G.R. No.

L-22358 January 29, 1975

PIO BARRETTO SONS, INC., petitioner,

vs.
COMPAÑIA MARITIMA, respondent.

Petition for review on certiorari of the decision of the Court of Appeals in its CA-G.R. No.
23367-R which reverses the judgment of the Court of First Instance of Manila, including
its resolution denying the petitioner's motion for reconsideration of the decision.

The factual background of the case is as follows:

Petitioner as plaintiff filed a complaint for collection of a sum of money against herein
respondent, alleging that during the months of October and November, 1941, the defendant
(now respondent) purchased on credit and received from the plaintiff (now petitioner),
lumber worth P5,300.55; and on December 4, 1941, the defendant-respondent again
purchased on credit and received from the plaintiff-petitioner, lumber worth P453.81,
thereby incurring a total indebtedness of P6,054.36 with stipulated interest of 12% per
annum, plus attorney's fees.

Respondent as defendant filed its answer denying all the material allegations of the
complaint and, by way of counterclaim, prayed that plaintiff-petitioner be ordered to pay
the sums of P500.00 as expenses of litigation and P1,500.90 as Attorney's fees, plus costs.

Plaintiff-petitioner having filed its answer to the counterclaim of defendant-respondent, the

case was heard and the trial court rendered judgment in favor of the plaintiff-petitioner, the
dispositive portion of which reads as follows:

WHEREFORE, judgment is hereby rendered ordering defendant to pay to

plaintiff the sum of P6,054.36, with legal interest thereon from the filing of
the complaint until fully paid, plus attorney's fees in the amount of P500.00,
together with the costs.

Both parties appealed to the Court of Appeals, the plaintiff PIO BARRETTO SONS, INC.
assigning the following error:

The Lower Court erred in holding that the moratorium orders and laws
condoned the stipulated interest of 12% per annum on defendant's prewar
indebtedness, and in awarding to plaintiff only the legal interest from the
filing of the complaint. (pp. 4-5, Brief for the Plaintiff-Appellant)

and defendant COMPAÑIA MARITIMA making four assignment of errors, to wit:

I. The Lower Court erred in holding that plaintiff had proven its alleged
claims of P5,600.55 and P453.81.

II. The Lower Court erred in holding that defendant had not paid plaintiff's
alleged claim in the amount of P5,600.55.

III. The Lower Court erred in not holding that the complaint states no cause
of action against defendant, and that the alleged cause of action, if any at all,
is already barred by the statute of limitation of actions.

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 IV. The Lower Court erred in ordering defendant to pay to plaintiff the sum
of P6,054.36 plus legal interest thereon from the filing of the complaint until
fully paid, plus attorney's fees in the amount of P500.00 together with the
costs. (pp. 1-2, Brief for the Defendant-Appellant)

The Court of Appeals reversed the judgment of the trial court and ordered the dismissal of
the case on the ground that delivery of the lumber by plaintiff-petitioner to defendant-
respondent was not duly proved.

Petitioner's motion for reconsideration of the decision of the Court of Appeals was denied
again on the ground of lack of sufficient showing of a valid delivery of the lumber in
question by the Barretto Sons, Inc. to the Compañia Maritima.

Hence this petition for review on certiorari.

Petitioner maintains that:

I. The Court of Appeals erred in creating and raising, motu propio, for the
first time a new issue, that of the question of delivery, upon which the Court
of Appeals based its decision reversing the judgment of the trial Court.

II. The Court of Appeals erred in its conclusion drawn from proven facts, and
has decided the case in a way not in accordance with law or with the
applicable decisions of this Court, and

III. The Court of Appeals erred in that it has so far departed from the accepted
and usual course of judicial proceedings. (pp. 1-2, Brief for Petitioner).

Petitioner further asserts that the case having been tried and decided by the trial court on
the issue of whether or not there was payment made by respondent Compañia Maritima of
the lumber covered by Exhs. "A-1" to "A-6" (invoices of petitioner) and Exh. "B", "B-1 "
to "B-4 (the counter-receipts issued by the respondent), it is alone on this issue that the
Court of Appeals should have decided the case and not on the issue of whether or not there
was delivery of the lumber in question.

The principal issue, therefore, before Us is whether or not the Court of Appeals decided
the case on a new issue not raised in the pleadings before the lower courts.

We rule that the issue of delivery on which the Court of Appeals based its decision
reversing that of the trial court is no new issue at all. For delivery and payment in a contract
of sale, or for that matter in quasi-contracts, are so interrelated and intertwined with each
other that without delivery of the goods there is no corresponding obligation to pay. The
two complement each other. Thus, "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." (Art. 1458, 1st par., new
Civil Code). The source of this provision of law is Article 1445 of the old Code, which
provides:

By the contract of purchase and sale one of the contracting parties obligates
himself to deliver a determinate thing and the other to pay a certain price
therefor in money or in something representing the same.

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It is clear that the two elements cannot be dissociated, for "the contract of purchase and
sale is, essentially, a bilateral contract, as it gives rise to reciprocal obligations; to wit, on
the part of the seller, "to deliver a determinate thing, and on the part of the buyer, "to pay
a certain price therefor in money or in something representing it." " (p. 1, Capistrano, The
Law of Purchase and Sale).

The finding of the Court of Appeals that there was no delivery of the lumber is well
founded. As succinctly ruled by said Court:

That this is basically an action for lumber allegedly bought, received, and not
paid for; now just as a seller, in order to recover, must prove not only that he
has sold and delivered and has not been paid, so a buyer in order to be
condemned to pay must be shown to have bought, received, and not paid. Of
course, it is correct to say as plaintiff says that even if there had been no
purchase, provided there had been a delivery, it could recover, not on the sale
but on the quasi-contract against unjust enrichment, but whether on sale or
on quasi contract, the vital element is delivery; ... nor should it be said that
there was no issue at all between the parties as to the fact of delivery; because
that issue was present in the pleadings, not only as can be seen in par. 2 of
the answer, but also as can be seen from the fact that plaintiff itself on p. 20
of the tsn. Vol. I, asked its own witness, Roman Legarda So, this question:

"Q. — Was that lumber covered by that invoice duly received

and acknowledged by the Compañia Maritima?"

and defendant on the other hand spent a good part of its proofs in
demonstrating that there had been no delivery, e.g., Vol. II, pp. 132-134; now
on the vital point of delivery, it must be remembered that the procedure
between the parties as sought to be proved by plaintiff itself thru its witness,
Juanito G. Perez, had been as follows:

"A. — Whenever the Compañia Maritima orders lumber from

our company, the Compañia Maritima issues a purchase order
to the Pio Barretto Sons, Inc. When this purchase order is
received by the Pio Barretto Sons, Inc., the Pio Barretto Sons,
Inc. delivers the lumber, as specified in the purchase order.
Upon delivery of this lumber, the lumber is covered by invoice
of the Pio Barretto, together with the purchase order of the
Compañia Maritima. Now, when the lumber is received by the
Compañia Maritima, the Compañia Maritima stamps our
invoice for the lumber delivered, and the receiving clerk signs
the said invoice for the Compañia Maritima. Now, after the
lumber has been delivered, our delivery man brings back to our
office and gives the invoice to me, together with the purchase
order. Now, at the end of each week, I prepare the Statement
of Accounts to be sent the Compañia Maritima, through our
collector, and, in turn, the Accounting Department of the
Compañia Maritima issues as the kinds of receipts for the
invoices, purchase orders, and statements of accounts
surrendered to them." tsn. 76-77, Vol. I;

stated otherwise, first, there was a purchase order by Maritima; 2ndly, there
was an invoice by Barretto; 3rdly, there was a delivery unto Maritima; 4thly,

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there was a delivery of the purchase order and delivery receipt unto Maritima
for checking or revision; and since Maritima would because of that retain the
purchase orders and delivery receipts, it would issue in exchange its own
counter receipt of said documents; and 5thly, after due verification had been
made, Maritima would then pay; this procedure should now be correlated to
the evidence herein presented; now plaintiff has here presented two sets of
documents, A to A-6 and B to B-4; the first set consists of a purchase order,
together with the invoices or delivery receipts, At to A-6; and the second set
consists of counter-receipts evidencing the fact that Maritima had received,
with the exception of that in B-4, certain documents, i.e., purchase orders and
delivery receipts from Barretto, "para su revision"; if then the documents
would be correlated with the testimonies and the procedure outlined by
witness Perez, it will result that as to A to A-6, plaintiff, according to it, had
already complied with the purchase order, the sale, and delivery, but that it
had not submitted all these to Maritima "para su revision" while as to B to B-
4, it had according to it, complied with purchase order (except as to B-4),
sale, delivery, and submission "para su revision", but the same had not been
as yet checked and verified by Maritima; the question is, has this proof
demonstrated plaintiff's cause of action, pursuant to the very procedure by it
outlined in its evidence to have been followed between the parties in the
course of their commercial transactions but how could that be when precisely
because of that practice, it gave unto Maritima the right to first verify; and
there is no showing that had been verified; but let it not be here said that just
because Maritima had not yet verified, plaintiff should not be permitted to
recover, for that practice must give way to the truth, — as plaintiff contends,
— that if it had after all proved delivery, defendant must pay; but has plaintiff
proved delivery under the evidence? According to what has been paid,
plaintiff had, according to it, submitted its documents in B to B-4 for
revision; this means to say that it had in its possession and given unto
Maritima purchase orders, and delivery receipts, but does this mean that it
had proved delivery? Can delivery be proved by the fact that one had in his
possession what one had believed to be a delivery receipt and submitted that
for verification, without any actual proof of delivery of the article? If that
were the case, a litigant would be excused from proving the element most
vital to show his cause of action; and a Court of Justice must have to rely on
the presumption that just because one had in his possession a "delivery
receipt", one had already delivered; but the vice of this argument is that it
altogether parts from the basis that the "delivery receipt" thus possessed and
surrendered was a genuine delivery receipt, evidencing the fact that buyer
had indeed received; but here, there absolutely is no proof of that; what this
Court has only seen in the evidence nearest to the required proof is the stamp
of Maritima on A-1 to A-6; for as this Court has said, the supposed admission
by defendant witness Narvaez that the lumber therein annotated had been
"delivered" was clearly and unfortunately, one that could not, — to be fair to
the witness, — have been correctly meant to have by him been made, for he
was "purchasing agent" only and could not be qualified at all to declare if
what he had authorized to be purchased had been thereafter delivered, and
the witness had in fact insisted against such alleged delivery to "Posadas",
and witness had all the time insisted that only one "J. Leoncio", could receive,
and this clarification is indisputably fortified by the very evidence of
plaintiff, consisting in the purchase order Exh. A, wherein is annotated:

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 "Not valid unless invoices are receipted
and signed by: J. LEONCIO";

which name, "J. Leoncio" had been written precisely by said witness and this
must mean that the signature of "Posadas" in A-1 to A-6 by the evidence of
plaintiff itself, has been shown to have been unauthorized; and going to the
stamp of Maritima on A-1 to A-6, this had to be correlated to the fact that
Narvaez has testified that:

This is our own stamp, but we did not authorize Mr. Posadas
to sign for any lumber received. tsn. 134, Vol. II;

nor has in fact, in any part of the evidence been shown any proof as even to
show the authenticity of said signature "Posadas"; or that said "Posadas" had
actually received said lumber; to prove at least that the lumber had been
deposited in the compound of Maritima by that "Posadas", for if there had
been such proof in the record, if plaintiff had shown evidence of that actual
delivery of the lumber into the possession of Maritima, then it would have
been the obligation of this Court under the law of quasi-contracts, to grant
Barretto its prayer for the value of that; but no, what Barrette has here
presented as witnesses were first Roman Legarda So, manager of Barretto,
who admitted in cross that:

Q. — With respect to Exhibits A-1 to A-5, you did not have

any personal intervention or participation in the preparation of
these documents?

A. — No, sir, I did not have any participation or intervention.

Q. — You did not have any personal intervention in the alleged

deliveries of these number to the Compañia Maritima? A. - No,
sir, I did not have.

A. — As a matter of fact, you do not know who put these

rubber stamps here and signed at the bottom of these Exhibits
A, A-1 to A- 5?

Q. — No, sir, I do not know. tsn. 57-58, Vol. I;

and then Juanita G. Perez, assistant cashier of Barretto who admitted in cross
that:

Q. — So, you do not know of your own personal knowledge

the circumstances or the manner in which these Exhibits A-1
to A-5 were stamped. You do not know of your own personal
knowledge?

A. — Well, when it comes to stamping, I do not have any

knowledge," tsn. 35, Vol. I;

under such a status of plaintiffs own proofs, how could it be said that plaintiff
had proved its case? And how would it be correctly insisted against this Court
that it had disregarded Lower Court's findings contrary to the existing

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 jurisprudence when there was no issue of credibility presented to this Court
on which it indeed would have been bound to rely as a rule upon Lower
Court's determination; but what had been before this Court was a simple issue
of preponderance and it had to make its conclusions based on the documents
themselves presented by plaintiff it is because of these that this Court is
impelled to reiterate that it should rule as it had ruled previously, for
litigations can not be determined by possibly correct suppositions,
deductions or even presumptions, with no basis in the evidence, for the truth
must have to be determined by the hard rules of proof. (pp. 1-7, CA
Resolution dated January 8, 1964).

"An examination of said receipts would reveal that they were counter-receipts issued by
Cia. Maritima unto Pio Barretto certifying to the fact of having received from Pio Barretto,
certain statements, "para su revision", which can only mean not an admission of having
received the lumber but only an admission of having received certain statements on claims
for lumber allegedly delivered; ... that plaintiff has the duty to prove its affirmative
allegations here of delivery to and failure of defendant to pay, ... otherwise, the meaning
would be that the sending of a statement of account would be an evidence of the admission
thereof which it surely is not. (p. 6, CA Decision dated November 18, 1963; p. 27, ROA).

We concur in the foregoing observations and find that the conclusion of the Court of
Appeals that plaintiff did not satisfactorily prove delivery of the lumber in question is in
accordance with the facts and the law.

WHEREFORE, the judgment appealed from is hereby affirmed without pronouncement as

to costs.

SO ORDERED.

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

FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING

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CO., INC., SEGUNDINA VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR
and FERNANDO TY, defendants-appellants.

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

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

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

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

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

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

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

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in
favor of Gaite a surety bond, and pursuant to the promise, Fonacier delivered to Gaite a
surety bond dated December 8, 1954 with himself (Fonacier) as principal and the Larap
Mines and Smelting Co. and its stockholders George Krakower, Segundina Vivas, Pacifico
Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified,
however, that when this bond was presented to him by Fonacier together with the
"Revocation of Power of Attorney and Contract", Exhibit "A", on December 8, 1954, he
refused to sign said Exhibit "A" unless another bond under written by a bonding company
was put up by defendants to secure the payment of the P65,000.00 balance of their price of
the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated
December 8, 1954 (Exhibit "B"),was executed by the same parties to the first bond Exhibit

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"A-1", with the Far Eastern Surety and Insurance Co. as additional surety, but it provided
that the liability of the surety company would attach only when there had been an actual
sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less then
P65,000.00, and that, furthermore, the liability of said surety company would automatically
expire on December 8, 1955. Both bonds were attached to the "Revocation of Power of
Attorney and Contract", Exhibit "A", and made integral parts thereof.

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

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

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

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

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

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

On the first question, the lower court held that the obligation of the defendants to pay
plaintiff the P65,000.00 balance of the price of the approximately 24,000 tons of iron ore
was one with a term: i.e., that it would be paid upon the sale of sufficient iron ore by
defendants, such sale to be effected within one year or before December 8, 1955; that the

8
giving of security was a condition precedent to Gait's giving of credit to defendants; and
that as the latter failed to put up a good and sufficient security in lieu of the Far Eastern
Surety bond (Exhibit "B") which expired on December 8, 1955, the obligation became due
and demandable under Article 1198 of the New Civil Code.

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

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay
him, jointly and severally, P65,000.00 with interest at 6% per annum from December 9,
1955 until payment, plus costs. From this judgment, defendants jointly appealed to this
Court.

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

The main issues presented by appellants in this appeal are:

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

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

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

7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier
all his rights and interests over the 24,000 tons of iron ore, more or less, above-
referred to together with all his rights and interests to operate the mine in
consideration of the sum of SEVENTY-FIVE THOUSAND PESOS (P75,000.00)
which the latter binds to pay as follows:

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

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

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

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

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

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

3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment
of the ore as a condition precedent, would be tantamount to leaving the payment at the
discretion of the debtor, for the sale or shipment could not be made unless the appellants
took steps to sell the ore. Appellants would thus be able to postpone payment indefinitely.
The desireability of avoiding such a construction of the contract Exhibit "A" needs no
stressing.

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

If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.

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

10
The only rational view that can be taken is that the sale of the ore to Fonacier was a sale
on credit, and not an aleatory contract where the transferor, Gaite, would assume the risk
of not being paid at all; and that the previous sale or shipment of the ore was not a
suspensive condition for the payment of the balance of the agreed price, but was intended
merely to fix the future date of the payment.

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

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

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

(1) . . .

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

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

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

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

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

11
Coming now to the second issue in this appeal, which is whether there were really 24,000
tons of iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier, and whether,
if there had been a short-delivery as claimed by appellants, they are entitled to the payment
of damages, we must, at the outset, stress two things: first, that this is a case of a sale of a
specific mass of fungible goods for a single price or a lump sum, the quantity of "24,000
tons of iron ore, more or less," stated in the contract Exhibit "A," being a mere estimate by
the parties of the total tonnage weight of the mass; and second, that the evidence shows
that neither of the parties had actually measured of weighed the mass, so that they both
tried to arrive at the total quantity by making an estimate of the volume thereof in cubic
meters and then multiplying it by the estimated weight per ton of each cubic meter.

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

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

We think not. As already stated, neither of the parties had actually measured or weighed
the whole mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate
their respective claims only upon an estimated number of cubic meters of ore multiplied
by the average tonnage factor per cubic meter.

Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles
of ore that he sold to Fonacier, while appellants contend that by actual measurement, their
witness Cirpriano Manlañgit found the total volume of ore in the stockpiles to be only
6.609 cubic meters. As to the average weight in tons per cubic meter, the parties are again
in disagreement, with appellants claiming the correct tonnage factor to be 2.18 tons to a
cubic meter, while appellee Gaite claims that the correct tonnage factor is about 3.7.

