of the time of the death of the decedent. Plaintiffs therefore
cannot claim an impairment of their legitime while their parents live.
All the foregoing considered, this case is DISMISSED.
In order to preserve whatever is left of the ties that should bind families together,
the counterclaim is likewise DISMISSED.
No costs.
SO ORDERED.[8]
The Ruling of the Court of Appeals
The Court of Appeals affirmed the decision of the trial court. The appellate court
ruled:
To the mind of the Court, appellants are skirting the real and decisive issue in
this case, which is, whether xxx they have a cause of action against appellees.
Upon this point, there is no question that plaintiffs-appellants, like their
defendant brothers and sisters, are compulsory heirs of defendant spouses,
Leonardo Joaquin and Feliciana Landrito, who are their parents. However, their
right to the properties of their defendant parents, as compulsory heirs, is merely
inchoate and vests only upon the latters death. While still alive, defendant
parents are free to dispose of their properties, provided that such dispositions
are not made in fraud of creditors.
Plaintiffs-appellants are definitely not parties to the deeds of sale in question.
Neither do they claim to be creditors of their defendant parents. Consequently,
they cannot be considered as real parties in interest to assail the validity of said
deeds either for gross inadequacy or lack of consideration or for failure to express
the true intent of the parties. In point is the ruling of the Supreme Court in
Velarde, et al. vs. Paez, et al., 101 SCRA 376, thus:
The plaintiffs are not parties to the alleged deed of sale and are not principally or
subsidiarily bound thereby; hence, they have no legal capacity to challenge their
validity.
Plaintiffs-appellants anchor their action on the supposed impairment of their
legitime by the dispositions made by their defendant parents in favor of their
defendant brothers and sisters. But, as correctly held by the court a quo, the
legitime of a compulsory heir is computed as of the time of the death of the
decedent. Plaintiffs therefore cannot claim an impairment of their legitime while
their parents live.
With this posture taken by the Court, consideration of the errors assigned by
plaintiffs-appellants is inconsequential.

WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs
against plaintiffs-appellants.
SO ORDERED.[9]
Hence, the instant petition.
Issues
Petitioners assign the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
CONVEYANCE IN QUESTION HAD NO VALID CONSIDERATION.
2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN ASSUMING
THAT THERE WAS A CONSIDERATION, THE SAME IS GROSSLY INADEQUATE.
3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE DEEDS OF
SALE DO NOT EXPRESS THE TRUE INTENT OF THE PARTIES.
4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
CONVEYANCE WAS PART AND PARCEL OF A CONSPIRACY AIMED AT
UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF THE SPOUSES
LEONARDO JOAQUIN AND FELICIANA LANDRITO OF THEIR INTEREST OVER
THE SUBJECT PROPERTIES.
5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS
HAVE A GOOD, SUFFICIENT AND VALID CAUSE OF ACTION AGAINST THE
PRIVATE RESPONDENTS.[10]
The Ruling of the Court
We find the petition without merit.
We will discuss petitioners legal interest over the properties subject of the Deeds
of Sale before discussing the issues on the purported lack of consideration and
gross inadequacy of the prices of the Deeds of Sale.
Whether Petitioners have a legal interest
over the properties subject of the Deeds of Sale
Petitioners Complaint betrays their motive for filing this case. In their Complaint,
petitioners asserted that the purported sale of the properties in litis was the
result of a deliberate conspiracy designed to unjustly deprive the rest of the
compulsory heirs (plaintiffs herein) of their legitime. Petitioners strategy was to
have the Deeds of Sale declared void so that ownership of the lots would
eventually revert to their respondent parents. If their parents die still owning the
lots, petitioners and their respondent siblings will then co-own their parents
estate by hereditary succession.[11]
It is evident from the records that petitioners are interested in the properties
subject of the Deeds of Sale, but they have failed to show any legal right to the
properties. The trial and appellate courts should have dismissed the action for
this reason alone. An action must be prosecuted in the name of the real party-
in-interest.[12]
[T]he question as to real party-in-interest is whether he is the party who would
be benefitted or injured by the judgment, or the party entitled to the avails of the
suit.
xxx
In actions for the annulment of contracts, such as this action, the real parties
are those who are parties to the agreement or are bound either principally or
subsidiarily or are prejudiced in their rights with respect to one of the contracting
parties and can show the detriment which would positively result to them from
the contract even though they did not intervene in it (Ibaez v. Hongkong &
Shanghai Bank, 22 Phil. 572 [1912]) xxx.
These are parties with a present substantial interest, as distinguished from a
mere expectancy or future, contingent, subordinate, or consequential interest.
The phrase present substantial interest more concretely is meant such interest
of a party in the subject matter of the action as will entitle him, under the
substantive law, to recover if the evidence is sufficient, or that he has the legal
title to demand and the defendant will be protected in a payment to or recovery
by him.[13]
Petitioners do not have any legal interest over the properties subject of the Deeds
of Sale. As the appellate court stated, petitioners right to their parents properties
is merely inchoate and vests only upon their parents death. While still living, the
parents of petitioners are free to dispose of their properties. In their
overzealousness to safeguard their future legitime, petitioners forget that
theoretically, the sale of the lots to their siblings does not affect the value of their
parents estate. While the sale of the lots reduced the estate, cash of equivalent
value replaced the lots taken from the estate.
Whether the Deeds of Sale are void
for lack of consideration
Petitioners assert that their respondent siblings did not actually pay the prices
stated in the Deeds of Sale to their respondent father. Thus, petitioners ask the
court to declare the Deeds of Sale void.
A contract of sale is not a real contract, but a consensual contract. As a
consensual contract, a contract of sale becomes a binding and valid contract
upon the meeting of the minds as to price. If there is a meeting of the minds of
the parties as to the price, the contract of sale is valid, despite the manner of
payment, or even the breach of that manner of payment. If the real price is not
stated in the contract, then the contract of sale is valid but subject to
reformation. If there is no meeting of the minds of the parties as to the price,
because the price stipulated in the contract is simulated, then the contract is
void.[14] Article 1471 of the Civil Code states that if the price in a contract of sale
is simulated, the sale is void.
It is not the act of payment of price that determines the validity of a contract of
sale. Payment of the price has nothing to do with the perfection of the contract.
Payment of the price goes into the performance of the contract. Failure to pay the
consideration is different from lack of consideration. The former results in a right
to demand the fulfillment or cancellation of the obligation under an existing valid
contract while the latter prevents the existence of a valid contract.[15]
Petitioners failed to show that the prices in the Deeds of Sale were absolutely
simulated. To prove simulation, petitioners presented Emma Joaquin Valdozs
testimony stating that their father, respondent Leonardo Joaquin, told her that
he would transfer a lot to her through a deed of sale without need for her payment
of the purchase price.[16] The trial court did not find the allegation of absolute
simulation of price credible. Petitioners failure to prove absolute simulation of
price is magnified by their lack of knowledge of their respondent siblings financial
capacity to buy the questioned lots.[17] On the other hand, the Deeds of Sale
which petitioners presented as evidence plainly showed the cost of each lot sold.
Not only did respondents minds meet as to the purchase price, but the real price
was also stated in the Deeds of Sale. As of the filing of the complaint, respondent
siblings have also fully paid the price to their respondent father.[18]
Whether the Deeds of Sale are void
for gross inadequacy of price
Petitioners ask that assuming that there is consideration, the same is grossly
inadequate as to invalidate the Deeds of Sale.
Articles 1355 of the Civil Code states:
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall
not invalidate a contract, unless there has been fraud, mistake or undue
influence. (Emphasis supplied)
Article 1470 of the Civil Code further provides:
Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as
may indicate a defect in the consent, or that the parties really intended a
donation or some other act or contract. (Emphasis supplied)
Petitioners failed to prove any of the instances mentioned in Articles 1355 and
1470 of the Civil Code which would invalidate, or even affect, the Deeds of Sale.
Indeed, there is no requirement that the price be equal to the exact value of the
subject matter of sale. All the respondents believed that they received the
commutative value of what they gave. As we stated in Vales v. Villa:[19]
Courts cannot follow one every step of his life and extricate him from bad
bargains, protect him from unwise investments, relieve him from one-sided
contracts, or annul the effects of foolish acts. Courts cannot constitute
themselves guardians of persons who are not legally incompetent. Courts operate
not because one person has been defeated or overcome by another, but because
he has been defeated or overcome illegally. Men may do foolish things, make
ridiculous contracts, use miserable judgment, and lose money by them indeed,
all they have in the world; but not for that alone can the law intervene and
restore. There must be, in addition, a violation of the law, the commission of what
the law knows as an actionable wrong, before the courts are authorized to lay
hold of the situation and remedy it. (Emphasis in the original)
Moreover, the factual findings of the appellate court are conclusive on the parties
and carry greater weight when they coincide with the factual findings of the trial
court. This Court will not weigh the evidence all over again unless there has been
a showing that the findings of the lower court are totally devoid of support or are
clearly erroneous so as to constitute serious abuse of discretion.[20] In the
instant case, the trial court found that the lots were sold for a valid consideration,
and that the defendant children actually paid the purchase price stipulated in
their respective Deeds of Sale. Actual payment of the purchase price by the buyer
to the seller is a factual finding that is now conclusive upon us.
WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.SUPREME
(3) Contract for Piece of Work
CELESTINO CO & COMPANY, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor General
Guillermo E. Torres and Solicitor Federico V. Sian for respondent.
BENGZON, J.:
Appeal from a decision of the Court of Tax Appeals.
Celestino Co & Company is a duly registered general copartnership doing
business under the trade name of "Oriental Sash Factory". From 1946 to 1951 it
paid percentage taxes of 7 per cent on the gross receipts of its sash, door and
window factory, in accordance with section one hundred eighty-six of the
National Revenue Code imposing taxes on sale of manufactured articles. However
in 1952 it began to claim liability only to the contractor's 3 per cent tax (instead
of 7 per cent) under section 191 of the same Code; and having failed to convince
the Bureau of Internal Revenue, it brought the matter to the Court of Tax
Appeals, where it also failed. Said the Court:
To support his contention that his client is an ordinary contractor . . . counsel
presented . . . duplicate copies of letters, sketches of doors and windows and
price quotations supposedly sent by the manager of the Oriental Sash Factory to
four customers who allegedly made special orders to doors and window from the
said factory. The conclusion that counsel would like us to deduce from these few
exhibits is that the Oriental Sash Factory does not manufacture ready-made
doors, sash and windows for the public but only upon special order of its select
customers. . . . I cannot believe that petitioner company would take, as in fact it
has taken, all the trouble and expense of registering a special trade name for its
sash business and then orders company stationery carrying the bold print
"Oriental Sash Factory (Celestino Co & Company, Prop.) 926 Raon St. Quiapo,
Manila, Tel. No. 33076, Manufacturers of all kinds of doors, windows, sashes,
furniture, etc. used season-dried and kiln-dried lumber, of the best quality
workmanships" solely for the purpose of supplying the needs for doors, windows
and sash of its special and limited customers. One ill note that petitioner has
chosen for its tradename and has offered itself to the public as a "Factory", which
means it is out to do business, in its chosen lines on a big scale. As a general
rule, sash factories receive orders for doors and windows of special design only
in particular cases but the bulk of their sales is derived from a ready-made doors
and windows of standard sizes for the average home. Moreover, as shown from
the investigation of petitioner's book of accounts, during the period from January
1, 1952 to September 30, 1952, it sold sash, doors and windows worth
P188,754.69. I find it difficult to believe that this amount which runs to six
figures was derived by petitioner entirely from its few customers who made
special orders for these items.
Even if we were to believe petitioner's claim that it does not manufacture ready-
made sash, doors and windows for the public and that it makes these articles
only special order of its customers, that does not make it a contractor within the
purview of section 191 of the national Internal Revenue Code. there are no less
than fifty occupations enumerated in the aforesaid section of the national
Internal Revenue Code subject to percentage tax and after reading carefully each
and every one of them, we cannot find under which the business of
manufacturing sash, doors and windows upon special order of customers fall
under the category of "road, building, navigation, artesian well, water workers
and other construction work contractors" are those who alter or repair buildings,
structures, streets, highways, sewers, street railways railroads logging roads,
electric lines or power lines, and includes any other work for the construction,
altering or repairing for which machinery driven by mechanical power is used.
(Payton vs. City of Anadardo 64 P. 2d 878, 880, 179 Okl. 68).
Having thus eliminated the feasibility off taxing petitioner as a contractor under
191 of the national Internal Revenue Code, this leaves us to decide the remaining
issue whether or not petitioner could be taxed with lesser strain and more
accuracy as seller of its manufactured articles under section 186 of the same
code, as the respondent Collector of Internal Revenue has in fact been doing the
Oriental Sash Factory was established in 1946.
The percentage tax imposed in section 191 of our Tax Code is generally a tax on
the sales of services, in contradiction with the tax imposed in section 186 of the
same Code which is a tax on the original sales of articles by the manufacturer,
producer or importer. (Formilleza's Commentaries and Jurisprudence on the
National Internal Revenue Code, Vol. II, p. 744). The fact that the articles sold
are manufactured by the seller does not exchange the contract from the purview
of section 186 of the National Internal Revenue Code as a sale of articles.
There was a strong dissent; but upon careful consideration of the whole matter
are inclines to accept the above statement of the facts and the law. The important
thing to remember is that Celestino Co & Company habitually makes sash,
windows and doors, as it has represented in its stationery and advertisements to
the public. That it "manufactures" the same is practically admitted by appellant
itself. The fact that windows and doors are made by it only when customers place
their orders, does not alter the nature of the establishment, for it is obvious that
it only accepted such orders as called for the employment of such material-
moulding, frames, panels-as it ordinarily manufactured or was in a position
habitually to manufacture.
Perhaps the following paragraph represents in brief the appellant's position in
this Court:
Since the petitioner, by clear proof of facts not disputed by the respondent,
manufacturers sash, windows and doors only for special customers and upon
their special orders and in accordance with the desired specifications of the
persons ordering the same and not for the general market: since the doors
ordered by Don Toribio Teodoro & Sons, Inc., for instance, are not in existence
and which never would have existed but for the order of the party desiring it; and
since petitioner's contractual relation with his customers is that of a contract for
a piece of work or since petitioner is engaged in the sale of services, it follows that
the petitioner should be taxed under section 191 of the Tax Code and NOT under
section 185 of the same Code." (Appellant's brief, p. 11-12).
But the argument rests on a false foundation. Any builder or homeowner, with
sufficient money, may order windows or doors of the kind manufactured by this
appellant. Therefore it is not true that it serves special customers only or confines
its services to them alone. And anyone who sees, and likes, the doors ordered by
Don Toribio Teodoro & Sons Inc. may purchase from appellant doors of the same
kind, provided he pays the price. Surely, the appellant will not refuse, for it can
easily duplicate or even mass-produce the same doors-it is mechanically
equipped to do so.
That the doors and windows must meet desired specifications is neither here nor
there. If these specifications do not happen to be of the kind habitually
manufactured by appellant — special forms for sash, mouldings of panels — it
would not accept the order — and no sale is made. If they do, the transaction
would be no different from a purchasers of manufactured goods held is stock for
sale; they are bought because they meet the specifications desired by the
purchaser.
Nobody will say that when a sawmill cuts lumber in accordance with the peculiar
specifications of a customer-sizes not previously held in stock for sale to the
public-it thereby becomes an employee or servant of the customer,1 not the seller
of lumber. The same consideration applies to this sash manufacturer.
The Oriental Sash Factory does nothing more than sell the goods that it mass-
produces or habitually makes; sash, panels, mouldings, frames, cutting them to
such sizes and combining them in such forms as its customers may desire.
On the other hand, petitioner's idea of being a contractor doing construction jobs
is untenable. Nobody would regard the doing of two window panels a construction
work in common parlance.2
Appellant invokes Article 1467 of the New Civil Code to bolster its contention that
in filing orders for windows and doors according to specifications, it did not sell,
but merely contracted for particular pieces of work or "merely sold its services".
Said article reads as follows:
A contract for the delivery at a certain price of an article which the vendor in the
ordinary course of his business manufactures or procures for the general market,
whether the same is on hand at the time or not, is a contract of sale, but if the
goods are to be manufactured specially for the customer and upon his special
order, and not for the general market, it is contract for a piece of work.
It is at once apparent that the Oriental Sash Factory did not merely sell its
services to Don Toribio Teodoro & Co. (To take one instance) because it also sold
the materials. The truth of the matter is that it sold materials ordinarily
manufactured by it — sash, panels, mouldings — to Teodoro & Co., although in
such form or combination as suited the fancy of the purchaser. Such new form
does not divest the Oriental Sash Factory of its character as manufacturer.
Neither does it take the transaction out of the category of sales under Article
1467 above quoted, because although the Factory does not, in the ordinary
course of its business, manufacture and keep on stock doors of the kind sold to
Teodoro, it could stock and/or probably had in stock the sash, mouldings and
panels it used therefor (some of them at least).
In our opinion when this Factory accepts a job that requires the use of
extraordinary or additional equipment, or involves services not generally
performed by it-it thereby contracts for a piece of work — filing special orders
within the meaning of Article 1467. The orders herein exhibited were not shown
to be special. They were merely orders for work — nothing is shown to call them
special requiring extraordinary service of the factory.
The thought occurs to us that if, as alleged-all the work of appellant is only to fill
orders previously made, such orders should not be called special work, but
regular work. Would a factory do business performing only special, extraordinary
or peculiar merchandise?
Anyway, supposing for the moment that the transactions were not sales, they
were neither lease of services nor contract jobs by a contractor. But as the doors
and windows had been admittedly "manufactured" by the Oriental Sash Factory,
such transactions could be, and should be taxed as "transfers" thereof under
section 186 of the National Revenue Code.
The appealed decision is consequently affirmed. So ordered.
(4) Contract for Piece of Work
G.R. No. L-27044 June 30, 1975
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX
APPEALS, respondents.
G.R. No. L-27452 June 30, 1975
ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX
APPEALS, respondent.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General
Felicisimo R. Rosete, Solicitor Lolita O. Gal-lang, and Special Attorney Gemaliel
H. Montalino for Commissioner of Internal Revenue, etc.
Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and
J.R. Balonkita for Engineering and Supply Company.
ESGUERRA, J.:
Petition for review on certiorari of the decision of the Court of Tax Appeals in CTA
Case No. 681, dated November 29, 1966, assessing a compensating tax of
P174,441.62 on the Engineering Equipment and Supply Company.
As found by the Court of Tax Appeals, and as established by the evidence on
record, the facts of this case are as follows:
Engineering Equipment and Supply Co. (Engineering for short), a domestic
corporation, is an engineering and machinery firm. As operator of an integrated
engineering shop, it is engaged, among others, in the design and installation of
central type air conditioning system, pumping plants and steel fabrications. (Vol.
I pp. 12-16 T.S.N. August 23, 1960)
On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now
Commissioner, of Internal Revenue denouncing Engineering for tax evasion by
misdeclaring its imported articles and failing to pay the correct percentage taxes
due thereon in connivance with its foreign suppliers (Exh. "2" p. 1 BIR record
Vol. I). Engineering was likewise denounced to the Central Bank (CB) for alleged
fraud in obtaining its dollar allocations. Acting on these denunciations, a raid
and search was conducted by a joint team of Central Bank, (CB), National Bureau
of Investigation (NBI) and Bureau of Internal Revenue (BIR) agents on September
27, 1956, on which occasion voluminous records of the firm were seized and
confiscated. (pp. 173-177 T.S.N.)
On September 30, 1957, revenue examiners Quesada and Catudan reported and
recommended to the then Collector, now Commissioner, of Internal Revenue
(hereinafter referred to as Commissioner) that Engineering be assessed for
P480,912.01 as deficiency advance sales tax on the theory that it misdeclared its
importation of air conditioning units and parts and accessories thereof which are
subject to tax under Section 185(m)1 of the Tax Code, instead of Section 186 of
the same Code. (Exh. "3" pp. 59-63 BIR rec. Vol. I) This assessment was revised
on January 23, 1959, in line with the observation of the Chief, BIR Law Division,
and was raised to P916,362.56 representing deficiency advance sales tax and
manufacturers sales tax, inclusive of the 25% and 50% surcharges. (pp. 72-80
BIR rec. Vol. I)
On March 3, 1959. the Commissioner assessed against, and demanded upon,
Engineering payment of the increased amount and suggested that P10,000 be
paid as compromise in extrajudicial settlement of Engineering's penal liability for
violation of the Tax Code. The firm, however, contested the tax assessment and
requested that it be furnished with the details and particulars of the
Commissioner's assessment. (Exh. "B" and "15", pp. 86-88 BIR rec. Vol. I) The
Commissioner replied that the assessment was in accordance with law and the
facts of the case.
On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals
and during the pendency of the case the investigating revenue examiners reduced
Engineering's deficiency tax liabilities from P916,362.65 to P740,587.86 (Exhs.
"R" and "9" pp. 162-170, BIR rec.), based on findings after conferences had with
Engineering's Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals rendered its decision, the
dispositive portion of which reads as follows:
For ALL THE FOREGOING CONSIDERATIONS, the decision of respondent
appealed from is hereby modified, and petitioner, as a contractor, is declared
exempt from the deficiency manufacturers sales tax covering the period from
June 1, 1948. to September 2, 1956. However, petitioner is ordered to pay
respondent, or his duly authorized collection agent, the sum of P174,141.62 as
compensating tax and 25% surcharge for the period from 1953 to September
1956. With costs against petitioner.
The Commissioner, not satisfied with the decision of the Court of Tax Appeals,
appealed to this Court on January 18, 1967, (G.R. No. L-27044). On the other
hand, Engineering, on January 4, 1967, filed with the Court of Tax Appeals a
motion for reconsideration of the decision abovementioned. This was denied on
April 6, 1967, prompting Engineering to file also with this Court its appeal,
docketed as G.R. No. L-27452.
Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the same
parties and issues, We have decided to consolidate and jointly decide them.
Engineering in its Petition claims that the Court of Tax Appeals committed the
following errors:
1. That the Court of Tax Appeals erred in holding Engineering Equipment
& Supply Company liable to the 30% compensating tax on its importations of
equipment and ordinary articles used in the central type air conditioning systems
it designed, fabricated, constructed and installed in the buildings and premises
of its customers, rather than to the compensating tax of only 7%;
2. That the Court of Tax Appeals erred in holding Engineering Equipment
& Supply Company guilty of fraud in effecting the said importations on the basis
of incomplete quotations from the contents of alleged photostat copies of
documents seized illegally from Engineering Equipment and Supply Company
which should not have been admitted in evidence;
3. That the Court of Tax Appeals erred in holding Engineering Equipment
& Supply Company liable to the 25% surcharge prescribed in Section 190 of the
Tax Code;
4. That the Court of Tax Appeals erred in holding the assessment as not
having prescribed;
5. That the Court of Tax Appeals erred in holding Engineering Equipment
& Supply Company liable for the sum of P174,141.62 as 30% compensating tax
and 25% surcharge instead of completely absolving it from the deficiency
assessment of the Commissioner.
The Commissioner on the other hand claims that the Court of Tax Appeals erred:
1. In holding that the respondent company is a contractor and not a
manufacturer.
2. In holding respondent company liable to the 3% contractor's tax imposed
by Section 191 of the Tax Code instead of the 30% sales tax prescribed in Section
185(m) in relation to Section 194(x) both of the same Code;
3. In holding that the respondent company is subject only to the 30%
compensating tax under Section 190 of the Tax Code and not to the 30% advance
sales tax imposed by section 183 (b), in relation to section 185(m) both of the
same Code, on its importations of parts and accessories of air conditioning units;
4. In not holding the company liable to the 50% fraud surcharge under
Section 183 of the Tax Code on its importations of parts and accessories of air
conditioning units, notwithstanding the finding of said court that the respondent
company fraudulently misdeclared the said importations;
5. In holding the respondent company liable for P174,141.62 as
compensating tax and 25% surcharge instead of P740,587.86 as deficiency
advance sales tax, deficiency manufacturers tax and 25% and 50% surcharge for
the period from June 1, 1948 to December 31, 1956.
The main issue revolves on the question of whether or not Engineering is a
manufacturer of air conditioning units under Section 185(m), supra, in relation
to Sections 183(b) and 194 of the Code, or a contractor under Section 191 of the
same Code.
The Commissioner contends that Engineering is a manufacturer and seller of air
conditioning units and parts or accessories thereof and, therefore, it is subject to
the 30% advance sales tax prescribed by Section 185(m) of the Tax Code, in
relation to Section 194 of the same, which defines a manufacturer as follows:
Section 194. — Words and Phrases Defined. — In applying the provisions of this
Title, words and phrases shall be taken in the sense and extension indicated
below:
xxx xxx xxx
(x) "Manufacturer" includes every person who by physical or chemical
process alters the exterior texture or form or inner substance of any raw material
or manufactured or partially manufactured products in such manner as to
prepare it for a special use or uses to which it could not have been put in its
original condition, or who by any such process alters the quality of any such
material or manufactured or partially manufactured product so as to reduce it
to marketable shape, or prepare it for any of the uses of industry, or who by any
such process combines any such raw material or manufactured or partially
manufactured products with other materials or products of the same or of
different kinds and in such manner that the finished product of such process of
manufacture can be put to special use or uses to which such raw material or
manufactured or partially manufactured products in their original condition
could not have been put, and who in addition alters such raw material or
manufactured or partially manufactured products, or combines the same to
produce such finished products for the purpose of their sale or distribution to
others and not for his own use or consumption.
In answer to the above contention, Engineering claims that it is not a
manufacturer and setter of air-conditioning units and spare parts or accessories
thereof subject to tax under Section 185(m) of the Tax Code, but a contractor
engaged in the design, supply and installation of the central type of air-
conditioning system subject to the 3% tax imposed by Section 191 of the same
Code, which is essentially a tax on the sale of services or labor of a contractor
rather than on the sale of articles subject to the tax referred to in Sections 184,
185 and 186 of the Code.
The arguments of both the Engineering and the Commissioner call for a
clarification of the term contractor as well as the distinction between a contract
of sale and contract for furnishing services, labor and materials. The distinction
between a contract of sale and one for work, labor and materials is tested by the
inquiry whether the thing transferred is one not in existence and which never
would have existed but for the order of the party desiring to acquire it, or a thing
which would have existed and has been the subject of sale to some other persons
even if the order had not been given.2 If the article ordered by the purchaser is
exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no
change or modification of it is made at defendant's request, it is a contract of
sale, even though it may be entirely made after, and in consequence of, the
defendants order for it.3
Our New Civil Code, likewise distinguishes a contract of sale from a contract for
a piece of work thus:
Art. 1467. A contract for the delivery at a certain price of an article which
the vendor in the ordinary course of his business manufactures or procures for
the general market, whether the same is on hand at the time or not, is a contract
of sale, but if the goods are to be manufactured specially for the customer and
upon his special order and not for the general market, it is a contract for a piece
of work.
The word "contractor" has come to be used with special reference to a person
who, in the pursuit of the independent business, undertakes to do a specific job
or piece of work for other persons, using his own means and methods without
submitting himself to control as to the petty details. (Arañas, Annotations and
Jurisprudence on the National Internal Revenue Code, p. 318, par. 191 (2), 1970
Ed.) The true test of a contractor as was held in the cases of Luzon Stevedoring
Co., vs. Trinidad, 43, Phil. 803, 807-808, and La Carlota Sugar Central vs.
Trinidad, 43, Phil. 816, 819, would seem to be that he renders service in the
course of an independent occupation, representing the will of his employer only
as to the result of his work, and not as to the means by which it is accomplished.
With the foregoing criteria as guideposts, We shall now examine whether
Engineering really did "manufacture" and sell, as alleged by the Commissioner to
hold it liable to the advance sales tax under Section 185(m), or it only had its
services "contracted" for installation purposes to hold it liable under section 198
of the Tax Code.
I
After going over the three volumes of stenographic notes and the voluminous
record of the BIR and the CTA as well as the exhibits submitted by both parties,
We find that Engineering did not manufacture air conditioning units for sale to
the general public, but imported some items (as refrigeration compressors in
complete set, heat exchangers or coils, t.s.n. p. 39) which were used in executing
contracts entered into by it. Engineering, therefore, undertook negotiations and
execution of individual contracts for the design, supply and installation of air
conditioning units of the central type (t.s.n. pp. 20-36; Exhs. "F", "G", "H", "I",
"J", "K", "L", and "M"), taking into consideration in the process such factors as
the area of the space to be air conditioned; the number of persons occupying or
would be occupying the premises; the purpose for which the various air
conditioning areas are to be used; and the sources of heat gain or cooling load
on the plant such as sun load, lighting, and other electrical appliances which are
or may be in the plan. (t.s.n. p. 34, Vol. I) Engineering also testified during the
hearing in the Court of Tax Appeals that relative to the installation of air
conditioning system, Engineering designed and engineered complete each
particular plant and that no two plants were identical but each had to be
engineered separately.
As found by the lower court, which finding4 We adopt —
Engineering, in a nutshell, fabricates, assembles, supplies and installs in the
buildings of its various customers the central type air conditioning system;
prepares the plans and specifications therefor which are distinct and different
from each other; the air conditioning units and spare parts or accessories thereof
used by petitioner are not the window type of air conditioner which are
manufactured, assembled and produced locally for sale to the general market;
and the imported air conditioning units and spare parts or accessories thereof
are supplied and installed by petitioner upon previous orders of its customers
conformably with their needs and requirements.
The facts and circumstances aforequoted support the theory that Engineering is
a contractor rather than a manufacturer.
The Commissioner in his Brief argues that "it is more in accord with reason and
sound business management to say that anyone who desires to have air
conditioning units installed in his premises and who is in a position and willing
to pay the price can order the same from the company (Engineering) and,
therefore, Engineering could have mass produced and stockpiled air conditioning
units for sale to the public or to any customer with enough money to buy the
same." This is untenable in the light of the fact that air conditioning units,
packaged, or what we know as self-contained air conditioning units, are distinct
from the central system which Engineering dealt in. To Our mind, the distinction
as explained by Engineering, in its Brief, quoting from books, is not an idle play
of words as claimed by the Commissioner, but a significant fact which We just
cannot ignore. As quoted by Engineering Equipment & Supply Co., from an
Engineering handbook by L.C. Morrow, and which We reproduce hereunder for
easy reference:
... there is a great variety of equipment in use to do this job (of air conditioning).
Some devices are designed to serve a specific type of space; others to perform a
specific function; and still others as components to be assembled into a tailor-
made system to fit a particular building. Generally, however, they may be
grouped into two classifications — unitary and central system.
The unitary equipment classification includes those designs such as room air
conditioner, where all of the functional components are included in one or two
packages, and installation involves only making service connection such as
electricity, water and drains. Central-station systems, often referred to as applied
or built-up systems, require the installation of components at different points in
a building and their interconnection.
The room air conditioner is a unitary equipment designed specifically for a room
or similar small space. It is unique among air conditioning equipment in two
respects: It is in the electrical appliance classification, and it is made by a great
number of manufacturers.
There is also the testimony of one Carlos Navarro, a licensed Mechanical and
Electrical Engineer, who was once the Chairman of the Board of Examiners for
Mechanical Engineers and who was allegedly responsible for the preparation of
the refrigeration and air conditioning code of the City of Manila, who said that
"the central type air conditioning system is an engineering job that requires
planning and meticulous layout due to the fact that usually architects assign
definite space and usually the spaces they assign are very small and of various
sizes. Continuing further, he testified:
I don't think I have seen central type of air conditioning machinery room that are
exactly alike because all our buildings here are designed by architects dissimilar
to existing buildings, and usually they don't coordinate and get the advice of air
conditioning and refrigerating engineers so much so that when we come to
design, we have to make use of the available space that they are assigning to us
so that we have to design the different component parts of the air conditioning
system in such a way that will be accommodated in the space assigned and
afterwards the system may be considered as a definite portion of the building. ...
Definitely there is quite a big difference in the operation because the window type
air conditioner is a sort of compromise. In fact it cannot control humidity to the
desired level; rather the manufacturers, by hit and miss, were able to satisfy
themselves that the desired comfort within a room could be made by a definite
setting of the machine as it comes from the factory; whereas the central type
system definitely requires an intelligent operator. (t.s.n. pp. 301-305, Vol. II)
The point, therefore, is this — Engineering definitely did not and was not engaged
in the manufacture of air conditioning units but had its services contracted for
the installation of a central system. The cases cited by the Commissioner
(Advertising Associates, Inc. vs. Collector of Customs, 97, Phil. 636; Celestino Co
& Co. vs. Collector of Internal Revenue, 99 Phil. 841 and Manila Trading & Supply
Co. vs. City of Manila, 56 O.G. 3629), are not in point. Neither are they applicable
because the facts in all the cases cited are entirely different. Take for instance
the case of Celestino Co where this Court held the taxpayer to be a manufacturer
rather than a contractor of sash, doors and windows manufactured in its factory.
Indeed, from the very start, Celestino Co intended itself to be a manufacturer of
doors, windows, sashes etc. as it did register a special trade name for its sash
business and ordered company stationery carrying the bold print "ORIENTAL
SASH FACTORY (CELESTINO CO AND COMPANY, PROP.) 926 Raon St., Quiapo,
Manila, Tel. No. etc., Manufacturers of All Kinds of Doors, Windows ... ." Likewise,
Celestino Co never put up a contractor's bond as required by Article 1729 of the
Civil Code. Also, as a general rule, sash factories receive orders for doors and
windows of special design only in particular cases, but the bulk of their sales is
derived from ready-made doors and windows of standard sizes for the average
home, which "sales" were reflected in their books of accounts totalling
P118,754.69 for the period from January, 1952 to September 30, 1952, or for a
period of only nine (9) months. This Court found said sum difficult to have been
derived from its few customers who placed special orders for these items.
Applying the abovestated facts to the case at bar, We found them to he
inapposite. Engineering advertised itself as Engineering Equipment and Supply
Company, Machinery Mechanical Supplies, Engineers, Contractors, 174
Marques de Comillas, Manila (Exh. "B" and "15" BIR rec. p. 186), and not as
manufacturers. It likewise paid the contractors tax on all the contracts for the
design and construction of central system as testified to by Mr. Rey Parker, its
President and General Manager. (t.s.n. p. 102, 103) Similarly, Engineering did
not have ready-made air conditioning units for sale but as per testimony of Mr.
Parker upon inquiry of Judge Luciano of the CTA —
Q — Aside from the general components, which go into air conditioning plant or
system of the central type which your company undertakes, and the procedure
followed by you in obtaining and executing contracts which you have already
testified to in previous hearing, would you say that the covering contracts for
these different projects listed ... referred to in the list, Exh. "F" are identical in
every respect? I mean every plan or system covered by these different contracts
are identical in standard in every respect, so that you can reproduce them?
A — No, sir. They are not all standard. On the contrary, none of them are the
same. Each one must be designed and constructed to meet the particular
requirements, whether the application is to be operated. (t.s.n. pp. 101-102)
What We consider as on all fours with the case at bar is the case of S.M. Lawrence
Co. vs. McFarland, Commissioner of Internal Revenue of the State of Tennessee
and McCanless, 355 SW 2d, 100, 101, "where the cause presents the question of
whether one engaged in the business of contracting for the establishment of air
conditioning system in buildings, which work requires, in addition to the
furnishing of a cooling unit, the connection of such unit with electrical and
plumbing facilities and the installation of ducts within and through walls,
ceilings and floors to convey cool air to various parts of the building, is liable for
sale or use tax as a contractor rather than a retailer of tangible personal property.
Appellee took the Position that appellant was not engaged in the business of
selling air conditioning equipment as such but in the furnishing to its customers
of completed air conditioning systems pursuant to contract, was a contractor
engaged in the construction or improvement of real property, and as such was
liable for sales or use tax as the consumer of materials and equipment used in
the consummation of contracts, irrespective of the tax status of its contractors.
To transmit the warm or cool air over the buildings, the appellant installed
system of ducts running from the basic units through walls, ceilings and floors
to registers. The contract called for completed air conditioning systems which
became permanent part of the buildings and improvements to the realty." The
Court held the appellant a contractor which used the materials and the
equipment upon the value of which the tax herein imposed was levied in the
performance of its contracts with its customers, and that the customers did not
purchase the equipment and have the same installed.
Applying the facts of the aforementioned case to the present case, We see that
the supply of air conditioning units to Engineer's various customers, whether the
said machineries were in hand or not, was especially made for each customer
and installed in his building upon his special order. The air conditioning units
installed in a central type of air conditioning system would not have existed but
for the order of the party desiring to acquire it and if it existed without the special
order of Engineering's customer, the said air conditioning units were not
intended for sale to the general public. Therefore, We have but to affirm the
conclusion of the Court of Tax Appeals that Engineering is a contractor rather
than a manufacturer, subject to the contractors tax prescribed by Section 191 of
the Code and not to the advance sales tax imposed by Section 185(m) in relation
to Section 194 of the same Code. Since it has been proved to Our satisfaction
that Engineering imported air conditioning units, parts or accessories thereof for
use in its construction business and these items were never sold, resold, bartered
or exchanged, Engineering should be held liable to pay taxes prescribed under
Section 1905 of the Code. This compensating tax is not a tax on the importation
of goods but a tax on the use of imported goods not subject to sales tax.
Engineering, therefore, should be held liable to the payment of 30%
compensating tax in accordance with Section 190 of the Tax Code in relation to
Section 185(m) of the same, but without the 50% mark up provided in Section
183(b).
II
We take up next the issue of fraud. The Commissioner charged Engineering with
misdeclaration of the imported air conditioning units and parts or accessories
thereof so as to make them subject to a lower rate of percentage tax (7%) under
Section 186 of the Tax Code, when they are allegedly subject to a higher rate of
tax (30%) under its Section 185(m). This charge of fraud was denied by
Engineering but the Court of Tax Appeals in its decision found adversely and
said"
... We are amply convinced from the evidence presented by respondent that
petitioner deliberately and purposely misdeclared its importations. This evidence
consists of letters written by petitioner to its foreign suppliers, instructing them
on how to invoice and describe the air conditioning units ordered by petitioner.
... (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals absolved
Engineering from paying the 50% surcharge prescribe by Section 183(a) of the
Tax Code by reasoning out as follows:
The imposition of the 50% surcharge prescribed by Section 183(a) of the Tax Code
is based on willful neglect to file the monthly return within 20 days after the end
of each month or in case a false or fraudulent return is willfully made, it can
readily be seen, that petitioner cannot legally be held subject to the 50%
surcharge imposed by Section 183(a) of the Tax Code. Neither can petitioner be
held subject to the 50% surcharge under Section 190 of the Tax Code dealing on
compensating tax because the provisions thereof do not include the 50%
surcharge. Where a particular provision of the Tax Code does not impose the 50%
surcharge as fraud penalty we cannot enforce a non-existing provision of law
notwithstanding the assessment of respondent to the contrary. Instances of the
exclusion in the Tax Code of the 50% surcharge are those dealing on tax on
banks, taxes on receipts of insurance companies, and franchise tax. However, if
the Tax Code imposes the 50% surcharge as fraud penalty, it expressly so
provides as in the cases of income tax, estate and inheritance taxes, gift taxes,
mining tax, amusement tax and the monthly percentage taxes. Accordingly, we
hold that petitioner is not subject to the 50% surcharge despite the existence of
fraud in the absence of legal basis to support the importation thereof. (p. 228
CTA rec.)
We have gone over the exhibits submitted by the Commissioner evidencing fraud
committed by Engineering and We reproduce some of them hereunder for clarity.
As early as March 18, 1953, Engineering in a letter of even date wrote to Trane
Co. (Exh. "3-K" pp. 152-155, BIR rec.) viz:
Your invoices should be made in the name of Madrigal & Co., Inc., Manila,
Philippines, c/o Engineering Equipment & Supply Co., Manila, Philippines —
forwarding all correspondence and shipping papers concerning this order to us
only and not to the customer.
When invoicing, your invoices should be exactly as detailed in the customer's
Letter Order dated March 14th, 1953 attached. This is in accordance with the
Philippine import licenses granted to Madrigal & Co., Inc. and such details must
only be shown on all papers and shipping documents for this shipment. No
mention of words air conditioning equipment should be made on any shipping
documents as well as on the cases. Please give this matter your careful attention,
otherwise great difficulties will be encountered with the Philippine Bureau of
Customs when clearing the shipment on its arrival in Manila. All invoices and
cases should be marked "THIS EQUIPMENT FOR RIZAL CEMENT CO."
The same instruction was made to Acme Industries, Inc., San Francisco,
California in a letter dated March 19, 1953 (Exh. "3-J-1" pp. 150-151, BIR rec.)
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New
York, U.S.A. (Exh. "3-1" pp. 147-149, BIR rec.) also enjoining the latter from
mentioning or referring to the term 'air conditioning' and to describe the goods
on order as Fiberglass pipe and pipe fitting insulation instead. Likewise on April
30, 1953, Engineering threatened to discontinue the forwarding service of
Universal Transcontinental Corporation when it wrote Trane Co. (Exh. "3-H" p.
146, BIR rec.):
It will be noted that the Universal Transcontinental Corporation is not following
through on the instructions which have been covered by the above
correspondence, and which indicates the necessity of discontinuing the use of
the term "Air conditioning Machinery or Air Coolers". Our instructions
concerning this general situation have been sent to you in ample time to have
avoided this error in terminology, and we will ask that on receipt of this letter
that you again write to Universal Transcontinental Corp. and inform them that,
if in the future, they are unable to cooperate with us on this requirement, we will
thereafter be unable to utilize their forwarding service. Please inform them that
we will not tolerate another failure to follow our requirements.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane Co.
another letter, viz:
In the past, we have always paid the air conditioning tax on climate changers
and that mark is recognized in the Philippines, as air conditioning equipment.
This matter of avoiding any tie-in on air conditioning is very important to us, and
we are asking that from hereon that whoever takes care of the processing of our
orders be carefully instructed so as to avoid again using the term "Climate
changers" or in any way referring to the equipment as "air conditioning."
And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953,
suggesting a solution, viz:
We feel that we can probably solve all the problems by following the procedure
outlined in your letter of March 25, 1953 wherein you stated that in all future
jobs you would enclose photostatic copies of your import license so that we might
make up two sets of invoices: one set describing equipment ordered simply
according to the way that they are listed on the import license and another
according to our ordinary regular methods of order write-up. We would then
include the set made up according to the import license in the shipping boxes
themselves and use those items as our actual shipping documents and invoices,
and we will send the other regular invoice to you, by separate correspondence.
(Exh- No. "3-F-1", p. 144 BIR rec.)
Another interesting letter of Engineering is one dated August 27, 1955 (Exh. "3-
C" p. 141 BIR rec.)
In the process of clearing the shipment from the piers, one of the Customs
inspectors requested to see the packing list. Upon presenting the packing list, it
was discovered that the same was prepared on a copy of your letterhead which
indicated that the Trane Co. manufactured air conditioning, heating and heat
transfer equipment. Accordingly, the inspectors insisted that this equipment was
being imported for air conditioning purposes. To date, we have not been able to
clear the shipment and it is possible that we will be required to pay heavy taxes
on equipment.
The purpose of this letter is to request that in the future, no documents of any
kind should be sent with the order that indicate in any way that the equipment
could possibly be used for air conditioning.
It is realized that this a broad request and fairly difficult to accomplish and
administer, but we believe with proper caution it can be executed. Your
cooperation and close supervision concerning these matters will be appreciated.
(Emphasis supplied)
The aforequoted communications are strongly indicative of the fraudulent intent
of Engineering to misdeclare its importation of air conditioning units and spare
parts or accessories thereof to evade payment of the 30% tax. And since the
commission of fraud is altogether too glaring, We cannot agree with the Court of
Tax Appeals in absolving Engineering from the 50% fraud surcharge, otherwise
We will be giving premium to a plainly intolerable act of tax evasion. As aptly
stated by then Solicitor General, now Justice, Antonio P. Barredo: 'this
circumstance will not free it from the 50% surcharge because in any case whether
it is subject to advance sales tax or compensating tax, it is required by law to
truly declare its importation in the import entries and internal revenue
declarations before the importations maybe released from customs custody. The
said entries are the very documents where the nature, quantity and value of the
imported goods declared and where the customs duties, internal revenue taxes,
and other fees or charges incident to the importation are computed. These
entries, therefore, serve the same purpose as the returns required by Section
183(a) of the Code.'
Anent the 25% delinquency surcharge, We fully agree to the ruling made by the
Court of Tax Appeals and hold Engineering liable for the same. As held by the
lower court:
At first blush it would seem that the contention of petitioner that it is not subject
to the delinquency, surcharge of 25% is sound, valid and tenable. However, a
serious study and critical analysis of the historical provisions of Section 190 of
the Tax Code dealing on compensating tax in relation to Section 183(a) of the
same Code, will show that the contention of petitioner is without merit. The
original text of Section 190 of Commonwealth Act 466, otherwise known as the
National Internal Revenue Code, as amended by Commonwealth Act No. 503,
effective on October 1, 1939, does not provide for the filing of a compensation tax
return and payment of the 25 % surcharge for late payment thereof. Under the
original text of Section 190 of the Tax Code as amended by Commonwealth Act
No. 503, the contention of the petitioner that it is not subject to the 25%
surcharge appears to be legally tenable. However, Section 190 of the Tax Code
was subsequently amended by the Republic Acts Nos. 253, 361, 1511 and 1612
effective October 1, 1946, July 1, 1948, June 9, 1949, June 16, 1956 and August
24, 1956 respectively, which invariably provides among others, the following:
... If any article withdrawn from the customhouse or the post office without
payment of the compensating tax is subsequently used by the importer for other
purposes, corresponding entry should be made in the books of accounts if any
are kept or a written notice thereof sent to the Collector of Internal Revenue and
payment of the corresponding compensating tax made within 30 days from the
date of such entry or notice and if tax is not paid within such period the amount
of the tax shall be increased by 25% the increment to be a part of the tax.
Since the imported air conditioning units-and spare parts or accessories thereof
are subject to the compensating tax of 30% as the same were used in the
construction business of Engineering, it is incumbent upon the latter to comply
with the aforequoted requirement of Section 190 of the Code, by posting in its
books of accounts or notifying the Collector of Internal Revenue that the imported
articles were used for other purposes within 30 days. ... Consequently; as the
30% compensating tax was not paid by petitioner within the time prescribed by
Section 190 of the Tax Code as amended, it is therefore subject to the 25%
surcharge for delinquency in the payment of the said tax. (pp. 224-226 CTA rec.)
III
Lastly the question of prescription of the tax assessment has been put in issue.
Engineering contends that it was not guilty of tax fraud in effecting the
importations and, therefore, Section 332(a) prescribing ten years is inapplicable,
claiming that the pertinent prescriptive period is five years from the date the
questioned importations were made. A review of the record however reveals that
Engineering did file a tax return or declaration with the Bureau of Customs before
it paid the advance sales tax of 7%. And the declaration filed reveals that it did
in fact misdeclare its importations. Section 332 of the Tax Code which provides:
Section 332. — Exceptions as to period of limitation of assessment and collection
of taxes. —
(a) In the case of a false or fraudulent return with intent to evade tax or of
a failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment at any time within ten
years after the discovery of the falsity, fraud or omission.
is applicable, considering the preponderance of evidence of fraud with the intent
to evade the higher rate of percentage tax due from Engineering. The, tax
assessment was made within the period prescribed by law and prescription had
not set in against the Government.
WHEREFORE, the decision appealed from is affirmed with the modification that
Engineering is hereby also made liable to pay the 50% fraud surcharge.
SO ORDERED.
(5) Agency to Sell
GR. No. L-11491 August 23, 1918
ANDRES QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-appellee.
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.
Crossfield & O'Brien for appellee.
AVANCEÑA, J.:
On January 24, 1911, in this city of manila, a contract in the following tenor was
entered into by and between the plaintiff, as party of the first part, and J. Parsons
(to whose rights and obligations the present defendant later subrogated itself), as
party of the second part:
CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J.
PARSONS, BOTH MERCHANTS ESTABLISHED IN MANILA, FOR THE
EXCLUSIVE SALE OF "QUIROGA" BEDS IN THE VISAYAN ISLANDS.
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in
the Visayan Islands to J. Parsons under the following conditions:
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the
latter's establishment in Iloilo, and shall invoice them at the same price he has
fixed for sales, in Manila, and, in the invoices, shall make and allowance of a
discount of 25 per cent of the invoiced prices, as commission on the sale; and
Mr. Parsons shall order the beds by the dozen, whether of the same or of different
styles.
(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received,
within a period of sixty days from the date of their shipment.
(C) The expenses for transportation and shipment shall be borne by M.
Quiroga, and the freight, insurance, and cost of unloading from the vessel at the
point where the beds are received, shall be paid by Mr. Parsons.
(D) If, before an invoice falls due, Mr. Quiroga should request its payment,
said payment when made shall be considered as a prompt payment, and as such
a deduction of 2 per cent shall be made from the amount of the invoice.
The same discount shall be made on the amount of any invoice which Mr.
Parsons may deem convenient to pay in cash.
(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand
of any alteration in price which he may plan to make in respect to his beds, and
agrees that if on the date when such alteration takes effect he should have any
order pending to be served to Mr. Parsons, such order shall enjoy the advantage
of the alteration if the price thereby be lowered, but shall not be affected by said
alteration if the price thereby be increased, for, in this latter case, Mr. Quiroga
assumed the obligation to invoice the beds at the price at which the order was
given.
(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga"
beds.
ART. 2. In compensation for the expenses of advertisement which, for the benefit
of both contracting parties, Mr. Parsons may find himself obliged to make, Mr.
Quiroga assumes the obligation to offer and give the preference to Mr. Parsons
in case anyone should apply for the exclusive agency for any island not comprised
with the Visayan group.
ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of
"Quiroga" beds in all the towns of the Archipelago where there are no exclusive
agents, and shall immediately report such action to Mr. Quiroga for his approval.
ART. 4. This contract is made for an unlimited period, and may be terminated by
either of the contracting parties on a previous notice of ninety days to the other
party.
Of the three causes of action alleged by the plaintiff in his complaint, only two of
them constitute the subject matter of this appeal and both substantially amount
to the averment that the defendant violated the following obligations: not to sell
the beds at higher prices than those of the invoices; to have an open
establishment in Iloilo; itself to conduct the agency; to keep the beds on public
exhibition, and to pay for the advertisement expenses for the same; and to order
the beds by the dozen and in no other manner. As may be seen, with the
exception of the obligation on the part of the defendant to order the beds by the
dozen and in no other manner, none of the obligations imputed to the defendant
in the two causes of action are expressly set forth in the contract. But the plaintiff
alleged that the defendant was his agent for the sale of his beds in Iloilo, and that
said obligations are implied in a contract of commercial agency. The whole
question, therefore, reduced itself to a determination as to whether the
defendant, by reason of the contract hereinbefore transcribed, was a purchaser
or an agent of the plaintiff for the sale of his beds.
In order to classify a contract, due regard must be given to its essential clauses.
In the contract in question, what was essential, as constituting its cause and
subject matter, is that the plaintiff was to furnish the defendant with the beds
which the latter might order, at the price stipulated, and that the defendant was
to pay the price in the manner stipulated. The price agreed upon was the one
determined by the plaintiff for the sale of these beds in Manila, with a discount
of from 20 to 25 per cent, according to their class. Payment was to be made at
the end of sixty days, or before, at the plaintiff's request, or in cash, if the
defendant so preferred, and in these last two cases an additional discount was
to be allowed for prompt payment. These are precisely the essential features of a
contract of purchase and sale. There was the obligation on the part of the plaintiff
to supply the beds, and, on the part of the defendant, to pay their price. These
features exclude the legal conception of an agency or order to sell whereby the
mandatory or agent received the thing to sell it, and does not pay its price, but
delivers to the principal the price he obtains from the sale of the thing to a third
person, and if he does not succeed in selling it, he returns it. By virtue of the
contract between the plaintiff and the defendant, the latter, on receiving the beds,
was necessarily obliged to pay their price within the term fixed, without any other
consideration and regardless as to whether he had or had not sold the beds.
It would be enough to hold, as we do, that the contract by and between the
defendant and the plaintiff is one of purchase and sale, in order to show that it
was not one made on the basis of a commission on sales, as the plaintiff claims
it was, for these contracts are incompatible with each other. But, besides,
examining the clauses of this contract, none of them is found that substantially
supports the plaintiff's contention. Not a single one of these clauses necessarily
conveys the idea of an agency. The words commission on sales used in clause (A)
of article 1 mean nothing else, as stated in the contract itself, than a mere
discount on the invoice price. The word agency, also used in articles 2 and 3,
only expresses that the defendant was the only one that could sell the plaintiff's
beds in the Visayan Islands. With regard to the remaining clauses, the least that
can be said is that they are not incompatible with the contract of purchase and
sale.
The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-
president of the defendant corporation and who established and managed the
latter's business in Iloilo. It appears that this witness, prior to the time of his
testimony, had serious trouble with the defendant, had maintained a civil suit
against it, and had even accused one of its partners, Guillermo Parsons, of
falsification. He testified that it was he who drafted the contract Exhibit A, and,
when questioned as to what was his purpose in contracting with the plaintiff,
replied that it was to be an agent for his beds and to collect a commission on
sales. However, according to the defendant's evidence, it was Mariano Lopez
Santos, a director of the corporation, who prepared Exhibit A. But, even
supposing that Ernesto Vidal has stated the truth, his statement as to what was
his idea in contracting with the plaintiff is of no importance, inasmuch as the
agreements contained in Exhibit A which he claims to have drafted, constitute,
as we have said, a contract of purchase and sale, and not one of commercial
agency. This only means that Ernesto Vidal was mistaken in his classification of
the contract. But it must be understood that a contract is what the law defines
it to be, and not what it is called by the contracting parties.
The plaintiff also endeavored to prove that the defendant had returned beds that
it could not sell; that, without previous notice, it forwarded to the defendant the
beds that it wanted; and that the defendant received its commission for the beds
sold by the plaintiff directly to persons in Iloilo. But all this, at the most only
shows that, on the part of both of them, there was mutual tolerance in the
performance of the contract in disregard of its terms; and it gives no right to have
the contract considered, not as the parties stipulated it, but as they performed
it. Only the acts of the contracting parties, subsequent to, and in connection
with, the execution of the contract, must be considered for the purpose of
interpreting the contract, when such interpretation is necessary, but not when,
as in the instant case, its essential agreements are clearly set forth and plainly
show that the contract belongs to a certain kind and not to another. Furthermore,
the return made was of certain brass beds, and was not effected in exchange for
the price paid for them, but was for other beds of another kind; and for the letter
Exhibit L-1, requested the plaintiff's prior consent with respect to said beds,
which shows that it was not considered that the defendant had a right, by virtue
of the contract, to make this return. As regards the shipment of beds without
previous notice, it is insinuated in the record that these brass beds were precisely
the ones so shipped, and that, for this very reason, the plaintiff agreed to their
return. And with respect to the so-called commissions, we have said that they
merely constituted a discount on the invoice price, and the reason for applying
this benefit to the beds sold directly by the plaintiff to persons in Iloilo was
because, as the defendant obligated itself in the contract to incur the expenses
of advertisement of the plaintiff's beds, such sales were to be considered as a
result of that advertisement.
In respect to the defendant's obligation to order by the dozen, the only one
expressly imposed by the contract, the effect of its breach would only entitle the
plaintiff to disregard the orders which the defendant might place under other
conditions; but if the plaintiff consents to fill them, he waives his right and cannot
complain for having acted thus at his own free will.
For the foregoing reasons, we are of opinion that the contract by and between the
plaintiff and the defendant was one of purchase and sale, and that the obligations
the breach of which is alleged as a cause of action are not imposed upon the
defendant, either by agreement or by law.
The judgment appealed from is affirmed, with costs against the appellant. So
ordered.
(6) Agency to Sell
G.R. No. L-47538 June 20, 1941
GONZALO PUYAT & SONS, INC., petitioner,
vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro Arco), respondent.
Feria & Lao for petitioner.
J. W. Ferrier and Daniel Me. Gomez for respondent.
LAUREL, J.:
This is a petition for the issuance of a writ of certiorari to the Court of Appeals
for the purpose of reviewing its Amusement Company (formerly known as Teatro
Arco), plaintiff-appellant, vs. Gonzalo Puyat and Sons. Inc., defendant-appellee."
It appears that the respondent herein brought an action against the herein
petitioner in the Court of First Instance of Manila to secure a reimbursement of
certain amounts allegedly overpaid by it on account of the purchase price of
sound reproducing equipment and machinery ordered by the petitioner from the
Starr Piano Company of Richmond, Indiana, U.S.A. The facts of the case as found
by the trial court and confirmed by the appellate court, which are admitted by
the respondent, are as follows:
In the year 1929, the "Teatro Arco", a corporation duly organized under the laws
of the Philippine Islands, with its office in Manila, was engaged in the business
of operating cinematographs. In 1930, its name was changed to Arco Amusement
Company. C. S. Salmon was the president, while A. B. Coulette was the business
manager. About the same time, Gonzalo Puyat & Sons, Inc., another corporation
doing business in the Philippine Islands, with office in Manila, in addition to its
other business, was acting as exclusive agents in the Philippines for the Starr
Piano Company of Richmond, Indiana, U.S. A. It would seem that this last
company dealt in cinematographer equipment and machinery, and the Arco
Amusement Company desiring to equipt its cinematograph with sound
reproducing devices, approached Gonzalo Puyat & Sons, Inc., thru its then
president and acting manager, Gil Puyat, and an employee named Santos. After
some negotiations, it was agreed between the parties, that is to say, Salmon and
Coulette on one side, representing the plaintiff, and Gil Puyat on the other,
representing the defendant, that the latter would, on behalf of the plaintiff, order
sound reproducing equipment from the Starr Piano Company and that the
plaintiff would pay the defendant, in addition to the price of the equipment, a 10
per cent commission, plus all expenses, such as, freight, insurance, banking
charges, cables, etc. At the expense of the plaintiff, the defendant sent a cable,
Exhibit "3", to the Starr Piano Company, inquiring about the equipment desired
and making the said company to quote its price without discount. A reply was
received by Gonzalo Puyat & Sons, Inc., with the price, evidently the list price of
$1,700 f.o.b. factory Richmond, Indiana. The defendant did not show the plaintiff
the cable of inquiry nor the reply but merely informed the plaintiff of the price of
$1,700. Being agreeable to this price, the plaintiff, by means of Exhibit "1", which
is a letter signed by C. S. Salmon dated November 19, 1929, formally authorized
the order. The equipment arrived about the end of the year 1929, and upon
delivery of the same to the plaintiff and the presentation of necessary papers, the
price of $1.700, plus the 10 per cent commission agreed upon and plus all the
expenses and charges, was duly paid by the plaintiff to the defendant.
Sometime the following year, and after some negotiations between the same
parties, plaintiff and defendants, another order for sound reproducing equipment
was placed by the plaintiff with the defendant, on the same terms as the first
order. This agreement or order was confirmed by the plaintiff by its letter Exhibit
"2", without date, that is to say, that the plaintiff would pay for the equipment
the amount of $1,600, which was supposed to be the price quoted by the Starr
Piano Company, plus 10 per cent commission, plus all expenses incurred. The
equipment under the second order arrived in due time, and the defendant was
duly paid the price of $1,600 with its 10 per cent commission, and $160, for all
expenses and charges. This amount of $160 does not represent actual out-of-
pocket expenses paid by the defendant, but a mere flat charge and rough
estimate made by the defendant equivalent to 10 per cent of the price of $1,600
of the equipment.
About three years later, in connection with a civil case in Vigan, filed by one Fidel
Reyes against the defendant herein Gonzalo Puyat & Sons, Inc., the officials of
the Arco Amusement Company discovered that the price quoted to them by the
defendant with regard to their two orders mentioned was not the net price but
rather the list price, and that the defendants had obtained a discount from the
Starr Piano Company. Moreover, by reading reviews and literature on prices of
machinery and cinematograph equipment, said officials of the plaintiff were
convinced that the prices charged them by the defendant were much too high
including the charges for out-of-pocket expense. For these reasons, they sought
to obtain a reduction from the defendant or rather a reimbursement, and failing
in this they brought the present action.
The trial court held that the contract between the petitioner and the respondent
was one of outright purchase and sale, and absolved that petitioner from the
complaint. The appellate court, however, — by a division of four, with one justice
dissenting — held that the relation between petitioner and respondent was that
of agent and principal, the petitioner acting as agent of the respondent in the
purchase of the equipment in question, and sentenced the petitioner to pay the
respondent alleged overpayments in the total sum of $1,335.52 or P2,671.04,
together with legal interest thereon from the date of the filing of the complaint
until said amount is fully paid, as well as to pay the costs of the suit in both
instances. The appellate court further argued that even if the contract between
the petitioner and the respondent was one of purchase and sale, the petitioner
was guilty of fraud in concealing the true price and hence would still be liable to
reimburse the respondent for the overpayments made by the latter.
The petitioner now claims that the following errors have been incurred by the
appellate court:
I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun
hechos, entre la recurrente y la recurrida existia una relacion implicita de
mandataria a mandante en la transaccion de que se trata, en vez de la de
vendedora a compradora como ha declarado el Juzgado de Primera Instncia de
Manila, presidido entonces por el hoy Magistrado Honorable Marcelino
Montemayor.
II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que,
suponiendo que dicha relacion fuerra de vendedora a compradora, la recurrente
obtuvo, mediante dolo, el consentimiento de la recurrida en cuanto al precio de
$1,700 y $1,600 de las maquinarias y equipos en cuestion, y condenar a la
recurrente ha obtenido de la Starr Piano Company of Richmond, Indiana.
We sustain the theory of the trial court that the contract between the petitioner
and the respondent was one of purchase and sale, and not one of agency, for the
reasons now to be stated.
In the first place, the contract is the law between the parties and should include
all the things they are supposed to have been agreed upon. What does not appear
on the face of the contract should be regarded merely as "dealer's" or "trader's
talk", which can not bind either party. (Nolbrook v. Conner, 56 So., 576, 11 Am.
Rep., 212; Bank v. Brosscell, 120 III., 161; Bank v. Palmer, 47 III., 92; Hosser v.
Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.) The letters, Exhibits 1
and 2, by which the respondent accepted the prices of $1,700 and $1,600,
respectively, for the sound reproducing equipment subject of its contract with
the petitioner, are clear in their terms and admit no other interpretation that the
respondent in question at the prices indicated which are fixed and determinate.
The respondent admitted in its complaint filed with the Court of First Instance of
Manila that the petitioner agreed to sell to it the first sound reproducing
equipment and machinery. The third paragraph of the respondent's cause of
action states:
3. That on or about November 19, 1929, the herein plaintiff (respondent) and
defendant (petitioner) entered into an agreement, under and by virtue of which
the herein defendant was to secure from the United States, and sell and deliver
to the herein plaintiff, certain sound reproducing equipment and machinery, for
which the said defendant, under and by virtue of said agreement, was to receive
the actual cost price plus ten per cent (10%), and was also to be reimbursed for
all out of pocket expenses in connection with the purchase and delivery of such
equipment, such as costs of telegrams, freight, and similar expenses. (Emphasis
ours.)
We agree with the trial judge that "whatever unforseen events might have taken
place unfavorable to the defendant (petitioner), such as change in prices, mistake
in their quotation, loss of the goods not covered by insurance or failure of the
Starr Piano Company to properly fill the orders as per specifications, the plaintiff
(respondent) might still legally hold the defendant (petitioner) to the prices fixed
of $1,700 and $1,600." This is incompatible with the pretended relation of agency
between the petitioner and the respondent, because in agency, the agent is
exempted from all liability in the discharge of his commission provided he acts
in accordance with the instructions received from his principal (section 254, Code
of Commerce), and the principal must indemnify the agent for all damages which
the latter may incur in carrying out the agency without fault or imprudence on
his part (article 1729, Civil Code).
While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten
per cent (10%) commission, this does not necessarily make the petitioner an
agent of the respondent, as this provision is only an additional price which the
respondent bound itself to pay, and which stipulation is not incompatible with
the contract of purchase and sale. (See Quiroga vs. Parsons Hardware Co., 38
Phil., 501.)
In the second place, to hold the petitioner an agent of the respondent in the
purchase of equipment and machinery from the Starr Piano Company of
Richmond, Indiana, is incompatible with the admitted fact that the petitioner is
the exclusive agent of the same company in the Philippines. It is out of the
ordinary for one to be the agent of both the vendor and the purchaser. The facts
and circumstances indicated do not point to anything but plain ordinary
transaction where the respondent enters into a contract of purchase and sale
with the petitioner, the latter as exclusive agent of the Starr Piano Company in
the United States.
It follows that the petitioner as vendor is not bound to reimburse the respondent
as vendee for any difference between the cost price and the sales price which
represents the profit realized by the vendor out of the transaction. This is the
very essence of commerce without which merchants or middleman would not
exist.
The respondents contends that it merely agreed to pay the cost price as
distinguished from the list price, plus ten per cent (10%) commission and all out-
of-pocket expenses incurred by the petitioner. The distinction which the
respondents seeks to draw between the cost price and the list price we consider
to be spacious. It is to be observed that the twenty-five per cent (25%) discount
granted by the Starr piano Company to the petitioner is available only to the
latter as the former's exclusive agent in the Philippines. The respondent could
not have secured this discount from the Starr Piano Company and neither was
the petitioner willing to waive that discount in favor of the respondent. As a
matter of fact, no reason is advanced by the respondent why the petitioner should
waive the 25 per cent discount granted it by the Starr Piano Company in
exchange for the 10 percent commission offered by the respondent. Moreover,
the petitioner was not duty bound to reveal the private arrangement it had with
the Starr Piano Company relative to such discount to its prospective customers,
and the respondent was not even aware of such an arrangement. The respondent,
therefore, could not have offered to pay a 10 per cent commission to the petitioner
provided it was given the benefit of the 25 per cent discount enjoyed by the
petitioner. It is well known that local dealers acting as agents of foreign
manufacturers, aside from obtaining a discount from the home office, sometimes
add to the list price when they resell to local purchasers. It was apparently to
guard against an exhorbitant additional price that the respondent sought to limit
it to 10 per cent, and the respondent is estopped from questioning that additional
price. If the respondent later on discovers itself at the short end of a bad bargain,
it alone must bear the blame, and it cannot rescind the contract, much less
compel a reimbursement of the excess price, on that ground alone. The
respondent could not secure equipment and machinery manufactured by the
Starr Piano Company except from the petitioner alone; it willingly paid the price
quoted; it received the equipment and machinery as represented; and that was
the end of the matter as far as the respondent was concerned. The fact that the
petitioner obtained more or less profit than the respondent calculated before
entering into the contract or reducing the price agreed upon between the
petitioner and the respondent. Not every concealment is fraud; and short of
fraud, it were better that, within certain limits, business acumen permit of the
loosening of the sleeves and of the sharpening of the intellect of men and women
in the business world.

