G.R. No.

122544 January 28, 1999
REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BLAZA,
ESTER ABAD DIZON and JOSEPH ANTHONY DIZON, RAYMUND A.
DIZON, GERARD A. DIZON, and JOSE A. DIZON, JR., petitioners,  sum of P8,000.00 a month starting December 1982, until private respondent
vs.
COURT OF APPEALS and OVERLAND EXPRESS LINES,
INC., respondents.
G.R. No. 124741 January 28, 1999
REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BALZA,
ESTER ABAD DIZON and JOSEPH ANTHONY DIZON, RAYMUND A.
DIZON, GERARD A. DIZON, and Jose A. DIZON, JR., petitioners,  of Appeals) rendered a decision 4stating that:
vs.
COURT OF APPEALS, HON. MAXIMIANO C. ASUNCION, and
OVERLAND EXPRESS LINES, INC., respondents.
MARTINEZ, J.:
Two consolidated petitions were filed before us seeking to set aside and
annul the decisions and resolutions of respondent Court of Appeals. What
seemed to be a simple ejectment suit was juxtaposed with procedural
intricacies which finally found its way to this Court.
G.R. No. 122544:
for the use and occupation of the premises during the period of illegal
detainer from June 1976 to November 1982 at the monthly rental of
P8,000.00, less payments made, plus 12% interest per annum from
November 18, 1976, the date of filing of the complaint, until fully paid, the
fully vacates the premises, and to pay P20,000.00 as and by way of
attorney's fees.
Private respondent filed a certiorari petition praying for the issuance of a
restraining order enjoining the enforcement of said judgment and dismissal of
the case for lack of jurisdiction of the City Court.
On September 26, 1984, the then Intermidiate Appellate Court 3 (now Court
. . ., the alleged question of whether petitioner was granted
an extension of the option to buy the property; whether such
option, if any, extended the lease or whether petitioner
actually paid the alleged P300,000.00 to Fidela Dizon, as
representative of private respondents in consideration of the
option and, whether petitioner thereafter offered to pay the
balance of the supposed purchase price, are all merely
incidental and do not remove the unlawful detainer case from
the jurisdiction or respondent court. In consonance with the
ruling in the case of Teodoro, Jr. vs. Mirasol (supra), the
above matters may be raised and decided in the unlawful
detainer suit as, to rule otherwise, would be a violation of the
principle prohibiting multiplicity of suits. (Original Records,
pp. 38-39).

On May 23, 1974, private respondent Overland Express Lines, Inc. (lessee)
entered into a Contract of Lease with Option to Buy with petitioners1 (lessors)
involving a 1,755.80 square meter parcel of land situated at corner MacArthur
Highway and South "H" Street, Diliman, Quezon City. The term of the lease
was for one (1) year commencing from May 16, 1974 up to May 15, 1975.
During this period, private respondent was granted an option to purchase for
the amount of P3,000.00 per square meter. Thereafter, the lease shall be on
a per month basis with a monthly rental of P3,000.00.
For failure of private respondent to pay the increased rental of P8,000.00 per
month effective June 1976, petitioners filed an action for ejectment (Civil
Case No. VIII-29155) on November 10, 1976 before the then City Court (now
Metropolitan Trial Court) of Quezon City, Branch VIII. On November 22,
1982, the City Court rendered judgment 2ordering private respondent to
vacate the leased premises and to pay the sum of P624,000.00 representing
rentals in arrears and/or as damages in the form of reasonable compensation
The motion for reconsideration was denied. On review, this Court dismissed
the petition in a resolution dated June 19, 1985 and likewise denied private
respondent's subsequent motion for reconsideration in a resolution dated
September 9, 1985. 5
On October 7, 1985, private respondent filed before the Regional Trial Court
(RTC) of Quezon City (Civil Case No. Q-45541) an action for Specific
Performance and Fixing of Period for Obligation with prayer for the issuance
of a restraining order pending hearing on the prayer for a writ of preliminary
injunction. It sought to compel the execution of a deed of sale pursuant to the
option to purchase and the receipt of the partial payment, and to fix the
period to pay the balance. In an Order dated October 25, 1985, the trial court
denied the issuance of a writ of preliminary injunction on the ground that the
decision of the then City Court for the ejectment of the private respondent,
having been affirmed by the then Intermediate Appellate Court and the
Supreme Court, has become final and executory.
Unable to secure an injunction, private respondent also filed before the RTC
of Quezon City, Branch 102 (Civil Case No. Q-46487) on November 15, 1985
a complaint for Annulment of and Relief from Judgment with injunction and
damages. In its decision 6 dated May 12, 1986, the trial court dismissed the
complaint for annulment on the ground of res judicata, and the writ of
preliminary injunction previously issued was dissolved. It also ordered private
respondent to pay P3,000.00 as attorney's fees. As a consequence of private
respondent's motion for reconsideration, the preliminary injunction was
reinstated, thereby restraining the execution of the City Court's judgment on
the ejectment case.
The two cases were the after consolidated before the RTC of Quezon City,
Branch 77. On April 28, 1989, a decision 7 was rendered dismissing private
respondent's complaint in Civil Case No. Q-45541 (specific performance
case) and denying its motion for reconsideration in Civil Case No. 46487
(annulment of the ejectment case). The motion for reconsideration of said
decision was likewise denied.
On appeal, 8 respondent Court of Appeals rendered a decision 9 upholding
the jurisdiction of the City Court of Quezon City in the ejectment case. It also
concluded that there was a perfected contract of sale between the parties on
the leased premises and that pursuant to the option to buy agreement,
private respondent had acquired the rights of a vendee in a contract of sale.
It opined that the payment by private respondent of P300,000.00 on June 20,
1975 as partial payment for the leased property, which petitioners accepted
(through Alice A. Dizon) and for which an official receipt was issued, was the
operative act that gave rise to a perfected contract of sale, and that for failure
of petitioners to deny receipt thereof, private respondent can therefore
assume that Alice A. Dizon, acting as agent of petitioners, was authorized by
them to receive the money in their behalf. The Court of Appeals went further
by stating that in fact, what was entered into was a "conditional contract of
sale" wherein ownership over the leased property shall not pass to the
private respondent until it has fully paid the purchase price. Since private
respondent did not consign to the court the balance of the purchase price
and continued to occupy the subject premises, it had the obligation to pay the
amount of P1,700.00 in monthly rentals until full payment of the purchase
price. The dispositive portion of said decision reads:
WHEREFORE, the appealed decision in Case No. 46387 is
AFFIRMED. The appealed decision in Case No. 45541 is, on
the other hand, ANNULLED and SET ASIDE. The
defendants-appellees are ordered to execute the deed of
absolute sale of the property in question, free from any lien
or encumbrance whatsoever, in favor of the plaintiff-
appellant, and to deliver to the latter the said deed of sale, as
well as the owner's duplicate of the certificate of title to said
property upon payment of the balance of the purchase price
by the plaintiff-appellant. The plaintiff-appellant is ordered to
pay P1,700.00 per month from June 1976, plus 6% interest
per annum, until payment of the balance of the purchase
price, as previously agreed upon by the parties.
SO ORDERED.
Upon denial of the motion for partil reconsideration (Civil Case No. Q-45541)
by respondent Court of Appeals, 10petitioners elevated the case via petition
for certiorari questioning the authority of Alice A. Dizon as agent of
petitioners in receiving private respondent's partial payment amounting to
P300,000.00 pursuant to the Contract of Lease with Option to Buy. Petitioner
also assail the propriety of private respondent's exercise of the option when it
tendered the said amount on June 20, 1975 which purportedly resulted in a
perfected contract of sale.
G.R. No. 124741:
Petitioners filed with respondent Court of Appeals a motion to remand the
records of Civil Case No. 38-29155 (ejectment case) to the Metropolitan Trial
Court (MTC), then City Court of Quezon City, Branch 38, for execution of the
judgment 11 dated November 22, 1982 which was granted in a resolution
dated June 29, 1992. Private respondent filed a motion to reconsider said
resolution which was denied.
Aggrieved, private respondent filed a petition for certiorari, prohibition with
preliminary injunction and/or restraining order with this Court (G.R. Nos.
106750-51) which was dismissed in a resolution dated September 16, 1992
on the ground that the same was a refiled case previously dismissed for lack
of merit. On November 26, 1992, entry of judgment was issued by this Court.
On July 14, 1993, petitioners filed an urgent ex-parte motion for execution of
the decision in Civil Case No. 38-29155 with the MTC of Quezon City,
Branch 38. On September 13, 1993, the trial court ordered the issuance of a
third alias writ of execution. In denying private respondent's motion for
reconsideration, it ordered the immediate implementation of the third writ of
execution without delay.
On December 22, 1993, private respondent filed with the Regional Trial Court
(RTC) of Quezon City, Branch 104 a petition for certiorari and prohibition with
preliminary injunction/restraining order (SP. PROC. No. 93-18722)
challenging the enforceability and validity of the MTC judgment as well as the
order for its execution.
On January 11, 1994, RTC of Quezon City, Branch 104 issued an
order12 granting the issuance of a writ of preliminary injunction upon private
respondent's' posting of an injunction bond of P50,000.00.
Assailing the aforequoted order after denial of their motion for partial
reconsideration, petitioners filed a petition 13 for certiorari and prohibition with
a prayer for a temporary restraining order and/or preliminary injunction with
the Court of Appeals. In its decision, 14 the Court of Appeals dismissed the
petition and ruled that:
The avowed purpose of this petition is to enjoin the public
respondent from restraining the ejectment of the private
respondent. To grant the petition would be to allow the
ejectment of the private respondent. We cannot do that now
in view of the decision of this Court in CA-G.R. CV Nos.
25153-54. Petitioners' alleged right to eject private
respondent has been demonstrated to be without basis in
the said civil case. The petitioners have been shown, after
all, to have no right to eject private respondents.
WHEREFORE, the petition is DENIED due course and is
accordingly DISMISSED.
SO ORDERED. 15
Petitioners' motion for reconsideration was denied in a resolution 16 by the
Court of Appeals stating that:
This court in its decision in CA-G.R. CV Nos. 25153-54
declared that the plaintiff-appellant (private respondent
herein) acquired the rights of a vendee in a contract of sale,
in effect, recognizing the right of the private respondent to
possess the subject premises. Considering said decision, we
should not allow ejectment; to do so would disturb the status
quo of the parties since the petitioners are not in possession
of the subject property. It would be unfair and unjust to
deprive the private respondent of its possession of the
subject property after its rights have been established in a
subsequent ruling.
WHEREFORE, the motion for reconsideration is DENIED for
lack of merit.
SO ORDERED. 17
Hence, this instant petition.
We find both petitions impressed with merit.
First. Petitioners have established a right to evict private respondent from the
subject premises for non-payment of rentals. The term of the Contract of
Lease with Option to Buy was for a period of one (1) year (May 16, 1974 to
May 15, 1975) during which the private respondent was given an option to
purchase said property at P3,000.00 square meter. After the expiration
thereof, the lease was for P3,000.00 per month.
Admittedly, no definite period beyond the one-year term of lease was agreed
upon by petitioners and private respondent. However, since the rent was paid
on a monthly basis, the period of lease is considered to be from month to
month in accordance with Article 1687 of the New Civil Code.18 Where the
rentals are paid monthly, the lease, even if verbal may be deemed to be on a
monthly basis, expiring at the end of every month pursuant to Article 1687, in
relation to Article 1673 of the Civil Code. 19 In such case, a demand to vacate
is not even necessary for judicial action after the expiration of every month. 20
When private respondent failed to pay the increased rental of P8,000.00 per
month in June 1976, the petitioners had a cause of action to institute an
ejectment suit against the former with the then City Court. In this regard, the
City Court (now MTC) had exclusive jurisdiction over the ejectment suit. The
filing by private respondent of a suit with the Regional Trial Court for specific
performance to enforce the option to purchase did not divest the then City
Court of its jurisdiction to take cognizance over the ejectment case. Of note is
the fact that the decision of the City Court was affirmed by both the
Intermediate Appellate Court and this Court.
Second. Having failed to exercise the option within the stipulated one-year
period, private respondent cannot enforce its option to purchase anymore.
Moreover, even assuming arguendo  that the right to exercise the option still
subsists at the time private respondent tendered the amount on June 20,
1975, the suit for specific performance to enforce the option to purchase was
filed only on October 7, 1985 or more than ten (10) years after accrual of the
cause of action as provided under Article 1144 of the New Civil Code.21
In this case, there was a contract of lease for one (1) year with option to
purchase. The contract of lease expired without the private respondent, as
lessee, purchasing the property but remained in possession thereof. Hence,
there was an implicit renewal of the contract of lease on a monthly basis. The
other terms of the original contract of lease which are revived in the implied
new lease under Article 1670 of the New Civil Code 22 are only those terms
which are germane to the lessee's right of continued enjoyment of the
property leased. 23 Therefore, an implied new lease does not ipso facto carry
with it any implied revival of private respondent's option to purchase (as
lessee thereof) the leased premises. The provision entitling the lessee the
option to purchase the leased premises is not deemed incorporated in the
impliedly renewed contract because it is alien to the possession of the
lessee. Private respondent's right to exercise the option to purchase expired
with the termination of the original contract of lease for one year. The
rationale of this Court is that:
This is a reasonable construction of the provision, which is
based on the presumption that when the lessor allows the
lessee to continue enjoying possession of the property for
fifteen days after the expiration of the contract he is willing
that such enjoyment shall be for the entire period
corresponding to the rent which is customarily paid — in this
case up to the end of the month because the rent was paid
monthly. Necessarily, if the presumed will of the parties
refers to the enjoyment of possession the presumption
covers the other terms of the contract related to such
possession, such as the amount of rental, the date when it
must be paid, the care of the property, the responsibility for
repairs, etc. But no such presumption may be indulged in
with respect to special agreements which by nature are
foreign to the right of occupancy or enjoyment inherent in a
contract of lease. 24
Third. There was no perfected contract of sale between petitioners and
private respondent. Private respondent argued that it delivered the check of
P300,000.00 to Alice A. Dizon who acted as agent of petitioners pursuant to
the supposed authority given by petitioner Fidela Dizon, the payee thereof.
Private respondent further contended that petitioners' filing of the ejectment
case against it based on the contract of lease with option to buy holds
petitioners in estoppel to question the authority of petitioner Fidela Dizon. It
insisted that the payment of P300,000.00 as partial payment of the purchase
price constituted a valid exercise of the option to buy.
Under Article 1475 of the New Civil Code, "the contract of sale is perfected at
the moment there is a meeting of minds upon the thing which is the object of
the contract and upon the price. From that moment, the parties may
reciprocally demand performance, subject to the provisions of the law
governing the form of contracts." Thus, the elements of a contract of sale are
consent, object, and price in money or its equivalent. It bears stressing that
the absence of any of these essential elements negates the existence of a
perfected contract of sale. Sale is a consensual contract and he who alleges
it must show its existence by competent proof. 25
In an attempt to resurrect the lapsed option, private respondent gave
P300,000.00 to petitioners (thru Alice A. Dizon) on the erroneous
presumption that the said amount tendered would constitute a perfected
contract of sale pursuant to the contract of lease with option to buy. There
was no valid consent by the petitioners (as co-owners of the leased
premises) on the supposed sale entered into by Alice A. Dizon, as
petitioners' alleged agent, and private respondent. The basis for agency is
representation and a person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the agent. 26 As provided in
Article 1868 of the New Civil Code, 27 there was no showing that petitioners
consented to the act of Alice A. Dizon nor authorized her to act on their
behalf with regard to her transaction with private respondent. The most
prudent thing private respondent should have done was to ascertain the
extent of the authority of Alice A. Dizon. Being negligent in this regard,
private respondent cannot seek relief on the basis of a supposed agency.
In Bacaltos Coal Mines vs. Court of Appeals, 28 we explained the rule in
dealing with an agent:
Every person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the agent. If he
does not make such inquiry, he is chargeable with
knowledge of the agent's authority, and his ignorance of that
authority will not be any excuse. Persons dealing with an
assumed agency, whether the assumed agency be a general
or special one, are bound at their peril, if they would hold the
principal, to ascertain not only the fact of the agency but also
the nature and extent of the authority, and in case either is
controverted, the burden of proof is upon them to establish it.
For the long years that private respondent was able to thwart the execution of
the ejectment suit rendered in favor of petitioners, we now write finis to this
controversy and shun further delay so as to ensure that this case would really
attain finality.
WHEREFORE, in view of the foregoing, both petitions are GRANTED. The
decision dated March 29, 1994 and the resolution dated October 19, 1995 in
CA-G.R. CV No. 25153-54, as well as the decision dated December 11, 1995
and the resolution dated April 23, 1997 in CA-G.R. SP No. 33113 of the
Court of Appeals are hereby REVERSED and SET ASIDE.
Let the records of this case be remanded to the trial court for immediate
execution of the judgment dated November 22, 1982 in Civil Case No. VIII-
29155 of the then City Court (now Metropolitan Trial Court) of Quezon City,
Branch VIII as affirmed in the decision dated September 26, 1984 of the then
Intermediate Appellate Court (now Court of Appeals) and in the resolution
dated June 19, 1985 of this Court.
However, petitioners are ordered to REFUND to private respondent the
amount of P300,000.00 which they received through Alice A. Dizon on June
20, 1975.1âwphi1.nêt
SO ORDERED.
Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.
G.R. No. L-11827             July 31, 1961
FERNANDO A. GAITE, plaintiff-appellee,  goodwill, and all the records and documents relative to the mines. In the
vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES &
SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO DANTE,
PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-
appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the
claims involved aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by
himself or in a representative capacity, of 11 iron lode mineral claims, known
as the Dawahan Group, situated in the municipality of Jose Panganiban,
province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier
constituted and appointed plaintiff-appellee Fernando A. Gaite as his true
and lawful attorney-in-fact to enter into a contract with any individual or
juridical person for the exploration and development of the mining claims
aforementioned on a royalty basis of not less than P0.50 per ton of ore that
might be extracted therefrom. On March 19, 1954, Gaite in turn executed a
general assignment (Record on Appeal, pp. 17-19) conveying the
development and exploitation of said mining claims into the Larap Iron Mines,
a single proprietorship owned solely by and belonging to him, on the same
royalty basis provided for in Exhibit "3". Thereafter, Gaite embarked upon the
development and exploitation of the mining claims in question, opening and
paving roads within and outside their boundaries, making other
improvements and installing facilities therein for use in the development of
the mines, and in time extracted therefrom what he claim and estimated to be
approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the
authority granted by him to Gaite to exploit and develop the mining claims in
question, and Gaite assented thereto subject to certain conditions. As a
result, a document entitled "Revocation of Power of Attorney and Contract"
was executed on December 8, 1954 (Exhibit "A"),wherein Gaite transferred
to Fonacier, for the consideration of P20,000.00, plus 10% of the royalties
that Fonacier would receive from the mining claims, all his rights and
interests on all the roads, improvements, and facilities in or outside said
claims, the right to use the business name "Larap Iron Mines" and its
same document, Gaite transferred to Fonacier all his rights and interests over
the "24,000 tons of iron ore, more or less" that the former had already
extracted from the mineral claims, in consideration of the sum of P75,000.00,
P10,000.00 of which was paid upon the signing of the agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)
will be paid from and out of the first letter of credit covering the first
shipment of iron ores and of the first amount derived from the local
sale of iron ore made by the Larap Mines & Smelting Co. Inc., its
assigns, administrators, or successors in interests.
To secure the payment of the said balance of P65,000.00, Fonacier promised
to execute in favor of Gaite a surety bond, and pursuant to the promise,
Fonacier delivered to Gaite a surety bond dated December 8, 1954 with
himself (Fonacier) as principal and the Larap Mines and Smelting Co. and its
stockholders George Krakower, Segundina Vivas, Pacifico Escandor,
Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified,
however, that when this bond was presented to him by Fonacier together
with the "Revocation of Power of Attorney and Contract", Exhibit "A", on
December 8, 1954, he refused to sign said Exhibit "A" unless another bond
under written by a bonding company was put up by defendants to secure the
payment of the P65,000.00 balance of their price of the iron ore in the
stockpiles in the mining claims. Hence, a second bond, also dated December
8, 1954 (Exhibit "B"),was executed by the same parties to the first bond
Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional
surety, but it provided that the liability of the surety company would attach
only when there had been an actual sale of iron ore by the Larap Mines &
Smelting Co. for an amount of not less then P65,000.00, and that,
furthermore, the liability of said surety company would automatically expire
on December 8, 1955. Both bonds were attached to the "Revocation of
Power of Attorney and Contract", Exhibit "A", and made integral parts
thereof.
