Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-11827             July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee,
vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO.,
INC., SEGUNDINA VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and
FERNANDO TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.

REYES, J.B.L., J.:

This appeal comes to us directly from the Court of First Instance because the claims
involved aggregate more than P200,000.00.

Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or
in a representative capacity, of 11 iron lode mineral claims, known as the Dawahan
Group, situated in the municipality of Jose Panganiban, province of Camarines Norte.

By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted

and appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact
to enter into a contract with any individual or juridical person for the exploration and
development of the mining claims aforementioned on a royalty basis of not less than
P0.50 per ton of ore that might be extracted therefrom. On March 19, 1954, Gaite in turn
executed a general assignment (Record on Appeal, pp. 17-19) conveying the
development and exploitation of said mining claims into the Larap Iron Mines, a single
proprietorship owned solely by and belonging to him, on the same royalty basis
provided for in Exhibit "3". Thereafter, Gaite embarked upon the development and
exploitation of the mining claims in question, opening and paving roads within and
outside their boundaries, making other improvements and installing facilities therein for
use in the development of the mines, and in time extracted therefrom what he claim and
estimated to be approximately 24,000 metric tons of iron ore.

For some reason or another, Isabelo Fonacier decided to revoke the authority granted
by him to Gaite to exploit and develop the mining claims in question, and Gaite
assented thereto subject to certain conditions. As a result, a document entitled
"Revocation of Power of Attorney and Contract" was executed on December 8, 1954
(Exhibit "A"),wherein Gaite transferred to Fonacier, for the consideration of P20,000.00,
plus 10% of the royalties that Fonacier would receive from the mining claims, all his
rights and interests on all the roads, improvements, and facilities in or outside said
claims, the right to use the business name "Larap Iron Mines" and its goodwill, and all
the records and documents relative to the mines. In the same document, Gaite
transferred to Fonacier all his rights and interests over the "24,000 tons of iron ore,
more or less" that the former had already extracted from the mineral claims, in
consideration of the sum of P75,000.00, P10,000.00 of which was paid upon the signing
of the agreement, and

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid

from and out of the first letter of credit covering the first shipment of iron ores and
of the first amount derived from the local sale of iron ore made by the Larap
Mines & Smelting Co. Inc., its assigns, administrators, or successors in interests.

To secure the payment of the said balance of P65,000.00, Fonacier promised to

execute in favor of Gaite a surety bond, and pursuant to the promise, Fonacier delivered
to Gaite a surety bond dated December 8, 1954 with himself (Fonacier) as principal and
the Larap Mines and Smelting Co. and its stockholders George Krakower, Segundina
Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1").
Gaite testified, however, that when this bond was presented to him by Fonacier together
with the "Revocation of Power of Attorney and Contract", Exhibit "A", on December 8,
1954, he refused to sign said Exhibit "A" unless another bond under written by a
bonding company was put up by defendants to secure the payment of the P65,000.00
balance of their price of the iron ore in the stockpiles in the mining claims. Hence, a
second bond, also dated December 8, 1954 (Exhibit "B"),was executed by the same
parties to the first bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as
additional surety, but it provided that the liability of the surety company would attach
only when there had been an actual sale of iron ore by the Larap Mines & Smelting Co.
for an amount of not less then P65,000.00, and that, furthermore, the liability of said
surety company would automatically expire on December 8, 1955. Both bonds were
attached to the "Revocation of Power of Attorney and Contract", Exhibit "A", and made
integral parts thereof.

On the same day that Fonacier revoked the power of attorney he gave to Gaite and the
two executed and signed the "Revocation of Power of Attorney and Contract", Exhibit
"A", Fonacier entered into a "Contract of Mining Operation", ceding, transferring, and
conveying unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and
explore the mining claims in question, together with the improvements therein and the
use of the name "Larap Iron Mines" and its good will, in consideration of certain
royalties. Fonacier likewise transferred, in the same document, the complete title to the
approximately 24,000 tons of iron ore which he acquired from Gaite, to the Larap &
Smelting Co., in consideration for the signing by the company and its stockholders of
the surety bonds delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).

Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far
Eastern Surety and Insurance Company, no sale of the approximately 24,000 tons of
iron ore had been made by the Larap Mines & Smelting Co., Inc., nor had the
P65,000.00 balance of the price of said ore been paid to Gaite by Fonacier and his
sureties payment of said amount, on the theory that they had lost right to make use of
the period given them when their bond, Exhibit "B" automatically expired (Exhibits "C" to
"C-24"). And when Fonacier and his sureties failed to pay as demanded by Gaite, the
latter filed the present complaint against them in the Court of First Instance of Manila
(Civil Case No. 29310) for the payment of the P65,000.00 balance of the price of the
ore, consequential damages, and attorney's fees.

All the defendants except Francisco Dante set up the uniform defense that the
obligation sued upon by Gaite was subject to a condition that the amount of P65,000.00
would be payable out of the first letter of credit covering the first shipment of iron ore
and/or the first amount derived from the local sale of the iron ore by the Larap Mines &
Smelting Co., Inc.; that up to the time of the filing of the complaint, no sale of the iron
ore had been made, hence the condition had not yet been fulfilled; and that
consequently, the obligation was not yet due and demandable. Defendant Fonacier also
contended that only 7,573 tons of the estimated 24,000 tons of iron ore sold to him by
Gaite was actually delivered, and counterclaimed for more than P200,000.00 damages.

At the trial of the case, the parties agreed to limit the presentation of evidence to two
issues:

(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00
become due and demandable when the defendants failed to renew the surety bond
underwritten by the Far Eastern Surety and Insurance Co., Inc. (Exhibit "B"), which
expired on December 8, 1955; and

(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant
Fonacier were actually in existence in the mining claims when these parties executed
the "Revocation of Power of Attorney and Contract", Exhibit "A."

On the first question, the lower court held that the obligation of the defendants to pay
plaintiff the P65,000.00 balance of the price of the approximately 24,000 tons of iron ore
was one with a term: i.e., that it would be paid upon the sale of sufficient iron ore by
defendants, such sale to be effected within one year or before December 8, 1955; that
the giving of security was a condition precedent to Gait's giving of credit to defendants;
and that as the latter failed to put up a good and sufficient security in lieu of the Far
Eastern Surety bond (Exhibit "B") which expired on December 8, 1955, the obligation
became due and demandable under Article 1198 of the New Civil Code.

As to the second question, the lower court found that plaintiff Gaite did have
approximately 24,000 tons of iron ore at the mining claims in question at the time of the
execution of the contract Exhibit "A."

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to

pay him, jointly and severally, P65,000.00 with interest at 6% per annum from
December 9, 1955 until payment, plus costs. From this judgment, defendants jointly
appealed to this Court.

During the pendency of this appeal, several incidental motions were presented for
resolution: a motion to declare the appellants Larap Mines & Smelting Co., Inc. and
George Krakower in contempt, filed by appellant Fonacier, and two motions to dismiss
the appeal as having become academic and a motion for new trial and/or to take judicial
notice of certain documents, filed by appellee Gaite. The motion for contempt is
unmeritorious because the main allegation therein that the appellants Larap Mines &
Smelting Co., Inc. and Krakower had sold the iron ore here in question, which allegedly
is "property in litigation", has not been substantiated; and even if true, does not make
these appellants guilty of contempt, because what is under litigation in this appeal is
appellee Gaite's right to the payment of the balance of the price of the ore, and not the
iron ore itself. As for the several motions presented by appellee Gaite, it is unnecessary
to resolve these motions in view of the results that we have reached in this case, which
we shall hereafter discuss.

The main issues presented by appellants in this appeal are:

(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay
appellee Gaite the P65,000.00 (balance of the price of the iron ore in question)is one
with a period or term and not one with a suspensive condition, and that the term expired
on December 8, 1955; and

(2) that the lower court erred in not holding that there were only 10,954.5 tons in the
stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.

The first issue involves an interpretation of the following provision in the contract Exhibit
"A":

7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F.

Fonacier all his rights and interests over the 24,000 tons of iron ore, more or less,
above-referred to together with all his rights and interests to operate the mine in
consideration of the sum of SEVENTY-FIVE THOUSAND PESOS (P75,000.00)
which the latter binds to pay as follows:

a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this
agreement.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid

from and out of the first letter of credit covering the first shipment of iron ore
made by the Larap Mines & Smelting Co., Inc., its assigns, administrators, or
successors in interest.

We find the court below to be legally correct in holding that the shipment or local sale of
the iron ore is not a condition precedent (or suspensive) to the payment of the balance
of P65,000.00, but was only a suspensive period or term. What characterizes a
conditional obligation is the fact that its efficacy or obligatory force (as distinguished
from its demandability) is subordinated to the happening of a future and uncertain event;
so that if the suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed. That the parties to the contract Exhibit "A" did
not intend any such state of things to prevail is supported by several circumstances:

1) The words of the contract express no contingency in the buyer's obligation to pay:
"The balance of Sixty-Five Thousand Pesos (P65,000.00) will be paid out of the first
letter of credit covering the first shipment of iron ores . . ." etc. There is no uncertainty
that the payment will have to be made sooner or later; what is undetermined is merely
the exact date at which it will be made. By the very terms of the contract, therefore, the
existence of the obligation to pay is recognized; only its maturity or demandability is
deferred.

2) A contract of sale is normally commutative and onerous: not only does each one of
the parties assume a correlative obligation (the seller to deliver and transfer ownership
of the thing sold and the buyer to pay the price),but each party anticipates performance
by the other from the very start. While in a sale the obligation of one party can be
lawfully subordinated to an uncertain event, so that the other understands that he
assumes the risk of receiving nothing for what he gives (as in the case of a sale of
hopes or expectations, emptio spei), it is not in the usual course of business to do so;
hence, the contingent character of the obligation must clearly appear. Nothing is found
in the record to evidence that Gaite desired or assumed to run the risk of losing his right
over the ore without getting paid for it, or that Fonacier understood that Gaite assumed
any such risk. This is proved by the fact that Gaite insisted on a bond a to guarantee
payment of the P65,000.00, an not only upon a bond by Fonacier, the Larap Mines &
Smelting Co., and the company's stockholders, but also on one by a surety company;
and the fact that appellants did put up such bonds indicates that they admitted the
definite existence of their obligation to pay the balance of P65,000.00.

3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or

shipment of the ore as a condition precedent, would be tantamount to leaving the
payment at the discretion of the debtor, for the sale or shipment could not be made
unless the appellants took steps to sell the ore. Appellants would thus be able to
postpone payment indefinitely. The desireability of avoiding such a construction of the
contract Exhibit "A" needs no stressing.

4) Assuming that there could be doubt whether by the wording of the contract the
parties indented a suspensive condition or a suspensive period (dies ad quem) for the
payment of the P65,000.00, the rules of interpretation would incline the scales in favor
of "the greater reciprocity of interests", since sale is essentially onerous. The Civil Code
of the Philippines, Article 1378, paragraph 1, in fine, provides:

If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.
and there can be no question that greater reciprocity obtains if the buyer' obligation is
deemed to be actually existing, with only its maturity (due date) postponed or deferred,
that if such obligation were viewed as non-existent or not binding until the ore was sold.