The writ of certiorari should be, as it is hereby, granted. The decision of the
appellate court is accordingly reversed and the petitioner is absolved from the
respondent's complaint in G. R. No. 1023, entitled "Arco Amusement Company
(formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat & Sons,
Inc., defendants-appellee," without pronouncement regarding costs. So ordered.
(7) Dacion En Pago
[G.R. No. 149420. October 8, 2003]
SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC.,
respondent.
DECISION
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged
in the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing business
under the name and style Sans Enterprises, is a building contractor. On
February 22, 1990, petitioner ordered scaffolding equipments from respondent
worth P540,425.80.[1] He paid a downpayment in the amount of P150,000.00.
The balance was made payable in ten monthly installments.
Respondent delivered the scaffoldings to petitioner.[2] Petitioner was able to pay
the first two monthly installments. His business, however, encountered financial
difficulties and he was unable to settle his obligation to respondent despite oral
and written demands made against him.[3]
On October 11, 1990, petitioner and respondent executed a Deed of
Assignment,[4] whereby petitioner assigned to respondent his receivables in the
amount of P335,462.14 from Jomero Realty Corporation. Pertinent portions of
the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a residential
house located at Greenmeadow Avenue, Quezon City owned by Jomero Realty
Corporation;
WHEREAS, in the construction of the aforementioned residential house, the
ASSIGNOR purchased on account scaffolding equipments from the ASSIGNEE
payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE
for the purchase of the aforementioned scaffoldings now in the amount of Three
Hundred Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos
(P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty
Five Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14),
Philippine Currency which represents part of the ASSIGNORs collectible from
Jomero Realty Corp., said ASSIGNOR hereby assigns, transfers and sets over
unto the ASSIGNEE all collectibles amounting to the said amount of P335,
462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and
assigns, the full power and authority to demand, collect, receive, compound,
compromise and give acquittance for the same or any part thereof, and in the
name and stead of the said ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE,
its successors and assigns that said debt is justly owing and due to the
ASSIGNOR for Jomero Realty Corporation and that said ASSIGNOR has not done
and will not cause anything to be done to diminish or discharge said debt, or
delay or to prevent the ASSIGNEE, its successors or assigns, from collecting the
same;
And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at
times hereafter, at the request of said ASSIGNEE, its successors or assigns, at
his cost and expense, execute and do all such further acts and deeds as shall be
reasonably necessary to effectually enable said ASSIGNEE to recover whatever
collectibles said ASSIGNOR has in accordance with the true intent and meaning
of these presents. xxx[5] (Italics supplied)
However, when respondent tried to collect the said credit from Jomero Realty
Corporation, the latter refused to honor the Deed of Assignment because it
claimed that petitioner was also indebted to it.[6] On November 26, 1990,
respondent sent a letter[7] to petitioner demanding payment of his obligation,
but petitioner refused to pay claiming that his obligation had been extinguished
when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for recovery of a
sum of money against the petitioner before the Regional Trial Court of Makati,
Branch 147, which was docketed as Civil Case No. 91-074.[8]
During the trial, petitioner argued that his obligation was extinguished with the
execution of the Deed of Assignment of credit. Respondent, for its part, presented
the testimony of its employee, Almeda Baaga, who testified that Jomero Realty
refused to honor the assignment of credit because it claimed that petitioner had
an outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision[9] dismissing the
complaint on the ground that the assignment of credit extinguished the
obligation. The decretal portion thereof provides:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in
favor of the defendant and against the plaintiff, dismissing the complaint and
ordering the plaintiff to pay the defendant attorneys fees in the amount of
P25,000.00.
Respondent appealed the decision to the Court of Appeals. On April 19, 2001,
the appellate court rendered a decision,[10] the dispositive portion of which
reads:
WHEREFORE, finding merit in this appeal, the court REVERSES the appealed
Decision and enters judgment ordering defendant-appellee Sonny Lo to pay the
plaintiff-appellant KJS ECO-FORMWORK SYSTEM PHILIPPINES, INC. Three
Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100
(P335,462.14) with legal interest of 6% per annum from January 10, 1991 (filing
of the Complaint) until fully paid and attorneys fees equivalent to 10% of the
amount due and costs of the suit.
SO ORDERED.[11]
In finding that the Deed of Assignment did not extinguish the obligation of the
petitioner to the respondent, the Court of Appeals held that (1) petitioner failed
to comply with his warranty under the Deed; (2) the object of the Deed did not
exist at the time of the transaction, rendering it void pursuant to Article 1409 of
the Civil Code; and (3) petitioner violated the terms of the Deed of Assignment
when he failed to execute and do all acts and deeds as shall be necessary to
effectually enable the respondent to recover the collectibles.[12]
Petitioner filed a motion for reconsideration of the said decision, which was
denied by the Court of Appeals.[13]
In this petition for review, petitioner assigns the following errors:
I sale of personal property,[19] produced the effects of a dation in payment which
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN
DECLARING THE DEED OF ASSIGNMENT (EXH. 4) AS NULL AND VOID FOR
LACK OF OBJECT ON THE BASIS OF A MERE HEARSAY CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED
OF ASSIGNMENT (EXH. 4) DID NOT EXTINGUISH PETITIONERS OBLIGATION
ON THE WRONG NOTION THAT PETITIONER FAILED TO COMPLY WITH HIS
WARRANTY THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION
OF THE TRIAL COURT AND IN ORDERING PAYMENT OF INTERESTS AND
ATTORNEYS FEES.[14]
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a credit,
known as the assignor, by a legal cause, such as sale, dacion en pago, exchange
or donation, and without the consent of the debtor, transfers his credit and
accessory rights to another, known as the assignee, who acquires the power to
enforce it to the same extent as the assignor could enforce it against the
debtor.[15]
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor
offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt.[16] In order that there be a valid dation in payment, the
following are the requisites: (1) There must be the performance of the prestation
in lieu of payment (animo solvendi) which may consist in the delivery of a
corporeal thing or a real right or a credit against the third person; (2) There must
be some difference between the prestation due and that which is given in
substitution (aliud pro alio); (3) There must be an agreement between the creditor
and debtor that the obligation is immediately extinguished by reason of the
performance of a prestation different from that due.[17] The undertaking really
partakes in one sense of the nature of sale, that is, the creditor is really buying
the thing or property of the debtor, payment for which is to be charged against
the debtors debt. As such, the vendor in good faith shall be responsible, for the
existence and legality of the credit at the time of the sale but not for the solvency
of the debtor, in specified circumstances.[18]
Hence, it may well be that the assignment of credit, which is in the nature of a
may extinguish the obligation.[20] However, as in any other contract of sale, the
vendor or assignor is bound by certain warranties. More specifically, the first
paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of the
credit at the time of the sale, unless it should have been sold as doubtful; but
not for the solvency of the debtor, unless it has been so expressly stipulated or
unless the insolvency was prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant
the existence and legality of the credit at the time of the sale or assignment. When
Jomero claimed that it was no longer indebted to petitioner since the latter also
had an unpaid obligation to it, it essentially meant that its obligation to petitioner
has been extinguished by compensation.[21] In other words, respondent alleged
the non-existence of the credit and asserted its claim to petitioners warranty
under the assignment. Therefore, it behooved on petitioner to make good its
warranty and paid the obligation.