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

12
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made
by appellant's witness Cipriano Manlañgit is correct, if we multiply it by the average
tonnage factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very
far from the estimate of 24,000 tons made by appellee Gaite, considering that actual
weighing of each unit of the mass was practically impossible, so that a reasonable
percentage of error should be allowed anyone making an estimate of the exact quantity in
tons found in the mass. It must not be forgotten that the contract Exhibit "A" expressly
stated the amount to be 24,000 tons, more or less. (ch. Pine River Logging & Improvement
Co. vs U.S., 279, 46 L. Ed. 1164).

There was, consequently, no short-delivery in this case as would entitle appellants to the
payment of damages, nor could Gaite have been guilty of any fraud in making any
misrepresentation to appellants as to the total quantity of ore in the stockpiles of the mining
claims in question, as charged by appellants, since Gaite's estimate appears to be
substantially correct.

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

Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and
Natividad, JJ., concur.

G.R. No. L-11668 April 1, 1918

ANTONIO ENRIQUEZ DE LA CAVADA, plaintiff-appellee,

vs.
ANTONIO DIAZ, defendant-appellant.

This action was instituted by the plaintiff for the purpose of requiring the defendant to
comply with a certain "contract of option" to purchase a certain piece or parcel of land
described in said contract and for damages for a noncompliance with said contract. After
the close of the trial the Honorable James A. Ostrand, judge, rendered a judgment the
dispositive part of which is as follows:

13
 Wherefore, it is hereby ordered and adjudged that the defendant, within the period
of thirty days from the date upon which this decision becomes final, convey to the
plaintiff a good and sufficient title in fee simple to the land described in decrees
Nos. 13909 and 13919 of the Court of Land Registration, upon payment or legal
tender of payment by said plaintiff of the sum of thirty thousand pesos (P30,000) in
cash, and upon said plaintiff giving security approved by this court for the payment
within the term of 6 years from the date of the conveyance for the additional sum of
forty thousand pesos (P40,000) with interest at the rate of 6 per cent per annum.

It is further ordered and adjudged that in the event of the failure of the defendant to
execute the conveyance as aforesaid, the plaintiff have and recover judgment against
him, the said defendant, for the sum of twenty thousand pesos (P20,000), with
interest at the rate of six per cent (6 per cent per annum from the date upon which
the conveyance should have been made). It is so ordered.

From that judgment the defendant appealed and made several assignment of error.

It appears from the record that on the 15th day of November, 1912, the defendant and the
plaintiff entered into the following "contract of option:"

(EXHIBIT A.)

CONTRACT OF OPTION.

I, the undersigned, Antonio Diaz, of legal age, with personal registration certificate
Number F-855949, issued at Pitogo, Tayabas, January 16, 1912, and temporarily
residing in Manila, P. I., do hereby grant an option to Antonio Enriquez to purchase
my hacienda at Pitogo consisting of 100 and odd hectares, within the period
necessary for the approval and issuance of a Torrens title thereto by the Government
for which he may pay me either the sum of thirty thousand pesos (P30,000),
Philippine currency, in cash, or within the period of six (6) years, beginning with
the date of the purchase, the sum of forty thousand pesos (P40,000), Philippine
currency, at six per cent interest per annum, with due security for the payment of
the said P40,000 in consideration of the sale to him of my property described as
follows, to wit:

About one hundred hectares of land in Pitogo, Tayabas, containing about 20,000
coconut trees and 10,000 nipa-palm trees, all belonging to me, which I hereby sell
to Antonio Enriquez de la Cavada for seventy thousand pesos, under the conditions
herein specified.

I declare that Antonio Enriquez is the sole person who has, and shall have, during
the period of this option, the right to purchase the property above-mentioned.

I likewise declare that Antonio Enriquez shall be free to resell the said property at
whatever price he may desire, provided that he should comply with the stipulations
covenanted with me.

In witness of my entire conformity with the foregoing, I hereunto affix my signature,

in Manila, P. I., this 15th day of November, 1912.

(Sgd.) Antonio Diaz.

14
 Signed in the presence of:

(Sgd.) J. VALDS DIAZ.

(EXHIBIT B.)

P. I., November 15, 1912.

Sr. Don ANTONIO DIAZ,

Calle Victoria, No. 125, W. C., Manila, P. I.

DEAR SIR: I have the honor to inform you that, in conformity with the letter of
option in my favor of even date, I will buy your coconut plantation in Pitogo,
containing one hundred hectares, together with all the coconut and nipa-palm trees
planted thereon, under the following conditions:

1. I shall send a surveyor to survey the said property, and to apply to the Government
for a Torrens title therefore, and, if the expenses incurred for the same should not
exceed P1,000, I shall pay the P500 and you the other P500; Provided, however,
that you shall give the surveyor all necessary assistance during his stay at
the hacienda.

2. I shall pay the purchase price to you in conformity with our letter of option of this
date, and after the Torrens title shall have been officially approved.

Yours respectfully,

(Sgd.) A. ENRIQUEZ

I acknowledge receipt of, and conform with, the foregoing.

(Sgd.) ANTONIO DIAZ

It appears from the record that soon after the execution of said contract, and in part
compliance with the terms thereof, the defendant presented two petitions in the Court of
Land Registration (Nos. 13909 and 13919), each for the purpose of obtaining the
registration of a part of the "Hacienda de Pitogo." Said petitions were granted, and each
parcel as registered and a certificate of title was issued for each part under the Torrens
system to the defendant herein. Later, and pretending to comply with the terms of said
contract, the defendant offered to transfer to the plaintiff one of said parcels only, which
was a part of said "hacienda." The plaintiff refused to accept said certificate for a part only
of said "hacienda" upon the ground (a) that it was only a part of the "Hacienda de Pitogo,"
and (b) under the contract (Exhibits A and B) he was entitled to a transfer to him all said
"hacienda."

The theory of the defendant is that the contract of sale of said "Hacienda de Pitogo"
included only 100 hectares, more or less, of said "hacienda," and that by offering to convey
to the plaintiff a portion of said "hacienda" composed of "100 hectares, more or less," he
thereby complied with the terms of the contract. The theory of the plaintiff is that he had
purchased all of said "hacienda," and that the same contained, at least, 100 hectares, more
or less. The lower court sustained the contention of the plaintiff, to wit, that the sale was a
sale of the "Hacienda de Pitogo" and not a sale of a part of it, and rendered a judgment
requiring the defendant to comply with the terms of the contract by transferring to the
15
plaintiff, by proper deeds of conveyance, all said "hacienda," or to pay in lieu thereof the
sum of P20,000 damages, together with 6 per cent interest from the date upon which said
conveyance should have been made.

After issue had been joined between the plaintiff and defendant upon their pleadings, they
entered into the following agreement with reference to the method of presenting their proof:

The attorneys for the parties in this case make the following stipulations:

1. Each of the litigating parties shall present his evidence before Don Felipe
Canillas, assistant clerk of the Court of First Instance of Manila, who, for such
purpose, should be appointed commissioner.

2. Said commissioner shall set a day and hour for the presentation of the evidence
above-mentioned, both oral and documentary, and in the stenographic notes shall
have record entered of all objections made to the evidence by either party, in order
that they may afterwards be decided by the court.

3. The transcription of the stenographic notes, containing the record of the evidence
taken, shall be paid for in equal shares by both parties.

4. At the close of the taking of the evidence, each of the parties shall file his brief in
respect to such evidence, whereupon the case as it then stands shall be submitted to
the decision of the court.

The parties request the court to approve this agreement in the part thereof which
refers to the proceedings in this case.

Manila, P. I., December 21, 1914.

(Sgd.) ANTONIO V. HERRERO. (Sgd.) ALFREDO CHICOTE.

Approved:

(Sgd.) GEO. R. HARVEY,

Judge.

Said agreement was approved by the lower court, and proof was taken in accordance
therewith. The defendant-appellant now alleges, giving several reasons therefor, that the
proof was improperly practiced, and that the judge was without authority o decide the cause
upon proof taken in the manner agreed upon by the respective parties. The defendant-
appellant makes no contention that he was not permitted to present all the proof he desired
to present. He makes no contention that he has been prejudiced in any manner whatsoever
by virtue of the method agreed upon for taking the testimony.

There is nothing in the law nor in public policy which prohibits the parties in a civil
litigation from making the agreement above quoted. While the law concedes to parties
litigant, generally, the right to have their proof taken in the presence of the judge, such right
is a renounceable one. In a civil action the parties litigant have a right to agree, outside of
the court, upon the facts in litigation. Under certain conditions the parties litigant have a
right to take the depositions of witnesses and submit the sworn statements in that form to

16
the court. The proof, as it was submitted to the court in the present case, by virtue of said
agreement, was, in effect, in the form of a deposition of the various witnesses presented.
Having agreed to the method of taking the proof, and the same having been taking in
compliance with said agreement, it is now too late, there being no law to the contrary, for
them to deny and repudiate the effect of their agreement. (Biunas vs. Mora, R. G. No.
11464, March 11, 1918; Behr vs. Levy Hermanos, R. G. No 12211, March 19, 1918.1)

Not only is there no law prohibiting the parties from entering into an agreement to submit
their proof to the court in civil actions as was done in the present case, but it may be a
method highly convenient, not only to the parties, but to busy courts. The judgment of the
lower court, therefore, should not be modified or reversed on account of the first
assignment of error.

In the second assignment of error, the appellant alleges (a) that the lower court committed
an error in declaring the contract (Exhibits A and B) a valid obligation, for the reason that
it not been admitted in evidence, and (b) that the same was null for a failure of
consideration. Upon the first question, an examination of the proof shows that said contract
(Exhibits A and B) was offered in evidence and admitted as proof without objection. Said
contract was, therefore, properly presented to the court as proof. Not only was the contract
before the court by reason of its having been presented in evidence, but the defendant
himself made said contract an integral part of his pleadings. The defendant admitted the
execution and delivery of the contract, and alleged that he made an effort to comply with
its terms. His only defense is that he sold to the plaintiff a part of the "hacienda" only and
that he offered, in compliance with the terms of the contract, to convey to the plaintiff all
of the land which he had promised to sell.

With reference to the second objection, to wit, that there was no consideration for said
contract it may be said (a) that the contract was for the sale of a definite parcel of land; (b)
that it was reduced to writing; (c) that the defendant promised to convey to the plaintiff
said parcel of land; (d) that the plaintiff promised to pay therefor the sum of P70,000 in the
manner prescribed in said contract; (e) that the defendant admitted the execution and
delivery of the contract and alleged that he made an effort to comply with the same (par. 3
of defendant's answer) and requested the plaintiff to comply with his part of the contract;
and (f) that no defense or pretension was made in the lower court that there was no
consideration for his contract. Having admitted the execution and delivery of the contract,
having admitted an attempt to comply with its terms, and having failed in the court below
to raise any question whatsoever concerning the inadequacy of consideration, it is rather
late, in the face of said admissions, to raise that question for the first time in this court. The
only dispute between the parties in the lower court was whether or not the defendant was
obliged to convey to the plaintiff all of said "hacienda." The plaintiff insisted that his
contract entitled him to a conveyance of all of said "hacienda." The defendant contended
that he had complied with the terms of his contract by offering to convey to the plaintiff a
part of the said "hacienda" only. That was the only question presented to the lower court
and that was the only question decided.

A promise made by one party, if made in accordance with the forms required by the law,
may be a good consideration (causa) for a promise made by another party. (Art. 1274, Civil
Code.) In other words, the consideration (causa) need not pass from one to the other at the
time the contract is entered into. For example, A promises to sell a certain parcel of land to
B for the sum of P70,000. A, by virtue of the promise of B to pay P70,000, promises to sell
said parcel of land to B for said sum, then the contract is complete, provided they have
complied with the forms required by the law. The consideration need not be paid at the
time of the promise. The one promise is a consideration for the other. Of course, A cannot

17
enforce a compliance with the contract and require B to pay said sum until he has complied
with his part of the contract. In the present case, the defendant promised to convey the land
in question to the plaintiff as soon as the same could be registered. The plaintiff promised
to pay to the defendant P70,000 therefor in accordance with the terms of their contract. The
plaintiff stood ready to comply with his part of the contract. The defendant, even though
he had obtained a registered title to said parcel of land, refused to comply with his promise.
All of the conditions of the contract on the part of the defendant had been concluded, except
delivering the deeds of transfer. Of course, if the defendant had been unable to obtain a
registration of his title, or if he had violated the terms of the alleged optional contract by
selling the same to some other person than the plaintiff, then he might have raised the
objection that he had received nothing from the plaintiff for the option which he had
conceded. That condition, of course, would have presented a different question from the
one which we have before us. The said contract (Exhibits A and B) was not, in fact, an
"optional contract" as that phrase is generally used. Reading the said contract from its four
corners it is clearly as absolute promise to sell a definite parcel of land for a fixed price
upon definite conditions. The defendant promised to convey to the plaintiff the land in
question as soon as the same was registered under the Torrens system, and the plaintiff
promised to pay to the defendant the sum of P70,000, under the conditions named, upon
the happening of that event. The contract was not, in fact, what is generally known as a
"contract of option." It differs very essentially from a contract of option. An optional
contract is a privilege existing in one person, for which he had paid a consideration, which
gives him the right to buy, for example, certain merchandise of certain specified property,
from another person, if he chooses, at any time within the agreed period, at a fixed price.
The contract of option is a separate and distinct contract from the contract which the parties
may enter into upon the consummation of the option. A consideration for an optional
contract is just as important as the consideration for any other kind of contract. If there was
no consideration for the contract of option, then it cannot be entered any more than any
other contract where no consideration exists. To illustrate, A offers B the sum of P100,000
for the option of buying his property within the period of 30 days. While it is true that the
conditions upon which A promises to buy the property at the end of the period mentioned
are usually fixed in the option, the consideration for the option is an entirely different
consideration from the consideration of the contract with reference to which the option
exists. A contract of option is a contract by virtue of the terms of which the parties thereto
promise and obligate themselves to enter into contract at a future time, upon the happening
of certain events, or the fulfillment of certain conditions.

Upon the other hand, suppose that the defendant had complied with his part of the contract
and had tendered the deeds of transfer of the "Hacienda de Pitogo" in accordance with its
terms and had demanded the payments specified in the contract, and the plaintiff refused
to comply — what then would have been the rights of the defendant? Might he not have
successfully maintained an action for the specific performance of the contract, or for the
damages resulting from the breach of said contract? When the defendant alleged that he
had complied with his part of the contract (par. 3 of defendant's answer) and demanded
that the plaintiff should immediately comply with his part of the same, he evidently was
laying the foundation for an action for damages, the nullification or a specific compliance
with the contract.

The appellant contends that the contract which he made was not with the plaintiff but with
Rosenstock, Elser and Co. That question was not presented in the court below. The contract
in question shows, upon its face, that the defendant made the same with the plaintiff, Not
having raised the question in the court below, and having admitted the execution and
delivery of the contract in question with the plaintiff, we are of the opinion that his

18
admission is conclusive upon that question (par. 1 of special defense of defendant's answer)
and need not be further discussed.

The appellant further contends that the action was premature, for the reason that the
plaintiff had not paid nor offered to pay the price agreed upon, under the conditions named,
for the land in question. That question was not raised in the court below, which fact,
ordinarily, would be a sufficient answer to the contention of the appellant. It may be added,
however, that the defendant could not demand the payment until he had offered the deeds
of conveyance, in accordance with the terms of his contract. He did not offer to comply
with the terms of his contract. True it is that he offered to comply partially with the terms
of the contract, but not fully. While the payment must be simultaneous with the delivery of
the deeds of conveyance, the payment need not be made until the deed of conveyance is
offered. The plaintiff stood ready and willing to perform his part of the contract
immediately upon the performance on the part of the defendant. (Arts. 1258 and 1451 of
Civil Code.)

In the fifth assignment of error the appellant contends that the lower court committed an
error in not declaring that the defendant was not obligated to sell the "Hacienda de Pitogo"
to the plaintiff "por incumplimiento, renuncia abandono y negligencia del mismo
demandante, etc." (For nonfulfillment, renunciation, abandonment and negligence of
plaintiff himself, etc.) That question was not presented to the court below. But even though
it had been the record shows that the plaintiff, at all times, insisted upon a compliance with
the terms of the contract on the part of the defendant, standing ready to comply with his
part of the same.

The appellant contends in his sixth assignment of error that the plaintiff had not suffered
the damages complained of, to wit, in the sum of P20,000. The only proof upon the question
of damages suffered by the plaintiff for the noncompliance with the terms of the contract
in question on the part of the defendant is that the plaintiff, in contemplation of the
compliance with the terms of the contract on the part of the defendant, entered into a
contract with a third party to sell the said "hacienda" at a profit of P30,000. That proof is
not disputed. No attempt was made in the lower court to deny that fact. The proof shows
that the person with whom the plaintiff had entered into a conditional sale of the land in
question had made a deposit for the purpose of guaranteeing the final consummation of
that contract. By reason of the failure of the defendant to comply with the contract here in
question, the plaintiff was obliged to return the sum deposited by said third party with a
promise to pay damages. The record does not show why the plaintiff did not ask for
damages in the sum of P30,000. He asked for a judgment only in the sum of P20,000. He
now asks that the judgment of the lower court be modified and that he be given a judgment
for P30,000. Considering the fact that he neither asked for a judgment for more than
P20,000 nor appealed from the judgment of the lower court, his request now cannot be
granted. We find no reason for modifying the judgment of the lower court by virtue of the
sixth assignment of error.

In the seventh assignment of error the appellant contends that the contract of sale was not
in effect a contract of sale. He alleges that the contract was, in fact, a contract by virtue of
which the plaintiff promised to find a buyer for the parcel of land in question; that the
plaintiff was not in fact the purchaser; that the only obligation that the plaintiff assumed
was to find some third person who would purchase the land from the defendant. Again, it
would be sufficient to say, in answer to that assignment of error, that no contention of that
nature was presented in the court below, and for that reason it is improperly presented now
for the first time. In addition, however, it may be added that the defendant, in his answer,

19
admitted that he not only sold the land in question, but offered to transfer the same to the
plaintiff, in compliance with the contract. (See answer of defendant.)

