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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 SEVENTYFIVE 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
Manlagit 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 Manlagit 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.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, THE


COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY, respondents.
DECISION
PANGANIBAN, J.:
In conducting researches and studies of social organizations and cultural values thru its
Institute of Philippine Culture, is the Ateneo de Manila University performing the work of an
independent contractor and thus taxable within the purview of then Section 205 of the National
Internal Revenue Code levying a three percent contractors tax? This question is answered by
the Court in the negative as it resolves this petition assailing the Decision[1] of the Respondent
Court of Appeals[2] in CA-G.R. SP No. 31790 promulgated on April 27, 1994 affirming that of the
Court of Tax Appeals.[3]

The Antecedent Facts


The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same
being largely undisputed by the parties.
Private respondent is a non-stock, non-profit educational institution with auxiliary units and
branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture
(IPC), which has no legal personality separate and distinct from that of private respondent. The
IPC is a Philippine unit engaged in social science studies of Philippine society and
culture. Occasionally, it accepts sponsorships for its research activities from international
organizations, private foundations and government agencies.
On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue
a demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for
alleged deficiency contractors tax, and an assessment dated June 27, 1983 in the sum
ofP1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31,
1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest and
subsequently filed with the latter a memorandum contesting the validity of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency
income tax but modifying the assessment for deficiency contractors tax by increasing the
amount due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or
reinvestigation of the modified assessment. At the same time, it filed in the respondent court a
petition for review of the said letter-decision of the petitioner. While the petition was pending
before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractors tax from P193,475.55 to P46,516.41, exclusive of
surcharge and interest.
On July 12, 1993, the respondent court rendered the questioned decision which dispositively
reads:
WHEREFORE, in view of the foregoing, respondents decision is SET ASIDE. The
deficiency contractors tax assessment in the amount of P46,516.41 exclusive of
surcharge and interest for the fiscal year ended March 31, 1978 is hereby
CANCELED. No pronouncement as to cost.

SO ORDERED.
Not in accord with said decision, petitioner has come to this Court via the present petition for
review raising the following issues:
1)WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE
PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO
SECTION 205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
CONTRACTORS TAX UNDER SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal Revenue Code, as amended,
provide:
Sec. 205. Contractor, proprietors or operators of dockyards, and others. - A
contractors tax of three per centum of the gross receipts is hereby imposed on the
following:
xxx

xxx

xxx

(16)
Business agents and other independent contractors except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors and except gross receipts of or from a pioneer industry registered with the Board of
Investments under Republic Act No. 5186:
xxx

xxx

xxx

The term independent contractors include persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless
of whether or not the performance of the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.
xxx

xxx

xxx

Petitioner contends that the respondent court erred in holding that private respondent is not an
independent contractor within the purview of Section 205 of the Tax Code. To petitioner, the
term independent contractor, as defined by the Code, encompasses all kinds of services
rendered for a fee and that the only exceptions are the following:
a.
Persons, association and corporations under contract for embroidery and
apparel for export and gross receipts of or from pioneer industry registered with the
Board of Investment under R.A. No. 5186;
b.
Individuals occupation tax under Section 12 of the Local Tax Code (under
the old Section 182 [b] of the Tax Code); and
c.
Regional or area headquarters established in the Philippines by multinational
corporations, including their alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as supervisory, communication and
coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific
Region (Section 205 of the Tax Code).

Petitioner thus submits that since private respondent falls under the definition of an
independent contractor and is not among the aforementioned exceptions, private respondent is
therefore subject to the 3% contractors tax imposed under the same Code.[4]
The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and
affirmed the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to
reverse the CA through this petition for review.

The Issues
Petitioner submits before us the following issues:
1)

Whether or not private respondent falls under the purview of independent contractor
pursuant to Section 205 of the Tax Code

2)

Whether or not private respondent is subject to 3% contractors tax under Section


205 of the Tax Code.[5]

In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its
auxiliary unit or branch -- the Institute of Philippine Culture -- performing the work of an
independent contractor and, thus, subject to the three percent contractors tax levied by then
Section 205 of the National Internal Revenue Code?

The Courts Ruling


The petition is unmeritorious.