Furthermore, we find that petitioner breached his obligation under the Deed of
Assignment, to wit:

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

Indeed, by warranting the existence of the credit, petitioner should be deemed to

have ensured the performance thereof in case the same is later found to be
inexistent. He should be held liable to pay to respondent the amount of his
indebtedness.

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

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

SO ORDERED.
(8) MIDD
[G.R. No. 168220. August 31, 2005]
SPS. RUDY PARAGAS and CORAZON B. PARAGAS, petitioners, vs. HRS. OF
DOMINADOR BALACANO, namely: DOMINIC, RODOLFO, NANETTE and CYRIC,
all surnamed BALACANO, represented by NANETTE BALACANO and ALFREDO
BALACANO, respondents.
RESOLUTION
CHICO-NAZARIO, J.:
This petition for review seeks to annul the Decision[1] dated 15 February 2005
of the Court of Appeals in CA-G.R. CV No. 64048, affirming with modification the
8 March 1999 Decision[2] of the Regional Trial Court (RTC), Branch 21, of
Santiago City, Isabela, in Civil Case No. 21-2313. The petition likewise seeks to
annul the Resolution[3] dated 17 May 2005 denying petitioners motion for
reconsideration.
The factual antecedents were synthesized by the Court of Appeals in its decision.
Gregorio Balacano, married to Lorenza Sumigcay, was the registered owner of
Lot 1175-E and Lot 1175-F of the Subd. Plan Psd-38042 [located at Baluarte,
Santiago City, Isabela] covered by TCT No. T-103297 and TCT No. T-103298 of
the Registry of Deeds of the Province of Isabela.
Gregorio and Lorenza had three children, namely: Domingo, Catalino and
Alfredo, all surnamed Balacano. Lorenza died on December 11, 1991. Gregorio,
on the other hand, died on July 28, 1996.
Prior to his death, Gregorio was admitted at the Veterans General Hospital in
Bayombong, Nueva Vizcaya on June 28, 1996 and stayed there until July 19,
1996. He was transferred in the afternoon of July 19, 1996 to the Veterans
Memorial Hospital in Quezon City where he was confined until his death.
Gregorio purportedly sold on July 22, 1996, or barely a week prior to his death,
a portion of Lot 1175-E (specifically consisting of 15,925 square meters from its
total area of 22,341 square meters) and the whole Lot 1175-F to the Spouses
Rudy (Rudy) and Corazon Paragas (collectively, the Spouses Paragas) for the total
consideration of P500,000.00. This sale appeared in a deed of absolute sale
notarized by Atty. Alexander V. de Guzman, Notary Public for Santiago City, on
the same date July 22, 1996 and witnessed by Antonio Agcaoili (Antonio) and
Julia Garabiles (Julia). Gregorios certificates of title over Lots 1175-E and 1175-
F were consequently cancelled and new certificates of title were issued in favor
of the Spouses Paragas.
The Spouses Paragas then sold on October 17, 1996 a portion of Lot 1175-E
consisting of 6,416 square meters to Catalino for the total consideration of
P60,000.00.
Domingos children (Dominic, Rodolfo, Nanette and Cyric, all surnamed
Balacano;) filed on October 22, 1996 a complaint for annulment of sale and
partition against Catalino and the Spouses Paragas. They essentially alleged in
asking for the nullification of the deed of sale that: (1) their grandfather Gregorio
could not have appeared before the notary public on July 22, 1996 at Santiago
City because he was then confined at the Veterans Memorial Hospital in Quezon
City; (2) at the time of the alleged execution of the deed of sale, Gregorio was
seriously ill, in fact dying at that time, which vitiated his consent to the disposal
of the property; and (3) Catalino manipulated the execution of the deed and
prevailed upon the dying Gregorio to sign his name on a paper the contents of
which he never understood because of his serious condition. Alternatively, they
alleged that assuming Gregorio was of sound and disposing mind, he could only
transfer a half portion of Lots 1175-E and 1175-F as the other half belongs to
their grandmother Lorenza who predeceased Gregorio they claimed that Lots
1175-E and 1175-F form part of the conjugal partnership properties of Gregorio
and Lorenza. Finally, they alleged that the sale to the Spouses Paragas covers
only a 5-hectare portion of Lots 1175-E and 1175-F leaving a portion of 6,416
square meters that Catalino is threatening to dispose. They asked for the
nullification of the deed of sale executed by Gregorio and the partition of Lots
1175-E and 1175-F. They likewise asked for damages.
Instead of filing their Answer, the defendants Catalino and the Spouses Paragas
moved to dismiss the complaint on the following grounds: (1) the plaintiffs have
no legal capacity - the Domingos children cannot file the case because Domingo
is still alive, although he has been absent for a long time; (2) an indispensable
party is not impleaded that Gregorios other son, Alfredo was not made a party to
the suit; and (3) the complaint states no cause of action that Domingos children
failed to allege a ground for the annulment of the deed of sale; they did not cite
any mistake, violence, intimidation, undue influence or fraud, but merely alleged
that Gregorio was seriously ill. Domingos children opposed this motion.
The lower court denied the motion to dismiss, but directed the plaintiffs-appellees
to amend the complaint to include Alfredo as a party. Alfredo was subsequently
declared as in default for his failure to file his Answer to the Complaint.
The defendants-appellees filed their Answer with Counterclaim on May 7, 1997,
denying the material allegations of the complaint. Additionally, they claimed that:
(1) the deed of sale was actually executed by Gregorio on July 19 (or 18), 1996
and not July 22, 1996; (2) the Notary Public personally went to the Hospital in
Bayombong, Nueva Vizcaya on July 18, 1996 to notarize the deed of sale already
subject of a previously concluded covenant between Gregorio and the Spouses
Paragas; (3) at the time Gregorio signed the deed, he was strong and of sound
and disposing mind; (4) Lots 1175-E and 1175-F were Gregorios separate capital
and the inscription of Lorenzas name in the titles was just a description of
Gregorios marital status; (5) the entire area of Lots 1175-E and 1175-F were sold
to the Spouses Paragas. They interposed a counterclaim for damages.
At the trial, the parties proceeded to prove their respective contentions.
Plaintiff-appellant Nanette Balacano testified to prove the material allegations of
their complaint. On Gregorios medical condition, she declared that: (1) Gregorio,
who was then 81 years old, weak and sick, was brought to the hospital in
Bayombong, Nueva Vizcaya on June 28, 1996 and stayed there until the
afternoon on July 19, 1996; (2) thereafter, Gregorio, who by then was weak and
could no longer talk and whose condition had worsened, was transferred in the
afternoon of July 19, 1996 to the Veterans Memorial Hospital in Quezon City
where Gregorio died. She claimed that Gregorio could not have signed a deed of
sale on July 19, 1996 because she stayed at the hospital the whole of that day
and saw no visitors. She likewise testified on their agreement for attorneys fees
with their counsel and the litigation expenses they incurred.
Additionally, the plaintiffs-appellees presented in evidence Gregorios medical
records and his death certificate.
Defendants-appellees, on the other hand, presented as witnesses Notary Public
de Guzman and instrumental witness Antonio to prove Gregorios execution of
the sale and the circumstances under the deed was executed. They uniformly
declared that: (1) on July 18, 1996, they went to the hospital in Bayombong,
Nueva Vizcaya where Gregorio was confined with Rudy; (2) Atty. De Guzman read
and explained the contents of the deed to Gregorio; (3) Gregorio signed the deed
after receiving the money from Rudy; (4) Julia and Antonio signed the deed as
witnesses. Additionally, Atty. De Guzman explained that the execution of the
deed was merely a confirmation of a previous agreement between the Spouses
Paragas and Gregorio that was concluded at least a month prior to Gregorios
death; that, in fact, Gregorio had previously asked him to prepare a deed that
Gregorio eventually signed on July 18, 1996. He also explained that the deed,
which appeared to have been executed on July 22, 1996, was actually executed
on July 18, 1996; he notarized the deed and entered it in his register only on
July 22, 1996. He claimed that he did not find it necessary to state the precise
date and place of execution (Bayombong, Nueva Vizcaya, instead of Santiago City)
of the deed of sale because the deed is merely a confirmation of a previously
agreed contract between Gregorio and the Spouses Paragas. He likewise stated
that of the stated P500,000.00 consideration in the deed, Rudy paid Gregorio
P450,000.00 in the hospital because Rudy had previously paid Gregorio
P50,000.00. For his part, Antonio added that he was asked by Rudy to take
pictures of Gregorio signing the deed. He also claimed that there was no entry on
the date when he signed; nor did he remember reading Santiago City as the place
of execution of the deed. He described Gregorio as still strong but sickly, who got
up from the bed with Julias help.
Witness for defendants-appellants Luisa Agsalda testified to prove that Lot 1175-
E was Gregorios separate property. She claimed that Gregorios father (Leon)
purchased a two-hectare lot from them in 1972 while the other lot was purchased
from her neighbor. She also declared that Gregorio inherited these lands from
his father Leon; she does not know, however, Gregorios brothers share in the
inheritance. Defendant-appellant Catalino also testified to corroborate the
testimony of witness Luisa Agsalda; he said that Gregorio told him that he
(Gregorio) inherited Lots 1175-E and 1175-F from his father Leon. He also stated
that a portion of Lot 1175-E consisting of 6,416 square meters was sold to him
by the Spouses Paragas and that he will pay the Spouses Paragas P50,000.00,
not as consideration for the return of the land but for the transfer of the title to
his name.
Additionally, the defendants-appellants presented in evidence the pictures taken
by Antonio when Gregorio allegedly signed the deed.[4]
The lower court, after trial, rendered the decision declaring null and void the deed
of sale purportedly executed by Gregorio Balacano in favor of the spouses Rudy
Paragas and Corazon Paragas. In nullifying the deed of sale executed by Gregorio,
the lower court initially noted that at the time Gregorio executed the deed,
Gregorio was ill. The lower courts reasoning in declaring the deed of sale null and
void and this reasonings premises may be summarized as follows: (1) the deed of
sale was improperly notarized; thus it cannot be considered a public document
that is usually accorded the presumption of regularity; (2) as a private document,
the deed of sales due execution must be proved in accordance with Section 20,
Rule 132 of the Revised Rules on Evidence either: (a) by anyone who saw the
document executed or written; or (b) by evidence of the genuineness of the
signature or handwriting of the maker; and (3) it was incumbent upon the
Spouses Paragas to prove the deed of sales due execution but failed to do so the
lower court said that witness Antonio Agcaoili is not credible while Atty.
Alexander De Guzman is not reliable.[5]
The lower court found the explanations of Atty. De Guzman regarding the
erroneous entries on the actual place and date of execution of the deed of sale as
justifications for a lie. The lower court said
The Court cannot imagine an attorney to undertake to travel to another province
to notarize a document when he must certainly know, being a lawyer and by all
means, not stupid, that he has no authority to notarize a document in that
province. The only logical thing that happened was that Rudy Paragas brought
the deed of sale to him on July 22, 1996 already signed and requested him to
notarize the same which he did, not knowing that at that time the vendor was
already in a hospital and [sic] Quezon City. Of course had he known, Atty. De
Guzman would not have notarized the document. But he trusted Rudy Paragas
and moreover, Gregorio Balacano already informed him previously in June that
he will sell his lands to Paragas. In addition [sic, (,) was omitted] Rudy Paragas
also told him that Balacano received an advance of P50,000.00.
The intention to sell is not actual selling. From the first week of June when,
according to Atty. De Guzman, Gregorio Balacano informed him that he will sell
his land to Rudy Paragas, enough time elapsed to the time he was brought to the
hospital on June 28, 1996. Had there been a meeting of the minds between
Gregorio Balacano and Rudy Paragas regarding the sale, surely Gregorio
Balacano would have immediately returned to the office of Atty. De Guzman to
execute the deed of sale. He did not until he was brought to the hospital and
diagnosed to have liver cirrhosis. Because of the seriousness of his illness, it is
not expected that Gregorio Balacano would be negotiating a contract of sale.
Thus, Rudy Paragas negotiated with Catalino Balacano, the son of Gregorio
Balacano with whom the latter was staying.[6]
The lower court also did not consider Antonio Agcaoili, petitioner Rudy Paragass
driver, a convincing witness, concluding that he was telling a rehearsed story.
The lower court said
The only portion of his testimony that is true is that he signed the document.
How could the Court believe that he brought a camera with him just to take
pictures of the signing? If the purpose was to record the proceeding for posterity,
why did he not take the picture of Atty. De Guzman when the latter was reading
and explaining the document to Gregorio Balacano? Why did he not take the
picture of both Gregorio Balacano and Atty. de Guzman while the old man was
signing the document instead of taking a picture of Gregorio Balacano alone
holding a ball pen without even showing the document being signed? Verily there
is a picture of a document but only a hand with a ball pen is shown with it. Why?
Clearly the driver Antonio Agcaoili must have only been asked by Rudy Paragas
to tell a concocted story which he himself would not dare tell in Court under
oath.[7]
The lower court likewise noted that petitioner Rudy Paragas did not testify about
the signing of the deed of sale. To the lower court, Rudys refusal or failure to
testify raises a lot of questions, such as: (1) was he (Rudy) afraid to divulge the
circumstances of how he obtained the signature of Gregorio Balacano, and (2)
was he (Rudy) afraid to admit that he did not actually pay the P500,000.00
indicated in the deed of sale as the price of the land?[8]
The lower court also ruled that Lots 1175-E and 1175-F were Gregorios and
Lorenzas conjugal partnership properties. The lower court found that these lots
were acquired during the marriage because the certificates of title of these lots
clearly stated that the lots are registered in the name Gregorio, married to
Lorenza Sumigcay. Thus, the lower court concluded that the presumption of law
(under Article 160 of the Civil Code of the Philippines) that property acquired
during the marriage is presumed to belong to the conjugal partnership fully
applies to Lots 1175-E and 1175-F.[9]
Thus, on 8 March 1999, the RTC, Branch 21, of Santiago City, Isabela, rendered
a Decision[10] in Civil Case No. 21-2313, the dispositive portion of which reads
as follows:
WHEREFORE in the light of the foregoing considerations judgment is hereby
rendered:
1. DECLARING as NULL and VOID the deed of sale purportedly executed by
Gregorio Balacano in favor of the spouses Rudy Paragas and Corazon Paragas
over lots 1175-E and 1175-F covered by TCT Nos. T-103297 and T-103298,
respectively;
2. ORDERING the cancellation of TCT Nos. T-258042 and T-258041 issued in
the name of the spouses Rudy and Corazon Paragas by virtue of the deed of sale;
and
DECLARING the parcel of lands, lots 1175-E and 1175-F as part of the estate of
the deceased spouses Gregorio Balacano and Lorenza Balacano.[11]
In the assailed Decision dated 15 February 2005, the Court of Appeals affirmed
the Decision of the trial court, with the modification that Lots 1175-E and 1175-
F were adjudged as belonging to the estate of Gregorio Balacano. The appellate
court disposed as follows:
WHEREFORE, premises considered, the appeal is hereby DISMISSED. We
AFFIRM the appealed Decision for the reasons discussed above, with the
MODIFICATION that Lots 1175-E and 1175-F belong to the estate of Gregorio
Balacano.
Let a copy of this Decision be furnished the Office of the Bar Confidant for
whatever action her Office may take against Atty. De Guzman.[12] (Emphasis in
the original.)
Herein petitioners motion for reconsideration was met with similar lack of
success when it was denied for lack of merit by the Court of Appeals in its
Resolution[13] dated 17 May 2005.
Hence, this appeal via a petition for review where petitioners assign the following
errors to the Court of Appeals, viz:
A. THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF
DISCRETION, SERIOUSLY ERRED IN FINDING THAT THERE WAS NO
PERFECTED AND PARTIALLY EXECUTED CONTRACT OF SALE OVER LOTS
1175-E AND 1175-F PRIOR TO THE SIGNING OF THE DEED OF SALE.
B. THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF
DISCRETION, SERIOUSLY FAILED TO APPRECIATE THE SIGNIFICANCE OF
THE JUDICIAL ADMISSION ON THE AUTHENTICITY AND DUE EXECUTION OF
THE DEED OF SALE MADE BY THE RESPONDENTS DURING THE PRE-TRIAL
CONFERENCE.
C. THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF
DISCRETION, BASED ITS CONCLUSION THAT GREGORIOS CONSENT TO THE
SALE OF THE LOTS WAS ABSENT MERELY ON SPECULATIONS AND
SURMISES.
D. THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF
DISCRETION, SERIOUSLY ERRED IN NOT RULING ON THE ISSUE OF
RESPONDENTS LACK OF LEGAL CAPACITY TO SUE FOR NOT BEING THE
PROPER PARTIES IN INTEREST.
E. THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF
DISCRETION, SERIOUSLY ERRED IN DISMISSING ATTY. ALEXANDER DE
GUZMAN AND ANTONIO AGCAOILI AS NOT CREDIBLE WITNESSES.[14]
At bottom is the issue of whether or not the Court of Appeals committed reversible
error in upholding the findings and conclusions of the trial court on the nullity
of the Deed of Sale purportedly executed between petitioners and the late
Gregorio Balacano.
To start, we held in Blanco v. Quasha[15] that this Court is not a trier of facts.
As such, it is not its function to examine and determine the weight of the evidence
supporting the assailed decision. Factual findings of the Court of Appeals, which
are supported by substantial evidence, are binding, final and conclusive upon
the Supreme Court,[16] and carry even more weight when the said court affirms
the factual findings of the trial court. Moreover, well- entrenched is the prevailing
jurisprudence that only errors of law and not of facts are reviewable by this Court
in a petition for review on certiorari under Rule 45 of the Revised Rules of Court.
The foregoing tenets in the case at bar apply with greater force to the petition
under consideration because the factual findings by the Court of Appeals are in
full agreement with that of the trial court.
Specifically, the Court of Appeals, in affirming the trial court, found that there
was no prior and perfected contract of sale that remained to be fully
consummated. The appellate court explained -
In support of their position, the defendants-appellants argue that at least a
month prior to Gregorios signing of the deed, Gregorio and the Spouses Paragas
already agreed on the sale of Lots 1175-E and 1175-F; and that, in fact, this
agreement was partially executed by Rudys payment to Gregorio of P50,000.00
before Gregorio signed the deed at the hospital. In line with this position,
defendants-appellants posit that Gregorios consent to the sale should be
determined, not at the time Gregorio signed the deed of sale on July 18, 1996,
but at the time when he agreed to sell the property in June 1996 or a month prior
to the deeds signing; and in June 1996, Gregorio was of sound and disposing
mind and his consent to the sale was in no wise vitiated at that time. The
defendants-appellants further argue that the execution or signing of the deed of
sale, however, irregular it might have been, does not affect the validity of the
previously agreed sale of the lots, as the execution or signing of the deed is merely
a formalization of a previously agreed oral contract.
...
In the absence of any note, memorandum or any other written instrument
evidencing the alleged perfected contract of sale, we have to rely on oral
testimonies, which in this case is that of Atty. de Guzman whose testimony on
the alleged oral agreement may be summarized as follows: (1) that sometime in
the first week of June 1996, Gregorio requested him (Atty. de Guzman) to prepare
a deed of sale of two lots; (2) Gregorio came to his firms office in the morning with
a certain Doming Balacano, then returned in the afternoon with Rudy; (3) he
(Atty. de Guzman) asked Gregorio whether he really intends to sell the lots;
Gregorio confirmed his intention; (4) Gregorio and Rudy left the law office at 5:00
p.m., leaving the certificates of title; (5) he prepared the deed a day after Rudy
and Gregorio came. With regard to the alleged partial execution of this agreement,
Atty. de Guzman said that he was told by Rudy that there was already a partial
payment of P50,000.00.
We do not consider Atty. de Guzmans testimony sufficient evidence to establish
the fact that there was a prior agreement between Gregorio and the Spouses
Paragas on the sale of Lots 1175-E and 1175-F. This testimony does not
conclusively establish the meeting of the minds between Gregorio and the
Spouses Paragas on the price or consideration for the sale of Lots 1175-E and
1175-F Atty. de Guzman merely declared that he was asked by Gregorio to
prepare a deed; he did not clearly narrate the details of this agreement. We
cannot assume that Gregorio and the Spouses Paragas agreed to a P500,000.00
consideration based on Atty. de Guzmans bare assertion that Gregorio asked him
to prepare a deed, as Atty. de Guzman was not personally aware of the agreed
consideration in the sale of the lots, not being privy to the parties agreement. To
us, Rudy could have been a competent witness to testify on the perfection of this
prior contract; unfortunately, the defendants-appellants did not present Rudy as
their witness.
We seriously doubt too the credibility of Atty. de Guzman as a witness. We cannot
rely on his testimony because of his tendency to commit falsity. He admitted in
open court that while Gregorio signed the deed on July 18, 1996 at Bayombong,
Nueva Vizcaya, he nevertheless did not reflect these matters when he notarized
the deed; instead he entered Santiago City and July 22, 1996, as place and date
of execution, respectively. To us, Atty. de Guzmans propensity to distort facts in
the performance of his public functions as a notary public, in utter disregard of
the significance of the act of notarization, seriously affects his credibility as a
witness in the present case. In fact, Atty. de Guzmans act in falsifying the entries
in his acknowledgment of the deed of sale could be the subject of administrative
and disciplinary action, a matter that we however do not here decide.
Similarly, there is no conclusive proof of the partial execution of the contract
because the only evidence the plaintiffs-appellants presented to prove this claim
was Atty. de Guzmans testimony, which is hearsay and thus, has no probative
value. Atty. de Guzman merely stated that Rudy told him that Rudy already gave
P50,000.00 to Gregorio as partial payment of the purchase price; Atty. de
Guzman did not personally see the payment being made.[17]
But, did Gregorio give an intelligent consent to the sale of Lots 1175-E and 1175-
F when he signed the deed of sale? The trial court as well as the appellate court
found in the negative. In the Court of Appeals rationale-
It is not disputed that when Gregorio signed the deed of sale, Gregorio was
seriously ill, as he in fact died a week after the deeds signing. Gregorio died of
complications caused by cirrhosis of the liver. Gregorios death was neither
sudden nor immediate; he fought at least a month-long battle against the disease
until he succumbed to death on July 22, 1996. Given that Gregorio purportedly
executed a deed during the last stages of his battle against his disease, we
seriously doubt whether Gregorio could have read, or fully understood, the
contents of the documents he signed or of the consequences of his act. We note
in this regard that Gregorio was brought to the Veterans Hospital at Quezon City
because his condition had worsened on or about the time the deed was allegedly
signed. This transfer and fact of death not long after speak volumes about
Gregorios condition at that time. We likewise see no conclusive evidence that the
contents of the deed were sufficiently explained to Gregorio before he affixed his
signature. The evidence the defendants-appellants offered to prove Gregorios
consent to the sale consists of the testimonies of Atty. de Guzman and Antonio.
As discussed above, we do not find Atty. de Guzman a credible witness. Thus, we
fully concur with the heretofore-quoted lower courts evaluation of the testimonies
given by Atty. de Guzman and Antonio because this is an evaluation that the
lower court was in a better position to make.
Additionally, the irregular and invalid notarization of the deed is a falsity that
raises doubts on the regularity of the transaction itself. While the deed was
indeed signed on July 18, 1996 at Bayombong, Nueva Vizcaya, the deed states
otherwise, as it shows that the deed was executed on July 22, 1996 at Santiago
City. Why such falsity was committed, and the circumstances under which this
falsity was committed, speaks volume about the regularity and the validity of the
sale. We cannot but consider the commission of this falsity, with the
indispensable aid of Atty. de Guzman, an orchestrated attempt to legitimize a
transaction that Gregorio did not intend to be binding upon him nor on his
bounty.
Article 24 of the Civil Code tells us that in all contractual, property or other
relations, when one of the parties is at a disadvantage on account of his moral
dependence, ignorance, indigence, mental weakness, tender age or other
handicap, the courts must be vigilant for his protection.[18]
Based on the foregoing, the Court of Appeals concluded that Gregorios consent
to the sale of the lots was absent, making the contract null and void.
Consequently, the spouses Paragas could not have made a subsequent transfer
of the property to Catalino Balacano. Indeed, nemo dat quod non habet. Nobody
can dispose of that which does not belong to him.[19]
We likewise find to be in accord with the evidence on record the ruling of the
Court of Appeals declaring the properties in controversy as paraphernal
properties of Gregorio in the absence of competent evidence on the exact date of
Gregorios acquisition of ownership of these lots.
On the credibility of witnesses, it is in rhyme with reason to believe the
testimonies of the witnesses for the complainants vis--vis those of the
defendants. In the assessment of the credibility of witnesses, we are guided by
the following well-entrenched rules: (1) that evidence to be believed must not only
spring from the mouth of a credible witness but must itself be credible, and (2)
findings of facts and assessment of credibility of witness are matters best left to
the trial court who had the front-line opportunity to personally evaluate the
witnesses demeanor, conduct, and behavior while testifying.[20]
In the case at bar, we agree in the trial courts conclusion that petitioners star
witness, Atty. De Guzman is far from being a credible witness. Unlike this Court,
the trial court had the unique opportunity of observing the demeanor of said
witness. Thus, we affirm the trial court and the Court of Appeals uniform decision
based on the whole evidence in record holding the Deed of Sale in question to be
null and void.