In the eighth assignment of error the appellant contends that the lower court committed an
error in its order requiring him to convey to the plaintiff the "Hacienda de Pitogo," for the
reason that the plaintiff had not demanded a transfer of said property, and for the additional
reason that a portion of said "hacienda" had already been sold to a third person. With
reference to the first contention, the record clearly shows that the plaintiff was constantly
insisting upon a compliance with the terms of the contract, to wit, a conveyance to him of
the "Hacienda de Pitogo" by the defendant. Naturally, he refused, under the contract, to
accept a conveyance of a part only of said "hacienda." With reference to the second
contention, it may be said that the mere fact that the defendant had sold a part of the
"hacienda" to other persons, is no sufficient reason for not requiring a strict compliance
with the terms of his contract with the plaintiff, or to answer in damages for his failure.
(Arts. 1101 and 1252 of the Civil Code.)

In view of the foregoing, and after a consideration of the facts and the law applicable
thereto, we are persuaded that there is no reason given in the record justifying a
modification or reversal of the judgment of the lower court. The same is, however, hereby
affirmed, with costs. So ordered.

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

[G.R. No. 135929. April 20, 2001]

LOURDES ONG LIMSON, petitioner, vs. COURT OF APPEALS, SPOUSES

LORENZO DE VERA and ASUNCION SANTOS-DE VERA, TOMAS
CUENCA, JR., and SUNVAR REALTY DEVELOPMENT
CORPORATION, respondents.
Filed under Rule 45 of the Rules of Court this Petition for Review on Certiorari seeks
to review, reverse and set aside the Decision[1] of the Court of Appeals dated 18 May 1998
reversing that of the Regional Trial Court dated 30 June 1993. The petition likewise assails
the Resolution[2] of the appellate court of 19 October 1998 denying petitioners Motion for
Reconsideration.

20
 Petitioner Lourdes Ong Limson, in her 14 May 1979 Complaint filed before the trial
court,[3] alleged that in July 1978 respondent spouses Lorenzo de Vera and Asuncion
Santos-de Vera, through their agent Marcosa Sanchez, offered to sell to petitioner a parcel
of land consisting of 48,260 square meters, more or less, situated in Barrio San Dionisio,
Paraaque, Metro Manila; that respondent spouses informed her that they were the owners
of the subject property; that on 31 July 1978 she agreed to buy the property at the price
of P34.00 per square meter and gave the sum of P20,000.00 to respondent spouses as
"earnest money;" that respondent spouses signed a receipt therefor and gave her a 10-day
option period to purchase the property; that respondent Lorenzo de Vera then informed her
that the subject property was mortgaged to Emilio Ramos and Isidro Ramos; that
respondent Lorenzo de Vera asked her to pay the balance of the purchase price to enable
him and his wife to settle their obligation with the Ramoses.
Petitioner also averred that she agreed to meet respondent spouses and the Ramoses on
5 August 1978 at the Office of the Registry of Deeds of Makati, Metro Manila, to
consummate the transaction but due to the failure of respondent Asuncion Santos-de Vera
and the Ramoses to appear, no transaction was formalized. In a second meeting scheduled
on 11 August 1978 she claimed that she was willing and ready to pay the balance of the
purchase price but the transaction again did not materialize as respondent spouses failed to
pay the back taxes of subject property.Subsequently, on 23 August 1978 petitioner
allegedly gave respondent Lorenzo de Vera three (3) checks in the total amount
of P36,170.00 for the settlement of the back taxes of the property and for the payment of
the quitclaims of the three (3) tenants of subject land. The amount was purportedly
considered part of the purchase price and respondent Lorenzo de Vera signed the receipts
therefor.
Petitioner alleged that on 5 September 1978 she was surprised to learn from the agent
of respondent spouses that the property was the subject of a negotiation for the sale to
respondent Sunvar Realty Development Corporation (SUNVAR) represented by
respondent Tomas Cuenca, Jr. On 15 September 1978 petitioner discovered that although
respondent spouses purchased the property from the Ramoses on 20 March 1970 it was
only on 15 September 1978 that TCT No. S-72946 covering the property was issued to
respondent spouses. As a consequence, she filed on the same day an Affidavit of Adverse
Claim with the Office of the Registry of Deeds of Makati, Metro Manila, which was
annotated on TCT No. S-72946. She also claimed that on the same day she informed
respondent Cuenca of her "contract" to purchase the property.
The Deed of Sale between respondent spouses and respondent SUNVAR was executed
on 15 September 1978 and TCT No. S-72377 was issued in favor of the latter on 26
September 1978 with the Adverse Claim of petitioner annotated thereon. Petitioner
claimed that when respondent spouses sold the property in dispute to SUNVAR, her valid
and legal right to purchase it was ignored if not violated. Moreover, she maintained that
SUNVAR was in bad faith as it knew of her "contract" to purchase the subject property
from respondent spouses.
Finally, for the alleged unlawful and unjust acts of respondent spouses, which caused
her damage, prejudice and injury, petitioner claimed that the Deed of Sale, should be
annuled and TCT No. S-72377 in the name of respondent SUNVAR canceled and TCT
No. S-72946 restored. She also insisted that a Deed of Sale between her and respondent
spouses be now executed upon her payment of the balance of the purchase price agreed
upon, plus damages and attorneys fees.
In their Answer[4] respondent spouses maintained that petitioner had no sufficient cause
of action against them; that she was not the real party in interest; that the option to buy the
property had long expired; that there was no perfected contract to sell between them; and,

21
that petitioner had no legal capacity to sue. Additionally, respondent spouses claimed
actual, moral and exemplary damages, and attorneys fees against petitioner.
On the other hand, respondents SUNVAR and Cuenca, in their Answer,[5] alleged that
petitioner was not the proper party in interest and/or had no cause of action against
them. But, even assuming that petitioner was the proper party in interest, they claimed that
she could only be entitled to the return of any amount received by respondent spouses. In
the alternative, they argued that petitioner had lost her option to buy the property for failure
to comply with the terms and conditions of the agreement as embodied in the receipt issued
therefor. Moreover, they contended that at the time of the execution of the Deed of Sale and
the payment of consideration to respondent spouses, they "did not know nor was informed"
of petitioners interest or claim over the subject property. They claimed furthermore that it
was only after the signing of the Deed of Sale and the payment of the corresponding
amounts to respondent spouses that they came to know of the claim of petitioner as it was
only then that they were furnished copy of the title to the property where the Adverse
Claim of petitioner was annotated. Consequently, they also instituted a Cross-
Claim against respondent spouses for bad faith in encouraging the negotiations between
them without telling them of the claim of petitioner. The same respondents maintained that
had they known of the claim of petitioner, they would not have initiated negotiations with
respondent spouses for the purchase of the property. Thus, they prayed for reimbursement
of all amounts and monies received from them by respondent spouses, attorneys fees and
expenses for litigation in the event that the trial court should annul the Deed of Sale and
deprive them of their ownership and possession of the subject land.
In their Answer to the Cross-Claim[6] of respondents SUNVAR and Cuenca,
respondent spouses insisted that they negotiated with the former only after the expiration
of the option period given to petitioner and her failure to comply with her commitments
thereunder. Respondent spouses contended that they acted legally and validly, in all
honesty and good faith. According to them, respondent SUNVAR made a verification of
the title with the Office of the Register of Deeds of Metro Manila District IV before the
execution of the Deed of Absolute Sale. Also, they claimed that the Cross-Claim was
barred by a written waiver executed by respondent SUNVAR in their favor. Thus,
respondent spouses prayed for actual damages for the unjustified filing of the Cross-Claim,
moral damages for the mental anguish and similar injuries they suffered by reason thereof,
exemplary damages "to prevent others from emulating the bad example" of respondents
SUNVAR and Cuenca, plus attorneys fees.
After a protracted trial and reconstitution of the court records due to the fire that razed
the Pasay City Hall on 18 January 1992, the Regional Trial Court rendered its 30 June
1993 Decision[7]in favor of petitioner. It ordered (a) the annulment and rescission of
the Deed of Absolute Sale executed on 15 September 1978 by respondent spouses in favor
of respondent SUNVAR; (b) the cancellation and revocation of TCT No. S-75377 of the
Registry of Deeds, Makati, Metro Manila, issued in the name of respondent Sunvar Realty
Development Corporation, and the restoration or reinstatement of TCT No. S-72946 of the
same Registry issued in the name of respondent spouses; (c) respondent spouses to execute
a deed of sale conveying ownership of the property covered by TCT No. S-72946 in favor
of petitioner upon her payment of the balance of the purchase price agreed upon; and, (d)
respondent spouses to pay petitioner P50,000.00 as and for attorneys fees, and to pay the
costs.
On appeal, the Court of Appeals completely reversed the decision of the trial court. It
ordered (a) the Register of Deeds of Makati City to lift the Adverse Claim and such other
encumbrances petitioner might have filed or caused to be annotated on TCT No. S-75377;
and, (b) petitioner to pay (1) respondent SUNVAR P50,000.00 as nominal
damages, P30,000.00 as exemplary damages and P20,000 as attorneys fees; (2) respondent
22
spouses, P15,000.00 as nominal damages, P10,000.00 as exemplary damages
and P10,000.00 as attorneys fees; and, (3) the costs.
Petitioner timely filed a Motion for Reconsideration which was denied by the Court of
Appeals on 19 October 1998. Hence, this petition.
At issue for resolution by the Court is the nature of the contract entered into between
petitioner Lourdes Ong Limson on one hand, and respondent spouses Lorenzo de Vera and
Asuncion Santos-de Vera on the other.
The main argument of petitioner is that there was a perfected contract to sell between
her and respondent spouses. On the other hand, respondent spouses and respondents
SUNVAR and Cuenca argue that what was perfected between petitioner and respondent
spouses was a mere option.
A scrutiny of the facts as well as the evidence of the parties overwhelmingly leads to
the conclusion that the agreement between the parties was a contract of option and not
a contract to sell.
An option, as used in the law of sales, is a continuing offer or contract by which the
owner stipulates with another that the latter shall have the right to buy the property at a
fixed price within a time certain, or under, or in compliance with, certain terms and
conditions, or which gives to the owner of the property the right to sell or demand a sale. It
is also sometimes called an "unaccepted offer." An option is not of itself a purchase, but
merely secures the privilege to buy.[8] It is not a sale of property but a sale of the right to
purchase.[9] It is simply a contract by which the owner of property agrees with another
person that he shall have the right to buy his property at a fixed price within a certain
time. He does not sell his land; he does not then agree to sell it; but he does sell
something, i.e., the right or privilege to buy at the election or option of the other party.[10] Its
distinguishing characteristic is that it imposes no binding obligation on the person holding
the option, aside from the consideration for the offer. Until acceptance, it is not, properly
speaking, a contract, and does not vest, transfer, or agree to transfer, any title to, or any
interest or right in the subject matter, but is merely a contract by which the owner of the
property gives the optionee the right or privilege of accepting the offer and buying the
property on certain terms.[11]
On the other hand, a contract, like a contract to sell, involves the meeting of minds
between two persons whereby one binds himself, with respect to the other, to give
something or to render some service.[12] Contracts, in general, are perfected by mere
consent,[13] which is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract. The offer must be certain and the
acceptance absolute.[14]
The Receipt[15] that contains the contract between petitioner and respondent spouses
provides

Received from Lourdes Limson the sum of Twenty Thousand Pesos (P20,000.00) under
Check No. 22391 dated July 31, 1978 as earnest money with option to purchase a parcel
of land owned by Lorenzo de Vera located at Barrio San Dionisio, Municipality of
Paraaque, Province of Rizal with an area of forty eight thousand two hundred sixty square
meters more or less at the price of Thirty Four Pesos (P34.00)[16] cash subject to the
condition and stipulation that have been agreed upon by the buyer and me which will form
part of the receipt. Should the transaction of the property not materialize not on the fault
of the buyer, I obligate myself to return the full amount of P20,000.00 earnest money with
option to buy or forfeit on the fault of the buyer. I guarantee to notify the buyer Lourdes
Limson or her representative and get her conformity should I sell or encumber this

23
property to a third person. This option to buy is good within ten (10) days until the absolute
deed of sale is finally signed by the parties or the failure of the buyer to comply with the
terms of the option to buy as herein attached.

In the interpretation of contracts, the ascertainment of the intention of the contracting

parties is to be discharged by looking to the words they used to project that intention in
their contract, all the words, not just a particular word or two, and words in context, not
words standing alone.[17] The above Receipt readily shows that respondent spouses and
petitioner only entered into a contract of option; a contract by which respondent spouses
agreed with petitioner that the latter shall have the right to buy the formers property at a
fixed price of P34.00 per square meter within ten (10) days from 31 July 1978. Respondent
spouses did not sell their property; they did not also agree to sell it; but they sold something,
i.e., the privilege to buy at the election or option of petitioner. The agreement imposed no
binding obligation on petitioner, aside from the consideration for the offer.
The consideration of P20,000.00 paid by petitioner to respondent spouses was referred
to as "earnest money." However, a careful examination of the words used indicates that the
money is not earnest money but option money. "Earnest money" and "option money" are
not the same but distinguished thus: (a) earnest money is part of the purchase price, while
option money is the money given as a distinct consideration for an option contract; (b)
earnest money is given only where there is already a sale, while option money applies to a
sale not yet perfected; and, (c) when earnest money is given, the buyer is bound to pay the
balance, while when the would-be buyer gives option money, he is not required to
buy,[18] but may even forfeit it depending on the terms of the option.
There is nothing in the Receipt which indicates that the P20,000.00 was part of the
purchase price. Moreover, it was not shown that there was a perfected sale between the
parties where earnest money was given. Finally, when petitioner gave the "earnest money,"
the Receipt did not reveal that she was bound to pay the balance of the purchase price. In
fact, she could even forfeit the money given if the terms of the option were not met. Thus,
the P20,000.00 could only be money given as consideration for the option contract. That
the contract between the parties is one of option is buttressed by the provision therein that
should the transaction of the property not materialize without fault of petitioner as buyer,
respondent Lorenzo de Vera obligates himself to return the full amount of P20,000.00
"earnest money" with option to buy or forfeit the same on the fault of petitioner. It is further
bolstered by the provision therein that guarantees petitioner that she or her representative
would be notified in case the subject property was sold or encumbered to a third
person. Finally, the Receipt provided for a period within which the option to buy was to be
exercised, i.e., "within ten (10) days" from 31 July 1978.
Doubtless, the agreement between respondent spouses and petitioner was an "option
contract" or what is sometimes called an "unaccepted offer." During the option period the
agreement was not converted into a bilateral promise to sell and to buy where both
respondent spouses and petitioner were then reciprocally bound to comply with their
respective undertakings as petitioner did not timely, affirmatively and clearly accept the
offer of respondent spouses.
The rule is that except where a formal acceptance is not required, although the
acceptance must be affirmatively and clearly made and evidenced by some acts or conduct
communicated to the offeror, it may be made either in a formal or an informal manner, and
may be shown by acts, conduct or words by the accepting party that clearly manifest a
present intention or determination to accept the offer to buy or sell. But there is nothing in
the acts, conduct or words of petitioner that clearly manifest a present intention or
determination to accept the offer to buy the property of respondent spouses within the 10-
day option period. The only occasion within the option period when petitioner could have
24
demonstrated her acceptance was on 5 August 1978 when, according to her, she agreed to
meet respondent spouses and the Ramoses at the Office of the Register of Deeds of
Makati. Petitioners agreement to meet with respondent spouses presupposes an invitation
from the latter, which only emphasizes their persistence in offering the property to the
former. But whether that showed acceptance by petitioner of the offer is hazy and dubious.
On or before 10 August 1978, the last day of the option period, no affirmative or clear
manifestation was made by petitioner to accept the offer. Certainly, there was no
concurrence of private respondent spouses offer and petitioners acceptance thereof within
the option period. Consequently, there was no perfected contract to sell between the parties.
On 11 August 1978 the option period expired and the exclusive right of petitioner to
buy the property of respondent spouses ceased. The subsequent meetings and negotiations,
specifically on 11 and 23 August 1978, between the parties only showed the desire of
respondent spouses to sell their property to petitioner. Also, on 14 September 1978 when
respondent spouses sent a telegram to petitioner demanding full payment of the purchase
price on even date simply demonstrated an inclination to give her preference to buy subject
property. Collectively, these instances did not indicate that petitioner still had the exclusive
right to purchase subject property. Verily, the commencement of negotiations between
respondent spouses and respondent SUNVAR clearly manifested that their offer to sell
subject property to petitioner was no longer exclusive to her.
We cannot subscribe to the argument of petitioner that respondent spouses extended
the option period when they extended the authority of their agent until 31 August 1978. The
extension of the contract of agency could not operate to extend the option period between
the parties in the instant case. The extension must not be implied but categorical and must
show the clear intention of the parties.
As to whether respondent spouses were at fault for the non-consummation of their
contract with petitioner, we agree with the appellate court that they were not to be
blamed. First, within the option period, or on 4 August 1978, it was respondent spouses
and not petitioner who initiated the meeting at the Office of the Register of Deeds of
Makati. Second, that the Ramoses failed to appear on 4 August 1978 was beyond the
control of respondent spouses. Third, the succeeding meetings that transpired to
consummate the contract were all beyond the option period and, as declared by the Court
of Appeals, the question of who was at fault was already immaterial. Fourth, even
assuming that the meetings were within the option period, the presence of petitioner was
not enough as she was not even prepared to pay the purchase price in cash as agreed
upon. Finally, even without the presence of the Ramoses, petitioner could have easily made
the necessary payment in cash as the price of the property was already set at P34.00 per
square meter and payment of the mortgage could very well be left to respondent spouses.
Petitioner further claims that when respondent spouses sent her a telegram demanding
full payment of the purchase price on 14 September 1978 it was an acknowledgment of
their contract to sell, thus denying them the right to claim otherwise.
We do not agree. As explained above, there was no contract to sell between petitioner
and respondent spouses to speak of. Verily, the telegram could not operate to estop them
from claiming that there was such contract between them and petitioner. Neither could it
mean that respondent spouses extended the option period. The telegram only showed that
respondent spouses were willing to give petitioner a chance to buy subject property even
if it was no longer exclusive.
The option period having expired and acceptance was not effectively made by
petitioner, the purchase of subject property by respondent SUNVAR was perfectly valid
and entered into in good faith. Petitioner claims that in August 1978 Hermigildo Sanchez,

25
the son of respondent spouses agent, Marcosa Sanchez, informed Marixi Prieto, a member
of the Board of Directors of respondent SUNVAR, that the property was already sold to
petitioner. Also, petitioner maintains that on 5 September 1978 respondent Cuenca met
with her and offered to buy the property from her at P45.00 per square meter. Petitioner
contends that these incidents, including the annotation of her Adverse Claim on the title of
subject property on 15 September 1978 show that respondent SUNVAR was aware of the
perfected sale between her and respondent spouses, thus making respondent SUNVAR a
buyer in bad faith.
Petitioner is not correct. The dates mentioned, at least 5 and 15 September 1978, are
immaterial as they were beyond the option period given to petitioner. On the other hand,
the referral to sometime in August 1978 in the testimony of Hermigildo Sanchez as
emphasized by petitioner in her petition is very vague. It could be within or beyond the
option period. Clearly then, even assuming that the meeting with Marixi Prieto actually
transpired, it could not necessarily mean that she knew of the agreement between petitioner
and respondent spouses for the purchase of subject property as the meeting could have
occurred beyond the option period. In which case, no bad faith could be attributed to
respondent SUNVAR. If, on the other hand, the meeting was within the option period,
petitioner was remiss in her duty to prove so. Necessarily, we are left with the conclusion
that respondent SUNVAR bought subject property from respondent spouses in good faith,
for value and without knowledge of any flaw or defect in its title.
The appellate court awarded nominal and exemplary damages plus attorneys fees to
respondent spouses and respondent SUNVAR. But nominal damages are adjudicated to
vindicate or recognize the right of the plaintiff that has been violated or invaded by the
defendant.[19] In the instant case, the Court recognizes the rights of all the parties and finds
no violation or invasion of the rights of respondents by petitioner. Petitioner, in filing her
complaint, only seeks relief, in good faith, for what she believes she was entitled to and
should not be made to suffer therefor.Neither should exemplary damages be awarded to
respondents as they are imposed only by way of example or correction for the public good
and only in addition to the moral, temperate, liquidated or compensatory damages.[20] No
such kinds of damages were awarded by the Court of Appeals, only nominal, which was
not justified in this case. Finally, attorneys fees could not also be recovered as the Court
does not deem it just and equitable under the circumstances.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals
ordering the Register of Deeds of Makati City to lift the adverse claim and such other
encumbrances petitioner Lourdes Ong Limson may have filed or caused to be annotated
on TCT No. S-75377 is AFFIRMED, with the MODIFICATION that the award of nominal
and exemplary damages as well as attorneys fees is DELETED.
SO ORDERED.
Mendoza, Quisumbing and Buena JJ., concur.
De Leon, Jr., J., on leave.

