Sales Cases Chapter 1&2

CELESTINO Co & COMPANY, petitioner, vs.
COLLECTOR OF INTEENAL
REVENUE, respondent.
MANUFACTURER; FILING ORDERS ACCORDING TO SPECIPICATIONS DOES
NOT ALTER CHARACTER OF ESTABLISHMENT.—A factory which habitually makes
sash, windows and doors, and sells the goods to the public is a manufacturer. The fact that
the windows and doors are made by it only when customers place their orders and
according to such form or combination. as suit the fancy of the purchasers does not alter
the nature of the establishment.
PETITION for review by certiorari of a decision of the Court of Tax Appeals.

The facts are stated in the opinion of the Court.
Solicitor General Ambrosio Podilla, First Assistant Solicitor General Gmllermo 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
842
842 PHILIPPINE REPORTS ANNOTATED
Celestino Co & Co. vs. Collector of Internal Revenue
"Oriental Sash Faetory". 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 sales 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 for doors and windows 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 eustomers, * * * 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 Go & Company, Prop.) 926 Raon St. Quiapo, Manila, Tel. No.
33076, Manufacturers of all kinds of doors, windows, sashes, furnitures, etc. used season-
dried and kiln-dried lumber, of the best quality workmanship' solely for the purpose of
supplying the needs for doors, windows and sash of its special and limited customers. One
will 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 ready-made doors and windows of standard
sizes for the average home. Moreover, as shown from the investigation of petitioner's books
of accounts, during the period from January 1, 1952 to September 30, 1952, it sold sash, doors
and windows worth F188,754.69. 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.
843
VOL. 99, AUGUST 81, 1956 843
Celestino Co. & Co. vs. Collector of Internal Revenue
"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 upon special order of
its customers, that does not make it a contractor within the purview of section 191 of the
National Intemal Revemie 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 one under which the business
enterprise of petitioner could appropriately fall. It would require a stretch of the law and
much effort to make the business of manufacturing sash, doors and windows upon special
order of customers fall under the category of 'road, building, navigation, artesian well, water
works and other construction work contractors; filling contractors' as enumerated in the
section being invoked by petitioner's counsel. Con^truction work contractors are those who
alter or repair buildings, structures, streets, highways, sewers, street railways, railroads^
logging roads, electric, steam or water plants telegraph and telephone plants and lines,
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 of taxing petitioner as a contractor under section
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 undfer section 186 of the same code, as the respondent Collector of
Internal Revenue has in fact been doing since 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 Reventie Code, Vol II, p. 744).
The fact that the articles sold are marmfactured by the seller does not exchange the contract
from the purview of section 186 of the National Intemal Revenue Code as a sale of articles."
There was a strong dissent; but upon careful consideration of the whole matter we
are inclined to accept tha above statement of the facts and the law. The important
^thing to remember is that Celestino Co & Com~
844
pany 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 aecepted such orders as called for the
employment of such materials-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, manufactures
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 speci.fications is neither here nor
there. If these specifieations
845
VOL, 99, AUGUST 31, 1956 845
do not happen to be of the kind habitually manufaetured by appellant—special forms
of sash, mouldings or 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
desi^ed by the purchaser.
No body 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 th£reby becomes an employee or servant of the customer, not the seller of lumber.
1
The same consideration applies to this sash manufaeturer.

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. Nobodjr would regard the doing of two window panels as eonstruction
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 generaj 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 hi* special order, and not for the general market, it is
contract for a piece of work."
________________
1 With all the consequences in Article 1729 New Civil Code' and Act No. 3959 (bond of contractor).
846
Celestino Co & Co. vs. Collector of Intemal Revenue
It is at onee apparent that the Oriental Sash Factoiy did not merely sell its services to
Don Toribio Teodoro & Co. (To take one instanee) because it also sold the materials.
The truth of the matter is that it sold materials ordiilarily manufactured by it—
^sash, panels, mouldings—to Teodoro & Co., although in such form or combinatiori
as suited the f ancy 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 kwui 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—ftlling 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 specmlrequiring
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 inade, such orders should not be called special work,
but regular work. Would a factory do business performing only special, extraordinary
or preculiar 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.
SUPREME COURT REPORTS ANNOTATED
Commissioner of Internal Revenue vs. Engineering
Equipment and Supply Company
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.
No. L-27452. June 30, 1975. *
ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner, vs. THE

COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX
APPEALS, respondents.
Taxation; Contractor’s tax; Company engaged in the design and installation of central
type air conditioning system subject to contractor’s tax; Reasons.—The company did not
manufacture air conditioning units for sale to the general public, but imported some items
which were used in executing contracts entered into by it. It undertook negotiations and
execution of individual contracts for the design, supply and installation of air conditioning
units of the central type, 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 loan on the plant such as sum load, lighting, and other
electrical appliances which are or may be in the plan. The company did not and was not
engaged in the manufacture of air conditioning
_______________
6Motion to Dismiss dated April 28, 1975.

*FIRST DIVISION.
591
VOL. 64, JUNE 30, 1975 591
units but had its services contracted for the installation of a central system. The supply
of air conditioning units to the company’s various customers, whether the said machineries
were on hand or not, was specially made for each customer and installed in his building upon
his special order. The company 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.
Same; Same; Distinction between a contract of sale and a 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. 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.
Same; Same; Test to determine whether a person a contractor or not.—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.
The true test of a contractor 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.
Same; Compensating tax; Compensating tax imposed on the user of imported goods not
subject to sales tax; Case at bar.—Since the company imported air conditioning units, parts
or accessories thereof for use in its construction business and these items were never sold,
resold, bartered or exchanged, it should be held liable to pay taxes prescribed under Section
190 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.
Same; Surcharge; Payment of surcharge in ca.se a false or fraudulent return is filed or
in case of willful neglect to file a return; Reasons; Case at bar.—The company deliberately
and purposely misdeclared its importations to evade the payment of the 30% tax.
592
592 SUPREME COURT REPORTS ANNOTATED
Since the commission of fraud is altogether too glaring, the company should not be
absolved from the 50% fraud surcharge, otherwise it would be giving premium to a plainly
intolerable act of tax evasion. Whether the company 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 are 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.
Same: Surcharge for delinquency in the payment of compensating tax.—Section 190 of
the Tax Code, as amended, provides that 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.
Same: Prescription; Assessment and collection of taxes in case a false or fraudulent
return is filed or in case of failure to file a return within 10 years after the discovery of the
falsity, fraud or omission.—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.
PETITION for review on certiorari of a decision of the Court of Tax Appeals.

Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo
R. Rosete, Solicitor Lolita O. Gal-lang and Special Attorney Gemaliel
H. Mantolino for Commissioner of Internal Revenue, etc.
Melquiades C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis
Ma. Guerrero and J.R. Balonkita for Engineering Equipment and Supply Company.
593
VOL. 64, JUNE 30, 1975 593
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) of the Tax Code, instead of Section 186 of the
1
same
__________________
1 “Section 185. Percentage tax on sales of x x x, refrigerators and others.—There shall be levied, assessed,
and collected once only on every original sale, barter, exchange, or similar transaction intended to transfer
ownership of, or title to, the other articles herein below enumerated, a tax equivalent to thirty percentum
of the gross selling price or gross value in money of the articles sold, bartered,
594
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.”
_______________
exchanged or transferred, such tax to be paid by the manufacturer or producers. Provided: That where
the articles enumerated herein below are manufactured out of materials subject to tax under this section,
the total cost of such materials, as duly established, shall be deductible from the gross selling price or gross
value in money of such manufactured articles.
xxx
(m) Air conditioning units and parts or accessories thereof (As amended by R.A. No. 588, effective from
September 22, 1950 until it was amended by R.A. No. 1612 made effective August 14, 1956 )
595
VOL. 64, JUNE 30, 1975 595
Commisioner of Internal Revenue vs. Engineering
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. 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. 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;
Company liable to the 25% surcharge prescribed in Section 190 of the Tax Code;
4. 4.That the Court of Tax Appeals erred in holding the assessment as not having
prescribed;
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. 1.In holding that the respondent company is a contractor and not a manufacturer;
2. 2In 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. 3In holding that the respondent company is subject only to the 30% compensating tax
under Section 190 of the Tax Code and not to
596
1. 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;
2. 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;
3. 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
(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
597
VOL. 64, JUNE 30, 1975 597
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 seller 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. If the article ordered by the purchaser is exactly such as
2
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
________________
2 Groves vs. Buck, 3, Maule & s. 178; Towers v. Osborne, 1 Strange 506, Benjamin on Sales 90; as cited
in Arañas, Annotations and Jurisprudence on the NIRC, as amended, 1970 ed. p. 323, 324.
3 Ibid p. 324, par. 191 (13).
598
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 finding We adopt—
4
________________
4Decision, Court of Tax Appeals, CTA Rec. p. 212.

599
VOL. 64, JUNE 30, 1975 599
“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:
“x x x 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.
600
“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. x x x”
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. 301-335, 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.
601
VOL. 64, JUNE 30, 1975 601
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 x x
x.” 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 be 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
602
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
603
VOL. 64, JUNE 30, 1975 603
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 190 of the Code. This 5
compensating tax is not a tax on the importation of goods but a
______________
5 “Section 190. Compensating tax.—All persons residing or doing business in the Philippines, who
purchase or receive from without the Philippines any commodities, goods, wares or merchandise, excepting
those subject to specific taxes under Title IV of this Code, shall pay on the total value thereof at the time
they are received by such persons, including freight, postage, insurance, commission and all similar charges,
a compensating tax equivalent to the percentage taxes imposed under this Title on original transactions
effected by merchants, importers or manufacturers, such tax to be paid before the withdrawal or removal of
said commodities, goods, wares or merchandise from the custom house or the post office. Provided, However,
That merchants, importers, and manufacturers, who are subject to the tax under Sections 184, 185, 186 or
189 of this Title, shall not be required to pay the herein tax imposed where such commodities, goods wares
or merchandise purchased or received by them from without the Philippines are to be sold, resold, bartered
or exchanged or are to he used in the manufacture or preparation of articles for sale, barter or exchange
and are to form part thereof. And Provided, Further, that the tax imposed in this section shall not apply to
articles to he used by the importer himself in the manufacture or preparation of articles subject to specific
tax, or those for consignment abroad and are to form part thereof. 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 written notice thereof sent to the Collector of Internal Revenue and payment of the corresponding
compensating tax made within 10 days from the date of such entry or notice. If the 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”. (As
amended by R.A. 253, effective July 1948)
604
tax on the use of imported goods riot 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:
“x x x 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. x x x” (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
605
VOL. 64, JUNE 30, 1975 605
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 the words air conditioning
equipment should be made on any shipping documents as well an 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
606
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 airconditioning 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 again 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. “3F-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 locating 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 the 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
607
VOL. 64, JUNE 30, 1975 607
conditioning.
“It is realized that this is 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 those matters will be appreciated.” (Italics 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 are 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
compensating 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
Republic Acts Nos. 48, 253, 361, 1511 and
608
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:
“x x x 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. x
x x 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
609
VOL. 64, JUNE 30, 1975 609
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.
Makalintal, C.J., Castro, Makasiar and Martin, JJ., concur.
Decision affirmed with modification.
Notes.—a) Contractor defined.—Although, in a general sense, every person who
enters into a contract may be called a contractor, yet the word, for want of a better
one, has come to be used with special reference to a person who, in the pursuit of an
independent business, undertakes to do a specific piece or job of work for other
persons, using his own means and methods without submitting himself to control as
to the petty details. The true test of a ‘contractor’ would seem to be that he renders
the 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. (Luzon Stevedoring Co. vs. Trinidad, L-18316, September 23, 1922).
b) When return considered sufficient.—A return need not be complete in all
particulars. It is sufficient if it complies substantially with the law. There is
substantial compliance (1) when the return is made in good faith and is not false or
fraudulent; (2) when it covers the entire period involved; and (3) when it contains
information as to the various items of income, deductions and credits with such
definiteness as to permit the computation and assessment of the tax. (Commissioner
of Internal Revenue vs. Lilia Yusay Gonzales, L-19495, Nov. 24, 1966).
-----o0o-----
[No. 11491. August 23, 1918.]
ANDRES QUIROGA, plaintiff and appellant, vs. PARSONS HARDWARE Co.,
defendant and appellee.
1. 1.SALES; INTERPRETATION OF CONTRACT.—For the classification of contracts,

due regard must be paid to their essential clauses. In the contract in the instant case,
what was essential, constituting its cause and subject matter, was that the plaintiff
was to furnish the defendant with the beds which the latter might order, at the
stipulated price, and that the defendant was to pay this price in the manner agreed
upon. 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 that
of the defendant, to pay their price. These features exclude the legal conception of an
agency or order to sell whereby the mandatary or agent receives 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. Held: That this contract is one of purchase and sale, and not of commercial agency.
1. 2.ID.; ID.—The testimony of the person who drafted this contract, to the effect that
his purpose was to be an agent for the beds and to collect a commission on the sales, is
of no importance to prove that the contract was one of agency, inasmuch as the
agreements contained in the contract constitute, according to law, covenants of
purchase and sale, and not of commercial
502
Quiroga vs, Parsons Hardware Co.
1. agency. 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.
1. 3.ID.; ID.—The fact that the contracting parties did not; perform the contract in
accordance with its terms, only shows mutual tolerance and gives no right to have
the contract considered, not as the parties stipulated it, but as they performed it.
4.ID.; ID.—Only the acts of the contracting parties, subsequent to, and in connection
with, the performance of the contract must be considered in the interpretation of 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.
1. 5.ID.; ID.—The defendant obligated itself to order the beds from the plaintiff by the
dozen. Held: That the effect of a breach of this clause by the defendant 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.
APPEAL from a judgment of the Court of First Instance of Manija. Abreu, J.