In Domingo v. Court of Appeals,[21] the Court declared as null and void the deed
of sale therein inasmuch as the seller, at the time of the execution of the alleged
contract, was already of advanced age and senile. We held

. . . She died an octogenarian on March 20, 1966, barely over a year when the
deed was allegedly executed on January 28, 1965, but before copies of the deed
were entered in the registry allegedly on May 16 and June 10, 1966. The general
rule is that a person is not incompetent to contract merely because of advanced
years or by reason of physical infirmities. However, when such age or infirmities
have impaired the mental faculties so as to prevent the person from properly,
intelligently, and firmly protecting her property rights then she is undeniably
incapacitated. The unrebutted testimony of Zosima Domingo shows that at the
time of the alleged execution of the deed, Paulina was already incapacitated
physically and mentally. She narrated that Paulina played with her waste and
urinated in bed. Given these circumstances, there is in our view sufficient reason
to seriously doubt that she consented to the sale of and the price for her parcels
of land. Moreover, there is no receipt to show that said price was paid to and
received by her. Thus, we are in agreement with the trial courts finding and
conclusion on the matter: . . .

In the case at bar, the Deed of Sale was allegedly signed by Gregorio on his death
bed in the hospital. Gregorio was an octogenarian at the time of the alleged
execution of the contract and suffering from liver cirrhosis at that circumstances
which raise grave doubts on his physical and mental capacity to freely consent
to the contract. Adding to the dubiety of the purported sale and further bolstering
respondents claim that their uncle Catalino, one of the children of the decedent,
had a hand in the execution of the deed is the fact that on 17 October 1996,
petitioners sold a portion of Lot 1175-E consisting of 6,416 square meters to
Catalino for P60,000.00.[22] One need not stretch his imagination to surmise
that Catalino was in cahoots with petitioners in maneuvering the alleged sale.

On the whole, we find no reversible error on the part of the appellate court in CA-
G.R. CV No. 64048 that would warrant the reversal thereof.

WHEREFORE, the present petition is hereby DENIED. Accordingly, the

Decision[23] and the Resolution,[24] dated 15 February 2005 and 17 May 2005,
respectively, of the Court of Appeals in CA-G.R. CV No. 64048 are hereby
AFFIRMED. No costs.

SO ORDERED.

(9) Sales by and between Spouses
G.R. No. L-57499 June 22, 1984
MERCEDES CALIMLIM- CANULLAS, petitioner,
vs.
HON. WILLELMO FORTUN, Judge, Court of First instance of Pangasinan, Branch
I, and CORAZON DAGUINES, respondents.
Fernandez Law Offices for petitioner.
Francisco Pulido for respondents.
MELENCIO-HERRERA, J.:
Petition for Review on certiorari assailing the Decision, dated October 6, 1980,
and the Resolution on the Motion for Reconsideration, dated November 27, 1980,
of the then Court of First Instance of Pangasinan, Branch I, in Civil Case No.
15620 entitled "Corazon DAGUINES vs. MERCEDES Calimlim-Canullas,"
upholding the sale of a parcel of land in favor of DAGUINES but not of the
conjugal house thereon'
The background facts may be summarized as follows: Petitioner MERCEDES
Calimlim-Canullas and FERNANDO Canullas were married on December 19,
1962. They begot five children. They lived in a small house on the residential land
in question with an area of approximately 891 square meters, located at Bacabac,
Bugallon, Pangasinan. After FERNANDO's father died in 1965, FERNANDO
inherited the land.
In 1978, FERNANDO abandoned his family and was living with private
respondent Corazon DAGUINES. During the pendency of this appeal, they were
convicted of concubinage in a judgment rendered on October 27, 1981 by the
then Court of First Instance of Pangasinan, Branch II, which judgment has
become final.
On April 15, 1980, FERNANDO sold the subject property with the house thereon
to DAGUINES for the sum of P2,000.00. In the document of sale, FERNANDO
described the house as "also inherited by me from my deceased parents."
Unable to take possession of the lot and house, DAGUINES initiated a complaint
on June 19, 1980 for quieting of title and damages against MERCEDES. The
latter resisted and claimed that the house in dispute where she and her children
were residing, including the coconut trees on the land, were built and planted
with conjugal funds and through her industry; that the sale of the land together
with the house and improvements to DAGUINES was null and void because they
are conjugal properties and she had not given her consent to the sale,
In its original judgment, respondent Court principally declared DAGUINES "as
the lawful owner of the land in question as well as the one-half () of the house
erected on said land." Upon reconsideration prayed for by MERCEDES, however,
respondent Court resolved:
WHEREFORE, the dispositive portion of the Decision of this Court, promulgated
on October 6, 1980, is hereby amended to read as follows:
(1) Declaring plaintiff as the true and lawful owner of the land in question
and the 10 coconut trees;
(2) Declaring as null and void the sale of the conjugal house to plaintiff on
April 15, 1980 (Exhibit A) including the 3 coconut trees and other crops planted
during the conjugal relation between Fernando Canullas (vendor) and his
legitimate wife, herein defendant Mercedes Calimlim- Canullas;
xxx xxx xxx
The issues posed for resolution are (1) whether or not the construction of a
conjugal house on the exclusive property of the husband ipso facto gave the land
the character of conjugal property; and (2) whether or not the sale of the lot
together with the house and improvements thereon was valid under the
circumstances surrounding the transaction.
The determination of the first issue revolves around the interpretation to be given
to the second paragraph of Article 158 of the Civil Code, which reads:
xxx xxx xxx
Buildings constructed at the expense of the partnership during the marriage on
land belonging to one of the spouses also pertain to the partnership, but the
value of the land shall be reimbursed to the spouse who owns the same.
We hold that pursuant to the foregoing provision both the land and the building
belong to the conjugal partnership but the conjugal partnership is indebted to
the husband for the value of the land. The spouse owning the lot becomes a
creditor of the conjugal partnership for the value of the lot, 1 which value would
be reimbursed at the liquidation of the conjugal partnership. 2
In his commentary on the corresponding provision in the Spanish Civil Code (Art.
1404), Manresa stated:

El articulo cambia la doctrine; los edificios construidos durante el matrimonio en
suelo propio de uno de los conjuges son gananciales, abonandose el valor del
suelo al conj uge a quien pertenezca.
It is true that in the case of Maramba vs. Lozano, 3 relied upon by respondent
Judge, it was held that the land belonging to one of the spouses, upon which the
spouses have built a house, becomes conjugal property only when the conjugal
partnership is liquidated and indemnity paid to the owner of the land. We believe
that the better rule is that enunciated by Mr. Justice J.B.L. Reyes in Padilla vs.
Paterno, 3 SCRA 678, 691 (1961), where the following was explained:
As to the above properties, their conversion from paraphernal to conjugal assets
should be deemed to retroact to the time the conjugal buildings were first
constructed thereon or at the very latest, to the time immediately before the death
of Narciso A. Padilla that ended the conjugal partnership. They can not be
considered to have become conjugal property only as of the time their values were
paid to the estate of the widow Concepcion Paterno because by that time the
conjugal partnership no longer existed and it could not acquire the ownership of
said properties. The acquisition by the partnership of these properties was, under
the 1943 decision, subject to the suspensive condition that their values would be
reimbursed to the widow at the liquidation of the conjugal partnership; once paid,
the effects of the fulfillment of the condition should be deemed to retroact to the
date the obligation was constituted (Art. 1187, New Civil Code) ...
The foregoing premises considered, it follows that FERNANDO could not have
alienated the house and lot to DAGUINES since MERCEDES had not given her
consent to said sale. 4
Anent the second issue, we find that the contract of sale was null and void for
being contrary to morals and public policy. The sale was made by a husband in
favor of a concubine after he had abandoned his family and left the conjugal
home where his wife and children lived and from whence they derived their
support. That sale was subversive of the stability of the family, a basic social
institution which public policy cherishes and protects. 5
Article 1409 of the Civil Code states inter alia that: contracts whose cause, object,
or purpose is contrary to law, morals, good customs, public order, or public policy
are void and inexistent from the very beginning.
Article 1352 also provides that: "Contracts without cause, or with unlawful
cause, produce no effect whatsoever. The cause is unlawful if it is contrary to
law, morals, good customs, public order, or public policy."
Additionally, the law emphatically prohibits the spouses from selling property to
each other subject to certain exceptions.6 Similarly, donations between spouses
during marriage are prohibited. 7 And this is so because if transfers or con
conveyances between spouses were allowed during marriage, that would destroy
the system of conjugal partnership, a basic policy in civil law. It was also designed
to prevent the exercise of undue influence by one spouse over the other,8 as well
as to protect the institution of marriage, which is the cornerstone of family law.
The prohibitions apply to a couple living as husband and wife without benefit of
marriage, otherwise, "the condition of those who incurred guilt would turn out to
be better than those in legal union." Those provisions are dictated by public
interest and their criterion must be imposed upon the wig of the parties. That
was the ruling in Buenaventura vs. Bautista, also penned by Justice JBL Reyes
(CA) 50 O.G. 3679, and cited in Matabuena vs. Cervantes. 9 We quote hereunder
the pertinent dissertation on this point:
We reach a different conclusion. While Art. 133 of the Civil Code considers as
void a donation between the spouses during the marriage, policy considerations
of the most exigent character as wen as the dictates of morality require that the
same prohibition should apply to a common-law relationship.
As announced in the outset of this opinion, a 1954 Court of Appeals decision,
Buenaventura vs. Bautista, 50 OG 3679, interpreting a similar provision of the
old Civil Code speaks unequivocally. If the policy of the law is, in the language of
the opinion of the then Justice J.B.L. Reyes of that Court, 'to prohibit donations
in favor of the other consort and his descendants because of fear of undue
influence and improper pressure upon the donor, a prejudice deeply rooted in
our ancient law, ..., then there is every reason to apply the same prohibitive policy
to persons living together as husband and wife without benefit of nuptials. For it
is not to be doubted that assent to such irregular connection for thirty years
bespeaks greater influence of one party over the other, so that the danger that
the law seeks to avoid is correspondingly increased'. Moreover, as pointed out by
Ulpian (in his lib 32 ad Sabinum, fr. 1), "It would not be just that such donations
— should subsist, lest the conditions of those who incurred guilt should turn out
to be better." So long as marriage remains the cornerstone of our family law,
reason and morality alike demand that the disabilities attached to marriage
should likewise attach to concubinage (Emphasis supplied),
WHEREFORE, the Decision of respondent Judge, dated October 6, 1980, and his
Resolution of November 27, 1980 on petitioner's Motion for Reconsideration, are
hereby set aside and the sale of the lot, house and improvements in question, is
hereby declared null and void. No costs.
SO ORDERED.
(10 and 12) Others Relatively Disqualified & Attorneys
G.R. No. L-35702 May 29, 1973
DOMINGO D. RUBIAS, plaintiff-appellant,
vs.
ISAIAS BATILLER, defendant-appellee.
Gregorio M. Rubias for plaintiff-appellant.
Vicente R. Acsay for defendant-appellee.
TEEHANKEE, J.:
In this appeal certified by the Court of Appeals to this Court as involving purely
legal questions, we affirm the dismissal order rendered by the Iloilo court of first
instance after pre-trial and submittal of the pertinent documentary exhibits.
Such dismissal was proper, plaintiff having no cause of action, since it was duly
established in the record that the application for registration of the land in
question filed by Francisco Militante, plaintiff's vendor and predecessor interest,
had been dismissed by decision of 1952 of the land registration court as affirmed
by final judgment in 1958 of the Court of Appeals and hence, there was no title
or right to the land that could be transmitted by the purported sale to plaintiff.
As late as 1964, the Iloilo court of first instance had in another case of ejectment
likewise upheld by final judgment defendant's "better right to possess the land
in question . having been in the actual possession thereof under a claim of title
many years before Francisco Militante sold the land to the plaintiff."
Furthermore, even assuming that Militante had anything to sell, the deed of sale
executed in 1956 by him in favor of plaintiff at a time when plaintiff was
concededly his counsel of record in the land registration case involving the very
land in dispute (ultimately decided adversely against Militante by the Court of
Appeals' 1958 judgment affirming the lower court's dismissal of Militante's
application for registration) was properly declared inexistent and void by the
lower court, as decreed by Article 1409 in relation to Article 1491 of the Civil
Code.
The appellate court, in its resolution of certification of 25 July 1972, gave the
following backgrounder of the appeal at bar:
On August 31, 1964, plaintiff Domingo D. Rubias, a lawyer, filed a suit to recover
the ownership and possession of certain portions of lot under Psu-99791 located
in Barrio General Luna, Barotac Viejo, Iloilo which he bought from his father-in-
law, Francisco Militante in 1956 against its present occupant defendant, Isaias
Batiller, who illegally entered said portions of the lot on two occasions — in 1945
and in 1959. Plaintiff prayed also for damages and attorneys fees. (pp. 1-7,
Record on Appeal). In his answer with counter-claim defendant claims the
complaint of the plaintiff does not state a cause of action, the truth of the matter
being that he and his predecessors-in-interest have always been in actual, open
and continuous possession since time immemorial under claim of ownership of
the portions of the lot in question and for the alleged malicious institution of the
complaint he claims he has suffered moral damages in the amount of P 2,000.00,
as well as the sum of P500.00 for attorney's fees. ...
On December 9, 1964, the trial court issued a pre-trial order, after a pre-trial
conference between the parties and their counsel which order reads as follows..
'When this case was called for a pre-trial conference today, the plaintiff appeared
assisted by himself and Atty. Gregorio M. Rubias. The defendant also appeared,
assisted by his counsel Atty. Vicente R. Acsay.
A. During the pre-trial conference, the parties have agreed that the following facts
are attendant in this case and that they will no longer introduced any evidence,
testimonial or documentary to prove them:
1. That Francisco Militante claimed ownership of a parcel of land located in
the Barrio of General Luna, municipality of Barotac Viejo province of Iloilo, which
he caused to be surveyed on July 18-31, 1934, whereby he was issued a plan
Psu-99791 (Exhibit "B"). (The land claimed contained an area of 171:3561
hectares.)
2. Before the war with Japan, Francisco Militante filed with the Court of
First Instance of Iloilo an application for the registration of the title of the land
technically described in psu-99791 (Exh. "B") opposed by the Director of Lands,
the Director of Forestry and other oppositors. However, during the war with
Japan, the record of the case was lost before it was heard, so after the war
Francisco Militante petitioned this court to reconstitute the record of the case.
The record was reconstituted on the Court of the First Instance of Iloilo and
docketed as Land Case No. R-695, GLRO Rec. No. 54852. The Court of First
Instance heard the land registration case on November 14, 1952, and after the
trial this court dismissed the application for registration. The appellant,
Francisco Militante, appealed from the decision of this Court to the Court of
Appeals where the case was docketed as CA-GR No. 13497-R..
3. Pending the disposal of the appeal in CA-GR No. 13497-R and more
particularly on June 18, 1956, Francisco Militante sold to the plaintiff, Domingo
Rubias the land technically described in psu-99791 (Exh. "A"). The sale was duly
recorded in the Office of the Register of Deeds for the province of Iloilo as Entry
No. 13609 on July 11, 1960 (Exh. "A-1").
(NOTE: As per deed of sale, Exh. A, what Militante purportedly sold to plaintiff-
appellant, his son-in-law, for the sum of P2,000.00 was "a parcel of untitled land
having an area Of 144.9072 hectares ... surveyed under Psu 99791 ... (and)
subject to the exclusions made by me, under (case) CA-i3497, Land Registration
Case No. R-695, G.L.R.O. No. 54852, Court of First Instance of the province of
Iloilo. These exclusions referred to portions of the original area of over 171
hectares originally claimed by Militante as applicant, but which he expressly
recognized during the trial to pertain to some oppositors, such as the Bureau of
Public Works and Bureau of Forestry and several other individual occupants and
accordingly withdrew his application over the same. This is expressly made of
record in Exh. A, which is the Court of Appeals' decision of 22 September 1958
confirming the land registration court's dismissal of Militante's application for
registration.)
4. On September 22,1958 the Court of appeals in CA-G.R. No. 13497-R
promulgated its judgment confirming the decision of this Court in Land Case No.
R-695, GLRO Rec. No. 54852 which dismissed the application for Registration
filed by Francisco Militante (Exh. "I").
5. Domingo Rubias declared the land described in Exh. 'B' for taxation
purposes under Tax Dec. No. 8585 (Exh. "C") for 1957; Tax Dec. Nos. 9533 (Exh.
"C-1") and 10019 (Exh. "C-3")for the year 1961; Tax Dec. No. 9868 (Exh. "C-2")
for the year 1964, paying the land taxes under Tax Dec. No. 8585 and 9533 (Exh.
"D", "D-1", "G-6").
6. Francisco Militante immediate predecessor-in-interest of the plaintiff,
has also declared the land for taxation purposes under Tax Dec. No. 5172 in
1940 (Exh. "E") for 1945; under Tax Dec. No. T-86 (Exh. "E-1") for 1948; under
Tax Dec. No. 7122 (Exh. "2"), and paid the land taxes for 1940 (Exhs. "G" and
"G-7"), for 1945 46 (Exh. "G-1") for 1947 (Exh. "G-2"), for 1947 & 1948 (Exh. "G-
3"), for 1948 (Exh. "G-4"), and for 1948 and 1949 (Exh. "G-5").
7. Tax Declaration No. 2434 in the name of Liberato Demontaño for the
land described therein (Exh. "F") was cancelled by Tax. Dec. No. 5172 of
Francisco Militante (Exh. "E"). Liberato Demontaño paid the land tax under Tax
Dec. No. 2434 on Dec. 20, 1939 for the years 1938 (50%) and 1959 (Exh. "H").
8. The defendant had declared for taxation purposes Lot No. 2 of the Psu-
155241 under Tax Dec. Not. 8583 for 1957 and a portion of Lot No. 2, Psu-
155241, for 1945 under Tax Dec. No. 8584 (Exh. "2-A" Tax No. 8583 (Exh. "2")
was revised by Tax Dec. No. 9498 in the name of the defendant (Exh. "2-B") and
Tax Dec. No. 8584 (Exh. "2-A") was cancelled by Tax Dec. No. 9584 also in the
name of the defendant (Exh. "2-C"). The defendant paid the land taxes for Lot 2,
Psu-155241, on Nov. 9, 1960 for the years 1945 and 1946, for the year 1950,
and for the year 1960 as shown by the certificate of the treasurer (Exh. "3"). The
defendant may present to the Court other land taxes receipts for the payment of
taxes for this lot.
9. The land claimed by the defendant as his own was surveyed on June 6
and 7,1956, and a plan approved by Director of Land on November 15, 1956 was
issued, identified as Psu 155241 (Exh. "5").
10. On April 22, 1960, the plaintiff filed forcible Entry and Detainer case
against Isaias Batiller in the Justice of the Peace Court of Barotac Viejo Province
of Iloilo (Exh. "4") to which the defendant Isaias Batiller riled his answer on
August 29, 1960 (Exh. "4-A"). The Municipal Court of Barotac Viejo after trial,
decided the case on May 10, 1961 in favor of the defendant and against the
plaintiff (Exh. "4-B"). The plaintiff appealed from the decision of the Municipal
Court of Barotac Viejo which was docketed in this Court as Civil Case No. 5750
on June 3, 1961, to which the defendant, Isaias Batiller, on June 13, 1961 filed
his answer (Exh. "4-C"). And this Court after the trial. decided the case on
November 26, 1964, in favor of the defendant, Isaias Batiller and against the
plaintiff (Exh. "4-D").
(NOTE: As per Exh. 4-B, which is the Iloilo court of first instance decision of 26
November 1964 dismissing plaintiff's therein complaint for ejectment against
defendant, the iloilo court expressly found "that plaintiff's complaint is
unjustified, intended to harass the defendant" and "that the defendant, Isaias
Batiller, has a better right to possess the land in question described in Psu
155241 (Exh. "3"), Isaias Batiller having been in the actual physical possession
thereof under a claim of title many years before Francisco Militante sold the land
to the plaintiff-hereby dismissing plaintiff's complaint and ordering the plaintiff
to pay the defendant attorney's fees ....")
B. During the trial of this case on the merit, the plaintiff will prove by
competent evidence the following:
1. That the land he purchased from Francisco Militante under Exh. "A" was
formerly owned and possessed by Liberato Demontaño but that on September 6,
1919 the land was sold at public auction by virtue of a judgment in a Civil Case
entitled "Edw J. Pflieder plaintiff vs. Liberato Demontaño Francisco Balladeros
and Gregorio Yulo, defendants", of which Yap Pongco was the purchaser (Exh.
"1-3"). The sale was registered in the Office of the Register of Deeds of Iloilo on
August 4, 1920, under Primary Entry No. 69 (Exh. "1"), and a definite Deed of
Sale was executed by Constantino A. Canto, provincial Sheriff of Iloilo, on Jan.
19, 1934 in favor of Yap Pongco (Exh. "I"), the sale having been registered in the
Office of the Register of Deeds of Iloilo on February 10, 1934 (Exh. "1-1").
2. On September 22, 1934, Yap Pongco sold this land to Francisco Militante
as evidenced by a notarial deed (Exh. "J") which was registered in the Registry of
Deeds on May 13, 1940 (Exh. "J-1").
3. That plaintiff suffered damages alleged in his complaint.
C. Defendants, on the other hand will prove by competent evidence during
the trial of this case the following facts:
1. That lot No. 2 of the Psu-1552 it (Exh. '5') was originally owned and
possessed by Felipe Batiller, grandfather of the defendant Basilio Batiller, on the
death of the former in 1920, as his sole heir. Isaias Batiller succeeded his father
, Basilio Batiller, in the ownership and possession of the land in the year 1930,
and since then up to the present, the land remains in the possession of the
defendant, his possession being actual, open, public, peaceful and continuous in
the concept of an owner, exclusive of any other rights and adverse to all other
claimants.
2. That the alleged predecessors in interest of the plaintiff have never been
in the actual possession of the land and that they never had any title thereto.
'ART. 1491. The following persons cannot acquire any purchase, even at a
public auction, either in person of through the mediation of another: .
xxx xxx xxx
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior
courts, and other officers and employees connected with the administration of
justice, the property and rights of in litigation or levied upon an execution before
the court within whose jurisdiction or territory they exercise their respective
functions; this prohibition includes the act of acquiring an assignment and shall
apply to lawyers, with respect to the property and rights which may be the object
of any litigation in which they may take part by virtue of their profession.'
defendant claims that plaintiff could not have acquired any interest in the
property in dispute as the contract he (plaintiff) had with Francisco Militante was
inexistent and void. (See pp. 22-31, Record on Appeal). Plaintiff strongly opposed
defendant's motion to dismiss claiming that defendant can not invoke Articles
1409 and 1491 of the Civil Code as Article 1422 of the same Code provides that
'The defense of illegality of contracts is not available to third persons whose
interests are not directly affected' (See pp. 32-35 Record on Appeal).