[1]
Penned by Associate Justice Jesus M. Elbinias, concurred in by Associate Justices
Hector L. Hofilea and Mariano M. Umali (Special Fifth Division).
[2]
Ibid.
[3]
Records, pp. 13-18.
[4]
Id., pp. 39-41.

26
[5]
Id., pp. 19-23.
[6]
Id., pp. 24-27.
[7]
Decision penned by Sofronio G. Sato, RTC-Br. 111, Pasay City.
[8]
Adelfa Properties, Inc. v. Court of Appeals, G.R. No. 111238, 25 January 1995, 240
SCRA 565, citing 77 C.J.S. Sales, Sec. 33, pp. 651-652.
[9]
Id., citing 30 Words and Phrases, 15.
[10]
Ibid.
[11]
Ibid.
[12]
Art. 1305, Civil Code.
[13]
Art. 1315, id.
[14]
Art. 1319, id.
[15]
See Petition, pp. 9-10; Rollo, pp. 19-20.
[16]
Presumably "per square meter," which does not appear disputed.
[17]
Id., citing Fernandez v. Court of Appeals, G.R. No. 80231, 18 October 1988, 166 SCRA
577.
[18]
Id., citing De Leon, Comments and Cases on Sales, 1986 Rev. Ed., p. 67.
[19]
Art. 2221, Civil Code.
[20]
Art. 2229, id.

G.R. No. L-25494 June 14, 1972

NICOLAS SANCHEZ, plaintiff-appellee,

vs.
SEVERINA RIGOS, defendant-appellant.

Appeal from a decision of the Court of First Instance of Nueva Ecija to the Court of
Appeals, which certified the case to Us, upon the ground that it involves a question purely
of law.

The record shows that, on April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina
Rigos executed an instrument entitled "Option to Purchase," whereby Mrs. Rigos "agreed,
promised and committed ... to sell" to Sanchez the sum of P1,510.00, a parcel of land
situated in the barrios of Abar and Sibot, municipality of San Jose, province of Nueva Ecija,
and more particularly described in Transfer Certificate of Title No. NT-12528 of said
province, within two (2) years from said date with the understanding that said option shall
be deemed "terminated and elapsed," if "Sanchez shall fail to exercise his right to buy the
property" within the stipulated period. Inasmuch as several tenders of payment of the sum
of Pl,510.00, made by Sanchez within said period, were rejected by Mrs. Rigos, on March
12, 1963, the former deposited said amount with the Court of First Instance of Nueva Ecija
and commenced against the latter the present action, for specific performance and damages.
27
After the filing of defendant's answer — admitting some allegations of the complaint,
denying other allegations thereof, and alleging, as special defense, that the contract
between the parties "is a unilateral promise to sell, and the same being unsupported by any
valuable consideration, by force of the New Civil Code, is null and void" — on February
11, 1964, both parties, assisted by their respective counsel, jointly moved for a judgment
on the pleadings. Accordingly, on February 28, 1964, the lower court rendered judgment
for Sanchez, ordering Mrs. Rigos to accept the sum judicially consigned by him and to
execute, in his favor, the requisite deed of conveyance. Mrs. Rigos was, likewise, sentenced
to pay P200.00, as attorney's fees, and other costs. Hence, this appeal by Mrs. Rigos.

This case admittedly hinges on the proper application of Article 1479 of our Civil Code,
which provides:

ART. 1479. A promise to buy and sell a determinate thing for a price certain
is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a

price certain is binding upon the promissor if the promise is supported by a
consideration distinct from the price.

In his complaint, plaintiff alleges that, by virtue of the option under consideration,
"defendant agreed and committed to sell" and "the plaintiff agreed and committed to buy"
the land described in the option, copy of which was annexed to said pleading as Annex A
thereof and is quoted on the margin. 1 Hence, plaintiff maintains that the promise contained
in the contract is "reciprocally demandable," pursuant to the first paragraph of said Article
1479. Although defendant had really "agreed, promised and committed" herself to sell the
land to the plaintiff, it is not true that the latter had, in turn, "agreed and committed himself
" to buy said property. Said Annex A does not bear out plaintiff's allegation to this effect.
What is more, since Annex A has been made "an integral part" of his complaint, the
provisions of said instrument form part "and parcel" 2 of said pleading.

The option did not impose upon plaintiff the obligation to purchase defendant's property.
Annex A is not a "contract to buy and sell." It merely granted plaintiff an "option" to buy.
And both parties so understood it, as indicated by the caption, "Option to Purchase," given
by them to said instrument. Under the provisions thereof, the defendant "agreed, promised
and committed" herself to sell the land therein described to the plaintiff for P1,510.00, but
there is nothing in the contract to indicate that her aforementioned agreement, promise and
undertaking is supported by a consideration "distinct from the price" stipulated for the sale
of the land.

Relying upon Article 1354 of our Civil Code, the lower court presumed the existence of
said consideration, and this would seem to be the main factor that influenced its decision
in plaintiff's favor. It should be noted, however, that:

(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article
1479 refers to "sales" in particular, and, more specifically, to "an accepted unilateral
promise to buy or to sell." In other words, Article 1479 is controlling in the case at bar.

(2) In order that said unilateral promise may be "binding upon the promisor, Article 1479
requires the concurrence of a condition, namely, that the promise be "supported by a
consideration distinct from the price." Accordingly, the promisee can not compel the
promisor to comply with the promise, unless the former establishes the existence of said

28
distinct consideration. In other words, the promisee has the burden of proving such
consideration. Plaintiff herein has not even alleged the existence thereof in his complaint.

(3) Upon the other hand, defendant explicitly averred in her answer, and pleaded as a
special defense, the absence of said consideration for her promise to sell and, by joining in
the petition for a judgment on the pleadings, plaintiff has impliedly admitted the truth of
said averment in defendant's answer. Indeed as early as March 14, 1908, it had been held,
in Bauermann v. Casas, 3 that:

One who prays for judgment on the pleadings without offering proof as to
the truth of his own allegations, and without giving the opposing party an
opportunity to introduce evidence, must be understood to admit the truth of
all the material and relevant allegations of the opposing party, and to rest
his motion for judgment on those allegations taken together with such of his
own as are admitted in the pleadings. (La Yebana Company vs. Sevilla, 9
Phil. 210). (Emphasis supplied.)

This view was reiterated in Evangelista v. De la Rosa 4 and Mercy's Incorporated v.

Herminia Verde. 5

Squarely in point is Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific
Co., 6 from which We quote:

The main contention of appellant is that the option granted to appellee to sell
to it barge No. 10 for the sum of P30,000 under the terms stated above has
no legal effect because it is not supported by any consideration and in support
thereof it invokes article 1479 of the new Civil Code. The article provides:

"ART. 1479. A promise to buy and sell a determinate thing for

a price certain is reciprocally demandable.

An accepted unilateral promise to buy or sell a determinate

thing for a price certain is binding upon the promisor if the
promise is supported by a consideration distinct from the
price."

On the other hand, Appellee contends that, even granting that the "offer of
option" is not supported by any consideration, that option became binding on
appellant when the appellee gave notice to it of its acceptance, and that
having accepted it within the period of option, the offer can no longer be
withdrawn and in any event such withdrawal is ineffective. In support this
contention, appellee invokes article 1324 of the Civil Code which provides:

"ART. 1324. When the offerer has allowed the offeree a certain
period to accept, the offer may be withdrawn any time before
acceptance by communicating such withdrawal, except when
the option is founded upon consideration as something paid or
promised."

There is no question that under article 1479 of the new Civil Code "an option
to sell," or "a promise to buy or to sell," as used in said article, to be valid
must be "supported by a consideration distinct from the price." This is clearly
inferred from the context of said article that a unilateral promise to buy or to

29
 sell, even if accepted, is only binding if supported by consideration. In other
words, "an accepted unilateral promise can only have a binding effect if
supported by a consideration which means that the option can still be
withdrawn, even if accepted, if the same is not supported by any
consideration. It is not disputed that the option is without consideration. It
can therefore be withdrawn notwithstanding the acceptance of it by appellee.

It is true that under article 1324 of the new Civil Code, the general rule
regarding offer and acceptance is that, when the offerer gives to the offeree
a certain period to accept, "the offer may be withdrawn at any time before
acceptance" except when the option is founded upon consideration, but this
general rule must be interpreted as modified by the provision of article 1479
above referred to, which applies to "a promise to buy and sell" specifically.
As already stated, this rule requires that a promise to sell to be valid must be
supported by a consideration distinct from the price.

We are not oblivious of the existence of American authorities which hold

that an offer, once accepted, cannot be withdrawn, regardless of whether it is
supported or not by a consideration (12 Am. Jur. 528). These authorities, we
note, uphold the general rule applicable to offer and acceptance as contained
in our new Civil Code. But we are prevented from applying them in view of
the specific provision embodied in article 1479. While under the "offer of
option" in question appellant has assumed a clear obligation to sell its barge
to appellee and the option has been exercised in accordance with its terms,
and there appears to be no valid or justifiable reason for appellant to
withdraw its offer, this Court cannot adopt a different attitude because the
law on the matter is clear. Our imperative duty is to apply it unless modified
by Congress.

However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua Hian
Tek, 8 decided later that Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific
Co., 9 saw no distinction between Articles 1324 and 1479 of the Civil Code and applied the
former where a unilateral promise to sell similar to the one sued upon here was involved,
treating such promise as an option which, although not binding as a contract in itself for
lack of a separate consideration, nevertheless generated a bilateral contract of purchase and
sale upon acceptance. Speaking through Associate Justice, later Chief Justice, Cesar
Bengzon, this Court said:

Furthermore, an option is unilateral: a promise to sell at the price fixed

whenever the offeree should decide to exercise his option within the specified
time. After accepting the promise and before he exercises his option, the
holder of the option is not bound to buy. He is free either to buy or not to buy
later. In this case, however, upon accepting herein petitioner's offer a bilateral
promise to sell and to buy ensued, and the respondent ipso facto assumed the
obligation of a purchaser. He did not just get the right subsequently to buy or
not to buy. It was not a mere option then; it was a bilateral contract of sale.

Lastly, even supposing that Exh. A granted an option which is not binding
for lack of consideration, the authorities hold that:

"If the option is given without a consideration, it is a mere offer

of a contract of sale, which is not binding until accepted. If,
however, acceptance is made before a withdrawal, it

30
 constitutes a binding contract of sale, even though the option
was not supported by a sufficient consideration. ... . (77 Corpus
Juris Secundum, p. 652. See also 27 Ruling Case Law 339 and
cases cited.)

"It can be taken for granted, as contended by the defendant, that

the option contract was not valid for lack of consideration. But
it was, at least, an offer to sell, which was accepted by letter,
and of the acceptance the offerer had knowledge before said
offer was withdrawn. The concurrence of both acts — the offer
and the acceptance — could at all events have generated a
contract, if none there was before (arts. 1254 and 1262 of the
Civil Code)." (Zayco vs. Serra, 44 Phil. 331.)

In other words, since there may be no valid contract without a cause or consideration, the
promisor is not bound by his promise and may, accordingly, withdraw it. Pending notice
of its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell
which, if accepted, results in a perfected contract of sale.

This view has the advantage of avoiding a conflict between Articles 1324 — on the general
principles on contracts — and 1479 — on sales — of the Civil Code, in line with the
cardinal rule of statutory construction that, in construing different provisions of one and
the same law or code, such interpretation should be favored as will reconcile or harmonize
said provisions and avoid a conflict between the same. Indeed, the presumption is that, in
the process of drafting the Code, its author has maintained a consistent philosophy or
position. Moreover, the decision in Southwestern Sugar & Molasses Co. v. Atlantic Gulf &
Pacific Co., 10 holding that Art. 1324 is modified by Art. 1479 of the Civil Code, in effect,
considers the latter as an exception to the former, and exceptions are not favored, unless
the intention to the contrary is clear, and it is not so, insofar as said two (2) articles are
concerned. What is more, the reference, in both the second paragraph of Art. 1479 and Art.
1324, to an option or promise supported by or founded upon a consideration, strongly
suggests that the two (2) provisions intended to enforce or implement the same principle.

Upon mature deliberation, the Court is of the considered opinion that it should, as it hereby
reiterates the doctrine laid down in the Atkins, Kroll & Co. case, and that, insofar as
inconsistent therewith, the view adhered to in the Southwestern Sugar & Molasses Co. case
should be deemed abandoned or modified.

WHEREFORE, the decision appealed from is hereby affirmed, with costs against
defendant-appellant Severina Rigos. It is so ordered.

Reyes, J.B.L., Makalintal, Zaldivar, Teehankee, Barredo and Makasiar, JJ., concur.

Castro, J., took no part.

Separate Opinions

ANTONIO, J., concurring:

I concur in the opinion of the Chief Justice.

I fully agree with the abandonment of the view previously adhered to in Southwestern
Sugar & Molasses Co. vs. Atlantic Gulf and Pacific Co., 1 which holds that an option to

31
sell can still be withdrawn, even if accepted, if the same is not supported by any
consideration, and the reaffirmance of the doctrine in Atkins, Kroll & Co., Inc. vs. Cua
Hian Tek, 2holding that "an option implies ... the legal obligation to keep the offer (to sell)
open for the time specified;" that it could be withdrawn before acceptance, if there was no
consideration for the option, but once the "offer to sell" is accepted, a bilateral promise to
sell and to buy ensues, and the offeree ipso facto assumes the obligations of a purchaser.
In other words, if the option is given without a consideration, it is a mere offer to sell,
which is not binding until accepted. If, however, acceptance is made before a withdrawal,
it constitutes a binding contract of sale. The concurrence of both acts — the offer and the
acceptance — could in such event generate a contract.

While the law permits the offeror to withdraw the offer at any time before acceptance even
before the period has expired, some writers hold the view, that the offeror can not exercise
this right in an arbitrary or capricious manner. This is upon the principle that an offer
implies an obligation on the part of the offeror to maintain in such length of time as to
permit the offeree to decide whether to accept or not, and therefore cannot arbitrarily
revoke the offer without being liable for damages which the offeree may suffer. A contrary
view would remove the stability and security of business transactions. 3

In the present case the trial court found that the "Plaintiff (Nicolas Sanchez) had offered
the sum of Pl,510.00 before any withdrawal from the contract has been made by the
Defendant (Severina Rigos)." Since Rigos' offer sell was accepted by Sanchez, before she
could withdraw her offer, a bilateral reciprocal contract — to sell and to buy — was
generated.

Separate Opinions

ANTONIO, J., concurring:

I concur in the opinion of the Chief Justice.

I fully agree with the abandonment of the view previously adhered to in Southwestern
Sugar & Molasses Co. vs. Atlantic Gulf and Pacific Co., 1 which holds that an option to
sell can still be withdrawn, even if accepted, if the same is not supported by any
consideration, and the reaffirmance of the doctrine in Atkins, Kroll & Co., Inc. vs. Cua
Hian Tek, 2holding that "an option implies ... the legal obligation to keep the offer (to sell)
open for the time specified;" that it could be withdrawn before acceptance, if there was no
consideration for the option, but once the "offer to sell" is accepted, a bilateral promise to
sell and to buy ensues, and the offeree ipso facto assumes the obligations of a purchaser.
In other words, if the option is given without a consideration, it is a mere offer to sell,
which is not binding until accepted. If, however, acceptance is made before a withdrawal,
it constitutes a binding contract of sale. The concurrence of both acts — the offer and the
acceptance — could in such event generate a contract.

While the law permits the offeror to withdraw the offer at any time before acceptance even
before the period has expired, some writers hold the view, that the offeror can not exercise
this right in an arbitrary or capricious manner. This is upon the principle that an offer
implies an obligation on the part of the offeror to maintain in such length of time as to
permit the offeree to decide whether to accept or not, and therefore cannot arbitrarily
revoke the offer without being liable for damages which the offeree may suffer. A contrary
view would remove the stability and security of business transactions. 3

32
In the present case the trial court found that the "Plaintiff (Nicolas Sanchez) had offered
the sum of Pl,510.00 before any withdrawal from the contract has been made by the
Defendant (Severina Rigos)." Since Rigos' offer sell was accepted by Sanchez, before she
could withdraw her offer, a bilateral reciprocal contract — to sell and to buy — was
generated.