On the same day that Fonacier revoked the power of attorney he gave to
Gaite and the two executed and signed the "Revocation of Power of Attorney
and Contract", Exhibit "A", Fonacier entered into a "Contract of Mining
Operation", ceding, transferring, and conveying unto the Larap Mines and
Smelting Co., Inc. the right to develop, exploit, and explore the mining claims
in question, together with the improvements therein and the use of the name
"Larap Iron Mines" and its good will, in consideration of certain royalties.
Fonacier likewise transferred, in the same document, the complete title to the
approximately 24,000 tons of iron ore which he acquired from Gaite, to the
Larap & Smelting Co., in consideration for the signing by the company and its
stockholders of the surety bonds delivered by Fonacier to Gaite (Record on
Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to
the Far Eastern Surety and Insurance Company, no sale of the
approximately 24,000 tons of iron ore had been made by the Larap Mines &
Smelting Co., Inc., nor had the P65,000.00 balance of the price of said ore
been paid to Gaite by Fonacier and his sureties payment of said amount, on
the theory that they had lost right to make use of the period given them when
their bond, Exhibit "B" automatically expired (Exhibits "C" to "C-24"). And
when Fonacier and his sureties failed to pay as demanded by Gaite, the
latter filed the present complaint against them in the Court of First Instance of
Manila (Civil Case No. 29310) for the payment of the P65,000.00 balance of
the price of the ore, consequential damages, and attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that
the obligation sued upon by Gaite was subject to a condition that the amount
of P65,000.00 would be payable out of the first letter of credit covering the
first shipment of iron ore and/or the first amount derived from the local sale of
the iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time of
the filing of the complaint, no sale of the iron ore had been made, hence the
condition had not yet been fulfilled; and that consequently, the obligation was
not yet due and demandable. Defendant Fonacier also contended that only
7,573 tons of the estimated 24,000 tons of iron ore sold to him by Gaite was
actually delivered, and counterclaimed for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation of
evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite
P65,000.00 become due and demandable when the defendants failed to
renew the surety bond underwritten by the Far Eastern Surety and Insurance
Co., Inc. (Exhibit "B"), which expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to
defendant Fonacier were actually in existence in the mining claims when
these parties executed the "Revocation of Power of Attorney and Contract",
Exhibit "A."
On the first question, the lower court held that the obligation of the
defendants to pay plaintiff the P65,000.00 balance of the price of the
approximately 24,000 tons of iron ore was one with a term: i.e., that it would
be paid upon the sale of sufficient iron ore by defendants, such sale to be
effected within one year or before December 8, 1955; that the giving of
security was a condition precedent to Gait's giving of credit to defendants;
and that as the latter failed to put up a good and sufficient security in lieu of
the Far Eastern Surety bond (Exhibit "B") which expired on December 8,
1955, the obligation became due and demandable under Article 1198 of the
New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have
approximately 24,000 tons of iron ore at the mining claims in question at the
time of the execution of the contract Exhibit "A."
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering
defendants to pay him, jointly and severally, P65,000.00 with interest at 6%
per annum from December 9, 1955 until payment, plus costs. From this
judgment, defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were
presented for resolution: a motion to declare the appellants Larap Mines &
Smelting Co., Inc. and George Krakower in contempt, filed by appellant
Fonacier, and two motions to dismiss the appeal as having become
academic and a motion for new trial and/or to take judicial notice of certain
documents, filed by appellee Gaite. The motion for contempt is unmeritorious
because the main allegation therein that the appellants Larap Mines &
Smelting Co., Inc. and Krakower had sold the iron ore here in question, which
allegedly is "property in litigation", has not been substantiated; and even if
true, does not make these appellants guilty of contempt, because what is
under litigation in this appeal is appellee Gaite's right to the payment of the
balance of the price of the ore, and not the iron ore itself. As for the several
motions presented by appellee Gaite, it is unnecessary to resolve these
motions in view of the results that we have reached in this case, which we
shall hereafter discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant
Fonacier to pay appellee Gaite the P65,000.00 (balance of the price of the
iron ore in question)is one with a period or term and not one with a
suspensive condition, and that the term expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons
in the stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the
contract Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines hereby transfers to
Isabelo F. Fonacier all his rights and interests over the 24,000 tons of
iron ore, more or less, above-referred to together with all his rights
and interests to operate the mine in consideration of the sum of
SEVENTY-FIVE THOUSAND PESOS (P75,000.00) which the latter
binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the
signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will
be paid from and out of the first letter of credit covering the first
shipment of iron ore made by the Larap Mines & Smelting Co., Inc.,
its assigns, administrators, or successors in interest.
We find the court below to be legally correct in holding that the shipment or
local sale of the iron ore is not a condition precedent (or suspensive) to the
payment of the balance of P65,000.00, but was only a suspensive period or
term. What characterizes a conditional obligation is the fact that its efficacy or
obligatory force (as distinguished from its demandability) is subordinated to
the happening of a future and uncertain event; so that if the suspensive
condition does not take place, the parties would stand as if the conditional
obligation had never existed. That the parties to the contract Exhibit "A" did
not intend any such state of things to prevail is supported by several
circumstances:
1) The words of the contract express no contingency in the buyer's obligation
to pay: "The balance of Sixty-Five Thousand Pesos (P65,000.00) will be
paid out of the first letter of credit covering the first shipment of iron ores . . ."
etc. There is no uncertainty that the payment will have to be made sooner or
later; what is undetermined is merely the exact date at which it will be made.
By the very terms of the contract, therefore, the existence of the obligation to
pay is recognized; only its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does
each one of the parties assume a correlative obligation (the seller to deliver
and transfer ownership of the thing sold and the buyer to pay the price),but
each party anticipates performance by the other from the very start. While in
a sale the obligation of one party can be lawfully subordinated to an uncertain
event, so that the other understands that he assumes the risk of receiving
nothing for what he gives (as in the case of a sale of hopes or
expectations, emptio spei), it is not in the usual course of business to do so;
hence, the contingent character of the obligation must clearly appear.
Nothing is found in the record to evidence that Gaite desired or assumed to
run the risk of losing his right over the ore without getting paid for it, or that
Fonacier understood that Gaite assumed any such risk. This is proved by the
fact that Gaite insisted on a bond a to guarantee payment of the P65,000.00,
an not only upon a bond by Fonacier, the Larap Mines & Smelting Co., and
the company's stockholders, but also on one by a surety company; and the
fact that appellants did put up such bonds indicates that they admitted the
definite existence of their obligation to pay the balance of P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the sale
or shipment of the ore as a condition precedent, would be tantamount to
leaving the payment at the discretion of the debtor, for the sale or shipment
could not be made unless the appellants took steps to sell the ore. Appellants
would thus be able to postpone payment indefinitely. The desireability of
avoiding such a construction of the contract Exhibit "A" needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract
the parties indented a suspensive condition or a suspensive period (dies ad
quem) for the payment of the P65,000.00, the rules of interpretation would
incline the scales in favor of "the greater reciprocity of interests", since sale is
essentially onerous. The Civil Code of the Philippines, Article 1378,
paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests.
and there can be no question that greater reciprocity obtains if the buyer'
obligation is deemed to be actually existing, with only its maturity (due date)
postponed or deferred, that if such obligation were viewed as non-existent or
not binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier
was a sale on credit, and not an aleatory contract where the transferor, Gaite,
would assume the risk of not being paid at all; and that the previous sale or
shipment of the ore was not a suspensive condition for the payment of the
balance of the agreed price, but was intended merely to fix the future date of
the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier
and his sureties, still have the right to insist that Gaite should wait for the sale
or shipment of the ore before receiving payment; or, in other words, whether
or not they are entitled to take full advantage of the period granted them for
making the payment.
We agree with the court below that the appellant have forfeited the right court
below that the appellants have forfeited the right to compel Gaite to wait for
the sale of the ore before receiving payment of the balance of P65,000.00,
because of their failure to renew the bond of the Far Eastern Surety
Company or else replace it with an equivalent guarantee. The expiration of
the bonding company's undertaking on December 8, 1955 substantially
reduced the security of the vendor's rights as creditor for the unpaid
P65,000.00, a security that Gaite considered essential and upon which he
had insisted when he executed the deed of sale of the ore to Fonacier
(Exhibit "A"). The case squarely comes under paragraphs 2 and 3 of Article
1198 of the Civil Code of the Philippines:
"ART. 1198. The debtor shall lose every right to make use of the
period:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or
securities which he has promised.
(3) When by his own acts he has impaired said guaranties or
securities after their establishment, and when through fortuitous
event they disappear, unless he immediately gives new ones equally
satisfactory.
Appellants' failure to renew or extend the surety company's bond upon its
expiration plainly impaired the securities given to the creditor (appellee
Gaite), unless immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's acceptance of the
surety company's bond with full knowledge that on its face it would
automatically expire within one year was a waiver of its renewal after the
expiration date. No such waiver could have been intended, for Gaite stood to
lose and had nothing to gain barely; and if there was any, it could be
rationally explained only if the appellants had agreed to sell the ore and pay
Gaite before the surety company's bond expired on December 8, 1955. But
in the latter case the defendants-appellants' obligation to pay became
absolute after one year from the transfer of the ore to Fonacier by virtue of
the deed Exhibit "A.".
All the alternatives, therefore, lead to the same result: that Gaite acted within
his rights in demanding payment and instituting this action one year from and
after the contract (Exhibit "A") was executed, either because the appellant
debtors had impaired the securities originally given and thereby forfeited any
further time within which to pay; or because the term of payment was
originally of no more than one year, and the balance of P65,000.00 became
due and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were
really 24,000 tons of iron ore in the stockpiles sold by appellee Gaite to
appellant Fonacier, and whether, if there had been a short-delivery as
claimed by appellants, they are entitled to the payment of damages, we must,
at the outset, stress two things: first, that this is a case of a sale of a specific
mass of fungible goods for a single price or a lump sum, the quantity of
"24,000 tons of iron ore, more or less," stated in the contract Exhibit "A,"
being a mere estimate by the parties of the total tonnage weight of the mass;
and second, that the evidence shows that neither of the parties had actually
measured of weighed the mass, so that they both tried to arrive at the total
quantity by making an estimate of the volume thereof in cubic meters and
then multiplying it by the estimated weight per ton of each cubic meter.
The sale between the parties is a sale of a specific mass or iron ore because
no provision was made in their contract for the measuring or weighing of the
ore sold in order to complete or perfect the sale, nor was the price of
P75,000,00 agreed upon by the parties based upon any such measurement.
(see Art. 1480, second par., New Civil Code). The subject matter of the sale
is, therefore, a determinate object, the mass, and not the actual number of
units or tons contained therein, so that all that was required of the seller
Gaite was to deliver in good faith to his buyer all of the ore found in the mass,
notwithstanding that the quantity delivered is less than the amount estimated
by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co.,
Inc. 171 So. 872, applying art. 2459 of the Louisiana Civil Code). There is no
charge in this case that Gaite did not deliver to appellants all the ore found in
the stockpiles in the mining claims in questions; Gaite had, therefore,
complied with his promise to deliver, and appellants in turn are bound to pay
the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook
to buy, not a definite mass, but approximately 24,000 tons of ore, so that any
substantial difference in this quantity delivered would entitle the buyers to
recover damages for the short-delivery, was there really a short-delivery in
this case?
We think not. As already stated, neither of the parties had actually measured
or weighed the whole mass of ore cubic meter by cubic meter, or ton by ton.
Both parties predicate their respective claims only upon an estimated number
of cubic meters of ore multiplied by the average tonnage factor per cubic
meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in
the stockpiles of ore that he sold to Fonacier, while appellants contend that
by actual measurement, their witness Cirpriano Manlañgit found the total
volume of ore in the stockpiles to be only 6.609 cubic meters. As to the
average weight in tons per cubic meter, the parties are again in
disagreement, with appellants claiming the correct tonnage factor to be 2.18
tons to a cubic meter, while appellee Gaite claims that the correct tonnage
factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate
of the tonnage factor of iron ore in this case to be that made by Leopoldo F.
Abad, chief of the Mines and Metallurgical Division of the Bureau of Mines, a
government pensionado to the States and a mining engineering graduate of
the Universities of Nevada and California, with almost 22 years of experience
in the Bureau of Mines. This witness placed the tonnage factor of every cubic
meter of iron ore at between 3 metric tons as minimum to 5 metric tons as
maximum. This estimate, in turn, closely corresponds to the average tonnage
factor of 3.3 adopted in his corrected report (Exhibits "FF" and FF-1") by
engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the
mining claims involved at the request of appellant Krakower, precisely to
make an official estimate of the amount of iron ore in Gaite's stockpiles after
the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the
stockpiles made by appellant's witness Cipriano Manlañgit is correct, if we
multiply it by the average tonnage factor of 3.3 tons to a cubic meter, the
product is 21,809.7 tons, which is not very far from the estimate of 24,000
tons made by appellee Gaite, considering that actual weighing of each unit of
the mass was practically impossible, so that a reasonable percentage of error
should be allowed anyone making an estimate of the exact quantity in tons
found in the mass. It must not be forgotten that the contract Exhibit "A"
expressly stated the amount to be 24,000 tons, more or less. (ch. Pine River
Logging & Improvement Co. vs U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle
appellants to the payment of damages, nor could Gaite have been guilty of
any fraud in making any misrepresentation to appellants as to the total
quantity of ore in the stockpiles of the mining claims in question, as charged
by appellants, since Gaite's estimate appears to be substantially correct.
WHEREFORE, finding no error in the decision appealed from, we hereby
affirm the same, with costs against appellants.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De
Leon and Natividad, JJ., concur.
G.R. No. 118114 December 7, 1995
TEODORO ACAP, petitioner, 
vs.
COURT OF APPEALS and EDY DE LOS REYES, respondents.
PADILLA, J.:
This is a petition for review on certiorari of the decision1 of the Court of
Appeals, 2nd Division, in CA-G.R. No. 36177, which affirmed the decision2 of
the Regional Trial Court of Himamaylan, Negros Occidental holding that
private respondent Edy de los Reyes had acquired ownership of Lot No.
1130 of the Cadastral Survey of Hinigaran, Negros Occidental based on a
document entitled "Declaration of Heirship and Waiver of Rights", and
ordering the dispossession of petitioner as leasehold tenant of the land for
failure to pay rentals.
The facts of the case are as follows:
The title to Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros
Occidental was evidenced by OCT No. R-12179. The lot has an area of
13,720 sq. meters. The title was issued and is registered in the name of
spouses Santiago Vasquez and Lorenza Oruma. After both spouses died,
their only son Felixberto inherited the lot. In 1975, Felixberto executed a duly
notarized document entitled "Declaration of Heirship and Deed of Absolute
Sale" in favor of Cosme Pido.
The evidence before the court a quo established that since 1960, petitioner
Teodoro Acap had been the tenant of a portion of the said land, covering an
area of nine thousand five hundred (9,500) meters. When ownership was
transferred in 1975 by Felixberto to Cosme Pido, Acap continued to be the
registered tenant thereof and religiously paid his leasehold rentals to Pido
and thereafter, upon Pido's death, to his widow Laurenciana.
The controversy began when Pido died intestate and on 27 November 1981,
his surviving heirs executed a notarized document denominated as
"Declaration of Heirship and Waiver of Rights of Lot No. 1130 Hinigaran
Cadastre," wherein they declared; to quote its pertinent portions, that:
. . . Cosme Pido died in the Municipality of Hinigaran, Negros
Occidental, he died intestate and without any known debts
and obligations which the said parcel of land is (sic) held
liable.
That Cosme Pido was survived by his/her legitimate heirs,
namely: LAURENCIANA PIDO, wife, ELY, ERVIN, ELMER,
and ELECHOR all surnamed PIDO; children;
That invoking the provision of Section 1, Rule 74 of the
Rules of Court, the above-mentioned heirs do hereby
declare unto [sic] ourselves the only heirs of the late Cosme
Pido and that we hereby adjudicate unto ourselves the
above-mentioned parcel of land in equal shares.
Now, therefore, We LAURENCIANA3 , ELY, ELMER, ERVIN
and ELECHOR all surnamed PIDO, do hereby waive,
quitclaim all our rights, interests and participation over the
said parcel of land in favor of EDY DE LOS REYES, of legal
age, (f)ilipino, married to VIRGINIA DE LOS REYES, and
resident of Hinigaran, Negros Occidental, Philippines. . . .
4 the following year after Laurenciana's departure for abroad. He denied
 (Emphasis supplied)
The document was signed by all of Pido's heirs. Private respondent Edy de
los Reyes did not sign said document.
It will be noted that at the time of Cosme Pido's death, title to the property
continued to be registered in the name of the Vasquez spouses. Upon
obtaining the Declaration of Heirship with Waiver of Rights in his favor,
private respondent Edy de los Reyes filed the same with the Registry of
Deeds as part of a notice of an adverse claimagainst the original certificate of
title.
Thereafter, private respondent sought for petitioner (Acap) to personally
inform him that he (Edy) had become the new owner of the land and that the
lease rentals thereon should be paid to him. Private respondent further
alleged that he and petitioner entered into an oral lease agreement wherein
petitioner agreed to pay ten (10) cavans of palay  per annum as lease rental.
In 1982, petitioner allegedly complied with said obligation. In 1983, however,
petitioner refused to pay any further lease rentals on the land, prompting
private respondent to seek the assistance of the then Ministry of Agrarian
Reform (MAR) in Hinigaran, Negros Occidental. The MAR invited petitioner
to a conference scheduled on 13 October 1983. Petitioner did not attend the
conference but sent his wife instead to the conference. During the meeting,
an officer of the Ministry informed Acap's wife about private respondent's
ownership of the said land but she stated that she and her husband
(Teodoro) did not recognize private respondent's claim of ownership over the
land.
On 28 April 1988, after the lapse of four (4) years, private respondent filed a
complaint for recovery of possession and damages against petitioner,
alleging in the main that as his leasehold tenant, petitioner refused and failed
to pay the agreed annual rental of ten (10) cavans of palay despite repeated
demands.
During the trial before the court a quo, petitioner reiterated his refusal to
recognize private respondent's ownership over the subject land. He averred
that he continues to recognize Cosme Pido as the owner of the said land,
and having been a registered tenant therein since 1960, he never reneged
on his rental obligations. When Pido died, he continued to pay rentals to
Pido's widow. When the latter left for abroad, she instructed him to stay in the
landholding and to pay the accumulated rentals upon her demand or return
from abroad.
Petitioner further claimed before the trial court that he had no knowledge
about any transfer or sale of the lot to private respondent in 1981 and even
having entered into a verbal lease tenancy contract with private respondent
and that assuming that the said lot was indeed sold to private respondent
without his knowledge, R.A. 3844, as amended, grants him the right to
redeem the same at a reasonable price. Petitioner also bewailed private
respondent's ejectment action as a violation of his right to security of tenure
under P.D. 27.
On 20 August 1991, the lower court rendered a decision in favor of private
respondent, the dispositive part of which reads:
 WHEREFORE, premises considered, the Court renders
judgment in favor of the plaintiff, Edy de los Reyes, and
against the defendant, Teodoro Acap, ordering the following,
to wit:
1. Declaring forfeiture of defendant's preferred right to
issuance of a Certificate of Land Transfer under Presidential
Decree No. 27 and his farmholdings;
2. Ordering the defendant Teodoro Acap to deliver
possession of said farm to plaintiff, and;
3. Ordering the defendant to pay P5,000.00 as attorney's
fees, the sum of P1,000.00 as expenses of litigation and the
amount of P10,000.00 as actual damages.5
In arriving at the above-mentioned judgment, the trial court stated that the
evidence had established that the subject land was "sold" by the heirs of
Cosme Pido to private respondent. This is clear from the following
disquisitions contained in the trial court's six (6) page decision:
There is no doubt that defendant is a registered tenant of
Cosme Pido. However, when the latter died their tenancy
relations changed since ownership of said land was passed
on to his heirs who, by executing a Deed of Sale, which
defendant admitted in his affidavit, likewise passed on their
ownership of Lot 1130 to herein plaintiff (private respondent).
