G.R. No.

122544 January 28, 1999

REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BLAZA, ESTER ABAD DIZON and
JOSEPH ANTHONY DIZON, RAYMUND A. DIZON, GERARD A. DIZON, and JOSE A. DIZON,
JR., petitioners,
vs.
COURT OF APPEALS and OVERLAND EXPRESS LINES, INC., respondents.

G.R. No. 124741 January 28, 1999

REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BALZA, ESTER ABAD DIZON and
JOSEPH ANTHONY DIZON, RAYMUND A. DIZON, GERARD A. DIZON, and Jose A. DIZON,
JR., petitioners,
vs.
COURT OF APPEALS, HON. MAXIMIANO C. ASUNCION, and OVERLAND EXPRESS LINES,
INC., respondents.

MARTINEZ, J.:

Two consolidated petitions were filed before us seeking to set aside and annul the decisions and
resolutions of respondent Court of Appeals. What seemed to be a simple ejectment suit was
juxtaposed with procedural intricacies which finally found its way to this Court.

G.R. No. 122544:

On May 23, 1974, private respondent Overland Express Lines, Inc. (lessee) entered into a Contract
of Lease with Option to Buy with petitioners (lessors) involving a 1,755.80 square meter parcel of
1

land situated at corner MacArthur Highway and South "H" Street, Diliman, Quezon City. The term of
the lease was for one (1) year commencing from May 16, 1974 up to May 15, 1975. During this
period, private respondent was granted an option to purchase for the amount of P3,000.00 per
square meter. Thereafter, the lease shall be on a per month basis with a monthly rental of
P3,000.00.

For failure of private respondent to pay the increased rental of P8,000.00 per month effective June
1976, petitioners filed an action for ejectment (Civil Case No. VIII-29155) on November 10, 1976
before the then City Court (now Metropolitan Trial Court) of Quezon City, Branch VIII. On November
22, 1982, the City Court rendered judgment ordering private respondent to vacate the leased
2

premises and to pay the sum of P624,000.00 representing rentals in arrears and/or as damages in
the form of reasonable compensation for the use and occupation of the premises during the period
of illegal detainer from June 1976 to November 1982 at the monthly rental of P8,000.00, less
payments made, plus 12% interest per annum from November 18, 1976, the date of filing of the
complaint, until fully paid, the sum of P8,000.00 a month starting December 1982, until private
respondent fully vacates the premises, and to pay P20,000.00 as and by way of attorney's fees.

Private respondent filed a certiorari petition praying for the issuance of a restraining order enjoining
the enforcement of said judgment and dismissal of the case for lack of jurisdiction of the City Court.

On September 26, 1984, the then Intermidiate Appellate Court (now Court of Appeals) rendered a
3

decision stating that:

4
 . . ., the alleged question of whether petitioner was granted an extension of the option
to buy the property; whether such option, if any, extended the lease or whether
petitioner actually paid the alleged P300,000.00 to Fidela Dizon, as representative of
private respondents in consideration of the option and, whether petitioner thereafter
offered to pay the balance of the supposed purchase price, are all merely incidental
and do not remove the unlawful detainer case from the jurisdiction or respondent
court. In consonance with the ruling in the case of Teodoro, Jr. vs. Mirasol (supra),
the above matters may be raised and decided in the unlawful detainer suit as, to rule
otherwise, would be a violation of the principle prohibiting multiplicity of suits.
(Original Records, pp. 38-39).

The motion for reconsideration was denied. On review, this Court dismissed the petition in a
resolution dated June 19, 1985 and likewise denied private respondent's subsequent motion for
reconsideration in a resolution dated September 9, 1985. 5

On October 7, 1985, private respondent filed before the Regional Trial Court (RTC) of Quezon City
(Civil Case No. Q-45541) an action for Specific Performance and Fixing of Period for Obligation with
prayer for the issuance of a restraining order pending hearing on the prayer for a writ of preliminary
injunction. It sought to compel the execution of a deed of sale pursuant to the option to purchase and
the receipt of the partial payment, and to fix the period to pay the balance. In an Order dated
October 25, 1985, the trial court denied the issuance of a writ of preliminary injunction on the ground
that the decision of the then City Court for the ejectment of the private respondent, having been
affirmed by the then Intermediate Appellate Court and the Supreme Court, has become final and
executory.

Unable to secure an injunction, private respondent also filed before the RTC of Quezon City, Branch
102 (Civil Case No. Q-46487) on November 15, 1985 a complaint for Annulment of and Relief from
Judgment with injunction and damages. In its decision dated May 12, 1986, the trial court
6

dismissed the complaint for annulment on the ground of res judicata, and the writ of preliminary
injunction previously issued was dissolved. It also ordered private respondent to pay P3,000.00 as
attorney's fees. As a consequence of private respondent's motion for reconsideration, the
preliminary injunction was reinstated, thereby restraining the execution of the City Court's judgment
on the ejectment case.

The two cases were the after consolidated before the RTC of Quezon City, Branch 77. On April 28,
1989, a decision was rendered dismissing private respondent's complaint in Civil Case No. Q-
7

45541 (specific performance case) and denying its motion for reconsideration in Civil Case No.
46487 (annulment of the ejectment case). The motion for reconsideration of said decision was
likewise denied.

On appeal, respondent Court of Appeals rendered a decision upholding the jurisdiction of the City
8 9

Court of Quezon City in the ejectment case. It also concluded that there was a perfected contract of
sale between the parties on the leased premises and that pursuant to the option to buy agreement,
private respondent had acquired the rights of a vendee in a contract of sale.

CA: It opined that the payment by private respondent of P300,000.00 on June 20, 1975 as partial
payment for the leased property, which petitioners accepted (through Alice A. Dizon) and for which
an official receipt was issued, was the operative act that gave rise to a perfected contract of sale,
and that for failure of petitioners to deny receipt thereof, private respondent can therefore assume
that Alice A. Dizon, acting as agent of petitioners, was authorized by them to receive the money in
their behalf. The Court of Appeals went further by stating that in fact, what was entered into was a
"conditional contract of sale" wherein ownership over the leased property shall not pass to the
private respondent until it has fully paid the purchase price. Since private respondent did not consign
to the court the balance of the purchase price and continued to occupy the subject premises, it had
the obligation to pay the amount of P1,700.00 in monthly rentals until full payment of the purchase
price.

RULING:

Third. There was no perfected contract of sale between petitioners and private respondent.
Private respondent argued that it delivered the check of P300,000.00 to Alice A. Dizon who acted as
agent of petitioners pursuant to the supposed authority given by petitioner Fidela Dizon, the payee
thereof. Private respondent further contended that petitioners' filing of the ejectment case against it
based on the contract of lease with option to buy holds petitioners in estoppel to question the
authority of petitioner Fidela Dizon. It insisted that the payment of P300,000.00 as partial payment of
the purchase price constituted a valid exercise of the option to buy.

Under Article 1475 of the New Civil Code, "the contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the contract and upon the price. From that
moment, the parties may reciprocally demand performance, subject to the provisions of the law
governing the form of contracts." Thus, the elements of a contract of sale are consent, object, and
price in money or its equivalent. It bears stressing that the absence of any of these essential
elements negates the existence of a perfected contract of sale. Sale is a consensual contract and he
who alleges it must show its existence by competent proof. 25

In an attempt to resurrect the lapsed option, private respondent gave P300,000.00 to petitioners
(thru Alice A. Dizon) on the erroneous presumption that the said amount tendered would constitute a
perfected contract of sale pursuant to the contract of lease with option to buy. There was no valid
consent by the petitioners (as co-owners of the leased premises) on the supposed sale entered into
by Alice A. Dizon, as petitioners' alleged agent, and private respondent. The basis for agency is
representation and a person dealing with an agent is put upon inquiry and must discover upon his
peril the authority of the agent. As provided in Article 1868 of the New Civil Code, there was no
26 27

showing that petitioners consented to the act of Alice A. Dizon nor authorized her to act on their
behalf with regard to her transaction with private respondent. The most prudent thing private
respondent should have done was to ascertain the extent of the authority of Alice A. Dizon. Being
negligent in this regard, private respondent cannot seek relief on the basis of a supposed agency.

In Bacaltos Coal Mines vs. Court of Appeals, we explained the rule in dealing with an agent:
28

Every person dealing with an agent is put upon inquiry and must discover upon his
peril the authority of the agent. If he does not make such inquiry, he is chargeable
with knowledge of the agent's authority, and his ignorance of that authority will not be
any excuse. Persons dealing with an assumed agency, whether the assumed agency
be a general or special one, are bound at their peril, if they would hold the principal,
to ascertain not only the fact of the agency but also the nature and extent of the
authority, and in case either is controverted, the burden of proof is upon them to
establish it.

For the long years that private respondent was able to thwart the execution of the ejectment suit
rendered in favor of petitioners, we now write finis to this controversy and shun further delay so as to
ensure that this case would really attain finality.

WHEREFORE, in view of the foregoing, both petitions are GRANTED. The decision dated March 29,
1994 and the resolution dated October 19, 1995 in CA-G.R. CV No. 25153-54, as well as the
decision dated December 11, 1995 and the resolution dated April 23, 1997 in CA-G.R. SP No.
33113 of the Court of Appeals are hereby REVERSED and SET ASIDE.

Let the records of this case be remanded to the trial court for immediate execution of the judgment
dated November 22, 1982 in Civil Case No. VIII-29155 of the then City Court (now Metropolitan Trial
Court) of Quezon City, Branch VIII as affirmed in the decision dated September 26, 1984 of the then
Intermediate Appellate Court (now Court of Appeals) and in the resolution dated June 19, 1985 of
this Court.

However, petitioners are ordered to REFUND to private respondent the amount of P300,000.00
which they received through Alice A. Dizon on June 20, 1975.1âwphi1.nêt

SO ORDERED.
G.R. No. 186264 July 8, 2013

DR. LORNA C. FORMARAN, Petitioner,

vs.
DR. GLENDA B. ONG AND SOLOMON S. ONG, Respondents.

DECISION

PEREZ, J.:

This is an Appeal by certiorari under Rule 45 of the Revised Rules of Court of the Decision 1 of the
Court of Appeals (CA) rendered on August 30, 2007, the dispositive portion of which reads as
follows:

"WHEREFORE, in the (sic) light of the foregoing, the assailed Decision is REVERSED AND SET
ASIDE. The Complaint of appellee Lorna C. Formaran is DISMISSED. The appellee, her agents or
representatives are ORDERED to vacate the land in question and to restore the same to appellants."

The facts adopted by both the trial court and the Court of Appeals are summarized thus:

"According to plaintiff (Petitioner)'s complaint, she owns the afore-described parcel of land which
was donated to her intervivos by her uncle and aunt, spouses Melquiades Barraca and Praxedes
Casidsid on June 25, 1967; that on August 12, 1967 upon the proddings and representation of
defendant (Respondent) Glenda, that she badly needed a collateral for a loan which she was
applying from a bank to equip her dental clinic, plaintiff made it appear that she sold one-half of the
afore-described parcel of land to the defendant Glenda; that the sale was totally without any
consideration and fictitious; that contrary to plaintiff’s agreement with defendant Glenda for the latter
to return the land, defendant Glenda filed a case for unlawful detainer against the plaintiff who
consequently suffered anxiety, sleepless nights and besmirched reputation; and that to protect
plaintiff’s rights and interest over the land in question, she was constrained to file the instant case,
binding herself to pay ₱50,000.00 as and for attorney's fees.

In an answer filed on December 22, 1997, defendant Glenda insisted on her ownership over the land
in question on account of a Deed of Absolute Sale executed by the plaintiff in her favor; and that
plaintiff’s claim of ownership therefore was virtually rejected by the Municipal Circuit Trial Court of
Ibaja-Nabas, Ibajay, Aklan, when it decided in her favor the unlawful detainer case she filed against
the plaintiff, docketed therein as Civil Case No. 183. Defendants are also claiming moral damages
and attorney’s fees in view of the filing of the present case against them.

Plaintiff’s testimony tends to show that the land in question is part of the land donated to her on June
25, 1967 by spouses Melquiades Barraca and Praxedes Casidsid, plaintiff’s uncle and aunt,
respectively. As owner thereof, she declared the land for taxation purposes (Exhibits A-1 to A-5,
inclusive). She religiously paid its realty taxes (Exhibit A-6). She mortgaged the land to Aklan
Development Bank to secure payment of a loan.

In 1967, defendant Glenda and her father, Melquiades Barraca came to her residence asking for
help. They were borrowing one-half of land donated to her so that defendant Glenda could obtain a
loan from the bank to buy a dental chair. They proposed that she signs an alleged sale over the said
portion of land.
Acceding to their request, she signed on August 12, 1967 a prepared Deed of Absolute Sale (Exhibit
C) which they brought along with them (TSN, p. 22, Ibid), covering the land in question without any
money involved. There was no monetary consideration in exchange for executing Exhibit C. She did
not also appear before the Notary Public Edilberto Miralles when Exhibit C was allegedly
acknowledged by her on November 9, 1967.

A month thereafter, plaintiff inquired from her uncle, Melquiades Barracca if they have obtained the
loan. The latter informed her that they did not push through with the loan because the bank’s interest
therefore was high. With her uncle’s answer, plaintiff inquired about Exhibit C. Her uncle replied that
they crampled (kinumos) the Deed of Absolute Sale (Exhibit C) and threw it away. Knowing that
Exhibit C was already thrown away, plaintiff did not bother anymore about the document (TSN, p. 7,
Ibid) she thought that there was no more transaction. Besides, she is also in actual possession of
the land and have even mortgaged the same.

In 1974, plaintiff transferred her residence from Nabas, Aklan, to Antipolo City where she has been
residing up to the present time. From the time she signed the Deed of Absolute Sale (Exhibit C) in
August, 1967 up to the present time of her change of residence to Antipolo City, defendant Glenda
never demanded actual possession of the land in question, except when the latter filed on May 30,
1996 a case for unlawful detainer against her. Following the filing of the ejectment case, she learned
for the first time that the Deed of Absolute Sale was registered on May 25, 1991 and was not thrown
away contrary to what Melquiades Barraca told her. Moreover, she and Melquiades Barraca did not
talk anymore about Exhibit C. That was also the first time she learned that the land in question is
now declared for taxation purposes in the name of defendant Glenda.

In closing her direct testimony, plaintiff declared that the filing of the unlawful detainer case against
her, caused her some sleepless nights and humiliation. She also suffered hypertension.

Upon the other hand, relevant matters that surfaced from the testimonies of the defendants shows
that on June 25, 1967, Melquiades Barraca, father of the defendant Glenda, donated a parcel of land
to her niece, plaintiff Lorna C. Formaran (Exhibit 3). At the time of the donation, plaintiff was still
single. She married Atty. Formaran only in September, 1967.

Subsequently, on August 12, 1967, Dr. Lorna B. Casidsid, herein plaintiff, executed a Deed of
Absolute Sale (Exhibit 1) over one-half portion of the land donated to her, in favor of defendant
Glenda. On account of the Sale (Exhibit 1) defendant Glenda was able to declare in her name the
land in question for taxation purposes (Exhibit 4) and paid the realty taxes (Exhibits 6, 6-A, 6-B and
6-C). She also was able to possess the land in question.

Defendant Glenda maintained that there was money involved affecting the sale of the land in her
favor. The sale was not to enable her to buy a dental chair for she had already one at the time.
Besides, the cost of a dental chair in 1967 was only ₱2,000.00 which she can readily afford.

The document of sale (Exhibit 1) affecting the land in question was not immediately registered after
its execution in 1967 but only on May 25, 1991 in order to accommodate the plaintiff who mortgaged
the land to Aklan Development Bank on May 18, 1978.

Based on the admissions of the parties in their pleadings, during the pre-trial and evidence on
record, there is no contention that on June 25, 1967, the afore-described parcel of land was donated
intervivos (Exhibit 3) by spouses Melquiades Barraca and Praxedes Casidsid to therein plaintiff, Dr.
Lorna Casidsid Formaran who was yet single. She was married to Atty. Formaran in September
1967. Praxedes was the aunt of Lorna as the latter’s father was the brother of Praxedes.
Following the donation, plaintiff immediately took possession of the land wherein one-half (1/2)
thereof is the land in question. Since then up to the present time, is still in actual possession of the
land, including the land in question.

Indeed, on May 30, 1996, herein defendant Glenda filed a complaint for unlawful detainer against
the plaintiff before the 7th Municipal Circuit Trial Court of Ibajay-Nabas, Ibajay, Aklan, docketed
there in as Civil Case No. 183. The case was decided on September 2, 1997, (Exhibit 2) in favor of
herein defendant Glenda; ordering the herein plaintiff to vacate the land in question.