[G.R. No. 116635. July 24, 1997]

CONCHITA NOOL and GAUDENCIO ALMOJERA, petitioner, vs. COURT OF

APPEALS, ANACLETO NOOL and EMILIA NEBRE, respondents.
A contract of repurchase arising out of a contract of sale where the seller did not have
any title to the property sold is not valid. Since nothing was sold, then there is also nothing
to repurchase.

Statement of the Case

This postulate is explained by this Court as it resolves this petition for review on
certiorari assailing the January 20, 1993 Decision[1] of Respondent Court of Appeals[2] in
CA-G.R. CV No. 36473, affirming the decision[3] of the trial court[4] which disposed as
follows:[5]
WHEREFORE, judgment is hereby rendered dismissing the complaint for no cause
of action, and hereby:
1. Declaring the private writing, Exhibit C, to be an option to sell, not
binding and considered validly withdrawn by the defendants for
want of consideration;
2. Ordering the plaintiffs to return to the defendants the sum
of P30,000.00 plus interest thereon at the legal rate, from the time
of filing of defendants counterclaim until the same is fully paid;

33
 3. Ordering the plaintiffs to deliver peaceful possession of the two
hectares mentioned in paragraph 7 of the complaint and in paragraph
31 of defendants answer (counterclaim);
4. Ordering the plaintiffs to pay reasonable rents on said two hectares
at P5,000.00 per annum or at P2,500.00 per cropping from the time
of judicial demand mentioned in paragraph 2 of the dispositive
portion of this decision, until the said two hectares shall have been
delivered to the defendants; and
5. To pay the costs.
SO ORDERED.

The Antecedent Facts

The facts, which appear undisputed by the parties, are narrated by the Court of Appeals
as follows:
Two (2) parcels of land are in dispute and litigated upon here. The first has an area
of 1 hectare . It was formerly owned by Victorino Nool and covered by Transfer
Certificate of Title No. T-74950. With an area of 3.0880 hectares, the other parcel
was previously owned by Francisco Nool under Transfer Certificate of Title No.
T-100945. Both parcels are situated in San Manuel, Isabela. The plaintiff spouses,
Conchita Nool and Gaudencio Almojera, now the appellants, seek recovery of the
aforementioned parcels of land from the defendants, Anacleto Nool, a younger
brother of Conchita, and Emilia Nebre, now the appellees.

In their complaint, plaintiff-appellants alleged inter alia that they are the owners of subject
parcels of land, and they bought the same from Conchitas other brothers, Victorino Nool
and Francisco Nool; that as plaintiffs were in dire need of money, they obtained a loan
from the Iligan Branch of the Development Bank of the Philippines, in Ilagan, Isabela,
secured by a real estate mortgage on said parcels of land, which were still registered in the
names of Victorino Nool and Francisco Nool, at the time, and for the failure of plaintiffs
to pay the said loan, including interest and surcharges, totaling P56,000.00, the mortgage
was foreclosed; that within the period of redemption, plaintiffs contacted defendant
Anacleto Nool for the latter to redeem the foreclosed properties from DBP, which the latter
did; and as a result, the titles of the two (2) parcels of land in question were transferred to
Anacleto Nool; that as part of their arrangement or understanding, Anacleto Nool agreed
to buy from the plaintiff Conchita Nool the two (2) parcels of land under controversy, for
a total price of P100,000.00, P30,000.00 of which price was paid to Conchita, and upon
payment of the balance of P14,000.00, plaintiffs were to regain possession of the two (2)
hectares of land, which amounts defendants failed to pay, and the same day the said
arrangement[6] was made; another covenant[7] was entered into by the parties, whereby
defendants agreed to return to plaintiffs the lands in question, at anytime the latter have the
necessary amount; that plaintiffs asked the defendants to return the same but despite the
intervention of the Barangay Captain of their place, defendants refused to return the said
parcels of land to plaintiffs; thereby impelling them (plaintiffs) to come to court for relief.

In their answer defendants-appellees theorized that they acquired the lands in

question from the Development Bank of the Philippines, through negotiated sale,
and were misled by plaintiffs when defendant Anacleto Nool signed the private
writing agreeing to return subject lands when plaintiffs have the money to redeem

34
 the same; defendant Anacleto having been made to believe, then, that his sister,
Conchita, still had the right to redeem the said properties.
The pivot of inquiry here, as aptly observed below, is the nature and significance
of the private document, marked Exhibit D for plaintiffs, which document has not
been denied by the defendants, as defendants even averred in their Answer that
they gave an advance payment of P30,000.00 therefor, and acknowledged that they
had a balance of P14,000.00 to complete their payment. On this crucial issue, the
lower court adjudged the said private writing (Exhibit D) as an option to sell not
binding upon and considered the same validly withdrawn by defendants for want
of consideration; and decided the case in the manner abovementioned.

There is no quibble over the fact that the two (2) parcels of land in dispute were mortgaged
to the Development Bank of the Philippines, to secure a loan obtained by plaintiffs from
DBP (Ilagan Branch), Ilagan, Isabela. For the non-payment of said loan, the mortgage was
foreclosed and in the process, ownership of the mortgaged lands was consolidated in DBP
(Exhibits 3 and 4 for defendants). After DBP became the absolute owner of the two parcels
of land, defendants negotiated with DBP and succeeded in buying the same. By virtue of
such sale by DBP in favor of defendants, the titles of DBP were cancelled and
corresponding Transfer Certificates of Title (Annexes C and D to the complaint) issued to
the dependants.[8]

It should be stressed that Manuel S. Mallorca, authorized officer of DBP, certified that
the one-year redemption period was from March 16, 1982 up to March 15, 1983 and that
the Mortgagors right of redemption was not exercised within this period.[9] Hence, DBP
became the absolute owner of said parcels of land for which it was issued new certificates
of title, both entered on May 23, 1983 by the Registry of Deeds for the Province of
Isabela.[10] About two years thereafter, on April 1, 1985, DBP entered into a Deed of
Conditional Sale[11] involving the same parcels of land with Private Respondent Anacleto
Nool as vendee. Subsequently, the latter was issued new certificates of title on February 8,
1988.[12]
The Court of Appeals ruled:[13]
WHEREFORE, finding no reversible error infirming it, the appealed Judgment is
hereby AFFIRMED in toto. No pronouncement as to costs.

The Issues

Petitioners impute to Respondent Court the following alleged errors:

1. The Honorable Court of Appeals, Second Division has misapplied the legal
import or meaning of Exhibit C in a way contrary to law and existing
jurisprudence in stating that it has no binding effect between the parties and
considered validly withdrawn by defendants-appellees for want of
consideration.
2. The Honorable Court of Appeals, Second Division has miserably failed to
give legal significance to the actual possession and cultivation and
appropriating exclusively the palay harvest of the two (2) hectares land
pending the payment of the remaining balance of fourteen thousand pesos
(P14,000.00) by defendants-appellees as indicated in Exhibit C.

35
 3. The Honorable Court of Appeals has seriously erred in affirming the decision
of the lower court by awarding the payment of rents per annum and the return
of P30,000.00 and not allowing the plaintiffs-appellants to re-acquire the four (4)
hectares, more or less upon payment of one hundred thousand pesos (P100,000.00)
as shown in Exhibit D.[14]

The Courts Ruling

The petition is bereft of merit.

First Issue: Are Exhibits C and D Valid and Enforceable?

The petitioner-spouses plead for the enforcement of their agreement with private
respondents as contained in Exhibits C and D, and seek damages for the latters alleged
breach thereof. In Exhibit C, which was a private handwritten document labeled by the
parties as Resibo ti Katulagan or Receipt of Agreement, the petitioners appear to have sold
to private respondents the parcels of land in controversy covered by TCT No. T-74950 and
TCT No. T-100945. On the other hand, Exhibit D, which was also a private handwritten
document in Ilocano and labeled as Kasuratan, private respondents agreed that Conchita
Nool can acquire back or repurchase later on said land when she has the money.[15]
In seeking to enforce her alleged right to repurchase the parcels of land, Conchita
(joined by her co-petitioner-husband) invokes Article 1370 of the Civil Code which
mandates that (i)f 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. Hence, petitioners
contend that the Court of Appeals erred in affirming the trial courts finding and conclusion
that said Exhibits C and D were not merely voidable but utterly void and inexistent.
We cannot sustain petitioners view. Article 1370 of the Civil Code is applicable only
to valid and enforceable contracts. The Regional Trial Court and the Court of Appeals
ruled that the principal contract of sale contained in Exhibit C and the auxilliary contract
of repurchase in Exhibit D are both void. This conclusion of the two lower courts appears
to find support in Dignos vs. Court of Appeals,[16] where the Court held:
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.
In the present case, it is clear that the sellers no longer had any title to the parcels of
land at the time of sale. Since Exhibit D, the alleged contract of repurchase, was dependent
on the validity of Exhibit C, it is itself void. A void contract cannot give rise to a valid
one.[17] Verily, Article 1422 of the Civil Code provides that (a) contract which is the direct
result of a previous illegal contract, is also void and inexistent.
We should however add that Dignos did not cite its basis for ruling that a sale is null
and void where the sellers were no longer the owners of the property. Such a situation
(where the sellers were no longer owners) does not appear to be one of the void contracts
enumerated in Article 1409 of the Civil Code.[18] Moreover, the Civil Code[19] itself
recognizes a sale where the goods are to be acquired x x x by the seller after the perfection
of the contract of sale, clearly implying that a sale is possible even if the seller was not the
owner at the time of sale, provided he acquires title to the property later on.
In the present case however, it is likewise clear that the sellers can no longer deliver
the object of the sale to the buyers, as the buyers themselves have already acquired title

36
and delivery thereof from the rightful owner, the DBP. Thus, such contract may be deemed
to be inoperative[20] and may thus fall, by analogy, under item no. 5 of Article 1409 of the
Civil Code: Those which contemplate an impossible service. Article 1459 of the Civil
Code provides that the vendor must have a right to transfer the ownership thereof [object
of the sale] at the time it is delivered. Here, delivery of ownership is no longer possible. It
has become impossible.
Furthermore, Article 1505 of the Civil Code provides that where goods are sold by a
person who is not the owner thereof, and who does not sell them under authority or with
consent of the owner, the buyer acquires no better title to the goods than the seller had,
unless the owner of the goods is by his conduct precluded from denying the sellers authority
to sell. Here, there is no allegation at all that petitioners were authorized by DBP to sell the
property to the private respondents. Jurisprudence, on the other hand, teaches us that a
person can sell only what he owns or is authorized to sell; the buyer can as a consequence
acquire no more than what the seller can legally transfer.[21] No one can give what he does
not have neno dat quod non habet. On the other hand, Exhibit D presupposes that
petitioners could repurchase the property that they sold to private respondents. As
petitioners sold nothing, it follows that they can also repurchase nothing. Nothing sold,
nothing to repurchase. In this light, the contract of repurchase is also inoperative and by
the same analogy, void.

Contract of Repurchase
Dependent on Validity of Sale

As borne out by the evidence on record, the private respondents bought the two parcels
of land directly from DBP on April 1, 1985 after discovering that petitioners did not own
said property, the subject of Exhibits C and D executed on November 30, 1984. Petitioners,
however, claim that they can exercise their alleged right to repurchase the property, after
private respondents had acquired the same from DBP.[22] We cannot accede to this, for it
clearly contravenes the intention of the parties and the nature of their agreement. Exhibit
D reads:

WRITING

Nov. 30, 1984

That I, Anacleto Nool have bought from my sister Conchita Nool a land an area of
four hectares (4 has.) in the value of One Hundred Thousand (100,000.00) Pesos. It
is our agreement as brother and sister that she can acquire back or repurchase later
on said land when she has the money. [Underscoring supplied]
As proof of this agreement we sign as brother and sister this written document this
day of Nov. 30, 1984, at District 4, San Manuel, Isabela.
Sgd ANACLETO NOOL
Anacleto Nool
Sgd Emilio Paron
Witness

Sgd Conchita Nool

37
Conchita Nool[23]

One repurchases only what one has previously sold. In other words, the right to
repurchase presupposes a valid contract of sale between the same parties. Undisputedly,
private respondents acquired title to the property from DBP, and not from the petitioners.
Assuming arguendo that Exhibit D is separate and distinct from Exhibit C and is not
affected by the nullity of the latter, still petitioners do not thereby acquire a right to
repurchase the property. In that scenario, Exhibit D ceases to be a right to repurchase
ancillary and incidental to the contract of sale; rather, it becomes an accepted unilateral
promise to sell. Article 1479 of the Civil Code, however, provides that an accepted
unilateral promise to buy or sell a determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration distinct from the price. In the
present case, the alleged written contract of repurchase contained in Exhibit D is bereft of
any consideration distinct from the price. Accordingly, as an independent contract, it
cannot bind private respondents. The ruling in Diamante vs. CA[24] supports this. In that
case, the Court through Mr. Justice Hilario G. Davide, Jr. explained:

Article 1601 of the Civil Code provides:

Conventional redemption shall take place when the vendor reserves the
right to repurchase the thing sold, with the obligation to comply with the
provisions of article 1616 and other stipulations which may have been
agreed upon.
In Villarica, et al. Vs. Court of Appeals, et al., decided on 29 November
1968, or barely seven (7) days before the respondent Court promulgated its
decisions in this case, this Court, interpreting the above Article, held:
The right of repurchase is not a right granted the vendor by the vendee in a
subsequent instrument, but is a right reserved by the vendor in the same
instrument of sale as one of the stipulations of the contract. Once the
instrument of absolute sale is executed, the vendor can not longer reserve
the right to repurchase, and any right thereafter granted the vendor by the
vendee in a separate instrument cannot be a right of repurchase but some
other right like the option to buy in the instant case. x x x.
In the earlier case of Ramos, et al. vs. Icasiano, et al., decided in 1927, this
Court had already ruled that an agreement to repurchase becomes a
promise to sell when made after the sale, because when the sale is made
without such an agreement, the purchaser acquires the thing sold
absolutely, and if he afterwards grants the vendor the right to repurchase,
it is a new contract entered into by the purchaser, as absolute owner already
of the object. In that case the vendor has nor reserved to himself the right
to repurchase.
In Vda. De Cruzo, et al. vs. Carriaga, et al. this Court found another
occasion to apply the foregoing principle.
Hence, the Option to Repurchase executed by private respondent in the present
case, was merely a promise to sell, which must be governed by Article 1479 of the
Civil Code which reads as follows:
Art. 1479. A promise to buy and sell a determinate thing for a price certain
is reciprocally demandable.

38
 An accepted unilateral promise to buy or to sell a determinate thing for a
price certain is binding upon the promissor if the promise is supported by
a consideration distinct from the price.

Right to Repurchase Based on

Homestead or Trust Non-Existent

Petitioners also base their alleged right to repurchase on (1) Sec. 119 of the Public
Land Act[25] and (2) an implied trust relation as brother and sister.[26]
The Court notes that Victorino Nool and Francisco Nool mortgaged the land to
DBP. The brothers, together with Conchita Nool and Anacleto Nool, were all siblings and
heirs qualified to repurchase the two parcels of land under Sec. 119 of the Public Land Act
which provides that (e)very conveyance of land acquired under the free patent or
homestead provisions, when proper, shall be subject to repurchase by the applicant, his
widow or legal heirs, within a period of five years from the date of conveyance.Assuming
the applicability of this statutory provision to the case at bar, it is indisputable that Private
Respondent Anacleto Nool already repurchased from DBP the contested properties. Hence,
there was no more right of repurchase that his sister Conchita or brothers Victorino and
Francisco could exercise. The properties were already owned by an heir of the homestead
grantee and the rationale of the of the provision to keep homestead lands within the family
of the grantee was thus fulfilled.[27]
The claim of a trust relation is likewise without merit. The records show that private
respondents did not purchase the contested properties from DBP in trust for petitioners.The
former, as previously mentioned, in fact bought the land from DBP upon realization that
the latter could not validly sell the same. Obviously, petitioners bought it for
themselves. There is no evidence at all in the records that they bought the land in trust for
private respondents. The fact that Anacleto Nool was the younger brother of Conchita Nool
and that they signed a contract of repurchase, which as discussed earlier was void, does not
prove the existence of an implied trust in favor of petitioners.

Second Issue: No Estoppel in Impugning the

Validity of Void Contracts

Petitioners argue that when Anacleto Nool took the possession of the two hectares,
more or less, and let the other two hectares to be occupied and cultivated by plaintiffs-
appellants, Anacleto Nool cannot later on disclaim the terms or contions (sic) agreed upon
and his actuation is within the ambit of estoppel x x x.[28] We disagree. The private
respondents cannot be estopped from raising the defense of nullity of contract, specially in
this case where they acted in good faith, believing that indeed petitioners could sell the two
parcels of land in question. Article 1410 of the Civil Code mandates that (t)he action or
defense for the declaration of the inexistence of a contract does not prescribe. It is well-
settled doctrine that as between parties to a contract, validity cannot be given to it by
estoppel if it is prohibited by law or it is against public policy (19 Am. Jur. 802). It is not
within the competence of any citizen to barter away what public policy by law seeks to
preserve.[29] Thus, it is immaterial that private respondents initially acted to implement the
contract of sale, believing in good faith that the same was valid. We stress that a contract
void at inception cannot be validated by ratification or prescription and certainly cannot be
binding on or enforceable against private respondents.[30]

39
Third Issue: Return of P30,000.00 with Interest
and Payment of Rent

Petitioners further argue that it would be a miscarriage of justice to order them (1) to
return the sum of P30,000.00 to private respondents when allegedly it was Private
Respondent Anacleto Nool who owed the former a balance of P14,000.00 and (2) to order
petitioners to pay rent when they were allowed to cultivate the said two hectares.[31]
We are not persuaded. Based on the previous discussion, the balance of P14,000.00
under the void contract of sale may not be enforced. Petitioners are the ones who have an
obligation to return what they unduly and improperly received by reason of the invalid
contract of sale. Since they cannot legally give title to what they sold, they cannot keep the
money paid for the object of the sale. It is basic that (e)very person who through an act of
performance by another, or any other means, acquires or comes into possession of
something at the expense of the latter without just or legal ground, shall return the
same.[32] Thus, if a void contract has already been performed, the restoration of what has
been given is in order.[33] Corollarily and as aptly ordered by respondent appellate court,
interest thereon will run only from the time of private respondents demand for the return
of this amount in their counterclaim.[34] In the same vein, petitioners possession and
cultivation of the two hectares are anchored on private respondents tolerance.Clearly, the
latters tolerance ceased upon their counterclaim and demand on the former to
vacate. Hence, their right to possess and cultivate the land ipso facto ceased.
WHEREFORE, the petition is DENIED and the assailed Decision of the Court of
Appeals affirming that of the trial court is hereby AFFIRMED.
SO ORDERED.