3. That Lot No. 2, Psu 155241, the subject of Free Patent application of the On October 18, 1965, the lower court issued an order disclaiming plaintiffs
defendant has been approved. complaint (pp. 42-49, Record on Appeal.) In the aforesaid order of dismissal the
lower court practically agreed with defendant's contention that the contract (Exh.
4. The damages suffered by the defendant, as alleged in his A) between plaintiff and Francism Militante was null and void. In due season
counterclaim."'1 plaintiff filed a motion for reconsideration (pp. 50-56 Record on Appeal) which
was denied by the lower court on January 14, 1966 (p. 57, Record on Appeal).
The appellate court further related the developments of the case, as follows:
Hence, this appeal by plaintiff from the orders of October 18, 1965 and January
On August 17, 1965, defendant's counsel manifested in open court that before 14, 1966.
any trial on the merit of the case could proceed he would file a motion to dismiss
plaintiff's complaint which he did, alleging that plaintiff does not have cause of Plaintiff-appellant imputes to the lower court the following errors:
action against him because the property in dispute which he (plaintiff) allegedly
bought from his father-in-law, Francisco Militante was the subject matter of LRC '1. The lower court erred in holding that the contract of sale between the
No. 695 filed in the CFI of Iloilo, which case was brought on appeal to this Court plaintiff-appellant and his father-in-law, Francisco Militante, Sr., now deceased,
and docketed as CA-G.R. No. 13497-R in which aforesaid case plaintiff was the of the property covered by Plan Psu-99791, (Exh. "A") was void, not voidable
counsel on record of his father-in-law, Francisco Militante. Invoking Arts. 1409 because it was made when plaintiff-appellant was the counsel of the latter in the
and 1491 of the Civil Code which reads: Land Registration case.

'Art. 1409. The following contracts are inexistent and void from the beginning: '2. The lower court erred in holding that the defendant-appellee is an
interested person to question the validity of the contract of sale between plaintiff-
xxx xxx xxx appellant and the deceased, Francisco Militante, Sr.

(7) Those expressly prohibited by law.

'3. The lower court erred in entertaining the motion to dismiss of the
defendant-appellee after he had already filed his answer, and after the
termination of the pre-trial, when the said motion to dismiss raised a collateral
question.
'4. The lower court erred in dismissing the complaint of the plaintiff-
appellant.'
The appellate court concluded that plaintiffs "assignment of errors gives rise to
two (2) legal posers — (1) whether or not the contract of sale between appellant
and his father-in-law, the late Francisco Militante over the property subject of
Plan Psu-99791 was void because it was made when plaintiff was counsel of his
father-in-law in a land registration case involving the property in dispute; and (2)
whether or not the lower court was correct in entertaining defendant-appellee's
motion to dismiss after the latter had already filed his answer and after he
(defendant) and plaintiff-appellant had agreed on some matters in a pre-trial
conference. Hence, its elevation of the appeal to this Court as involving pure
questions of law.
It is at once evident from the foregoing narration that the pre-trial conference
held by the trial court at which the parties with their counsel agreed and
stipulated on the material and relevant facts and submitted their respective
documentary exhibits as referred to in the pre-trial order, supra,2 practically
amounted to a fulldress trial which placed on record all the facts and exhibits
necessary for adjudication of the case.
The three points on which plaintiff reserved the presentation of evidence at the-
trial dealing with the source of the alleged right and title of Francisco Militante's
predecessors, supra,3 actually are already made of record in the stipulated facts
and admitted exhibits. The chain of Militante's alleged title and right to the land
as supposedly traced back to Liberato Demontaño was actually asserted by
Militante (and his vendee, lawyer and son-in-law, herein plaintiff) in the land
registration case and rejected by the Iloilo land registration court which
dismissed Militante's application for registration of the land. Such dismissal, as
already stated, was affirmed by the final judgment in 1958 of the Court of
Appeals.4
The four points on which defendant on his part reserved the presentation of
evidence at the trial dealing with his and his ancestors' continuous, open, public
and peaceful possession in the concept of owner of the land and the Director of
Lands' approval of his survey plan thereof, supra,5 are likewise already duly
established facts of record, in the land registration case as well as in the
ejectment case wherein the Iloilo court of first instance recognized the superiority
of defendant's right to the land as against plaintiff.
No error was therefore committed by the lower court in dismissing plaintiff's
complaint upon defendant's motion after the pre-trial.
1. The stipulated facts and exhibits of record indisputably established
plaintiff's lack of cause of action and justified the outright dismissal of the
complaint. Plaintiff's claim of ownership to the land in question was predicated
on the sale thereof for P2,000.00 made in 1956 by his father-in- law, Francisco
Militante, in his favor, at a time when Militante's application for registration
thereof had already been dismissed by the Iloilo land registration court and was
pending appeal in the Court of Appeals.
With the Court of Appeals' 1958 final judgment affirming the dismissal of
Militante's application for registration, the lack of any rightful claim or title of
Militante to the land was conclusively and decisively judicially determined.
Hence, there was no right or title to the land that could be transferred or sold by
Militante's purported sale in 1956 in favor of plaintiff.
Manifestly, then plaintiff's complaint against defendant, to be declared absolute
owner of the land and to be restored to possession thereof with damages was
bereft of any factual or legal basis.
2. No error could be attributed either to the lower court's holding that the
purchase by a lawyer of the property in litigation from his client is categorically
prohibited by Article 1491, paragraph (5) of the Philippine Civil Code, reproduced
supra;6 and that consequently, plaintiff's purchase of the property in litigation
from his client (assuming that his client could sell the same since as already
shown above, his client's claim to the property was defeated and rejected) was
void and could produce no legal effect, by virtue of Article 1409, paragraph (7) of
our Civil Code which provides that contracts "expressly prohibited or declared
void by law' are "inexistent and that "(T)hese contracts cannot be ratified. Neither
can the right to set up the defense of illegality be waived."
The 1911 case of Wolfson vs. Estate of Martinez7 relied upon by plaintiff as
holding that a sale of property in litigation to the party litigant's lawyer "is not
void but voidable at the election of the vendor" was correctly held by the lower
court to have been superseded by the later 1929 case of Director of Lands vs.
Abagat.8 In this later case of Abagat, the Court expressly cited two antecedent
cases involving the same transaction of purchase of property in litigation by the
lawyer which was expressly declared invalid under Article 1459 of the Civil Code
of Spain (of which Article 1491 of our Civil Code of the Philippines is the
counterpart) upon challenge thereof not by the vendor-client but by the adverse
parties against whom the lawyer was to enforce his rights as vendee thus
acquired.
These two antecedent cases thus cited in Abagat clearly superseded (without so
expressly stating the previous ruling in Wolfson:
The spouses, Juan Soriano and Vicente Macaraeg, were the owners of twelve
parcels of land. Vicenta Macaraeg died in November, 1909, leaving a large
number of collateral heirs but no descendants. Litigation between the surviving
husband, Juan Soriano, and the heirs of Vicenta immediately arose, and the
herein appellant Sisenando Palarca acted as Soriano's lawyer. On May 2, 1918,
Soriano executed a deed for the aforesaid twelve parcels of land in favor of
Sisenando Palarca and on the following day, May 3, 1918, Palarca filed an
application for the registration of the land in the deed. After hearing, the Court
of First Instance declared that the deed was invalid by virtue of the provisions of
article 1459 of the Civil Code, which prohibits lawyers and solicitors from
purchasing property rights involved in any litigation in which they take part by
virtue of their profession. The application for registration was consequently
denied, and upon appeal by Palarca to the Supreme Court, the judgement of the
lower court was affirmed by a decision promulgated November 16,1925. (G.R. No.
24329, Palarca vs. Director of Lands, not reported.)
In the meantime cadastral case No. 30 of the Province of Tarlac was instituted,
and on August 21, 1923, Eleuteria Macaraeg, as administratrix of the estate of
Vicente Macaraeg, filed claims for the parcels in question. Buenaventura
Lavitoria administrator of the estate of Juan Soriano, did likewise and so did
Sisenando Palarca. In a decision dated June 21, 1927, the Court of First
Instance, Judge Carballo presiding, rendered judgment in favor of Palarea and
ordered the registration of the land in his name. Upon appeal to this court by the
administration of the estates of Juan Soriano and Vicente Macaraeg, the
judgment of the court below was reversed and the land adjudicated to the two
estates as conjugal property of the deceased spouses. (G.R. No. 28226, Director
of Lands vs. Abagat, promulgated May 21, 1928, not reported.)9
In the very case of Abagat itself, the Court, again affirming the invalidity and
nullity of the lawyer's purchase of the land in litigation from his client, ordered
the issuance of a writ of possession for the return of the land by the lawyer to the
adverse parties without reimbursement of the price paid by him and other
expenses, and ruled that "the appellant Palarca is a lawyer and is presumed to
know the law. He must, therefore, from the beginning, have been well aware of
the defect in his title and is, consequently, a possessor in bad faith."
As already stated, Wolfson and Abagat were decided with relation to Article 1459
of the Civil Code of Spain then adopted here, until it was superseded on August
30, 1950 by the Civil Code of the Philippines whose counterpart provision is
Article 1491.
Article 1491 of our Civil Code (like Article 1459 of the Spanish Civil Code)
prohibits in its six paragraphs certain persons, by reason of the relation of trust
or their peculiar control over the property, from acquiring such property in their
trust or control either directly or indirectly and "even at a public or judicial
auction," as follows: (1) guardians; (2) agents; (3) administrators; (4) public
officers and employees; judicial officers and employees, prosecuting attorneys,
and lawyers; and (6) others especially disqualified by law.
In Wolfson which involved the sale and assignment of a money judgment by the
client to the lawyer, Wolfson, whose right to so purchase the judgment was being
challenged by the judgment debtor, the Court, through Justice Moreland, then
expressly reserved decision on "whether or not the judgment in question actually
falls within the prohibition of the article" and held only that the sale's "voidability
can not be asserted by one not a party to the transaction or his representative,"
citing from Manresa 10 that "(C)onsidering the question from the point of view of
the civil law, the view taken by the code, we must limit ourselves to classifying
as void all acts done contrary to the express prohibition of the statute. Now then:
As the code does not recognize such nullity by the mere operation of law, the
nullity of the acts hereinbefore referred to must be asserted by the person having
the necessary legal capacity to do so and decreed by a competent
court." 11
The reason thus given by Manresa in considering such prohibited acquisitions
under Article 1459 of the Spanish Civil Code as merely voidable at the instance
and option of the vendor and not void — "that the Code does not recognize such
nullity de pleno derecho" — is no longer true and applicable to our own Philippine
Civil Code which does recognize the absolute nullity of contracts "whose cause,
object, or purpose is contrary to law, morals, good customs, public order or
public policy" or which are "expressly prohibited or declared void by law" and
declares such contracts "inexistent and void from the beginning." 12
The Supreme Court of Spain and modern authors have likewise veered from
Manresa's view of the Spanish codal provision itself. In its sentencia of 11 June
1966, the Supreme Court of Spain ruled that the prohibition of Article 1459 of
the Spanish Civil Code is based on public policy, that violation of the prohibition
contract cannot be validated by confirmation or ratification, holding that:
... la prohibicion que el articulo 1459 del C.C. establece respecto a los
administradores y apoderados, la cual tiene conforme a la doctrina de esta Sala,
contendia entre otras, en S. de 27-5-1959, un fundamento de orden moral lugar
la violacion de esta a la nulidad de pleno derecho del acto o negocio celebrado,
... y prohibicion legal, afectante orden publico, no cabe con efecto alguno la
aludida retification ... 13
The criterion of nullity of such prohibited contracts under Article 1459 of the
Spanish Civil Code (Article 1491 of our Civil Code) as a matter of public order
and policy as applied by the Supreme Court of Spain to administrators and
agents in its above cited decision should certainly apply with greater reason to
judges, judicial officers, fiscals and lawyers under paragraph 5 of the codal
article.
Citing the same decisions of the Supreme Court of Spain, Gullon Ballesteros, his
"Curso de Derecho Civil, (Contratos Especiales)" (Madrid, 1968) p. 18, affirms
that, with respect to Article 1459, Spanish Civil Code:.
Que caracter tendra la compra que se realice por estas personas? Porsupuesto
no cabe duda de que el caso (art.) 1459, 40 y 50, la nulidad esabsoluta porque
el motivo de la prohibicion es de orden publico. 14
Perez Gonzales in such view, stating that "Dado el caracter prohibitivo
delprecepto, la consequencia de la infraccion es la nulidad radical y ex lege." 15
Castan, quoting Manresa's own observation that.
"El fundamento do esta prohibicion es clarisimo. No sa trata con este precepto
tan solo de guitar la ocasion al fraude; persiguese, ademasel proposito de rodear
a las personas que intervienen en la administrcionde justicia de todos los retigios
que necesitan pora ejercer su ministerio librandolos de toda suspecha, que
aunque fuere in fundada, redundura endescredito de la institucion." 16 arrives
at the contrary and now accepted view that "Puede considerace en nuestro
derecho inexistente 'o radicalmente nulo el contrato en los siguentes cases: a) ...;
b) cuando el contrato se ha celebrado en violacion de una prescripcion 'o
prohibicion legal, fundada sobre motivos de orden publico (hipotesis del art. 4
del codigo) ..." 17
It is noteworthy that Caltan's rationale for his conclusion that fundamental
consideration of public policy render void and inexistent such expressly
prohibited purchase (e.g. by public officers and employees of government
property intrusted to them and by justices, judges, fiscals and lawyers of property
and rights in litigation and submitted to or handled by them, under Article 1491,
paragraphs (4) and (5) of our Civil Code) has been adopted in a new article of our
Civil Code, viz, Article 1409 declaring such prohibited contracts as "inexistent
and void from the beginning." 18
Indeed, the nullity of such prohibited contracts is definite and permanent and
cannot be cured by ratification. The public interest and public policy remain
paramount and do not permit of compromise or ratification. In his aspect, the
permanent disqualification of public and judicial officers and lawyers grounded
on public policy differs from the first three cases of guardians, agents and
administrators (Article 1491, Civil Code), as to whose transactions it had been
opined that they may be "ratified" by means of and in "the form of a new contact,
in which cases its validity shall be determined only by the circumstances at the
time the execution of such new contract. The causes of nullity which have ceased
to exist cannot impair the validity of the new contract. Thus, the object which
was illegal at the time of the first contract, may have already become lawful at
the time of the ratification or second contract; or the service which was
impossible may have become possible; or the intention which could not be
ascertained may have been clarified by the parties. The ratification or second
contract would then be valid from its execution; however, it does not retroact to
the date of the first contract." 19
As applied to the case at bar, the lower court therefore properly acted upon
defendant-appellant's motion to dismiss on the ground of nullity of plaintiff's
alleged purchase of the land, since its juridical effects and plaintiff's alleged cause
of action founded thereon were being asserted against defendant-appellant. The
principles governing the nullity of such prohibited contracts and judicial
declaration of their nullity have been well restated by Tolentino in his treatise on
our Civil Code, as follows:
Parties Affected. — Any person may invoke the in existence of the contract
whenever juridical effects founded thereon are asserted against him. Thus, if
there has been a void transfer of property, the transferor can recover it by the
accion reinvindicatoria; and any prossessor may refuse to deliver it to the
transferee, who cannot enforce the contract. Creditors may attach property of the
debtor which has been alienated by the latter under a void contract; a mortgagee
can allege the inexistence of a prior encumbrance; a debtor can assert the nullity
of an assignment of credit as a defense to an action by the assignee.
Action On Contract. — Even when the contract is void or inexistent, an action is
necessary to declare its inexistence, when it has already been fulfilled. Nobody
can take the law into his own hands; hence, the intervention of the competent
court is necessary to declare the absolute nullity of the contract and to decree
the restitution of what has been given under it. The judgment, however, will
retroact to the very day when the contract was entered into.
If the void contract is still fully executory, no party need bring an action to declare
its nullity; but if any party should bring an action to enforce it, the other party
can simply set up the nullity as a defense. 20
ACCORDINGLY, the order of dismissal appealed from is hereby affirmed, with
costs in all instances against plaintiff-appellant. So ordered.
(11) Sales by Guardians, Agents and Administrators
[G.R. No. L-8477. May 31, 1956.]
THE PHILIPPINE TRUST COMPANY, as Guardian of the Property of the minor,
MARIANO L. BERNARDO, Petitioner, vs. SOCORRO ROLDAN, FRANCISCO
HERMOSO, FIDEL C. RAMOS and EMILIO CRUZ, Respondents.
DECISION
BENGZON, J.:
As guardian of the property of the minor Mariano L. Bernardo, the Philippine
Trust Company filed in the Manila court of first instance a complaint to annul
two contracts regarding 17 parcels of land: (a) sale thereof by Socorro Roldan, as
guardian of said minor, to Fidel C. Ramos; (b) sale thereof by Fidel C. Ramos to
Socorro Roldan personally. The complaint likewise sought to annul a conveyance
of four out of the said seventeen parcels by Socorro Roldan to Emilio Cruz.
The action rests on the proposition that the first two sales were in reality a sale
by the guardian to herself — therefore, null and void under Article 1459 of the
Civil Code. As to the third conveyance, it is also ineffective, because Socorro
Roldan had acquired no valid title to convey to Cruz.
The material facts of the case are not complicated. These 17 parcels located in
Guiguinto, Bulacan, were part of the properties inherited by Mariano L. Bernardo
from his father, Marcelo Bernardo, deceased. In view of his minority,
guardianship proceedings were instituted, wherein Socorro Roldan was
appointed his guardian. She was the surviving spouse of Marcelo Bernardo, and
the stepmother of said Mariano L. Bernardo.
On July 27, 1947, Socorro Roldan filed in said guardianship proceedings (Special
Proceeding 2485, Manila), a motion asking for authority to sell as guardian the
17 parcels for the sum of P14,700 to Dr. Fidel C. Ramos, the purpose of the sale
being allegedly to invest the money in a residential house, which the minor
desired to have on Tindalo Street, Manila. The motion was granted.
On August 5, 1947 Socorro Roldan, as guardian, executed the proper deed of
sale in favor of her brother-in-law Dr. Fidel C. Ramos (Exhibit A-1), and on
August 12, 1947 she asked for, and obtained, judicial confirmation of the sale.
On August 13, 1947, Dr. Fidel C. Ramos executed in favor of Socorro Roldan,
personally, a deed of conveyance covering the same seventeen parcels, for the
sum of P15,000 (Exhibit A-2). And on October 21, 1947 Socorro Roldan sold four
parcels out of the seventeen to Emilio Cruz for P3,000, reserving to herself the
right to repurchase (Exhibit A-3).
The Philippine Trust Company replaced Socorro Roldan as guardian, on August
10, 1948. And this litigation, started two months later, seeks to undo what the
previous guardian had done. The step-mother in effect, sold to herself, the
properties of her ward, contends the Plaintiff, and the sale should be annulled
because it violates Article 1459 of the Civil Code prohibiting the guardian from
purchasing “either in person or through the mediation of another” the property
of her ward.
The court of first instance, following our decision in Rodriguez vs. Mactal, 60 Phil.
13 held the article was not controlling, because there was no proof that Fidel C.
Ramos was a mere intermediary or that the latter had previously agreed with
Socorro Roldan to buy the parcels for her benefit.
However, taking the former guardian at her word - she swore she had
repurchased the lands from Dr. Fidel C. Ramos to preserve it and to give her
protege opportunity to redeem — the court rendered judgment upholding the
contracts but allowing the minor to repurchase all the parcels by paying P15,000,
within one year.
The Court of Appeals affirmed the judgment, adding that the minor knew the
particulars of, and approved the transaction, and that “only clear and positive
evidence of fraud or bad faith, and not mere insinuations and inferences will
overcome the presumptions that a sale was concluded in all good faith for value”.
At first glance the resolutions of both courts accomplished substantial justice:
the minor recovers his properties. But if the conveyances are annulled as prayed
for, the minor will obtain a better deal: he receives all the fruits of the lands from
the year 1947 (Article 1303 Civil Code) and will return P14,700, not P15,000.
To our minds the first two transactions herein described couldn’t be in a better
juridical situation than if this guardian had purchased the seventeen parcels on
the day following the sale to Dr. Ramos. Now, if she was willing to pay P15,000
why did she sell the parcels for less? In one day (or actually one week) the price
could not have risen so suddenly. Obviously when, seeking approval of the sale
she represented the price to be the best obtainable in the market, she was not
entirely truthful. This is one phase to consider.
Again, supposing she knew the parcels were actually worth P17,000; then she
agreed to sell them to Dr. Ramos at P14,700and knowing the realty’s value she
offered him the next day P15,000 or P15,500, and got it. Will there be any doubt
that she was recreant to her guardianship, and that her acquisition should be
nullified? Even without proof that she had connived with Dr. Ramos.
Remembering the general doctrine that guardianship is a trust of the highest
order, and the trustee cannot be allowed to have any inducement to neglect his
ward’s interest and in line with the court’s suspicion whenever the guardian
acquires the ward’s property 1 we have no hesitation to declare that in this case,
in the eyes of the law, Socorro Roldan took by purchase her ward’s parcels thru
Dr. Ramos, and that Article 1459 of the Civil Code applies.
She acted it may be true without malice; there may have been no previous
agreement between her and Dr. Ramos to the effect that the latter would buy the
lands for her. But the stubborn fact remains that she acquired her protege’s
properties, through her brother-in-law. That she planned to get them for herself
at the time of selling them to Dr. Ramos, may be deduced from the very short
time between the two sales (one week). The temptation which naturally besets a
guardian so circumstanced, necessitates the annulment of the transaction, even
if no actual collusion is proved (so hard to prove) between such guardian and the
intermediate purchaser. This would uphold a sound principle of equity and
justice. 2
We are aware of course that in Rodriguez vs. Mactal, 60 Phil. p. 13 wherein the
guardian Mactal sold in January 1926 the property of her ward to Silverio Chioco,
and in March 1928 she bought it from Chioco, this Court said:
“In order to bring the sale in this case within the part of Article 1459, quoted
above, it is essential that the proof submitted establish some agreement between
Silverio Chioco and Trinidad Mactal to the effect that Chioco should buy the
property for the benefit of Mactal. If there was no such agreement, either express
or implied, then the sale cannot be set aside
on which the house was erected. Estimating such lot at P14,700 only, (ordinarily
the city lot is more valuable than the building) the result is that the price paid
for the seventeen parcels gave the minor an income of only P1,200 a year,
whereas the harvest from the seventeen parcels netted his step-mother a yearly
profit of P1,522.00. The minor was thus on the losing end.
Hence, from both the legal and equitable standpoints these three sales should
not be sustained the first two for violation of article 1459 of the Civil Code; Fand
the third because Socorro Roldan could pass no title to Emilio Cruz. The
annulment carries with is (Article 1303 Civil Code) the obligation of Socorro
Roldan to return the 17 parcels together with their fruits and the duty of the
minor, through his guardian to repay P14,700 with legal interest.
Judgment is therefore rendered:
a. Annulling the three contracts of sale in question; yb. declaring the
minor as the owner of the seventeen parcels of land, with the
obligation to return to Socorro Roldan the price of P14,700 with legal
interest from August 12, 1947; c. Ordering Socorro Roldan and
Emilio Cruz to deliver said parcels of land to the minor; chan d.
Requiring Socorro Roldan to pay him beginning with 1947 the fruits,
which her attorney admits, amounted to P1,522 a year;. Authorizing
the minor to deliver directly to Emilio Cruz, out of the price of
P14,700 above mentioned, the sum of P3,000; and f. charging
Appellees with the costs. SO ORDERED.