The facts are stated in the opinion of the court.
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.
Crossfield & O'Brien for appellee.
AVANCENA, 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:
"CONTBACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND
J. PAKSONS, BOTH MERCHANTS ESTABLISHED IN MANILA,
FOR THE EXCLUSIVE SALE OF 'QUIROGA' BEDS IN THE VI
SAYAN 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:
503
VOL. 38, AUGUST 23, 1918 503
Quiroga vs. Parsons Hardware Co.
1. " (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 an allowance of a discount of 25 per
cent of the invoiced. prices, as commission on the sales; and, Mr. Parsons shall order
the beds by the dozen, whether of the same or of different styles.
2. "(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.
3. "(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.
4. "(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 f rom 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.
5. "(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.
6. "(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
504
Mr. Parsons in case anyone should apply for the exclusive agency for any island not
comprised within 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, reduces 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 f or 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
505
VOL. 38, AUGUST 23, 1918 505
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 if, 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 held, 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 IslandsT. 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.
506
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 def endant'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
a$ 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
507
VOL. 38, AUGUST 23, 1918 507
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 purpose of making this return, the defendant, in its
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.
Arellano, C. J., Torres, Johnson, Street, and Malcolm, JJ.,concur.
Judgment affirmed.
GONZALO PUYAT & SONS, INC., petitioner, vs. ARCO AMUSEMENT COMPANY
(formerly known as Teatro Arco), respondent.
CONTRACTS; PURCHASE AND SALE; INTERPRETATION.—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, 120 111., 161; Bank v. Palmer, 47 111., 92;
Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.) The letters, Exhíbits 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 of no other interpretation than
403
VOL. 72, JUNE 20, 1941 403
Puyat & Sons, Inc. vs. Arco Amusement Co.
that the respondent agreed to purchase from the petitioner the equipment 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.
PETITION for review on certiorari.
The facts are stated in the opinion of the court.
Feria & La O 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 decision in civil case G. R. No. 1023, entitled "Arco
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
404
last company dealt in cinematograph equipment and machinery, and the Arco
Amusement Company desiring to equip 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 hebalf of the plaintiff, order sound reproducing equipment
from the Star 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 defendant, 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
405
VOL. 72, JUNE 20, 1941 405
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 above mentioned was not the net price but rather the
list price, and that the defendant 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 expenses. 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 f
urther argued that even if the contract between the petitioner and the respondent
was one of purchase and sale, the petitioner was
406
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 incurrió en error de derecho al declarar que, según
hechos, entre la recurrente y la recurrida existía una relación implicita de
mandataria a mandante en la transacción de que se trata, en vez de la de vendedora
a compradora como ha declarado el Juzgado de Primera Instancia de Manila,
presidido entonces por el hoy Magistrado Honorable Marceliano Montemayor.
"II. El Tribunal de Apelaciones incurrió en error de derecho al declarar que,
suponiendo que dicha relación fuera 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 cuestión, y condenar a la recurrente a
devolver a la recurrida la diferencia o descuento de 25 por ciento que 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, 120 111., 161; Bank v. Palmer, 47 111., 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 of no other interpretation than that the respondent agreed to
purchase from the petitioner the equipment in question at the prices indicated which
are fixed and determinate. The respond-
407
VOL. 72, JUNE 20, 1941 407
ent 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." (Italics 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 letters, 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
408
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 respondent 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 respondent
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 per cent 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
409
VOL. 72, JUNE 20, 1941 409
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 of
purchase and sale, is no ground for rescinding 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 and Sons,
Inc., defendant-appellee," without pronouncement regarding costs. So ordered.
Avanceña, C. J., Diaz, Moran and Horrilleno, JJ., concur.
Writ granted.
SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC.,
respondent.
Civil Law; Sales; Obligations; Assignment of Credit; Definition of an assignment of
credit.—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.
Same; Same; Same; Dacion En Pago; 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; Requisites in order that there be a valid dation in payment.—Corollary
thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to
the creditor who accepts it as equivalent of payment of an outstanding debt. In order that
there be a valid dation in payment, the following are the requisites: (1) 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.
Same; Same; Same; Same; 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.—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.
_______________
*FIRST DIVISION.
183
VOL. 413, OCTOBER 8, 2003 183
Lo vs. KJS Eco-Formwork System Phil., Inc.
PETITION for review on certiorari of a decision of the Court of Appeals.

Arturo S. Santos for petitioner.
E.P. Mallari & Associates for private respondent.
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in

the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing business under the
name and style San’s Enterprises, is a building contractor. On February 22, 1990,
petitioner ordered scaffolding equipments from respondent worth P540,425.80. He 1
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. Petitioner was able to pay the
2
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, whereby petitioner assigned to respondent his receivables in the
4
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
_______________
1 Exhibit “A,” Records, p. 128.

2 Exhibits “B-B-8,” Records, pp. 130-138.
3 Exhibit “C,” Records, p. 139.
4 Records, pp. 142-143.
184
the amount of Three Hundred Thirty Five Thousand Four Hundred Sixty Two and 14/100
Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five
Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14), Philippine Currency
which represents part of the ASSIGNOR’S collectible from Jomero Realty Corp., said
ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles
amounting to the said amount of P335,462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the
full power and authority to demand, collect, receive, compound, compromise and give
acquittance for the same or any part thereof, and in the name and stead of the said
ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its
successors and assigns that said debt is justly owing and due to the ASSIGNOR for Jomero
Realty Corporation and that said ASSIGNOR has not done and will not cause anything to be
done to diminish or discharge said debt, or delay or to prevent the ASSIGNEE, its successors
or assigns, from collecting the same;
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR,
his heirs, executors, administrators, or assigns, shall and will at times hereafter, at the
request of said ASSIGNEE, its successors or assigns, at his cost and expense, execute and do
all such further acts and deeds as shall be reasonably necessary to effectually enable said
ASSIGNEE to recover whatever collectibles said ASSIGNOR has in accordance with the true
intent and meaning of these presents. x x x (Italics supplied)
5
However, when respondent tried to collect the said credit from Jomero Realty
Corporation, the latter refused to honor the Deed of Assignment because it claimed
that petitioner was also indebted to it. On November 26, 1990, respondent sent a
6
letter to petitioner demanding payment of his obligation, but petitioner refused to

7
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
_______________
5 Records, p. 142.
6 TSN, April 28, 1993, p. 25.
7 Exhibit “C,” Records, p. 139.
8 Records, pp. 1-6.
185
VOL. 413, OCTOBER 8, 2003 185
During the trial, petitioner argued that his obligation was extinguished with the
execution of the Deed of Assignment of credit. Respondent, for its part, presented the
testimony of its employee, Almeda Bañaga, who testified that Jomero ‘Realty refused
to honor the assignment of credit because it claimed that petitioner had an
outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision dismissing the complaint
9
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 attorney’s fees in the amount of P25,000.00.”
Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the
appellate court rendered a decision, the dispositive portion of which reads:
10
“WHEREFORE, finding merit in this appeal, the court REVERSES the appealed Decision
and enters judgment ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant
KJS ECO-FORMWORK SYSTEM PHILIPPINES, INC. Three Hundred Thirty Five
Thousand Four Hundred Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per
annum from January 10, 1991 (filing of the Complaint) until fully paid and attorney’s fees
equivalent to 10% of the amount due and-costs of the suit.
SO ORDERED.” 11
In finding that the Deed of Assignment did not extinguish the obligation of the
petitioner to the respondent, the Court of Appeals held that (1) petitioner failed to
comply with his warranty under the Deed; (2) the object of the Deed did not exist at
the time of the transaction, rendering it void pursuant to Article 1409 of the Civil
Code; and (3) petitioner violated the terms of the Deed of Assignment when he failed
to execute and do all acts and deeds as shall
_______________
9 Penned by Judge Teofilo L. Guadiz, Jr.