The only rational view that can be taken is that the sale of the ore to Fonacier was a
sale on credit, and not an aleatory contract where the transferor, Gaite, would assume
the risk of not being paid at all; and that the previous sale or shipment of the ore was
not a suspensive condition for the payment of the balance of the agreed price, but was
intended merely to fix the future date of the payment.

This issue settled, the next point of inquiry is whether appellants, Fonacier and his
sureties, still have the right to insist that Gaite should wait for the sale or shipment of the
ore before receiving payment; or, in other words, whether or not they are entitled to take
full advantage of the period granted them for making the payment.

We agree with the court below that the appellant have forfeited the right court below that
the appellants have forfeited the right to compel Gaite to wait for the sale of the ore
before receiving payment of the balance of P65,000.00, because of their failure to
renew the bond of the Far Eastern Surety Company or else replace it with an equivalent
guarantee. The expiration of the bonding company's undertaking on December 8, 1955
substantially reduced the security of the vendor's rights as creditor for the unpaid
P65,000.00, a security that Gaite considered essential and upon which he had insisted
when he executed the deed of sale of the ore to Fonacier (Exhibit "A"). The case
squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the
Philippines:

"ART. 1198. The debtor shall lose every right to make use of the period:

(1) . . .

(2) When he does not furnish to the creditor the guaranties or securities which he
has promised.

(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory.

Appellants' failure to renew or extend the surety company's bond upon its expiration
plainly impaired the securities given to the creditor (appellee Gaite), unless immediately
renewed or replaced.

There is no merit in appellants' argument that Gaite's acceptance of the surety

company's bond with full knowledge that on its face it would automatically expire within
one year was a waiver of its renewal after the expiration date. No such waiver could
have been intended, for Gaite stood to lose and had nothing to gain barely; and if there
was any, it could be rationally explained only if the appellants had agreed to sell the ore
and pay Gaite before the surety company's bond expired on December 8, 1955. But in
the latter case the defendants-appellants' obligation to pay became absolute after one
year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A.".

All the alternatives, therefore, lead to the same result: that Gaite acted within his rights
in demanding payment and instituting this action one year from and after the contract
(Exhibit "A") was executed, either because the appellant debtors had impaired the
securities originally given and thereby forfeited any further time within which to pay; or
because the term of payment was originally of no more than one year, and the balance
of P65,000.00 became due and payable thereafter.

Coming now to the second issue in this appeal, which is whether there were really
24,000 tons of iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier,
and whether, if there had been a short-delivery as claimed by appellants, they are
entitled to the payment of damages, we must, at the outset, stress two things: first, that
this is a case of a sale of a specific mass of fungible goods for a single price or a lump
sum, the quantity of "24,000 tons of iron ore, more or less," stated in the contract Exhibit
"A," being a mere estimate by the parties of the total tonnage weight of the mass;
and second, that the evidence shows that neither of the parties had actually measured
of weighed the mass, so that they both tried to arrive at the total quantity by making an
estimate of the volume thereof in cubic meters and then multiplying it by the estimated
weight per ton of each cubic meter.

The sale between the parties is a sale of a specific mass or iron ore because no
provision was made in their contract for the measuring or weighing of the ore sold in
order to complete or perfect the sale, nor was the price of P75,000,00 agreed upon by
the parties based upon any such measurement.(see Art. 1480, second par., New Civil
Code). The subject matter of the sale is, therefore, a determinate object, the mass, and
not the actual number of units or tons contained therein, so that all that was required of
the seller Gaite was to deliver in good faith to his buyer all of the ore found in the mass,
notwithstanding that the quantity delivered is less than the amount estimated by them
(Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872,
applying art. 2459 of the Louisiana Civil Code). There is no charge in this case that
Gaite did not deliver to appellants all the ore found in the stockpiles in the mining claims
in questions; Gaite had, therefore, complied with his promise to deliver, and appellants
in turn are bound to pay the lump price.

But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not
a definite mass, but approximately 24,000 tons of ore, so that any substantial difference
in this quantity delivered would entitle the buyers to recover damages for the short-
delivery, was there really a short-delivery in this case?

We think not. As already stated, neither of the parties had actually measured or
weighed the whole mass of ore cubic meter by cubic meter, or ton by ton. Both parties
predicate their respective claims only upon an estimated number of cubic meters of ore
multiplied by the average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the
stockpiles of ore that he sold to Fonacier, while appellants contend that by actual
measurement, their witness Cirpriano Manlañgit found the total volume of ore in the
stockpiles to be only 6.609 cubic meters. As to the average weight in tons per cubic
meter, the parties are again in disagreement, with appellants claiming the correct
tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite claims that the
correct tonnage factor is about 3.7.

In the face of the conflict of evidence, we take as the most reliable estimate of the
tonnage factor of iron ore in this case to be that made by Leopoldo F. Abad, chief of the
Mines and Metallurgical Division of the Bureau of Mines, a government pensionado to
the States and a mining engineering graduate of the Universities of Nevada and
California, with almost 22 years of experience in the Bureau of Mines. This witness
placed the tonnage factor of every cubic meter of iron ore at between 3 metric tons as
minimum to 5 metric tons as maximum. This estimate, in turn, closely corresponds to
the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and FF-
1") by engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining
claims involved at the request of appellant Krakower, precisely to make an official
estimate of the amount of iron ore in Gaite's stockpiles after the dispute arose.

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

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

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

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the
same, with costs against appellants.

Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon a

G.R. No. 126376               November 20, 2003

SPOUSES BERNARDO BUENAVENTURA and CONSOLACION JOAQUIN,

SPOUSES JUANITO EDRA and NORA JOAQUIN, SPOUSES RUFINO VALDOZ and
EMMA JOAQUIN, and NATIVIDAD JOAQUIN, petitioners,
vs.
COURT OF APPEALS, SPOUSES LEONARDO JOAQUIN and FELICIANA
LANDRITO, SPOUSES FIDEL JOAQUIN and CONCHITA BERNARDO, SPOUSES
TOMAS JOAQUIN and SOLEDAD ALCORAN, SPOUSES ARTEMIO JOAQUIN and
SOCORRO ANGELES, SPOUSES ALEXANDER MENDOZA and CLARITA
JOAQUIN, SPOUSES TELESFORO CARREON and FELICITAS JOAQUIN,
SPOUSES DANILO VALDOZ and FE JOAQUIN, and SPOUSES GAVINO JOAQUIN
and LEA ASIS, respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review on certiorari 1 to annul the Decision2 dated 26 June 1996 of
the Court of Appeals in CA-G.R. CV No. 41996. The Court of Appeals affirmed the
Decision3 dated 18 February 1993 rendered by Branch 65 of the Regional Trial Court of
Makati ("trial court") in Civil Case No. 89-5174. The trial court dismissed the case after it
found that the parties executed the Deeds of Sale for valid consideration and that the
plaintiffs did not have a cause of action against the defendants.

The Facts

The Court of Appeals summarized the facts of the case as follows:

Defendant spouses Leonardo Joaquin and Feliciana Landrito are the parents of
plaintiffs Consolacion, Nora, Emma and Natividad as well as of defendants Fidel,
Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all surnamed JOAQUIN. The
married Joaquin children are joined in this action by their respective spouses.

Sought to be declared null and void ab initio are certain deeds of sale of real property
executed by defendant parents Leonardo Joaquin and Feliciana Landrito in favor of
their co-defendant children and the corresponding certificates of title issued in their
names, to wit:

1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan (LRC) Psd-
256395 executed on 11 July 1978, in favor of defendant Felicitas Joaquin, for a
consideration of ₱6,000.00 (Exh. "C"), pursuant to which TCT No. [36113/T-172]
was issued in her name (Exh. "C-1");
 2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC) Psd-
256394 executed on 7 June 1979, in favor of defendant Clarita Joaquin, for a
consideration of ₱1[2],000.00 (Exh. "D"), pursuant to which TCT No. S-109772
was issued in her name (Exh. "D-1");

3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC) Psd-
256394 executed on 12 May 1988, in favor of defendant spouses Fidel Joaquin
and Conchita Bernardo, for a consideration of ₱54,[3]00.00 (Exh. "E"), pursuant
to which TCT No. 155329 was issued to them (Exh. "E-1");

4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC) Psd-
256394 executed on 12 May 1988, in favor of defendant spouses Artemio
Joaquin and Socorro Angeles, for a consideration of ₱[54,3]00.00 (Exh. "F"),
pursuant to which TCT No. 155330 was issued to them (Exh. "F-1"); and

5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision plan (LRC)
Psd-256395 executed on 9 September 1988, in favor of Tomas Joaquin, for a
consideration of ₱20,000.00 (Exh. "G"), pursuant to which TCT No. 157203 was
issued in her name (Exh. "G-1").

6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC) Psd-
256395 executed on 7 October 1988, in favor of Gavino Joaquin, for a
consideration of ₱25,000.00 (Exh. "K"), pursuant to which TCT No. 157779 was
issued in his name (Exh. "K-1").]

In seeking the declaration of nullity of the aforesaid deeds of sale and certificates of title,
plaintiffs, in their complaint, aver:

- XX-

The deeds of sale, Annexes "C," "D," "E," "F," and "G," [and "K"] are simulated as they
are, are NULL AND VOID AB INITIO because –

a) Firstly, there was no actual valid consideration for the deeds of sale xxx over
the properties in litis;

b) Secondly, assuming that there was consideration in the sums reflected in the
questioned deeds, the properties are more than three-fold times more valuable
than the measly sums appearing therein;

c) Thirdly, the deeds of sale do not reflect and express the true intent of the
parties (vendors and vendees); and

d) Fourthly, the purported sale of the properties in litis was the result of a

deliberate conspiracy designed to unjustly deprive the rest of the compulsory
heirs (plaintiffs herein) of their legitime.
- XXI -

Necessarily, and as an inevitable consequence, Transfer Certificates of Title Nos.

36113/T-172, S-109772, 155329, 155330, 157203 [and 157779] issued by the Registrar
of Deeds over the properties in litis xxx are NULL AND VOID AB INITIO.

Defendants, on the other hand aver (1) that plaintiffs do not have a cause of action
against them as well as the requisite standing and interest to assail their titles over the
properties in litis; (2) that the sales were with sufficient considerations and made by
defendants parents voluntarily, in good faith, and with full knowledge of the
consequences of their deeds of sale; and (3) that the certificates of title were issued
with sufficient factual and legal basis.4 (Emphasis in the original)

The Ruling of the Trial Court

Before the trial, the trial court ordered the dismissal of the case against defendant
spouses Gavino Joaquin and Lea Asis. 5 Instead of filing an Answer with their co-
defendants, Gavino Joaquin and Lea Asis filed a Motion to Dismiss. 6 In granting the
dismissal to Gavino Joaquin and Lea Asis, the trial court noted that "compulsory heirs
have the right to a legitime but such right is contingent since said right commences only
from the moment of death of the decedent pursuant to Article 777 of the Civil Code of
the Philippines."7

After trial, the trial court ruled in favor of the defendants and dismissed the complaint.
The trial court stated:

In the first place, the testimony of the defendants, particularly that of the xxx father will
show that the Deeds of Sale were all executed for valuable consideration. This
assertion must prevail over the negative allegation of plaintiffs.