Interpretation of Tax Laws


The parts of then Section 205 of the National Internal Revenue Code germane to the case
before us read:
SEC. 205. Contractors, proprietors or operators of dockyards, and others. -- A contractors
tax of three per centum of the gross receipts is hereby imposed on the following:
xxx

xxx

xxx

(16)
Business agents and other independent contractors, except persons,
associations and corporations under contract for embroidery and apparel for export, as
well as their agents and contractors, and except gross receipts of or from a pioneer
industry registered with the Board of Investments under the provisions of Republic
Act No. 5186;
xxx

xxx

xxx

The term independent contractors include persons (juridical or natural) not


enumerated above (but not including individuals subject to the occupation tax under
Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all
kinds of services for a fee regardless of whether or not the performance of the service

calls for the exercise or use of the physical or mental faculties of such contractors or
their employees.
The term independent contractor shall not include regional or area headquarters
established in the Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region.
The term gross receipts means all amounts received by the prime or principal
contractor as the total contract price, undiminished by amount paid to the
subcontractor, shall be excluded from the taxable gross receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de
Manila University falls within the definition of an independent contractor and is not one of
those mentioned as excepted; hence, it is properly a subject of the three percent contractors
tax levied by the foregoing provision of law.[6] Petitioner states that the term independent
contractor is not specifically defined so as to delimit the scope thereof, so much so that any
person who x x x renders physical and mental service for a fee, is now indubitably considered
an independent contractor liable to 3% contractors tax.[7] according to petitioner, Ateneo has
the burden of proof to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles
of tax exemption without first applying the well-settled doctrine of strict interpretation in the
imposition of taxes. It is obviously both illogical and impractical to determine who are exempted
without first determining who are covered by the aforesaid provision. The Commissioner should
have determined first if private respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens on the populace, before asking
Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the
hornbook doctrine in the interpretation of tax laws that (a) statute will not be construed as
imposing a tax unless it does so clearly,expressly, and unambiguously. x x x (A) tax cannot be
imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax
laws and the provisions of a taxing act are not to be extended by implication.[8] Parenthetically,
in answering the question of who is subject to tax statutes, it is basic that in case of doubt, such
statutes are to be construed most strongly against the government and in favor of the subjects
or citizens because burdens are not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import.[9]
To fall under its coverage, Section 205 of the National Internal Revenue Code requires that
the independent contractor be engaged in the business of selling its services. Hence, to impose
the three percent contractors tax on Ateneos Institute of Philippine Culture, it should be
sufficiently proven that the private respondent is indeed selling its services for a fee in pursuit of
an independent business. And it is only after private respondent has been found clearly to be
subject to the provisions of Sec. 205 that the question of exemption therefrom would arise. Only
after such coverage is shown does the rule of construction -- that tax exemptions are to be
strictly construed against the taxpayer -- come into play, contrary to petitioners position. This is
the main line of reasoning of the Court of Tax Appeals in its decision, [10] which was affirmed by
the CA.

The Ateneo de Manila University Did Not Contract


for the Sale of the Services of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneos Institute of
Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a business
apart from and independently of the academic purposes of the university.
Stressing that it is not the Ateneo de Manila University per se which is being taxed,
Petitioner Commissioner of Internal Revenue contends that the tax is due on its activity of
conducting researches for a fee. The tax is due on the gross receipts made in favor of IPC
pursuant to the contracts the latter entered to conduct researches for the benefit primarily of its
clients. The tax is imposed on the exercise of a taxable activity. x x x [T]he sale of services of
private respondent is made under a contract and the various contracts entered into between
private respondent and its clients are almost of the same terms, showing, among others, the
compensation and terms of payment.[11] (Underscoring supplied.)
In theory, the Commissioner of Internal Revenue may be correct. However, the records do
not show that Ateneos IPC in fact contracted to sell its research services for a fee. Clearly
then, as found by the Court of Appeals and the Court of Tax Appeals, petitioners theory is
inapplicable to the established factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove its bare contention that,
indeed, contracts for sale of services were ever entered into by the private respondent. As
appropriately pointed out by the latter:
An examination of the Commissioners Written Formal Offer of Evidence in the Court of Tax
Appeals shows that only the following documentary evidence was presented:
Exhibit 1
BIR letter of authority no. 331844
2 Examiners Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner
Bienvenido A. Tan Jr.
None of the foregoing evidence even comes close to purport to be contracts between private respondent
and third parties.[12]
Moreover, the Court of Tax Appeals accurately and correctly declared that the funds
received by the Ateneo de Manila University are technically not a fee. They may however fall as
gifts or donations which are tax-exempt as shown by private respondents compliance with the
requirement of Section 123 of the National Internal Revenue Code providing for the exemption
of such gifts to an educational institution.[13]
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
To our mind, private respondent hardly fits into the definition of an independent contractor.
For one, the established facts show that IPC, as a unit of the private respondent, is not engaged
in business. Undisputedly, private respondent is mandated by law to undertake research
activities to maintain its university status. In fact, the research activities being carried out by the
IPC is focused not on business or profit but on social sciences studies of Philippine society and
culture. Since it can only finance a limited number of IPCs research projects, private
respondent occasionally accepts sponsorship for unfunded IPC research projects from
international organizations, private foundations and governmental agencies. However, such
sponsorships are subject to private respondents terms and conditions, among which are, that the
research is confined to topics consistent with the private respondents academic agenda; that no
proprietary or commercial purpose research is done; and that private respondent retains not only