10 Penned by Justice Hilarion L. Aquino with Justices Ma. Alicia Austria-Martinez (now a member of
this Court) and Jose L. Sabio, Jr., concurring.
11 Decision, CA-G.R. CV No. 47713, p. 6; Rollo, p. 14.
186
be necessary to effectually enable the respondent to recover the collectibles. 12
Petitioner filed a motion for reconsideration of the said decision, which was denied
by the Court of Appeals. 13
In this petition for review, petitioner assigns the following errors:
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN

DECLARING THE DEED OF ASSIGNMENT (EXH. “4”) AS NULL AND VOID FOR LACK
OF OBJECT ON THE BASIS OF A MERE HEARSAY CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF

ASSIGNMENT (EXH. “4”) DID NOT EXTINGUISH PETITIONER’S OBLIGATION ON THE
WRONG NOTION THAT PETITIONER FAILED TO COMPLY WITH HIS WARRANTY
THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION

OF THE TRIAL COURT AND IN ORDERING PAYMENT OF INTERESTS AND
ATTORNEY’S FEES. 14
The petition is without merit.

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

offers another thing to the creditor who accepts it
_______________
12 Rollo, pp. 9-14.

13 Rollo, p. 50.
14 Petition, pp. 6-7, Rollo, pp. 24-25.
15 South City Homes, Inc., et al. v. BA Finance Corporation, G.R. No. 135462, 7 December 2001, 371 SCRA
603.
187
VOL. 413, OCTOBER 8, 2003 187
as equivalent of payment of an outstanding debt. In order that there be a 16
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
17
in one sense of the nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against the debtor’s debt.
As such, the vendor in good faith shall be responsible, for the existence and legality
of the credit at the time of the sale but not for the solvency of the debtor, in specified
circumstances. 18
Hence, it may well be that the assignment of credit, which is in the nature of a sale
of personal property, produced the effects of a dation in payment which may
19
extinguish the obligation. However, as in any other contract of sale, the vendor or
20
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
_______________
16 Filinvest Credit Corporation v. Philippine Acetylene, Co., Inc., G.R. No. L-50449, January 30, 1982, 111
SCRA 421.
17 3 Castan, Vol. I, 8th Ed., page 283 cited in IV Caguioa ‘Comments and Cases in Civil Law, page 325.
18 Civil Code, Article 1628. 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 solvency was prior to the sale and of common knowledge.
xxx
19 Civil Code, Art. 417. The following are also considered as personal property:
(1) Obligations and actions which have for their object movables or demandable sums, and x x x.
20 Civil Code, Art. 1231. Obligations are extinguished:
(1) By payment or performance; x x x.
188
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
21
of the credit and asserted its claim to petitioner’s warranty under the assignment.
Therefore, it behooved on petitioner to make good its warranty and paid the
obligation.
Furthermore, we find that petitioner breached his obligation under the Deed of
Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his
heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request
of said ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such
further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE
to recover whatever collectibles said ASSIGNOR has in accordance with the true intent and
meaning of these presents. (italics ours)
22
Indeed, by warranting the existence of the credit, petitioner should be deemed to have
ensured the performance thereof in case the same is later found to be inexistent. He
should be held liable to pay to respondent the amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay
respondent the sum of P335,462.14 with legal interest thereon. However, we find that
the award by the Court of Appeals of attorney’s fees is without factual basis. No
evidence or testimony was presented to substantiate this claim. Attorney’s fees, being
in the nature of actual damages, must be duly substantiated by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated
April 19, 2001 in CA-G.R. CV No. 47713,
_______________
21 Civil Code, Art. 1278. Compensation shall take place when two persons, in their own rights, are
creditors and debtors of each other.

22 Records, p. 143.
189
VOL. 413, OCTOBER 8, 2003 189
Oaminal vs. Castillo
ordering petitioner to pay respondent the sum of P335,462.14 with legal interest of
6% per annum from January 10, 1991 until fully paid is AFFIRMED with
MODIFICATION. Upon finality of this Decision, the rate of legal interest shall be
12% per annum, inasmuch as the obligation shall thereafter become equivalent to a
forbearance of credit. The award of attorney’s fees is DELETED for lack of
23
evidentiary basis.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Vitug, Carpio and Azcuna, JJ.,concur.
Judgment affirmed with modification.
Note.—One who pleads payment has the burden of proving it and even where the
plaintiff must allege non-payment the general rule is that the burden rests on the
defendant to prove payment rather than on the plaintiff to prove non-payment.
(Audion Electric Co., Inc. vs. National Labor Relations Commission, 308 SCRA
340[1999])
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.
Appeals; Factual findings of the Court of Appeals, which are supported by substantial
evidence, are binding, final and conclusive upon the Supreme Court, and carry even more
weight when the said court affirms the factual findings of the trial court.—To start, we held
in Blanco v. Quasha 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, and carry
_______________
*SECOND DIVISION.
718
Paragas vs. Heirs of Dominador Balacano
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.
Contracts; Sales; Nobody can dispose of that which does not belong to him.—Based on
the foregoing, the Court of Appeals concluded that Gregorio’s 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.
Witnesses; In the assessment of the credibility of witnesses, the Court is guided by the
following well-entrenched rules: (1) that evidence to be believed must not only come from the
mouth of a credible source but must itself be credible, and (2) findings of fact 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.—On the credibility of witnesses, it is in rhyme with reason to believe the
testimonies of the witnesses for the complainants vis-à-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. In the
case at bar, we agree in the trial court’s 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.
Contracts; Sales; Capacity of Parties; A contract of the sale executed by one who is already
of advanced age and senile is null and void; While the general rule is that a person is not
incompetent to contract merely because of advanced years or by reason of physical
719
VOL. 468, AUGUST 31, 2005 719
infirmities, when such age or infirmities have impaired the mental faculties so as to
prevent the person from properly, intelligently or firmly protecting his property rights, then he
is undeniably incapacitated; The circumstances that the seller was an octogenarian at the time
of alleged execution of the Deed of Sale and was suffering from liver cirrhosis at that raise
grave doubts on his physical and mental capacity to freely give consent to the contract.—
In Domingo v. Court of Appeals, 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 court’s 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. One need not stretch his imagination to surmise that Catalino was in cahoots
with petitioners in maneuvering the alleged sale.
720
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the resolution of the Court.

Clarence B. Jandoc for petitioners.
Cirilo A. Bravo for respondents.
RESOLUTION
CHICO-NAZARIO, J.:
This petition for review seeks to annul the Decision dated 15 February 2005 of the
1
Court of Appeals in CA-G.R. CV No. 64048, affirming with modification the 8 March
1999 Decision of the Regional Trial Court (RTC), Branch 21, of Santiago City,
2
Isabela, in Civil Case No. 21-2313. The petition likewise seeks to annul the
Resolution dated 17 May 2005 denying petitioners’ motion for reconsideration.
3
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
_______________
1 Penned by Associate Justice Arturo D. Brion with Associate Justices Eugenio S. Labitoria and Eliezer R. De
Los Santos concurring; Rollo, pp. 31-53.