And then there is the argument that plaintiffs do not have a valid cause of action against
defendants since there can be no legitime to speak of prior to the death of their parents.
The court finds this contention tenable. In determining the legitime, the value of the
property left at the death of the testator shall be considered (Art. 908 of the New Civil
Code). Hence, the legitime of a compulsory heir is computed as of the time of the death
of the decedent. Plaintiffs therefore cannot claim an impairment of their legitime while
their parents live.

All the foregoing considered, this case is DISMISSED.

In order to preserve whatever is left of the ties that should bind families together, the
counterclaim is likewise DISMISSED.

No costs.

SO ORDERED.8
The Ruling of the Court of Appeals

The Court of Appeals affirmed the decision of the trial court.1âwphi1 The appellate court
ruled:

To the mind of the Court, appellants are skirting the real and decisive issue in this case,
which is, whether xxx they have a cause of action against appellees.

Upon this point, there is no question that plaintiffs-appellants, like their defendant
brothers and sisters, are compulsory heirs of defendant spouses, Leonardo Joaquin and
Feliciana Landrito, who are their parents. However, their right to the properties of their
defendant parents, as compulsory heirs, is merely inchoate and vests only upon the
latter’s death. While still alive, defendant parents are free to dispose of their properties,
provided that such dispositions are not made in fraud of creditors.

Plaintiffs-appellants are definitely not parties to the deeds of sale in question. Neither do
they claim to be creditors of their defendant parents. Consequently, they cannot be
considered as real parties in interest to assail the validity of said deeds either for gross
inadequacy or lack of consideration or for failure to express the true intent of the parties.
In point is the ruling of the Supreme Court in Velarde, et al. vs. Paez, et al., 101 SCRA
376, thus:

The plaintiffs are not parties to the alleged deed of sale and are not principally or
subsidiarily bound thereby; hence, they have no legal capacity to challenge their
validity.

Plaintiffs-appellants anchor their action on the supposed impairment of their legitime by

the dispositions made by their defendant parents in favor of their defendant brothers
and sisters. But, as correctly held by the court a quo, "the legitime of a compulsory heir
is computed as of the time of the death of the decedent. Plaintiffs therefore cannot claim
an impairment of their legitime while their parents live."

With this posture taken by the Court, consideration of the errors assigned by plaintiffs-
appellants is inconsequential.

WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs against
plaintiffs-appellants.

SO ORDERED.9

Hence, the instant petition.

Issues

Petitioners assign the following as errors of the Court of Appeals:

 1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
CONVEYANCE IN QUESTION HAD NO VALID CONSIDERATION.

2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN

ASSUMING THAT THERE WAS A CONSIDERATION, THE SAME IS GROSSLY
INADEQUATE.

3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE DEEDS

OF SALE DO NOT EXPRESS THE TRUE INTENT OF THE PARTIES.

4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

CONVEYANCE WAS PART AND PARCEL OF A CONSPIRACY AIMED AT
UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF THE SPOUSES
LEONARDO JOAQUIN AND FELICIANA LANDRITO OF THEIR INTEREST
OVER THE SUBJECT PROPERTIES.

5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS

HAVE A GOOD, SUFFICIENT AND VALID CAUSE OF ACTION AGAINST THE
PRIVATE RESPONDENTS.10

The Ruling of the Court

We find the petition without merit.

We will discuss petitioners’ legal interest over the properties subject of the Deeds of
Sale before discussing the issues on the purported lack of consideration and gross
inadequacy of the prices of the Deeds of Sale.

Whether Petitioners have a legal interest over the properties subject of the Deeds of
Sale

Petitioners’ Complaint betrays their motive for filing this case. In their Complaint,
petitioners asserted that the "purported sale of the properties in litis was the result of a
deliberate conspiracy designed to unjustly deprive the rest of the compulsory heirs
(plaintiffs herein) of their legitime." Petitioners’ strategy was to have the Deeds of Sale
declared void so that ownership of the lots would eventually revert to their respondent
parents. If their parents die still owning the lots, petitioners and their respondent siblings
will then co-own their parents’ estate by hereditary succession. 11

It is evident from the records that petitioners are interested in the properties subject of
the Deeds of Sale, but they have failed to show any legal right to the properties. The
trial and appellate courts should have dismissed the action for this reason alone. An
action must be prosecuted in the name of the real party-in-interest. 12

[T]he question as to "real party-in-interest" is whether he is "the party who would be

benefitted or injured by the judgment, or the ‘party entitled to the avails of the suit.’"
xxx

In actions for the annulment of contracts, such as this action, the real parties are those
who are parties to the agreement or are bound either principally or subsidiarily or are
prejudiced in their rights with respect to one of the contracting parties and can show the
detriment which would positively result to them from the contract even though they did
not intervene in it (Ibañez v. Hongkong & Shanghai Bank, 22 Phil. 572 [1912]) xxx.

These are parties with "a present substantial interest, as distinguished from a mere
expectancy or future, contingent, subordinate, or consequential interest…. The phrase
‘present substantial interest’ more concretely is meant such interest of a party in the
subject matter of the action as will entitle him, under the substantive law, to recover if
the evidence is sufficient, or that he has the legal title to demand and the defendant will
be protected in a payment to or recovery by him." 13

Petitioners do not have any legal interest over the properties subject of the Deeds of
Sale. As the appellate court stated, petitioners’ right to their parents’ properties is
merely inchoate and vests only upon their parents’ death. While still living, the parents
of petitioners are free to dispose of their properties. In their overzealousness to
safeguard their future legitime, petitioners forget that theoretically, the sale of the lots to
their siblings does not affect the value of their parents’ estate. While the sale of the lots
reduced the estate, cash of equivalent value replaced the lots taken from the estate.

Whether the Deeds of Sale are void for lack of consideration

Petitioners assert that their respondent siblings did not actually pay the prices stated in
the Deeds of Sale to their respondent father. Thus, petitioners ask the court to declare
the Deeds of Sale void.

A contract of sale is not a real contract, but a consensual contract. As a consensual

contract, a contract of sale becomes a binding and valid contract upon the meeting of
the minds as to price. If there is a meeting of the minds of the parties as to the price, the
contract of sale is valid, despite the manner of payment, or even the breach of that
manner of payment. If the real price is not stated in the contract, then the contract of
sale is valid but subject to reformation. If there is no meeting of the minds of the parties
as to the price, because the price stipulated in the contract is simulated, then the
contract is void.14 Article 1471 of the Civil Code states that if the price in a contract of
sale is simulated, the sale is void.

It is not the act of payment of price that determines the validity of a contract of sale.
Payment of the price has nothing to do with the perfection of the contract. Payment of
the price goes into the performance of the contract. Failure to pay the consideration is
different from lack of consideration. The former results in a right to demand the
fulfillment or cancellation of the obligation under an existing valid contract while the
latter prevents the existence of a valid contract. 15
Petitioners failed to show that the prices in the Deeds of Sale were absolutely
simulated. To prove simulation, petitioners presented Emma Joaquin Valdoz’s
testimony stating that their father, respondent Leonardo Joaquin, told her that he would
transfer a lot to her through a deed of sale without need for her payment of the
purchase price.16 The trial court did not find the allegation of absolute simulation of price
credible. Petitioners’ failure to prove absolute simulation of price is magnified by their
lack of knowledge of their respondent siblings’ financial capacity to buy the questioned
lots.17 On the other hand, the Deeds of Sale which petitioners presented as evidence
plainly showed the cost of each lot sold. Not only did respondents’ minds meet as to the
purchase price, but the real price was also stated in the Deeds of Sale. As of the filing of
the complaint, respondent siblings have also fully paid the price to their respondent
father.18

Whether the Deeds of Sale are void for gross inadequacy of price

Petitioners ask that assuming that there is consideration, the same is grossly
inadequate as to invalidate the Deeds of Sale.

Articles 1355 of the Civil Code states:

Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or undue influence.
(Emphasis supplied)

Article 1470 of the Civil Code further provides:

Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as may
indicate a defect in the consent, or that the parties really intended a donation or some
other act or contract. (Emphasis supplied)

Petitioners failed to prove any of the instances mentioned in Articles 1355 and 1470 of
the Civil Code which would invalidate, or even affect, the Deeds of Sale. Indeed, there
is no requirement that the price be equal to the exact value of the subject matter of sale.
All the respondents believed that they received the commutative value of what they
gave. As we stated in Vales v. Villa:19

Courts cannot follow one every step of his life and extricate him from bad bargains,
protect him from unwise investments, relieve him from one-sided contracts, or annul the
effects of foolish acts. Courts cannot constitute themselves guardians of persons who
are not legally incompetent. Courts operate not because one person has been defeated
or overcome by another, but because he has been defeated or overcome illegally. Men
may do foolish things, make ridiculous contracts, use miserable judgment, and lose
money by them – indeed, all they have in the world; but not for that alone can the law
intervene and restore. There must be, in addition, a violation of the law, the commission
of what the law knows as an actionable wrong, before the courts are authorized to lay
hold of the situation and remedy it. (Emphasis in the original)
Moreover, the factual findings of the appellate court are conclusive on the parties and
carry greater weight when they coincide with the factual findings of the trial court. This
Court will not weigh the evidence all over again unless there has been a showing that
the findings of the lower court are totally devoid of support or are clearly erroneous so
as to constitute serious abuse of discretion. 20 In the instant case, the trial court found
that the lots were sold for a valid consideration, and that the defendant children actually
paid the purchase price stipulated in their respective Deeds of Sale. Actual payment of
the purchase price by the buyer to the seller is a factual finding that is now conclusive
upon us.

WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Panganiban, Ynares-Santiago, and Azcuna, JJ., concur.

Celestino & Co. v. Collector, 99 Phil. 841 (1956)

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-27044 June 30, 1975

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX
APPEALS, respondents.

G.R. No. L-27452 June 30, 1975

ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX
APPEALS, respondent.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General

Felicisimo R. Rosete, Solicitor Lolita O. Gal-lang, and Special Attorney Gemaliel
H. Montalino for Commissioner of Internal Revenue, etc.
Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and
J.R. Balonkita for Engineering and Supply Company.

ESGUERRA, J.:

Petition for review on certiorari of the decision of the Court of Tax Appeals in
CTA Case No. 681, dated November 29, 1966, assessing a compensating tax of
P174,441.62 on the Engineering Equipment and Supply Company.

As found by the Court of Tax Appeals, and as established by the evidence on

record, the facts of this case are as follows:

Engineering Equipment and Supply Co. (Engineering for short), a domestic

corporation, is an engineering and machinery firm. As operator of an integrated
engineering shop, it is engaged, among others, in the design and installation of
central type air conditioning system, pumping plants and steel fabrications. (Vol. I
pp. 12-16 T.S.N. August 23, 1960)

On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now
Commissioner, of Internal Revenue denouncing Engineering for tax evasion by
misdeclaring its imported articles and failing to pay the correct percentage taxes
due thereon in connivance with its foreign suppliers (Exh. "2" p. 1 BIR record Vol.
I). Engineering was likewise denounced to the Central Bank (CB) for alleged fraud
in obtaining its dollar allocations. Acting on these denunciations, a raid and
search was conducted by a joint team of Central Bank, (CB), National Bureau of
Investigation (NBI) and Bureau of Internal Revenue (BIR) agents on September 27,
1956, on which occasion voluminous records of the firm were seized and
confiscated. (pp. 173-177 T.S.N.)