As owner hereof, plaintiff has the right to demand payment of
rental and the tenant is obligated to pay rentals due from the
time demand is made. . . .6
xxx xxx xxx
Certainly, the sale of the Pido family of Lot 1130 to herein
plaintiff does not of itself extinguish the relationship. There
was only a change of the personality of the lessor in the
person of herein plaintiff Edy de los Reyes who being the
purchaser or transferee, assumes the rights and obligations
of the former landowner to the tenant Teodoro Acap, herein
defendant.7
Aggrieved, petitioner appealed to the Court of Appeals, imputing error to the
lower court when it ruled that private respondent acquired ownership of Lot
No. 1130 and that he, as tenant, should pay rentals to private respondent
and that failing to pay the same from 1983 to 1987, his right to a certificate of
land transfer under P.D. 27 was deemed forfeited.
The Court of Appeals brushed aside petitioner's argument that the
Declaration of Heirship and Waiver of Rights (Exhibit "D"), the document
relied upon by private respondent to prove his ownership to the lot, was
excluded by the lower court in its order dated 27 August 1990. The order
indeed noted that the document was not identified by Cosme Pido's heirs and
was not registered with the Registry of Deeds of Negros Occidental.
According to respondent court, however, since the Declaration of Heirship
and Waiver of Rights appears to have been duly notarized, no further proof of
its due execution was necessary. Like the trial court, respondent court was
also convinced that the said document stands as  prima facie proof of
appellee's (private respondent's) ownership of the land in dispute.
With respect to its non-registration, respondent court noted that petitioner
had actual knowledge of the subject saleof the land in dispute to private
respondent because as early as 1983, he (petitioner) already knew of private
respondent's claim over the said land but which he thereafter denied, and
that in 1982, he (petitioner) actually paid rent to private respondent.
Otherwise stated, respondent court considered this fact of rental payment in
1982 as estoppel on petitioner's part to thereafter refute private respondent's
claim of ownership over the said land. Under these circumstances,
respondent court ruled that indeed there was deliberate refusal by petitioner
to pay rent for a continued period of five years that merited forfeiture of his
otherwise preferred right to the issuance of a certificate of land transfer.
In the present petition, petitioner impugns the decision of the Court of
Appeals as not in accord with the law and evidence when it rules that private
respondent acquired ownership of Lot No. 1130 through the aforementioned
Declaration of Heirship and Waiver of Rights.
Hence, the issues to be resolved presently are the following:
1. WHETHER OR NOT THE SUBJECT DECLARATION OF
HEIRSHIP AND WAIVER OF RIGHTS IS A RECOGNIZED
MODE OF ACQUIRING OWNERSHIP BY PRIVATE
RESPONDENT OVER THE LOT IN QUESTION.
2. WHETHER OR NOT THE SAID DOCUMENT CAN BE
CONSIDERED A DEED OF SALE IN FAVOR OF PRIVATE
RESPONDENT OF THE LOT IN QUESTION.
Petitioner argues that the Regional Trial Court, in its order dated 7 August
1990, explicitly excluded the document marked as Exhibit "D" (Declaration of
Heirship, etc.) as private respondent's evidence because it was not
registered with the Registry of Deeds and was not identified by anyone of the
heirs of Cosme Pido. The Court of Appeals, however, held the same to be
admissible, it being a notarized document, hence, a prima facie  proof of
private respondents' ownership of the lot to which it refers.
Petitioner points out that the Declaration of Heirship and Waiver of Rights is
not one of the recognized modes of acquiring ownership under Article 712 of
the Civil Code. Neither can the same be considered a deed of sale so as to
transfer ownership of the land to private respondent because no
consideration is stated in the contract (assuming it is a contract or deed of
sale).
Private respondent defends the decision of respondent Court of Appeals as
in accord with the evidence and the law. He posits that while it may indeed
be true that the trial court excluded his Exhibit "D" which is the Declaration of
Heirship and Waiver of Rights as part of his evidence, the trial court declared
him nonetheless owner of the subject lot based on other evidence adduced
during the trial, namely, the notice of adverse claim (Exhibit "E") duly
registered by him with the Registry of Deeds, which contains the questioned
Declaration of Heirship and Waiver of Rights as an integral part thereof.
We find the petition impressed with merit.
In the first place, an asserted right or claim to ownership or a real right over a
thing arising from a juridical act, however justified, is not per se sufficient to
give rise to ownership over the res. That right or title must be completed by
fulfilling certain conditions imposed by law. Hence, ownership and real rights
are acquired only pursuant to a legal mode or process. While title is the
juridical justification, mode is the actual process of acquisition or transfer of
ownership over a thing in question.8
Under Article 712 of the Civil Code, the modes of acquiring ownership are
generally classified into two (2) classes, namely, the original mode (i.e.,
through occupation, acquisitive prescription, law or intellectual creation) and
the derivative mode  (i.e., through succession mortis causa or tradition as a
result of certain contracts, such as sale, barter, donation, assignment or
mutuum).
In the case at bench, the trial court was obviously confused as to the nature
and effect of the Declaration of Heirship and Waiver of Rights, equating the
same with a contract (deed) of sale. They are not the same.
In a Contract of Sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other
party to pay a price certain in money or its equivalent.9
Upon the other hand, a declaration of heirship and waiver of rights operates
as a public instrument when filed with the Registry of Deeds whereby the
intestate heirs adjudicate and divide the estate left by the decedent among
themselves as they see fit. It is in effect an extrajudicial settlement between
the heirs under Rule 74 of the Rules of Court.10
Hence, there is a marked difference between a sale of hereditary rights and
a waiver of hereditary rights. The first presumes the existence of a contract
or deed of sale between the parties.11 The second is, technically speaking, a
mode of extinction of ownership where there is an abdication or intentional
relinquishment of a known right with knowledge of its existence and intention
to relinquish it, in favor of other persons who are co-heirs in the
succession.12 Private respondent, being then a stranger to the succession of
Cosme Pido, cannot conclusively claim ownership over the subject lot on the
sole basis of the waiver document which neither recites the elements of
either a sale,13 or a donation,14 or any other derivative mode of acquiring
ownership.
Quite surprisingly, both the trial court and public respondent Court of Appeals
concluded that a "sale" transpired between Cosme Pido's heirs and private
respondent and that petitioner acquired actual knowledge of said sale when
he was summoned by the Ministry of Agrarian Reform to discuss private
respondent's claim over the lot in question. This conclusion has no basis both
in fact and in law.
On record, Exhibit "D", which is the "Declaration of Heirship and Waiver of
Rights" was excluded by the trial court in its order dated 27 August
1990 because the document was neither registered with the Registry of
Deeds nor identified by the heirs of Cosme Pido. There is no showing that
private respondent had the same document attached to or made part of the
record. What the trial court admitted was Annex "E", a notice of adverse
claim filed with the Registry of Deeds which contained the Declaration of
Heirship with Waiver of rights and was annotated at the back of the Original
Certificate of Title to the land in question.
A notice of adverse claim, by its nature, does not however prove private
respondent's ownership over the tenanted lot. "A notice of adverse claim is
nothing but a notice of a claim adverse to the registered owner, the validity of
which is yet to be established in court at some future date, and is no better
than a notice of lis pendens which is a notice of a case already pending in
court."15
It is to be noted that while the existence of said adverse claim was duly
proven, there is no evidence whatsoever that a deed of sale was executed
between Cosme Pido's heirs and private respondent transferring the rights of
Pido's heirs to the land in favor of private respondent. Private respondent's
right or interest therefore in the tenanted lot remains an adverse claim which
cannot by itself be sufficient to cancel the OCT to the land and title the same
in private respondent's name.
Consequently, while the transaction between Pido's heirs and private
respondent may be binding on both parties, the right of petitioner as
a registered tenant to the land cannot be perfunctorily forfeited on a
mere allegation of private respondent's ownership without the
corresponding proof thereof.
Petitioner had been a registered tenant in the subject land since 1960 and
religiously paid lease rentals thereon. In his mind, he continued to be the
registered tenant of Cosme Pido and his family (after Pido's death), even if in
1982, private respondent allegedly informed petitioner that he had become
the new owner of the land.
Under the circumstances, petitioner may have, in good faith, assumed such
statement of private respondent to be true and may have in fact delivered 10
cavans of palay as annual rental for 1982 to private respondent. But in 1983,
it is clear that petitioner had misgivings over private respondent's claim of
ownership over the said land because in the October 1983 MAR conference,
his wife Laurenciana categorically denied all of private respondent's
allegations. In fact, petitioner even secured a certificate from the MAR dated
9 May 1988 to the effect that he continued to be the registered tenant of
Cosme Pido and not of private respondent. The reason is that private
respondent never registered the Declaration of Heirship with Waiver of
Rights with the Registry of Deeds or with the MAR. Instead, he (private
respondent) sought to do indirectly what could not be done directly, i.e., file
a notice of adverse claim on the said lot to establish ownership thereover.
It stands to reason, therefore, to hold that there was no unjustified or
deliberate refusal  by petitioner to pay the lease rentals or amortizations to
the landowner/agricultural lessor which, in this case, private respondent
failed to establish in his favor by clear and convincing evidence.16
Consequently, the sanction of forfeiture of his preferred right to be issued a
Certificate of Land Transfer under P.D. 27 and to the possession of his
farmholdings should not be applied against petitioners, since private
respondent has not established a cause of action for recovery of possession
against petitioner.
WHEREFORE, premises considered, the Court hereby GRANTS the petition
and the decision of the Court of Appeals dated 1 May 1994 which affirmed
the decision of the RTC of Himamaylan, Negros Occidental dated 20 August
1991 is hereby SET ASIDE. The private respondent's complaint for recovery
of possession and damages against petitioner Acap is hereby DISMISSED
for failure to properly state a cause of action, without prejudice to private
respondent taking the proper legal steps to establish the legal mode by which
he claims to have acquired ownership of the land in question.
SO ORDERED.
Davide, Jr., Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.
G.R. No. L-21677 June 29, 1972
ANTONIO G. DE SANTOS, petitioner-appellant, vs. CITY OF MANILA and
ARELLANO UNIVERSITY, INC., Respondents-Appellees.
De Santos & Delfino for petitioner-appellant.
E. Voltaire Garcia for respondents-appellees.
MAKASIAR, J.:
Petitioner-appellant seeks the review by certiorari of a decision dated July
11, 1963 of the Court of Appeals, in CA-G.R. No. 29354-R, which affirmed
that of the Court of First Instance of Manila in Civil Case No.
39730.chanroblesvirtualawlibrarychanrobles virtual law library
The facts as found by the appellate court are as follows:
On October 1, 1958, a contract of exchange was made and entered into by
and between the City of Manila and the Arellano University, Inc., in
accordance with, and by virtue of, Resolution No. 442 of the Municipal Board
of Manila, adopted on August 15, 1958, and approved by the City Mayor on
August 22, 1958, whereby five parcels of land of the City of Manila (Lots 1, 2,
3, 4 and 5, Psu-167195) containing an aggregate area of 2458.3 square
meters, more or less, were exchanged for three parcels of land of the
Arellano University, Inc. (Lots 4-A, 9-A, and 10-A, Psd-53347) containing an
aggregate area of 2171.4 square meters, more or less, which were needed
for the construction of the Azcarraga (now Claro M. Recto)
Extension.chanroblesvirtualawlibrarychanrobles virtual law library
On account of said contract of exchange, (the present) action was brought on
March 25, 1959, by Antonio G. de Santos, plaintiff, against the City of Manila
and the Arellano University, Inc., defendants, (1) to declare the said contract
of exchange null and void insofar as Lot No. 1 of Psu-167195 is concerned;
(2) in the event that the validity of said contract is sustained, to declare Lot 1
subject to plaintiff's right of redemption within 30 days from the written notice
of such exchange; and (3) in the event that said Lot 1 be declared not to
belong to the City of Manila, to enjoin the said City, "in the event that it finally
acquires the aforesaid property, to respect plaintiff's right of
preemption."chanrobles virtual law library
Defendant University filed answer with counterclaim for P5,000.00 "for
services of counsel to protect its interests and defend this suit against the
unfounded complaint of plaintiff."chanrobles virtual law library
Defendant City also filed answer, alleging that it is the owner of the lot in
question, Lot No. 1 of Psu-167195, and that plaintiff has no preferential or
better right than defendant Arellano University to acquire said lot by
preemption, legal redemption, sale, exchange or other form of
acquisition.chanroblesvirtualawlibrarychanrobles virtual law library
The lot under controversy - Lot No. 1 Psu-167195 - contains 221.50 square
meters. It was a part of the partially dried bed of the Estero de San Miguel or
Sampaloc, and is situated south of Lot No. 4, Block 2646, Manila Cadastre,
which contains an area of 1460 square meters and which was acquired by
plaintiff on January 31, 1958 from Enrique C. Lopez (Exh. F). It also adjoins
the properties belonging to the Arellano University,
Inc.chanroblesvirtualawlibrarychanrobles virtual law library
By letter of May 14, 1957, the City of Manila advised the Arellano University,
Inc., that about 2,400 square meters of its site on Legarda Street were
needed by the City for the construction of Azcarraga extension. This letter
was answered on May 21, 1957, with the proposition that in exchange for
said 2,400 square meters, the City cede to the University
the esterosadjoining the Arellano site, on the basis of 2 square meters
of estero (filled) for every square meter of the Arellano land, or in case of
unfilled esteros, on the basis of 3 to 1 (Exh. 2). The negotiations culminated
in the passage of the aforementioned Resolution No. 442 followed by the
execution of the contract of exchange sought to be
annulled.chanroblesvirtualawlibrarychanrobles virtual law library
Upon the other hand, Enrique C. Lopez, predecessor-in- interest of plaintiff
Antonio G. de Santos, having been advised that his property, Lot 4, Block
2646, would be affected by the widening of Legarda St., Sampaloc, and that
the necessary area (56 sq. m.) would be expropriated, wrote the City
Engineer under date of August 8, 1957, proposing that the required area "be
exchanged with the City property back of my same Lot 4, Bloc 2646 ... The
City property at the back of my lot, I am referring to, is at present a part of the
Estero de San Miguel" (Exh. E). This letter of Mr. Lopez was coursed through
official channels, and the City Appraisal Committee stated that the exchange
of the lot of Mr. Enrique C. Lopez affected by the widening of Legarda St.,
with the lot (around 190 sq. m.) formerly a part of the abandoned estero bed
"may be made on the basis of meter for meter, the excess area in favor of
the City to be paid for at the rate of P45.00 per square meter" (Exh. E-3). The
papers were then forwarded to the City Mayor by the City Engineer per
indorsement of April 15, 1958 (Exh. E-6). Meanwhile, on January 31, 1958,
the aforesaid Lot 4, Block 2646, Manila Cadastre, was exchanged by Mr.
Enrique C. Lopez for 6 parcels of land situated in Jose Abad Santos
belonging to the herein plaintiff, a copy of the deed of exchange being Exhibit
F. By letter dated February 25, 1959 (Exh. J-1), the City Mayor informed
plaintiff, in effect, that his Office approved an indorsement of the Officer in
charge of the Department of Engineering and Public Works of the City (Exb.
J-2) wherein it was recommended that "action on the claim of Dr. Antonio
Santos as successor-in-interest of Mr. Lopez be held in abeyance," for the
reasons stated therein, to wit:
"Azcarraga Extension was planned long before the war. It is considered as a
major thoroughfare to bypass Legarda. After the war, with the creation of the
National Planning Commission, Azcarraga Extension was again incorporated
in their plans so that the opening of Azcarraga Extension from Mendiola to
the Rotonda is being given great importance. Azcarraga Extension passes
thru the property of the Arellano University and the San Beda College on
which we have an expropriation proceedings against the College. The
expropriation case is now in court and the chances are great that we will win
the case.chanroblesvirtualawlibrarychanrobles virtual law library
"There were plans before to widen Legarda to relieve traffic on this street, but
in view of the tremendous cost of expropriation involved and in view of the
proposed opening of the Azcarraga Extension, negotiations for the widening
of Legarda Street even on a piece-meal basis were suspended
temporarily.chanroblesvirtualawlibrarychanrobles virtual law library
"In view of the above, any exchange now involving the widening of Legarda
Street with any property that the City has, should be held in abeyance. On
the other hand, efforts should be concentrated on the acquisition of
properties along Azcarraga Extension because of its prime importance for
lessening traffic on Legarda without widening it."
After hearing, the trial court on March 7, 1961 rendered judgment for the
defendants holding that plaintiff has no right to exercise any right of pre-
emption or redemption over the lot in question; denying the alternative cause
of action for annulment of the deed of exchange on the ground that such an
issue cannot be raised by plaintiff, who is not a proper party in interest;
dismissing the complaint; and directing plaintiff to pay defendant Arellano
University the sum of P5,000.00 as attorney's fees, with costs against the
plaintiff (Annex "E", pp. 67-76, ROA).chanroblesvirtualawlibrarychanrobles
virtual law library
On appeal by plaintiff, the Court of Appeals affirmed on July 11, 1963 the
above decision of the trial court (Annex "A", pp. 24-32,
rec.).chanroblesvirtualawlibrarychanrobles virtual law library
Hence, this present petition for review
by certiorari.chanroblesvirtualawlibrarychanrobles virtual law library
The assignment of errors posed by petitioner-appellant in his brief boils down
to two issues: (1) whether or not petitioner-appellant has any right of pre-
emption or redemption over Lot No. 1 of Psu-167195, or, as an alternative
cause of action, to seek the annulment of the deed of exchange executed by
and between respondents-appellees; and (2) whether or not the award of
P5,000.00 as attorney's fees in favor of Arellano University is
justified.chanroblesvirtualawlibrarychanrobles virtual law library
Petitioner-appellant has no right to pre-empt or redeem the lot in question as
adjoining owner under the pertinent provision of law on the matter, Article
1622 of the new Civil Code, thus:
ART. 1622. Whenever a piece of urban land is so small and so situated that
a major portion thereof cannot be used for any practical purpose within a
reasonable time, having been bought merely for speculation, is about to be
re-sold, the owner of any adjoining land has a right of pre-emption at a
reasonable price.
If the re-sale has been perfected, the owner of the adjoining land shall have a
right of redemption, also at a reasonable price.
When two or more owners of adjoining lands wish to exercise the right of pre-
emption or redemption, the owner whose intended use of the land in question
appears best justified shall be preferred.
The aforequoted provision grants to the adjacent owner the right of pre-
emption under paragraph one, if the urban land is about to be re-sold, and
the right of redemption under paragraph two, if the re-sale has been
perfected. The exercise of either right, however, is premised on the existence
of two conditions, namely: (1) the piece of urban land is so small that it
cannot be used for any practical purpose within a reasonable time; and (2)
such small urban land was bought merely for speculation.1chanrobles virtual
law library
In the instant case, petitioner-appellant had neither alleged in his complaint
nor proved, either that Lot No. 1 of Psu-167195 "is so small and so situated
that a major portion thereof cannot be used for any practical purpose;" or that
it has "been bought merely for speculation;" or that it "is about to be re-sold."
On the contrary, the Court of Appeals found that Lot No. 1 is a portion of a
partially dried bed of Estero de San Miguel or Sampaloc, which finding of fact
is conclusive. The City of Manila did not acquire it by purchase. The Court of
Appeals likewise determined that said Lot No. 1 is also adjacent to the lots of
the defendant-appellee University, which determination is beyond review by
US. It is not disputed that the aforesaid lot in controversy consists of 221.50
square meters, more or less, an area bigger than the average size of lots in
Manila as found by the trial court. Besides, it is alleged by respondent-
appellee Arellano University that, as an educational institution whose present
site is not enough for its needs, it can devote said parcel of land to serve
public interest (Annex "B", p. 58, ROA), which intended use entitles the
University to preference under the last paragraph of Article 1622 aforecited.