After the plaintiff acquired ownership by way of donation over the afore-described parcel of land
which includes the land in question, she declared the same for taxation purposes under Tax
Declaration No. 12533, effective 1969 (Exhibit A-1). Revision caused the subsequent and
successive cancellation of Exhibit A-1 by Tax Declaration No. 177, effective 1974 (Exhibit A-2);

Tax Declaration No. 183 effective 1980 (Exhibit A-3); Tax Declaration No. 187, effective 1985
(Exhibit A-4); PIN-038-14-001-06-049, effective 1990 (Exhibit A-5); and APP/TD No. 93-001-330,
effective 1994 (Exhibit A-6).

The last two Tax Declarations (Exhibits A-5 and A-6) no longer covered the land in question which
was segregated therefrom when the Deed of Sale executed on August 12, 1967 (Exhibit C) was
registered for the first time on May 25, 1991.

Realty taxes of the afore-described parcel of land, including the land in question, have been paid by
the plaintiff since 1967 up to the present time (Exhibit B). However, defendant Glenda paid for the
first time the realty taxes of the land in question on January 9, 1995 (Exhibit 6) and up to the present
time (Exhibit 6-A and 6-B). 1âwphi1

On account of the Deed of Absolute Sale (Exhibit C or 1) signed by the plaintiff, during the cadastral
survey, the land in question was surveyed in the name of defendant and designated as Lot No. 188
(Exhibit 5) and the other half on the western side was designated as Lot No. 189. The land in
question is particularly described as follows:

A parcel of residential land (Lot No. 188, Cad. No. 758-D Nabas Cadastre) located at Poblacion
Nabas, Aklan, Bounded on North by Lot No. 196; on the East by Lot No. 187; on the West by Lot No.
189 all of Cad. No. 758-D; and on the South by Mabini St., containing an area of THREE HUNDRED
FIFTY SEVEN (357) SQUARE METERS, more or less."

Petitioner filed on action for annulment of the Deed of Sale (Civil Case No. 5398) against
respondents before the Regional Trial Court (RTC), of Kalibo, Aklan, Branch 5.

On December 3, 1999, the trial court rendered a Decision in favor of petitioner and against the
respondent by declaring the Deed of Absolute Sale null and void for being an absolutely simulated
contract and for want of consideration; declaring the petitioner as the lawful owner entitled to the
possession of the land in question; as well as ordering (a) the cancellation of respondent Glenda’s
Tax Declaration No. 1031, and (b) respondents to pay petitioner ₱25,000.00 for attorney’s fees and
litigation expenses.

Respondents coursed an appeal to the CA. The CA, on August 30, 2007, reversed and set aside the
Decision of the trial court and ordered petitioner to vacate the land in question and restore the same
to respondents.
Hence, the present petition.

The petition sufficiently shows with convincing arguments that the decision of the CA is based on a
misappreciation of facts.

The Court believes and so holds that the subject Deed of Sale is indeed simulated, 2 as it is: (1)
totally devoid of consideration; (2) it was executed on August 12, 1967, less than two months from
the time the subject land was donated to petitioner on June 25, 1967 by no less than the parents of
respondent Glenda Ong; (3) on May 18, 1978, petitioner mortgaged the land to the Aklan
Development Bank for a ₱23,000.00 loan; (4) from the time of the alleged sale, petitioner has been
in actual possession of the subject land; (5) the alleged sale was registered on May 25, 1991 or
about twenty four (24) years after execution; (6) respondent Glenda Ong never introduced any
improvement on the subject land; and (7) petitioner’s house stood on a part of the subject land.
These are facts and circumstances which may be considered badges of bad faith that tip the
balance in favor of petitioner.

The Court is in accord with the observation and findings of the (RTC, 3 Kalibo, Aklan) thus:

"The amplitude of foregoing undisputed facts and circumstances clearly shows that the sale of the
land in question was purely simulated. It is void from the very beginning (Article 1346, New Civil
Code). If the sale was legitimate, defendant Glenda should have immediately taken possession of
the land, declared in her name for taxation purposes, registered the sale, paid realty taxes,
introduced improvements therein and should not have allowed plaintiff to mortgage the land. These
omissions properly militated against defendant Glenda’s submission that the sale was legitimate and
the consideration was paid.

While the Deed of Absolute Sale was notarized, it cannot justify the conclusion that the sale is a true
conveyance to which the parties are irrevocably and undeniably bound. Although the notarization of
Deed of Absolute Sale, vests in its favor the presumption of regularity, it does not validate nor make
binding an instrument never intended, in the first place, to have any binding legal effect upon the
parties thereto (Suntay vs. Court of Appeals, G.R. No. 114950, December 19, 1995; cited in Ruperto
Viloria vs. Court of Appeals, et al., G.R. No. 119974, June 30, 1999)."

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals rendered on August
30, 2007 in CA G.R. CV No. 66187 is hereby REVERSED and SET ASIDE. The Decision of the
Regional Trial Court, Branch 5, Kalibo, Aklan in Civil Case No. 5398 dated December 3, 1999 is
REINSTATED.

SO ORDERED.
G.R. No. L-25885 January 31, 1972

LUZON BROKERAGE CO., INC., plaintiff-appellee,

vs.
MARITIME BUILDING CO., INC., and MYERS BUILDING CO., INC., defendants, MARITIME
BUILDING CO., INC., defendant-appellant.

Ross, Salcedo, Del Rosario, Bito and Misa for plaintiff-appellee.

C. R. Tiongson and L. V. Simbulan and Araneta, Mendoza and Papa for defendant Myers Building
Co., Inc.

Ambrosio Padilla Law Offices for defendant-appellant Maritima Building Co., Inc.

REYES, J.B.L., J.:p

Direct appeal (prior to the effectivity of Republic Act 5440) by Maritime Building Co., Inc. from a decision of the Court of First Instance of
Manila (in its Civil Case No. 47319), the dispositive part of which provides as follows:

FOR ALL THE FOREGOING CONSIDERATIONS, judgment is hereby rendered

declaring that the Myers Building Co., Inc. is entitled to receive the rentals which the
plaintiff has been paying, including those already deposited in Court, thereby
relieving the plaintiff of any obligation to pay the same to any other party, and
ordering the Maritime Building Co., Inc. to pay the commission fees paid by the
Myers Building Co., Inc. to the Clerk of this Court, plus the sum of P3,000.00 as and
for attorney's fees.

On the cross-claim by the Myers Building Co., Inc., the Maritima Building Co., Inc. is
hereby ordered to pay the Myers Building Co., Inc. the sum of P10,000.00 damages,
plus the sum of P30,000.00, representing rentals wrongfully collected by it from the
plaintiff corresponding to the months of March, April and May, 1961 and the costs
hereof.

The antecedents of the litigation are summarized in the appealed judgment thus:

This is an action for interpleading.

It appears that on April 30, 1949, in the City of Manila, the defendant Myers Building
Co., Inc., owner of three parcels of land in the City of Manila, together with the
improvements thereon, entered into a contract entitled "Deed of Conditional Sale" in
favor of Bary Building Co., Inc., later known as Maritime Building Co., Inc., whereby
the former sold the same to the latter for P1,000,000.00, Philippine currency.
P50,000.00 of this price was paid upon the execution of the said contract and the
parties agreed that the balance of P950,000.00 was to be paid in monthly
installments at the rate of P10,000.00 with interest of 5% per annum until the same
was fully paid.
In Par. (O), they agreed that in case of failure on the part of the vendee to pay any of
the installments due and payable, the contract shall be annulled at the option of the
vendor and all payments already made by vendee shall be forfeited and the vendor
shall have right to re-enter the property and take possession thereof.

Later, the monthly installment of P10,000.00 above-stipulated with 5% interest per

annum was amended or decreased to P5,000.00 per month and the interest was
raised to 5-1/2% per annum. The monthly installments under the contract was
regularly paid by the Bary Building Co., Inc. and/or the Maritime Co., Inc. until the
end of February, 1961. It failed to pay the monthly installment corresponding to the
month of March 1961, for which the Vice-President, George Schedler, of the
Maritime Building Co., Inc., wrote a letter to the President of Myers, Mr. C. Parsons,
requesting for a moratorium on the monthly payment of the installments until the end
of the year 1961, for the reason that the said company was encountering difficulties
in connection with the operation of the warehouse business. However, Mr. C.
Parsons, in behalf of the Myers Estate, answered that the monthly payments due
were not payable to the Myers Estate but to the Myers Building Co., Inc., and that the
Board of Directors of the Myers Co., Inc. refused to grant the request for moratorium
for suspension of payments under any condition.

Notwithstanding the denial of this request for moratorium by the Myers Board of
Directors the Maritime Building Co., Inc. failed to pay the monthly installments
corresponding to the months of March, April and May, 1961. Whereupon, on May 16,
1961, the Myers Building Co., Inc. made a demand upon the Maritime Building Co.,
Inc., for the payment of the installments that had become due and payable, which
letter, however, was returned unclaimed.

Then, on June 5, 1961, the Myers Building Co., Inc. wrote the Maritime Building Co.,
Inc. another letter advising it of the cancellation of the Deed of Conditional Sale
entered into between them and demanding the return of the possession of the
properties and holding the Maritime Building Co., Inc. liable for use and occupation of
the said properties at P10,000.00 monthly.

In the meantime, the Myers Building Co., Inc. demanded upon the Luzon Brokerage
Co., Inc. to whom the Maritime Building Co., Inc. leased the properties, the payment
of monthly rentals of P10,000.00 and the surrender of the same to it. As a
consequence, the Luzon Brokerage Co., Inc. found itself in a payment to the wrong
party, filed this action for interpleader against the Maritime Building Co., Inc.

After the filing of this action, the Myers Building Co., Inc. in its answer filed a cross-
claim against the Maritime Building Co., Inc. praying for the confirmation of its right to
cancel the said contract. In the meantime, the contract between the Maritime Building
Co., Inc. and the Luzon Brokerage Co., Inc. was extended by mutual agreement for a
period of four (4) more years, from April, 1964 to March 31, 1968.

The Maritime Building Co., Inc. now contends (1) that the Myers Building Co., Inc.
cannot cancel the contract entered into by them for the conditional sale of the
properties in question extrajudicially and (2) that it had not failed to pay the monthly
installments due under the contract and, therefore, is not guilty of having violated the
same.
It should be further elucidated that the suspension by the appellant Maritime Building Co., Inc.
(hereinafter called Maritime) of the payment of installments due from it to appellee Myers Building
Co., Inc. (hereinafter designated as Myers Corporation) arose from an award of backwages made by
the Court of Industrial Relations in favor of members of Luzon Labor Union who served the Fil-
American forces in Bataan in early 1942 at the instance of the employer Luzon Brokerage Co. and
for which F. H. Myers, former majority stockholder of the Luzon Brokerage Co., had allegedly
promised to indemnify E. M. Schedler (who controlled Maritime) when the latter purchased Myers'
stock in the Brokerage Company. Schedler contended that he was being sued for the backpay
award of some P325,000, when it was a liability of Myers, or of the latter's estate upon his death. In
his letter to Myers Corporation (Exhibit "11", Maritime) dated 7 April 1961 (two months and ten days
before the initial complaint in the case at bar), Schedler claimed the following:

At all times when the F. H. Myers Estate was open in the Philippine Islands and open
in San Francisco, the Myers Estate or heirs assumed the defense of the Labor Union
claims and led us to believe that they would indemnify us therefrom.

Recently, however, for the first time, and after both the Philippine and San Francisco
F. H. Myers Estates were closed, we have been notified that the F. H. Myers
indemnity on the Labor Union case will not be honored, and in fact Mrs. Schedler and
I have been sued in the Philippines by my successor in interest, Mr. Wentholt, and
have been put to considerable expense.

You are advised that my wife and I, as the owners of the Maritime Building Company,
intend to withhold any further payments to Myers Building Company or Estate, in
order that we can preserve those funds and assets to set off against the potential
liability to which I am now exposed by the failure of the Myers heirs to honor the
indemnity agreement pertaining to the Labor claims.

The trial court found the position of Schedler indefensible, and that Maritime, by its failure to pay,
committed a breach of the sale contract; that Myers Company, from and after the breach, became
entitled to terminate the contract, to forfeit the installments paid, as well as to repossess, and collect
the rentals of, the building from its lessee, Luzon Brokerage Co., in view of the terms of the
conditional contract of sale stipulating that:

(d) It is hereby agreed, covenanted and stipulated by and between the parties hereto
that the Vendor will execute and deliver to the Vendee a definite or absolute deed of
sale upon the full payment by the vendee of the unpaid balance of the purchase price
hereinabove stipulated; that should the Vendee fail to pay any of the monthly
installments, when due, or otherwise fail to comply with any of the terms and
conditions herein stipulated, then this Deed of Conditional Sale shall automatically
and without any further formality, become null and void, and all sums so paid by the
Vendee by reason thereof, shall be considered as rentals and the Vendor shall then
and there be free to enter into the premises, take possession thereof or sell the
properties to any other party.

xxx xxx xxx

(o) In case the Vendee fails to make payment or payments, or any part thereof, as
herein provided, or fails to perform any of the covenants or agreements hereof, this
contract shall, at the option of the Vendor, be annulled and, in such event, all
payments made by the Vendee to the Vendor by virtue of this contract shall be
forfeited and retained by the Vendor in full satisfaction of the liquidated damages by
 said Vendor sustained; and the said Vendor shall have the right to forthwith re-enter,
and take possession of, the premises subject-matter of this contract.

"The remedy of forfeiture stated in the next-preceding paragraph shall not be

exclusive of any other remedy, but the Vendor shall have every other remedy
granted it by virtue of this contract, by law, and by equity."

From the judgment of the court below, the dispositive portion whereof has been transcribed at the
start of this opinion, Myers duly appealed to this Court.

The main issue posed by appellant is that there has been no breach of contract by Maritime; and
assuming that there was one, that the appellee Myers was not entitled to rescind or resolve the
contract without recoursing to judicial process.

It is difficult to understand how appellant Maritime can seriously contend that its failure or refusal to
pay the P5,000 monthly installments corresponding to the months of March, April and May, 1961 did
not constitute a breach of contract with Myers, when said agreement (transcribed in the Record on
Appeal, pages 59-71) expressly stipulated that the balance of the purchase price (P950,000) —

shall be paid at the rate of Ten Thousand Pesos (P10,000) monthly on or before the
10th day of each month with interest at 5% per annum, this amount to be first applied
on the interest, and the balance paid to the principal thereof; and the failure to pay
any installment or interest when due shall ipso facto cause the whole unpaid balance
of the principal and interest to be and become immediately due and payable.
(Contract, paragraph b; Record on Appeal, page 63)

Contrary to appellant Maritime's averments, the default was not made in good faith. The text of the
letter to Myers (Exhibit "11", Maritime), heretofore quoted, leaves no doubt that the non-payment of
the installments was the result of a deliberate course of action on the part of appellant, designed to
coerce the appellee Myers Corporation into answering for an alleged promise of the late F. H.
MYERS to indemnify E. W. Schedler, the controlling stock-holder of appellant, for any payments to
be made to the members of the Luzon Labor Union. This is apparent also from appellant's letter to
his counsel (Exhibit "12", Maritime):

... I do not wish to deposit pesos representing the months of March, April and May,
since the Myers refusal to honor the indemnity concerning the labor claims has
caused me to disburse (sic) roughly $10,000.00 to date in fees, cost and travel
expenses. However, if the Myers people will deposit in trust with Mr. C. Parsons
25,000 pesos to cover my costs to date, I will then deposit with Mr. Parsons, in trust,
15,000 pesos for March, April and May and will also post a monthly deposit of 5,000
pesos until the dispute is settled. The dispute won't be settled in my mind, unless and
until:

a) The Myers people indemnify me fully the labor cases;

b) The labor cases are terminated favorably to Luzon Brokerage and no liability
exists;

c) The Myers people pay any judgment entered on the labor cases thereby releasing
me; or
 d) It is finally determined either in San Francisco or in the Philippines by a court that
the Myers heirs must honor the indemnity which Mr. F. H. Myers promised when I
purchased Luzon Brokerage Company.

Yet appellant Maritime (assuming that it had validly acquired the claims of its president and
controlling stockholder, E. M. Schedler) could not ignore the fact that whatever obligation F. H.
Myers or his estate had assumed in favor of Schedler with respect to the Luzon Brokerage labor
case was not, and could not have been, an obligation of appellee corporation (Myers Building
Company). No proof exists that the board of directors of the Myers Corporation had agreed to
assume responsibility for the debts (if any) that the late Myers or his heirs had incurred in favor of
Schedler. Not only this, but it is apparent from the letters quoted heretofore that Schedler had
allowed the estate proceedings of the late F. M. Myers to close without providing for any contingent
liability in Schedler's favor; so that by offsetting the alleged debt of Myers to him, against the balance
of the price due under the "Deed of Conditional Sale", appellant Maritime was in fact attempting to
burden the Myers Building Company with an uncollectible debt, since enforcement thereof against
the estate of F. H. Myers was already barred.