the absolute right to publish but also the ownership of the results of the research conducted by
the IPC. Quite clearly, the aforementioned terms and conditions belie the allegation that private
respondent is a contractor or is engaged in business.
For another, it bears stressing that private respondent is a non-stock, non-profit educational
corporation. The fact that it accepted sponsorship for IPCs unfunded projects is merely
incidental. For, the main function of the IPC is to undertake research projects under the
academic agenda of the private respondent. Moreover, the records do not show that in accepting
sponsorship of research work, IPC realized profits from such work. On the contrary, the
evidence shows that for about 30 years, IPC had continuously operated at a loss, which means
that sponsored funds are less than actual expenses for its research projects. That IPC has been
operating at a loss loudly bespeaks of the fact that education and not profit is the motive for
undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the sponsored research projects, the
fact still remains that there is no proof that part of such earnings or profits was ever distributed
as dividends to any stockholder, as in fact none was so distributed because they accrued to the
benefit of the private respondent which is a non-profit educational institution.[14]
Therefore, it is clear that the funds received by Ateneos Institute of Philippine Culture are
not given in the concept of a fee or price in exchange for the performance of a service or
delivery of an object. Rather, the amounts are in the nature of an endowment or donation given
by IPCs benefactors solely for the purpose of sponsoring or funding the research with no
strings attached. As found by the two courts below, such sponsorships are subject to IPCs
terms and conditions. No proprietary or commercial research is done, and IPC retains the
ownership of the results of the research, including the absolute right to publish the same. The
copyrights over the results of the research are owned by Ateneo and, consequently, no portion
thereof may be reproduced without its permission.[15] The amounts given to IPC, therefore, may
not be deemed, it bears stressing, as fees or gross receipts that can be subjected to the three
percent contractors tax.
It is also well to stress that the questioned transactions of Ateneos Institute of Philippine
Culture cannot be deemed either as a contract of sale or a contract for a piece of work. By the
contract of sale, one of the contracting parties obligates himself to transfer the ownership of and
to deliver a determinate thing, and the other to pay therefor a price certain in money or its
equivalent.[16] By its very nature, a contract of sale requires a transfer of ownership. Thus,
Article 1458 of the Civil Code expressly makes the obligation to transfer ownership as an
essential element of the contract of sale, following modern codes, such as the German and the
Swiss. Even in the absence of this express requirement, however, most writers, including
Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered such
transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same view,
stating that the delivery of the thing does not mean a mere physical transfer, but is a means of
transmitting ownership. Transfer of title or an agreement to transfer it for a price paid or
promised to be paid is the essence of sale.[17] In the case of a contract for a piece of work, the
contractor binds himself to execute a piece of work for the employer, in consideration of a
certain price or compensation. x x x If the contractor agrees to produce the work from materials
furnished by him, he shall deliver the thing produced to the employer and transfer dominion over
the thing. x x x.[18] Ineludably, whether the contract be one of sale or one for a piece of work, a
transfer of ownership is involved and a party necessarily walks away with an object. [19] In the
case at bench, it is clear from the evidence on record that there was no sale either of objects or
services because, as adverted to earlier, there was no transfer of ownership over the research