On September 30, 1957, revenue examiners Quesada and Catudan reported and
recommended to the then Collector, now Commissioner, of Internal Revenue
(hereinafter referred to as Commissioner) that Engineering be assessed for
P480,912.01 as deficiency advance sales tax on the theory that it misdeclared its
importation of air conditioning units and parts and accessories thereof which are
subject to tax under Section 185(m) 1 of the Tax Code, instead of Section 186 of the
same Code. (Exh. "3" pp. 59-63 BIR rec. Vol. I) This assessment was revised on
January 23, 1959, in line with the observation of the Chief, BIR Law Division, and was
raised to P916,362.56 representing deficiency advance sales tax and manufacturers
sales tax, inclusive of the 25% and 50% surcharges. (pp. 72-80 BIR rec. Vol. I)

On March 3, 1959. the Commissioner assessed against, and demanded upon,

Engineering payment of the increased amount and suggested that P10,000 be paid as
compromise in extrajudicial settlement of Engineering's penal liability for violation of the
Tax Code. The firm, however, contested the tax assessment and requested that it be
furnished with the details and particulars of the Commissioner's assessment. (Exh. "B"
and "15", pp. 86-88 BIR rec. Vol. I) The Commissioner replied that the assessment was
in accordance with law and the facts of the case.

On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and
during the pendency of the case the investigating revenue examiners reduced
Engineering's deficiency tax liabilities from P916,362.65 to P740,587.86 (Exhs. "R" and
"9" pp. 162-170, BIR rec.), based on findings after conferences had with Engineering's
Accountant and Auditor.

On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive
portion of which reads as follows:

For ALL THE FOREGOING CONSIDERATIONS, the decision of

respondent appealed from is hereby modified, and petitioner, as a
contractor, is declared exempt from the deficiency manufacturers sales tax
covering the period from June 1, 1948. to September 2, 1956. However,
petitioner is ordered to pay respondent, or his duly authorized collection
agent, the sum of P174,141.62 as compensating tax and 25% surcharge
for the period from 1953 to September 1956. With costs against petitioner.

The Commissioner, not satisfied with the decision of the Court of Tax Appeals,
appealed to this Court on January 18, 1967, (G.R. No. L-27044). On the other hand,
Engineering, on January 4, 1967, filed with the Court of Tax Appeals a motion for
reconsideration of the decision abovementioned. This was denied on April 6, 1967,
prompting Engineering to file also with this Court its appeal, docketed as G.R. No. L-
27452.

Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the same parties
and issues, We have decided to consolidate and jointly decide them.

Engineering in its Petition claims that the Court of Tax Appeals committed the following
errors:

1. That the Court of Tax Appeals erred in holding Engineering Equipment

& Supply Company liable to the 30% compensating tax on its importations
of equipment and ordinary articles used in the central type air conditioning
systems it designed, fabricated, constructed and installed in the buildings
and premises of its customers, rather than to the compensating tax of only
7%;

2. That the Court of Tax Appeals erred in holding Engineering Equipment

& Supply Company guilty of fraud in effecting the said importations on the
basis of incomplete quotations from the contents of alleged photostat
copies of documents seized illegally from Engineering Equipment and
Supply Company which should not have been admitted in evidence;
 3. That the Court of Tax Appeals erred in holding Engineering Equipment
& Supply Company liable to the 25% surcharge prescribed in Section 190
of the Tax Code;

4. That the Court of Tax Appeals erred in holding the assessment as not
having prescribed;

5. That the Court of Tax Appeals erred in holding Engineering Equipment

& Supply Company liable for the sum of P174,141.62 as 30%
compensating tax and 25% surcharge instead of completely absolving it
from the deficiency assessment of the Commissioner.

The Commissioner on the other hand claims that the Court of Tax Appeals erred:

1. In holding that the respondent company is a contractor and not a

manufacturer.

2. In holding respondent company liable to the 3% contractor's tax

imposed by Section 191 of the Tax Code instead of the 30% sales tax
prescribed in Section 185(m) in relation to Section 194(x) both of the same
Code;

3. In holding that the respondent company is subject only to the 30%

compensating tax under Section 190 of the Tax Code and not to the 30%
advance sales tax imposed by section 183 (b), in relation to section
185(m) both of the same Code, on its importations of parts and
accessories of air conditioning units;

4. In not holding the company liable to the 50% fraud surcharge under
Section 183 of the Tax Code on its importations of parts and accessories
of air conditioning units, notwithstanding the finding of said court that the
respondent company fraudulently misdeclared the said importations;

5. In holding the respondent company liable for P174,141.62 as

compensating tax and 25% surcharge instead of P740,587.86 as
deficiency advance sales tax, deficiency manufacturers tax and 25% and
50% surcharge for the period from June 1, 1948 to December 31, 1956.

The main issue revolves on the question of whether or not Engineering is a

manufacturer of air conditioning units under Section 185(m), supra, in relation to
Sections 183(b) and 194 of the Code, or a contractor under Section 191 of the same
Code.

The Commissioner contends that Engineering is a manufacturer and seller of air

conditioning units and parts or accessories thereof and, therefore, it is subject to the
30% advance sales tax prescribed by Section 185(m) of the Tax Code, in relation to
Section 194 of the same, which defines a manufacturer as follows:

Section 194. — Words and Phrases Defined. — In applying the provisions

of this Title, words and phrases shall be taken in the sense and extension
indicated below:

xxx xxx xxx

(x) "Manufacturer" includes every person who by physical or chemical

process alters the exterior texture or form or inner substance of any raw
material or manufactured or partially manufactured products in such
manner as to prepare it for a special use or uses to which it could not have
been put in its original condition, or who by any such process alters the
quality of any such material or manufactured or partially manufactured
product so as to reduce it to marketable shape, or prepare it for any of the
uses of industry, or who by any such process combines any such raw
material or manufactured or partially manufactured products with other
materials or products of the same or of different kinds and in such manner
that the finished product of such process of manufacture can be put to
special use or uses to which such raw material or manufactured or
partially manufactured products in their original condition could not have
been put, and who in addition alters such raw material or manufactured or
partially manufactured products, or combines the same to produce such
finished products for the purpose of their sale or distribution to others and
not for his own use or consumption.

In answer to the above contention, Engineering claims that it is not a manufacturer and
setter of air-conditioning units and spare parts or accessories thereof subject to tax
under Section 185(m) of the Tax Code, but a contractor engaged in the design, supply
and installation of the central type of air-conditioning system subject to the 3% tax
imposed by Section 191 of the same Code, which is essentially a tax on the sale of
services or labor of a contractor rather than on the sale of articles subject to the tax
referred to in Sections 184, 185 and 186 of the Code.

The arguments of both the Engineering and the Commissioner call for a clarification of
the term contractor as well as the distinction between a contract of sale and contract for
furnishing services, labor and materials. The distinction between a contract of sale and
one for work, labor and materials is tested by the inquiry whether the thing transferred is
one not in existence and which never would have existed but for the order of the party
desiring to acquire it, or a thing which would have existed and has been the subject of
sale to some other persons even if the order had not been given. 2 If the article ordered
by the purchaser is exactly such as the plaintiff makes and keeps on hand for sale to
anyone, and no change or modification of it is made at defendant's request, it is a
contract of sale, even though it may be entirely made after, and in consequence of, the
defendants order for it.3
Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece
of work thus:

Art. 1467. A contract for the delivery at a certain price of an article which
the vendor in the ordinary course of his business manufactures or
procures for the general market, whether the same is on hand at the time
or not, is a contract of sale, but if the goods are to be manufactured
specially for the customer and upon his special order and not for the
general market, it is a contract for a piece of work.

The word "contractor" has come to be used with special reference to a person who, in
the pursuit of the independent business, undertakes to do a specific job or piece of work
for other persons, using his own means and methods without submitting himself to
control as to the petty details. (Arañas, Annotations and Jurisprudence on the National
Internal Revenue Code, p. 318, par. 191 (2), 1970 Ed.) The true test of a contractor as
was held in the cases of Luzon Stevedoring Co., vs. Trinidad, 43, Phil. 803, 807-808,
and La Carlota Sugar Central vs. Trinidad, 43, Phil. 816, 819, would seem to be that he
renders service in the course of an independent occupation, representing the will of his
employer only as to the result of his work, and not as to the means by which it is
accomplished.

With the foregoing criteria as guideposts, We shall now examine whether Engineering
really did "manufacture" and sell, as alleged by the Commissioner to hold it liable to the
advance sales tax under Section 185(m), or it only had its services "contracted" for
installation purposes to hold it liable under section 198 of the Tax Code.

After going over the three volumes of stenographic notes and the voluminous record of
the BIR and the CTA as well as the exhibits submitted by both parties, We find that
Engineering did not manufacture air conditioning units for sale to the general public, but
imported some items (as refrigeration compressors in complete set, heat exchangers or
coils, t.s.n. p. 39) which were used in executing contracts entered into by it.
Engineering, therefore, undertook negotiations and execution of individual contracts for
the design, supply and installation of air conditioning units of the central type (t.s.n. pp.
20-36; Exhs. "F", "G", "H", "I", "J", "K", "L", and "M"), taking into consideration in the
process such factors as the area of the space to be air conditioned; the number of
persons occupying or would be occupying the premises; the purpose for which the
various air conditioning areas are to be used; and the sources of heat gain or cooling
load on the plant such as sun load, lighting, and other electrical appliances which are or
may be in the plan. (t.s.n. p. 34, Vol. I) Engineering also testified during the hearing in
the Court of Tax Appeals that relative to the installation of air conditioning system,
Engineering designed and engineered complete each particular plant and that no two
plants were identical but each had to be engineered separately.

As found by the lower court, which finding4 We adopt —

 Engineering, in a nutshell, fabricates, assembles, supplies and installs in
the buildings of its various customers the central type air conditioning
system; prepares the plans and specifications therefor which are distinct
and different from each other; the air conditioning units and spare parts or
accessories thereof used by petitioner are not the window type of air
conditioner which are manufactured, assembled and produced locally for
sale to the general market; and the imported air conditioning units and
spare parts or accessories thereof are supplied and installed by petitioner
upon previous orders of its customers conformably with their needs and
requirements.

The facts and circumstances aforequoted support the theory that Engineering is a
contractor rather than a manufacturer.

The Commissioner in his Brief argues that "it is more in accord with reason and sound
business management to say that anyone who desires to have air conditioning units
installed in his premises and who is in a position and willing to pay the price can order
the same from the company (Engineering) and, therefore, Engineering could have mass
produced and stockpiled air conditioning units for sale to the public or to any customer
with enough money to buy the same." This is untenable in the light of the fact that air
conditioning units, packaged, or what we know as self-contained air conditioning units,
are distinct from the central system which Engineering dealt in. To Our mind, the
distinction as explained by Engineering, in its Brief, quoting from books, is not an idle
play of words as claimed by the Commissioner, but a significant fact which We just
cannot ignore. As quoted by Engineering Equipment & Supply Co., from an Engineering
handbook by L.C. Morrow, and which We reproduce hereunder for easy reference:

... there is a great variety of equipment in use to do this job (of air
conditioning). Some devices are designed to serve a specific type of
space; others to perform a specific function; and still others as
components to be assembled into a tailor-made system to fit a particular
building. Generally, however, they may be grouped into two classifications
— unitary and central system.