Under the circumstances, the action of Maritime in suspending payments to Myers Corporation was
a breach of contract tainted with fraud or malice (dolo), as distinguished from mere negligence
(culpa), "dolo" being succinctly defined as a "conscious and intentional design to evade the normal
fulfillment of existing obligations" (Capistrano, Civil Code of the Philippines, Vol. 3, page 38), and
therefore incompatible with good faith (Castan, Derecho Civil, 7th Ed., Vol. 3, page 129; Diaz Pairo,
Teoria de Obligaciones, Vol. 1, page 116).

Maritime having acted in bad faith, it was not entitled to ask the court to give it further time to make
payment and thereby erase the default or breach that it had deliberately incurred. Thus the lower
court committed no error in refusing to extend the periods for payment. To do otherwise would be to
sanction a deliberate and reiterated infringement of the contractual obligations incurred by Maritime,
an attitude repugnant to the stability and obligatory force of contracts.

From another point of view, it is irrelevant whether appellant Maritime's infringement of its contract
was casual or serious, for as pointed out by this Court in Manuel vs. Rodriguez, 109 Phil. 1, at page
10 —

The contention of plaintiff-appellant that Payatas Subdivision Inc. had no right to

cancel the contract as there was only a "casual breach" is likewise untenable. In
contracts to sell, where ownership is retained by the seller and is not to pass until the
full payment of the price, such payment, as we said, is a positive suspensive
condition, the failure of which is not a breach, casual or serious, but simply an event
that prevented the obligation of the vendor to convey title from acquiring binding
force, in accordance with Article 1117 of the Old Civil Code. To argue that there was
only a casual breach is to proceed from the assumption that the contract is one of
absolute sale, where non-payment is a resolutory condition, which is not the case.

But it is argued for Maritime that even if it had really violated the Contract of Conditional Sale with
Myers, the latter could not extrajudicially rescind or resolve the contract, but must first recourse to
the courts. While recognizing that paragraph (d) of the deed of conditional sale expressly
provides inter alia —

that should the Vendee fail to pay any of the monthly installments when due, or
otherwise fail to comply with any of the terms and conditions herein stipulated, then
this Deed of Conditional Sale shall automatically and without any further formality,
 become null and void, and all sums so paid by the Vendee by reason thereof shall be
considered as rentals.. (Emphasis supplied)

herein appellant Maritime avers that paragraph (e) of the deed contemplates that a suit should be
brought in court for a judicial declaration of rescission. The paragraph relied upon by Maritime is
couched in the following, terms:

(e) It is also hereby agreed, covenanted and stipulated by and between the parties
hereto that should the Vendor rescind this Deed of Conditional Sale, for any of the
reasons stipulated in the preceding paragraph, the Vendee by these presents
obligates itself to peacefully deliver the properties subject of this contract to the
Vendor, and in the event that the Vendee refuses to peacefully deliver the
possession of the properties subject of this contract to the Vendor in case of
rescission, and a suit should be brought in court by the Vendor to seek judicial
declaration of rescission and take possession of the properties subject of this
contract, the Vendee hereby obligates itself to pay all the expenses to be incurred by
reason of such suit and in addition obligates itself to pay the sum of P10,000.00, in
concept of damages, penalty and attorney's fees.

Correlation of this paragraph (e) with the preceding paragraph (d) of the Deed of Conditional Sale
(quoted in page 5 of this opinion) reveals no incompatibility between the two; and the suit to "be
brought in Court by the Vendor to seek judicial declaration of rescission" is provided for by
paragraph(e) only in the eventuality that, notwithstanding the automatic annulment of the deed under
paragraph (d), the Vendee "refuses to peacefully deliver the possession of the properties subject of
this contract". The step contemplated is logical since the Vendor can not, by himself, dispossess the
Vendee manu militari, if the latter should refuse to vacate despite the violation of the contract, since
no party can take the law in his own hands. But the bringing of such an action in no way contradicts
or restricts the automatic termination of the contract in case the Vendee (i.e., appellant Maritime)
should not comply with the agreement.

Anyway, this Court has repeatedly held that —

Well settled is, however, the rule that a judicial action for the rescission of a contract
is not necessary where the contract provides that it may be revoked and cancelled
for violation of any of its terms and conditions" (Lopez vs. Commissioner of Customs,
L-28235, 30 January 1971, 37 SCRA 327, 334,, and cases cited therein). (Emphasis
1

supplied.)

Resort to judicial action for rescission is obviously not contemplated.... The validity of
the stipulation can not be seriously disputed. It is in the nature of a facultative
resolutory condition which in many cases has been upheld by this Court. (Ponce
Enrile vs. Court of Appeals, L-27549, 30 Sept. 1969; 29 SCRA 504).

The obvious remedy of the party opposing the rescission for any reason being to file the
corresponding action to question the rescission and enforce the agreement, as indicated in our
decision in University of the Philippines vs. Walfrido de los Angeles,
L-28602, 29 September 1970, 35 SCRA 107.

Of course, it must be understood that the act of a party in treating a contract as

cancelled or resolved on account of infractions by the other contracting party must be
made known to the other and is always provisional, being ever subject to scrutiny
and review by the proper court. If the other party denies that rescission is justified, it
 is free to resort to judicial action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the consequent indemnity awarded
to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article
2203).

Maritime likewise invokes Article 1592 of the Civil Code of the Philippines as entitling it to pay
despite its default:

ART. 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may pay, even after the expiration of
the period, as long as no demand for rescission of the contract has been made upon
him either judicially or by a notarial act. After the demand, the court may not grant
him a new term.

Assuming arguendo that Article 1592 is applicable, the cross-claim filed by Myers against Maritime
in the court below constituted a judicial demand for rescission that satisfies the requirements of said
article.

But even if it were not so, appellant overlooks that its contract with appellee Myers is not the ordinary
sale envisaged by Article 1592, transferring ownership simultaneously with the delivery of the real
property sold, but one in which the vendor retained ownership of the immovable object of the sale,
merely undertaking to convey it provided the buyer strictly complied with the terms of the contract
(see paragraph [d], ante, page 5). In suing to recover possession of the building from Maritime,
appellee Myers is not after the resolution or setting aside of the contract and the restoration of the
parties to the status quo ante, as contemplated by Article 1592, but precisely enforcing the
provisions of the agreement that it is no longer obligated to part with the ownership or possession of
the property because Maritime failed to comply with the specified condition precedent, which is to
pay the installments as they fell due.

The distinction between contracts of sale and contract to sell with reserved title has been recognized
by this Court in repeated decisions upholding the power of promisors under contracts to sell in case
2

of failure of the other party to complete payment, to extrajudicially terminate the operation of the
contract, refuse conveyance and retain the sums or installments already received, where such rights
are expressly provided for, as in the case at bar.

Maritime's appeal that it would be iniquituous that it should be compelled to forfeit the P973,000
already paid to Myers, as a result of its failure to make good a balance of only P319,300.65, payable
at P5,000 monthly, becomes unimpressive when it is considered that while obligated to pay the price
of one million pesos at P5,000 monthly, plus interest, Maritime, on the other hand, had leased the
building to Luzon Brokerage, Inc. since 1949; and Luzon paid P13,000 a month rent, from
September, 1951 to August 1956, and thereafter until 1961, at P10,000 a month, thus paying a total
of around one and a half million pesos in rentals to Maritime. Even adding to Maritime's losses of
P973,000 the P10,000 damages and P3,000 attorneys' fees awarded by the trial court, it is
undeniable that appellant Maritime has come out of the entire transaction still at a profit to itself.

There remains the procedural objection raised by appellant Maritime to this interpleader action filed
by the Luzon Brokerage Co., the lessee of the building conditionally sold by Myers to Maritime. It
should be recalled that when Maritime defaulted in its payments to Myers, and the latter notified the
former that it was cancelling the contract of conditional sale, Myers also notified Luzon Brokerage,
Maritime's lessee of the building, of the cancellation of the sale, and demanded that Luzon should
pay to Myers the rentals of the building beginning from June, 1961, under penalty of ejectment
(Record on Appeal, pages 14-15). In doubt as to who was entitled to the rentals, Luzon filed this
action for interpleader against Myers and Maritime, and deposited the rentals in court as they fell
due. The appellant Maritime moved to dismiss on the ground that (a) Luzon could not entertain
doubts as to whom the rentals should be paid since Luzon had leased the building from Maritime
since 1949, renewing the contract from time to time, and Myers had no right to cancel the lease; and
(b) that Luzon was not a disinterested party, since it tended to favor appellee Myers. The court below
overruled Maritime's objections and We see no plausible reason to overturn the order. While Myers
was not a party to the lease, its cancellation of the conditional sale of the premises to Maritime,
Luzon's lessor, could not but raise reasonable doubts as to the continuation of the lease, for the
termination of the lessor's right of possession of the premises necessarily ended its right to the
rentals falling due thereafter. The preceding portion of our opinion is conclusive that Luzon's doubts
were grounded under the law and the jurisprudence of this Court.

No adequate proof exists that Luzon was favoring any one of the contending parties. It was
interested in being protected against prejudice deriving from the result of the controversy, regardless
of who should win. For the purpose it was simpler for Luzon to compel the disputants to litigate
between themselves, rather than chance being sued by Myers, and later being compelled to proceed
against Maritime to recoup its losses. In any event, Maritime ultimately confirmed the act of Luzon in
suing for interpleader, by agreeing to renew Luzon's lease in 1963 during the pendency of the
present action, and authorizing Luzon to continue depositing the rentals in court "until otherwise
directed by a court of competent jurisdiction" (Exhibit "18-Maritime"). The procedural objection has
thus become moot.

PREMISES CONSIDERED, the appealed decision should be, and hereby is, affirmed, and appellant
Maritime Building Co., as well as appellee Luzon Brokerage Co., are further ordered to surrender the
premises to the appellee Myers Building Co. Costs against appellant.
G.R. No. L-59266 February 29, 1988

SILVESTRE DIGNOS and ISABEL LUMUNGSOD, petitioners,

vs.
HON. COURT OF APPEALS and ATILANO G. JABIL, respondents.

BIDIN, J.:

This is a petition for review on certiorari seeking the reversal of the: (1) Decision * of the 9th Division, Court of Appeals dated July 31,1981,
affirming with modification the Decision, dated August 25, 1972 of the Court of First Instance ** of Cebu in civil Case No. 23-L entitled Atilano
G. Jabil vs. Silvestre T. Dignos and Isabela Lumungsod de Dignos and Panfilo Jabalde, as Attorney-in-Fact of Luciano Cabigas and Jovita L.
de Cabigas; and (2) its Resolution dated December 16, 1981, denying defendant-appellant's (Petitioner's) motion for reconsideration, for lack
of merit.

The undisputed facts as found by the Court of Appeals are as follows:

The Dignos spouses were owners of a parcel of land, known as Lot No. 3453, of the
cadastral survey of Opon, Lapu-Lapu City. On June 7, 1965, appellants (petitioners)
Dignos spouses sold the said parcel of land to plaintiff-appellant (respondent Atilano
J. Jabil) for the sum of P28,000.00, payable in two installments, with an assumption
of indebtedness with the First Insular Bank of Cebu in the sum of P12,000.00, which
was paid and acknowledged by the vendors in the deed of sale (Exh. C) executed in
favor of plaintiff-appellant, and the next installment in the sum of P4,000.00 to be
paid on or before September 15, 1965.

On November 25, 1965, the Dignos spouses sold the same land in favor of
defendants spouses, Luciano Cabigas and Jovita L. De Cabigas, who were then U.S.
citizens, for the price of P35,000.00. A deed of absolute sale (Exh. J, also marked
Exh. 3) was executed by the Dignos spouses in favor of the Cabigas spouses, and
which was registered in the Office of the Register of Deeds pursuant to the
provisions of Act No. 3344.

As the Dignos spouses refused to accept from plaintiff-appellant the balance of the
purchase price of the land, and as plaintiff- appellant discovered the second sale
made by defendants-appellants to the Cabigas spouses, plaintiff-appellant brought
the present suit. (Rollo, pp. 27-28)

After due trial, the Court of first Instance of Cebu rendered its Decision on August 25,1972, the
decretal portion of which reads:

WHEREFORE, the Court hereby declares the deed of sale executed on November
25, 1965 by defendant Isabela L. de Dignos in favor of defendant Luciano Cabigas, a
citizen of the United States of America, null and void ab initio, and the deed of sale
executed by defendants Silvestre T. Dignos and Isabela Lumungsod de Dignos not
rescinded. Consequently, the plaintiff Atilano G. Jabil is hereby ordered to pay the
sum, of Sixteen Thousand Pesos (P16,000.00) to the defendants-spouses upon the
execution of the Deed of absolute Sale of Lot No. 3453, Opon Cadastre and when
the decision of this case becomes final and executory.
 The plaintiff Atilano G. Jabil is ordered to reimburse the defendants Luciano Cabigas
and Jovita L. de Cabigas, through their attorney-in-fact, Panfilo Jabalde, reasonable
amount corresponding to the expenses or costs of the hollow block fence, so far
constructed.

It is further ordered that defendants-spouses Silvestre T. Dignos and Isabela

Lumungsod de Dignos should return to defendants-spouses Luciano Cabigas and
Jovita L. de Cabigas the sum of P35,000.00, as equity demands that nobody shall
enrich himself at the expense of another.

The writ of preliminary injunction issued on September 23, 1966, automatically

becomes permanent in virtue of this decision.

With costs against the defendants.

From the foregoing, the plaintiff (respondent herein) and defendants-spouss (petitioners herein)
appealed to the Court of Appeals, which appeal was docketed therein as CA-G.R. No. 54393-R,
"Atilano G. Jabil v. Silvestre T. Dignos, et al."

On July 31, 1981, the Court of Appeals affirmed the decision of the lower court except as to the
portion ordering Jabil to pay for the expenses incurred by the Cabigas spouses for the building of a
fence upon the land in question. The disposive portion of said decision of the Court of Appeals
reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, except as to the modification

of the judgment as pertains to plaintiff-appellant above indicated, the judgment
appealed from is hereby AFFIRMED in all other respects.

With costs against defendants-appellants.

SO ORDERED.

Judgment MODIFIED.

A motion for reconsideration of said decision was filed by the defendants- appellants (petitioners)
Dignos spouses, but on December 16, 1981, a resolution was issued by the Court of Appeals
denying the motion for lack of merit.

Hence, this petition.

In the resolution of February 10, 1982, the Second Division of this Court denied the petition for lack
of merit. A motion for reconsideration of said resolution was filed on March 16, 1982. In the
resolution dated April 26,1982, respondents were required to comment thereon, which comment was
filed on May 11, 1982 and a reply thereto was filed on July 26, 1982 in compliance with the
resolution of June 16,1 982. On August 9,1982, acting on the motion for reconsideration and on all
subsequent pleadings filed, this Court resolved to reconsider its resolution of February 10, 1982 and
to give due course to the instant petition. On September 6, 1982, respondents filed a rejoinder to
reply of petitioners which was noted on the resolution of September 20, 1982.

Petitioners raised the following assignment of errors:

I

THE COURT OF APPEALS COMMITTED A GRAVE ERROR OF LAW IN GROSSLY,

INCORRECTLY INTERPRETING THE TERMS OF THE CONTRACT, EXHIBIT C, HOLDING IT AS
AN ABSOLUTE SALE, EFFECTIVE TO TRANSFER OWNERSHIP OVER THE PROPERTY IN
QUESTION TO THE RESPONDENT AND NOT MERELY A CONTRACT TO SELL OR PROMISE
TO SELL; THE COURT ALSO ERRED IN MISAPPLYING ARTICLE 1371 AS WARRANTING
READING OF THE AGREEMENT, EXHIBIT C, AS ONE OF ABSOLUTE SALE, DESPITE THE
CLARITY OF THE TERMS THEREOF SHOWING IT IS A CONTRACT OF PROMISE TO SELL.

II

THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN INCORRECTLY APPLYING

AND OR IN MISAPPLYING ARTICLE 1592 OF THE NEW CIVIL CODE AS WARRANTING THE
ERRONEOUS CONCLUSION THAT THE NOTICE OF RESCISSION, EXHIBIT G, IS INEFFECTIVE
SINCE IT HAS NOT BEEN JUDICIALLY DEMANDED NOR IS IT A NOTARIAL ACT.