These facts alone would be sufficient to negate any claim that the area of the
controverted urban lot is so small and so situated that a major portion thereof
may not be used for any practical purpose within a reasonable time.
Respondent-appellee City of Manila, as owner, exchanged the disputed lot
and other lots belonging to it, with those of respondent-appellee Arellano
University, because the former needed portions of properties of the latter for
the Azcarraga (now Claro M. Recto) Street extension; and such an exchange
would not necessitate disbursements of funds by respondent-appellee City of
Manila. And it has not been alleged nor shown, either, that respondent-
appellee City of Manila had the intention then to sell the said
property. 2Consequently, petitioner-appellant is not entitled to the benefits of
Article 1622 abovecited.chanroblesvirtualawlibrarychanrobles virtual law
library
Petitioner-appellant contends that he is entitled to preempt or to redeem Lot
No. 1 of Psu-167195 under precedents and established policy of respondent-
appellee City of Manila. The latter, however, maintains that said alleged
precedents and policy are at most only recommendatory to its Municipal
Board. At any rate, all that petitioner-appellant presented on this point were
communications between City of Manila officials and his predecessor-in-
interest, Enrique Lopez, regarding the latter's proposal to exchange his lot
which may be affected by the widening of Legarda Street with City property,
a part of the Estero de San Miguel which includes the controverted lot. If any
right, therefore were at all acquired by petitioner-appellant from Enrique
Lopez, it was but the right to pursue the latter's claim to its legitimate end.
However, as stated in the portion of appellate court's decision aforequoted,
action on this matter was held in abeyance, as the extension of Azcarraga
Street was given priority over the widening of Legarda Street. It, thus,
becomes obvious that the basis of petitioner-appellant's claim failed to
materialize. On the other hand, negotiations between respondent-appellees,
which ante-dated the claims of Enrique Lopez and petitioner-appellant, were
carried out successfully and culminated in the passage of Resolution No. 442
of the Municipal Board of respondent-appellee City of Manila followed by the
execution of the contract of exchange between respondents- appellees. As a
necessary consequence, the nebulous right of pre-emption or redemption of
petitioner-appellant completely
vanished.chanroblesvirtualawlibrarychanrobles virtual law library
A person, who is not a party obliged principally or subsidiarily under a
contract, may exercise an action for nullity of the contract if he is prejudiced
in his rights with respect to one of the contracting parties, and can show
detriment which would positively result to him from the contract in which he
had no intervention. 3chanrobles virtual law library
The said contract of exchange is not detrimental to the right or interest of
petitioner-appellant; because he has neither the right of pre-emption nor
redemption over the disputed lot. Petitioner-appellant, therefore, cannot
legally seek the annulment of said deed of
exchange.chanroblesvirtualawlibrarychanrobles virtual law library
Petitioner-appellant contests the award of attorney's fees on the ground that
it is not sound policy to place a penalty on the right to litigate. However, the
award of attorney's fees is a matter essentially discretionary with the trial
court. Paragraph 4 of Article 2208, Civil Code, authorizes such an award,
since the instant action is clearly unfounded, and no abuse of discretion
having been shown, the award should not be disturbed. 4chanrobles virtual
law library
WHEREFORE, the appealed decision is hereby affirmed, and the appeal is
hereby dismissed, with costs against petitioner-appellant. So ordered.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Castro, Fernando,
Teehankee, Barredo and Antonio, JJ., concur.
G.R. No. 149420             October 8, 2003
SONNY LO, petitioner, 
vs.
KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.
DECISION
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation
engaged in the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing
business under the name and style San’s Enterprises, is a building
contractor. On February 22, 1990, petitioner ordered scaffolding equipments
from respondent worth P540,425.80.1 He paid a downpayment in the amount
of P150,000.00. The balance was made payable in ten monthly installments.
Respondent delivered the scaffoldings to petitioner.2 Petitioner was able to
pay the first two monthly installments.1a\^/phi1.netHis business, however,
encountered financial difficulties and he was unable to settle his obligation to
respondent despite oral and written demands made against him.3
On October 11, 1990, petitioner and respondent executed a Deed of
Assignment,4 whereby petitioner assigned to respondent his receivables in
the amount of P335,462.14 from Jomero Realty Corporation. Pertinent
portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a
residential house located at Greenmeadow Avenue, Quezon City owned by
Jomero Realty Corporation;
WHEREAS, in the construction of the aforementioned residential house, the
ASSIGNOR purchased on account scaffolding equipments from the
ASSIGNEE payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the
ASSIGNEE for the purchase of the aforementioned scaffoldings now in the
amount of Three Hundred Thirty Five Thousand Four Hundred Sixty Two and
14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred
Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos
(P335,462.14), Philippine Currency which represents part of the
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. xxx5 (Italics supplied)
However, when respondent tried to collect the said credit from Jomero Realty
Corporation, the latter refused to honor the Deed of Assignment because it
claimed that petitioner was also indebted to it.6 On November 26, 1990,
respondent sent a letter7 to petitioner demanding payment of his obligation,
but petitioner refused to pay claiming that his obligation had been
extinguished when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for recovery
of a sum of money against the petitioner before the Regional Trial Court of
Makati, Branch 147, which was docketed as Civil Case No. 91-074.8
During the trial, petitioner argued that his obligation was extinguished with
the execution of the Deed of Assignment of credit. Respondent, for its part,
presented the testimony of its employee, Almeda 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 decision9 dismissing the
complaint on the ground that the assignment of credit extinguished the
obligation. The decretal portion thereof provides:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment
in favor of the defendant and against the plaintiff, dismissing the complaint
and ordering the plaintiff to pay the defendant attorney’s fees in the amount
of P25,000.00.1a\^/phi1.net
Respondent appealed the decision to the Court of Appeals. On April 19,
2001, the appellate court rendered a decision,10 the dispositive portion of
which reads:
WHEREFORE, finding merit in this appeal, the court REVERSES the
appealed Decision and enters judgment ordering defendant-appellee Sonny
Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM
PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred
Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum
from January 10, 1991 (filing of the Complaint) until fully paid and attorney’s
fees equivalent to 10% of the amount due and costs of the suit.
SO ORDERED.11
In finding that the Deed of Assignment did not extinguish the obligation of the
petitioner to the respondent, the Court of Appeals held that (1) petitioner
failed to comply with his warranty under the Deed; (2) the object of the Deed
did not exist at the time of the transaction, rendering it void pursuant to Article
1409 of the Civil Code; and (3) petitioner violated the terms of the Deed of
Assignment when he failed to execute and do all acts and deeds as shall be
necessary to effectually enable the respondent to recover the collectibles.12
Petitioner filed a motion for reconsideration of the said decision, which was
denied by the Court of Appeals.13
In this petition for review, petitioner assigns the following errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR
IN DECLARING THE DEED OF ASSIGNMENT (EXH. "4") AS NULL AND
VOID FOR LACK OF OBJECT ON THE BASIS OF A MERE HEARSAY
CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
DEED OF ASSIGNMENT (EXH. "4") DID NOT EXTINGUISH PETITIONER’S
OBLIGATION ON THE WRONG NOTION THAT PETITIONER FAILED TO
COMPLY WITH HIS WARRANTY THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE TRIAL COURT AND IN ORDERING PAYMENT OF
INTERESTS AND ATTORNEY’S FEES.14
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a
credit, known as the assignor, by a legal cause, such as sale, dacion en
pago, exchange or donation, and without the consent of the debtor, transfers
his credit and accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the assignor could
enforce it against the debtor.15
Corollary thereto, in dacion en pago, as a special mode of payment, the
debtor offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt.16 In order that there be a valid dation  in
payment, the following are the requisites: (1) There must be the performance
of the prestation in lieu of payment (animo solvendi) which may consist in the
delivery of a corporeal thing or a real right or a credit against the third person;
(2) There must be some difference between the prestation due and that
which is given in substitution (aliud pro alio); (3) There must be an agreement
between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that
due.17 The undertaking really partakes in one sense of the nature of sale, that
is, the creditor is really buying the thing or property of the debtor, payment for
which is to be charged against the 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,19 produced the effects of a dation in payment which
may extinguish the obligation.20 However, as in any other contract of sale, the
vendor or assignor is bound by certain warranties. More specifically, the first
paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of
the credit at the time of the sale, unless it should have been sold as doubtful;
but not for the solvency of the debtor, unless it has been so expressly
stipulated or unless the insolvency was prior to the sale and of common
knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to
warrant the existence and legality of the credit at the time of the sale or
assignment. When Jomero claimed that it was no longer indebted to
petitioner since the latter also had an unpaid obligation to it, it essentially
meant that its obligation to petitioner has been extinguished by
compensation.21 In other words, respondent alleged the non-existence of the
credit and asserted its claim to 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.22 (underscoring ours)
Indeed, by warranting the existence of the credit, petitioner should be
deemed to have ensured the performance thereof in case the same is later
found to be inexistent. He should be held liable to pay to respondent the
amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering petitioner to
pay respondent the sum of P335,462.14 with legal interest thereon. However,
we find that the award by the Court of Appeals of attorney’s fees is without
factual basis. No evidence or testimony was presented to substantiate this
claim. Attorney’s fees, being in the nature of actual damages, must be duly
substantiated by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals
dated April 19, 2001 in CA-G.R. CV No. 47713, ordering petitioner to pay
respondent the sum of P335,462.14 with legal interest of 6% per annum from
January 10, 1991 until fully paid is AFFIRMED with MODIFICATION. Upon
finality of this Decision, the rate of legal interest shall be 12% per annum,
inasmuch as the obligation shall thereafter become equivalent to a
forbearance of credit.23 The award of attorney’s fees is DELETED for lack of
evidentiary basis.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Vitug, Carpio and Azcuna, JJ., concur.

G.R. No. L-8506             August 31, 1956
CELESTINO CO & COMPANY, petitioner, 
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor
General Guillermo E. Torres and Solicitor Federico V. Sian for respondent.
BENGZON, J.:
Appeal from a decision of the Court of Tax Appeals.
Celestino Co & Company is a duly registered general copartnership doing
business under the trade name of "Oriental Sash Factory". From 1946 to
1951 it paid percentage taxes of 7 per cent on the gross receipts of its sash,
door and window factory, in accordance with section one hundred eighty-six
of the National Revenue Code imposing taxes on sale of manufactured
articles. However in 1952 it began to claim liability only to the contractor's 3
per cent tax (instead of 7 per cent) under section 191 of the same Code; and
having failed to convince the Bureau of Internal Revenue, it brought the
matter to the Court of Tax Appeals, where it also failed. Said the Court:
To support his contention that his client is an ordinary contractor . . .
counsel presented . . . duplicate copies of letters, sketches of doors
and windows and price quotations supposedly sent by the manager
of the Oriental Sash Factory to four customers who allegedly made
special orders to doors and window from the said factory. The
conclusion that counsel would like us to deduce from these few
exhibits is that the Oriental Sash Factory does not manufacture
ready-made doors, sash and windows for the public but only upon
special order of its select customers. . . . I cannot believe that
petitioner company would take, as in fact it has taken, all the trouble
and expense of registering a special trade name for its sash
business and then orders company stationery carrying the bold
print "Oriental Sash Factory (Celestino Co & Company, Prop.) 926
Raon St. Quiapo, Manila, Tel. No. 33076, Manufacturers of all kinds
of doors, windows, sashes, furniture, etc. used season-dried and
kiln-dried lumber, of the best quality workmanships" solely for the
purpose of supplying the needs for doors, windows and sash of its
special and limited customers. One ill note that petitioner has chosen
for its tradename and has offered itself to the public as a "Factory",
which means it is out to do business, in its chosen lines on a big
scale. As a general rule, sash factories receive orders for doors and
windows of special design only in particular cases but the bulk of
their sales is derived from a ready-made doors and windows of
standard sizes for the average home. Moreover, as shown from the
investigation of petitioner's book of accounts, during the period from
January 1, 1952 to September 30, 1952, it sold sash, doors and
windows worth P188,754.69. I find it difficult to believe that this
amount which runs to six figures was derived by petitioner entirely
from its few customers who made special orders for these items.
Even if we were to believe petitioner's claim that it does not
manufacture ready-made sash, doors and windows for the public and
that it makes these articles only special order of its customers, that
does not make it a contractor within the purview of section 191 of the
national Internal Revenue Code. there are no less than fifty
occupations enumerated in the aforesaid section of the national
Internal Revenue Code subject to percentage tax and after reading
carefully each and every one of them, we cannot find under which
the business of manufacturing sash, doors and windows upon
special order of customers fall under the category of "road, building,
navigation, artesian well, water workers and other construction work
contractors" are those who alter or repair buildings, structures,
streets, highways, sewers, street railways railroads logging roads,
electric lines or power lines, and includes any other work for the
construction, altering or repairing for which machinery driven by
mechanical power is used. (Payton vs. City of Anadardo 64 P. 2d
878, 880, 179 Okl. 68).
Having thus eliminated the feasibility off taxing petitioner as a
contractor under 191 of the national Internal Revenue Code, this
leaves us to decide the remaining issue whether or not petitioner
could be taxed with lesser strain and more accuracy as seller of its
manufactured articles under section 186 of the same code, as the
respondent Collector of Internal Revenue has in fact been doing the
Oriental Sash Factory was established in 1946.
The percentage tax imposed in section 191 of our Tax Code is
generally a tax on the sales of services, in contradiction with the tax
imposed in section 186 of the same Code which is a tax on the
original sales of articles by the manufacturer, producer or importer.
(Formilleza's Commentaries and Jurisprudence on the National
Internal Revenue Code, Vol. II, p. 744). The fact that the articles sold
are manufactured by the seller does not exchange the contract from
the purview of section 186 of the National Internal Revenue Code as
a sale of articles.
There was a strong dissent; but upon careful consideration of the whole
matter are inclines to accept the above statement of the facts and the law.
The important thing to remember is that Celestino Co & Company habitually
makes sash, windows and doors, as it has represented in its stationery and
advertisements to the public. That it "manufactures" the same is practically
admitted by appellant itself. The fact that windows and doors are made by it
only when customers place their orders, does not alter the nature of the
establishment, for it is obvious that it only accepted such orders as called for
the employment of such material-moulding, frames, panels-as it ordinarily
manufactured or was in a position habitually to manufacture.
Perhaps the following paragraph represents in brief the appellant's position in
this Court:
Since the petitioner, by clear proof of facts not disputed by the
respondent, manufacturers sash, windows and doors only for special
customers and upon their special orders and in accordance with the
desired specifications of the persons ordering the same and not for
the general market: since the doors ordered by Don Toribio Teodoro
& Sons, Inc., for instance, are not in existence and which never
would have existed but for the order of the party desiring it; and since
petitioner's contractual relation with his customers is that of a
contract for a piece of work or since petitioner is engaged in the sale
of services, it follows that the petitioner should be taxed under
section 191 of the Tax Code and NOT under section 185 of the same
Code." (Appellant's brief, p. 11-12).
But the argument rests on a false foundation. Any builder or homeowner, with
sufficient money, may order windows or doors of the kind manufactured by
this appellant. Therefore it is not true that it serves special customers only or
confines its services to them alone. And anyone who sees, and likes, the
doors ordered by Don Toribio Teodoro & Sons Inc. may purchase from
appellant doors of the same kind, provided he pays the price. Surely, the
appellant will not refuse, for it can easily duplicate or even mass-produce the
same doors-it is mechanically equipped to do so.
That the doors and windows must meet desired specifications is neither here
nor there. If these specifications do not happen to be of the kind habitually
manufactured by appellant — special forms for sash, mouldings of panels —
it would not accept the order — and no sale is made. If they do, the
transaction would be no different from a purchasers of manufactured goods
held is stock for sale; they are bought because they meet the specifications
desired by the purchaser.
Nobody will say that when a sawmill cuts lumber in accordance with the
peculiar specifications of a customer-sizes not previously held in stock for
sale to the public-it thereby becomes an employee or servant of the
customer,1 not the seller of lumber. The same consideration applies to this
sash manufacturer.
The Oriental Sash Factory does nothing more than sell the goods that it
mass-produces or habitually makes; sash, panels, mouldings, frames, cutting
them to such sizes and combining them in such forms as its customers may
desire.
On the other hand, petitioner's idea of being a contractor doing construction
jobs is untenable. Nobody would regard the doing of two window panels a
construction work in common parlance.2
Appellant invokes Article 1467 of the New Civil Code to bolster its contention
that in filing orders for windows and doors according to specifications, it did
not sell, but merely contracted for particular pieces of work or "merely sold its
services".
Said article reads as follows:
A contract for the delivery at a certain price of an article which the
vendor in the ordinary course of his business manufactures or
procures for the general market, whether the same is on hand at the
time or not, is a contract of sale, but if the goods are to be
manufactured specially for the customer and upon his special order,
and not for the general market, it is contract for a piece of work.
It is at once apparent that the Oriental Sash Factory did not merely sell its
services to Don Toribio Teodoro & Co. (To take one instance) because it also
sold the materials. The truth of the matter is that it sold materials ordinarily
manufactured by it — sash, panels, mouldings — to Teodoro & Co., although
in such form or combination as suited the fancy of the purchaser. Such new
form does not divest the Oriental Sash Factory of its character as
manufacturer. Neither does it take the transaction out of the category of sales
under Article 1467 above quoted, because although the Factory does not, in
the ordinary course of its business, manufacture and keep on stock doors of
the kind sold to Teodoro, it could stock and/or probably had in stock the sash,
mouldings and panels it used therefor (some of them at least).
In our opinion when this Factory accepts a job that requires the use of
extraordinary or additional equipment, or involves services not generally
performed by it-it thereby contracts for a piece of work — filing special orders
within the meaning of Article 1467. The orders herein exhibited were not
shown to be special. They were merely orders for work — nothing is shown
to call them special requiring extraordinary service of the factory.
The thought occurs to us that if, as alleged-all the work of appellant is only to
fill orders previously made, such orders should not be called special work,
but regular work. Would a factory do business performing only special,
extraordinary or peculiar merchandise?
Anyway, supposing for the moment that the transactions were not sales, they
were neither lease of services nor contract jobs by a contractor. But as the
doors and windows had been admittedly "manufactured" by the Oriental
Sash Factory, such transactions could be, and should be taxed as "transfers"
thereof under section 186 of the National Revenue Code.
The appealed decision is consequently affirmed. So ordered.
Paras, C. J., Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J.
B. L., and Felix, JJ., concur.
G.R. No. L-27044 June 30, 1975
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,  was conducted by a joint team of Central Bank, (CB), National Bureau
vs.
ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT
OF TAX APPEALS, respondents.
G.R. No. L-27452 June 30, 1975
ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner,  of Internal Revenue (hereinafter referred to as Commissioner) that
vs.  Engineering be assessed for P480,912.01 as deficiency advance sales
THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF
TAX APPEALS, respondent.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor
General Felicisimo R. Rosete, Solicitor Lolita O. Gal-lang, and Special
Attorney Gemaliel H. Montalino for Commissioner of Internal Revenue,
etc.
Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma.
Guerrero and J.R. Balonkita for Engineering and Supply Company.
ESGUERRA, J.:
Petition for review on certiorari  of the decision of the Court of Tax
Appeals in CTA Case No. 681, dated November 29, 1966, assessing a
compensating tax of P174,441.62 on the Engineering Equipment and
Supply Company.
As found by the Court of Tax Appeals, and as established by the
evidence on record, the facts of this case are as follows:
Engineering Equipment and Supply Co. (Engineering for short), a
domestic corporation, is an engineering and machinery firm. As
operator of an integrated engineering shop, it is engaged, among
others, in the design and installation of central type air conditioning
system, pumping plants and steel fabrications. (Vol. I pp. 12-16 T.S.N.
August 23, 1960)
On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now
Commissioner, of Internal Revenue denouncing Engineering for tax
evasion by misdeclaring its imported articles and failing to pay the
correct percentage taxes due thereon in connivance with its foreign
suppliers (Exh. "2" p. 1 BIR record Vol. I). Engineering was likewise
denounced to the Central Bank (CB) for alleged fraud in obtaining its
dollar allocations. Acting on these denunciations, a raid and search
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,
tax on the theory that it misdeclared its importation of air conditioning
units and parts and accessories thereof which are subject to tax under
Section 185(m)1 of the Tax Code, instead of Section 186 of the same Code.