2 Penned by Judge Fe Albano Madrid; Rollo, pp. 111-126.
3 Rollo, pp. 56-59.
721
VOL. 468, AUGUST 31, 2005 721
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”). Gregorio’s 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.
Domingo’s 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
722
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 Domingo’s 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 Gregorio’s
other son, Alfredo was not made a party to the suit; and (3) the complaint states no cause of
action—that Domingo’s 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. Domingo’s 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 Counter-claim 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 Gregorio’s separate capital
and the inscription of Lorenza’s name in the titles was just a description of Gregorio’s marital
status; (5) the entire area of Lots 1175-E and 1175-F were sold to the Spouses Paragas. They
interposed a counter-claim 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 Gregorio’s 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
723
VOL. 468, AUGUST 31, 2005 723
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 attorney’s fees with their counsel and the litigation expenses they
incurred.
Additionally, the plaintiffs-appellees presented in evidence Gregorio’s 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 Gregorio’s 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 Gregorio’s 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 Julia’s help.
Witness for defendants-appellants Luisa Agsalda testified to prove that Lot 1175-E was
Gregorio’s separate property. She claimed that Gregorio’s father (Leon) purchased a two-
hectare lot from them
724
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, Gregorio’s 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 court’s reasoning in declaring the deed of sale null and void and this
reasoning’s 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 sale’s
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 sale’s 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
_______________
4Rollo, pp. 32-39.

5Rollo, p. 40.
725
VOL. 468, AUGUST 31, 2005 725
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 Paragas’s
driver, a convincing witness, concluding that he was telling a rehearsed story. The
lower court said—
_______________
6Rollo, p. 41.
726
“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, Rudy’s 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 Gregorio’s and
Lorenza’s 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
_______________
7 Rollo, pp. 41-42.

8 Rollo, p. 42.
9 Rollo, p. 42.
727
VOL. 468, AUGUST 31, 2005 727
Thus, on 8 March 1999, the RTC, Branch 21, of Santiago City, Isabela, rendered a
Decision in Civil Case No. 21-2313, the dispositive portion of which reads as follows:
10
“WHEREFORE in the light of the foregoing considerations judgment is hereby rendered:
1. 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. 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.” (Emphasis in the original.)
12
Herein petitioners’ motion for reconsideration was met with similar lack of success
when it was denied for lack of
_______________
10 Penned by Judge Fe Albano Madrid; Rollo, pp. 111-126.

11 Rollo, p. 126.
12 Rollo, p. 53.
728
merit by the Court of Appeals in its Resolution dated 17 May 2005.
13
Hence, this appeal via a petition for review where petitioners assign the following
errors to the Court of Appeals, viz.:
1. 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.
2. 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.
3. C.THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF
DISCRETION, BASED ITS CONCLUSION THAT GREGORIO’S CONSENT TO
THE SALE OF THE LOTS WAS ABSENT MERELY ON SPECULATIONS AND
SURMISES.
4. 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.
5. 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.
_______________
13 Rollo, p. 56.
Rollo, pp. 17-18.
14
729
VOL. 468, AUGUST 31, 2005 729
To start, we held in Blanco v. Quasha that this Court is not a trier of facts. As such,
15
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, and carry even more weight when the said court affirms the factual findings
16
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
Gregorio’s 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 Rudy’s
payment to Gregorio of P50,000.00 before Gregorio signed the deed at the hospital. In line
with this position, defendants-appellants posit that Gregorio’s 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 deed’s 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 valid-
_______________
15 G.R. No. 133148, 17 November 1999, 318 SCRA 373.

16 Philippine Airlines, Inc. v. Court of Appeals, G.R. No. 120262, 17 July 1997, 275 SCRA 621.
730
ity 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 firm’s 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 Guzman’s 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 Guzman’s 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;
731
VOL. 468, AUGUST 31, 2005 731
instead he entered Santiago City and July 22, 1996, as place and date of execution,
respectively. To us, Atty. de Guzman’s 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 Guzman’s 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 Guzman’s
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 deed’s signing. Gregorio died of complications caused by
cirrhosis of the liver. Gregorio’s 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 Veteran’s 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 Gregorio’s 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 defen-
_______________
17 Rollo, pp. 46-50.

732
dants-appellants offered to prove Gregorio’s 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 court’s 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 Gregorio’s 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 ab-
_______________
Rollo, pp. 51-52.

18
Egao v. Court of Appeals, G.R. No. 79787, 29 June 1989, 174 SCRA 484.
19
733
VOL. 468, AUGUST 31, 2005 733
sence of competent evidence on the exact date of Gregorio’s 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-à-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 court’s 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, the Court declared as null and void the deed of
21
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
_______________
20 People v. Astudillo, G.R. No. 141518, 29 April 2003, 401 SCRA 723.
21 G.R. No. 127540, 17 October 2001, 367 SCRA 368, 380.
734
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 court’s 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. One need 22
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 and the Resolution, dated 15 February 2005 and 17
23 24
May 2005, respectively, of the Court of Appeals in CA-G.R. CV No. 64048 are hereby
AFFIRMED. No costs.
_______________
22 Rollo, p. 34.
23 Penned by Associate Justice Arturo D. Brion with Associate Justices Eugenio S. Labitoria and Eliezer
R. De Los Santos concurring; Rollo, pp. 31-53.
24 Rollo, pp. 56-59.
735
VOL. 468, AUGUST 31, 2005 735
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr. and Tinga, JJ., concur.
Petition denied, judgment and resolution affirmed.
Notes.—The mere fact that a party’s evidence was not believed by both the trial
court and the appellate court, and that the said courts tended to give more credence
to the evidence presented by the other party, is in itself not a reason for setting aside
such courts’ findings. (Tañedo vs. Court of Appeals, 252 SCRA 80 [1996])
A void contract cannot give rise to a valid one. (Nool vs. Court of Appeals, 276
SCRA 149 [1997]) An action for declaration of nullity of a void contract is
imprescriptible. (Santos vs. Santos, 366 SCRA 395 [2001])
MERCEDES CALIMLIM-CANULLAS, petitioner, vs. HON. WILLELMO FORTUN,
Judge, Court of First Instance of Pangasinan, Branch I, and CORAZON DAGUINES,
respondents.
Property; Husband and Wife; Where conjugal house is constructed on land belonging
exclusively to the husband, the land ipso facto becomes conjugal, but husband is entitled to
reimbursement of
_______________
*FIRST DIVISION.
676
Calimlim-Canullas vs. Fortun
value of land.—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, which value would be reimbursed at the
liquidation of the conjugal partnership.
Same; Same; Same.—“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). x x x”
Same; Same; Same; Sale; Consent of wife needed for validity of sale of land of husband
on which conjugal house was constructed.—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.
Same; Same; Same; Sale to concubine null and void.—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.
PETITION for certiorari to review the decision of the Court of First Instance of
Pangasinan, Br. I. Fortun, J.