III

THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN REJECTING THE

APPLICABILITY OF ARTICLES 2208,2217 and 2219 OF THE NEW CIVIL CODE AND
ESTABLISHED JURISPRUDENCE AS TO WARRANT THE AWARD OF DAMAGES AND
ATTORNEY'S FEES TO PETITIONERS.

IV

PLAINTIFF'S COMPLAINT FOR SPECIFIC PERFORMANCE SHOULD HAVE BEEN DISMISSED,

HE HAVING COME TO COURT WITH UNCLEAN HANDS.

BY AND LARGE, THE COURT OF APPEALS COMMITTED AN ERROR IN AFFIRMING WITH

MODIFICATION THE DECISION OF THE TRIAL COURT DUE TO GRAVE MISINTERPRETATION,
MISAPPLICATION AND MISAPPREHENSION OF THE TERMS OF THE QUESTIONED
CONTRACT AND THE LAW APPLICABLE THERETO.

The foregoing assignment of errors may be synthesized into two main issues, to wit:

I. Whether or not subject contract is a deed of absolute sale or a contract Lot sell.

II. Whether or not there was a valid rescission thereof.

There is no merit in this petition.

It is significant to note that this petition was denied by the Second Division of this Court in its
Resolution dated February 1 0, 1 982 for lack of merit, but on motion for reconsideration and on the
basis of all subsequent pleadings filed, the petition was given due course.

I.

The contract in question (Exhibit C) is a Deed of Sale, with the following conditions:
 1. That Atilano G..Jabilis to pay the amount of Twelve Thousand Pesos P12,000.00)
Phil. Philippine Currency as advance payment;

2. That Atilano G. Jabil is to assume the balance of Twelve Thousand Pesos

(P12,000.00) Loan from the First Insular Bank of Cebu;

3. That Atilano G. Jabil is to pay the said spouses the balance of Four. Thousand
Pesos (P4,000.00) on or before September 15,1965;

4. That the said spouses agrees to defend the said Atilano G. Jabil from other claims
on the said property;

5. That the spouses agrees to sign a final deed of absolute sale in favor of Atilano G.
Jabil over the above-mentioned property upon the payment of the balance of Four
Thousand Pesos. (Original Record, pp. 10-11)

In their motion for reconsideration, petitioners reiterated their contention that the Deed of Sale
(Exhibit "C") is a mere contract to sell and not an absolute sale; that the same is subject to two (2)
positive suspensive conditions, namely: the payment of the balance of P4,000.00 on or before
September 15,1965 and the immediate assumption of the mortgage of P12,000.00 with the First
Insular Bank of Cebu. It is further contended that in said contract, title or ownership over the property
was expressly reserved in the vendor, the Dignos spouses until the suspensive condition of full and
punctual payment of the balance of the purchase price shall have been met. So that there is no
actual sale until full payment is made (Rollo, pp. 51-52).

In bolstering their contention that Exhibit "C" is merely a contract to sell, petitioners aver that there is
absolutely nothing in Exhibit "C" that indicates that the vendors thereby sell, convey or transfer their
ownership to the alleged vendee. Petitioners insist that Exhibit "C" (or 6) is a private instrument and
the absence of a formal deed of conveyance is a very strong indication that the parties did not intend
"transfer of ownership and title but only a transfer after full payment" (Rollo, p. 52). Moreover,
petitioners anchored their contention on the very terms and conditions of the contract, more
particularly paragraph four which reads, "that said spouses has agreed to sell the herein mentioned
property to Atilano G. Jabil ..." and condition number five which reads, "that the spouses agrees to
sign a final deed of absolute sale over the mentioned property upon the payment of the balance of
four thousand pesos."

Such contention is untenable.

By and large, the issues in this case have already been settled by this Court in analogous cases.

Thus, it has been held that a deed of sale is absolute in nature although denominated as a "Deed of
Conditional Sale" where nowhere in the contract in question is a proviso or stipulation to the effect
that title to the property sold is reserved in the vendor until full payment of the purchase price, nor is
there a stipulation giving the vendor the right to unilaterally rescind the contract the moment the
vendee fails to pay within a fixed period Taguba v. Vda. de Leon, 132 SCRA 722; Luzon Brokerage
Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305).

A careful examination of the contract shows that there is no such stipulation reserving the title of the
property on the vendors nor does it give them the right to unilaterally rescind the contract upon non-
payment of the balance thereof within a fixed period.
On the contrary, all the elements of a valid contract of sale under Article 1458 of the Civil Code, are
present, such as: (1) consent or meeting of the minds; (2) determinate subject matter; and (3) price
certain in money or its equivalent. In addition, Article 1477 of the same Code provides that "The
ownership of the thing sold shall be transferred to the vendee upon actual or constructive delivery
thereof." As applied in the case of Froilan v. Pan Oriental Shipping Co., et al. (12 SCRA 276), this
Court held that in the absence of stipulation to the contrary, the ownership of the thing sold passes
to the vendee upon actual or constructive delivery thereof.

While it may be conceded that there was no constructive delivery of the land sold in the case at bar,
as subject Deed of Sale is a private instrument, it is beyond question that there was actual delivery
thereof. As found by the trial court, the Dignos spouses delivered the possession of the land in
question to Jabil as early as March 27,1965 so that the latter constructed thereon Sally's Beach
Resort also known as Jabil's Beach Resort in March, 1965; Mactan White Beach Resort on January
15,1966 and Bevirlyn's Beach Resort on September 1, 1965. Such facts were admitted by petitioner
spouses (Decision, Civil Case No. 23-L; Record on Appeal, p. 108).

Moreover, the Court of Appeals in its resolution dated December 16,1981 found that the acts of
petitioners, contemporaneous with the contract, clearly show that an absolute deed of sale was
intended by the parties and not a contract to sell.

Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they were
no longer owners of the same and the sale is null and void.

II.

Petitioners claim that when they sold the land to the Cabigas spouses, the contract of sale was
already rescinded.

Applying the rationale of the case of Taguba v. Vda. de Leon (supra) which is on all fours with the
case at bar, the contract of sale being absolute in nature is governed by Article 1592 of the Civil
Code. It is undisputed that petitioners never notified private respondents Jabil by notarial act that
they were rescinding the contract, and neither did they file a suit in court to rescind the sale. The
most that they were able to show is a letter of Cipriano Amistad who, claiming to be an emissary of
Jabil, informed the Dignos spouses not to go to the house of Jabil because the latter had no money
and further advised petitioners to sell the land in litigation to another party (Record on Appeal, p. 23).
As correctly found by the Court of Appeals, there is no showing that Amistad was properly
authorized by Jabil to make such extra-judicial rescission for the latter who, on the contrary,
vigorously denied having sent Amistad to tell petitioners that he was already waiving his rights to the
land in question. Under Article 1358 of the Civil Code, it is required that acts and contracts which
have for their object the extinguishment of real rights over immovable property must appear in a
public document.

Petitioners laid considerable emphasis on the fact that private respondent Jabil had no money on the
stipulated date of payment on September 15,1965 and was able to raise the necessary amount only
by mid-October 1965.

It has been ruled, however, that "where time is not of the essence of the agreement, a slight delay
on the part of one party in the performance of his obligation is not a sufficient ground for the
rescission of the agreement" (Taguba v. Vda. de Leon, supra). Considering that private respondent
has only a balance of P4,000.00 and was delayed in payment only for one month, equity and justice
mandate as in the aforecited case that Jabil be given an additional period within which to complete
payment of the purchase price.
WHEREFORE, the petition filed is hereby Dismissed for lack of merit and the assailed decision of
the Court of Appeals is Affirmed in toto.

SO ORDERED.
G.R. No. 190016 October 2, 2013

FREDERICK VENTURA, MARITES VENTURA-ROXAS, and PHILIP VENTURA (HEIRS OF

DECEASED DOLORES C. VENTURA), Petitioners,
vs.
HEIRS OF SPOUSES EUSTACIO T. ENDAYA and TRINIDAD L. ENDAYA, namely, TITUS L.
ENDAYA, ENRICO L. ENDAYA, and JOSEPHINE ENDAYA-BANTUG,1 Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari2 is the Decision3 dated August 18, 2006 of the Court
of Appeals (CA) in CA-G.R. CV No.68465 which reversed and set aside the Decision 4 dated August
7, 2000 of the Regional Trial Court of Parañaque City, Branch 258 (RTC) in Civil Case No. 96-0500,
dismissing petitioners' complaint for specific performance seeking to compel respondents to execute
a deed of sale over the properties subject of this case.

The facts

On June 29, 1981, Dolores Ventura (Dolores) entered into a Contract to Sell 5 (contract to sell) with
spouses Eustacio and Trinidad Endaya (Sps. Endaya) for the purchase of two parcels of land
covered by Transfer Certificates of Title (TCT) Nos. 3922256 and (343392) S-679757 (subject
properties), denominated as Lots 8 and 9, Block 3, situated in Marian Road II, Marian Park 8 (now
Barangay San Martin de Porres),9 Parañaque City, Metro Manila.

The contract to sell provides that the purchase price of ₱347,760.00shall be paid by Dolores in the
following manner: (a) down payment of ₱103,284.00 upon execution of the contract; and (b) the
balance of ₱244,476.00 within a 15-year period (payment period), plus 12% interest per annum
(p.a.) on the outstanding balance and 12% interest p.a. on arrearages. It further provides that all
payments made shall be applied in the following order: first, to the reimbursement of real estate
taxes and other charges; second, to the interest accrued to the date of payment; third, to the
amortization of the principal obligation; and fourth, to the payment of any other accessory obligation
subsequently incurred by the owner in favor of the buyer. It likewise imposed upon Dolores the
obligation to pay the real property taxes over the subject properties, or to reimburse Sps. Endaya for
any tax payments made by them, plus 1% interest per month. Upon full payment of the stipulated
consideration, Sps. Endaya undertook to execute a final deed of sale and transfer ownership over
the same in favor of Dolores.10

Meanwhile, Dolores was placed in possession of the subject properties and allowed to erect a
building thereon.11 However, on April 10, 1992, before the payment period expired, Dolores passed
away.12

On November 28, 1996, Dolores’ children, Frederick Ventura, Marites Ventura-Roxas, and Philip
Ventura (petitioners), filed before the RTC a Complaint13 and, thereafter, an Amended Complaint14 for
specific performance, seeking to compel Sps. Endaya to execute a deed of sale over the subject
properties. In this regard, they averred that due to the close friendship between their parents and
Sps. Endaya, the latter did not require the then widowed Dolores to pay the down payment stated in
the contract to sell and, instead, allowed her to pay amounts as her means would permit. The
payments were made in cash as well as in kind,15 and the same were recorded by respondent
Trinidad herself in a passbook16 given to Dolores to evidence the receipt of said payments. As of
June 15, 1996, the total payments made by Dolores and petitioners amounted to ₱952,152.00,
which is more than the agreed purchase price of ₱347,760.00, including the 12%interest p.a.
thereon computed on the outstanding balance.17

However, when petitioners demanded18 the execution of the corresponding deed of sale, Sps.
Endaya refused.

For their part, Sps. Endaya filed their Answer,19 admitting the execution and genuineness of the
contract to sell and the passbook. However, they countered that Dolores did not pay the stipulated
down payment and remitted only a total of 22 installments. After her death in1992, petitioners no
longer remitted any installment. Sps. Endaya also averred that prior to Dolores' death, the parties
agreed to a restructuring of the contract to sell whereby Dolores agreed to give a "bonus" of
₱265,673.93 and to pay interest at the increased rate of 24% p.a. on the outstanding balance. They
further claimed that in April 1996, when the balance of the purchase price stood at ₱1,699,671.69, a
final restructuring of the contract to sell was agreed with petitioners, fixing the obligation at
₱3,000,000.00. Thereafter, the latter paid a total of ₱380,000.00 on two separate
occasions,20 leaving a balance of ₱2,620,000.00. In any event, Sps. Endaya pointed out that the
automatic cancellation clause under the foregoing contract rendered the same cancelled as early as
1981 with Dolores’ failure to make a down payment and to faithfully pay the installments; 21 hence,
petitioners’ complaint for specific performance must fail. In addition, Sps. Endaya interposed a
counterclaim for the alleged unpaid balance of ₱2,620,000.00, plus damages, attorney's fees and
costs of suit.22

In their Reply with Answer to Counterclaim,23 petitioners denied the existence of any restructuring of
the contract to sell, invoking24 the Dead Man's Statute25 and the Statute of Frauds.26 In turn, Sps.
Endaya filed a Rejoinder,27 challenging the inapplicability of the foregoing principles since the case
was not filed against an estate or an administrator of an estate, and in view of the partial
performance of the contract to sell.28

While the oral depositions of Sps. Endaya were taken at the 4th Municipal Circuit Trial Court of
Malvar-Balete, Batangas on account of their frailty and old age, they, however, did not make a
formal offer of their depositions and documentary evidence. Hence, the case was submitted for
decision on the basis of the petitioners' evidence.29

The RTC Ruling

In a Decision30 dated August 7, 2000, the RTC found that petitioners were able to prove by a
preponderance of evidence the fact of full payment of the purchase price for the subject
properties.31 As such, it ordered Sps. Endaya to execute a deed of absolute sale covering the sale of
the subject properties in petitioners’ favor and to pay them attorney's fees and costs of
suit.32 Dissatisfied, Sps. Endaya elevated the matter to the CA.

The CA Ruling and Subsequent Proceedings

In a Decision33 dated August 18, 2006 (August 18, 2006 Decision),the CA reversed and set aside the
RTC ruling. It found that petitioners were not able to show that they fully complied with their
obligations under the contract to sell. It observed that aside from the payment of the purchase price
and 12% interest p.a. on the outstanding balance, the contract to sell imposed upon petitioners the
obligations to pay 12% interest p.a. on the arrears and to reimburse Sps. Endaya the amount of the
pertinent real estate taxes due on the subject properties, which the former, however, totally
disregarded as shown in their summary of payments.34
Meanwhile, counsel for petitioners, Atty. German A. Gineta, passed away on June 12, 2006, 35 hence,
the notice of the August 18, 2006 Decision sent to him was returned unserved. 36 On the other hand,
the notice sent to petitioners at No. 2, Barangay San Martin de Porres, Parañaque City, was likewise
returned unserved for the reason "insufficient address."37 Nonetheless, the CA deemed the service of
the said notice to them as valid and complete as of March 9, 2007 pursuant to Section 8, 38 Rule 13 of
the Rules of Court (Rules). Accordingly, it directed39 the Division Clerk of Court to issue the
corresponding Entry of Judgment. An Entry of Judgment40 was, thus, made in the CA Book of Entries
of Judgments certifying that the August 18, 2006 Decision became final and executory on March 25,
2007.The records were thereafter remanded41 to the RTC.

In July 2009, respondent Titus Endaya, heir of Sps. Endaya,42 demanded43 petitioners to vacate the
subject properties, which they refused.

On November 10, 2009, petitioners filed the instant petition invoking the benevolence of the Court to
set aside the CA’s August 18, 2006 Decision and, instead, reinstate the RTC Decision in the interest
of substantial justice. They claimed that they had no knowledge of the demise of their counsel;
therefore, they were unable to file a timely motion for reconsideration before the CA or the proper
petition before the Court. Further, they contend that they have proven full payment of the purchase
price within the payment period as required by the contract to sell.

For their part, the heirs of Sps. Endaya (respondents) objected 44 to the belated filing of the petition
long after the said CA Decision had lapsed into finality, especially as the petition raised factual
issues that are improper in a petition for review on certiorari under Rule 45 of the Rules. In any case,
they countered that the CA correctly held that petitioners failed to fully comply with their obligations
under the contract to sell; thus, respondents are under no obligation to execute any deed of sale
over the subject properties in favor of petitioners.

On September 22, 2010, the Court gave due course to the petition and required the parties to file
their respective memoranda,45 which they duly submitted.

The Issues Before the Court

The principal issues in this case are: (a) whether or not petitioners’ right to appeal before the Court
should be upheld; and (b) whether or not respondents should execute a deed of sale over the
subject properties in favor of petitioners.

The Court's Ruling

The petition is partly meritorious.