However, the underlined portion was not intended to establish a general principle
of law applicable to all subsequent litigations. It merely meant that the
subsequent purchase by Mactal could not be annulled in that particular case
because there was no proof of a previous agreement between Chioco and her. The
court then considered such proof necessary to establish that the two sales were
actually part of one scheme — guardian getting the ward’s property through
another person — because two years had elapsed between the sales. Such period
of time was sufficient to dispel the natural suspicion of the guardian’s motives or
actions. In the case at bar, however, only one week had elapsed. And if we were
technical, we could say, only one day had elapsed from the judicial approval of
the sale (August 12), to the purchase by the guardian (Aug. 13).

Attempting to prove that the transaction was beneficial to the minor, Appellee’s
attorney alleges that the money (P14,700) invested in the house on Tindalo Street
produced for him rentals of P2,400 yearly; whereas the parcels of land yielded to
his step-mother only an average of P1,522 per year. 3 The argument would carry
some weight if that house had been built out of the purchase price of P14,700
only. 4 One thing is certain: the calculation does not include the price of the lot
(13) Attorneys
G.R. No. L-68838 March 11, 1991
FLORENCIO FABILLO and JOSEFA TANA (substituted by their heirs Gregorio
Fabillo, Roman Fabillo, Cristeta F. Maglinte and Antonio Fabillo), petitioners,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT (Third Civil Case
Division) and ALFREDO MURILLO (substituted by his heirs Fiamita M. Murillo,
Flor M. Agcaoili and Charito M. Babol), respondents.
Francisco A. Tan for petitioners.
Von Kaiser P. Soro for private respondent.
FERNAN, C.J.:
In the instant petition for review on certiorari, petitioners seek the reversal of the
appellate court's decision interpreting in favor of lawyer Alfredo M. Murillo the
contract of services entered into between him and his clients, spouses Florencio
Fabillo and Josefa Taña.
In her last will and testament dated August 16, 1957, Justina Fabillo bequeathed
to her brother, Florencio, a house and lot in San Salvador Street, Palo, Leyte
which was covered by tax declaration No. 19335, and to her husband, Gregorio
D. Brioso, a piece of land in Pugahanay, Palo, Leyte.1 After Justina's death,
Florencio filed a petition for the probate of said will. On June 2, 1962, the probate
court approved the project of partition "with the reservation that the ownership
of the land declared under Tax Declaration No. 19335 and the house erected
thereon be litigated and determined in a separate proceedings."2
Two years later, Florencio sought the assistance of lawyer Alfredo M. Murillo in
recovering the San Salvador property. Acquiescing to render his services, Murillo
wrote Florencio the following handwritten letter:
Dear Mr. Fabillo:
I have instructed my stenographer to prepare the complaint and file the same on
Wednesday if you are ready with the filing fee and sheriffs fee of not less than
P86.00 including transportation expenses.
Considering that Atty. Montilla lost this case and the present action is a revival
of a lost case, I trust that you will gladly give me 40% of the money value of the
house and lot as a contigent (sic) fee in case of a success. When I come back I
shall prepare the contract of services for your signature.
Thank you.
Cordially yours,
(Sgd.) Alfredo M. Murillo
Aug. 9, 19643
Thirteen days later, Florencio and Murillo entered into the following contract:
CONTRACT OF SERVICES
KNOW ALL MEN BY THESE PRESENTS:
That I, FLORENCIO FABILLO, married to JOSEFA TANA, of legal age, Filipino
citizen and with residence and postal address at Palo, Leyte, was the Petitioner
in Special Proceedings No. 843, entitled "In the Matter of the Testate Estate of
the late Justina Fabillo, Florencio Fabillo, Petitioner" of the Court of First
Instance of Leyte;
That by reason of the Order of the Court of First Instance of Leyte dated June 2,
1962, my claim for the house and lot mentioned in paragraph one (1) of the last
will and testament of the late Justina Fabillo, was denied altho the will was
probated and allowed by the Court;
That acting upon the counsel of Atty. Alfredo M. Murillo, I have cause(d) the
preparation and filing of another case, entitled "Florencio Fabillo vs. Gregorio D.
Brioso," which was docketed as Civil Case No. 3532 of the Court of First Instance
of Leyte;
That I have retained and engaged the services of Atty. ALFREDO M. MURILLO,
married and of legal age, with residence and postal address at Santa Fe, Leyte to
be my lawyer not only in Social Proceedings No. 843 but also in Civil Case No.
3532 under the following terms and conditions;
That he will represent me and my heirs, in case of my demise in the two cases
until their successful conclusion or until the case is settled to my entire
satisfaction;
That for and in consideration for his legal services, in the two cases, I hereby
promise and bind myself to pay Atty. ALFREDO M. MURILLO, in case of success
in any or both cases the sum equivalent to FORTY PER CENTUM (40%) of
whatever benefit I may derive from such cases to be implemented as follows:
If the house and lot in question is finally awarded to me or a part of the same by
virtue of an amicable settlement, and the same is sold, Atty. Murillo, is hereby
constituted as Atty. in-fact to sell and convey the said house and lot and he shall
be given as his compensation for his services as counsel and as attorney-in-fact
the sum equivalent to forty per centum of the purchase price of the house and
lot;
If the same house and lot is just mortgage(d) to any person, Atty. Murillo shall
be given the sum equivalent to forty per centum (40%) of the proceeds of the
mortgage;
If the house and lot is leased to any person, Atty. Murillo shall be entitled to
receive an amount equivalent to 40% (FORTY PER CENTUM) of the rentals of the
house and lot, or a part thereof;
If the house and lot or a portion thereof is just occupied by the undersigned or
his heirs, Atty. Murillo shall have the option of either occupying or leasing to any
interested party FORTY PER CENT of the house and lot.
Atty. Alfredo M. Murillo shall also be given as part of his compensation for legal
services in the two cases FORTY PER CENTUM of whatever damages, which the
undersigned can collect in either or both cases, provided, that in case I am
awarded attorney's fees, the full amount of attorney's fees shall be given to the
said Atty. ALFREDO M. MURILLO;
That in the event the house and lot is (sic) not sold and the same is maintained
by the undersigned or his heirs, the costs of repairs, maintenance, taxes and
insurance premiums shall be for the account of myself or my heirs and Attorney
Murillo, in proportion to our rights and interest thereunder that is forty per cent
shall be for the account of Atty. Murillo and sixty per cent shall be for my account
or my heirs.
IN WITNESS HEREOF, I hereby set unto my signature below this 22nd day of
August 1964 at Tacloban City.
(Sgd.) FLORENCIO FABILLO
(Sgd.) JOSEFA T. FABILLO
WITH MY CONFORMITY:
(Sgd.) ALFREDO M. MURILLO
(Sgd.) ROMAN T. FABILLO
(Witness) (Sgd.) CRISTETA F. MAGLINTE
(Witness)4
Pursuant to said contract, Murillo filed for Florencio Fabillo Civil Case No. 3532
against Gregorio D. Brioso to recover the San Salvador property. The case was
terminated on October 29, 1964 when the court, upon the parties' joint motion
in the nature of a compromise agreement, declared Florencio Fabillo as the lawful
owner not only of the San Salvador property but also the Pugahanay parcel of
land.
Consequently, Murillo proceeded to implement the contract of services between
him and Florencio Fabillo by taking possession and exercising rights of
ownership over 40% of said properties. He installed a tenant in the Pugahanay
property.
Sometime in 1966, Florencio Fabillo claimed exclusive right over the two
properties and refused to give Murillo his share of their produce.5 Inasmuch as
his demands for his share of the produce of the Pugahanay property were
unheeded, Murillo filed on March 23, 1970 in the then Court of First Instance of
Leyte a complaint captioned "ownership of a parcel of land, damages and
appointment of a receiver" against Florencio Fabillo, his wife Josefa Taña, and
their children Ramon (sic) Fabillo and Cristeta F. Maglinte.6
Murillo prayed that he be declared the lawful owner of forty per cent of the two
properties; that defendants be directed to pay him jointly and severally P900.00
per annum from 1966 until he would be given his share of the produce of the
land plus P5,000 as consequential damages and P1,000 as attorney's fees, and
that defendants be ordered to pay moral and exemplary damages in such
amounts as the court might deem just and reasonable.
In their answer, the defendants stated that the consent to the contract of services
of the Fabillo spouses was vitiated by old age and ailment; that Murillo misled
them into believing that Special Proceedings No. 843 on the probate of Justina's
will was already terminated when actually it was still pending resolution; and
that the contingent fee of 40% of the value of the San Salvador property was
excessive, unfair and unconscionable considering the nature of the case, the
length of time spent for it, the efforts exerted by Murillo, and his professional
standing.
They prayed that the contract of services be declared null and void; that Murillo's
fee be fixed at 10% of the assessed value of P7,780 of the San Salvador property;
that Murillo be ordered to account for the P1,000 rental of the San Salvador
property which he withdrew from the court and for the produce of the Pugahanay
property from 1965 to 1966; that Murillo be ordered to vacate the portion of the
San Salvador property which he had occupied; that the Pugahanay property
which was not the subject of either Special Proceedings No. 843 or Civil Case No.
3532 be declared as the exclusive property of Florencio Fabillo, and that Murillo
be ordered to pay moral damages and the total amount of P1,000 representing
expenses of litigation and attorney's fees.
In its decision of December 2, 1975,7 the lower court ruled that there was
insufficient evidence to prove that the Fabillo spouses' consent to the contract
was vitiated. It noted that the contract was witnessed by two of their children
who appeared to be highly educated. The spouses themselves were old but
literate and physically fit.
In claiming jurisdiction over the case, the lower court ruled that the complaint
being one "to recover real property from the defendant spouses and their heirs or
to enforce a lien thereon," the case could be decided independent of the probate
proceedings. Ruling that the contract of services did not violate Article 1491 of
the Civil Code as said contract stipulated a contingent fee, the court upheld
Murillo's claim for "contingent attorney's fees of 40% of the value of recoverable
properties." However, the court declared Murillo to be the lawful owner of 40% of
both the San Salvador and Pugahanay properties and the improvements thereon.
It directed the defendants to pay jointly and severally to Murillo the amount of
P1,200 representing 40% of the net produce of the Pugahanay property from
1967 to 1973; entitled Murillo to 40% of the 1974 and 1975 income of the
Pugahanay property which was on deposit with a bank, and ordered defendants
to pay the costs of the suit.
Both parties filed motions for the reconsideration of said decision: Fabillo, insofar
as the lower court awarded 40% of the properties to Murillo and the latter insofar
as it granted only P1,200 for the produce of the properties from 1967 to 1973.
On January 29, 1976, the lower court resolved the motions and modified its
decision thus:
ACCORDINGLY, the judgment heretofore rendered is modified to read as follows:
(a) Declaring the plaintiff as entitled to and the true and lawful owner of
forty percent (40%) of the parcels of land and improvements thereon covered by
Tax Declaration Nos. 19335 and 6229 described in Paragraph 5 of the complaint;
(b) Directing all the defendants to pay jointly and severally to the plaintiff
the sum of Two Thousand Four Hundred Fifty Pesos (P2,450.00) representing
40% of the net produce of the Pugahanay property from 1967 to 1973;
(c) Declaring the plaintiff entitled to 40% of the 1974 and 1975 income of
said riceland now on deposit with the Prudential Bank, Tacloban City, deposited
by Mr. Pedro Elona, designated receiver of the property;
(d) Ordering the defendants to pay the plaintiff the sum of Three Hundred
Pesos (P 300.00) as attorney's fees; and
(e) Ordering the defendants to pay the costs of this suit.
SO ORDERED.
In view of the death of both Florencio and Justina Fabillo during the pendency
of the case in the lower court, their children, who substituted them as parties to
the case, appealed the decision of the lower court to the then Intermediate
Appellate Court. On March 27, 1984, said appellate court affirmed in toto the
decision of the lower court.8
The instant petition for review on certiorari which was interposed by the Fabillo
children, was filed shortly after Murillo himself died. His heirs likewise
substituted him in this case. The Fabillos herein question the appellate court's
interpretation of the contract of services and contend that it is in violation of
Article 1491 of the Civil Code.
The contract of services did not violate said provision of law. Article 1491 of the
Civil Code, specifically paragraph 5 thereof, prohibits lawyers from acquiring by
purchase even at a public or judicial auction, properties and rights which are the
objects of litigation in which they may take part by virtue of their profession. The
said prohibition, however, applies only if the sale or assignment of the property
takes place during the pendency of the litigation involving the client's property.9
Hence, a contract between a lawyer and his client stipulating a contingent fee is
not covered by said prohibition under Article 1491 (5) of the Civil Code because
the payment of said fee is not made during the pendency of the litigation but only
after judgment has been rendered in the case handled by the lawyer. In fact,
under the 1988 Code of Professional Responsibility, a lawyer may have a lien over
funds and property of his client and may apply so much thereof as may be
necessary to satisfy his lawful fees and disbursements.10
As long as the lawyer does not exert undue influence on his client, that no fraud
is committed or imposition applied, or that the compensation is clearly not
excessive as to amount to extortion, a contract for contingent fee is valid and
enforceable.11 Moreover, contingent fees were impliedly sanctioned by No. 13 of
the Canons of Professional Ethics which governed lawyer-client relationships
when the contract of services was entered into between the Fabillo spouses and
Murillo.12
However, we disagree with the courts below that the contingent fee stipulated
between the Fabillo spouses and Murillo is forty percent of the properties subject
of the litigation for which Murillo appeared for the Fabillos. A careful scrutiny of
the contract shows that the parties intended forty percent of the value of the
properties as Murillo's contingent fee. This is borne out by the stipulation that
"in case of success of any or both cases," Murillo shall be paid "the sum
equivalent to forty per centum of whatever benefit" Fabillo would derive from
favorable judgments. The same stipulation was earlier embodied by Murillo in
his letter of August 9, 1964 aforequoted.
Worth noting are the provisions of the contract which clearly states that in case
the properties are sold, mortgaged, or leased, Murillo shall be entitled
respectively to 40% of the "purchase price," "proceeds of the mortgage," or
"rentals." The contract is vague, however, with respect to a situation wherein the
properties are neither sold, mortgaged or leased because Murillo is allowed "to
have the option of occupying or leasing to any interested party forty per cent of
the house and lot." Had the parties intended that Murillo should become the
lawful owner of 40% of the properties, it would have been clearly and
unequivocally stipulated in the contract considering that the Fabillos would part
with actual portions of their properties and cede the same to Murillo.

The ambiguity of said provision, however, should be resolved against Murillo as

it was he himself who drafted the contract.13 This is in consonance with the rule
of interpretation that, in construing a contract of professional services between
a lawyer and his client, such construction as would be more favorable to the
client should be adopted even if it would work prejudice to the lawyer.14 Rightly
so because of the inequality in situation between an attorney who knows the
technicalities of the law on the one hand and a client who usually is ignorant of
the vagaries of the law on the other hand.15

Considering the nature of the case, the value of the properties subject matter
thereof, the length of time and effort exerted on it by Murillo, we hold that Murillo
is entitled to the amount of Three Thousand Pesos (P3,000.00) as reasonable
attorney's fees for services rendered in the case which ended on a compromise
agreement. In so ruling, we uphold "the time-honored legal maxim that a lawyer
shall at all times uphold the integrity and dignity of the legal profession so that
his basic ideal becomes one of rendering service and securing justice, not money-
making. For the worst scenario that can ever happen to a client is to lose the
litigated property to his lawyer in whom all trust and confidence were bestowed
at the very inception of the legal controversy."16

WHEREFORE, the decision of the then Intermediate Appellate Court is hereby

reversed and set aside and a new one entered (a) ordering the petitioners to pay
Atty. Alfredo M. Murillo or his heirs the amount of P3,000.00 as his contingent
fee with legal interest from October 29, 1964 when Civil Case No. 3532 was
terminated until the amount is fully paid less any and all amounts which Murillo
might have received out of the produce or rentals of the Pugahanay and San
Salvador properties, and (b) ordering the receiver of said properties to render a
complete report and accounting of his receivership to the court below within
fifteen (15) days from the finality of this decision. Costs against the private
respondent.

SO ORDERED.