(Exh. "3" pp. 59-63 BIR rec. Vol. I) This assessment was revised on January
23, 1959, in line with the observation of the Chief, BIR Law Division, and was
raised to P916,362.56 representing deficiency advance sales tax and
manufacturers sales tax, inclusive of the 25% and 50% surcharges. (pp. 72-
80 BIR rec. Vol. I)
On March 3, 1959. the Commissioner assessed against, and demanded
upon, Engineering payment of the increased amount and suggested that
P10,000 be paid as compromise in extrajudicial settlement of Engineering's
penal liability for violation of the Tax Code. The firm, however, contested the
tax assessment and requested that it be furnished with the details and
particulars of the Commissioner's assessment. (Exh. "B" and "15", pp. 86-88
BIR rec. Vol. I) The Commissioner replied that the assessment was in
accordance with law and the facts of the case.
On July 30, 1959, Engineering appealed the case to the Court of Tax
Appeals and during the pendency of the case the investigating revenue
examiners reduced Engineering's deficiency tax liabilities from P916,362.65
to P740,587.86 (Exhs. "R" and "9" pp. 162-170, BIR rec.), based on findings
after conferences had with Engineering's Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals rendered its decision, the
dispositive portion of which reads as follows:
For ALL THE FOREGOING CONSIDERATIONS, the
decision of respondent appealed from is hereby modified,
and petitioner, as a contractor, is declared exempt from the
deficiency manufacturers sales tax covering the period from
June 1, 1948. to September 2, 1956. However, petitioner is
ordered to pay respondent, or his duly authorized collection
agent, the sum of P174,141.62 as compensating tax and
25% surcharge for the period from 1953 to September 1956.
With costs against petitioner.
The Commissioner, not satisfied with the decision of the Court of Tax
Appeals, appealed to this Court on January 18, 1967, (G.R. No. L-27044).
On the other hand, Engineering, on January 4, 1967, filed with the Court of
Tax Appeals a motion for reconsideration of the decision abovementioned.
This was denied on April 6, 1967, prompting Engineering to file also with this
Court its appeal, docketed as G.R. No. L-27452.
Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the
same parties and issues, We have decided to consolidate and jointly decide
them.
Engineering in its Petition claims that the Court of Tax Appeals committed the
following errors:
1. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company liable to the 30%
compensating tax on its importations of equipment and
ordinary articles used in the central type air conditioning
systems it designed, fabricated, constructed and installed in
the buildings and premises of its customers, rather than to
the compensating tax of only 7%;
2. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company guilty of fraud in
effecting the said importations on the basis of incomplete
quotations from the contents of alleged photostat copies of
documents seized illegally from Engineering Equipment and
Supply Company which should not have been admitted in
evidence;
3. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company liable to the 25%
surcharge prescribed in Section 190 of the Tax Code;
4. That the Court of Tax Appeals erred in holding the
assessment as not having prescribed;
5. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company liable for the
sum of P174,141.62 as 30% compensating tax and 25%
surcharge instead of completely absolving it from the
deficiency assessment of the Commissioner.
The Commissioner on the other hand claims that the Court of Tax Appeals
erred:
1. In holding that the respondent company is a contractor
and not a manufacturer.
2. In holding respondent company liable to the 3%
contractor's tax imposed by Section 191 of the Tax Code
instead of the 30% sales tax prescribed in Section 185(m) in
relation to Section 194(x) both of the same Code;
3. In holding that the respondent company is subject only to
the 30% compensating tax under Section 190 of the Tax
Code and not to the 30% advance sales tax imposed by
section 183 (b), in relation to section 185(m) both of the
same Code, on its importations of parts and accessories of
air conditioning units;
 4. In not holding the company liable to the 50% fraud
surcharge under Section 183 of the Tax Code on its
importations of parts and accessories of air conditioning
units, notwithstanding the finding of said court that the
respondent company fraudulently misdeclared the said
importations;
5. In holding the respondent company liable for P174,141.62
as compensating tax and 25% surcharge instead of
P740,587.86 as deficiency advance sales tax, deficiency
manufacturers tax and 25% and 50% surcharge for the
period from June 1, 1948 to December 31, 1956.
The main issue revolves on the question of whether or not Engineering is a
manufacturer of air conditioning units under Section 185(m), supra, in relation
to Sections 183(b) and 194 of the Code, or a contractor under Section 191 of
the same Code.
The Commissioner contends that Engineering is a manufacturer and seller of
air conditioning units and parts or accessories thereof and, therefore, it is
subject to the 30% advance sales tax prescribed by Section 185(m) of the
Tax Code, in relation to Section 194 of the same, which defines a
manufacturer as follows:
Section 194. — Words and Phrases Defined. — In applying
the provisions of this Title, words and phrases shall be taken
in the sense and extension indicated below:
xxx xxx xxx
(x) "Manufacturer" includes every person who by physical or
chemical process alters the exterior texture or form or inner
substance of any raw material or manufactured or partially
manufactured products in such manner as to prepare it for a
special use or uses to which it could not have been put in its
original condition, or who by any such process alters the
quality of any such material or manufactured or partially
manufactured product so as to reduce it to marketable
shape, or prepare it for any of the uses of industry, or who by
any such process combines any such raw material or
manufactured or partially manufactured products with other
materials or products of the same or of different kinds and in
such manner that the finished product of such process of
manufacture can be put to special use or uses to which such
raw material or manufactured or partially manufactured
products in their original condition could not have been put,
and who in addition alters such raw material or manufactured
or partially manufactured products, or combines the same to
produce such finished products for the purpose of their sale
or distribution to others and not for his own use or
consumption.
In answer to the above contention, Engineering claims that it is not a
manufacturer and setter of air-conditioning units and spare parts or
accessories thereof subject to tax under Section 185(m) of the Tax Code, but
a contractor engaged in the design, supply and installation of the central type
of air-conditioning system subject to the 3% tax imposed by Section 191 of
the same Code, which is essentially a tax on the sale of services or labor of a
contractor rather than on the sale of articles subject to the tax referred to in
Sections 184, 185 and 186 of the Code.
The arguments of both the Engineering and the Commissioner call for a
clarification of the term contractor as well as the distinction between a
contract of sale and contract for furnishing services, labor and materials. The
distinction between a contract of sale and one for work, labor and materials is
tested by the inquiry whether the thing transferred is one not in existence and
which never would have existed but for the order of the party desiring to
acquire it, or a thing which would have existed and has been the subject of
sale to some other persons even if the order had not been given.2 If the
article ordered by the purchaser is exactly such as the plaintiff makes and
keeps on hand for sale to anyone, and no change or modification of it is
made at defendant's request, it is a contract of sale, even though it may be
entirely made after, and in consequence of, the defendants order for it.3
Our New Civil Code, likewise distinguishes a contract of sale from a contract
for a piece of work thus:
Art. 1467. A contract for the delivery at a certain price of an
article which the vendor in the ordinary course of his
business manufactures or procures for the general market,
whether the same is on hand at the time or not, is a contract
of sale, but if the goods are to be manufactured specially for
the customer and upon his special order and not for the
general market, it is a contract for a piece of work.
The word "contractor" has come to be used with special reference to a
person who, in the pursuit of the independent business, undertakes to do a
specific job or piece of work for other persons, using his own means and
methods without submitting himself to control as to the petty details. (Arañas,
Annotations and Jurisprudence on the National Internal Revenue Code, p.
318, par. 191 (2), 1970 Ed.) The true test of a contractor as was held in the
cases of Luzon Stevedoring Co., vs. Trinidad, 43, Phil. 803, 807-808, and La
Carlota Sugar Central vs. Trinidad,  43, Phil. 816, 819, would seem to be that
he renders service in the course of an independent occupation, representing
the will of his employer only as to the result of his work, and not as to the
means by which it is accomplished.
With the foregoing criteria as guideposts, We shall now examine whether
Engineering really did "manufacture" and sell, as alleged by the
Commissioner to hold it liable to the advance sales tax under Section
185(m), or it only had its services "contracted" for installation purposes to
hold it liable under section 198 of the Tax Code.
I money to buy the same." This is untenable in the light of the fact that air
After going over the three volumes of stenographic notes and the voluminous
record of the BIR and the CTA as well as the exhibits submitted by both
parties, We find that Engineering did not manufacture air conditioning units
for sale to the general public, but imported some items (as refrigeration
compressors in complete set, heat exchangers or coils, t.s.n. p. 39) which
were used in executing contracts entered into by it. Engineering, therefore,
undertook negotiations and execution of individual contracts for the design,
supply and installation of air conditioning units of the central type (t.s.n. pp.
20-36; Exhs. "F", "G", "H", "I", "J", "K", "L", and "M"), taking into consideration
in the process such factors as the area of the space to be air conditioned; the
number of persons occupying or would be occupying the premises; the
purpose for which the various air conditioning areas are to be used; and the
sources of heat gain or cooling load on the plant such as sun load, lighting,
and other electrical appliances which are or may be in the plan. (t.s.n. p. 34,
Vol. I) Engineering also testified during the hearing in the Court of Tax
Appeals that relative to the installation of air conditioning system,
Engineering designed and engineered complete each particular plant and
that no two plants were identical but each had to be engineered separately.
As found by the lower court, which finding4 We adopt —
Engineering, in a nutshell, fabricates, assembles, supplies
and installs in the buildings of its various customers the
central type air conditioning system; prepares the plans and
specifications therefor which are distinct and different from
each other; the air conditioning units and spare parts or
accessories thereof used by petitioner are not the window
type of air conditioner which are manufactured, assembled
and produced locally for sale to the general market; and the
imported air conditioning units and spare parts or
accessories thereof are supplied and installed by petitioner
upon previous orders of its customers conformably with their
needs and requirements.
The facts and circumstances aforequoted support the theory that Engineering
is a contractor rather than a manufacturer.
The Commissioner in his Brief argues that "it is more in accord with reason
and sound business management to say that anyone who desires to have air
conditioning units installed in his premises and who is in a position and
willing to pay the price can order the same from the company (Engineering)
and, therefore, Engineering could have mass produced and stockpiled air
conditioning units for sale to the public or to any customer with enough
conditioning units, packaged, or what we know as self-contained air
conditioning units, are distinct from the central system which Engineering
dealt in. To Our mind, the distinction as explained by Engineering, in its Brief,
quoting from books, is not an idle play of words as claimed by the
Commissioner, but a significant fact which We just cannot ignore. As quoted
by Engineering Equipment & Supply Co., from an Engineering handbook by
L.C. Morrow, and which We reproduce hereunder for easy reference:
... there is a great variety of equipment in use to do this job
(of air conditioning). Some devices are designed to serve a
specific type of space; others to perform a specific function;
and still others as components to be assembled into a tailor-
made system to fit a particular building. Generally, however,
they may be grouped into two classifications — unitary and
central system.
The unitary equipment classification includes those designs
such as room air conditioner, where all of the functional
components are included in one or two packages, and
installation involves only making service connection such as
electricity, water and drains. Central-station systems, often
referred to as applied or built-up systems, require the
installation of components at different points in a building
and their interconnection.
The room air conditioner is a unitary equipment designed
specifically for a room or similar small space. It is unique
among air conditioning equipment in two respects: It is in the
electrical appliance classification, and it is made by a great
number of manufacturers.
There is also the testimony of one Carlos Navarro, a licensed Mechanical
and Electrical Engineer, who was once the Chairman of the Board of
Examiners for Mechanical Engineers and who was allegedly responsible for
the preparation of the refrigeration and air conditioning code of the City of
Manila, who said that "the central type air conditioning system is an
engineering job that requires planning and meticulous layout due to the fact
that usually architects assign definite space and usually the spaces they
assign are very small and of various sizes. Continuing further, he testified:
I don't think I have seen central type of air conditioning
machinery room that are exactly alike because all our
buildings here are designed by architects dissimilar to
existing buildings, and usually they don't coordinate and get
the advice of air conditioning and refrigerating engineers so
much so that when we come to design, we have to make use
of the available space that they are assigning to us so that
we have to design the different component parts of the air
conditioning system in such a way that will be
accommodated in the space assigned and afterwards the
system may be considered as a definite portion of the
building. ...
Definitely there is quite a big difference in the operation
because the window type air conditioner is a sort of
compromise. In fact it cannot control humidity to the desired
level; rather the manufacturers, by hit and miss, were able to
satisfy themselves that the desired comfort within a room
could be made by a definite setting of the machine as it
comes from the factory; whereas the central type system
definitely requires an intelligent operator. (t.s.n. pp. 301-305,
Vol. II)
The point, therefore, is this — Engineering definitely did not and was not
engaged in the manufacture of air conditioning units but had its services
contracted for the installation of a central system. The cases cited by the
Commissioner (Advertising Associates, Inc. vs. Collector of Customs, 97,
Phil. 636; Celestino Co & Co. vs. Collector of Internal Revenue, 99 Phil. 841
and Manila Trading & Supply Co. vs. City of Manila, 56 O.G. 3629), are not in
point. Neither are they applicable because the facts in all the cases cited are
entirely different. Take for instance the case of Celestino Co where this Court
held the taxpayer to be a manufacturer rather than a contractor of sash,
doors and windows manufactured in its factory. Indeed, from the very start,
Celestino Co intended itself to be a manufacturer of doors, windows, sashes
etc. as it did register a special trade name for its sash business and ordered
company stationery carrying the bold print "ORIENTAL SASH FACTORY
(CELESTINO CO AND COMPANY, PROP.) 926 Raon St., Quiapo, Manila,
Tel. No. etc., Manufacturers of All Kinds of Doors, Windows ... ." Likewise,
Celestino Co never put up a contractor's bond as required by Article 1729 of
the Civil Code. Also, as a general rule, sash factories receive orders for
doors and windows of special design only in particular cases, but the bulk of
their sales is derived from ready-made doors and windows of standard sizes
for the average home, which "sales" were reflected in their books of accounts
totalling P118,754.69 for the period from January, 1952 to September 30,
1952, or for a period of only nine (9) months. This Court found said sum
difficult to have been derived from its few customers who placed special
orders for these items. Applying the abovestated facts to the case at bar, We
found them to he inapposite. Engineering advertised itself as Engineering
Equipment and Supply Company, Machinery Mechanical Supplies,
Engineers, Contractors, 174 Marques de Comillas, Manila (Exh. "B" and "15"
BIR rec. p. 186), and not as manufacturers. It likewise paid the contractors
tax on all the contracts for the design and construction of central system as
testified to by Mr. Rey Parker, its President and General Manager. (t.s.n. p.
102, 103) Similarly, Engineering did not have ready-made air conditioning
units for sale but as per testimony of Mr. Parker upon inquiry of Judge
Luciano of the CTA —
Q — Aside from the general components,
which go into air conditioning plant or
system of the central type which your
company undertakes, and the procedure
followed by you in obtaining and executing
contracts which you have already testified to
in previous hearing, would you say that the
covering contracts for these different
projects listed ... referred to in the list, Exh.
"F" are identical in every respect? I mean
every plan or system covered by these
different contracts are identical in standard
in every respect, so that you can reproduce
them?
A — No, sir. They are not all standard. On
the contrary, none of them are the same.
Each one must be designed and constructed
to meet the particular requirements, whether
the application is to be operated. (t.s.n. pp.
101-102)
What We consider as on all fours with the case at bar is the case of S.M.
Lawrence Co. vs. McFarland,  Commissioner of Internal Revenue of the State
of Tennessee and McCanless, 355 SW 2d, 100, 101, "where the cause
presents the question of whether one engaged in the business of contracting
for the establishment of air conditioning system in buildings, which work
requires, in addition to the furnishing of a cooling unit, the connection of such
unit with electrical and plumbing facilities and the installation of ducts within
and through walls, ceilings and floors to convey cool air to various parts of
the building, is liable for sale or use tax as a contractor rather than a retailer
of tangible personal property. Appellee took the Position that appellant was
not engaged in the business of selling air conditioning equipment as such but
in the furnishing to its customers of completed air conditioning systems
pursuant to contract, was a contractor engaged in the construction or
improvement of real property, and as such was liable for sales or use tax as
the consumer of materials and equipment used in the consummation of
contracts, irrespective of the tax status of its contractors. To transmit the
warm or cool air over the buildings, the appellant installed system of ducts
running from the basic units through walls, ceilings and floors to registers.
The contract called for completed air conditioning systems which became
permanent part of the buildings and improvements to the realty." The Court
held the appellant a contractor which used the materials and the equipment
upon the value of which the tax herein imposed was levied in the
performance of its contracts with its customers, and that the customers did
not purchase the equipment and have the same installed.
Applying the facts of the aforementioned case to the present case, We see
that the supply of air conditioning units to Engineer's various customers,
whether the said machineries were in hand or not, was especially made for
each customer and installed in his building upon his special order. The air
conditioning units installed in a central type of air conditioning system would
not have existed but for the order of the party desiring to acquire it and if it
existed without the special order of Engineering's customer, the said air
conditioning units were not intended for sale to the general public. Therefore,
We have but to affirm the conclusion of the Court of Tax Appeals that
Engineering is a contractor rather than a manufacturer, subject to the
contractors tax prescribed by Section 191 of the Code and not to the
advance sales tax imposed by Section 185(m) in relation to Section 194 of
the same Code. Since it has been proved to Our satisfaction that Engineering
imported air conditioning units, parts or accessories thereof for use in its
construction business and these items were never sold, resold, bartered or
exchanged, Engineering should be held liable to pay taxes prescribed under
Section 1905 of the Code. This compensating tax is not a tax on the
importation of goods but a tax on the use of imported goods not subject to
sales tax. Engineering, therefore, should be held liable to the payment of
30% compensating tax in accordance with Section 190 of the Tax Code in
relation to Section 185(m) of the same, but without the 50% mark up
provided in Section 183(b).
II
We take up next the issue of fraud. The Commissioner charged Engineering
with misdeclaration of the imported air conditioning units and parts or
accessories thereof so as to make them subject to a lower rate of percentage
tax (7%) under Section 186 of the Tax Code, when they are allegedly subject
to a higher rate of tax (30%) under its Section 185(m). This charge of fraud
was denied by Engineering but the Court of Tax Appeals in its decision found
adversely and said"
... We are amply convinced from the evidence presented by
respondent that petitioner deliberately and purposely
misdeclared its importations. This evidence consists of
letters written by petitioner to its foreign suppliers, instructing
them on how to invoice and describe the air conditioning
units ordered by petitioner. ... (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals absolved
Engineering from paying the 50% surcharge prescribe by Section 183(a) of
the Tax Code by reasoning out as follows:
The imposition of the 50% surcharge prescribed by Section
183(a) of the Tax Code is based on willful neglect to file the
monthly return within 20 days after the end of each month or
in case a false or fraudulent return is willfully made, it can
readily be seen, that petitioner cannot legally be held subject
to the 50% surcharge imposed by Section 183(a) of the Tax
Code. Neither can petitioner be held subject to the 50%
surcharge under Section 190 of the Tax Code dealing on
compensating tax because the provisions thereof do not
include the 50% surcharge. Where a particular provision of
the Tax Code does not impose the 50% surcharge as fraud
penalty we cannot enforce a non-existing provision of law
notwithstanding the assessment of respondent to the
contrary. Instances of the exclusion in the Tax Code of the
50% surcharge are those dealing on tax on banks, taxes on
receipts of insurance companies, and franchise tax.
However, if the Tax Code imposes the 50% surcharge as
fraud penalty, it expressly so provides as in the cases of
income tax, estate and inheritance taxes, gift taxes, mining
tax, amusement tax and the monthly percentage taxes.
Accordingly, we hold that petitioner is not subject to the 50%
surcharge despite the existence of fraud in the absence of
legal basis to support the importation thereof. (p. 228 CTA
rec.)
We have gone over the exhibits submitted by the Commissioner evidencing
fraud committed by Engineering and We reproduce some of them hereunder
for clarity.