Anent the first issue, it is observed that the CA erroneously sent the notice of the assailed August
18, 2006 Decision to petitioners at No. 2, Barangay San Martin de Porres, Parañaque City, instead
of their address of record, i.e., Marian Road 2, Brgy. San Martin de Porres, Parañaque, Metro
Manila46 and thus, was returned unserved for the reason "insufficient address." 47

The notices of the Entry of Judgment48 and the transmittal letter49 to the Clerk of Court of the RTC
indicate this fact. As such, there was clearly no proper and valid service of the said CA Decision
which deprived petitioners of the opportunity to file a motion for reconsideration before the CA and/or
further appeal to the Court. Verily, it would be unjust and unfair to allow petitioners to suffer the
adverse effects of the premature entry of judgment made by the CA. Therefore, the Court deems it
prudent to set aside the foregoing entry and upholds petitioners' right to appeal.
Nevertheless, with respect to the second issue, a thorough review of the records reveals no
sufficient reason to warrant the reversal of the CA’s August 18, 2006 Decision dismissing petitioners'
complaint for specific performance which sought to enforce the contract to sell and to compel
respondents to execute a deed of sale over the subject properties. 1âwphi1

A contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly
reserving the ownership of the subject property despite delivery thereof to the prospective buyer,
binds himself to sell the said property exclusively to the latter upon his fulfillment of the conditions
agreed upon, i.e., the full payment of the purchase price50 and/or compliance with the other
obligations stated in the contract to sell. Given its contingent nature, the failure of the prospective
buyer to make full payment51 and/or abide by his commitments stated in the contract to sell prevents
the obligation of the prospective seller to execute the corresponding deed of sale to effect the
transfer of ownership to the buyer from arising. As discussed in Sps. Serrano and Herrera v.
Caguiat:52

A contract to sell is akin to a conditional sale where the efficacy or obligatory force of the vendor's
obligation to transfer title 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. x x x.53

To note, while the quality of contingency inheres in a contract to sell, the same should not be
confused with a conditional contract of sale. In a contract to sell, the fulfillment of the suspensive
condition will not automatically transfer ownership to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey title to the prospective buyer by
entering into a contract of absolute sale.54 On the other hand, in a conditional contract of sale, the
fulfillment of the suspensive condition renders the sale absolute and the previous delivery of the
property has the effect of automatically transferring the seller’s ownership or title to the property to
the buyer.55

Keeping with these principles, the Court finds that respondents had no obligation to petitioners to
execute a deed of sale over the subject properties. As aptly pointed out by the CA, aside from the
payment of the purchase price and 12% interest p.a. on the outstanding balance, the contract to sell
likewise imposed upon petitioners the obligation to pay the real property taxes over the subject
properties as well as 12% interest p.a. on the arrears.56 However, the summary of payments57 as well
as the statement of account58 submitted by petitioners clearly show that only the payments
corresponding to the principal obligation and the 12% interest p.a. on the outstanding balance were
considered in arriving at the amount of ₱952,152.00. The Court has examined the petition 59 as well
as petitioners' memorandum60 and found no justifiable reason for the said omission. Hence, the
reasonable conclusion would therefore be that petitioners indeed failed to comply with all their
obligations under the contract to sell and, as such, have no right to enforce the same. Consequently,
there lies no error on the part of the CA in reversing the RTC Decision and dismissing petitioners’
complaint for specific performance seeking to compel respondents to execute a deed of sale over
the subject properties.

WHEREFORE, the Entry of Judgment in CA-G.R. CV No. 68465 is hereby LIFTED. The Decision
dated August 18, 2006 of the Court of Appeals in the said case is, however, AFFIRMED.

SO ORDERED.
G.R. No. L-8506 August 31, 1956

CELESTINO CO & COMPANY, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor General Guillermo E. Torres
and Solicitor Federico V. Sian for respondent.

BENGZON, J.:

Appeal from a decision of the Court of Tax Appeals.

Celestino Co & Company is a duly registered general copartnership doing business under the trade
name of "Oriental Sash Factory". From 1946 to 1951 it paid percentage taxes of 7 per cent on the
gross receipts of its sash, door and window factory, in accordance with section one hundred eighty-
six of the National Revenue Code imposing taxes on sale of manufactured articles. However in 1952
it began to claim liability only to the contractor's 3 per cent tax (instead of 7 per cent) under section
191 of the same Code; and having failed to convince the Bureau of Internal Revenue, it brought the
matter to the Court of Tax Appeals, where it also failed. Said the Court:

To support his contention that his client is an ordinary contractor . . . counsel presented . . .
duplicate copies of letters, sketches of doors and windows and price quotations supposedly
sent by the manager of the Oriental Sash Factory to four customers who allegedly made
special orders to doors and window from the said factory. The conclusion that counsel would
like us to deduce from these few exhibits is that the Oriental Sash Factory does not
manufacture ready-made doors, sash and windows for the public but only upon special order
of its select customers. . . . I cannot believe that petitioner company would take, as in fact it
has taken, all the trouble and expense of registering a special trade name for its sash
business and then orders company stationery carrying the bold print "Oriental Sash
Factory (Celestino Co & Company, Prop.) 926 Raon St. Quiapo, Manila, Tel. No.
33076, Manufacturers of all kinds of doors, windows, sashes, furniture, etc. used season-
dried and kiln-dried lumber, of the best quality workmanships" solely for the purpose of
supplying the needs for doors, windows and sash of its special and limited customers. One ill
note that petitioner has chosen for its tradename and has offered itself to the public as a
"Factory", which means it is out to do business, in its chosen lines on a big scale. As a
general rule, sash factories receive orders for doors and windows of special design only in
particular cases but the bulk of their sales is derived from a ready-made doors and windows
of standard sizes for the average home. Moreover, as shown from the investigation of
petitioner's book of accounts, during the period from January 1, 1952 to September 30,
1952, it sold sash, doors and windows worth P188,754.69. I find it difficult to believe that this
amount which runs to six figures was derived by petitioner entirely from its few customers
who made special orders for these items.

Even if we were to believe petitioner's claim that it does not manufacture ready-made sash,
doors and windows for the public and that it makes these articles only special order of its
customers, that does not make it a contractor within the purview of section 191 of the
national Internal Revenue Code. there are no less than fifty occupations enumerated in the
aforesaid section of the national Internal Revenue Code subject to percentage tax and after
reading carefully each and every one of them, we cannot find under which the business of
manufacturing sash, doors and windows upon special order of customers fall under the
 category of "road, building, navigation, artesian well, water workers and other construction
work contractors" are those who alter or repair buildings, structures, streets, highways,
sewers, street railways railroads logging roads, electric lines or power lines, and includes any
other work for the construction, altering or repairing for which machinery driven by
mechanical power is used. (Payton vs. City of Anadardo 64 P. 2d 878, 880, 179 Okl. 68).

Having thus eliminated the feasibility off taxing petitioner as a contractor under 191 of the
national Internal Revenue Code, this leaves us to decide the remaining issue whether or not
petitioner could be taxed with lesser strain and more accuracy as seller of its manufactured
articles under section 186 of the same code, as the respondent Collector of Internal
Revenue has in fact been doing the Oriental Sash Factory was established in 1946.

The percentage tax imposed in section 191 of our Tax Code is generally a tax on the sales
of services, in contradiction with the tax imposed in section 186 of the same Code which is a
tax on the original sales of articles by the manufacturer, producer or importer. (Formilleza's
Commentaries and Jurisprudence on the National Internal Revenue Code, Vol. II, p. 744).
The fact that the articles sold are manufactured by the seller does not exchange the contract
from the purview of section 186 of the National Internal Revenue Code as a sale of articles.

There was a strong dissent; but upon careful consideration of the whole matter are inclines to accept
the above statement of the facts and the law. The important thing to remember is that Celestino Co
& Company habitually makes sash, windows and doors, as it has represented in its stationery and
advertisements to the public. That it "manufactures" the same is practically admitted by appellant
itself. The fact that windows and doors are made by it only when customers place their orders, does
not alter the nature of the establishment, for it is obvious that it only accepted such orders as called
for the employment of such material-moulding, frames, panels-as it ordinarily manufactured or was
in a position habitually to manufacture.

Perhaps the following paragraph represents in brief the appellant's position in this Court:

Since the petitioner, by clear proof of facts not disputed by the respondent, manufacturers
sash, windows and doors only for special customers and upon their special orders and in
accordance with the desired specifications of the persons ordering the same and not for the
general market: since the doors ordered by Don Toribio Teodoro & Sons, Inc., for instance,
are not in existence and which never would have existed but for the order of the party
desiring it; and since petitioner's contractual relation with his customers is that of a contract
for a piece of work or since petitioner is engaged in the sale of services, it follows that the
petitioner should be taxed under section 191 of the Tax Code and NOT under section 185 of
the same Code." (Appellant's brief, p. 11-12).

But the argument rests on a false foundation. Any builder or homeowner, with sufficient money, may
order windows or doors of the kind manufactured by this appellant. Therefore it is not true that it
serves special customers only or confines its services to them alone. And anyone who sees, and
likes, the doors ordered by Don Toribio Teodoro & Sons Inc. may purchase from appellant doors of
the same kind, provided he pays the price. Surely, the appellant will not refuse, for it can easily
duplicate or even mass-produce the same doors-it is mechanically equipped to do so.

That the doors and windows must meet desired specifications is neither here nor there. If these
specifications do not happen to be of the kind habitually manufactured by appellant — special forms
for sash, mouldings of panels — it would not accept the order — and no sale is made. If they do, the
transaction would be no different from a purchasers of manufactured goods held is stock for sale;
they are bought because they meet the specifications desired by the purchaser.
Nobody will say that when a sawmill cuts lumber in accordance with the peculiar specifications of a
customer-sizes not previously held in stock for sale to the public-it thereby becomes an employee or
servant of the customer,1 not the seller of lumber. The same consideration applies to this sash
manufacturer.

The Oriental Sash Factory does nothing more than sell the goods that it mass-produces or habitually
makes; sash, panels, mouldings, frames, cutting them to such sizes and combining them in such
forms as its customers may desire.

On the other hand, petitioner's idea of being a contractor doing construction jobs is untenable.
Nobody would regard the doing of two window panels a construction work in common parlance. 2

Appellant invokes Article 1467 of the New Civil Code to bolster its contention that in filing orders for
windows and doors according to specifications, it did not sell, but merely contracted for particular
pieces of work or "merely sold its services".

Said article reads as follows:

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

It is at once apparent that the Oriental Sash Factory did not merely sell its services to Don Toribio
Teodoro & Co. (To take one instance) because it also sold the materials. The truth of the matter is
that it sold materials ordinarily manufactured by it — sash, panels, mouldings — to Teodoro & Co.,
although in such form or combination as suited the fancy of the purchaser. Such new form does not
divest the Oriental Sash Factory of its character as manufacturer. Neither does it take the
transaction out of the category of sales under Article 1467 above quoted, because although the
Factory does not, in the ordinary course of its business, manufacture and keep on stock doors of the
kind sold to Teodoro, it could stock and/or probably had in stock the sash, mouldings and panels it
used therefor (some of them at least).

In our opinion when this Factory accepts a job that requires the use of extraordinary or additional
equipment, or involves services not generally performed by it-it thereby contracts for a piece of
work — filing special orders within the meaning of Article 1467. The orders herein exhibited were not
shown to be special. They were merely orders for work — nothing is shown to call them special
requiring extraordinary service of the factory.

The thought occurs to us that if, as alleged-all the work of appellant is only to fill orders previously
made, such orders should not be called special work, but regular work. Would a factory do business
performing only special, extraordinary or peculiar merchandise?

Anyway, supposing for the moment that the transactions were not sales, they were neither lease of
services nor contract jobs by a contractor. But as the doors and windows had been admittedly
"manufactured" by the Oriental Sash Factory, such transactions could be, and should be taxed as
"transfers" thereof under section 186 of the National Revenue Code.

The appealed decision is consequently affirmed. So ordered.

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) of the Tax
1

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. If the
2

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 finding We adopt —

4

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 190 of the Code. This compensating tax is not a tax on the importation of
5

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.
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.
II. Object

G.R. No. L-31271 April 29, 1974

ROMEO MARTINEZ and LEONOR SUAREZ, spouses, petitioners-appellants,

vs.
HON. COURT OF APPEALS, SECRETARY and UNDERSECRETARY OF PUBLIC WORKS &
COMMUNICATIONS, respondents-appellees.

Flores Macapagal, Ocampo and Balbastro for petitioners-appellants.

Office of the Solicitor General Felix Q. Antonio, Acting Assistant Solicitor General Dominador L.
Quiroz and Solicitor Concepcion T. Agapinan for respondents-appellees.

ESGUERRA, J.:p

Petition for review by certiorari of the judgment of the Court of Appeals dated November 17, 1969 in its CA-G.R. 27655-R which reverses the
judgment of the Court of First Instance of Pampanga in favor of petitioners-appellants against the Secretary and Undersecretary of Public
Works & Communications in the case instituted to annul the order of November 25, 1958 of respondent Secretary of Public Works &
Communications directing the removal by the petitioners of the dikes they had constructed on Lot No. 15856 of the Register of Deeds of
Pampanga, which order was issued pursuant to the provisions of Republic Act No. 2056. The dispositive portion of the judgment of reversal
of the Court of Appeals reads as follows:

IN VIEW OF THE FOREGOING CONSIDERATIONS, the judgment appealed from is

hereby reversed, and another entered: [1] upholding the validity of the decision
reached by the respondent officials in the administrative case; [2] dissolving the
injunction issued by the Court below; and [3] cancelling the registration of Lot No. 2,
the disputed area, and ordering its reconveyance to the public domain. No costs in
this instance.

The background facts are stated by the Court of Appeals as follows:

The spouses Romeo Martinez and Leonor Suarez, now petitioners-appellees, are the
registered owners of two (2) parcels of land located in Lubao, Pampanga, covered by
transfer certificate of title No. 15856 of the Register of Deeds of the said province.
Both parcels of land are fishponds. The property involved in the instant case is the
second parcel mentioned in the above-named transfer certificate of title.

The disputed property was originally owned by one Paulino Montemayor, who
secured a "titulo real" over it way back in 1883. After the death of Paulino
Montemayor the said property passed to his successors-in-interest, Maria
Montemayor and Donata Montemayor, who in turn, sold it, as well as the first parcel,
to a certain Potenciano Garcia.

Because Potenciano Garcia was prevented by the then municipal president of

Lubao, Pedro Beltran, from restoring the dikes constructed on the contested
property, the former, on June 22, 1914, filed Civil Case No. 1407 with the Court of
First Instance against the said Pedro Beltran to restrain the latter in his official
capacity from molesting him in the possession of said second parcel, and on even
date, applied for a writ of preliminary injunction, which was issued against said
municipal president. The Court, by decision promulgated June 12, 1916, declared
permanent the preliminary injunction, which, decision, on appeal, was affirmed by the
Supreme Court on August 21, 1918. From June 22, 1914, the dikes around the
property in question remained closed until a portion thereof was again opened just
before the outbreak of the Pacific War.

On April 17, 1925. Potenciano Garcia applied for the registration of both parcels of
land in his name, and the Court of First Instance of Pampanga, sitting as land
registration court, granted the registration over and against the opposition of the
Attorney-General and the Director of Forestry. Pursuant to the Court's decision,
original certificate of title No. 14318, covering said parcels 1 and 2 was issued to the
spouses Potenciano Garcia and Lorenza Sioson.

These parcels of land were subsequently bought by Emilio Cruz de Dios in whose
name transfer certificate of title No. 1421 was first issued on November 9, 1925.

Thereafter, the ownership of these properties changed hands until eventually they
were acquired by the herein appellee spouses who hold them by virtue of transfer
certificate of title No. 15856.

To avoid any untoward incident, the disputants agreed to refer the matter to the
Committee on Rivers and Streams, by then composed of the Honorable Pedro
Tuason, at that time Secretary of Justice, as chairman, and the Honorable Salvador
Araneta and Vicente Orosa, Secretary of Agriculture and National Resources and
Secretary of Public Works and Communications, respectively, as members. This
committee thereafter appointed a Sub-Committee to investigate the case and to
conduct an ocular inspection of the contested property, and on March 11, 1954, said
Sub-Committee submitted its report to the Committee on Rivers and Streams to the
effect that Parcel No. 2 of transfer certificate of title No. 15856 was not a public river
but a private fishpond owned by the herein spouses.

On July 7, 1954, the Committee on Rivers and Streams rendered its decision the
dispositive part of which reads:

"In view of the foregoing considerations, the spouses Romeo

Martinez and Leonor Suarez should be restored to the exclusive
possession, use and enjoyment of the creek in question which forms
part of their registered property and the decision of the courts on the
matter be given full force and effect."