677
VOL. 129, JUNE 22, 1984 677
Fernandez Law Offices for petitioner.
Francisco Pulido for respondents.
MELENCIO-HERRERA, J.:
A 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
678
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 (½) 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. “(1)Declaring plaintiff as the true and lawful owner of the land in question and the 10
coconut trees;
2. “(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:
x x x”
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:
“x x x
“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
679
VOL. 129, JUNE 22, 1984 679
of the conjugal partnership for the value of the lot, which value would be reimbursed
1
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 doctrina; los edificios construidos durante el matrimonio en suelo
propio de uno de los conjuges son gananciales, abonandose el valor del suelo al conjuge a
quien pertenezca.”
It is true that in the case of Maramba vs. Lozano, relied upon by respondent Judge,
3
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 JBL 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). x x x”
The foregoing premises considered, it follows that FERNANDO could not have
alienated the house and lot to
_______________
1 Tabotabo vs. Molero, 22 Phil. 418 (1912).
2 Vda. de Padilla vs. Paterno, 3 SCRA 678, 691 (1961).
3 20 SCRA 474 (1967).
680
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. Similarly, donations between spouses during
6
marriage are prohibited. And this is so because if transfers or conveyances between

7
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, as well as to protect the institution of
8
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 will of the parties. That was the ruling in Buenaventura vs.
________________
4 Article 166, Civil Code.

5 Article 216, Civil Code.
6 Article 1490, ibid.
681
VOL. 129, JUNE 22, 1984 681
Bautista, also penned by Justice JBL Reyes (CA) 50 O.G. 3679, and cited in
Matabuena vs. Cervantes. We quote hereunder the pertinent dissertation on this
9
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 well 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, x x x, 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” (Italics 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.
Teehankee, (Chairman), Plana, Relova, Gutierrez, Jr., and De la Fuente, JJ.,
concur.
Decision set aside.
________________
938 SCRA 284 (1971).

682
People vs. Tumaliuan
Notes.—That all property acquired during marriage are conjugal is merely a
rebuttable presumption. (Laperal, Jr. vs. Katigbak, 10 SCRA 493.)
Husband’s power to alienate conjugal property must be with wife’s consent.
(Villocino vs. Doyon, 18 SCRA 1094.)
The contract of sale of conjugal property, in its entirety, executed by the husband
without the wife s consent may be annulled by the wife. (Bucoy vs. Paulino, 23 SCRA
248.)
Property acquired partly with paraphernal and partly with conjugal funds is held
to belong to both patrimonies in common, in proportion to the contribution of each of
the total purchase price. (Castillo, Jr. vs. Pasco, 11 SCRA 102.)
DOMINGO D. RUBIAS, plaintiff-appellant, vs. ISAIAS BATILLER, defendant-
appellee.
Actions; Dismissal of complaint for declaration of absolute ownership and restoration of
possession of land where plaintiff has no right or title thereto; Case at bar.—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 made in 1956 by his father-in-law in his favor at
a time when the latter's application for registration thereof had already been dismissed by
the land registration court and was pending appeal in the Court of Appeals. With the
appellate court's 1958 final judgment affirming the dismissal of the vendor's application for
registration, the lack of any rightful claim or title of the said vendor 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 the vendor's purported sale in 1956 in favor of the
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.
Sales; Prohibition against purchase by lawyer of property in litigation from his
client; Article 1491, paragraph (5) of the Philippine Civil Code construed.—Article 1491 of the
Civil Code of the Philippines (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 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; (5) judicial officers and
employees, prosecuting attorneys, and lawyers; and (6) others specially disqualified by law.
Same; Prohibited purchase void and produces no legal effect.—Castan's rationale for his
conclusion that fundamental considerations of public policy render void and inexistent such
expressly prohibited purchases (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 submitted to or handled by them, under Article 1491, paragraphs (4) and (5) of the
Civil Code of the Philippines) has been adopted in a new article of the Civil Code of the
Philippines, viz, Article 1409 declaring such
121
VOL. 51, MAY 29, 1973 121
Rubias vs. Batiller
prohibited contracts as "inexistent and void from the beginning."
Same; Nullity of such prohibited contracts cannot be cured by ratification.—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.
Same; Nullity of such prohibited contracts differentiated from the nullity of contracts of
purchase by the guardians, agents and administrators.—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, its has been opined, 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. 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 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.
APPEAL from a decision of the Court of First Instance of Iloilo. Rovira, J.

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
122
Rubias vs. Batiller
Francisco Militante, plaintiff's vendor and predecessor in 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 allegedly entered said
portions of the lot on two occasions—in 1945 and in 1959. Plaintiff prayed also for damages
and attorney's 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 P2,000.00, as well as the sum of P500.00 for
attorney's fees, x x x
123
VOL. 51, MAY 29, 1973 123
Rubias vs. Batiller
"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 introduce any evidence, testimonial or documentary to prove
them:
1. 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. 2.Before the war with Japan, Francisco Militante filed with the Court of First Instance of Iloilo
an application for the registration of 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 in the Court of 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 trial this Court dismissed the application
for registration.The applicant, Francisco Militante, appealed from the decision of this Court
to the Court of Appeals where the case was docketed as CA-G.R. No. 13497-R.
3. 3.Pending the disposal of the appeal in CA-G.R. 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 14, 1960 (Exh. 'A-1').
(NOTE: As per the deed of sale, Exh. A, what Militante

124
Rubias vs. Batiller
1. 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 -13497, 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.)
2. 4.On September 22, 1958 the Court of Appeals in CA-G.R. No. 13497-Rpromulgated
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').
3. 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').
4. 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').
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').
125
VOL. 51, MAY 29, 1973 125
Rubias vs. Batiller
1. 8.The defendant had declared for taxation purposes Lot No. 2 of the Psu-155241 under
Tax Dec. Noc. 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.
2. 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 Lands on November 15, 1956 was issued,
identified as Psu 155241 (Exh. '5').
3. 10.On April 22, 1960, the plaintiff filed a 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 filed 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 x x x.")
B. During the trial of this case on the merit, the plaintiff will
126
Rubias vs. Batiller
prove by competent evidence the following:
1. 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. '1-2'). The sale was
registered in the Office of the Register of Deeds of Iloilo on August 4, 1920, under
Primary Entry No. 69 (Exh. '1-3') 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. '1'), the sale having been registered in the Office of the Register of
Deeds of Iloilo on February 10, 1934 (Exh. '1-1').
2. 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. 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. 1.That Lot No. 2 of the Psu-155241 (Exh. '5') was originally owned and possessed by
Felipe Batiller, grandfather of the defendant, who was succeeded by 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. 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.
3. 3.That Lot No. 2, Psu 155241, the subject of Free Patent application of the
defendant has been approved.
4. 4.The damages suffered by the defendant as alleged in his
127
V OL. 51, MAY 29, 1973 127
Rubias vs. Batiller
counterclaim.' " 1
The appellate court further related the developments of the case, as follows:
"On August 17, 1965, defendant's counsel manifested in open court that before 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 a cause of 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 No. 695 filed in the CFI of Iloilo, which case was
brought on appeal to this Court and docketed as CA-G-R. No. 13497-R in which aforesaid
case plaintiff was the counsel on record of his father-in-law, Francisco Militante. Invoking
Arts. 1409 and 1491 of the Civil Code which reads:
'Art. 1409. The following contracts are inexistent and void from the beginning:
x x x
(7) Those expressly prohibited or declared void by law.
'ART. 1491. The following persons cannot acquire any purchase, even at a public or judicial
auction, either in person or through the mediation of another:
x x x
(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 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
______________
1 Notes in parentheses and emphasis added.