As early as March 18, 1953, Engineering in a letter of even date wrote to
Trane Co. (Exh. "3-K" pp. 152-155, BIR rec.) viz:
Your invoices should be made in the name of Madrigal &
Co., Inc., Manila, Philippines, c/o Engineering Equipment &
Supply Co., Manila, Philippines — forwarding all
correspondence and shipping papers concerning this order
to us only and not to the customer.
When invoicing, your invoices should be exactly as detailed
in the customer's Letter Order dated March 14th, 1953
attached. This is in accordance with the Philippine import
licenses granted to Madrigal & Co., Inc. and such details
must only be shown on all papers and shipping documents
for this shipment. No mention of words air conditioning
equipment should be made on any shipping documents as
well as on the cases.  Please give this matter your careful
attention, otherwise great difficulties will be encountered with
the Philippine Bureau of Customs when clearing the
shipment on its arrival in Manila. All invoices and cases
should be marked "THIS EQUIPMENT FOR RIZAL
CEMENT CO."
The same instruction was made to Acme Industries, Inc., San Francisco,
California in a letter dated March 19, 1953 (Exh. "3-J-1" pp. 150-151, BIR
rec.)
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp.,
New York, U.S.A. (Exh. "3-1" pp. 147-149, BIR rec.) also enjoining the latter
from mentioning or referring to the term 'air conditioning' and to describe the
goods on order as Fiberglass pipe and pipe fitting insulation instead.
Likewise on April 30, 1953, Engineering threatened to discontinue the
forwarding service of Universal Transcontinental Corporation when it wrote
Trane Co. (Exh. "3-H" p. 146, BIR rec.):
It will be noted that the Universal Transcontinental
Corporation is not following through on the instructions which
have been covered by the above correspondence, and which
indicates the necessity of discontinuing the use of the term
"Air conditioning Machinery or Air Coolers". Our instructions
concerning this general situation have been sent to you in
ample time to have avoided this error in terminology, and we
will ask that on receipt of this letter that you again write to
Universal Transcontinental Corp. and inform them that, if in
the future, they are unable to cooperate with us on this
requirement, we will thereafter be unable to utilize their
forwarding service. Please inform them that we will not
tolerate another failure to follow our requirements.
And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane
Co. another letter, viz:
In the past, we have always paid the air conditioning tax on
climate changers and that mark is recognized in the
Philippines, as air conditioning equipment. This matter of
avoiding any tie-in on air conditioning is very important to us,
and we are asking that from hereon that whoever takes care
of the processing of our orders be carefully instructed so as
to avoid again using the term "Climate changers" or in any
way referring to the equipment as "air conditioning."
And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953,
suggesting a solution, viz:
We feel that we can probably solve all the problems by
following the procedure outlined in your letter of March 25,
1953 wherein you stated that in all future jobs you would
enclose photostatic copies of your import license so that we
might make up two sets of invoices: one set describing
equipment ordered simply according to the way that they are
listed on the import license and another according to our
ordinary regular methods of order write-up. We would then
include the set made up according to the import license in
the shipping boxes themselves and use those items as our
actual shipping documents and invoices, and we will send
the other regular invoice to you, by separate
correspondence. (Exh- No. "3-F-1", p. 144 BIR rec.)
Another interesting letter of Engineering is one dated August 27, 1955 (Exh.
"3-C" p. 141 BIR rec.)
In the process of clearing the shipment from the piers, one of
the Customs inspectors requested to see the packing list.
Upon presenting the packing list, it was discovered that the
same was prepared on a copy of your letterhead which
indicated that the Trane Co. manufactured air conditioning,
 heating and heat transfer equipment. Accordingly, the
inspectors insisted that this equipment was being imported
for air conditioning purposes. To date, we have not been
able to clear the shipment and it is possible that we will be
required to pay heavy taxes on equipment.
The purpose of this letter is to request that in the future, no
documents of any kind should be sent with the order that
indicate in any way that the equipment could possibly be
used for air conditioning.
It is realized that this a broad request and fairly difficult to
accomplish and administer, but we believe with proper
caution it can be executed. Your cooperation and close
supervision concerning these matters will be appreciated.
(Emphasis supplied)
The aforequoted communications are strongly indicative of the fraudulent
intent of Engineering to misdeclare its importation of air conditioning units
and spare parts or accessories thereof to evade payment of the 30% tax.
And since the commission of fraud is altogether too glaring, We cannot agree
with the Court of Tax Appeals in absolving Engineering from the 50% fraud
surcharge, otherwise We will be giving premium to a plainly intolerable act of
tax evasion. As aptly stated by then Solicitor General, now Justice, Antonio
P. Barredo: 'this circumstance will not free it from the 50% surcharge
because in any case whether it is subject to advance sales tax or
compensating tax, it is required by law to truly declare its importation in the
import entries and internal revenue declarations before the importations
maybe released from customs custody. The said entries are the very
documents where the nature, quantity and value of the imported goods
declared and where the customs duties, internal revenue taxes, and other
fees or charges incident to the importation are computed. These entries,
therefore, serve the same purpose as the returns required by Section 183(a)
of the Code.'
Anent the 25% delinquency surcharge, We fully agree to the ruling made by
the Court of Tax Appeals and hold Engineering liable for the same. As held
by the lower court:
At first blush it would seem that the contention of petitioner
that it is not subject to the delinquency, surcharge of 25% is
sound, valid and tenable. However, a serious study and
critical analysis of the historical provisions of Section 190 of
the Tax Code dealing on compensating tax in relation to
Section 183(a) of the same Code, will show that the
contention of petitioner is without merit. The original text of
Section 190 of Commonwealth Act 466, otherwise known as
the National Internal Revenue Code, as amended by
Commonwealth Act No. 503, effective on October 1, 1939,
does not provide for the filing of a compensation tax return
and payment of the 25 % surcharge for late payment thereof.
Under the original text of Section 190 of the Tax Code as
amended by Commonwealth Act No. 503, the contention of
the petitioner that it is not subject to the 25% surcharge
appears to be legally tenable. However, Section 190 of the
Tax Code was subsequently amended by the Republic Acts
Nos. 253, 361, 1511 and 1612 effective October 1, 1946,
July 1, 1948, June 9, 1949, June 16, 1956 and August 24,
1956 respectively, which invariably provides among others,
the following:
... If any article withdrawn from the
customhouse or the post office without
payment of the compensating tax is
subsequently used by the importer for other
purposes, corresponding entry should be
made in the books of accounts if any are
kept or a written notice thereof sent to the
Collector of Internal Revenue and payment
of the corresponding compensating tax
made within 30 days from the date of such
entry or notice and if tax is not paid within
such period the amount of the tax shall be
increased by 25% the increment to be a part
of the tax.
Since the imported air conditioning units-and spare parts or accessories
thereof are subject to the compensating tax of 30% as the same were used in
the construction business of Engineering, it is incumbent upon the latter to
comply with the aforequoted requirement of Section 190 of the Code, by
posting in its books of accounts or notifying the Collector of Internal Revenue
that the imported articles were used for other purposes within 30 days. ...
Consequently; as the 30% compensating tax was not paid by petitioner within
the time prescribed by Section 190 of the Tax Code as amended, it is
therefore subject to the 25% surcharge for delinquency in the payment of the
said tax. (pp. 224-226 CTA rec.)
III
Lastly the question of prescription of the tax assessment has been put in
issue. Engineering contends that it was not guilty of tax fraud in effecting the
importations and, therefore, Section 332(a) prescribing ten years is
inapplicable, claiming that the pertinent prescriptive period is five years from
the date the questioned importations were made. A review of the record
however reveals that Engineering did file a tax return or declaration with the
Bureau of Customs before it paid the advance sales tax of 7%. And the
declaration filed reveals that it did in fact misdeclare its importations. Section
332 of the Tax Code which provides:
Section 332. — Exceptions as to period of limitation of
assessment and collection of taxes. —
(a) In the case of a false or fraudulent return with intent to
evade tax or of a failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such
tax may be begun without assessment at any time within ten
years after the discovery of the falsity, fraud or omission.
is applicable, considering the preponderance of evidence of fraud with the
intent to evade the higher rate of percentage tax due from Engineering. The,
tax assessment was made within the period prescribed by law and
prescription had not set in against the Government.
WHEREFORE, the decision appealed from is affirmed with the modification
that Engineering is hereby also made liable to pay the 50% fraud surcharge.
SO ORDERED.
Makalintal, C.J., Castro, Makasiar and Martin, JJ., concur.
G.R. No. 149756             February 11, 2005
MYRNA RAMOS, petitioner,  accept.9
vs.
SUSANA S. SARAO and JONAS RAMOS, respondents.
DECISION
PANGANIBAN, J.:
Although the parties in the instant case denominated their contract as
a "DEED OF SALE UNDER PACTO DE RETRO," the "sellers" have
continued to possess and to reside at the subject house and lot up to the
present. This evident factual circumstance was plainly overlooked by the trial
and the appellate courts, thereby justifying a review of this case. This
overlooked fact clearly shows that the petitioner intended merely to secure a
loan, not to sell the property. Thus, the contract should be deemed an
equitable mortgage.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
assailing the August 31, 2001 Decision2 of the Court of Appeals (CA) in CA-
GR CV No. 50095, which disposed as follows:
"WHEREFORE, the instant appeal is DISMISSED for lack of merit. The
decision dated January 19, 1995 of the Regional Trial Court, Branch 145,
Makati City is AFFIRMEDin toto."3
The Facts
On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a
contract over their conjugal house and lot in favor of Susana S. Sarao for and
in consideration of ₱1,310,430.4 Entitled "DEED OF SALE UNDER PACTO
DE RETRO," the contract, inter alia, granted the Ramos spouses the option
to repurchase the property within six months from February 21, 1991, for
₱1,310,430 plus an interest of 4.5 percent a month.5 It was further agreed
that should the spouses fail to pay the monthly interest or to exercise the
right to repurchase within the stipulated period, the conveyance would be
deemed an absolute sale.6
On July 30, 1991, Myrna Ramos tendered to Sarao the amount of
₱1,633,034.20 in the form of two manager’s checks, which the latter refused
to accept for being allegedly insufficient.7 On August 8, 1991, Myrna filed a
Complaint for the redemption of the property and moral damages plus
attorney’s fees.8 The suit was docketed as Civil Case No. 91-2188 and raffled
to Branch 145 of the Regional Trial Court (RTC) of Makati City. On August
13, 1991, she deposited with the RTC two checks that Sarao refused to
On December 21, 1991, Sarao filed against the Ramos spouses a Petition
"for consolidation of ownership in pacto de retro sale" docketed as Civil Case
No. 91-3434 and raffled to Branch 61 of the RTC of Makati City.10 Civil Case
Nos. 91-2188 and 91-3434 were later consolidated and jointly tried before property[. S]he consulted her lawyer, Atty. Aguinaldo, and on the same date
Branch 145 of the said Makati RTC.11 a corresponding deed of sale under pacto de retrowas executed and signed
(Exh. 1 ). Later on, she sent, through her lawyer, a demand letter dated June
The two lower courts narrated the trial in this manner: 10, 1991 (Exh. 6) in view of Myrna’s failure to pay the monthly interest of
4.5% as agreed upon under the deed[. O]n June 14, 1991 Jonas replied to
said demand letter (Exh. 8); in the reply Jonas admitted that he no longer
"x x x Myrna [Ramos] testified as follows: On February 21, 1991, she and her
ha[d] the capacity to redeem the property and to pay the interest. In view of
husband borrowed from Sarao the amount of ₱1,234,000.00, payable within
the said reply of Jonas, [Sarao] filed the corresponding consolidation
six (6) months, with an interest thereon at 4.5% compounded monthly from
proceedings. She [further claimed] that before filing said action she incurred
said date until August 21, 1991, in order for them to pay [the] mortgage on
expenses including payment of real estate taxes in arrears, x x x transfer tax
their house. For and in consideration of the said amount, they executed a
and capital [gains] tax, and [expenses] for [the] consolidated proceedings, for
deed of sale under a [pacto de retro] in favor of Sarao over their conjugal
which these expenses were accordingly receipted (Exhs. 6, 6-1 to 6-0). She
house and lot registered under TCT No. 151784 of the Registry of Deeds of
also presented a modified computation of the expenses she had incurred in
Makati (Exhibit A). She further claimed that Sarao will keep the torrens title
connection with the execution of the subject deed (Exh. 9). She also testified
until the lapse of the 6-month period, in which case she will redeem [the]
that Myrna did not tender payment of the correct and sufficient price for said
subject property and the torrens title covering it. When asked why it was the
real property within the 6-month period as stipulated in the contract, despite
amount of ₱1,310,430 instead of the aforestated amount which appeared in
her having been shown the computation of the loan obligation, inclusive of
the deed, she explained that upon signing of the deed in question, the sum of
capital gains tax, real estate tax, transfer tax and other expenses. She
₱20,000.00 representing attorney’s fees was added, and its total amount was
admitted though that Myrna has tendered payment amounting to
multiplied with 4.5% interest rate, so that they could pay in advance the
₱1,633,034.20 in the form of two manager’s checks, but these were refused
compounded interest. She also stated that although the market value of the
acceptance for being insufficient. She also claimed that several letters (Exhs.
subject property as of February 1991 [was] calculated to [be] more or less
2, 4 and 5) were sent to Myrna and her lawyer, informing them of the
₱10 million, it was offered [for] only ₱1,310,430.00 for the reason that they
computation of the loan obligation inclusive of said expenses. Finally, she
intended nothing but to redeem the same. In May 1991, she wrote a letter to
denied the allegations made in the complaint that she allied herself with
Atty. Mario Aguinaldo requesting him to give a computation of the loan
Jonas, and claimed that she ha[d] no knowledge about said allegation."12
obligation, and [expressed] her intention to redeem the subject property, but
she received no reply to her letter. Instead, she, through her husband,
secured directly from Sarao a handwritten computation of their loan After trial, the RTC dismissed the Complaint and granted the prayer of Sarao
obligation, the total of which amount[ed] to ₱1,562,712.14. Later, she sent to consolidate the title of the property in her favor.13 Aggrieved, Myrna
several letters to Sarao, [furnishing] Atty. Aguinaldo with copies, asking them elevated the case to the CA.
for the updated computation of their loan obligation as of July 1991, but [no
reply was again received]. During the hearing of February 17, 1992, she Ruling of the Court of Appeals
admitted receiving a letter dated July 23, 1991 from Atty. Aguinaldo which
show[ed] the computation of their loan obligation [totaling] to ₱2,911,579.22 The appellate court sustained the RTC’s finding that the disputed contract
(Exhs. 6, 6-A). On July 30, 1991, she claimed that she offered the was a bonafide pacto de retro sale, not a mortgage to secure a loan.14 It ruled
redemption price in the form of two (2) manager’s checks amounting to that Myrna Ramos had failed to exercise the right of repurchase, as the
₱1,633,034.20 (Exhs. H-1 & H-2) to Atty. Aguinaldo, but the latter refused to consignation of the two manager’s checks was deemed invalid. She allegedly
accept them because they [were] not enough to pay the loan obligation. failed (1) to deposit the correct repurchase price and (2) to comply with the
Having refused acceptance of the said checks covering the redemption price, required notice of consignation.15
on August 13, 1991 she came to Court to consign the checks (Exhs. L-4 and
L-5). Subsequently, she proceeded to the Register of Deeds to cause the Hence, this Petition.16
annotation of lis pendens on TCT No. 151784 (Exh. B-1-A). Hence, she filed
the x x x civil case against Sarao.
The Issues
"On the other hand, Sarao testified as follows: On February 21, 1991,
spouses Ramos together with a certain Linda Tolentino and her husband, Petitioner raises the following issues for our consideration:
Nestor Tolentino approached her and offered transaction involv[ing a] sale of
"1. Whether or not the honorable appellate court erred in ruling the subject
Deed of Sale under Pacto de Retro was, and is in reality and under the law
an equitable mortgage;
"2. Whether or not the honorable appellate court erred in affirming the ruling
of the court a quo that there was no valid tender of payment of the
redemption price neither [sic] a valid consignation in the instant case; and
"3. Whether or not [the] honorable appellate court erred in affirming the ruling
of the court a quo denying the claim of petitioner for damages and attorney’s
fees."17
The Court’s Ruling
The Petition is meritorious in regard to Issues 1 and 2.
First Issue:
A Pacto de Retro Sale
or an Equitable Mortgage?
Respondent Sarao avers that the herein Petition should have been dismissed
outright, because petitioner (1) failed to show proof that she had served a
copy of it to the Court of Appeals and (2) raised questions of fact that were
not proper issues in a petition under Rule 45 of the Rules of Court.18 This
Court, however, disregarded the first ground; otherwise, substantial injustice
would have been inflicted on petitioner. Since the Court of Appeals is not a
party here, failure to serve it a copy of the Petition would not violate any right
of respondent. Service to the CA is indeed mentioned in the Rules, but only
to inform it of the pendency of the appeal before this Court.
As regards Item 2, there are exceptions to the general rule barring a review
of questions of fact.19 The Court reviewed the factual findings in the present
case, because the CA had manifestly overlooked certain relevant and
undisputed facts which, after being considered, justified a different
conclusion.20
Pacto de Retro Sale Distinguished
from Equitable Mortgage
The pivotal issue in the instant case is whether the parties intended the
contract to be a bona fide pacto de retrosale or an equitable mortgage.
In a pacto de retro, ownership of the property sold is immediately transferred
to the vendee a retro, subject only to the repurchase by the vendor a retro
within the stipulated period.21 The vendor a retro’s failure to exercise the right
of repurchase within the agreed time vests upon the vendee a retro, by
operation of law, absolute title to the property.22 Such title is not impaired
even if the vendee a retro fails to consolidate title under Article 1607 of the
Civil Code.23
On the other hand, an equitable mortgage is a contract that -- although
lacking the formality, the form or words, or other requisites demanded by a
statute -- nevertheless reveals the intention of the parties to burden a piece
or pieces of real property as security for a debt.24 The essential requisites of
such a contract are as follows: (1) the parties enter into what appears to be a
contract of sale, but (2) their intention is to secure an existing debt by way of
a mortgage.25 The nonpayment of the debt when due gives the mortgagee
the right to foreclose the mortgage, sell the property, and apply the proceeds
of the sale to the satisfaction of the loan obligation.26
This Court has consistently decreed that the nomenclature used by the
contracting parties to describe a contract does not determine its nature.27 The
decisive factor is their intention -- as shown by their conduct, words, actions
and deeds -- prior to, during, and after executing the agreement.28 This juristic
principle is supported by the following provision of law:
Article 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.29
Even if a contract is denominated as a pacto de retro, the owner of the
property may still disprove it by means of parol evidence,30 provided that the
nature of the agreement is placed in issue by the pleadings filed with the trial
court.31
There is no single conclusive test to determine whether a deed absolute on
its face is really a simple loan accommodation secured by a
mortgage.32 However, the law enumerates several instances that show when
a contract is presumed to be an equitable mortgage, as follows:
Article 1602. The contract shall be presumed to be an equitable mortgage, in
any of the following cases:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is
executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of
the parties is that the transaction shall secure the payment of a debt or the
performance of any other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be
received by the vendee as rent or otherwise shall be considered as interest
which shall be subject to the usury laws.33
Furthermore, a contract purporting to be a pacto de retro is construed as an
equitable mortgage when the terms of the document and the surrounding
circumstances so require.34 The law discourages the use of a pacto de
retro,because this scheme is frequently used to circumvent a contract known
as a pactum commissorium. The Court has frequently noted that a pacto de
retro is used to conceal a contract of loan secured by a mortgage.35 Such
construction is consistent with the doctrine that the law favors the least
transmission of rights.36
Equitable Mortgage Presumed to be Favored by Law
Jurisprudence has consistently declared that the presence of even just one of
the circumstances set forth in the forgoing Civil Code provision suffices to
convert a contract to an equitable mortgage.37 Article 1602 specifically states
that the equitable presumption applies to any of the cases therein
enumerated.