The unitary equipment classification includes those designs such as room

air conditioner, where all of the functional components are included in one
or two packages, and installation involves only making service connection
such as electricity, water and drains. Central-station systems, often
referred to as applied or built-up systems, require the installation of
components at different points in a building and their interconnection.

The room air conditioner is a unitary equipment designed specifically for a

room or similar small space. It is unique among air conditioning equipment
in two respects: It is in the electrical appliance classification, and it is
made by a great number of manufacturers.
There is also the testimony of one Carlos Navarro, a licensed Mechanical and Electrical
Engineer, who was once the Chairman of the Board of Examiners for Mechanical
Engineers and who was allegedly responsible for the preparation of the refrigeration
and air conditioning code of the City of Manila, who said that "the central type air
conditioning system is an engineering job that requires planning and meticulous layout
due to the fact that usually architects assign definite space and usually the spaces they
assign are very small and of various sizes. Continuing further, he testified:

I don't think I have seen central type of air conditioning machinery room
that are exactly alike because all our buildings here are designed by
architects dissimilar to existing buildings, and usually they don't coordinate
and get the advice of air conditioning and refrigerating engineers so much
so that when we come to design, we have to make use of the available
space that they are assigning to us so that we have to design the different
component parts of the air conditioning system in such a way that will be
accommodated in the space assigned and afterwards the system may be
considered as a definite portion of the building. ...

Definitely there is quite a big difference in the operation because the

window type air conditioner is a sort of compromise. In fact it cannot
control humidity to the desired level; rather the manufacturers, by hit and
miss, were able to satisfy themselves that the desired comfort within a
room could be made by a definite setting of the machine as it comes from
the factory; whereas the central type system definitely requires an
intelligent operator. (t.s.n. pp. 301-305, Vol. II)

The point, therefore, is this — Engineering definitely did not and was not engaged in the
manufacture of air conditioning units but had its services contracted for the installation
of a central system. The cases cited by the Commissioner (Advertising Associates, Inc.
vs. Collector of Customs, 97, Phil. 636; Celestino Co & Co. vs. Collector of Internal
Revenue, 99 Phil. 841 and Manila Trading & Supply Co. vs. City of Manila, 56 O.G.
3629), are not in point. Neither are they applicable because the facts in all the cases
cited are entirely different. Take for instance the case of Celestino Co where this Court
held the taxpayer to be a manufacturer rather than a contractor of sash, doors and
windows manufactured in its factory. Indeed, from the very start, Celestino Co intended
itself to be a manufacturer of doors, windows, sashes etc. as it did register a special
trade name for its sash business and ordered company stationery carrying the bold print
"ORIENTAL SASH FACTORY (CELESTINO CO AND COMPANY, PROP.) 926 Raon
St., Quiapo, Manila, Tel. No. etc., Manufacturers of All Kinds of Doors, Windows ... ."
Likewise, Celestino Co never put up a contractor's bond as required by Article 1729 of
the Civil Code. Also, as a general rule, sash factories receive orders for doors and
windows of special design only in particular cases, but the bulk of their sales is derived
from ready-made doors and windows of standard sizes for the average home, which
"sales" were reflected in their books of accounts totalling P118,754.69 for the period
from January, 1952 to September 30, 1952, or for a period of only nine (9) months. This
Court found said sum difficult to have been derived from its few customers who placed
special orders for these items. Applying the abovestated facts to the case at bar, We
found them to he inapposite. Engineering advertised itself as Engineering Equipment
and Supply Company, Machinery Mechanical Supplies, Engineers, Contractors, 174
Marques de Comillas, Manila (Exh. "B" and "15" BIR rec. p. 186), and not as
manufacturers. It likewise paid the contractors tax on all the contracts for the design and
construction of central system as testified to by Mr. Rey Parker, its President and
General Manager. (t.s.n. p. 102, 103) Similarly, Engineering did not have ready-made
air conditioning units for sale but as per testimony of Mr. Parker upon inquiry of Judge
Luciano of the CTA —

Q — Aside from the general components, which go into air

conditioning plant or system of the central type which your
company undertakes, and the procedure followed by you in
obtaining and executing contracts which you have already
testified to in previous hearing, would you say that the
covering contracts for these different projects listed ...
referred to in the list, Exh. "F" are identical in every respect?
I mean every plan or system covered by these different
contracts are identical in standard in every respect, so that
you can reproduce them?

A — No, sir. They are not all standard. On the contrary, none
of them are the same. Each one must be designed and
constructed to meet the particular requirements, whether the
application is to be operated. (t.s.n. pp. 101-102)

What We consider as on all fours with the case at bar is the case of S.M. Lawrence Co.
vs. McFarland, Commissioner of Internal Revenue of the State of Tennessee and
McCanless, 355 SW 2d, 100, 101, "where the cause presents the question of whether
one engaged in the business of contracting for the establishment of air conditioning
system in buildings, which work requires, in addition to the furnishing of a cooling unit,
the connection of such unit with electrical and plumbing facilities and the installation of
ducts within and through walls, ceilings and floors to convey cool air to various parts of
the building, is liable for sale or use tax as a contractor rather than a retailer of tangible
personal property. Appellee took the Position that appellant was not engaged in the
business of selling air conditioning equipment as such but in the furnishing to its
customers of completed air conditioning systems pursuant to contract, was a contractor
engaged in the construction or improvement of real property, and as such was liable for
sales or use tax as the consumer of materials and equipment used in the consummation
of contracts, irrespective of the tax status of its contractors. To transmit the warm or
cool air over the buildings, the appellant installed system of ducts running from the basic
units through walls, ceilings and floors to registers. The contract called for completed air
conditioning systems which became permanent part of the buildings and improvements
to the realty." The Court held the appellant a contractor which used the materials and
the equipment upon the value of which the tax herein imposed was levied in the
performance of its contracts with its customers, and that the customers did not purchase
the equipment and have the same installed.

Applying the facts of the aforementioned case to the present case, We see that the
supply of air conditioning units to Engineer's various customers, whether the said
machineries were in hand or not, was especially made for each customer and installed
in his building upon his special order. The air conditioning units installed in a central
type of air conditioning system would not have existed but for the order of the party
desiring to acquire it and if it existed without the special order of Engineering's
customer, the said air conditioning units were not intended for sale to the general public.
Therefore, We have but to affirm the conclusion of the Court of Tax Appeals that
Engineering is a contractor rather than a manufacturer, subject to the contractors tax
prescribed by Section 191 of the Code and not to the advance sales tax imposed by
Section 185(m) in relation to Section 194 of the same Code. Since it has been proved to
Our satisfaction that Engineering imported air conditioning units, parts or accessories
thereof for use in its construction business and these items were never sold, resold,
bartered or exchanged, Engineering should be held liable to pay taxes prescribed under
Section 1905 of the Code. This compensating tax is not a tax on the importation of
goods but a tax on the use of imported goods not subject to sales tax. Engineering,
therefore, should be held liable to the payment of 30% compensating tax in accordance
with Section 190 of the Tax Code in relation to Section 185(m) of the same, but without
the 50% mark up provided in Section 183(b).

II

We take up next the issue of fraud. The Commissioner charged Engineering with
misdeclaration of the imported air conditioning units and parts or accessories thereof so
as to make them subject to a lower rate of percentage tax (7%) under Section 186 of
the Tax Code, when they are allegedly subject to a higher rate of tax (30%) under its
Section 185(m). This charge of fraud was denied by Engineering but the Court of Tax
Appeals in its decision found adversely and said"

... We are amply convinced from the evidence presented by respondent

that petitioner deliberately and purposely misdeclared its importations.
This evidence consists of letters written by petitioner to its foreign
suppliers, instructing them on how to invoice and describe the air
conditioning units ordered by petitioner. ... (p. 218 CTA rec.)

Despite the above findings, however, the Court of Tax Appeals absolved Engineering
from paying the 50% surcharge prescribe by Section 183(a) of the Tax Code by
reasoning out as follows:

The imposition of the 50% surcharge prescribed by Section 183(a) of the

Tax Code is based on willful neglect to file the monthly return within 20
days after the end of each month or in case a false or fraudulent return is
willfully made, it can readily be seen, that petitioner cannot legally be held
 subject to the 50% surcharge imposed by Section 183(a) of the Tax Code.
Neither can petitioner be held subject to the 50% surcharge under Section
190 of the Tax Code dealing on compensating tax because the provisions
thereof do not include the 50% surcharge. Where a particular provision of
the Tax Code does not impose the 50% surcharge as fraud penalty we
cannot enforce a non-existing provision of law notwithstanding the
assessment of respondent to the contrary. Instances of the exclusion in
the Tax Code of the 50% surcharge are those dealing on tax on banks,
taxes on receipts of insurance companies, and franchise tax. However, if
the Tax Code imposes the 50% surcharge as fraud penalty, it expressly so
provides as in the cases of income tax, estate and inheritance taxes, gift
taxes, mining tax, amusement tax and the monthly percentage taxes.
Accordingly, we hold that petitioner is not subject to the 50% surcharge
despite the existence of fraud in the absence of legal basis to support the
importation thereof. (p. 228 CTA rec.)

We have gone over the exhibits submitted by the Commissioner evidencing fraud
committed by Engineering and We reproduce some of them hereunder for clarity.

As early as March 18, 1953, Engineering in a letter of even date wrote to Trane Co.
(Exh. "3-K" pp. 152-155, BIR rec.) viz:

Your invoices should be made in the name of Madrigal & Co., Inc., Manila,
Philippines, c/o Engineering Equipment & Supply Co., Manila, Philippines
— forwarding all correspondence and shipping papers concerning this
order to us only and not to the customer.

When invoicing, your invoices should be exactly as detailed in the

customer's Letter Order dated March 14th, 1953 attached. This is in
accordance with the Philippine import licenses granted to Madrigal & Co.,
Inc. and such details must only be shown on all papers and shipping
documents for this shipment. No mention of words air conditioning
equipment should be made on any shipping documents as well as on the
cases. Please give this matter your careful attention, otherwise great
difficulties will be encountered with the Philippine Bureau of Customs
when clearing the shipment on its arrival in Manila. All invoices and cases
should be marked "THIS EQUIPMENT FOR RIZAL CEMENT CO."

The same instruction was made to Acme Industries, Inc., San Francisco, California in a
letter dated March 19, 1953 (Exh. "3-J-1" pp. 150-151, BIR rec.)

On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York,

U.S.A. (Exh. "3-1" pp. 147-149, BIR rec.) also enjoining the latter from mentioning or
referring to the term 'air conditioning' and to describe the goods on order as Fiberglass
pipe and pipe fitting insulation instead. Likewise on April 30, 1953, Engineering
threatened to discontinue the forwarding service of Universal Transcontinental
Corporation when it wrote Trane Co. (Exh. "3-H" p. 146, BIR rec.):

It will be noted that the Universal Transcontinental Corporation is not

following through on the instructions which have been covered by the
above correspondence, and which indicates the necessity of discontinuing
the use of the term "Air conditioning Machinery or Air Coolers". Our
instructions concerning this general situation have been sent to you in
ample time to have avoided this error in terminology, and we will ask that
on receipt of this letter that you again write to Universal Transcontinental
Corp. and inform them that, if in the future, they are unable to cooperate
with us on this requirement, we will thereafter be unable to utilize their
forwarding service. Please inform them that we will not tolerate another
failure to follow our requirements.