128
Rubias vs. Batiller
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).
"On October 18, 1965, the lower court issued an order dismissing plaintiff's 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. A) between plaintiff and Francisco
Militante was null and void. In due season 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).
"Hence, this appeal by plaintiff from the orders of October 18, 1965 and January 14, 1966.
"Plaintiff-appellant imputes to the lower court the following errors:
1. '1.The lower court erred in holding that the contract of sale between the plaintiff-
appellant and his father-in-law, Francisco Militante, Sr., now deceased, of the
property covered by Plan Psu-99791, (Exh. 'A') was void, not voidable because it was
made when plaintiff- appellant was the counsel of the latter in the Land Registration
case.
2. '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-appellant and the
deceased, Francisco Militante, Sr.
3. '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. '4.The lower court erred in dismissing the complaint of the plaintiff-appellant.' "
The appellate court concluded that plaintiff's "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,
129
VOL. 51, MAY 29, 1973 129
Rubias vs. Batiller
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, practically amounted to a fulldress trial
2
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, actually are already made of record in the stipulated
3
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, are likewise already duly established facts
5
of record, in the land
_______________
2 At pages 2 to 5; sub-paragraphs 1 to 10 of Par. A.

3 At pages 5 to 6; sub-paragraphs 1 to 3 of Par. B.
4 Exhibit "1".
5 At page 6; sub-paragraphs 1 to 4 of Par. C.
130
Rubias vs. Batiller
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; and that
6
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
_______________
6At page 7.
131
VOL. 51, MAY 29, 1973 131
Rubias vs. Batiller
"expressly prohibited or declared void by law" are "inexistent and void from the
beginning" 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 Martinez relied upon by plaintiff as holding
7
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. In this later
8
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 seeking 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 Vicenta 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 Macaraeg 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 described 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 may tak e part by virtue of their profession. The application for
registration was consequently denied, and upon appeal by Palarca to the Supreme Court, the
judgment of the lower court was affirmed by a decision promulgated November 16, 1925.
______________
7 20 Phil. 340, 342-343 (Oct. 13, 1911).

8 53 Phil. 147 (March 27, 1929).
132
Rubias vs. Batiller
(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 Vicenta 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 Palarca and ordered the registration of the land in
his name. Upon appeal to this court by the administrators of the estates of Juan Soriano and Vicenta
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; (5) judicial officers and employees, prosecuting attorneys, and lawyers;
and (6) others especially disqualified by law.
______________
953 Phil. at pp. 147-148; emphasis added.

133
VOL. 51, MAY 29, 1973 133
Rubias vs. Batiller
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 that "(C)onsidering the question from the point of view of the civil law, the
10
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:
" x x x la prohibición que el articulo 1459 del C.C. establece respecto a los administradores y
apoderados, la cual tiene conforme a
______________
10 Vol. 10, p. 108.

11 20 Phil. at p. 343.
12 Article 1409, pars. (1) and (7), Philippine Civil Code.
134
Rubias vs. Batiller
la doctrina de esta Sala, contenida entre otras, en S. de 27-5-1959, un fundamento de orden
moral, dando lugar la violación de esta regla a la nulidad de pleno derecho del acto ó negocio
celebrado, x x x y porque al realizarse el acto juridico en contravención con una prohibición
legal, afectante al orden público, no cabe con efecto alguno la aludida ratificaciónx x x" 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 decision of the Supreme Court of Spain, Gullón Ballesteros, in his
"Curso de Derecho Civil, (Contratos Especiales)" (Madrid, 1968) p. 18, affirms that,
with respect to Article 1459, Spanish Civil Code:
"Qúe carácter tendrá la compra que se realice por estas personas? Por supuesto no cabe duda
de que en el caso del (art.) 1459, 4° y 5°, la nulidad es absoluta porque el motivo de la
prohibición es de orden público." 14
Perez Gonzales concurs in such view, stating that "Dado el carácter prohibitivo del
precepto, la consequencia de la infracción es la nulidad radical y ex lege." 15
Castan, quoting Manresa's own observation that

"El fundamento de esta prohibición es clarísimo. No se trata con este precepto tan solo de
quitar la ocasión al fraude; persiguese, además, el propósito de rodear a las personas que
intervienen en la administración de justicia de todos los restigios que necesitan para ejercer
su ministerio, librándolos de toda sospecha, que aunque fuere infundada,
redundaría en descredito de la institución." 16
_____________
13Rodriguez Navarro, Doctrina Civil del Tribunal Supremo, Appendice de 1961-1966, pp. 693-694;
emphasis added.
14 Emphasis added.
15 Perez Gonzales & Alguer: Enneccerus, Derecho Civil, Tomo II—2°, p. 26.
16 Castan, Derecho Civil, Tomo 4, p. 73 (9a Ed.), citing 10 Manresa 107; emphasis added.
135
VOL. 51, MAY 29, 1973 135
Rubias vs. Batiller
considerarse en nuestro derecho inexistente ó radicalmente nulo el contrato en los siguentes
cases: a) x x x ; b) cuando el contrato se ha celebrado en violación de una prescripción ó
prohibición legal, fundada sobre motivos de orden público (hipótesis del art. 4 del Código) x x
x."
17
It is noteworthy that Castan's rationale for his conclusion that fundamental

considerations 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
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 this 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 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. 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
_______________
17Castan, Derecho Civil, Tomo 3, p. 437 (8a Ed.); emphasis added.

18Tolentino in Vol. IV, p. 575, states as to the "Source of Article (that) This provision is new but merely
groups together contracts which have already been considered as void ab initio under the old Civil Code, as
interpreted by jurisprudence and commentators."
136
Rubias vs. Batiller
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 inexistence 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 reivindicatoria; 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 delare 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
______________
Idem, at pp. 578-579.