data obtained or the results of research projects undertaken by the Institute of Philippine
Culture.
Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done
in pursuance of maintaining Ateneos university status and not in the course of an independent
business of selling such research with profit in mind. This is clear from a reading of the
regulations governing universities:
31.In addition to the legal requisites an institution must meet, among others, the following
requirements before an application for university status shall be considered:
xxx

xxx

xxx

(e)
The institution must undertake research and operate with a competent
qualified staff at least three graduate departments in accordance with the rules and
standards for graduate education. One of the departments shall be science and
technology. The competence of the staff shall be judged by their effective teaching,
scholarly publications and research activities published in its school journal as well as
their leadership activities in the profession.
(f)
The institution must show evidence of adequate and stable financial
resources and support, a reasonable portion of which should be devoted to institutional
development and research. (underscoring supplied)
xxx

xxx

x x x

32. University status may be withdrawn, after due notice and hearing, for failure to maintain
satisfactorily the standards and requirements therefor.[20]
Petitioners contention that it is the Institute of Philippine Culture that is being taxed and not
the Ateneo is patently erroneous because the former is not an independent juridical entity that is
separate and distinct from the latter.

Factual Findings and Conclusions of the Court of Tax Appeals


Affirmed by the Court of Appeals Generally Conclusive
In addition, we reiterate that the Court of Tax Appeals is a highly specialized body
specifically created for the purpose of reviewing tax cases. Through its expertise, it is
undeniably competent to determine the issue of whether[21] Ateneo de Manila University may be
deemed a subject of the three percent contractors tax through the evidence presented before
it. Consequently, as a matter of principle, this Court will not set aside the conclusion reached
by x x x the Court of Tax Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject unless there has been an abuse or improvident exercise of authority x x
x.[22] This point becomes more evident in the case before us where the findings and
conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any
abuse of authority, much less grave abuse of discretion. Thus, we find the decision of the latter
affirming that of the former free from any palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at
a huge deficit of P1,624,014.00 as shown in its statements of fund and disbursements for the
period 1972 to 1985.[23] In fact, it was Ateneo de Manila University itself that had funded the
research projects of the institute, and it was only when Ateneo could no longer produce the
needed funds that the institute sought funding from outside. The testimony of Ateneos Director
for Accounting Services, Ms. Leonor Wijangco, provides significant insight on the academic and
nonprofit nature of the institutes research activities done in furtherance of the universitys
purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the
Institute of Philippine Culture) that as far as grants from sponsored research it is
possible that the grant sometimes is less than the actual cost. Will you please tell
us in this case when the actual cost is a lot less than the grant who shoulders the
additional cost?
A

The University.

Now, why is this done by the University?

Because of our faculty development program as a university, because a university


has to have its own research institute.[24]

So, why is it that Ateneo continues to operate and conduct researches through its Institute
of Philippine Culture when it undisputedly loses not an insignificant amount in the process? The
plain and simple answer is that private respondent is not a contractor selling its services for a
fee but an academic institution conducting these researches pursuant to its commitments to
education and, ultimately, to public service. For the institute to have tenaciously continued
operating for so long despite its accumulation of significant losses, we can only agree with both
the Court of Tax Appeals and the Court of Appeals that education and not profit is [IPCs]
motive for undertaking the research projects.[25]
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of
the Court of Appeals is hereby AFFIRMED in full.
SO ORDERED.

G.R. No. L-11491

August 23, 1918

ANDRES QUIROGA, plaintiff-appellant,


vs.
PARSONS HARDWARE CO., defendant-appellee.
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.
Crossfield & O'Brien for appellee.
AVANCEA, 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.

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
2
be reimbursed at the liquidation of the conjugal partnership.
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.
3

It is true that in the case of Maramba vs. Lozano, 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
4
lot to DAGUINES since MERCEDES had not given her consent to said sale.
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
5
cherishes and protects.
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
6
7
certain exceptions. Similarly, donations between spouses during marriage are prohibited. 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
8
exercise of undue influence by one spouse over the other, 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
9
Justice JBL Reyes (CA) 50 O.G. 3679, and cited in Matabuena vs. Cervantes. 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.