[18]
Article 1409 of the Civil Code provides.
ART. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose case, object or purpose is contrary to law, morals, good customs, public
order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose case or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal obejct of the contract
cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality
be waived.
[19]
Article 1402. Civil Code.
[20]
Cf. Vitug, Compendium of Civil Law and Jurisprudence (1993), p. 547.
[21]
Segura vs. Segura, 165 SCRA 368, 374, September 19, 1988.
[24]
206 SCRA 52, 60-61, February 7, 1992.
[25]
Memorandum, p. 12; rollo, p. 56.
[26]
Ibid., p. 14; rollo, p. 58.
[27]
See Ferrer vs. Mangente, 50 SCRA 424, April 13, 1973.

40
[28]
Petition, pp. 12-13; rollo, pp. 13-14.
[29]
Prudential Bank vs. Panis, 153 SCRA 390, 398, August 31, 1987; citing
Arsenal vs. IAC, 143 SCRA 54, (1986) and Gonzalo Puyat & Sons, Inc. vs. De los
Amas and Alino, supra.
[30]
Tolentino, Arturo A., Commentaries and Jurisprudence on the Civil Code of the
Philippines, p. 633, Vol. IV, (1991).
[32]
Article 22, Civil Code of the Philippines.
[33]
Tolentino, supra, p. 632; citing Perez Gonzales & Alguer; 1-I Ennecerus, Kipp & Wolff
364-366; 3 Von Tuhr 311; 3 Fabres 231.

[G.R. No. 143513. November 14, 2001]

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, petitioner, vs. COURT

OF APPEALS and FIRESTONE CERAMICS, INC., respondents.

[G.R. No. 143590. November 14, 2001]

NATIONAL DEVELOPMENT CORPORATION, petitioner, vs. FIRESTONE

CERAMICS, INC., respondents.
A litigation is not simply a contest of litigants before the bar of public opinion; more
than that, it is a pursuit of justice through legal and equitable means. To prevent the search
for justice from evolving into a competition for public approval, society invests the
judiciary with complete independence thereby insulating it from demands expressed
through any medium, the press not excluded. Thus, if the court would merely reflect, and
worse, succumb to the great pressures of the day, the end result, it is feared, would be a
travesty of justice.
In the early sixties, petitioner National Development Corporation (NDC), a
government owned and controlled corporation created under CA 182 as amended by CA
311 and PD No. 668, had in its disposal a ten (10)-hectare property located along Pureza
St., Sta. Mesa, Manila. The estate was popularly known as the NDC compound and covered
by Transfer Certificates of Title Nos. 92885, 110301 and 145470.
Sometime in May 1965 private respondent Firestone Ceramics Inc. (FIRESTONE)
manifested its desire to lease a portion of the property for its ceramic manufacturing
business. On 24 August 1965 NDC and FIRESTONE entered into a contract of lease
denominated as Contract No. C-30-65 covering a portion of the property measured at
2.90118 hectares for use as a manufacturing plant for a term of ten (10) years, renewable

41
for another ten (10) years under the same terms and conditions.[1] In consequence of the
agreement, FIRESTONE constructed on the leased premises several warehouses and other
improvements needed for the fabrication of ceramic products.
Three and a half (3-1/2) years later, or on 8 January 1969, FIRESTONE entered into a
second contract of lease with NDC over the latter's four (4)-unit pre-fabricated reparation
steel warehouse stored in Daliao, Davao. FIRESTONE agreed to ship the warehouse to
Manila for eventual assembly within the NDC compound. The second contract,
denominated as Contract No. C-26-68, was for similar use as a ceramic manufacturing
plant and was agreed expressly to be "co-extensive with the lease of LESSEE with
LESSOR on the 2.60 hectare-lot."[2]
On 31 July 1974 the parties signed a similar contract concerning a six (6)-unit pre-
fabricated steel warehouse which, as agreed upon by the parties, would expire on 2
December 1978.[3]Prior to the expiration of the aforementioned contract, FIRESTONE
wrote NDC requesting for an extension of their lease agreement. Consequently on 29
November 1978 the Board of Directors of NDC adopted Resolution No. 11-78-117
extending the term of the lease, subject to several conditions among which was that in the
event NDC "with the approval of higher authorities, decide to dispose and sell these
properties including the lot, priority should be given to the LESSEE"[4] (underscoring
supplied). On 22 December 1978, in pursuance of the resolution, the parties entered into a
new agreement for a ten-year lease of the property, renewable for another ten (10) years,
expressly granting FIRESTONE the first option to purchase the leased premises in the
event that it decided "to dispose and sell these properties including the lot . . . . "[5]
The contracts of lease conspicuously contain an identically worded provision requiring
FIRESTONE to construct buildings and other improvements within the leased premises
worth several hundred thousands of pesos.[6]
The parties' lessor-lessee relationship went smoothly until early 1988 when
FIRESTONE, cognizant of the impending expiration of their lease agreement with NDC,
informed the latter through several letters and telephone calls that it was renewing its lease
over the property. While its letter of 17 March 1988 was answered by Antonio A. Henson,
General Manager of NDC, who promised immediate action on the matter, the rest of its
communications remained unacknowledged.[7] FIRESTONE's predicament worsened
when rumors of NDC's supposed plans to dispose of the subject property in favor of
petitioner Polytechnic University of the Philippines (PUP) came to its
knowledge. Forthwith, FIRESTONE served notice on NDC conveying its desire to
purchase the property in the exercise of its contractual right of first refusal.
Apprehensive that its interest in the property would be disregarded, FIRESTONE
instituted an action for specific performance to compel NDC to sell the leased property in
its favor.FIRESTONE averred that it was pre-empting the impending sale of the NDC
compound to petitioner PUP in violation of its leasehold rights over the 2.60-
hectare[8] property and the warehouses thereon which would expire in 1999. FIRESTONE
likewise prayed for the issuance of a writ of preliminary injunction to enjoin NDC from
disposing of the property pending the settlement of the controversy.[9]
In support of its complaint, FIRESTONE adduced in evidence a letter of Antonio A.
Henson dated 15 July 1988 addressed to Mr. Jake C. Lagonera, Director and Special
Assistant to Executive Secretary Catalino Macaraeg, reviewing a proposed memorandum
order submitted to then President Corazon C. Aquino transferring the whole NDC
compound, including the leased property, in favor of petitioner PUP. Attached to the letter
was a draft of the proposed memorandum order as well as a summary of existing leases on
the subject property. The survey listed FIRESTONE as lessee of a portion of the property,
placed at 29,000[10] square meters, whose contract with NDC was set to expire on 31
42
December 1989[11] renewable for another ten (10) years at the option of the lessee. The
report expressly recognized FIRESTONE's right of first refusal to purchase the leased
property "should the lessor decide to sell the same."[12]
Meanwhile, on 21 February 1989 PUP moved to intervene and asserted its interest in
the subject property, arguing that a "purchaser pendente lite of property which is subject of
a litigation is entitled to intervene in the proceedings."[13] PUP referred to Memorandum
Order No. 214 issued by then President Aquino ordering the transfer of the whole NDC
compound to the National Government, which in turn would convey the aforementioned
property in favor of PUP at acquisition cost. The issuance was supposedly made in
recognition of PUP's status as the "Poor Man's University" as well as its serious need to
extend its campus in order to accommodate the growing student population. The order of
conveyance of the 10.31-hectare property would automatically result in the cancellation of
NDC's total obligation in favor of the National Government in the amount
of P57,193,201.64.
Convinced that PUP was a necessary party to the controversy that ought to be joined
as party defendant in order to avoid multiplicity of suits, the trial court granted PUP's
motion to intervene. FIRESTONE moved for reconsideration but was denied. On
certiorari, the Court of Appeals affirmed the order of the trial court. FIRESTONE came to
us on review but in a Resolution dated 11 July 1990 we upheld PUP's inclusion as party-
defendant in the present controversy.
Following the denial of its petition, FIRESTONE amended its complaint to include
PUP and Executive Secretary Catalino Macaraeg, Jr., as party-defendants, and sought the
annulment of Memorandum Order No. 214. FIRESTONE alleged that
although Memorandum Order No. 214 was issued "subject to such liens/leases existing [on
the subject property]," PUP disregarded and violated its existing lease by increasing the
rental rate at P200,000.00 a month while demanding that it vacated the premises
immediately.[14] FIRESTONE prayed that in the event Memorandum Order No. 214 was
not declared unconstitutional, the property should be sold in its favor at the price for which
it was sold to PUP - P554.74 per square meter or for a total purchase price
of P14,423,240.00.[15]
Petitioner PUP, in its answer to the amended complaint, argued in essence that the
lease contract covering the property had expired long before the institution of the
complaint, and that further, the right of first refusal invoked by FIRESTONE applied solely
to the six-unit pre-fabricated warehouse and not the lot upon which it stood.
After trial on the merits, judgment was rendered declaring the contracts of lease
executed between FIRESTONE and NDC covering the 2.60-hectare property and the
warehouses constructed thereon valid and existing until 2 June 1999. PUP was ordered and
directed to sell to FIRESTONE the "2.6 hectare leased premises or as may be determined
by actual verification and survey of the actual size of the leased properties where plaintiff's
fire brick factory is located" at P1,500.00 per square meter considering that, as admitted by
FIRESTONE, such was the prevailing market price thereof.
The trial court ruled that the contracts of lease executed between FIRESTONE and
NDC were interrelated and inseparable because "each of them forms part of the integral
system of plaintiff's brick manufacturing plant x x x if one of the leased premises will be
taken apart or otherwise detached from the two others, the purpose of the lease as well as
plaintiff's business operations would be rendered useless and inoperative."[16] It thus
decreed that FIRESTONE could exercise its option to purchase the property until 2 June
1999 inasmuch as the 22 December 1978 contract embodied a covenant to renew the lease
for another ten (10) years at the option of the lessee as well as an agreement giving the
lessee the right of first refusal.
43
 The trial court also sustained the constitutionality of Memorandum Order No.
214 which was not per se hostile to FIRESTONE's property rights, but deplored as
prejudicial thereto the "very manner with which defendants NDC and PUP interpreted and
applied the same, ignoring in the process that plaintiff has existing contracts of lease
protectable by express provisions in the Memorandum No. 214 itself."[17] It further
explained that the questioned memorandum was issued "subject to such liens/leases
existing thereon"[18] and petitioner PUP was under express instructions "to enter, occupy
and take possession of the transferred property subject to such leases or liens and
encumbrances that may be existing thereon"[19] (underscoring supplied).
Petitioners PUP, NDC and the Executive Secretary separately filed their Notice of
Appeal, but a few days thereafter, or on 3 September 1996, perhaps realizing the
groundlessness and the futility of it all, the Executive Secretary withdrew his appeal.[20]
Subsequently, the Court of Appeals affirmed the decision of the trial court ordering the
sale of the property in favor of FIRESTONE but deleted the award of attorney's fees in the
amount of Three Hundred Thousand Pesos (P300,000.00). Accordingly, FIRESTONE was
given a grace period of six (6) months from finality of the court's judgment within which
to purchase the property in questioned in the exercise of its right of first refusal. The Court
of Appeals observed that as there was a sale of the subject property, NDC could not excuse
itself from its obligation TO OFFER THE PROPERTY FOR SALE FIRST TO
FIRESTONE BEFORE IT COULD TO OTHER PARTIES. The Court of Appeals
held: "NDC cannot look to Memorandum Order No. 214 to excuse or shield it from its
contractual obligations to FIRESTONE. There is nothing therein that allows NDC to
disavow or repudiate the solemn engagement that it freely and voluntarily undertook, or
agreed to undertake."[21]
PUP moved for reconsideration asserting that in ordering the sale of the property in
favor of FIRESTONE the courts a quo unfairly created a contract to sell between the
parties. It argued that the "court cannot substitute or decree its mind or consent for that of
the parties in determining whether or not a contract (has been) perfected between PUP and
NDC."[22] PUP further contended that since "a real property located in Sta. Mesa can
readily command a sum of P10,000.00 per square (meter)," the lower court gravely erred
in ordering the sale of the property at only P1,500.00 per square meter. PUP also advanced
the theory that the enactment of Memorandum Order No. 214 amounted to a withdrawal
of the option to purchase the property granted to FIRESTONE. NDC, for its part,
vigorously contended that the contracts of lease executed between the parties had expired
without being renewed by FIRESTONE; consequently, FIRESTONE was no longer
entitled to any preferential right in the sale or disposition of the leased property.
We do not see it the way PUP and NDC did. It is elementary that a party to a contract
cannot unilaterally withdraw a right of first refusal that stands upon valuable
consideration. That principle was clearly upheld by the Court of Appeals when it denied
on 6 June 2000 the twin motions for reconsideration filed by PUP and NDC on the ground
that the appellants failed to advance new arguments substantial enough to warrant a
reversal of the Decision sought to be reconsidered.[23] On 28 June 2000 PUP filed an urgent
motion for an additional period of fifteen (15) days from 29 June 2000 or until 14 July
2000 within which to file a Petition for Review on Certiorari of the Decision of the Court
of Appeals.
On the last day of the extended period PUP filed its Petition for Review on
Certiorari assailing the Decision of the Court of Appeals of 6 December 1999 as well as
the Resolution of 6 June 2000 denying reconsideration thereof. PUP raised two issues: (a)
whether the courts a quo erred when they "conjectured" that the transfer of the leased
property from NDC to PUP amounted to a sale; and, (b) whether FIRESTONE can

44
rightfully invoke its right of first refusal. Petitioner posited that if we were to place
our imprimatur on the decisions of the courts a quo, "public welfare or specifically the
constitutional priority accorded to education" would greatly be prejudiced.[24]
Paradoxically, our paramount interest in education does not license us, or any party for
that matter, to destroy the sanctity of binding obligations. Education may be prioritized for
legislative or budgetary purposes, but we doubt if such importance can be used to
confiscate private property such as FIRESTONE's right of first refusal.
On 17 July 2000 we denied PUP's motion for extension of fifteen (15) days within
which to appeal inasmuch as the aforesaid pleading lacked an affidavit of service of copies
thereof on the Court of Appeals and the adverse party, as well as written explanation for
not filing and serving the pleading personally.[25]
Accordingly, on 26 July 2000 we issued a Resolution dismissing PUP's Petition for
Review for having been filed out of time. PUP moved for reconsideration imploring a
resolution or decision on the merits of its petition. Strangely, about the same time, several
articles came out in the newspapers assailing the denial of the petition. The daily papers
reported that we unreasonably dismissed PUP's petition on technical grounds, affirming in
the process the decision of the trial court to sell the disputed property to the prejudice of
the government in the amount of P1,000,000,000.00.[26] Counsel for petitioner PUP,
alleged that the trial court and the Court of Appeals "have decided a question of substance
in a way definitely not in accord with law or jurisprudence."[27]
At the outset, let it be noted that the amount of P1,000,000,000.00 as reported in the
papers was way too exaggerated, if not fantastic. We stress that NDC itself sold the whole
10.31-hectare property to PUP at only P57,193,201.64 which represents NDC's obligation
to the national government that was, in exchange, written off. The price offered per square
meter of the property was pegged at P554.74. FIRESTONE's leased premises would
therefore be worth only P14,423,240.00. From any angle, this amount is certainly far below
the ballyhooed price of P1,000,000,000.00.
On 4 October 2000 we granted PUP's Motion for Reconsideration to give it a chance
to ventilate its right, if any it still had in the leased premises, thereby paving the way for a
reinstatement of its Petition for Review.[28] In its appeal, PUP took to task the courts a
quo for supposedly "substituting or decreeing its mind or consent for that of the parties
(referring to NDC and PUP) in determining whether or not a contract of sale was
perfected." PUP also argued that inasmuch as "it is the parties alone whose minds must
meet in reference to the subject matter and cause," it concluded that it was error for the
lower courts to have decreed the existence of a sale of the NDC compound thus allowing
FIRESTONE to exercise its right of first refusal.
On the other hand, NDC separately filed its own Petition for Review and advanced
arguments which, in fine, centered on whether or not the transaction between petitioners
NDC and PUP amounted to a sale considering that ownership of the property remained
with the government.[29] Petitioner NDC introduced the novel proposition that if the parties
involved are both government entities the transaction cannot be legally called a sale.
In due course both petitions were consolidated.[30]
We believe that the courts a quo did not hypothesize, much less conjure, the sale of the
disputed property by NDC in favor of petitioner PUP. Aside from the fact that the intention
of NDC and PUP to enter into a contract of sale was clearly expressed in the Memorandum
Order No. 214,[31] a close perusal of the circumstances of this case strengthens the theory
that the conveyance of the property from NDC to PUP was one of absolute sale, for a
valuable consideration, and not a mere paper transfer as argued by petitioners.