In the present factual milieu, the vendor retained possession of the property
allegedly sold.38 Petitioner and her children continued to use it as their
residence, even after Jonas Ramos had abandoned them.39 In fact, it
remained as her address for the service of court orders and copies of
Respondent Sarao’s pleadings.40
The presumption of equitable mortgage imposes a burden on Sarao to
present clear evidence to rebut it. Corollary to this principle, the favored party
need not introduce proof to establish such presumption; the party challenging
it must overthrow it, lest it persist.41 To overturn that prima facie fact that
operated against her, Sarao needed to adduce substantial and credible
evidence to prove that the contract was a bona fide pacto de retro. This
evidentiary burden she miserably failed to discharge.
Contrary to Sarao’s bare assertions, a meticulous review of the evidence
reveals that the alleged contract was executed merely as security for a loan.
The July 23, 1991 letter of Respondent Sarao’s lawyer had required
petitioner to pay a computed amount -- under the heading "House and Lot
Loan"42 -- to enable the latter to repurchase the property. In effect,
respondent would resell the property to petitioner, once the latter’s loan
obligation would have been paid. This explicit requirement was a clear
indication that the property was to be used as security for a loan.
The loan obligation was clear from Sarao’s evidence as found by the trial
court, which we quote:
"x x x [Sarao] also testified that Myrna did not tender payment of the correct
and sufficient price for said real property within the 6-month period as
stipulated in the contract, despite her having been shown the computation of
the loan obligation, inclusive of capital gains tax, real estate tax, transfer tax
and other expenses. She admitted though that Myrna has tendered payment
amounting to ₱1,633,034.20 in the form of two manager’s checks, but these
were refused acceptance for being insufficient. She also claimed that several
letters (Exhs. 2, 4 and 5) were sent to Myrna and her lawyer, informing them
of the computation of the loan obligation inclusive of said expenses. x x x."43
Respondent herself stressed that the pacto de retro had been entered into on
the very same day that the property was to be foreclosed by a commercial
bank.44 Such circumstance proves that the spouses direly needed funds to
avert a foreclosure sale. Had they intended to sell the property just to realize
some profit, as Sarao suggests,45 they would not have retained possession of
the house and continued to live there. Clearly, the spouses had entered into
the alleged pacto de retro sale to secure a loan obligation, not to transfer
ownership of the property.
Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to her
lawyer that the contract was a pacto de retro.46 That letter, however, cannot
override the finding that the pacto de retro was executed merely as security
for a loan obligation. Moreover, on May 17, 1991, prior to the transmittal of
the letter, petitioner had already sent a letter to Sarao’s lawyer expressing
the former’s desire to settle the mortgage on the property.47 Considering that
she had already denominated the transaction with Sarao as a mortgage,
petitioner cannot be prejudiced by her husband’s alleged admission,
especially at a time when they were already estranged.48
Inasmuch as the contract between the parties was an equitable mortgage,
Respondent Sarao’s remedy was to recover the loan amount from petitioner
by filing an action for the amount due or by foreclosing the property.49
Second Issue:
Propriety of Tender of
Payment and Consignation
Tender of payment is the manifestation by debtors of their desire to comply
with or to pay their obligation.50 If the creditor refuses the tender of payment
without just cause, the debtors are discharged from the obligation by the
consignation of the sum due.51 Consignation is made by depositing the proper
amount to the judicial authority, before whom the tender of payment and the
announcement of the consignation shall be proved.52 All interested parties are
to be notified of the consignation.53 Compliance with these requisites is
mandatory.54
The trial and the appellate courts held that there was no valid consignation,
because petitioner had failed to offer the correct amount and to provide
ample consignation notice to Sarao.55 This conclusion is incorrect.
Note that the principal loan was ₱1,310,430 plus 4.5 per cent monthly
interest compounded for six months. Expressing her desire to pay in the fifth
month, petitioner averred that the total amount due was ₱1,633,034.19,
based on the computation of Sarao herself.56 The amount of ₱2,911,579.22
that the latter demanded from her to settle the loan obligation was plainly
exorbitant, since this sum included other items not covered by the
agreement. The property had been used solely as secure ty for the
₱1,310,430 loan; it was therefore improper to include in that amount
payments for gasoline and miscellaneous expenses, taxes, attorney’s fees,
and other alleged loans. When Sarao unjustly refused the tender of payment
in the amount of ₱1,633,034.20, petitioner correctly filed suit and consigned
the amount in order to be released from the latter’s obligation.
The two lower courts cited Article 1257 of the Civil Code to justify their ruling
that petitioner had failed to notify Respondent Sarao of the consignation. This
provision of law states that the obligor may be released, provided the
consignation is first announced to the parties interested in the fulfillment of
the obligation.
The facts show that the notice requirement was complied with. In her August
1, 1991 letter, petitioner said that should the respondent fail to accept
payment, the former would consign the amount.57 This statement was an
unequivocal announcement of consignation. Concededly, sending to the
creditor a tender of payment and notice of consignation -- which was
precisely what petitioner did -- may be done in the same act.58
Because petitioners’ consignation of the amount of ₱1,633,034.20 was valid,
it produced the effect of payment.59"The consignation, however, has a
retroactive effect, and the payment is deemed to have been made at the time
of the deposit of the thing in court or when it was placed at the disposal of the
judicial authority."60 "The rationale for consignation is to avoid making the
performance of an obligation more onerous to the debtor by reason of causes
not imputable to him."61
Third Issue:
Moral Damages and Attorney’s Fees
Petitioner seeks moral damages in the amount of ₱500,000 for alleged
sleepless nights and anxiety over being homeless.62 Her bare assertions are
insufficient to prove the legal basis for granting any award under Article 2219
of the Civil Code.63 Verily, an award of moral damages is uncalled for,
considering that it was Respondent Sarao’s accommodation that settled the
earlier obligation of the spouses with the commercial bank and allowed them
to retain ownership of the property.
Neither have attorney’s fees been shown to be proper.64 As a general rule, in
the absence of a contractual or statutory liability therefor, sound public policy
frowns on penalizing the right to litigate.65 This policy applies especially to the
present case, because there is a need to determine whether the disputed
contract was a pacto de retro sale or an equitable mortgage.
Other Matters
In a belated Manifestation filed on October 19, 2004, Sarao declared that she
was the "owner of the one-half share of Jonas Ramos in the conjugal
property," because of his alleged failure to file a timely appeal with the
CA.66 Such declaration of ownership has no basis in law, considering that the
present suit being pursued by petitioner pertains to a mortgage covering the
whole property.
Besides, it is basic that defenses and issues not raised below cannot be
considered on appeal.67
The Court, however, observes that Respondent Sarao paid real property
taxes amounting to ₱67,567.10 to halt the auction sale scheduled for October
8, 2004, by the City of Muntinlupa.68 Her payment was made in good faith and
benefited petitioner. Accordingly, Sarao should be reimbursed; otherwise,
petitioner would be unjustly enriched,69under Article 2175 of the Civil Code
which provides:
Art. 2175. Any person who is constrained to pay the taxes of another shall be
entitled to reimbursement from the latter.
WHEREFORE, the Petition is partly GRANTED and the assailed
Decision SET ASIDE. Judgment is hereby rendered:
(1) DECLARING (a) the disputed contract as an equitable mortgage, (b)
petitioner’s loan to Respondent Sarao to be in the amount of ₱1,633,034.19
as of July 30, 1991; and (c) the mortgage on the property -- covered by TCT
No. 151784 in the name of the Ramos spouses and issued by the Register of
Deeds of Makati City --as discharged
(2) ORDERING the RTC to release to Sarao the consigned amount of
₱1,633,034.19
(3) COMMANDING Respondent Sarao to return to petitioner the owner’s
copy of TCT No. 151784 in the name of the Ramos spouses and issued by
the Register of Deeds of Makati City
(4) DIRECTING the Register of Deeds of Makati City to cancel Entry No.
24057, the annotation appearing on TCT No. 151784
(5) ORDERING petitioner to pay Sarao in the amount of ₱67,567.10 as
reimbursement for real property taxes
No pronouncement as to costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.
G.R. No. 160408
SPOUSES ROBERTO and ADELAIDA PEN, Petitioners, 
vs.
SPOUSES SANTOS and LINDA JULIAN, Respondents.
DECISION
BERSAMIN, J.:
The petitioners who were the buyers of the mortgaged property of the
respondents seek the reversal of the decision promulgated on October 20,
2003,1 whereby the Court of Appeals (CA) affirmed with modification the
adverse judgment rendered on August 30, 1999 by the Regional Trial Court
(RTC), Branch 77, in Quezon City.2 In their respective rulings, the CA and the
RTC both declared the deed of sale respecting the respondents' property as
void and inexistent, albeit premised upon different reasons.
Antecedents
The CA summarized the antecedent facts and procedural matters in its
assailed decision as follows:
On April 9, 1986, the appellees (the Julians) obtained a P60,000.00 loan from
appellant Adelaida Pen. On May 23, 1986 and on the (sic) May 27, 1986,
they were again extended loans in the amounts of P50,000.00 and
P10,000.00, respectively by appellant Adelaida. The initial interests were
deducted by appellant Adelaida, (1) P3,600.00 from the P60,000.00 loan; (2)
P2,400.00 from the P50,000.00 loan; and (3) P600.00 from the P10,000.00
loan. Two (2) promissory notes were executed by the appellees in favor of
appellant Adelaida to evidence the foregoing loans, one dated April 9, 1986
and payable on June 15, 1986 for the P60,000.00 loan and another dated
May 22, 1986 payable on July 22, 1986 for the P50,000.00 loan. Both Joans
were charged interest at 6% per month. As security, on May 23, 1986, the
appellees executed a Real Estate Mortgage over their property covered by
TCT No. 327733 registered under the name of appellee Santos Julian, Jr.
The owner's duplicate of TCT No. 327733 was delivered to the appellants.
Appellant's version of the subsequent events run as follows: When the loans
became due and demandable, appellees failed to pay despite several
demands. As such, appellant Adelaida decided to institute foreclosure
proceedings. However, she was prevailed upon by appellee Linda not to
foreclose the property because of the cost of litigation and since it would
cause her embarrassment as the proceedings will be announced in public
places at the City Hall, where she has many friends. Instead, appellee Linda
offered their mortgaged property as payment in kind. After the ocular
inspection, the parties agreed to have the property valued at P70,000.00.
Thereafter, on October 22, 1986 appellee executed a two (2) page Deed of
Sale duly signed by her on the left margin and over her printed name. After
the execution of the Deed of Sale, appellant Pen paid the capital gains tax
and the required real property tax. Title to the property was transferred to the
appellants by the issuance of TCT No. 364880 on July 17, 1987. A
reconstituted title was also issued to the appellants on July 09, 1994 when
the Quezon City Register of Deeds was burned (sic).
On July 1989, appellants allege that appellee Linda offered to repurchase the
property to which the former agreed at the repurchase price of P436,l 15.00
payable in cash on July 31, 1989. The appellees failed to repurchase on the
agreed date. On February 1990, appellees again offered to repurchase the
property for the same amount, but they still failed to repurchase. On June 28,
1990, another offer was made to repurchase the property for the same
amount. Appellee Linda offered to pay P100,000.00 in cash as sign of good
faith. The offer was rejected by appellant Adelaida. The latter held the money
only for safekeeping upon the pleading of appellee Linda. Upon the
agreement of the parties, the amount of P100,000.00 was deducted from the
balance of the appellees' indebtedness, so that as of October 15, 1997, their
unpaid balance amounted to P319,065.00. Appellants allege that instead of
paying lthe] said balance, the appellees instituted on September 8, 1994 the
civil complaint and filed an adverse claim and lis pendens which were
annotated at the back of the title to the property.
On the other hand, the appellees aver the following: At the time the mortgage
was executed, they were likewise required by the appellant Adelaida to sign
a one (1) page document purportedly an "Absolute Deed of Sale". Said
document did not contain any consideration, and was "undated, unfilled and
unnotarized". They allege that their total payments amounted to P115,400.00
and that their last payment was on June 28, 1990 in the amount of
P100,000.00.
In December 1992, appellee Linda Julian offered to pay appellant Adelaida
the amount of P150,000.00. The latter refused to accept the offer and
demanded that she be paid the amount of P250,000.00. Unable to meet the
demand, appellee Linda desisted from the offer and requested that she be
shown the land title which she conveyed to the appellee Adelaida, but the
latter refused. Upon verification with the Registry of Deeds of Quezon City,
she was informed that the title to the mortgaged property had already been
registered in the name of appellee Adelaida under TCT No. 364880, and that
the transfer was entered on July 17, 1987. A reconstituted title, TCT No. RT-
45272 (364880), also appeared on file in the Registry of Deeds replacing
TCT No. 364880.
By reason of the foregoing discoveries, appellee filed an Affidavit of Adverse
Claim on January 1993.1avvphi1 Counsel for the appellees, on August 12,
1994, formally demanded the reconveyance of the title and/or the property to
them, but the appellants refused. In the process of obtaining other
documents; the appellees also discovered that the appellants have obtained
several Declarations of Real Property, and a Deed of Sale consisting of two
(2) pages which was notarized by one Atty. Cesar Ching. Said document
indicates a consideration of P70,000.00 for the lot, and was made to appear
as having been executed on October 22, 1986. On September 8, 1994,
appellees filed a suit for the Cancellation of Sale, Cancellation of Title issued
to the appellants; Recovery of Possession; Damages with Prayer for
Preliminary Injunction. The complaint alleged that appellant Adelaida,
through obvious bad faith, maliciously typed, unilaterally filled up, and caused
to be notarized the Deed of Sale earlier signed by appellee Julian, and used
this spurious deed of sale as the vehicle for her fraudulent transfer unto
herself the parcel of land covered by TCT No. 327733.3
Judgment of the RTC
In its judgment rendered on August 30, 1999,4 the RTC ruled in favor of the
respondents. According greater credence to the version of the respondents
on the true nature of their transaction, the trial court concluded that they had
not agreed on the consideration for the sale at the time they signed the deed
of sale; that in the absence of the consideration, the sale lacked one of the
essential requisites of a valid contract; that the defense of prescription was
rejected because the action to impugn the void contract was imprescriptible;
and that the promissory notes and the real estate mortgage in favor of the
petitioners were nonetheless valid, rendering the respondents liable to still
pay their outstanding obligation with interest.
The RTC disposed thusly:
WHEREFORE, judgment is hereby rendered:
1. Declaring the Deed of Sale, dated October 22, 1986, void or
inexistent;
2. Cancelling TCT No. RT-45272 (364480) and declaring it to be of
no further legal force and effect;
3. Ordering the defendants to reconvey the subject property to the
plaintiffs and to deliver to them the possession thereof; and
4. Ordering the plaintiffs to pay to the defendants the unpaid balance
of their indebtedness plus accrued interest totaling P,319,065.00 as
of October 15, 1997, plus interests at the legal rate counted from the
date of filing of the complaint and until the full payment thereof,
 without prejudice to the right of the defendants to foreclose the
mortgage in the event that plaintiffs will fail to pay their obligation.
No pronouncement as to cost.
SO ORDERED.5
Decision of the CA
On appeal by the petitioners, the CA affirmed the RTC with modification
under its assailed decision of October 20, 2003,6 decreeing:
WHEREFORE, premises considered, the Decision of the Regional Trial
Court of Quezon City is AFFIRMED WITH modification. Judgement is hereby
rendered:
1. Declaring the Deed of Sale, dated October 22, 1986, void or
inexistent;
2. Cancelling TCT No. RT-45272 (364880) and declaring it to be of
no further legal force and effect;
3. Ordering the appellants-defendants to reconvey the subject
property to the plaintiffs-appellees and to deliver to them the
possession thereof; and
4. Ordering the plaintiffs-appellces to pay to the defendants the
unpaid balance of their indebtedness, P43,492.15 as of June 28,
1990, plus interests at the legal rate of 12% per annum from said
date and until the full payment thereof, without prejudice to the right
of the defendants to foreclose the mortgage in the event that
plaintiffs-appellees will fail to pay their obligation.
SO ORDERED.7
The CA pronounced the deed of sale as void but not because of the
supposed lack of consideration as the R TC had indicated, but because of
the deed of sale having been executed at the same time as the real estate
mortgage, which rendered the sale as a prohibited pactum commissorium  in
light of the fact that the deed of sale was blank as to the consideration and
the date, which details would be filled out upon the default by the
respondents; that the promissory notes contained no stipulation on the
payment of interest on the obligation, for which reason no monetary interest
could be imposed for the use of money; and that compensatory interest
should instead be imposed as a form of damages arising from Linda's failure
to pay the outstanding obligation.
Issues
In this appeal, the petitioners posit the following issues, namely: (1) whether
or not the CA erred in ruling against the validity of the deed of sale; and (2)
whether or not the CA erred in ruling that no monetary interest was due for
Linda's use of Adelaida's money.
Ruling of the Court
The appeal is partly meritorious.
That the petitioners are raising factual issues about the true nature of their
transaction with the respondent is already of itself, sufficient reason to
forthwith deny due course to the petition for review on certiorari. They cannot
ignore that any appeal to the Court is limited to questions of law because the
Court is not a trier of facts. As such, the factual findings of the CA should be
respected and accorded great weight, and even finality when supported by
the substantial evidence on record.8 Moreover, in view of the unanimity
between the RTC and the CA on the deed of sale being void, varying only in
their justifications, the Court affirms the CA, and adopts its conclusions on
the invalidity of the deed of sale.
Nonetheless, We will take the occasion to explain why we concur with the
CA's justification in discrediting the deed of sale between the parties
as pactum commissorium.
Article 2088 of the Civil Code prohibits the creditor from appropriating the
things given by way of pledge or mortgage, or from disposing of them; any
stipulation to the contrary is null and void. The elements for pactum
commissorium to exist are as follows, to wit: (a)  that there should be a
pledge or mortgage wherein property is pledged or mortgaged by way of
security for the payment of the principal obligation; and (b)  that there should
be a stipulation for an automatic appropriation by the creditor of the thing
pledged or mortgaged in the event of non-payment of the principal obligation
within the stipulated period.9 The first element was present considering that
the property of the respondents was mortgaged by Linda in favor of Adelaida
as security for the farmer's indebtedness. As to the second, the authorization
for Adelaida to appropriate the property subject of the mortgage upon Linda's
default was implied from Linda's having signed the blank deed of sale
simultaneously with her signing of the real estate mortgage. The haste with
which the transfer of property was made upon the default by Linda on her
obligation, and the eventual transfer of the property in a manner not in the
form of a valid dacion en pago ultimately confirmed the nature of the
transaction as a pactum commissorium.
It is notable that in reaching its conclusion that Linda's deed of sale had been
executed simultaneously with the real estate mortgage, the CA first
compared the unfilled deed of sale presented by Linda with the notarized
deed of sale adduced by Adelaida. The CA justly deduced that the
completion and execution of the deed of sale had been conditioned on the
non-payment of the debt by Linda, and reasonably pronounced that such
circumstances rendered the transaction pactum commissorium. The Court
should not disturb or undo the CA's conclusion in the absence of the clear
showing of abuse, arbitrariness or capriciousness on the part of the CA.10
The petitioners have theorized that their transaction with the respondents
was a valid dacion en pago  by highlighting that it was Linda who had offered
to sell her property upon her default. Their theory cannot stand
scrutiny. Dacion en pago  is in the nature of a sale because property is
alienated in favor of the creditor in satisfaction of a debt in money.11 For a
valid dacion en pago  to transpire, however, the attendance of the following
elements must be established, namely: (a) the existence of a money
obligation; (b) the alienation to the creditor of a property by the debtor with
the consent of the former; and (c) the satisfaction of the money obligation of
the debtor.12 To have a valid dacion en pago,  therefore, the alienation of the
property must fully extinguish the debt. Yet, the debt of the
respondents subsisted despite the transfer of the property in favor of
Adelaida.
The petitioners insist that the parties agreed that the deed of sale would not
yet contain the date and the consideration because they had still to agree on
the price.13 Their insistence is not supported by the established
circumstances. It appears that two days after the loan fell due on October 15,
1986,14 Linda offered to sell the mortgaged property;15 hence, the parties
made the ocular inspection of the premises on October 18, 1986. By that
time, Adelaida had already become aware that the appraiser had valued the
property at P70,000.00. If that was so, there was no plausible reason for still
leaving the consideration on the deed of sale blank if the deed was drafted by
Adelaida on October 20, 1986, especially considering that they could have
conveniently communicated with each other in the meanwhile on this
significant aspect of their transaction. It was also improbable for Adelaida to
still hand the unfilled deed of sale to Linda as her copy if, after all, the deed of
sale would be eventually notarized on October 22, 1986.