The municipal officials of Lubao, led by Acting Mayor Mariano Zagad, apparently
refused to recognize the above decision, because on September 1, 1954, the
spouses Romeo Martinez and Leonor Suarez instituted Civil Case No. 751 before
the Court of First Instance of Pampanga against said Mayor Zagad, praying that the
latter be enjoined from molesting them in their possession of their property and in the
construction of the dikes therein. The writ of preliminary injunction applied for was
issued against the respondent municipal Mayor, who immediately elevated the
injunction suit for review to the Supreme Court, which dismissed Mayor Zagad's
petition on September 7, 1953. With this dismissal order herein appellee spouses
proceeded to construct the dikes in the disputed parcel of land.
Some four (4) years later, and while Civil Case No. 751 was still pending the
Honorable Florencio Moreno, then Secretary of Public Works and Communications,
ordered another investigation of the said parcel of land, directing the appellees
herein to remove the dikes they had constructed, on the strength of the authority
vested in him by Republic Act No. 2056, approved on June 13, 1958, entitled "An Act
To Prohibit, Remove and/or Demolish the Construction of Dams. Dikes, Or Any
Other Walls In Public Navigable Waters, Or Waterways and In Communal Fishing
Grounds, To Regulate Works in Such Waters or Waterways And In Communal
Fishing Grounds, And To Provide Penalties For Its Violation, And For Other
Purposes. 1 The said order which gave rise to the instant proceedings, embodied a
threat that the dikes would be demolished should the herein appellees fail to comply
therewith within thirty (30) days.

The spouses Martinez replied to the order by commencing on January 2, 1959 the
present case, which was decided in their favor by the lower Court in a decision dated
August 10, 1959, the dispositive part of which reads:

"WHEREFORE, in view of the foregoing considerations, the Court

hereby declares the decision, Exhibit S, rendered by the
Undersecretary of Public Works and Communications null and void;
declares the preliminary injunction, hereto for issued, permanent, and
forever enjoining both respondents from molesting the spouses
Romeo Martinez and Leonor Suarez in their possession, use and
enjoyment of their property described in Plan Psu-9992 and referred
to in their petition."

"Without pronouncement as to costs."

"SO ORDERED."

As against this judgment respondent officials of the Department of Public Works and
Communications took the instant appeal, contending that the lower Court erred:

1. In holding that then Senator Rogelio de la Rosa, complainant in the administrative

case, is not an interested party and his letter-complaint dated August 15, 1958 did
not confer jurisdiction upon the respondent Undersecretary of Public Works and
Communications to investigate the said administrative case;

2. In holding that the duty to investigate encroachments upon public rivers conferred
upon the respondent Secretary under Republic Act No. 7056 cannot be lawfully
delegated by him to his subordinates;

3. In holding that the investigation ordered by the respondent Secretary in this case
is illegal on the ground that the said respondent Secretary has arrogated unto himself
the power, which he does not possess, of reversing, making nugatory, and setting
aside the two lawful decisions of the Court Exhibits K and I, and even annulling
thereby, the one rendered by the highest Tribunal of the land;

4. In not sustaining respondent's claim that petitioners have no cause of action

because the property in dispute is a public river and in holding that the said claim has
no basis in fact and in law;
 5. In not passing upon and disposing of respondent's counterclaim;

6. In not sustaining respondent's claim that the petition should not have been
entertained on the ground that the petitioners have not exhausted administrative
remedies; and

7. In holding that the decision of the respondents is illegal on the ground that it
violates the principles that laws shall have no retroactive effect unless the contrary is
provided and in holding that the said Republic Act No. 2056 is unconstitutional on the
ground that respondents' threat of prosecuting petitioners under Section 3 thereof for
acts done four years before its enactment renders the said law ex post facto.

The Court of Appeals sustained the above-mentioned assignment of errors committed by the Court
of First Instance of Pampanga and, as previously stated, reversed the judgment of the latter court.
From this reversal this appeal by certiorari was taken, and before this Court, petitioners-appellants
assigned the following errors allegedly committed by the Court of Appeals:

1. THE COURT OF APPEALS ERRED IN DECLARING IN THE INSTANT CASE

THAT PARCEL NO. 2 OF TRANSFER CERTIFICATE OF TITLE NO. 15856 IS A
PUBLIC RIVER AND ORDERING THE CANCELLATION OF ITS REGISTRATION
BECAUSE THIS CONSTITUTES A COLLATERAL ATTACK ON A TORRENS TITLE
IN VIOLATION OF THE LAW AND THE WELL-SETTLED JURISPRUDENCE ON
THE MATTER.

2. THE COURT OF APPEALS ERRED IN REOPENING AND RE-LITIGATING THE

ISSUE AS TO WHETHER OR NOT LOT NO. 2 OF TRANSFER CERTIFICATE OF
TITLE NO. 15856 REGISTER OF DEEDS OF PAMPANGA, IS A PUBLIC RIVER
NOTWITHSTANDING THE FACT THAT THIS ISSUE HAS BEEN LONG
RESOLVED AND SETTLED BY THE LAND REGISTRATION COURT OF
PAMPANGA IN LAND REGISTRATION PROCEEDING NO. 692 AND IS NOW RES
JUDICATA.

3. THE COURT OF APPEALS ERRED IN ORDERING THE CANCELLATION OF

THE REGISTRATION OF LOT NO. 2 OF TRANSFER CERTIFICATE OF TITLE NO.
15856 NOTWITHSTANDING THE FACT THAT THE TORRENS TITLE COVERING
IT HAS BEEN VESTED IN THE PETITIONERS WHO ARE THE SEVENTH OF THE
SUCCESSIVE INNOCENT PURCHASERS THEREOF AND WHO IN PURCHASING
THE SAME RELIED ON THE PRINCIPLE THAT THE PERSONS DEALING WITH
REGISTERED LAND NEED NOT GO BEHIND THE REGISTER TO DETERMINE
THE CONDITION OF THE PROPERTY.

The 1st and 2nd assignment of errors, being closely related, will be taken up together.

The ruling of the Court of Appeals that Lot No. 2 covered by Transfer Certificate of Title No. 15856 of
the petitioners-appellants is a public stream and that said title should be cancelled and the river
covered reverted to public domain, is assailed by the petitioners-appellants as being a collateral
attack on the indefeasibility of the torrens title originally issued in 1925 in favor of the petitioners-
appellants' predecessor-in-interest, Potenciano Garcia, which is violative of the rule of res judicata. It
is argued that as the decree of registration issued by the Land Registration Court was not re-opened
through a petition for review filed within one (1) year from the entry of the decree of title, the
certificate of title issued pursuant thereto in favor of the appellants for the land covered thereby is no
longer open to attack under Section 38 of the Land Registration Act (Act 496) and the jurisprudence
on the matter established by this Tribunal. Section 38 of the Land Registration Act cited by
appellants expressly makes a decree of registration, which ordinarily makes the title absolute and
indefeasible, subject to the exemption stated in Section 39 of the said Act among which are: "liens,
claims or rights arising or existing under the laws or Constitution of the United States or of the
Philippine Islands which the statute of the Philippine Islands cannot require to appear of record in the
registry."

At the time of the enactment of Section 496, one right recognized or existing under the law is that
provided for in Article 339 of the old Civil Code which reads as follows:

Property of public ownership is:

1. That destined to the public use, such as roads, canals, rivers, torrents, ports, and
bridges constructed by the State, and banks shores, roadsteads, and that of a similar
character. (Par. 1)

The above-mentioned properties are parts of the public domain intended for public use, are outside
the commerce of men and, therefore, not subject to private appropriation. ( 3 Manresa, 6th ed. 101-
104.)

In Ledesma v. Municipality of Iloilo, 49 Phil. 769, this Court held:

A simple possession of a certificate of title under the Torrens system does not
necessarily make the possessor a true owner of all the property described therein. If
a person obtains title under the Torrens system which includes by mistake or
oversight, lands which cannot be registered under the Torrens system, he does not
by virtue of said certificate alone become the owner of the land illegally included.

In Mercado v. Municipal President of Macabebe, 59 Phil. 592, it was also said:

It is useless for the appellant now to allege that she has obtained certificate of title
No. 329 in her favor because the said certificate does not confer upon her any right
to the creek in question, inasmuch as the said creek, being of the public domain, is
included among the various exceptions enumerated in Section 39 of Act 496 to which
the said certificate is subject by express provision of the law.

The same ruling was laid down in Director of Lands v. Roman Catholic Bishop of Zamboanga, 61
Phil. 644, as regards public plaza.

In Dizon, et al. v. Rodriguez, et al., G.R. No. L-20300-01 and G.R. No. L-20355-56, April 30, 1965,
20 SCRA 704, it was held that the incontestable and indefeasible character of a Torrens certificate of
title does not operate when the land covered thereby is not capable of registration.

It is, therefore, clear that the authorities cited by the appellants as to the conclusiveness and
incontestability of a Torrens certificate of title do not apply here. The Land Registration Court has no
jurisdiction over non-registerable properties, such as public navigable rivers which are parts of the
public domain, and cannot validly adjudge the registration of title in favor of a private applicant.
Hence, the judgment of the Court of First Instance of Pampanga as regards the Lot No. 2 of
Certificate of Title No. 15856 in the name of petitioners-appellants may be attacked at any time,
either directly or collaterally, by the State which is not bound by any prescriptive period provided for
by the Statute of Limitations (Article 1108, par. 4, new Civil Code). The right of reversion or
reconveyance to the State of the public properties fraudulently registered and which are not capable
of private appropriation or private acquisition does not prescribe. (Republic v. Ramona Ruiz, et al.,
G.R. No. L-23712, April 29, 1968, 23 SCRA 348; Republic v. Ramos, G.R. No.
L-15484, January 31, 1963, 7 SCRA 47.)

When it comes to registered properties, the jurisdiction of the Secretary of Public Works &
Communications under Republic Act 2056 to order the removal or obstruction to navigation along a
public and navigable creek or river included therein, has been definitely settled and is no longer
open to question (Lovina v. Moreno, G.R. No L-17821, November 29, 1963, 9 SCRA 557; Taleon v.
Secretary of Public Works & Communications G.R. No. L-24281, May 16, 1961, 20 SCRA 69, 74).

The evidence submitted before the trial court which was passed upon by the respondent Court of
Appeals shows that Lot No. 2 (Plan Psu 992) of Transfer Certificate of Title No. 15856, is a river of
the public domain. The technical description of both Lots Nos. 1 and 2 appearing in Original
Certificate of Title No. 14318 of the Register of Deeds of Pampanga, from which the present
Transfer Certificate of Title No. 15856 was derived, confirms the fact that Lot No. 2 embraced in said
title is bounded practically on all sides by rivers. As held by the Court of First Instance of Pampanga
in Civil Case No. 1247 for injunction filed by the petitioners' predecessors-in-interest against the
Municipal Mayor of Lubao and decided in 1916 (Exh. "L"), Lot No. 2 is a branch of the main river that
has been covered with water since time immemorial and, therefore, part of the public domain. This
finding having been affirmed by the Supreme Court, there is no longer any doubt that Lot No. 2 of
Transfer Certificate of Title No. 15856 of petitioners is a river which is not capable of private
appropriation or acquisition by prescription. (Palanca v. Com. of the Philippines, 69 Phil. 449;
Meneses v. Com. of the Philippines, 69 Phil. 647). Consequently, appellants' title does not include
said river.

II

As regards the 3rd assignment of error, there is no weight in the appellants' argument that, being a
purchaser for value and in good faith of Lot No. 2, the nullification of its registration would be
contrary to the law and to the applicable decisions of the Supreme Court as it would destroy the
stability of the title which is the core of the system of registration. Appellants cannot be deemed
purchasers for value and in good faith as in the deed of absolute conveyance executed in their favor,
the following appears:

6. Que la segunda parcela arriba descrita y mencionada esta actualmente abierta,

sin malecones y excluida de la primera parcela en virtud de la Orden Administrative
No. 103, tal como fue enmendada, del pasado regimen o Gobierno.

7. Que los citados compradores Romeo Martinez y Leonor Suarez se encargan de

gestionar de las autoridades correspondientes para que la citada segunda parcela
pueda ser convertida de nuevo en pesqueria, corriendo a cuenta y cargo de los
mismos todos los gastos.

8. Que en el caso de que dichos compradores no pudiesen conseguir sus propositos

de convertir de nuevo en pesquera la citada segunda parcela, los aqui vendedores
no devolveran ninguna cantidad de dinero a los referidos compradores; este es, no
se disminuiriat el precio de esta venta. (Exh. 13-a, p. 52, respondents record of
exhibits)

These stipulations were accepted by the petitioners-appellants in the same conveyance in the
following terms:
 Romeo Martinez y Leonor Suarez, mayores de edad, filipinos y residentes en al
Barrio de Julo Municipio de Malabon, Provincia de Rizal, por la presente, declaran
que estan enterados del contenido de este documento y lo aceptan en los precisos
terminos en que arriba uedan consignados. (Exh. 13-a, ibid)

Before purchasing a parcel of land, it cannot be contended that the appellants who were the
vendees did not know exactly the condition of the land that they were buying and the obstacles or
restrictions thereon that may be put up by the government in connection with their project of
converting Lot No. 2 in question into a fishpond. Nevertheless, they willfully and voluntarily assumed
the risks attendant to the sale of said lot. One who buys something with knowledge of defect or lack
of title in his vendor cannot claim that he acquired it in good faith (Leung Lee v. Strong Machinery
Co., et al., 37 Phil. 664).

The ruling that a purchaser of a registered property cannot go beyond the record to make inquiries
as to the legality of the title of the registered owner, but may rely on the registry to determine if there
is no lien or encumbrances over the same, cannot be availed of as against the law and the accepted
principle that rivers are parts of the public domain for public use and not capable of private
appropriation or acquisition by prescription.

FOR ALL THE FOREGOING, the judgment of the Court of Appeals appealed from is in accordance
with law, and the same is hereby affirmed with costs against the petitioners-appellants.
G.R. No. L-24732 April 30, 1968

PIO SIAN MELLIZA, petitioner,

vs.
CITY OF ILOILO, UNIVERSITY OF THE PHILIPPINES and THE COURT APPEALS, respondents.

Cornelio P. Ravena for petitioner.

Office of the Solicitor General for respondents.

BENGZON, J.P., J.:

Juliana Melliza during her lifetime owned, among other properties, three parcels of residential land in
Iloilo City registered in her name under Original Certificate of Title No. 3462. Said parcels of land
were known as Lots Nos. 2, 5 and 1214. The total area of Lot No. 1214 was 29,073 square meters.

On November 27, 1931 she donated to the then Municipality of Iloilo, 9,000 square meters of Lot
1214, to serve as site for the municipal hall. 1 The donation was however revoked by the parties for
the reason that the area donated was found inadequate to meet the requirements of the
development plan of the municipality, the so-called "Arellano Plan". 2

Subsequently, Lot No. 1214 was divided by Certeza Surveying Co., Inc. into Lots 1214-A and 1214-
B. And still later, Lot 1214-B was further divided into Lots 1214-B-1, Lot 1214-B-2 and Lot 1214-B-3.
As approved by the Bureau of Lands, Lot 1214-B-1 with 4,562 square meters, became known as Lot
1214-B; Lot 1214-B-2, with 6,653 square meters, was designated as Lot 1214-C; and Lot 1214-B-13,
with 4,135 square meters, became Lot 1214-D.

On November 15, 1932 Juliana Melliza executed an instrument without any caption containing the
following:

Que en consideracion a la suma total de SEIS MIL CUATRO CIENTOS VEINTIDOS PESOS
(P6,422.00), moneda filipina que por la presente declaro haber recibido a mi entera
satisfaccion del Gobierno Municipal de Iloilo, cedo y traspaso en venta real y difinitiva a
dicho Gobierno Municipal de Iloilo los lotes y porciones de los mismos que a continuacion se
especifican a saber: el lote No. 5 en toda su extension; una porcion de 7669 metros
cuadrados del lote No. 2, cuya porcion esta designada como sub-lotes Nos. 2-B y 2-C del
piano de subdivision de dichos lotes preparado por la Certeza Surveying Co., Inc., y una
porcion de 10,788 metros cuadrados del lote No. 1214 — cuya porcion esta designada
como sub-lotes Nos. 1214-B-2 y 1214-B-3 del mismo plano de subdivision.

Asimismo nago constar que la cesion y traspaso que ariba se mencionan es de venta
difinitiva, y que para la mejor identificacion de los lotes y porciones de los mismos que son
objeto de la presente, hago constar que dichos lotes y porciones son los que necesita el
Gobierno Municipal de Iloilo para la construccion de avenidas, parques y City Hall site del
Municipal Government Center de iloilo, segun el plano Arellano.

On January 14, 1938 Juliana Melliza sold her remaining interest in Lot 1214 to Remedios Sian
Villanueva who thereafter obtained her own registered title thereto, under Transfer Certificate of Title
No. 18178. Remedios in turn on November 4, 1946 transferred her rights to said portion of land to
Pio Sian Melliza, who obtained Transfer Certificate of Title No. 2492 thereover in his name.
Annotated at the back of Pio Sian Melliza's title certificate was the following:
 ... (a) that a portion of 10,788 square meters of Lot 1214 now designated as Lots Nos. 1214-
B-2 and 1214-B-3 of the subdivision plan belongs to the Municipality of Iloilo as per
instrument dated November 15, 1932....