And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane Co. another
letter, viz:

In the past, we have always paid the air conditioning tax on climate
changers and that mark is recognized in the Philippines, as air
conditioning equipment. This matter of avoiding any tie-in on air
conditioning is very important to us, and we are asking that from hereon
that whoever takes care of the processing of our orders be carefully
instructed so as to avoid again using the term "Climate changers" or in
any way referring to the equipment as "air conditioning."

And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953, suggesting
a solution, viz:

We feel that we can probably solve all the problems by following the
procedure outlined in your letter of March 25, 1953 wherein you stated
that in all future jobs you would enclose photostatic copies of your import
license so that we might make up two sets of invoices: one set describing
equipment ordered simply according to the way that they are listed on the
import license and another according to our ordinary regular methods of
order write-up. We would then include the set made up according to the
import license in the shipping boxes themselves and use those items as
our actual shipping documents and invoices, and we will send the other
regular invoice to you, by separate correspondence. (Exh- No. "3-F-1", p.
144 BIR rec.)

Another interesting letter of Engineering is one dated August 27, 1955 (Exh. "3-C" p.
141 BIR rec.)

In the process of clearing the shipment from the piers, one of the Customs
inspectors requested to see the packing list. Upon presenting the packing
 list, it was discovered that the same was prepared on a copy of your
letterhead which indicated that the Trane Co. manufactured air
conditioning, heating and heat transfer equipment. Accordingly, the
inspectors insisted that this equipment was being imported for air
conditioning purposes. To date, we have not been able to clear the
shipment and it is possible that we will be required to pay heavy taxes on
equipment.

The purpose of this letter is to request that in the future, no documents of

any kind should be sent with the order that indicate in any way that the
equipment could possibly be used for air conditioning.

It is realized that this a broad request and fairly difficult to accomplish and
administer, but we believe with proper caution it can be executed. Your
cooperation and close supervision concerning these matters will be
appreciated. (Emphasis supplied)

The aforequoted communications are strongly indicative of the fraudulent intent of

Engineering to misdeclare its importation of air conditioning units and spare parts or
accessories thereof to evade payment of the 30% tax. And since the commission of
fraud is altogether too glaring, We cannot agree with the Court of Tax Appeals in
absolving Engineering from the 50% fraud surcharge, otherwise We will be giving
premium to a plainly intolerable act of tax evasion. As aptly stated by then Solicitor
General, now Justice, Antonio P. Barredo: 'this circumstance will not free it from the
50% surcharge because in any case whether it is subject to advance sales tax or
compensating tax, it is required by law to truly declare its importation in the import
entries and internal revenue declarations before the importations maybe released from
customs custody. The said entries are the very documents where the nature, quantity
and value of the imported goods declared and where the customs duties, internal
revenue taxes, and other fees or charges incident to the importation are computed.
These entries, therefore, serve the same purpose as the returns required by Section
183(a) of the Code.'

Anent the 25% delinquency surcharge, We fully agree to the ruling made by the Court of
Tax Appeals and hold Engineering liable for the same. As held by the lower court:

At first blush it would seem that the contention of petitioner that it is not
subject to the delinquency, surcharge of 25% is sound, valid and tenable.
However, a serious study and critical analysis of the historical provisions
of Section 190 of the Tax Code dealing on compensating tax in relation to
Section 183(a) of the same Code, will show that the contention of
petitioner is without merit. The original text of Section 190 of
Commonwealth Act 466, otherwise known as the National Internal
Revenue Code, as amended by Commonwealth Act No. 503, effective on
October 1, 1939, does not provide for the filing of a compensation tax
return and payment of the 25 % surcharge for late payment thereof. Under
 the original text of Section 190 of the Tax Code as amended by
Commonwealth Act No. 503, the contention of the petitioner that it is not
subject to the 25% surcharge appears to be legally tenable. However,
Section 190 of the Tax Code was subsequently amended by the Republic
Acts Nos. 253, 361, 1511 and 1612 effective October 1, 1946, July 1,
1948, June 9, 1949, June 16, 1956 and August 24, 1956 respectively,
which invariably provides among others, the following:

... If any article withdrawn from the customhouse or the post

office without payment of the compensating tax is
subsequently used by the importer for other purposes,
corresponding entry should be made in the books of
accounts if any are kept or a written notice thereof sent to
the Collector of Internal Revenue and payment of the
corresponding compensating tax made within 30 days from
the date of such entry or notice and if tax is not paid within
such period the amount of the tax shall be increased by 25%
the increment to be a part of the tax.

Since the imported air conditioning units-and spare parts or accessories thereof are
subject to the compensating tax of 30% as the same were used in the construction
business of Engineering, it is incumbent upon the latter to comply with the aforequoted
requirement of Section 190 of the Code, by posting in its books of accounts or notifying
the Collector of Internal Revenue that the imported articles were used for other
purposes within 30 days. ... Consequently; as the 30% compensating tax was not paid
by petitioner within the time prescribed by Section 190 of the Tax Code as amended, it
is therefore subject to the 25% surcharge for delinquency in the payment of the said tax.
(pp. 224-226 CTA rec.)

III

Lastly the question of prescription of the tax assessment has been put in issue.
Engineering contends that it was not guilty of tax fraud in effecting the importations and,
therefore, Section 332(a) prescribing ten years is inapplicable, claiming that the
pertinent prescriptive period is five years from the date the questioned importations
were made. A review of the record however reveals that Engineering did file a tax return
or declaration with the Bureau of Customs before it paid the advance sales tax of 7%.
And the declaration filed reveals that it did in fact misdeclare its importations. Section
332 of the Tax Code which provides:

Section 332. — Exceptions as to period of limitation of assessment and

collection of taxes. —

(a) In the case of a false or fraudulent return with intent to evade tax or of
a failure to file a return, the tax may be assessed, or a proceeding in court
 for the collection of such tax may be begun without assessment at any
time within ten years after the discovery of the falsity, fraud or omission.

is applicable, considering the preponderance of evidence of fraud with the intent to

evade the higher rate of percentage tax due from Engineering. The, tax assessment
was made within the period prescribed by law and prescription had not set in against
the Government.

WHEREFORE, the decision appealed from is affirmed with the modification that
Engineering is hereby also made liable to pay the 50% fraud surcharge.

SO ORDERED.

Makalintal, C.J., Castro, Makasiar and Martin, JJ., concur.

Footnotes

1 Section 185. Percentage tax on sales of ..., refrigerators and others. —

There shall be levied, assessed, and collected once only on every original
sale, barter, exchange, or similar transaction intended to transfer
ownership of, or title to, the other articles herein below enumerated, a tax
equivalent to thirty percentum of the gross selling price or gross value in
money of the articles sold, bartered, exchanged or transferred, such tax to
be paid by the manufacturer or producers. Provided: That where the
articles enumerated herein below are manufactured out of material subject
to tax under this section, the total cost of such materials, as duly
established shall be deductible from the gross selling price or gross value
in money of such manufactured articles.

xxx xxx xxx

(m) Air conditioning units and parts or accessories thereof. (As amended
by R.A. No. 588, effective from September 22, 1950 until it was amended
by R.A. No. 1612 made effective August 14, 1956.) manufactured
articles. ...

2 Groves vs. Buck, 3, Maule & s. 178; Towers v. Osborne, 1 Strange 506,
Benjamin on Sales 90; as cited in Arañas, Annotation., and Jurisprudence
on the NIRC, as amended, 1970 ed. p. 323, 324.

3 Ibid., p. 324, par. 191 (13).

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

 5 "Section 190. Compensating tax. — All persons residing or doing
business in the Philippines, who purchase or receive from without the
Philippines any commodities, goods, wares or merchandise, except those
subject to specific taxes under the Title IV of this Code, shall pay on the
total value thereof at the time they are received by such persons, including
freight, postage, insurance, commission and similar charges, a
compensating tax equivalent the percentage taxes imposed under this
Title on original transactions effected by merchants, importers or
manufacturers, such tax to be paid before the withdrawal or removal of
said commodities, goods, wares or merchandise from the custom house
or post office. Provided, However, That merchants, importers, and
manufacturers, who are subject to the tax under Sections 184, 185, 186 or
189 of this Title, shall not be required to pay the herein tax imposed where
such commodities, goods, wares or merchandise purchased or received
by them from without the Philippines are to be sold, resold, bartered or
exchanged or to be used in the manufacture or preparation of articles for
sale, barter or exchange and are to form part thereof. And Provided,
Further, that the tax imposed in this section shall not apply to articles to be
used by the importer himself in the manufacture or preparation of articles
subject to specific tax, or those for consignment abroad and are to form
part thereof. If any article withdrawn from the customhouse or the post
office without payment of the compensating tax is subsequently used by
importer for other purposes, corresponding entry should be made in the
books of accounts, if any are kept or written notice thereof sent to the
Collector of Internal Revenue and payment of the corresponding
compensating tax made within 10 days from the date of such entry or
notice. If the tax is not paid within such period the amount of the tax shall
be increased by 25%, the increment to be part of the tax".(As amended by
R.A. 253, effective July 1948).1äwphï1.ñët

G.R. No. L-11491            August 23, 1918

ANDRES QUIROGA, plaintiff-appellant,
vs.
PARSONS HARDWARE CO., defendant-appellee.

Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.

Crossfield & O'Brien for appellee.

AVANCEÑA, J.:

On January 24, 1911, in this city of manila, a contract in the following tenor was entered
into by and between the plaintiff, as party of the first part, and J. Parsons (to whose
rights and obligations the present defendant later subrogated itself), as party of the
second part:
 CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND
J. PARSONS, BOTH MERCHANTS ESTABLISHED IN MANILA, FOR
THE EXCLUSIVE SALE OF "QUIROGA" BEDS IN THE VISAYAN
ISLANDS.

ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the
Visayan Islands to J. Parsons under the following conditions:

(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the
latter's establishment in Iloilo, and shall invoice them at the same price he has
fixed for sales, in Manila, and, in the invoices, shall make and allowance of a
discount of 25 per cent of the invoiced prices, as commission on the sale; and
Mr. Parsons shall order the beds by the dozen, whether of the same or of
different styles.

(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within a
period of sixty days from the date of their shipment.

(C) The expenses for transportation and shipment shall be borne by M. Quiroga,
and the freight, insurance, and cost of unloading from the vessel at the point
where the beds are received, shall be paid by Mr. Parsons.

(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said
payment when made shall be considered as a prompt payment, and as such a
deduction of 2 per cent shall be made from the amount of the invoice.

The same discount shall be made on the amount of any invoice which Mr.
Parsons may deem convenient to pay in cash.

(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of
any alteration in price which he may plan to make in respect to his beds, and
agrees that if on the date when such alteration takes effect he should have any
order pending to be served to Mr. Parsons, such order shall enjoy the advantage
of the alteration if the price thereby be lowered, but shall not be affected by said
alteration if the price thereby be increased, for, in this latter case, Mr. Quiroga
assumed the obligation to invoice the beds at the price at which the order was
given.