According to Article 1318 of the Civil Code, the requisites for any contract to
be valid are, namely: (a)  the consent of the contracting parties; (b) the
object; and (c) the consideration. There is a perfection of a contract when
there is a meeting of the minds of the parties on each of these
requisites.16 The following passage has fittingly discussed the process of
perfection in Moreno, Jr. v. Private Management Office:17
To reach that moment of perfection, the parties must agree on the same
thing in the same sense, so that their minds meet as to all the terms. They
must have a distinct intention common to both and without doubt or
difference; until all understand alike, there can be no assent, and therefore
no contract. The minds of parties must meet at every point; nothing can be
left open for further arrangement. So long as there is any uncertainty or
indefiniteness, or future negotiations or considerations to be had between the
parties, there is not a completed contract, and in fact, there is no contract at
all.18
In a sale, the contract is perfected at the moment when the seller obligates
herself to deliver and to transfer ownership of a thing or right to the buyer for
a price certain, as to which the latter agrees.19 The absence of the
consideration from Linda's copy of the deed of sale was credible proof of the
lack of an essential requisite for the sale. In other words, the meeting of the
minds of the parties so vital in the perfection of the contract of sale did not
transpire. And, even assuming that Linda's leaving the consideration blank
implied the authority of Adelaida to fill in that essential detail in the deed of
sale upon Linda's default on the loan, the conclusion of the CA that the deed
of sale was a pactum commisorium still holds, for, as earlier mentioned, all
the elements of pactum commisorium were present.
Anent interest, the CA deleted the imposition of monetary interest but
decreed compensatory interest of 12% per annum.
Interest that is the compensation fixed by the parties for the use or
forbearance of money is referred to as monetary interest.1âwphi1 On the
other hand, interest that may be imposed by law or by the courts as penalty
or indemnity for damages is called compensatory interest. In other words, the
right to recover interest arises only either by vi11ue of a contract or as
damages for delay or failure to pay the principal loan on which the interest is
demanded.20
The CA correctly deleted the monetary interest from the judgment. Pursuant
to Article 1956 of the Civil Code, no interest shall be due unless it has been
expressly stipulated in writing. In order for monetary interest to be imposed,
therefore, two requirements must be present, specifically: (a)  that there has
been an express stipulation for the payment of interest; and (b) that the
agreement for the payment of interest has been reduced in
writing.21Considering that the promissory notes contained no stipulation on
the payment of monetary interest, monetary interest cannot be validly
imposed.
The CA properly imposed compensatory interest to offset the delay in the
respondents' performance of their obligation. Nonetheless, the imposition of
the legal rate of interest should be modified to conform to the prevailing
jurisprudence. The rate of 12% per annum  imposed by the CA was the rate
set in accordance with Eastern Shipping Lines, Inc., v. Court of Appeals. 22 In
the meanwhile, Bangko Sentral ng Pilipinas Monetary Board Resolution No.
796 dated May 16, 2013, amending Section 2 of Circular No. 905, Series of
1982, and Circular No. 799, Series of 2013, has lowered to 6% per
annum the legal rate of interest for a loan or forbearance of money, goods or
credit starting July 1, 2013. This revision is expressly recognized in Nacar v.
Gallery Frames.23 It should be noted, however, that imposition of the legal
rate of interest at 6% per annum is prospective in application.
Accordingly, the legal rate of interest on the outstanding obligation of
P43,492.15 as of June 28, 1990, as the CA found, should be as
follows: (a)  from the time of demand on October 13, 1994 until June 30,
2013, the legal rate of interest was 12% per annum  conformably
with Eastern Shipping lines; and (b) following Nacar, from July 1, 2013 until
full payment, the legal interest is 6% per annum.
WHEREFORE, the Court AFFIRMS the decision promulgated on October
20, 2003 subject to the MODIFICATION that the amount of P43,492.l5 due
from the respondents shall earn legal interest of 12% per annum reckoned
from October 13, 1994 until June 30, 2013, and 6% per annum  from July 1,
2013 until full payment.
Without pronouncement on costs of suit.
SO ORDERED.
LUCAS P. BERSAMIN
Associate Justice
G.R. No. 162421               August 31, 2007
NELSON CABALES and RITO CABALES, Petitioners,  spouses Jesus and Anunciacion Feliano for ₱8,000.00. The Deed of Sale
vs.
COURT OF APPEALS, JESUS FELIANO and ANUNCIACION
FELIANO, Respondents.
DECISION
PUNO, C.J.:
This is a petition for review on certiorari seeking the reversal of the
decision1 of the Court of Appeals dated October 27, 2003, in CA-G.R. CV No.
68319 entitled "Nelson Cabales and Rito Cabales v. Jesus Feliano and
Anunciacion Feliano," which affirmed with modification the decision2 of the
Regional Trial Court of Maasin, Southern Leyte, Branch 25, dated August 11,
2000, in Civil Case No. R-2878. The resolution of the Court of Appeals dated
February 23, 2004, which denied petitioners’ motion for reconsideration, is
likewise herein assailed.
The facts as found by the trial court and the appellate court are well
established.
Rufino Cabales died on July 4, 1966 and left a 5,714-square meter parcel of
land located in Brgy. Rizal, Sogod, Southern Leyte, covered by Tax
Declaration No. 17270 to his surviving wife Saturnina and children Bonifacio,
Albino, Francisco, Leonora, Alberto and petitioner Rito.
On July 26, 1971, brothers and co-owners Bonifacio, Albino and Alberto sold
the subject property to Dr. Cayetano Corrompido for ₱2,000.00, with right to
repurchase within eight (8) years. The three (3) siblings divided the proceeds
of the sale among themselves, each getting a share of ₱666.66.
The following month or on August 18, 1971, Alberto secured a note ("vale")
from Dr. Corrompido in the amount of ₱300.00.
In 1972, Alberto died leaving his wife and son, petitioner Nelson.
On December 18, 1975, within the eight-year redemption period, Bonifacio
and Albino tendered their payment of ₱666.66 each to Dr. Corrompido. But
Dr. Corrompido only released the document of sale with pacto de retro after
Saturnina paid for the share of her deceased son, Alberto, including his
"vale" of ₱300.00.
On even date, Saturnina and her four (4) children Bonifacio, Albino,
Francisco and Leonora sold the subject parcel of land to respondents-
provided in its last paragraph, thus:
It is hereby declared and understood that the amount of TWO THOUSAND
TWO HUNDRED EIGHTY SIX PESOS (P2,286.00) corresponding and
belonging to the Heirs of Alberto Cabales and to Rito Cabales who are still
minors upon the execution of this instrument are held
in trust by the VENDEE and to be paid and delivered only to them upon
reaching the age of 21.
On December 17, 1985, the Register of Deeds of Southern Leyte issued
Original Certificate of Title No. 17035 over the purchased land in the names
of respondents-spouses.
On December 30, 1985, Saturnina and her four (4) children executed an
affidavit to the effect that petitioner Nelson would only receive the amount of
₱176.34 from respondents-spouses when he reaches the age of 21
considering that Saturnina paid Dr. Corrompido ₱966.66 for the obligation of
petitioner Nelson’s late father Alberto, i.e., ₱666.66 for his share in the
redemption of the sale with pacto de retro as well as his "vale" of ₱300.00.
On July 24, 1986, 24-year old petitioner Rito Cabales acknowledged receipt
of the sum of ₱1,143.00 from respondent Jesus Feliano, representing the
former’s share in the proceeds of the sale of subject property.
In 1988, Saturnina died. Petitioner Nelson, then residing in Manila, went back
to his father’s hometown in Southern Leyte. That same year, he learned from
his uncle, petitioner Rito, of the sale of subject property. In 1993, he signified
his intention to redeem the subject land during a barangay conciliation
process that he initiated.
On January 12, 1995, contending that they could not have sold their
respective shares in subject property when they were minors, petitioners filed
before the Regional Trial Court of Maasin, Southern Leyte, a complaint for
redemption of the subject land plus damages.
In their answer, respondents-spouses maintained that petitioners were
estopped from claiming any right over subject property considering that (1)
petitioner Rito had already received the amount corresponding to his share of
the proceeds of the sale of subject property, and (2) that petitioner Nelson
failed to consign to the court the total amount of the redemption price
necessary for legal redemption. They prayed for the dismissal of the case on
the grounds of laches and prescription.
No amicable settlement was reached at pre-trial. Trial ensued and on August
11, 2000, the trial court ruled against petitioners. It held that (1) Alberto or, by
his death, any of his heirs including petitioner Nelson lost their right to subject
land when not one of them repurchased it from Dr. Corrompido; (2) Saturnina
was effectively subrogated to the rights and interests of Alberto when she
paid for Alberto’s share as well as his obligation to Dr. Corrompido; and (3)
petitioner Rito had no more right to redeem his share to subject property as
the sale by Saturnina, his legal guardian pursuant to Section 7, Rule 93 of
the Rules of Court, was perfectly valid; and it was shown that he received his
share of the proceeds of the sale on July 24, 1986, when he was 24 years
old.
On appeal, the Court of Appeals modified the decision of the trial court. It
held that the sale by Saturnina of petitioner Rito’s undivided share to the
property was unenforceable for lack of authority or legal representation but
that the contract was effectively ratified by petitioner Rito’s receipt of the
proceeds on July 24, 1986. The appellate court also ruled that petitioner
Nelson is co-owner to the extent of one-seventh (1/7) of subject property as
Saturnina was not subrogated to Alberto’s rights when she repurchased his
share to the property. It further directed petitioner Nelson to pay the estate of
the late Saturnina Cabales the amount of ₱966.66, representing the amount
which the latter paid for the obligation of petitioner Nelson’s late father
Alberto. Finally, however, it denied petitioner Nelson’s claim for redemption
for his failure to tender or consign in court the redemption money within the
period prescribed by law.
In this petition for review on certiorari, petitioners contend that the Court of
Appeals erred in (1) recognizing petitioner Nelson Cabales as co-owner of
subject land but denied him the right of legal redemption, and (2) not
recognizing petitioner Rito Cabales as co-owner of subject land with similar
right of legal redemption.
First, we shall delineate the rights of petitioners to subject land.
When Rufino Cabales died intestate, his wife Saturnina and his six (6)
children, Bonifacio, Albino, Francisco, Leonora, Alberto and petitioner Rito,
survived and succeeded him. Article 996 of the New Civil Code provides that
"[i]f a widow or widower and legitimate children or descendants are left, the
surviving spouse has in the succession the same share as that of each of the
children." Verily, the seven (7) heirs inherited equally on subject property.
Petitioner Rito and Alberto, petitioner Nelson’s father, inherited in their own
rights and with equal shares as the others.
But before partition of subject land was effected, Alberto died. By operation of
law, his rights and obligations to one-seventh of subject land were transferred
to his legal heirs – his wife and his son petitioner Nelson.
We shall now discuss the effects of the two (2) sales of subject land to the
rights of the parties.
The first sale with pacto de retro to Dr. Corrompido by the brothers and co-
owners Bonifacio, Albino and Alberto was valid but only as to their pro-
indiviso shares to the land. When Alberto died prior to repurchasing his
share, his rights and obligations were transferred to and assumed by his
heirs, namely his wife and his son, petitioner Nelson. But the records show
that it was Saturnina, Alberto’s mother, and not his heirs, who repurchased
for him. As correctly ruled by the Court of Appeals, Saturnina was not
subrogated to Alberto’s or his heirs’ rights to the property when she
repurchased the share.
In Paulmitan v. Court of Appeals,3 we held that a co-owner who redeemed
the property in its entirety did not make her the owner of all of it. The property
remained in a condition of co-ownership as the redemption did not provide for
a mode of terminating a co-ownership.4 But the one who redeemed had the
right to be reimbursed for the redemption price and until reimbursed, holds a
lien upon the subject property for the amount due.5 Necessarily, when
Saturnina redeemed for Alberto’s heirs who had then acquired his pro-
indiviso share in subject property, it did not vest in her ownership over the
pro-indiviso share she redeemed. But she had the right to be reimbursed for
the redemption price and held a lien upon the property for the amount due
until reimbursement. The result is that the heirs of Alberto, i.e., his wife and
his son petitioner Nelson, retained ownership over their pro-indiviso share.
Upon redemption from Dr. Corrompido, the subject property was resold to
respondents-spouses by the co-owners. Petitioners Rito and Nelson were
then minors and as indicated in the Deed of Sale, their shares in the
proceeds were held in trust by respondents-spouses to be paid and delivered
to them upon reaching the age of majority.
As to petitioner Rito, the contract of sale was unenforceable as correctly held
by the Court of Appeals. Articles 320 and 326 of the New Civil Code6 state
that:
Art. 320. The father, or in his absence the mother, is the legal administrator
of the property pertaining to the child under parental authority. If the property
is worth more than two thousand pesos, the father or mother shall give a
bond subject to the approval of the Court of First Instance.
Art. 326. When the property of the child is worth more than two thousand
pesos, the father or mother shall be considered a guardian of the child’s
property, subject to the duties and obligations of guardians under the Rules
of Court.
In other words, the father, or, in his absence, the mother, is considered legal
administrator of the property pertaining to the child under his or her parental
authority without need of giving a bond in case the amount of the property of
the child does not exceed two thousand pesos.7 Corollary to this, Rule 93,
Section 7 of the Revised Rules of Court of 1964, applicable to this case,
automatically designates the parent as legal guardian of the child without
need of any judicial appointment in case the latter’s property does not exceed
two thousand pesos,8 thus:
Sec. 7. Parents as guardians. – When the property of the child under
parental authority is worth two thousand pesos or less, the father or the
mother, without the necessity of court appointment, shall be his legal
guardian x x x x9
Saturnina was clearly petitioner Rito’s legal guardian without necessity of
court appointment considering that the amount of his property or one-seventh
of subject property was ₱1,143.00, which is less than two thousand pesos.
However, Rule 96, Sec. 110 provides that:
Section 1. To what guardianship shall extend. – A guardian appointed shall
have the care and custody of the person of his ward, and the management of
his estate, or the management of the estate only, as the case may be. The
guardian of the estate of a nonresident shall have the management of all the
estate of the ward within the Philippines, and no court other than that in
which such guardian was appointed shall have jurisdiction over the
guardianship.
Indeed, the legal guardian only has the plenary power of administration of the
minor’s property. It does not include the power of alienation which needs
judicial authority.11 Thus, when Saturnina, as legal guardian of petitioner Rito,
sold the latter’s pro-indiviso share in subject land, she did not have the legal
authority to do so.
Article 1403 of the New Civil Code provides, thus:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his
powers;
xxxx
Accordingly, the contract of sale as to the pro-indiviso share of petitioner Rito
was unenforceable. However, when he acknowledged receipt of the
proceeds of the sale on July 24, 1986, petitioner Rito effectively ratified it.
This act of ratification rendered the sale valid and binding as to him.
With respect to petitioner Nelson, on the other hand, the contract of sale was
void. He was a minor at the time of the sale. Saturnina or any and all the
other co-owners were not his legal guardians with judicial authority to
alienate or encumber his property. It was his mother who was his legal
guardian and, if duly authorized by the courts, could validly sell his undivided
share to the property. She did not. Necessarily, when Saturnina and the
others sold the subject property in its entirety to respondents-spouses, they
only sold and transferred title to their pro-indiviso shares and not that part
which pertained to petitioner Nelson and his mother. Consequently, petitioner
Nelson and his mother retained ownership over their undivided share of
subject property.12
But may petitioners redeem the subject land from respondents-spouses?
Articles 1088 and 1623 of the New Civil Code are pertinent:
Art. 1088. Should any of the heirs sell his hereditary rights to a stranger
before the partition, any or all of the co-heirs may be subrogated to the rights
of the purchaser by reimbursing him for the price of the sale, provided they
do so within the period of one month from the time they were notified in
writing of the sale by the vendor.
Art. 1623. The right of legal pre-emption or redemption shall not be exercised
except within thirty days from the notice in writing by the prospective vendor,
or by the vendor, as the case may be. The deed of sale shall not be recorded
in the Registry of Property, unless accompanied by an affidavit of the vendor
that he has given written notice thereof to all possible redemptioners.
The right of redemption of co-owners excludes that of adjoining owners.
Clearly, legal redemption may only be exercised by the co-owner or co-
owners who did not part with his or their pro-indiviso share in the property
held in common. As demonstrated, the sale as to the undivided share of
petitioner Rito became valid and binding upon his ratification on July 24,
1986. As a result, he lost his right to redeem subject property.
However, as likewise established, the sale as to the undivided share of
petitioner Nelson and his mother was not valid such that they were not
divested of their ownership thereto. Necessarily, they may redeem the
subject property from respondents-spouses. But they must do so within thirty
days from notice in writing of the sale by their co-owners vendors. In
reckoning this period, we held in Alonzo v. Intermediate Appellate
Court,13 thus:
x x x we test a law by its results; and likewise, we may add, by its purposes.
It is a cardinal rule that, in seeking the meaning of the law, the first concern of
the judge should be to discover in its provisions the intent of the lawmaker.
Unquestionably, the law should never be interpreted in such a way as to
cause injustice as this is never within the legislative intent. An indispensable
part of that intent, in fact, for we presume the good motives of the legislature,
is to render justice.
Thus, we interpret and apply the law not independently of but in consonance
with justice. Law and justice are inseparable, and we must keep them so. x x
xx
x x x x While we may not read into the law a purpose that is not there, we
nevertheless have the right to read out of it the reason for its enactment. In
doing so, we defer not to "the letter that killeth" but to "the spirit that vivifieth,"
to give effect to the lawmaker’s will.
In requiring written notice, Article 1088 (and Article 1623 for that
matter)14 seeks to ensure that the redemptioner is properly notified of the sale
and to indicate the date of such notice as the starting time of the 30-day
period of redemption. Considering the shortness of the period, it is really
necessary, as a general rule, to pinpoint the precise date it is supposed to
begin, to obviate the problem of alleged delays, sometimes consisting of only
a day or two.1awph!1
In the instant case, the right of redemption was invoked not days but years
after the sale was made in 1978. We are not unmindful of the fact that
petitioner Nelson was a minor when the sale was perfected. Nevertheless,
the records show that in 1988, petitioner Nelson, then of majority age, was
informed of the sale of subject property. Moreover, it was noted by the
appellate court that petitioner Nelson was likewise informed thereof in 1993
and he signified his intention to redeem subject property during a barangay
conciliation process. But he only filed the complaint for legal redemption and
damages on January 12, 1995, certainly more than thirty days from learning
about the sale.
In the face of the established facts, petitioner Nelson cannot feign ignorance
of the sale of subject property in 1978. To require strict proof of written notice
of the sale would be to countenance an obvious false claim of lack of
knowledge thereof, thus commending the letter of the law over its purpose,
i.e., the notification of redemptioners.
The Court is satisfied that there was sufficient notice of the sale to petitioner
Nelson. The thirty-day redemption period commenced in 1993, after
petitioner Nelson sought the barangay conciliation process to redeem his
property. By January 12, 1995, when petitioner Nelson filed a complaint for
legal redemption and damages, it is clear that the thirty-day period had
already expired.

As in Alonzo, the Court, after due consideration of the facts of the instant
case, hereby interprets the law in a way that will render justice.15

Petitioner Nelson, as correctly held by the Court of Appeals, can no longer

redeem subject property. But he and his mother remain co-owners thereof
with respondents-spouses. Accordingly, title to subject property must include
them.

IN VIEW WHEREOF, the petition is DENIED. The assailed decision and

resolution of the Court of Appeals of October 27, 2003 and February 23,
2004 are AFFIRMED WITH MODIFICATION. The Register of Deeds of
Southern Leyte is ORDERED to cancel Original Certificate of Title No. 17035
and to issue in lieu thereof a new certificate of title in the name of
respondents-spouses Jesus and Anunciacion Feliano for the 6/7 portion, and
petitioner Nelson Cabales and his mother for the remaining 1/7 portion, pro
indiviso.

SO ORDERED.