On August 24, 1949 the City of Iloilo, which succeeded to the Municipality of Iloilo, donated the city
hall site together with the building thereon, to the University of the Philippines (Iloilo branch). The site
donated consisted of Lots Nos. 1214-B, 1214-C and 1214-D, with a total area of 15,350 square
meters, more or less.

Sometime in 1952, the University of the Philippines enclosed the site donated with a wire fence. Pio
Sian Melliza thereupon made representations, thru his lawyer, with the city authorities for payment of
the value of the lot (Lot 1214-B). No recovery was obtained, because as alleged by plaintiff, the City
did not have funds (p. 9, Appellant's Brief.)

The University of the Philippines, meanwhile, obtained Transfer Certificate of Title No. 7152 covering
the three lots, Nos. 1214-B, 1214-C and 1214-D.

On December 10, 1955 Pio Sian Melliza filed an action in the Court of First Instance of Iloilo against
Iloilo City and the University of the Philippines for recovery of Lot 1214-B or of its value.

The defendants answered, contending that Lot 1214-B was included in the public instrument
executed by Juliana Melliza in favor of Iloilo municipality in 1932. After stipulation of facts and trial,
the Court of First Instance rendered its decision on August 15, 1957, dismissing the complaint. Said
court ruled that the instrument executed by Juliana Melliza in favor of Iloilo municipality included in
the conveyance Lot 1214-B. In support of this conclusion, it referred to the portion of the instrument
stating:

Asimismo hago constar que la cesion y traspaso que arriba se mencionan es de venta
difinitiva, y que para la major identificacion de los lotes y porciones de los mismos que son
objeto de la presente, hago constar que dichos lotes y porciones son los que necesita el
Gobierno municipal de Iloilo para la construccion de avenidas, parques y City Hall site del
Municipal Government Center de Iloilo, segun el plano Arellano.

and ruled that this meant that Juliana Melliza not only sold Lots 1214-C and 1214-D but also such
other portions of lots as were necessary for the municipal hall site, such as Lot 1214-B. And thus it
held that Iloilo City had the right to donate Lot 1214-B to the U.P.

Pio Sian Melliza appealed to the Court of Appeals. In its decision on May 19, 1965, the Court of
Appeals affirmed the interpretation of the Court of First Instance, that the portion of Lot 1214 sold by
Juliana Melliza was not limited to the 10,788 square meters specifically mentioned but included
whatever was needed for the construction of avenues, parks and the city hall site. Nonetheless, it
ordered the remand of the case for reception of evidence to determine the area actually taken by
Iloilo City for the construction of avenues, parks and for city hall site.

The present appeal therefrom was then taken to Us by Pio Sian Melliza. Appellant maintains that the
public instrument is clear that only Lots Nos. 1214-C and 1214-D with a total area of 10,788 square
meters were the portions of Lot 1214 included in the sale; that the purpose of the second paragraph,
relied upon for a contrary interpretation, was only to better identify the lots sold and none other; and
that to follow the interpretation accorded the deed of sale by the Court of Appeals and the Court of
First Instance would render the contract invalid because the law requires as an essential element of
sale, a "determinate" object (Art. 1445, now 1448, Civil Code).
Appellees, on the other hand, contend that the present appeal improperly raises only questions of
fact. And, further, they argue that the parties to the document in question really intended to include
Lot 1214-B therein, as shown by the silence of the vendor after Iloilo City exercised ownership
thereover; that not to include it would have been absurd, because said lot is contiguous to the others
admittedly included in the conveyance, lying directly in front of the city hall, separating that building
from Lots 1214-C and 1214-D, which were included therein. And, finally, appellees argue that the
sale's object was determinate, because it could be ascertained, at the time of the execution of the
contract, what lots were needed by Iloilo municipality for avenues, parks and city hall site "according
to the Arellano Plan", since the Arellano plan was then already in existence.

The appeal before Us calls for the interpretation of the public instrument dated November 15, 1932.
And interpretation of such contract involves a question of law, since the contract is in the nature of
law as between the parties and their successors-in-interest.

At the outset, it is well to mark that the issue is whether or not the conveyance by Juliana Melliza to
Iloilo municipality included that portion of Lot 1214 known as Lot 1214-B. If not, then the same was
included, in the instrument subsequently executed by Juliana Melliza of her remaining interest in Lot
1214 to Remedios Sian Villanueva, who in turn sold what she thereunder had acquired, to Pio Sian
Melliza. It should be stressed, also, that the sale to Remedios Sian Villanueva — from which Pio
Sian Melliza derived title — did not specifically designate Lot 1214-B, but only such portions of Lot
1214 as were not included in the previous sale to Iloilo municipality (Stipulation of Facts, par. 5,
Record on Appeal, p. 23). And thus, if said Lot 1214-B had been included in the prior conveyance to
Iloilo municipality, then it was excluded from the sale to Remedios Sian Villanueva and, later, to Pio
Sian Melliza.

The point at issue here is then the true intention of the parties as to the object of the public
instrument Exhibit "D". Said issue revolves on the paragraph of the public instrument aforequoted
and its purpose, i.e., whether it was intended merely to further describe the lots already specifically
mentioned, or whether it was intended to cover other lots not yet specifically mentioned.

First of all, there is no question that the paramount intention of the parties was to provide Iloilo
municipality with lots sufficient or adequate in area for the construction of the Iloilo City hall site, with
its avenues and parks. For this matter, a previous donation for this purpose between the same
parties was revoked by them, because of inadequacy of the area of the lot donated.

Secondly, reading the public instrument in toto, with special reference to the paragraphs describing
the lots included in the sale, shows that said instrument describes four parcels of land by their lot
numbers and area; and then it goes on to further describe, not only those lots already mentioned,
but the lots object of the sale, by stating that said lots are the ones needed for the construction of the
city hall site, avenues and parks according to the Arellano plan. If the parties intended merely to
cover the specified lots — Lots 2, 5, 1214-C and 1214-D, there would scarcely have been any need
for the next paragraph, since these lots are already plainly and very clearly described by their
respective lot number and area. Said next paragraph does not really add to the clear description that
was already given to them in the previous one.

It is therefore the more reasonable interpretation, to view it as describing those other portions of
land contiguous to the lots aforementioned that, by reference to the Arellano plan, will be found
needed for the purpose at hand, the construction of the city hall site.

Appellant however challenges this view on the ground that the description of said other lots in the
aforequoted second paragraph of the public instrument would thereby be legally insufficient,
because the object would allegedly not be determinate as required by law.
Such contention fails on several counts. The requirement of the law that a sale must have for its
object a determinate thing, is fulfilled as long as, at the time the contract is entered into, the object of
the sale is capable of being made determinate without the necessity of a new or further agreement
between the parties (Art. 1273, old Civil Code; Art. 1460, New Civil Code). The specific mention of
some of the lots plus the statement that the lots object of the sale are the ones needed for city hall
site, avenues and parks, according to the Arellano plan, sufficiently provides a basis, as of the time
of the execution of the contract, for rendering determinate said lots without the need of a new and
further agreement of the parties.

The Arellano plan was in existence as early as 1928. As stated, the previous donation of land for city
hall site on November 27, 1931 was revoked on March 6, 1932 for being inadequate in area under
said Arellano plan. Appellant claims that although said plan existed, its metes and bounds were not
fixed until 1935, and thus it could not be a basis for determining the lots sold on November 15, 1932.
Appellant however fails to consider that the area needed under that plan for city hall site was then
already known; that the specific mention of some of the lots covered by the sale in effect fixed the
corresponding location of the city hall site under the plan; that, therefore, considering the said lots
specifically mentioned in the public instrument Exhibit "D", and the projected city hall site, with its
area, as then shown in the Arellano plan (Exhibit 2), it could be determined which, and how much of
the portions of land contiguous to those specifically named, were needed for the construction of the
city hall site.

And, moreover, there is no question either that Lot 1214-B is contiguous to Lots 1214-C and 1214-D,
admittedly covered by the public instrument. It is stipulated that, after execution of the contract
Exhibit "D", the Municipality of Iloilo possessed it together with the other lots sold. It sits practically in
the heart of the city hall site. Furthermore, Pio Sian Melliza, from the stipulation of facts, was the
notary public of the public instrument. As such, he was aware of its terms. Said instrument was also
registered with the Register of Deeds and such registration was annotated at the back of the
corresponding title certificate of Juliana Melliza. From these stipulated facts, it can be inferred that
Pio Sian Melliza knew of the aforesaid terms of the instrument or is chargeable with knowledge of
them; that knowing so, he should have examined the Arellano plan in relation to the public
instrument Exhibit "D"; that, furthermore, he should have taken notice of the possession first by the
Municipality of Iloilo, then by the City of Iloilo and later by the University of the Philippines of Lot
1214-B as part of the city hall site conveyed under that public instrument, and raised proper
objections thereto if it was his position that the same was not included in the same. The fact remains
that, instead, for twenty long years, Pio Sian Melliza and his predecessors-in-interest, did not object
to said possession, nor exercise any act of possession over Lot 1214-B. Applying, therefore,
principles of civil law, as well as laches, estoppel, and equity, said lot must necessarily be deemed
included in the conveyance in favor of Iloilo municipality, now Iloilo City.

WHEREFORE, the decision appealed from is affirmed insofar as it affirms that of the Court of First
Instance, and the complaint in this case is dismissed. No costs. So ordered.

Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.
Concepcion , C.J., is on leave.
G.R. No. L-22487 May 21, 1969

ASUNCION ATILANO, CRISTINA ATILANO, ROSARIO ATILANO, assisted by their respective

husbands, HILARIO ROMANO, FELIPE BERNARDO, and MAXIMO LACANDALO, ISABEL
ATILANO and GREGORIO ATILANO, plaintiffs-appellees,
vs.
LADISLAO ATILANO and GREGORIO M. ATILANO, defendants-appellants.

Climaco and Azcarraga for plaintiff-appellee.

T. de los Santos for defendants-appellants.

MAKALINTAL, J.:

In 1916 Eulogio Atilano I acquired, by purchase from one Gerardo Villanueva, lot No. 535 of the then
municipality of Zamboanga cadastre. The vendee thereafter obtained transfer certificate of title No.
1134 in his name. In 1920 he had the land subdivided into five parts, identified as lots Nos. 535-A,
535-B, 535-C, 535-D and 535-E, respectively. On May 18 of the same year, after the subdivision had
been effected, Eulogio Atilano I, for the sum of P150.00, executed a deed of sale covering lot No.
535-E in favor of his brother Eulogio Atilano II, who thereupon obtained transfer certificate of title No.
3129 in his name. Three other portions, namely lots Nos. 535-B, 535-C and 535-D, were likewise
sold to other persons, the original owner, Eulogio Atilano I, retaining for himself only the remaining
portion of the land, presumably covered by the title to lot No. 535-A. Upon his death the title to this
lot passed to Ladislao Atilano, defendant in this case, in whose name the corresponding certificate
(No. T-5056) was issued.

On December 6, 1952, Eulogio Atilano II having become a widower upon the death of his wife Luisa
Bautista, he and his children obtained transfer certificate of title No. 4889 over lot No. 535-E in their
names as co-owners. Then, on July 16, 1959, desiring to put an end to the co-ownership, they had
the land resurveyed so that it could properly be subdivided; and it was then discovered that the land
they were actually occupying on the strength of the deed of sale executed in 1920 was lot No. 535-A
and not lot 535-E, as referred to in the deed, while the land which remained in the possession of the
vendor, Eulogio Atilano I, and which passed to his successor, defendant Ladislao Atilano, was lot
No. 535-E and not lot No. 535-A.

On January 25, 1960, the heirs of Eulogio Atilano II, who was by then also deceased, filed the
present action in the Court of First Instance of Zamboanga, alleging, inter alia, that they had offered
to surrender to the defendants the possession of lot No. 535-A and demanded in return the
possession of lot No. 535-E, but that the defendants had refused to accept the exchange. The
plaintiffs' insistence is quite understandable, since lot No. 535-E has an area of 2,612 square
meters, as compared to the 1,808 square-meter area of lot No. 535-A.

In their answer to the complaint the defendants alleged that the reference to lot No. 535-E in the
deed of sale of May 18, 1920 was an involuntary error; that the intention of the parties to that sale
was to convey the lot correctly identified as lot No. 535-A; that since 1916, when he acquired the
entirety of lot No. 535, and up to the time of his death, Eulogio Atilano I had been possessing and
had his house on the portion designated as lot No. 535-E, after which he was succeeded in such
possession by the defendants herein; and that as a matter of fact Eulogio Atilano I even increased
the area under his possession when on June 11, 1920 he bought a portion of an adjoining lot, No.
536, from its owner Fruto del Carpio. On the basis of the foregoing allegations the defendants
interposed a counterclaim, praying that the plaintiffs be ordered to execute in their favor the
corresponding deed of transfer with respect to lot No. 535-E.
The trial court rendered judgment for the plaintiffs on the sole ground that since the property was
registered under the Land Registration Act the defendants could not acquire it through prescription.
There can be, of course, no dispute as to the correctness of this legal proposition; but the
defendants, aside from alleging adverse possession in their answer and counterclaim, also alleged
error in the deed of sale of May 18, 1920, thus: "Eulogio Atilano 1.o, por equivocacion o error
involuntario, cedio y traspaso a su hermano Eulogio Atilano 2.do el lote No. 535-E en vez del Lote
No. 535-A." lawphi1.ñet

The logic and common sense of the situation lean heavily in favor of the defendants' contention.
When one sells or buys real property — a piece of land, for example — one sells or buys the
property as he sees it, in its actual setting and by its physical metes and bounds, and not by the
mere lot number assigned to it in the certificate of title. In the particular case before us, the portion
correctly referred to as lot No. 535-A was already in the possession of the vendee, Eulogio Atilano II,
who had constructed his residence therein, even before the sale in his favor even before the
subdivision of the entire lot No. 535 at the instance of its owner, Eulogio Atillano I. In like manner the
latter had his house on the portion correctly identified, after the subdivision, as lot No. 535-E, even
adding to the area thereof by purchasing a portion of an adjoining property belonging to a different
owner. The two brothers continued in possession of the respective portions the rest of their lives,
obviously ignorant of the initial mistake in the designation of the lot subject of the 1920 until 1959,
when the mistake was discovered for the first time.

The real issue here is not adverse possession, but the real intention of the parties to that sale. From
all the facts and circumstances we are convinced that the object thereof, as intended and
understood by the parties, was that specific portion where the vendee was then already residing,
where he reconstructed his house at the end of the war, and where his heirs, the plaintiffs herein,
continued to reside thereafter: namely, lot No. 535-A; and that its designation as lot No. 535-E in the
deed of sale was simple mistake in the drafting of the document. The mistake did not vitiate the
1âwphi1.ñet

consent of the parties, or affect the validity and binding effect of the contract between them. The new
Civil Code provides a remedy for such a situation by means of reformation of the instrument. This
remedy is available when, there having been a meeting of the funds of the parties to a contract, their
true intention is not expressed in the instrument purporting to embody the agreement by reason of
mistake, fraud, inequitable conduct on accident (Art. 1359, et seq.) In this case, the deed of sale
executed in 1920 need no longer reformed. The parties have retained possession of their respective
properties conformably to the real intention of the parties to that sale, and all they should do is to
execute mutual deeds of conveyance.

WHEREFORE, the judgment appealed from is reversed. The plaintiffs are ordered to execute a
deed of conveyance of lot No. 535-E in favor of the defendants, and the latter in turn, are ordered to
execute a similar document, covering lot No. 595-A, in favor of the plaintiffs. Costs against the latter.
G.R. No. L-36902 January 30, 1982

LUIS PICHEL, petitioner,

vs.
PRUDENCIO ALONZO, respondent.

GUERRERO, J.:

This is a petition to review on certiorari the decision of the Court of First Instance of Basilan City
dated January 5, 1973 in Civil Case No. 820 entitled "Prudencio Alonzo, plaintiff, vs. Luis Pichel,
defendant."