(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga"
beds.

ART. 2. In compensation for the expenses of advertisement which, for the benefit
of both contracting parties, Mr. Parsons may find himself obliged to make, Mr.
Quiroga assumes the obligation to offer and give the preference to Mr. Parsons
in case anyone should apply for the exclusive agency for any island not
comprised with the Visayan group.
 ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of
"Quiroga" beds in all the towns of the Archipelago where there are no exclusive
agents, and shall immediately report such action to Mr. Quiroga for his approval.

ART. 4. This contract is made for an unlimited period, and may be terminated by
either of the contracting parties on a previous notice of ninety days to the other
party.

Of the three causes of action alleged by the plaintiff in his complaint, only two of them
constitute the subject matter of this appeal and both substantially amount to the
averment that the defendant violated the following obligations: not to sell the beds at
higher prices than those of the invoices; to have an open establishment in Iloilo; itself to
conduct the agency; to keep the beds on public exhibition, and to pay for the
advertisement expenses for the same; and to order the beds by the dozen and in no
other manner. As may be seen, with the exception of the obligation on the part of the
defendant to order the beds by the dozen and in no other manner, none of the
obligations imputed to the defendant in the two causes of action are expressly set forth
in the contract. But the plaintiff alleged that the defendant was his agent for the sale of
his beds in Iloilo, and that said obligations are implied in a contract of commercial
agency. The whole question, therefore, reduced itself to a determination as to whether
the defendant, by reason of the contract hereinbefore transcribed, was a purchaser or
an agent of the plaintiff for the sale of his beds.

In order to classify a contract, due regard must be given to its essential clauses. In the
contract in question, what was essential, as constituting its cause and subject matter, is
that the plaintiff was to furnish the defendant with the beds which the latter might order,
at the price stipulated, and that the defendant was to pay the price in the manner
stipulated. The price agreed upon was the one determined by the plaintiff for the sale of
these beds in Manila, with a discount of from 20 to 25 per cent, according to their class.
Payment was to be made at the end of sixty days, or before, at the plaintiff's request, or
in cash, if the defendant so preferred, and in these last two cases an additional discount
was to be allowed for prompt payment. These are precisely the essential features of a
contract of purchase and sale. There was the obligation on the part of the plaintiff to
supply the beds, and, on the part of the defendant, to pay their price. These features
exclude the legal conception of an agency or order to sell whereby the mandatory or
agent received the thing to sell it, and does not pay its price, but delivers to the principal
the price he obtains from the sale of the thing to a third person, and if he does not
succeed in selling it, he returns it. By virtue of the contract between the plaintiff and the
defendant, the latter, on receiving the beds, was necessarily obliged to pay their price
within the term fixed, without any other consideration and regardless as to whether he
had or had not sold the beds.

It would be enough to hold, as we do, that the contract by and between the defendant
and the plaintiff is one of purchase and sale, in order to show that it was not one made
on the basis of a commission on sales, as the plaintiff claims it was, for these contracts
are incompatible with each other. But, besides, examining the clauses of this contract,
none of them is found that substantially supports the plaintiff's contention. Not a single
one of these clauses necessarily conveys the idea of an agency. The
words commission on sales used in clause (A) of article 1 mean nothing else, as stated
in the contract itself, than a mere discount on the invoice price. The word agency, also
used in articles 2 and 3, only expresses that the defendant was the only one that could
sell the plaintiff's beds in the Visayan Islands. With regard to the remaining clauses, the
least that can be said is that they are not incompatible with the contract of purchase and
sale.

The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of
the defendant corporation and who established and managed the latter's business in
Iloilo. It appears that this witness, prior to the time of his testimony, had serious trouble
with the defendant, had maintained a civil suit against it, and had even accused one of
its partners, Guillermo Parsons, of falsification. He testified that it was he who drafted
the contract Exhibit A, and, when questioned as to what was his purpose in contracting
with the plaintiff, replied that it was to be an agent for his beds and to collect a
commission on sales. However, according to the defendant's evidence, it was Mariano
Lopez Santos, a director of the corporation, who prepared Exhibit A. But, even
supposing that Ernesto Vidal has stated the truth, his statement as to what was his idea
in contracting with the plaintiff is of no importance, inasmuch as the agreements
contained in Exhibit A which he claims to have drafted, constitute, as we have said, a
contract of purchase and sale, and not one of commercial agency. This only means that
Ernesto Vidal was mistaken in his classification of the contract. But it must be
understood that a contract is what the law defines it to be, and not what it is called by
the contracting parties.

The plaintiff also endeavored to prove that the defendant had returned beds that it could
not sell; that, without previous notice, it forwarded to the defendant the beds that it
wanted; and that the defendant received its commission for the beds sold by the plaintiff
directly to persons in Iloilo. But all this, at the most only shows that, on the part of both
of them, there was mutual tolerance in the performance of the contract in disregard of
its terms; and it gives no right to have the contract considered, not as the parties
stipulated it, but as they performed it. Only the acts of the contracting parties,
subsequent to, and in connection with, the execution of the contract, must be
considered for the purpose of interpreting the contract, when such interpretation is
necessary, but not when, as in the instant case, its essential agreements are clearly set
forth and plainly show that the contract belongs to a certain kind and not to another.
Furthermore, the return made was of certain brass beds, and was not effected in
exchange for the price paid for them, but was for other beds of another kind; and for the
letter Exhibit L-1, requested the plaintiff's prior consent with respect to said beds, which
shows that it was not considered that the defendant had a right, by virtue of the
contract, to make this return. As regards the shipment of beds without previous notice, it
is insinuated in the record that these brass beds were precisely the ones so shipped,
and that, for this very reason, the plaintiff agreed to their return. And with respect to the
so-called commissions, we have said that they merely constituted a discount on the
invoice price, and the reason for applying this benefit to the beds sold directly by the
plaintiff to persons in Iloilo was because, as the defendant obligated itself in the contract
to incur the expenses of advertisement of the plaintiff's beds, such sales were to be
considered as a result of that advertisement.

In respect to the defendant's obligation to order by the dozen, the only one expressly
imposed by the contract, the effect of its breach would only entitle the plaintiff to
disregard the orders which the defendant might place under other conditions; but if the
plaintiff consents to fill them, he waives his right and cannot complain for having acted
thus at his own free will.

For the foregoing reasons, we are of opinion that the contract by and between the
plaintiff and the defendant was one of purchase and sale, and that the obligations the
breach of which is alleged as a cause of action are not imposed upon the defendant,
either by agreement or by law.

The judgment appealed from is affirmed, with costs against the appellant. So ordered.

Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.

G.R. No. L-47538             June 20, 1941

GONZALO PUYAT & SONS, INC., petitioner,

vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro Arco), respondent.

Feria & Lao for petitioner.

J. W. Ferrier and Daniel Me. Gomez for respondent.

LAUREL, J.:

This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the
purpose of reviewing its Amusement Company (formerly known as Teatro Arco),
plaintiff-appellant, vs. Gonzalo Puyat and Sons. Inc., defendant-appellee."

It appears that the respondent herein brought an action against the herein petitioner in
the Court of First Instance of Manila to secure a reimbursement of certain amounts
allegedly overpaid by it on account of the purchase price of sound reproducing
equipment and machinery ordered by the petitioner from the Starr Piano Company of
Richmond, Indiana, U.S.A. The facts of the case as found by the trial court and
confirmed by the appellate court, which are admitted by the respondent, are as follows:

In the year 1929, the "Teatro Arco", a corporation duly organized under the laws
of the Philippine Islands, with its office in Manila, was engaged in the business of
operating cinematographs. In 1930, its name was changed to Arco Amusement
Company. C. S. Salmon was the president, while A. B. Coulette was the
business manager. About the same time, Gonzalo Puyat & Sons, Inc., another
corporation doing business in the Philippine Islands, with office in Manila, in
addition to its other business, was acting as exclusive agents in the Philippines
for the Starr Piano Company of Richmond, Indiana, U.S. A. It would seem that
this last company dealt in cinematographer equipment and machinery, and the
Arco Amusement Company desiring to equipt its cinematograph with sound
reproducing devices, approached Gonzalo Puyat & Sons, Inc., thru its then
president and acting manager, Gil Puyat, and an employee named Santos. After
some negotiations, it was agreed between the parties, that is to say, Salmon and
Coulette on one side, representing the plaintiff, and Gil Puyat on the other,
representing the defendant, that the latter would, on behalf of the plaintiff, order
sound reproducing equipment from the Starr Piano Company and that the
plaintiff would pay the defendant, in addition to the price of the equipment, a 10
per cent commission, plus all expenses, such as, freight, insurance, banking
charges, cables, etc. At the expense of the plaintiff, the defendant sent a cable,
Exhibit "3", to the Starr Piano Company, inquiring about the equipment desired
and making the said company to quote its price without discount. A reply was
received by Gonzalo Puyat & Sons, Inc., with the price, evidently the list price of
$1,700 f.o.b. factory Richmond, Indiana. The defendant did not show the plaintiff
the cable of inquiry nor the reply but merely informed the plaintiff of the price of
$1,700. Being agreeable to this price, the plaintiff, by means of Exhibit "1", which
is a letter signed by C. S. Salmon dated November 19, 1929, formally authorized
the order. The equipment arrived about the end of the year 1929, and upon
delivery of the same to the plaintiff and the presentation of necessary papers, the
price of $1.700, plus the 10 per cent commission agreed upon and plus all the
expenses and charges, was duly paid by the plaintiff to the defendant.

Sometime the following year, and after some negotiations between the same
parties, plaintiff and defendants, another order for sound reproducing equipment
was placed by the plaintiff with the defendant, on the same terms as the first
order. This agreement or order was confirmed by the plaintiff by its letter Exhibit
"2", without date, that is to say, that the plaintiff would pay for the equipment the
amount of $1,600, which was supposed to be the price quoted by the Starr Piano
Company, plus 10 per cent commission, plus all expenses incurred. The
equipment under the second order arrived in due time, and the defendant was
duly paid the price of $1,600 with its 10 per cent commission, and $160, for all
expenses and charges. This amount of $160 does not represent actual out-of-
pocket expenses paid by the defendant, but a mere flat charge and rough
estimate made by the defendant equivalent to 10 per cent of the price of $1,600
of the equipment.

About three years later, in connection with a civil case in Vigan, filed by one Fidel
Reyes against the defendant herein Gonzalo Puyat & Sons, Inc., the officials of
the Arco Amusement Company discovered that the price quoted to them by the
defendant with regard to their two orders mentioned was not the net price but
rather the list price, and that the defendants had obtained a discount from the
 Starr Piano Company. Moreover, by reading reviews and literature on prices of
machinery and cinematograph equipment, said officials of the plaintiff were
convinced that the prices charged them by the defendant were much too high
including the charges for out-of-pocket expense. For these reasons, they sought
to obtain a reduction from the defendant or rather a reimbursement, and failing in
this they brought the present action.