19
Idem, at p. 578.
20
137
VOL. 51, MAY 29, 1973 137
Rubias vs. Batiller
hereby affirmed, with costs in all instances against plaintiff-appellant. So ordered.
Makalintal, Actg.
C.J., Zaldivar, Castro, Fernando,Barredo, Makasiar, Antonio and Esguerra,
JJ., concur.
Order affirmed.
Notes.—a) Purchase by lawyer before commencement of lawyer-client
relationship.—Granting that they were attorneys for the defendant, yet they were not
forbidden to buy the property in question. Attorneys are only prohibited from buying
their client's property which is the subject of litigation. The questioned sale was
effected before the subject thereof became involved in the present action. There was
already at the time of the sale a litigation over this property between the parties but
the attorneys were not the defendant's attorneys in that case (Gregorio Araneta, Inc.
vs. Tuason de Paterno, L-2886, August 22, 1952).
b) Extent of article 1491, Civil Code.—Article 1491 does not prohibit a lawyer from
acquiring a certain percentage of the value of the properties in litigation that may be
awarded to his client. A contingent fee based on such value is allowed (Recto vs.
Harden, L-6897, November 29, 1956).
c) Prohibition does not only apply where interest in the property acquired by the
attorney before the property became the subject matter of litigation.—The provisions
of the Civil Code and of the Canons of Legal Ethics prohibit the purchase by lawyers
of any interest in the subject matter of the litigation in which they participated by
reason of their profession. The attorney's alleged interest in the lots was acquired
before he intervened as counsel for the defendant in the ejectment cases against the
latter and that said interest is not necessarily inconsistent with that of his
aforementioned client, aside from the fact that he had made no substantial
misrepresentation in the pleadings filed by him in said cases (Del Rosario vs.
Millado, Adm. Case No. 724, January 31, 1969).
The same prohibition is not violated by a lawyer who participates at a foreclosure
sale of his client's property in
138
Associated Labor Union vs. Court of Industrial Relations
behalf of his client (Diaz vs. Kapunan, 45 Phil. 482) or by an attorney who, as counsel
of one of the three heirs, negotiated a contract between the heirs and a corporation of
which he was an officer for the subdivision and sale of the heirs' property, the attorney
himself not being a party to the contract (Tuason vs. Tuason, 88 Phil. 428)
G.R. No. 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.
Sales; Lawyers; Contingent Fee Arrangements; Attorney’s Lien; A contract between a
lawyer and his client stipulating a contingent fee is not covered by the prohibition under Art.
1491 (5) 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.—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. 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.
_______________
*THIRD DIVISION.
29
VOL. 195, MARCH 11, 1991 29
Fabillo vs. Intermediate Appellate Court
Lawyers; Contracts, Interpretation of; 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.—The ambiguity of said provision, however, should be resolved against
Murillo as it was he himself who drafted the contract. 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 if it would
work prejudice to the lawyer. 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.
Same; A lawyer’s basic ideal must be to render service and secure justice, not money-
making.—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 (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.”
PETITION for certiorari to review the decision of the then Intermediate Appellate
Court.

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
30
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. After Justina’s death, Florencio filed a petition for the probate of said will. On
1
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, 1964” 3
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
_______________
1 Exhibit J.
2 Exhibit C.
3 Exhibit 5, italics supplied.
31
VOL. 195, MARCH 11, 1991 31
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 Special 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
32
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 (Sgd.) CRISTETA F. MAGLINTE
(Witness) (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. Inasmuch as his
5
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,
_______________
4Exhibit A, italics supplied; acknowledgment omitted.

5Record on Appeal, p. 4.
33
VOL. 195, MARCH 11, 1991 33
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, the lower court ruled that there was
7
insufficient evidence to prove that the Fabillo spouses’ consent to the contract was
vitiated. It noted that the
_______________
6Civil Case No. 4434.

7Penned by Judge Auxencio C. Dacuycuy.
34
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:
1. (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;
2. (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;
3. (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;
4. (d)Ordering the defendants to pay the plaintiff the sum of Three
35
VOL. 195, MARCH 11, 1991 35
1. Hundred Pesos (P300.00) as attorney’s fees; and

2. (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
_______________
Penned by Justice Mariano A. Zosa and concurred in by Justices Jorge R. Coquia and Floreliana Castro-
8
Bartolome.
9 Director of Lands vs. Ababa, G.R. No. 26096, February 27, 1979, 88 SCRA 513.
10 Rule 16.03, Canon 16.
36
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. Moreover, contingent fees were impliedly sanctioned by No. 13 of
11
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. This is in consonance with the rule of
13
interpretation that, in construing a contract of professional services between a lawyer

and his client, such construction as would be more favorable to
_______________
11 Ulanday vs. Manila Railroad Co., 45 Phil. 540, 554.

12 See Recto vs. Harden, 100 Phil. 427, 428.
13 Reyes vs. De la Cruz, 105 Phil. 372.
37
VOL. 195, MARCH 11, 1991 37
the client should be adopted even if it would work prejudice to the lawyer. Rightly 14
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 moneymaking. 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.
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.
Decision reversed and set aside.
_______________
14 De los Santos vs. Palanca, 119 Phil. 765.

15 Amalgamated Laborers Association vs. CIR, 131 Phil. 374.
16 Licudan et al. vs. The Hon. Court of Appeals and Teodoro O. Domalanta, G.R. No. 91958, January 24,
1991.

Sales Cases Chapter 1&2

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Sales Cases Chapter 1&2

Uploaded by

Copyright:

Available Formats

CELESTINO Co & COMPANY, petitioner, vs.

PETITION for review by certiorari of a decision of the Court of Tax Appeals.

Appeal from a decision of the Court of Tax Appeals.

The same consideration applies to this sash manufaeturer.

THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ENGINEERING

ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner, vs. THE

6Motion to Dismiss dated April 28, 1975.

PETITION for review on certiorari of a decision of the Court of Tax Appeals.

The facts are stated in the opinion of the Court.

4Decision, Court of Tax Appeals, CTA Rec. p. 212.

compensating tax is not a tax on the importation of goods but a

1. 1.SALES; INTERPRETATION OF CONTRACT.—For the classification of contracts,

APPEAL from a judgment of the Court of First Instance of Manija. Abreu, J.

PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in

first two monthly installments. His business, however, encountered financial

On October 11, 1990, petitioner and respondent executed a Deed of

amount of P335,462.14 from Jomero Realty Corporation. Pertinent portions of the

1 Exhibit “A,” Records, p. 128.

4 Records, pp. 142-143.

letter to petitioner demanding payment of his obligation, but petitioner refused to

8 Records, pp. 1-6.

9 Penned by Judge Teofilo L. Guadiz, Jr.

In this petition for review, petitioner assigns the following errors:

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION

The petition is without merit.

Corollary thereto, in dacion en pago, as a special mode of payment, the debtor

12 Rollo, pp. 9-14.

assignor is bound by certain warranties. More specifically, the first paragraph of

creditors and debtors of each other.

The facts are stated in the resolution of the Court.

Los Santos concurring; Rollo, pp. 31-53.

3 Rollo, pp. 56-59.

4Rollo, pp. 32-39.

7 Rollo, pp. 41-42.

“WHEREFORE in the light of the foregoing considerations judgment is hereby rendered:

10 Penned by Judge Fe Albano Madrid; Rollo, pp. 111-126.

1. A.THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF

15 G.R. No. 133148, 17 November 1999, 318 SCRA 373.

17 Rollo, pp. 46-50.

Rollo, pp. 51-52.

The facts are stated in the opinion of the Court.

at the liquidation of the conjugal partnership. 2

marriage are prohibited. And this is so because if transfers or conveyances between

4 Article 166, Civil Code.

7 Article 133, ibid.

8 Article 1337, ibid.

938 SCRA 284 (1971).

APPEAL from a decision of the Court of First Instance of Iloilo. Rovira, J.

The facts are stated in the opinion of the Court.

(NOTE: As per the deed of sale, Exh. A, what Militante

1 Notes in parentheses and emphasis added.

of record, in the land

2 At pages 2 to 5; sub-paragraphs 1 to 10 of Par. A.

5 At page 6; sub-paragraphs 1 to 4 of Par. C.

consequently, plaintiff's purchase of the property in litigation from his client

7 20 Phil. 340, 342-343 (Oct. 13, 1911).

953 Phil. at pp. 147-148; emphasis added.

The reason thus given by Manresa in considering such prohibited acquisitions

10 Vol. 10, p. 108.