This case originated in the lower Court as an action for the annulment of a "Deed of Sale" dated
August 14, 1968 and executed by Prudencio Alonzo, as vendor, in favor of Luis Pichel, as vendee,
involving property awarded to the former by the Philippine Government under Republic Act No. 477.
Pertinent portions of the document sued upon read as follows:

That the VENDOR for and in consideration of the sum of FOUR THOUSAND TWO
HUNDRED PESOS (P4,200.00), Philippine Currency, in hand paid by the VENDEE
to the entire satisfaction of the VENDOR, the VENDOR hereby sells transfers, and
conveys, by way of absolute sale, all the coconut fruits of his coconut land,
designated as Lot No. 21 - Subdivision Plan No. Psd- 32465, situated at Balactasan
Plantation, Lamitan, Basilan City, Philippines;

That for the herein sale of the coconut fruits are for all the fruits on the
aforementioned parcel of land presently found therein as well as for future fruits to be
produced on the said parcel of land during the years period; which shag commence
to run as of SEPTEMBER 15,1968; up to JANUARY 1, 1976 (sic);

That the delivery of the subject matter of the Deed of Sale shall be from time to time
and at the expense of the VENDEE who shall do the harvesting and gathering of the
fruits;

That the Vendor's right, title, interest and participation herein conveyed is of his own
exclusive and absolute property, free from any liens and encumbrances and he
warrants to the Vendee good title thereto and to defend the same against any and all
claims of all persons whomsoever. 1

After the pre-trial conference, the Court a quo issued an Order dated November 9, 1972 which in part
read thus:

The following facts are admitted by the parties:

Plaintiff Prudencio Alonzo was awarded by the Government that parcel of land
designated as Lot No. 21 of Subdivision Plan Psd 32465 of Balactasan, Lamitan,
Basilan City in accordance with Republic Act No. 477. The award was cancelled by
the Board of Liquidators on January 27, 1965 on the ground that, previous thereto,
 plaintiff was proved to have alienated the land to another, in violation of law. In 197 2,
plaintiff's rights to the land were reinstated.

On August 14, 1968, plaintiff and his wife sold to defendant an the fruits of the
coconut trees which may be harvested in the land in question for the period,
September 15, 1968 to January 1, 1976, in consideration of P4,200.00. Even as of
the date of sale, however, the land was still under lease to one, Ramon Sua, and it
was the agreement that part of the consideration of the sale, in the sum of
P3,650.00, was to be paid by defendant directly to Ramon Sua so as to release the
land from the clutches of the latter. Pending said payment plaintiff refused to snow
the defendant to make any harvest.

In July 1972, defendant for the first time since the execution of the deed of sale in his
favor, caused the harvest of the fruit of the coconut trees in the land.

xxx xxx xxx

Considering the foregoing, two issues appear posed by the complaint and the
answer which must needs be tested in the crucible of a trial on the merits, and they
are:

First.— Whether or nor defendant actually paid to plaintiff the full sum of P4,200.00
upon execution of the deed of sale.

Second.— Is the deed of sale, Exhibit 'A', the prohibited encumbrance contemplated
in Section 8 of Republic Act No. 477? 2

Anent the first issue, counsel for plaintiff Alonzo subsequently 'stipulated and agreed that his client ...
admits fun payment thereof by defendant. 3 The remaining issue being one of law, the Court below
considered the case submitted for summary judgment on the basis of the pleadings of the parties, and the
admission of facts and documentary evidence presented at the pre-trial conference.

The lower court rendered its decision now under review, holding that although the agreement in
question is denominated by the parties as a deed of sale of fruits of the coconut trees found in the
vendor's land, it actually is, for all legal intents and purposes, a contract of lease of the land itself.
According to the Court:

... the sale aforestated has given defendant complete control and enjoyment of the
improvements of the land. That the contract is consensual; that its purpose is to allow
the enjoyment or use of a thing; that it is onerous because rent or price certain is
stipulated; and that the enjoyment or use of the thing certain is stipulated to be for a
certain and definite period of time, are characteristics which admit of no other
conclusion. ... The provisions of the contract itself and its characteristics govern its
nature. 4

The Court, therefore, concluded that the deed of sale in question is an encumbrance prohibited by
Republic Act No. 477 which provides thus:

Sec. 8. Except in favor of the Government or any of its branches, units, or

institutions, land acquired under the provisions of this Act or any permanent
improvements thereon shall not be thereon and for a term of ten years from and after
 the date of issuance of the certificate of title, nor shall they become liable to the
satisfaction of any debt contracted prior to the expiration of such period.

Any occupant or applicant of lands under this Act who transfers whatever rights he
has acquired on said lands and/or on the improvements thereon before the date of
the award or signature of the contract of sale, shall not be entitled to apply for
another piece of agricultural land or urban, homesite or residential lot, as the case
may be, from the National Abaca and Other Fibers Corporation; and such transfer
shall be considered null and void. 5

The dispositive portion of the lower Court's decision states:

WHEREFORE, it is the judgment of this Court that the deed of sale, Exhibit 'A',
should be, as it is, hereby declared nun and void; that plaintiff be, as he is, ordered to
pay back to defendant the consideration of the sale in the sum of P4,200.00 the
same to bear legal interest from the date of the filing of the complaint until paid; that
defendant shall pay to the plaintiff the sum of P500.00 as attorney's fees.

Costs against the defendant. 6

Before going into the issues raised by the instant Petition, the matter of whether, under the admitted facts
of this case, the respondent had the right or authority to execute the "Deed of Sale" in 1968, his award
over Lot No. 21 having been cancelled previously by the Board of Liquidators on January 27, 1965, must
be clarified. The case in point is Ras vs. Sua 7 wherein it was categorically stated by this Court that a
cancellation of an award granted pursuant to the provisions of Republic Act No. 477 does not
automatically divest the awardee of his rights to the land. Such cancellation does not result in the
immediate reversion of the property subject of the award, to the State. Speaking through Mr. Justice
J.B.L. Reyes, this Court ruled that "until and unless an appropriate proceeding for reversion is instituted
by the State, and its reacquisition of the ownership and possession of the land decreed by a competent
court, the grantee cannot be said to have been divested of whatever right that he may have over the
same property." 8

There is nothing in the record to show that at any time after the supposed cancellation of herein
respondent's award on January 27, 1965, reversion proceedings against Lot No. 21 were instituted
by the State. Instead, the admitted fact is that the award was reinstated in 1972. Applying the
doctrine announced in the above-cited Ras case, therefore, herein respondent is not deemed to
have lost any of his rights as grantee of Lot No. 21 under Republic Act No. 477 during the period
material to the case at bar, i.e., from the cancellation of the award in 1965 to its reinstatement in
1972. Within said period, respondent could exercise all the rights pertaining to a grantee with respect
to Lot No. 21.

This brings Us to the issues raised by the instant Petition. In his Brief, petitioner contends that the
lower Court erred:

1. In resorting to construction and interpretation of the deed of sale in question where

the terms thereof are clear and unambiguous and leave no doubt as to the intention
of the parties;

2. In declaring — granting without admitting that an interpretation is necessary — the

deed of sale in question to be a contract of lease over the land itself where the
respondent himself waived and abandoned his claim that said deed did not express
the true agreement of the parties, and on the contrary, respondent admitted at the
 pre-trial that his agreement with petitioner was one of sale of the fruits of the coconut
trees on the land;

3. In deciding a question which was not in issue when it declared the deed of sale in
question to be a contract of lease over Lot 21;

4. In declaring furthermore the deed of sale in question to be a contract of lease over

the land itself on the basis of facts which were not proved in evidence;

5. In not holding that the deed of sale, Exhibit "A" and "2", expresses a valid contract
of sale;

6. In not deciding squarely and to the point the issue as to whether or not the deed of
sale in question is an encumbrance on the land and its improvements prohibited by
Section 8 of Republic Act 477; and

7. In awarding respondent attorney's fees even granting, without admitting, that the
deed of sale in question is violative of Section 8 of Republic Act 477.

The first five assigned errors are interrelated, hence, We shall consider them together. To begin
with, We agree with petitioner that construction or interpretation of the document in question is not
called for. A perusal of the deed fails to disclose any ambiguity or obscurity in its provisions, nor is
there doubt as to the real intention of the contracting parties. The terms of the agreement are clear
and unequivocal, hence the literal and plain meaning thereof should be observed. Such is the
mandate of the Civil Code of the Philippines which provides that:

Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulation shall control ... .

Pursuant to the afore-quoted legal provision, the first and fundamental duty of the courts is the
application of the contract according to its express terms, interpretation being resorted to only when
such literal application is impossible. 9

Simply and directly stated, the "Deed of Sale dated August 14, 1968 is precisely what it purports to be. It
is a document evidencing the agreement of herein parties for the sale of coconut fruits of Lot No. 21,
and not for the lease of the land itself as found by the lower Court. In clear and express terms, the
document defines the object of the contract thus: "the herein sale of the coconut fruits are for an the fruits
on the aforementioned parcel of land during the years ...(from) SEPTEMBER 15, 1968; up to JANUARY
1, 1976." Moreover, as petitioner correctly asserts, the document in question expresses a valid contract of
sale. It has the essential elements of a contract of sale as defined under Article 1485 of the New Civil
Code which provides thus:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.

A contract of sale may be absolute or conditional.

The subject matter of the contract of sale in question are the fruits of the coconut trees on the land
during the years from September 15, 1968 up to January 1, 1976, which subject matter is a
determinate thing. Under Article 1461 of the New Civil Code, things having a potential existence may
be the object of the contract of sale. And in Sibal vs. Valdez, 50 Phil. 512, pending crops which have
potential existence may be the subject matter of the sale. Here, the Supreme Court, citing Mechem
on Sales and American cases said which have potential existence may be the subject matter of sale.
Here, the Supreme Court, citing Mechem on Sales and American cases said:

Mr. Mechem says that a valid sale may be made of a thing, which though not yet
actually in existence, is reasonably certain to come into existence as the natural
increment or usual incident of something already in existence, and then belonging to
the vendor, and the title will vest in the buyer the moment the thing comes into
existence. (Emerson vs. European Railway Co., 67 Me., 387; Cutting vs. Packers
Exchange, 21 Am. St. Rep. 63) Things of this nature are said to have a potential
existence. A man may sell property of which he is potentially and not actually
possess. He may make a valid sale of the wine that a vineyard is expected to
produce; or the grain a field may grow in a given time; or the milk a cow may yield
during the coming year; or the wool that shall thereafter grow upon sheep; or what
may be taken at the next case of a fisherman's net; or fruits to grow; or young
animals not yet in existence; or the goodwill of a trade and the like. The thing sold,
however, must be specific and Identified. They must be also owned at the time by the
vendor. (Hull vs. Hull 48 Conn. 250 (40 Am. Rep., 165) (pp. 522-523).

We do not agree with the trial court that the contract executed by and between the parties is
"actually a contract of lease of the land and the coconut trees there." (CFI Decision, p. 62, Records).
The Court's holding that the contract in question fits the definition of a lease of things wherein one of
the parties binds himself to give to another the enjoyment or use of a thing for a price certain and for
a period which may be definite or indefinite (Art. 1643, Civil Code of the Philippines) is erroneous.
The essential difference between a contract of sale and a lease of things is that the delivery of the
thing sold transfers ownership, while in lease no such transfer of ownership results as the rights of
the lessee are limited to the use and enjoyment of the thing leased.

In Rodriguez vs. Borromeo, 43 Phil. 479, 490, the Supreme Court held:

Since according to article 1543 of the same Code the contract of lease is defined as
the giving or the concession of the enjoyment or use of a thing for a specified time
and fixed price, and since such contract is a form of enjoyment of the property, it is
evident that it must be regarded as one of the means of enjoyment referred to in said
article 398, inasmuch as the terms enjoyment, use, and benefit involve the same and
analogous meaning relative to the general utility of which a given thing is capable.
(104 Jurisprudencia Civil, 443)

In concluding that the possession and enjoyment of the coconut trees can therefore be said to be the
possession and enjoyment of the land itself because the defendant-lessee in order to enjoy his right
under the contract, he actually takes possession of the land, at least during harvest time, gather all
of the fruits of the coconut trees in the land, and gain exclusive use thereof without the interference
or intervention of the plaintiff-lessor such that said plaintiff-lessor is excluded in fact from the land
during the period aforesaid, the trial court erred. The contract was clearly a "sale of the coconut
fruits." The vendor sold, transferred and conveyed "by way of absolute sale, all the coconut fruits of
his land," thereby divesting himself of all ownership or dominion over the fruits during the seven-year
period. The possession and enjoyment of the coconut trees cannot be said to be the possession and
enjoyment of the land itself because these rights are distinct and separate from each other, the first
pertaining to the accessory or improvements (coconut trees) while the second, to the principal (the
land). A transfer of the accessory or improvement is not a transfer of the principal. It is the other way
around, the accessory follows the principal. Hence, the sale of the nuts cannot be interpreted nor
construed to be a lease of the trees, much less extended further to include the lease of the land
itself.

The real and pivotal issue of this case which is taken up in petitioner's sixth assignment of error and
as already stated above, refers to the validity of the "Deed of Sale", as such contract of sale, vis-a-
vis the provisions of Sec. 8, R.A. No. 477. The lower Court did not rule on this question, having
reached the conclusion that the contract at bar was one of lease. It was from the context of a lease
contract that the Court below determined the applicability of Sec. 8, R.A. No. 477, to the instant
case.

Resolving now this principal issue, We find after a close and careful examination of the terms of the
first paragraph of Section 8 hereinabove quoted, that the grantee of a parcel of land under R.A. No.
477 is not prohibited from alienating or disposing of the natural and/or industrial fruits of the land
awarded to him. What the law expressly disallows is the encumbrance or alienation of the land itself
or any of the permanent improvements thereon. Permanent improvements on a parcel of land are
things incorporated or attached to the property in a fixed manner, naturally or artificially. They
include whatever is built, planted or sown on the land which is characterized by fixity, immutability or
immovability. Houses, buildings, machinery, animal houses, trees and plants would fall under the
category of permanent improvements, the alienation or encumbrance of which is prohibited by R.A.
No. 477. While coconut trees are permanent improvements of a land, their nuts are natural or
industrial fruits which are meant to be gathered or severed from the trees, to be used, enjoyed, sold
or otherwise disposed of by the owner of the land. Herein respondents, as the grantee of Lot No. 21
from the Government, had the right and prerogative to sell the coconut fruits of the trees growing on
the property.

By virtue of R.A. No. 477, bona fide occupants, veterans, members of guerilla organizations and
other qualified persons were given the opportunity to acquire government lands by purchase, taking
into account their limited means. It was intended for these persons to make good and productive use
of the lands awarded to them, not only to enable them to improve their standard of living, but
likewise to help provide for the annual payments to the Government of the purchase price of the lots
awarded to them. Section 8 was included, as stated by the Court a quo, to protect the grantees from
themselves and the incursions of opportunists who prey on their misery and poverty." It is there to
insure that the grantees themselves benefit from their respective lots, to the exclusion of other
persons.

The purpose of the law is not violated when a grantee sells the produce or fruits of his land. On the
contrary, the aim of the law is thereby achieved, for the grantee is encouraged and induced to be
more industrious and productive, thus making it possible for him and his family to be economically
self-sufficient and to lead a respectable life. At the same time, the Government is assured of
payment on the annual installments on the land. We agree with herein petitioner that it could not
have been the intention of the legislature to prohibit the grantee from selling the natural and
industrial fruits of his land, for otherwise, it would lead to an absurd situation wherein the grantee
would not be able to receive and enjoy the fruits of the property in the real and complete sense.

Respondent through counsel, in his Answer to the Petition contends that even
granting arguendo that he executed a deed of sale of the coconut fruits, he has the "privilege to
change his mind and claim it as (an) implied lease," and he has the "legitimate right" to file an action
for annulment "which no law can stop." He claims it is his "sole construction of the meaning of the
transaction that should prevail and not petitioner. (sic). 10 Respondent's counsel either misapplies the
law or is trying too hard and going too far to defend his client's hopeless cause. Suffice it to say that
respondent-grantee, after having received the consideration for the sale of his coconut fruits, cannot be
allowed to impugn the validity of the contracts he entered into, to the prejudice of petitioner who
contracted in good faith and for a consideration.

The issue raised by the seventh assignment of error as to the propriety of the award of attorney's
fees made by the lower Court need not be passed upon, such award having been apparently based
on the erroneous finding and conclusion that the contract at bar is one of lease. We shall limit
Ourselves to the question of whether or not in accordance with Our ruling in this case, respondent is
entitled to an award of attorney's fees. The Civil Code provides that:

Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendant's act or omission has compelled the plaintiff to litigate with
third persons or to incur expenses to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff's plainly valid, just and demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and skilled
workers;

(8) In actions for indemnity under workmen's compensation and employer's liability
laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorney's
fees and expenses of litigation should be recovered.

In all cases, the attorney's fees and expenses of litigation must be reasonable.

We find that none of the legal grounds enumerated above exists to justify or warrant the grant of
attorney's fees to herein respondent.

IN VIEW OF THE FOREGOING, the judgment of the lower Court is hereby set aside and another
one is entered dismissing the Complaint. Without costs.

SO ORDERED.
III. Price