45
 A contract of sale, as defined in the Civil Code, is a contract where one of the parties
obligates himself to transfer the ownership of and to deliver a determinate thing to the other
or others who shall pay therefore a sum certain in money or its equivalent.[32] It is therefore
a general requisite for the existence of a valid and enforceable contract of sale that it be
mutually obligatory, i.e., there should be a concurrence of the promise of the vendor to sell
a determinate thing and the promise of the vendee to receive and pay for the property so
delivered and transferred. The Civil Code provision is, in effect, a "catch-all" provision
which effectively brings within its grasp a whole gamut of transfers whereby ownership of
a thing is ceded for a consideration.
Contrary to what petitioners PUP and NDC propose, there is not just one party involved
in the questioned transaction. Petitioners NDC and PUP have their respective charters and
therefore each possesses a separate and distinct individual personality.[33] The inherent
weakness of NDCs proposition that there was no sale as it was only the government which
was involved in the transaction thus reveals itself. Tersely put, it is not necessary to write
an extended dissertation on government owned and controlled corporations and their legal
personalities. Beyond cavil, a government owned and controlled corporation has a
personality of its own, distinct and separate from that of the government.[34] The
intervention in the transaction of the Office of the President through the Executive
Secretary did not change the independent existence of these entities. The involvement of
the Office of the President was limited to brokering the consequent relationship between
NDC and PUP. But the withdrawal of the appeal by the Executive Secretary is considered
significant as he knew, after a review of the records, that the transaction was subject to
existing liens and encumbrances, particularly the priority to purchase the leased premises
in favor of FIRESTONE.
True that there may be instances when a particular deed does not disclose the real
intentions of the parties, but their action may nevertheless indicate that a binding obligation
has been undertaken. Since the conduct of the parties to a contract may be sufficient to
establish the existence of an agreement and the terms thereof, it becomes necessary for the
courts to examine the contemporaneous behavior of the parties in establishing the existence
of their contract.
The preponderance of evidence shows that NDC sold to PUP the whole NDC
compound, including the leased premises, without the knowledge much less consent of
private respondent FIRESTONE which had a valid and existing right of first refusal.
All three (3) essential elements of a valid sale, without which there can be no sale, were
attendant in the "disposition" and "transfer" of the property from NDC to PUP - consent of
the parties, determinate subject matter, and consideration therefor.
Consent to the sale is obvious from the prefatory clauses of Memorandum Order No.
214 which explicitly states the acquiescence of the parties to the sale of the property -

WHEREAS, PUP has expressed its willingness to acquire said NDC properties and
NDC has expressed its willingness to sell the properties to PUP (underscoring
supplied).[35]

Furthermore, the cancellation of NDC's liabilities in favor of the National Government

in the amount of P57,193,201.64 constituted the "consideration" for the sale. As correctly
observed by the Court of Appeals-

The defendants-appellants' interpretation that there was a mere transfer, and not a sale,
apart from being specious sophistry and a mere play of words, is too strained and
hairsplitting. For it is axiomatic that every sale imposes upon the vendor the obligation to

46
transfer ownership as an essential element of the contract. Transfer of title or an agreement
to transfer title for a price paid, or promised to be paid, is the very essence of sale (Kerr &
Co. v. Lingad, 38 SCRA 524; Schmid & Oberly, Inc., v. RJL Martinez Fishing Corp., 166
SCRA 493). At whatever legal angle we view it, therefore, the inescapable fact remains
that all the requisites of a valid sale were attendant in the transaction between co-
defendants-appellants NDC and PUP concerning the realities subject of the present suit.[36]

What is more, the conduct of petitioner PUP immediately after the transaction is in
itself an admission that there was a sale of the NDC compound in its favor. Thus, after the
issuance of Memorandum Order No. 214 petitioner PUP asserted its ownership over the
property by posting notices within the compound advising residents and occupants to
vacate the premises.[37] In its Motion for Intervention petitioner PUP also admitted that its
interest as a "purchaser pendente lite" would be better protected if it was joined as party-
defendant in the controversy thereby confessing that it indeed purchased the property.
In light of the foregoing disquisition, we now proceed to determine whether
FIRESTONE should be allowed to exercise its right of first refusal over the property. Such
right was expressly stated by NDC and FIRESTONE in par. XV of their third contract
denominated as A-10-78 executed on 22 December 1978 which, as found by the courts a
quo, was interrelated to and inseparable from their first contract denominated as C-30-65
executed on 24 August 1965 and their second contract denominated as C-26-68 executed
on 8 January 1969. Thus -

Should the LESSOR desire to sell the leased premises during the term of this Agreement,
or any extension thereof, the LESSOR shall first give to the LESSEE, which shall have
the right of first option to purchase the leased premises subject to mutual agreement of
both parties.[38]

In the instant case, the right of first refusal is an integral and indivisible part of the
contract of lease and is inseparable from the whole contract. The consideration for the right
is built into the reciprocal obligations of the parties. Thus, it is not correct for petitioners
to insist that there was no consideration paid by FIRESTONE to entitle it to the exercise
of the right, inasmuch as the stipulation is part and parcel of the contract of lease making
the consideration for the lease the same as that for the option.
It is a settled principle in civil law that when a lease contract contains a right of first
refusal, the lessor is under a legal duty to the lessee not to sell to anybody at any price until
after he has made an offer to sell to the latter at a certain price and the lessee has failed to
accept it.[39] The lessee has a right that the lessor's first offer shall be in his favor.
The option in this case was incorporated in the contracts of lease by NDC for the
benefit of FIRESTONE which, in view of the total amount of its investments in the
property, wanted to be assured that it would be given the first opportunity to buy the
property at a price for which it would be offered. Consistent with their agreement, it was
then implicit for NDC to have first offered the leased premises of 2.60 hectares to
FIRESTONE prior to the sale in favor of PUP. Only if FIRESTONE failed to exercise its
right of first priority could NDC lawfully sell the property to petitioner PUP.
It now becomes apropos to ask whether the courts a quo were correct in fixing the
proper consideration of the sale at P1,500.00 per square meter. In contracts of sale, the
basis of the right of first refusal must be the current offer of the seller to sell or the offer to
purchase of the prospective buyer. Only after the lessee-grantee fails to exercise its right
under the same terms and within the period contemplated can the owner validly offer to
sell the property to a third person, again, under the same terms as offered to the
grantee.[40] It appearing that the whole NDC compound was sold to PUP for P554.74 per

47
square meter, it would have been more proper for the courts below to have ordered the sale
of the property also at the same price. However, since FIRESTONE never raised this as an
issue, while on the other hand it admitted that the value of the property stood at P1,500.00
per square meter, then we see no compelling reason to modify the holdings of the courts a
quo that the leased premises be sold at that price.
Our attention is invited by petitioners to Ang Yu Asuncion v. CA[41] in concluding that
if our holding in Ang Yu would be applied to the facts of this case then FIRESTONE's
"option, if still subsisting, is not enforceable," the option being merely a preparatory
contract which cannot be enforced.
The contention has no merit. At the heels of Ang Yu came Equatorial Realty
Development, Inc., v. Mayfair Theater, Inc.,[42] where after much deliberation we declared,
and so we hold, that a right of first refusal is neither "amorphous nor merely preparatory"
and can be enforced and executed according to its terms. Thus, in Equatorial we ordered
the rescission of the sale which was made in violation of the lessee's right of first refusal
and further ordered the sale of the leased property in favor of Mayfair Theater, as grantee
of the right. Emphatically, we held that "(a right of first priority) should be enforced
according to the law on contracts instead of the panoramic and indefinite rule on human
relations." We then concluded that the execution of the right of first refusal consists in
directing the grantor to comply with his obligation according to the terms at which he
should have offered the property in favor of the grantee and at that price when the offer
should have been made.
One final word. Petitioner PUP should be cautioned against bidding for public
sympathy by bewailing the dismissal of its petition before the press. Such advocacy is not
likely to elicit the compassion of this Court or of any court for that matter. An entreaty for
a favorable disposition of a case not made directly through pleadings and oral arguments
before the courts do not persuade us, for as judges, we are ruled only by our forsworn duty
to give justice where justice is due.
WHEREFORE, the petitions in G.R. No. 143513 and G.R. No. 143590 are
DENIED. Inasmuch as the first contract of lease fixed the area of the leased premises at
2.90118 hectares while the second contract placed it at 2.60 hectares, let a ground survey
of the leased premises be immediately conducted by a duly licensed, registered surveyor at
the expense of private respondent FIRESTONE CERAMICS, INC., within two (2) months
from finality of the judgment in this case. Thereafter, private respondent FIRESTONE
CERAMICS, INC., shall have six (6) months from receipt of the approved survey within
which to exercise its right to purchase the leased property at P1,500.00 per square meter,
and petitioner Polytechnic University of the Philippines is ordered to reconvey the property
to FIRESTONE CERAMICS, INC., in the exercise of its right of first refusal upon payment
of the purchase price thereof.
SO ORDERED.

48
G.R. No. L-7382 June 29, 1955

SOUTHWESTERN SUGAR AND MOLASSES COMPANY, plaintiff-appellee,

vs.
ATLANTIC GULF & PACIFIC COMPANY, defendant-appellant.

This is an action for specific performance.

On March 24, 19 53, the Atlantic Gulf & Pacific Company of Manila, hereafter called
Atlantic Gulf for short, granted an option to Southwestern Sugar & Molasses Co. (Far East)
Inc., hereafter called Southwestern Company, to buy its barge No. 10 for the sum of
P30,000 to be exercised within a period of ninety days.

On May 11, 1953, the Southwestern Company wrote to Atlantic Gulf advising the latter
that it wanted "to exercise our option at your earliest convenience" and requested that it be
notified as soon as the barge was available.

On May 12, 1953, the Atlantic Gulf replied stating that their understanding was that the
"offer of option" is to be a cash transaction and to be effected "at the time the lighter is
available", and, on June 25, 1953, reiterating the unavailability of the barge, it further
advised the Southwestern Company that since there is still further work for it, and as this
situation still applies" the barge could not be turned over to the latter company.

On June 27, 1953, in view if such vacillating attitude, the Southwestern Company instituted
the present action to compel the Atlantic Gulf to sell the barge in line with the option,
depositing with the court a check covering the sum of P30,000. This check however was
later withdrawn with the approval of the court.

On June 29, 1953, the Atlantic Gulf withdraw its "offer of option" with due notices to the
Southwestern Company stating as reason therefor that the option was granted merely as a
favor. The Atlantic Gulf set up as a defense the option to sell made by it to the Southwestern
Company is null and void because it is not supported by any consideration.

49
After due trial, the lower court rendered judgment granting plaintiff's prayer for specific
performance. It further ordered the defendant to pay damages in an amount equivalent to 6
per centum per annum on the sum of P30,000 from the date of the filing of the complaint,
and to pay the sum of P600 as attorney's fees, plus the costs of action.

The case before us on the assertion that the only issue involved is one of law.

The option granted by appellant to appellee is contained in a letter dated March 24, 1953
which reads as follows:

March 24, 1953

Southwestern Sugar & Molasses Co. Far East, Inc.

145 Muelle de Binondo
Manila, Philippines
Gentlemen:

This is to confirm our conversion of today whereby we offer you our Barge No. 10,
which is 120' 00" long by 44"-0 wide and 9'-0" deep, for the sum of of P30,000.
Barge to cleaned of creosote and fuel oil.

This option is to be good for ninety (90) days, or until June 30, 1953.

Yours very truly,

ATLANTIC, GULF & PACIFIC CO. OF

MANILA
(Sgd.) W. H. SCHOENING

The main contention of appellant is that the option granted to appellee to sell to it barge
No. 10 for the sum of P30,000 under the terms stated above has no legal effect because it
is not supported by any consideration and in support thereof it invokes article 1479 of the
new Civil Code. This article provides:

ART. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.

An accepted unilateral promise to buy or sell a determinate thing for a price certain
is binding upon the promisor if the promise is supported by a consideration distinct
from the price.

On the other hand, appellee contends that, even granting that the "offer of option" is not
supported by any consideration, that option became binding on appellant when the appellee
gave notice to its acceptance, and that having accepted it within the period of option, the
offer can no longer be withdrawn and in any event such withdrawal is ineffective. In
support of this contention, appellee invokes article 1324 of the Civil Code which provides:

ART. 1324. When the offerer has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon consideration, as something
paid or promised.

50
There is no question that under article 1479 of the new Civil Code "an option to sell", or a
"promise to buy or to sell", as used in said article, to be valid must be "supported by a
consideration distinct from the price." This is clearly inferred from the context of said
article that a unilateral promise to buy or sell, even if accepted, is only binding if supported
by a consideration. In other words, "an accepted unilateral promise" can only have a
binding effect if supported by a consideration, which means that the option can still be
withdrawn, even if accepted, if the same is not supported by any consideration. Here it is
not disputed that the option is without consideration. It can therefore be withdrawn
notwithstanding the acceptance made of it by appellee.

It is true that under article 1324 of the new Civil Code, the general rule regarding offer and
acceptance is that, when the offerer gives to the offeree a certain period to accept, "the offer
may be withdrawn at any time before acceptance" except when the option is founded upon
consideration, but this general rule must be interpreted as modified by the provision of
article 1479 above referred to, which applies to "a promise to buy and sell" specifically. As
already stated, this rule requires that a promise to sell to be valid must be supported by a
consideration distinct from the price.

We are not oblivious of the existence of American authorities which hold that an offer,
once accepted, cannot be withdrawn, regardless of whether it is supported or not by a
consideration (12 Am. Jur. 528). These authorities, we note, uphold the general
rule applicable to offer and acceptance as contained in our new Civil Code. But we are
prevented from applying them in view of the specific provision embodied in article 1479.
While under the "offer of option" in question appellant has assumed a clear obligation to
sell its barge to appellee and the option has been exercised in accordance with its terms,
and there appears to be no valid or justifiable reason for appellant to withdraw its offer,
this Court cannot adopt a different attitude because the law on the matter is clear. Our
imperative duty is to apply it unless modified by Congress.

Wherefore, the decision appealed from is reversed, without pronouncement as to costs.

51
G.R. No. 106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO &

BAUERMANN, INC., petitioners,
vs.
MAYFAIR THEATER, INC., respondent.

Before us is a petition for review of the decision 1 of the Court of

Appeals 2 involving questions in the resolution of which the respondent appellate
court analyzed and interpreted particular provisions of our laws on contracts and
sales. In its assailed decision, the respondent court reversed the trial court 3 which,
in dismissing the complaint for specific performance with damages and annulment
of contract, 4found the option clause in the lease contracts entered into by private
respondent Mayfair Theater, Inc. (hereafter, Mayfair) and petitioner Carmelo &
Bauermann, Inc. (hereafter, Carmelo) to be impossible of performance and
unsupported by a consideration and the subsequent sale of the subject property to
petitioner Equatorial Realty Development, Inc. (hereafter, Equatorial) to have been
made without any breach of or prejudice to, the said lease contracts. 5

We reproduce below the facts as narrated by the respondent court, which narration,
we note, is almost verbatim the basis of the statement of facts as rendered by the
petitioners in their pleadings:

Carmelo owned a parcel of land, together with two 2-storey buildings

constructed thereon located at Claro M Recto Avenue, Manila, and covered
by TCT No. 18529 issued in its name by the Register of Deeds of Manila.

On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for
the latter's lease of a portion of Carmelo's property particularly described, to
wit:
52
 A PORTION OF THE SECOND FLOOR of the two-storey
building, situated at C.M. Recto Avenue, Manila, with a floor
area of 1,610 square meters.

THE SECOND FLOOR AND MEZZANINE of the two-storey

building, situated at C.M. Recto Avenue, Manila, with a floor
area of 150 square meters.

for use by Mayfair as a motion picture theater and for a term of twenty (20)
years. Mayfair thereafter constructed on the leased property a movie house
known as "Maxim Theatre."

Two years later, on March 31, 1969, Mayfair entered into a second contract
of lease with Carmelo for the lease of another portion of Carmelo's property,
to wit:

A PORTION OF THE SECOND FLOOR of the two-storey

building, situated at C.M. Recto Avenue, Manila, with a floor
area of 1,064 square meters.

THE TWO (2) STORE SPACES AT THE GROUND FLOOR

and MEZZANINE of the two-storey building situated at C.M.
Recto Avenue, Manila, with a floor area of 300 square meters
and bearing street numbers 1871 and 1875,

for similar use as a movie theater and for a similar term of twenty (20) years.
Mayfair put up another movie house known as "Miramar Theatre" on this
leased property.

Both contracts of lease provides (sic) identically worded paragraph 8, which

reads:

That if the LESSOR should desire to sell the leased premises,

the LESSEE shall be given 30-days exclusive option to
purchase the same.

In the event, however, that the leased premises is sold to

someone other than the LESSEE, the LESSOR is bound and
obligated, as it hereby binds and obligates itself, to stipulate in
the Deed of Sale hereof that the purchaser shall recognize this
lease and be bound by all the terms and conditions thereof.

Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr.

Henry Yang, President of Mayfair, through a telephone conversation that
Carmelo was desirous of selling the entire Claro M. Recto property. Mr.
Pascal told Mr. Yang that a certain Jose Araneta was offering to buy the
whole property for US Dollars 1,200,000, and Mr. Pascal asked Mr. Yang if
the latter was willing to buy the property for Six to Seven Million Pesos.

Mr. Yang replied that he would let Mr. Pascal know of his decision. On
August 23, 1974, Mayfair replied through a letter stating as follows:

53
 It appears that on August 19, 1974 your Mr. Henry Pascal
informed our client's Mr. Henry Yang through the telephone
that your company desires to sell your above-mentioned C.M.
Recto Avenue property.

Under your company's two lease contracts with our client, it is

uniformly provided:

8. That if the LESSOR should desire to sell the leased premises

the LESSEE shall be given 30-days exclusive option to
purchase the same. In the event, however, that the leased
premises is sold to someone other than the LESSEE, the
LESSOR is bound and obligated, as it is (sic) herebinds (sic)
and obligates itself, to stipulate in the Deed of Sale thereof that
the purchaser shall recognize this lease and be bound by all the
terms and conditions hereof (sic).

Carmelo did not reply to this letter.

On September 18, 1974, Mayfair sent another letter to Carmelo purporting

to express interest in acquiring not only the leased premises but "the entire
building and other improvements if the price is reasonable. However, both
Carmelo and Equatorial questioned the authenticity of the second letter.

Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue
land and building, which included the leased premises housing the "Maxim"
and "Miramar" theatres, to Equatorial by virtue of a Deed of Absolute Sale,
for the total sum of P11,300,000.00.

In September 1978, Mayfair instituted the action a quo for specific

performance and annulment of the sale of the leased premises to Equatorial.
In its Answer, Carmelo alleged as special and affirmative defense (a) that it
had informed Mayfair of its desire to sell the entire C.M. Recto Avenue
property and offered the same to Mayfair, but the latter answered that it was
interested only in buying the areas under lease, which was impossible since
the property was not a condominium; and (b) that the option to purchase
invoked by Mayfair is null and void for lack of consideration. Equatorial, in
its Answer, pleaded as special and affirmative defense that the option is void
for lack of consideration (sic) and is unenforceable by reason of its
impossibility of performance because the leased premises could not be sold
separately from the other portions of the land and building. It counterclaimed
for cancellation of the contracts of lease, and for increase of rentals in view
of alleged supervening extraordinary devaluation of the currency. Equatorial
likewise cross-claimed against co-defendant Carmelo for indemnification in
respect of Mayfair's claims.