The trial court held that the contract between the petitioner and the respondent was one
of outright purchase and sale, and absolved that petitioner from the complaint. The
appellate court, however, — by a division of four, with one justice dissenting — held that
the relation between petitioner and respondent was that of agent and principal, the
petitioner acting as agent of the respondent in the purchase of the equipment in
question, and sentenced the petitioner to pay the respondent alleged overpayments in
the total sum of $1,335.52 or P2,671.04, together with legal interest thereon from the
date of the filing of the complaint until said amount is fully paid, as well as to pay the
costs of the suit in both instances. The appellate court further argued that even if the
contract between the petitioner and the respondent was one of purchase and sale, the
petitioner was guilty of fraud in concealing the true price and hence would still be liable
to reimburse the respondent for the overpayments made by the latter.

The petitioner now claims that the following errors have been incurred by the appellate
court:

I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun

hechos, entre la recurrente y la recurrida existia una relacion implicita de
mandataria a mandante en la transaccion de que se trata, en vez de la de
vendedora a compradora como ha declarado el Juzgado de Primera Instncia de
Manila, presidido entonces por el hoy Magistrado Honorable Marcelino
Montemayor.

II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que,

suponiendo que dicha relacion fuerra de vendedora a compradora, la recurrente
obtuvo, mediante dolo, el consentimiento de la recurrida en cuanto al precio de
$1,700 y $1,600 de las maquinarias y equipos en cuestion, y condenar a la
recurrente ha obtenido de la Starr Piano Company of Richmond, Indiana.

We sustain the theory of the trial court that the contract between the petitioner and the
respondent was one of purchase and sale, and not one of agency, for the reasons now
to be stated.

In the first place, the contract is the law between the parties and should include all the
things they are supposed to have been agreed upon. What does not appear on the face
of the contract should be regarded merely as "dealer's" or "trader's talk", which can not
bind either party. (Nolbrook v. Conner, 56 So., 576, 11 Am. Rep., 212; Bank v.
Brosscell, 120 III., 161; Bank v. Palmer, 47 III., 92; Hosser v. Copper, 8 Allen, 334;
Doles v. Merrill, 173 Mass., 411.) The letters, Exhibits 1 and 2, by which the respondent
accepted the prices of $1,700 and $1,600, respectively, for the sound reproducing
equipment subject of its contract with the petitioner, are clear in their terms and admit
no other interpretation that the respondent in question at the prices indicated which are
fixed and determinate. The respondent admitted in its complaint filed with the Court of
First Instance of Manila that the petitioner agreed to sell to it the first sound reproducing
equipment and machinery. The third paragraph of the respondent's cause of action
states:

3. That on or about November 19, 1929, the herein plaintiff (respondent) and
defendant (petitioner) entered into an agreement, under and by virtue of which
the herein defendant was to secure from the United States, and sell and deliver
to the herein plaintiff, certain sound reproducing equipment and machinery, for
which the said defendant, under and by virtue of said agreement, was to receive
the actual cost price plus ten per cent (10%), and was also to be reimbursed for
all out of pocket expenses in connection with the purchase and delivery of such
equipment, such as costs of telegrams, freight, and similar expenses. (Emphasis
ours.)

We agree with the trial judge that "whatever unforseen events might have taken place
unfavorable to the defendant (petitioner), such as change in prices, mistake in their
quotation, loss of the goods not covered by insurance or failure of the Starr Piano
Company to properly fill the orders as per specifications, the plaintiff (respondent) might
still legally hold the defendant (petitioner) to the prices fixed of $1,700 and $1,600." This
is incompatible with the pretended relation of agency between the petitioner and the
respondent, because in agency, the agent is exempted from all liability in the discharge
of his commission provided he acts in accordance with the instructions received from
his principal (section 254, Code of Commerce), and the principal must indemnify the
agent for all damages which the latter may incur in carrying out the agency without fault
or imprudence on his part (article 1729, Civil Code).

While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten per cent
(10%) commission, this does not necessarily make the petitioner an agent of the
respondent, as this provision is only an additional price which the respondent bound
itself to pay, and which stipulation is not incompatible with the contract of purchase and
sale. (See Quiroga vs. Parsons Hardware Co., 38 Phil., 501.)

In the second place, to hold the petitioner an agent of the respondent in the purchase of
equipment and machinery from the Starr Piano Company of Richmond, Indiana, is
incompatible with the admitted fact that the petitioner is the exclusive agent of the same
company in the Philippines. It is out of the ordinary for one to be the agent of both the
vendor and the purchaser. The facts and circumstances indicated do not point to
anything but plain ordinary transaction where the respondent enters into a contract of
purchase and sale with the petitioner, the latter as exclusive agent of the Starr Piano
Company in the United States.
It follows that the petitioner as vendor is not bound to reimburse the respondent as
vendee for any difference between the cost price and the sales price which represents
the profit realized by the vendor out of the transaction. This is the very essence of
commerce without which merchants or middleman would not exist.

The respondents contends that it merely agreed to pay the cost price as distinguished
from the list price, plus ten per cent (10%) commission and all out-of-pocket expenses
incurred by the petitioner. The distinction which the respondents seeks to draw between
the cost price and the list price we consider to be spacious. It is to be observed that the
twenty-five per cent (25%) discount granted by the Starr piano Company to the
petitioner is available only to the latter as the former's exclusive agent in the Philippines.
The respondent could not have secured this discount from the Starr Piano Company
and neither was the petitioner willing to waive that discount in favor of the respondent.
As a matter of fact, no reason is advanced by the respondent why the petitioner should
waive the 25 per cent discount granted it by the Starr Piano Company in exchange for
the 10 percent commission offered by the respondent. Moreover, the petitioner was not
duty bound to reveal the private arrangement it had with the Starr Piano Company
relative to such discount to its prospective customers, and the respondent was not even
aware of such an arrangement. The respondent, therefore, could not have offered to
pay a 10 per cent commission to the petitioner provided it was given the benefit of the
25 per cent discount enjoyed by the petitioner. It is well known that local dealers acting
as agents of foreign manufacturers, aside from obtaining a discount from the home
office, sometimes add to the list price when they resell to local purchasers. It was
apparently to guard against an exhorbitant additional price that the respondent sought
to limit it to 10 per cent, and the respondent is estopped from questioning that additional
price. If the respondent later on discovers itself at the short end of a bad bargain, it
alone must bear the blame, and it cannot rescind the contract, much less compel a
reimbursement of the excess price, on that ground alone. The respondent could not
secure equipment and machinery manufactured by the Starr Piano Company except
from the petitioner alone; it willingly paid the price quoted; it received the equipment and
machinery as represented; and that was the end of the matter as far as the respondent
was concerned. The fact that the petitioner obtained more or less profit than the
respondent calculated before entering into the contract or reducing the price agreed
upon between the petitioner and the respondent. Not every concealment is fraud; and
short of fraud, it were better that, within certain limits, business acumen permit of the
loosening of the sleeves and of the sharpening of the intellect of men and women in the
business world.

The writ of certiorari should be, as it is hereby, granted. The decision of the appellate
court is accordingly reversed and the petitioner is absolved from the respondent's
complaint in G. R. No. 1023, entitled "Arco Amusement Company (formerly known as
Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc., defendants-appellee,"
without pronouncement regarding costs. So

FIRST DIVISION
[G.R. No. 149420. October 8, 2003.]

SONNY LO, Petitioner, v. 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.chanrob1es virtua1 1aw 1ibrary

Respondent delivered the scaffoldings to petitioner. 2 Petitioner was able to pay the first
two monthly installments. His business, however, encountered financial difficulties and
he was unable to settle his obligation to respondent despite oral and written demands
made against him. 3

On October 11, 1990, petitioner and respondent executed a Deed of Assignment, 4

whereby petitioner assigned to respondent his receivables in the amount of
P335,462.14 from Jomero Realty Corporation. Pertinent portions of the Deed
provide:chanrob1es virtual 1aw library

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. . . . 5
(Italics supplied)

However, when respondent tried to collect the said credit from Jomero Realty
Corporation, the latter refused to honor the Deed of Assignment because it claimed that
petitioner was also indebted to it. 6 On November 26, 1990, respondent sent a letter 7
to petitioner demanding payment of his obligation, but petitioner refused to pay claiming
that his obligation had been extinguished when they executed the Deed of Assignment.

Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of
money against the petitioner before the Regional Trial Court of Makati, Branch 147,
which was docketed as Civil Case No. 91-074. 8

During the trial, petitioner argued that his obligation was extinguished with the execution
of the Deed of Assignment of credit. Respondent, for its part, presented the testimony of
its employee, Almeda Bañaga, who testified that Jomero Realty refused to honor the
assignment of credit because it claimed that petitioner had an outstanding indebtedness
to it.chanrob1es virtua1 1aw 1ibrary

On August 25, 1994, the trial court rendered a decision 9 dismissing the complaint on
the ground that the assignment of credit extinguished the obligation. The decretal
portion thereof provides:chanrob1es virtual 1aw library

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of
the defendant and against the plaintiff, dismissing the complaint and ordering the
plaintiff to pay the defendant attorney’s fees in the amount of P25,000.00.

Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the
appellate court rendered a decision, 10 the dispositive portion of which
reads:chanrob1es virtual 1aw library

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:chanrob1es virtual 1aw
library

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. 15chanrob1es virtua1 1aw
1ibrary

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:chanrob1es virtual 1aw library

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:chanrob1es virtual 1aw library

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
(Emphasis 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 DELETE for
lack of evidentiary basis.chanrob1es virtua1 1aw 1ibrary

SO ORDERED.

Davide, Jr., C.J., Vitug, Carpio and Azcuna, JJ., concur.

Endnotes:

1. Exhibit "A," Records, p. 128.

2. Exhibits "B-B-8," Records, pp. 130-138.

3. Exhibit "C," Records, p. 139.

4. Records, pp. 142-143.

5. Records, p. 142.

6. TSN, April 28, 1993, p. 25.

7. Exhibit "C," Records, p. 139.

8. Records, pp. 1-6.

9. Penned by Judge Teofilo L. Guadiz, Jr.

10. Penned by Justice Hilarion L. Aquino with Justices Ma. Alicia Austria-Martinez (now
a member of this Court) and Jose L. Sabio, Jr., concurring.

11. Decision, CA-G.R. CV No. 47713, p. 6; Rollo, p. 14.

12. Rollo, pp. 9-14.

13. Rollo, p. 50.

14. Petition, pp. 6-7, Rollo, pp. 24-25.

15. South City Homes, Inc., Et. Al. v. BA Finance Corporation, G.R. No. 135462, 7
December 2001.

16. Filinvest Credit Corporation v. Philippine Acetylene, Co., Inc., G.R. No. L-50449,
January 30, 1982.

17. 3 Castan, Vol. I, 8th Ed., page 283 cited in IV Caguioa Comments and Cases in
Civil Law, page 325.

18. Civil Code, Article 1628. The vendor in good faith shall be responsible for the
existence and legality of the credit at the time of the sale unless it should have been
sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly
stipulated or unless the solvency was prior to the sale and of common knowledge. . . .

19. Civil Code, Art. 417. The following are also considered as personal
property:chanrob1es virtual 1aw library

(1) Obligations and actions which have for their object movables or demandable sums,
and . . ..

20. Civil Code, Art. 1231. Obligations are extinguished:chanrob1es virtual 1aw library

(1) By payment or performance; . . ..

21. Civil Code, Art. 1278. Compensation shall take place when two persons, in their
own rights, are creditors and debtors of each other.

22. Records, p. 143.

23. Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, 12 July 1994, 234
SCRA 78.