1. Gaite v. Fonacier
Facts:
Gaite was appointed by Fonacier as attorney-in-fact to contract any party for the
exploration and development of mining claims. Gaite executed a deed of
assignment in favor of a single proprietorship owned by him. For some reasons,
Fonacier revoked the agency, which was acceded to by Gaite, subject to certain
conditions, one of which being the transfer of ores extracted from the mineral
claims for P75,000, of which P10,000 has already been paid upon signing of the
agreement and the balance to be paid from the first letter of credit for the first
local sale of the iron ores. To secure payment, Fonacier delivered a surety
agreement with Larap Mines and some of its stockholders, and another one with
Far Eastern Insurance. When the second surety agreement expired with no sale
being made on the ores, Gaite demanded the P65,000 balance. Defendants
contended that the payment was subject to the condition that the ores will be
sold.
Issue:
(1) Whether the sale is conditional or one with a period
(2) Whether there were insufficient tons of ores
Held:
(1) The shipment or local sale of the iron ore is not a condition precedent (or
suspensive) to the payment of the balance of P65,000.00, but was only a
suspensive period or term. What characterizes a conditional obligation is the fact
that its efficacy or obligatory force (as distinguished from its demandability) is
subordinated to the happening of a future and uncertain event; so that if the
suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed.
A contract of sale is normally commutative and onerous: not only does each one
of the parties assume a correlative obligation (the seller to deliver and transfer
ownership of the thing sold and the buyer to pay the price),but each party
anticipates performance by the other from the very start. While in a sale the
obligation of one party can be lawfully subordinated to an uncertain event, so
that the other understands that he assumes the risk of receiving nothing for what
he gives (as in the case of a sale of hopes or expectations, emptio spei), it is not
in the usual course of business to do so; hence, the contingent character of the
obligation must clearly appear. Nothing is found in the record to evidence that
Gaite desired or assumed to run the risk of losing his right over the ore without
getting paid for it, or that Fonacier understood that Gaite assumed any such risk.
This is proved by the fact that Gaite insisted on a bond a to guarantee payment
of the P65,000.00, an not only upon a bond by Fonacier, the Larap Mines &
Smelting Co., and the company's stockholders, but also on one by a surety
company; and the fact that appellants did put up such bonds indicates that they
admitted the definite existence of their obligation to pay the balance of
P65,000.00.
The appellant have forfeited the right court below that the appellants have
forfeited the right to compel Gaite to wait for the sale of the ore before receiving
payment of the balance of P65,000.00, because of their failure to renew the bond
of the Far Eastern Surety Company or else replace it with an equivalent
guarantee. The expiration of the bonding company's undertaking on December
8, 1955 substantially reduced the security of the vendor's rights as creditor for
the unpaid P65,000.00, a security that Gaite considered essential and upon
which he had insisted when he executed the deed of sale of the ore to Fonacier.
(2) The sale between the parties is a sale of a specific mass or iron ore because
no provision was made in their contract for the measuring or weighing of the ore
sold in order to complete or perfect the sale, nor was the price of P75,000,00
agreed upon by the parties based upon any such measurement.(see Art. 1480,
second par., New Civil Code). The subject matter of the sale is, therefore, a
determinate object, the mass, and not the actual number of units or tons
contained therein, so that all that was required of the seller Gaite was to deliver
in good faith to his buyer all of the ore found in the mass, notwithstanding that
the quantity delivered is less than the amount estimated by them.
2. Buenaventura v. CA
Facts: Sought to be declared null and void ab initio are certain deeds of sale of
real property executed by defendant parents Leonardo Joaquin and Feliciana
Landrito in favor of their co-defendant children. The petitioners contend that
there was no actual valid consideration and that assuming that there was
consideration in the sums reflected the properties are more than three-fold times
more valuable than the small sums appearing therein. The RTC ruled in favor of
the defendants and dismissed the case. RTC’s ruling was affirmed by CA. Hence
the appeal.
Issue:Whether or not there was a valid consideration in the deeds of sale
Held: If there is a meeting of the minds of the parties as to the price, the contract
of sale is valid, despite the manner of payment, or even the breach of that manner
of payment. If the real price is not stated in the contract, then the contract of sale
is valid but subject to reformation.
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall
not invalidate a contract, unless there has been fraud, mistake or undue
influence.
Article 1470 of the Civil Code further provides: Gross inadequacy of price does
not affect a contract of sale, except as may indicate a defect in the consent, or
that the parties really intended a donation or some other act or contract.
Petitioners failed to prove any of the instances mentioned in Articles 1355 and
1470 of the Civil Code which would invalidate, or even affect, the Deeds of Sale.
Indeed, there is no requirement that the price be equal to the exact value of the
subject matter of sale. All the respondents believed that they received the
commutative value of what they gave.
3.Celestino & Co. v. Collector
4.CIR V ENGINEERING EQUIPMENT AND SUPPLY COMPANY
FACTS: Engineering Equipment & Supply (EES) was engaged in the business of
designing and installing central air-conditioning systems. It was assessed by the
Commissioner of Internal Revenue for 30% advanced sales tax, among other
penalties pursuant to an anonymous complaint filed before the BIR. EES
vehemently objected and argued that they are contractors and not manufacturers
and should be liable only for the 3% tax on sales of services or pieces of work.
The commissioner demanded upon Engineering the payment of the assessed tax
and suggested that
Engineering pay P10k as compromise for Engineering’s penal liability for
violation of the Tax Code.
ISSUE: W/N EES is a contractor for a piece of work thus only liable for 3% tax
HELD: Contractor
– same; and to order the beds by the dozen and in no other manner. With the
a person who, in the pursuit of the independent business, undertakes to do a
specific job or piece of work for other persons, using his own means and methods
without submitting himself to control as to the petty details. True test of
contractor
– said obligations are implied in a contract of commercial agency. The whole
he renders service in the course of an independent occupation representing the
will of his employer only as to the result of his work, and not as to the means by
which it is accomplished. The SC found that EES was not a manufacturer of air-
conditioning units. While it imported such items, they were not for sale to the
general public and were used as mere components for the design of the
centralized air-conditioning system, the designs and specifications of w/c are
different for every client. Various technical factors must be considered and it can
be argued that no two plants are the same; all are engineered separately and
distinctly. Each project requires careful planning and meticulous layout. Such
central air-conditioning systems and their designs would not have existed were
it not for the special order of the party desiring to acquire it. EES is thus not
liable for the sales tax. In comparison with Celestino case: Engineering advertised
itself as Engineering Equipment and Supply Company, Machinery Mechanical
Supplies, Engineers, Contractors while Orien
tal used “Oriental Sash Factory”. It also paid the contractors
tax on all the contracts for design and construction of central system unlike
Oriental who did not pay contractors tax. Engineering did not have ready-made
air conditioning units for sale unlike oriental whose bulk of their sale came from
ready-made doors and windows As for their liability for violation of Tax Code,
they should pay the whole amount not the one suggested by the commissioner.
5. Quiroga vs Parsons
G.R. No. L-11491
Subject: Sales
Doctrine: Contract of Agency to Sell vs Contract of Sale
Facts: On Jan 24, 1911, plaintiff and the respondent entered into a contract
making the latter an “agent” of the former. The contract stipulates that Don
Andres Quiroga, here in petitioner, grants exclusive rights to sell his beds in the
Visayan region to J. Parsons. The contract only stipulates that J.Parsons should
pay Quiroga within 6 months upon the delivery of beds.
Quiroga files a case against Parsons for allegedly violating the following
stipulations: not to sell the beds at higher prices than those of the invoices; to
have an open establishment in Iloilo; itself to conduct the agency; to keep the
beds on public exhibition, and to pay for the advertisement expenses for the
exception of the obligation on the part of the defendant to order the beds by the
dozen and in no other manner, none of the obligations imputed to the defendant
in the two causes of action are expressly set forth in the contract. But the plaintiff
alleged that the defendant was his agent for the sale of his beds in Iloilo, and that
question, therefore, reduced itself to a determination as to whether the
defendant, by reason of the contract hereinbefore transcribed, was a purchaser
or an agent of the plaintiff for the sale of his beds.
Issue: Whether the contract is a contract of agency or of sale.
Held: In order to classify a contract, due attention must be given to its essential
clauses. In the contract in question, what was essential, as constituting its cause
and subject matter, is that the plaintiff was to furnish the defendant with the
beds which the latter might order, at the price stipulated, and that the defendant
was to pay the price in the manner stipulated. Payment was to be made at the
end of sixty days, or before, at the plaintiff’s request, or in cash, if the defendant
so preferred, and in these last two cases an additional discount was to be allowed
for prompt payment. These are precisely the essential features of a contract of
purchase and sale. There was the obligation on the part of the plaintiff to supply
the beds, and, on the part of the defendant, to pay their price. These features
exclude the legal conception of an agency or order to sell whereby the mandatory
or agent received the thing to sell it, and does not pay its price, but delivers to
the principal the price he obtains from the sale of the thing to a third person, and
if he does not succeed in selling it, he returns it. By virtue of the contract between
the plaintiff and the defendant, the latter, on receiving the beds, was necessarily
obliged to pay their price within the term fixed, without any other consideration
and regardless as to whether he had or had not sold the beds.
In respect to the defendant’s obligation to order by the dozen, the only one
expressly imposed by the contract, the effect of its breach would only entitle the
plaintiff to disregard the orders which the defendant might place under other
conditions; but if the plaintiff consents to fill them, he waives his right and cannot
complain for having acted thus at his own free will.
For the foregoing reasons, we are of opinion that the contract by and between the
plaintiff and the defendant was one of purchase and sale, and that the obligations
the breach of which is alleged as a cause of action are not imposed upon the
defendant, either by agreement or by law.
6. Puyat and Sons Co. v. Arco Amusement Company
Facts:
Respondent is engaged in operating cinematographs, while petitioner is acting as
an agent for Starr Piano Company of Richmond. Respondent negotiated with
petitioner and agreed that petitioner would order sound reproducing equipment
on its behalf, and respondent would pay 10% commission and out-of-pocket
expenses in addition to the selling price. Transactions for 2 orders transpired.
After 3 years, respondent discovered that that price quoted to them by petitioner
was not the net price but the list price. They sought to obtain reimbursement
from the petitioner, and failing on this, filed the instant case.
Issue:
Whether the contract between petitioner and respondent is that of agency where
agent is bound to indemnify the principal for damages, or a mere contract of sales
Held:
The letters, by which the respondent accepted the prices for the sound
reproducing equipment subject of its contract with the petitioner, are clear in
their terms and admit no other interpretation that the respondent in question at
the prices indicated which are fixed and determinate. The respondent admitted
in its complaint filed with the Court of First Instance of Manila that the petitioner
agreed to sell to it the first sound reproducing equipment and machinery.
We agree with the trial judge that "whatever unforseen events might have taken
place unfavorable to the defendant (petitioner), such as change in prices, mistake
in their quotation, loss of the goods not covered by insurance or failure of the
Starr Piano Company to properly fill the orders as per specifications, the plaintiff
(respondent) might still legally hold the defendant (petitioner) to the prices fixed
of $1,700 and $1,600." This is incompatible with the pretended relation of agency
between the petitioner and the respondent, because in agency, the agent is
exempted from all liability in the discharge of his commission provided he acts
in accordance with the instructions received from his principal (section 254, Code
of Commerce), and the principal must indemnify the agent for all damages which
the latter may incur in carrying out the agency without fault or imprudence on
his part (article 1729, Civil Code).
While the letters state that the petitioner was to receive ten per cent (10%)
commission, this does not necessarily make the petitioner an agent of the
respondent, as this provision is only an additional price which the respondent
bound itself to pay, and which stipulation is not incompatible with the contract
of purchase and sale.
In the second place, to hold the petitioner an agent of the respondent in the
purchase of equipment and machinery from the Starr Piano Company of
Richmond, Indiana, is incompatible with the admitted fact that the petitioner is
the exclusive agent of the same company in the Philippines. It is out of the
ordinary for one to be the agent of both the vendor and the purchaser. The facts
and circumstances indicated do not point to anything but plain ordinary
transaction where the respondent enters into a contract of purchase and sale
with the petitioner, the latter as exclusive agent of the Starr Piano Company in
the United States.
It follows that the petitioner as vendor is not bound to reimburse the respondent
as vendee for any difference between the cost price and the sales price which
represents the profit realized by the vendor out of the transaction. This is the
very essence of commerce without which merchants or middleman would not
exist.
(7) LO V. KJS ECO-FRAMEWORK SYSTEM PHIL INC G.R. NO 149420 (2003)
FACTS: Respondent KJS Eco-Framework System is a corporation engaged in the
sale of steel scaffoldings, while petitioner Sonny Lo, doing business under the
name of San’s Enterprises, is a building contractor.
1. In February 1990, petitioner ordered scaffolding equipments from the
respondent amounting to P540, 425.80. He paid a down payment of P150,000
and the balance was to be paid in 10 monthly installments
2. However, Lo was only able to pay the first 2 monthly installments due to
financial difficulties despite demands from the respondent
3. In October 1990, petitioner and respondent executed a deed of assignment
whereby petitioner assigned to respondent his receivables of P335,462.14 from
Jomero Realty Corp
4. But when respondent tried to collect the said credit from Jomero Realty
Corp, the latter refused to honor the deed of assignment because it claimed that
the petitioner was also indebted to it. As such, KJS sent Lo a demand letter but
the latter refused to pay, claiming that his obligation had been extinguished when
they executed the deed of assignment
5. Subsequently, respondent filed an action for recovery of sum of money
against petitioner.
6. Petitioner argued that his obligation was extinguished with the execution of
the deed of assignment of credit. Respondent alleged that Jomero Realty Corp
refused to honor the deed of assignment because it claimed that the petitioner
had outstanding indebtedness to it
7. The trial court dismissed the complaint on the ground that the assignment
of credit extinguished the bligation
8. Upon appeal, CA reversed the trial court decision and held in favor of KJS.
CA held that
a. Petitioner failed to comply with his warranty under the deed
b. The object of the deed did not exist at the time of the transaction, rendering
it void under Art 1409 NCC
c. Petitioner violated the terms of the deed of assignment when he failed to
execute and do all acts necessary to effectually enable the respondent to recover
the collectibles
ISSUE: WON the deed of assignment extinguished the petitioner’s obligation
HELD: No, the petitioner’s obligation was not extinguished with the execution of
the deed of assignment.
An assignment of credit is an agreement by virtue of which the owner of a credit,
known as the assignor, by a legal cause, such as sale, dacion en pago, exchange
or donation, and without the consent of the debtor, transfers his credit and
accessory rights to another, known as the assignee, who acquires the power to
enforce it to the same extent as the assignor could enforce it against the debtor.
In dacion en pago, as a special mode of payment, the debtor offers another thing
to the creditor who accepts it as equivalent of payment of an outstanding debt.
In order that there be a valid dation in payment, the following are the requisites:
(1) There must be the performance of the prestation in lieu of payment (animo
solvendi) which may consist in the delivery of a corporeal thing or a real right or
a credit against the third person; (2) There must be some difference between the
prestation due and that which is given in substitution (aliud pro alio); (3) There
must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different
from that due. The undertaking really partakes in one sense of the nature of sale,
that is, the creditor is really buying the thing or property of the debtor, payment
for which is to be charged against the debtor’s debt. As such, the vendor in good
faith shall be responsible, for the existence and legality of the credit at the time
of the sale but not for the solvency of the debtor, in specified circumstances.
Hence, it may well be that the assignment of credit, which is in the nature of a
sale of personal property, produced the effects of a dation in payment which may
extinguish the obligation. However, as in any other contract of sale, the vendor
or assignor is bound by certain warranties. More specifically, the first paragraph
of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of the
credit at the time of the sale, unless it should have been sold as doubtful; but
not for the solvency of the debtor, unless it has been so expressly stipulated or
unless the insolvency was prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant
the existence and legality of the credit at the time of the sale or assignment.
When Jomero claimed that it was no longer indebted to petitioner since the latter
also had an unpaid obligation to it, it essentially meant that its obligation to
petitioner has been extinguished by compensation. In other words, respondent
alleged the non-existence of the credit and asserted its claim to petitioner’s
warranty under the assignment. Therefore, it necessary for the petitioner to
make good its warranty and pay the obligation.
Furthermore, the petitioner breached his obligation under the Deed of
Assignment, to execute and do all such further acts and deeds as shall be
reasonably necessary to effectually enable said ASSIGNEE to recover whatever
collectibles said ASSIGNOR has in accordance with the true intent and meaning
of these presents.
Indeed, by warranting the existence of the credit, petitioner should be deemed to
have ensured the performance thereof in case the same is later found to be
inexistent. He should be held liable to pay to respondent the amount of his
indebtedness.
8. PARAGAS v. HEIRS OF DOMINADOR BALACANO
FACTS: Gregorio Balacano, married to Lorenza, owned 2 parcels of land. He was
already 81 years old, very weak, could barely talk, and had been battling w/ liver
disease for over a month. On his deathbed, barely a week before he died, he
allegedly signed a Deed of Absolute Sale over the lots in favor of the Paragas
Spouses, accompanied by Atty. De Guzman who proceeded to notarize the same,
alleging that it was a mere confirmation of a previous sale and that Gregorio had
already paid a P 50,000.00 deposit. The
Paragas’ driver was also there to take a p
icture of Gregorio signing the said deed, w/ a ballpen in his hand. There was
nothing to show that the contents of the deed were explained to Gregorio. Paragas
then sold a portion of the disputed lot to Catalino. The grandson of Gregorio,
Domingo, sought to annul the sale and partition. There was no sufficient evidence
to support any prior agreement or partial execution thereof. ISSUE: W/N
Balacano is incapacitated to enter into a contract of sale HELD: A person is not
rendered incompetent merely because of old age; however, when such age has
impaired the mental faculties as to prevent a person from protecting his rights,
then he is undeniably incapacitated. He is clearly at a disadvantage, and the
courts must be vigilant for his protection. In this case,
Gregorio’s consent was clearly absent –
hence the sale was null and void. The dubious circumstances raise serious
doubts on his capacity to render consent. Considering that the Paragas Spouses
are not owners of the said properties, it only follows that the subsequent sale
thereof to Catalino
– oppositors. The case was docked as a land case, and after trial the court
who was not in good faith
– Appeals.
is likewise void. Further, the lots pertained to the conjugal partnership
– Pending that appeal, he sold to Rubias (hisson-in-law and a lawyer) the land.
having been inherited by Gregorio during his marriage toLorenza. It cannot thus
be sold w/o the latter’s consent
9. Calimlim-Canullas v. Fortun
Concept: Between Spouses Sale
Facts:
Dec 19, 1962 – Fernando & Mercedes Calimlim-Canullas got married & had
5kids. They built a conjugal home in fernando’s inherited property.
1978 – Fernando abandoned his home & lived with Corazon Daguines.
April 15, 1980 – Fernando sold the house & lot to his concubine for only P2000
stating that house&lot were inherited by him.
June 19, 1980 – Daguines claimed ownership but was unable so she filed case
against Mercedes
Oct 27, 1981 – Fernando & Daguines convicted of concubinage
RTC of Pangasinan ruled in favor of the concubine granting lot and half of house
to her. Real wife Mercedes appealed.
Issues: 1) WON conjugal house on exclusive property of husband is ipso facto
givencharacter of conjugal property2) WON sale of the house & lot to concubine
was valid in this case
Held & Ratio: 1) Yes! Lot where conjugal home was built w/ conjugal funds
becomesconjugal property subject to reimbursement from conjugal funds upon
liquidation(which should happen in normal cases upon death – till death do us
part, correct?)2) Sale to the concubine is NULL & VOID! Art. 1409 & 1352 of the
civil code says so!Unlawful cause. Also, constitution protects the family.
Ruling: RTC decision set aside & sale of house & lot is declared null & void. No
cost.
(10 and 12) Rubias vs Batiller (1973)
Facts:
-
Francisco Militante claimed that he owned a parcel of land located in Iloilo. He
filed with the CFI of Iloilo an application for the registration of title of the land.
This was opposed by the Director of Lands, the Director of Forestry, and other
dismissed the application for registration. Militante appealed to the Court of
-
-
The CA rendered a decision, dismissing the application for registration.
-
Rubias filed a Forcible Entry and Detainer case against Batiller.
-
In that case, the court held that Rubias has no cause of action because the
property in dispute which Rubias allegedly bought from Militante was the subject
matter of a land case, in which case Rubias was the counsel on record of Militante
himself. It thus falls under Article1491 of the Civil Code. (Hence, this appeal.)
Issue: Whether the sale of the land is prohibited under Article 1491.Held: YES
. Article 1491 says that “The following persons cannot acquire any purchase,
even at a publicor judicial auction, either in person or through the
mediation of another…. (5) Justices, judges, prosecuting attorneys, clerks of
superior and inferior courts, and other officers and employees connected with
the administration of justice, the property and rights in litigation or levied upon
an execution before the court within whose jurisdiction or territory they exercise
their respective functions; this prohibition includes the act of acquiring by
assignment and shall apply to lawyesr, with respect to the property and rights
which may be the object of any litigation in which they may take part by virtue
of theirprofession.” The present case clearly falls under this,especially since the
case was still pending appeal whenthe sale was made.
Issue: Legal effect of a sale falling under Article1491?Held: NULL AND
VOID.CANNOT BE RATIFIED.
Manresa considered such prohibited acquisitions (which fell under the Spanish
Civil Code)as merely voidable because the Spanish Code did not recognize nullity.
But our Civil Code does recognize the absolute nullity of contracts “whose cause,
object or purpose is contract to law, morals, good customs, public order or public
policy” or which are “expressly prohibited or declared void by law” and declares
such contracts “inexistent and void from the beginning.” The nullity of such
prohibited contracts is definite and permanent, and cannot be cured by
ratification. The public interest and public policy remain paramount and do not
permit of compromise or ratification. In this aspect, the permanent
disqualification of public and judicial officers and lawyers grounded on public
policy differs from the first three cases of guardian’s agents and administrators
(under Art 1491). As to their transactions, it has been
opined that they may be “ratified” by means of and in “the form of a new contract,
in which case its validity shall be determined only by the circumstances at the
time of execution of such new contract.” In those cases, the object which was
illegal at the time of the first contract may have already become lawful at the time
of the ratification or second contract, or the intent, or the service which was
impossible. The ratification or second contract would then be valid from its
execution; however, it does not retroact to the date of the first contract. Decision
affirmed.
11. Philippine Trust Co. v. Roldan
Facts:
Mariano Bernardo, a minor, inherited 17 parcels of land from his deceased father.
Respondent, Mariano’s step-mother, was appointed his guardian. As guardian,
she sold the 17 parcels to Dr. Ramos, her brother-in-law, for P14,700. After a
week, Dr. Ramos sold the lands to her for P15,000. Subsequently, she sold 4 out
of 17 parcels to Emilio Cruz. Petitioner replaced Roldan as guardian, and two
months thereafter, this litigation sought to declare as null and void the sale to
Dr. Ramos, and the sale to Emilio Cruz.
Issue:
Whether the sale of the land by the guardian is null and void for being violative
of the prohibition for a guardian to purchase either in person or through the
mediation of another the property of her ward
Held:
Remembering the general doctrine that guardianship is a trust of the highest
order, and the trustee cannot be allowed to have any inducement to neglect his
ward’s interest, and in line with the court’s suspicion whenever the guardian
acquires ward’s property we have no hesitation to declare that in this case, in the
eyes of the law, Socorro Roldan took by purchase her ward’s parcels thru Dr.
Ramos, and that Article 1459 of the Civil Code applies.
13. FABILLO v. IAC
FACTS:
Florencio Fabillo contracted the services of Atty. Murillo to revive a lost case over
his inheritance from his deceased sister Justinia. He sought to acquire the San
Salvador and Pugahanay Properties that his sister left behind, against the latter’s
husband. They entered into a contract where a contingent fee in favor of Atty.
Murillo in case the case was won was agreed upon. The fee was for 40% of the
value of whatever benefit Florencio may derive from the suit –such as if the
properties were sold, rented, or mortgaged. It was vague, however, regarding the
fee in case Florencio or his heirs decide to occupy the house – allowing Atty.
Murillo the option to occupy or lease 40% of the said house and lot. A compromise
agreement was entered into where Florencio acquired both the San Salvador and
Pugahanay Properties. Atty. Murillo installed a tenant in the Pugahanay
Property; later on Florencio claimed exclusive rights over the properties invoking
Art. 1491 of the Civil Code. Florencio and Atty. Murillo both died and were
succeeded by their respective heirs.
ISSUE: W/N contingent fees agreed upon are valid
HELD: Contingent fees are not contemplated by the prohibition in Art. 1491
disallowing lawyers to purchase properties of their clients under litigation. The
said prohibition applies only during the pendency of the litigation. Payment of
the contingent fee is made after the litigation, and is thus not covered by the
prohibition. For as long as there is no fraud or undue influence, or as long as the
fees are not exorbitant, the same is valid and enforceable. It is even recognized
by the Cannons of Professional Ethics. However, considering that the contract is
vague on the matter of division of the shares if Florencio occupies the property;
the ambiguity is to be construed against Atty. Murillo being the one who drafted
the contract and being a lawyer more knowledgeable about the law. The Court
thus, invoking the time-honored principle that a lawyer shall uphold the dignity
of the legal profession, ordered only a
contingent fee of P 3,000.00 as reasonable attorney’s fees.