During the pre-trial conference held on January 23, 1979, the parties
stipulated on the following:

1. That there was a deed of sale of the contested premises by

the defendant Carmelo . . . in favor of defendant Equatorial . .
.;

54
 2. That in both contracts of lease there appear (sic) the
stipulation granting the plaintiff exclusive option to purchase
the leased premises should the lessor desire to sell the same
(admitted subject to the contention that the stipulation is null
and void);

3. That the two buildings erected on this land are not of the
condominium plan;

4. That the amounts stipulated and mentioned in paragraphs 3

(a) and (b) of the contracts of lease constitute the consideration
for the plaintiff's occupancy of the leased premises, subject of
the same contracts of lease, Exhibits A and B;

xxx xxx xxx

6. That there was no consideration specified in the option to

buy embodied in the contract;

7. That Carmelo & Bauermann owned the land and the two
buildings erected thereon;

8. That the leased premises constitute only the portions actually

occupied by the theaters; and

9. That what was sold by Carmelo & Bauermann to defendant

Equatorial Realty is the land and the two buildings erected
thereon.

xxx xxx xxx

After assessing the evidence, the court a quo rendered the appealed decision,
the decretal portion of which reads as follows:

WHEREFORE, judgment is hereby rendered:

(1) Dismissing the complaint with costs against the plaintiff;

(2) Ordering plaintiff to pay defendant Carmelo & Bauermann

P40,000.00 by way of attorney's fees on its counterclaim;

(3) Ordering plaintiff to pay defendant Equatorial Realty

P35,000.00 per month as reasonable compensation for the use
of areas not covered by the contract (sic) of lease from July 31,
1979 until plaintiff vacates said area (sic) plus legal interest
from July 31, 1978; P70,000 00 per month as reasonable
compensation for the use of the premises covered by the
contracts (sic) of lease dated (June 1, 1967 from June 1, 1987
until plaintiff vacates the premises plus legal interest from June
1, 1987; P55,000.00 per month as reasonable compensation for
the use of the premises covered by the contract of lease dated
March 31, 1969 from March 30, 1989 until plaintiff vacates the

55
 premises plus legal interest from March 30, 1989; and
P40,000.00 as attorney's fees;

(4) Dismissing defendant Equatorial's crossclaim against

defendant Carmelo & Bauermann.

The contracts of lease dated June 1, 1967 and March 31, 1969
are declared expired and all persons claiming rights under these
contracts are directed to vacate the premises. 6

The trial court adjudged the identically worded paragraph 8 found in both aforecited
lease contracts to be an option clause which however cannot be deemed to be
binding on Carmelo because of lack of distinct consideration therefor.

The court a quo ratiocinated:

Significantly, during the pre-trial, it was admitted by the parties that the
option in the contract of lease is not supported by a separate consideration.
Without a consideration, the option is therefore not binding on defendant
Carmelo & Bauermann to sell the C.M. Recto property to the former. The
option invoked by the plaintiff appears in the contracts of lease . . . in effect
there is no option, on the ground that there is no consideration. Article 1352
of the Civil Code, provides:

Contracts without cause or with unlawful cause, produce no

effect whatever. The cause is unlawful if it is contrary to law,
morals, good custom, public order or public policy.

Contracts therefore without consideration produce no effect whatsoever.

Article 1324 provides:

When the offeror has allowed the offeree a certain period to

accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except when
the option is founded upon consideration, as something paid or
promised.

in relation with Article 1479 of the same Code:

A promise to buy and sell a determine thing for a price certain

is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determine

thing for a price certain is binding upon the promissor if the
promise is supported by a consideration distinct from the price.

The plaintiff cannot compel defendant Carmelo to comply with the promise
unless the former establishes the existence of a distinct consideration. In
other words, the promisee has the burden of proving the consideration. The
consideration cannot be presumed as in Article 1354:

Although the cause is not stated in the contract, it is presumed

that it exists and is lawful unless the debtor proves the contrary.

56
 where consideration is legally presumed to exists. Article 1354 applies to
contracts in general, whereas when it comes to an option it is governed
particularly and more specifically by Article 1479 whereby the promisee has
the burden of proving the existence of consideration distinct from the price.
Thus, in the case of Sanchez vs. Rigor, 45 SCRA 368, 372-373, the Court
said:

(1) Article 1354 applies to contracts in general, whereas the

second paragraph of Article 1479 refers to sales in particular,
and, more specifically, to an accepted unilateral promise to buy
or to sell. In other words, Article 1479 is controlling in the case
at bar.

(2) In order that said unilateral promise may be binding upon

the promissor, Article 1479 requires the concurrence of a
condition, namely, that the promise be supported by a
consideration distinct from the price.

Accordingly, the promisee cannot compel the promissor to

comply with the promise, unless the former establishes the
existence of said distinct consideration. In other words, the
promisee has the burden of proving such consideration.
Plaintiff herein has not even alleged the existence thereof in his
complaint. 7

It follows that plaintiff cannot compel defendant Carmelo & Bauermann to

sell the C.M. Recto property to the former.

Mayfair taking exception to the decision of the trial court, the battleground shifted
to the respondent Court of Appeals. Respondent appellate court reversed the court a
quo and rendered judgment:

1. Reversing and setting aside the appealed Decision;

2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return to

Equatorial the amount of P11,300,000.00 within fifteen (15) days from notice
of this Decision, and ordering Equatorial Realty Development, Inc. to accept
such payment;

3. Upon payment of the sum of P11,300,000, directing Equatorial Realty

Development, Inc. to execute the deeds and documents necessary for the
issuance and transfer of ownership to Mayfair of the lot registered under TCT
Nos. 17350, 118612, 60936, and 52571; and

4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the

amount as adjudged, declaring the Deed of Absolute Sale between the
defendants-appellants Carmelo & Bauermann, Inc. and Equatorial Realty
Development, Inc. as valid and binding upon all the parties. 8

Rereading the law on the matter of sales and option contracts, respondent Court of
Appeals differentiated between Article 1324 and Article 1479 of the Civil Code,
analyzed their application to the facts of this case, and concluded that since
paragraph 8 of the two lease contracts does not state a fixed price for the purchase

57
of the leased premises, which is an essential element for a contract of sale to be
perfected, what paragraph 8 is, must be a right of first refusal and not an option
contract. It explicated:

Firstly, the court a quo misapplied the provisions of Articles 1324 and 1479,
second paragraph, of the Civil Code.

Article 1324 speaks of an "offer" made by an offeror which the offeree may
or may not accept within a certain period. Under this article, the offer may
be withdrawn by the offeror before the expiration of the period and while the
offeree has not yet accepted the offer. However, the offer cannot be
withdrawn by the offeror within the period if a consideration has been
promised or given by the offeree in exchange for the privilege of being given
that period within which to accept the offer. The consideration is distinct
from the price which is part of the offer. The contract that arises is known as
option. In the case of Beaumont vs. Prieto, 41 Phil. 670, the Supreme court,
citing Bouvier, defined an option as follows: "A contract by virtue of which
A, in consideration of the payment of a certain sum to B, acquires the
privilege of buying from or selling to B, certain securities or properties within
a limited time at a specified price," (pp. 686-7).

Article 1479, second paragraph, on the other hand, contemplates of an

"accepted unilateral promise to buy or to sell a determinate thing for a price
within (which) is binding upon the promisee if the promise is supported by a
consideration distinct from the price." That "unilateral promise to buy or to
sell a determinate thing for a price certain" is called an offer. An "offer", in
laws, is a proposal to enter into a contract (Rosenstock vs. Burke, 46 Phil.
217). To constitute a legal offer, the proposal must be certain as to the object,
the price and other essential terms of the contract (Art. 1319, Civil Code).

Based on the foregoing discussion, it is evident that the provision granting

Mayfair "30-days exclusive option to purchase" the leased premises is NOT
AN OPTION in the context of Arts. 1324 and 1479, second paragraph, of the
Civil Code. Although the provision is certain as to the object (the sale of the
leased premises) the price for which the object is to be sold is not stated in
the provision Otherwise stated, the questioned stipulation is not by itself, an
"option" or the "offer to sell" because the clause does not specify the price
for the subject property.

Although the provision giving Mayfair "30-days exclusive option to

purchase" cannot be legally categorized as an option, it is, nevertheless, a
valid and binding stipulation. What the trial court failed to appreciate was the
intention of the parties behind the questioned proviso.

xxx xxx xxx

The provision in question is not of the pro-forma type customarily found in

a contract of lease. Even appellees have recognized that the stipulation was
incorporated in the two Contracts of Lease at the initiative and behest of
Mayfair. Evidently, the stipulation was intended to benefit and protect
Mayfair in its rights as lessee in case Carmelo should decide, during the term
of the lease, to sell the leased property. This intention of the parties is
achieved in two ways in accordance with the stipulation. The first is by giving

58
 Mayfair "30-days exclusive option to purchase" the leased property. The
second is, in case Mayfair would opt not to purchase the leased property,
"that the purchaser (the new owner of the leased property) shall recognize
the lease and be bound by all the terms and conditions thereof."

In other words, paragraph 8 of the two Contracts of lease, particularly the

stipulation giving Mayfair "30-days exclusive option to purchase the (leased
premises)," was meant to provide Mayfair the opportunity to purchase and
acquire the leased property in the event that Carmelo should decide to
dispose of the property. In order to realize this intention, the implicit
obligation of Carmelo once it had decided to sell the leased property, was not
only to notify Mayfair of such decision to sell the property, but, more
importantly, to make an offer to sell the leased premises to Mayfair, giving
the latter a fair and reasonable opportunity to accept or reject the offer, before
offering to sell or selling the leased property to third parties. The right vested
in Mayfair is analogous to the right of first refusal, which means that Carmelo
should have offered the sale of the leased premises to Mayfair before offering
it to other parties, or, if Carmelo should receive any offer from third parties
to purchase the leased premises, then Carmelo must first give Mayfair the
opportunity to match that offer.

In fact, Mr. Pascal understood the provision as giving Mayfair a right of first
refusal when he made the telephone call to Mr. Yang in 1974. Mr. Pascal
thus testified:

Q Can you tell this Honorable Court how you

made the offer to Mr. Henry Yang by telephone?

A I have an offer from another party to buy the

property and having the offer we decided to
make an offer to Henry Yang on a first-refusal
basis. (TSN November 8, 1983, p. 12.).

and on cross-examination:

Q When you called Mr. Yang on August 1974

can you remember exactly what you have told
him in connection with that matter, Mr. Pascal?

A More or less, I told him that I received an offer

from another party to buy the property and I was
offering him first choice of the enter property.
(TSN, November 29, 1983, p. 18).

We rule, therefore, that the foregoing interpretation best renders effectual the
intention of the parties.9

Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to
which the requirement of distinct consideration indispensable in an option contract,
has no application, respondent appellate court also addressed the claim of Carmelo
and Equatorial that assuming arguendo that the option is valid and effective, it is
impossible of performance because it covered only the leased premises and not the

59
entire Claro M. Recto property, while Carmelo's offer to sell pertained to the entire
property in question. The Court of Appeals ruled as to this issue in this wise:

We are not persuaded by the contentions of the defendants-appellees. It is to

be noted that the Deed of Absolute Sale between Carmelo and Equatorial
covering the whole Claro M. Recto property, made reference to four titles:
TCT Nos. 17350, 118612, 60936 and 52571. Based on the information
submitted by Mayfair in its appellant's Brief (pp. 5 and 46) which has not
been controverted by the appellees, and which We, therefore, take judicial
notice of the two theaters stand on the parcels of land covered by TCT No.
17350 with an area of 622.10 sq. m and TCT No. 118612 with an area of
2,100.10 sq. m. The existence of four separate parcels of land covering the
whole Recto property demonstrates the legal and physical possibility that
each parcel of land, together with the buildings and improvements thereof,
could have been sold independently of the other parcels.

At the time both parties executed the contracts, they were aware of the
physical and structural conditions of the buildings on which the theaters were
to be constructed in relation to the remainder of the whole Recto property.
The peculiar language of the stipulation would tend to limit Mayfair's right
under paragraph 8 of the Contract of Lease to the acquisition of the leased
areas only. Indeed, what is being contemplated by the questioned stipulation
is a departure from the customary situation wherein the buildings and
improvements are included in and form part of the sale of the subjacent land.
Although this situation is not common, especially considering the non-
condominium nature of the buildings, the sale would be valid and capable of
being performed. A sale limited to the leased premises only, if hypothetically
assumed, would have brought into operation the provisions of co-ownership
under which Mayfair would have become the exclusive owner of the leased
premises and at the same time a co-owner with Carmelo of the subjacent land
in proportion to Mayfair's interest over the premises sold to it. 10

Carmelo and Equatorial now comes before us questioning the correctness and legal
basis for the decision of respondent Court of Appeals on the basis of the following
assigned errors:

THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING

THAT THE OPTION CLAUSE IN THE CONTRACTS OF LEASE IS
ACTUALLY A RIGHT OF FIRST REFUSAL PROVISO. IN DOING SO
THE COURT OF APPEALS DISREGARDED THE CONTRACTS OF
LEASE WHICH CLEARLY AND UNEQUIVOCALLY PROVIDE FOR
AN OPTION, AND THE ADMISSION OF THE PARTIES OF SUCH
OPTION IN THEIR STIPULATION OF FACTS.

II

WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT

OF APPEALS ERRED IN DIRECTING EQUATORIAL TO EXECUTE A
DEED OF SALE EIGHTEEN (18) YEARS AFTER MAYFAIR FAILED
TO EXERCISE ITS OPTION (OR, EVEN ITS RIGHT OF FIRST
REFUSAL ASSUMING IT WAS ONE) WHEN THE CONTRACTS

60
 LIMITED THE EXERCISE OF SUCH OPTION TO 30 DAYS FROM
NOTICE.

III

THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT

DIRECTED IMPLEMENTATION OF ITS DECISION EVEN BEFORE
ITS FINALITY, AND WHEN IT GRANTED MAYFAIR A RELIEF THAT
WAS NOT EVEN PRAYED FOR IN THE COMPLAINT.

IV

THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES

IN THE ASSIGNMENT OF APPEALED CASES WHEN IT ALLOWED
THE SAME DIVISION XII, PARTICULARLY JUSTICE MANUEL
HERRERA, TO RESOLVE ALL THE MOTIONS IN THE
"COMPLETION PROCESS" AND TO STILL RESOLVE THE MERITS
OF THE CASE IN THE "DECISION STAGE". 11

We shall first dispose of the fourth assigned error respecting alleged irregularities
in the raffle of this case in the Court of Appeals. Suffice it to say that in our
Resolution, 12 dated December 9, 1992, we already took note of this matter and set
out the proper applicable procedure to be the following:

On September 20, 1992, counsel for petitioner Equatorial Realty

Development, Inc. wrote a letter-complaint to this Court alleging certain
irregularities and infractions committed by certain lawyers, and Justices of
the Court of Appeals and of this Court in connection with case CA-G.R. CV
No. 32918 (now G.R. No. 106063). This partakes of the nature of an
administrative complaint for misconduct against members of the judiciary.
While the letter-complaint arose as an incident in case CA-G.R. CV No.
32918 (now G.R. No. 106063), the disposition thereof should be separate and
independent from Case G.R. No. 106063. However, for purposes of receiving
the requisite pleadings necessary in disposing of the administrative
complaint, this Division shall continue to have control of the case. Upon
completion thereof, the same shall be referred to the Court En Banc for
proper disposition. 13

This court having ruled the procedural irregularities raised in the fourth assigned
error of Carmelo and Equatorial, to be an independent and separate subject for an
administrative complaint based on misconduct by the lawyers and justices
implicated therein, it is the correct, prudent and consistent course of action not to
pre-empt the administrative proceedings to be undertaken respecting the said
irregularities. Certainly, a discussion thereupon by us in this case would entail a
finding on the merits as to the real nature of the questioned procedures and the true
intentions and motives of the players therein.

In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of
paragraph 8 stipulated in the two contracts of lease between Carmelo and Mayfair
in the face of conflicting findings by the trial court and the Court of Appeals; and
(2) to determine the rights and obligations of Carmelo and Mayfair, as well as

61
Equatorial, in the aftermath of the sale by Carmelo of the entire Claro M. Recto
property to Equatorial.

Both contracts of lease in question provide the identically worded paragraph 8,

which reads:

That if the LESSOR should desire to sell the leased premises, the LESSEE
shall be given 30-days exclusive option to purchase the same.

In the event, however, that the leased premises is sold to someone other than
the LESSEE, the LESSOR is bound and obligated, as it hereby binds and
obligates itself, to stipulate in the Deed of Sale thereof that the purchaser
shall recognize this lease and be bound by all the terms and conditions
thereof. 14

We agree with the respondent Court of Appeals that the aforecited contractual
stipulation provides for a right of first refusal in favor of Mayfair. It is not an option
clause or an option contract. It is a contract of a right of first refusal.

As early as 1916, in the case of Beaumont vs. Prieto, 15 unequivocal was our
characterization of an option contract as one necessarily involving the choice
granted to another for a distinct and separate consideration as to whether or not to
purchase a determinate thing at a predetermined fixed price.

It is unquestionable that, by means of the document Exhibit E, to wit, the

letter of December 4, 1911, quoted at the beginning of this decision, the
defendant Valdes granted to the plaintiff Borck the right to purchase the
Nagtajan Hacienda belonging to Benito Legarda, during the period of three
months and for its assessed valuation, a grant which necessarily implied the
offer or obligation on the part of the defendant Valdes to sell to Borck the
said hacienda during the period and for the price mentioned . . . There was,
therefore, a meeting of minds on the part of the one and the other, with regard
to the stipulations made in the said document. But it is not shown that there
was any cause or consideration for that agreement, and this omission is a bar
which precludes our holding that the stipulations contained in Exhibit E is a
contract of option, for, . . . there can be no contract without the requisite,
among others, of the cause for the obligation to be established.

In his Law Dictionary, edition of 1897, Bouvier defines an option as a

contract, in the following language:

A contract by virtue of which A, in consideration of

the payment of a certain sum to B, acquires the privilege of
buying from, or selling to B, certain securities or properties
within a limited time at a specified price. (Story vs. Salamon,
71 N.Y., 420.)

From vol. 6, page 5001, of the work "Words and Phrases," citing the case
of Ide vs. Leiser (24 Pac., 695; 10 Mont., 5; 24 Am. St. Rep., 17) the
following quotation has been taken:

An agreement in writing to give a person the option to purchase

lands within a given time at a named price is neither a sale nor

62
 an agreement to sell. It is simply a contract by which the owner
of property agrees with another person that he shall have the
right to buy his property at a fixed price within a certain time.
He does not sell his land; he does not then agree to sell it; but
he does sell something; that is, the right or privilege to buy at
the election or option of the other party. The second party gets
in praesenti, not lands, nor an agreement that he shall have
lands, but he does get something of value; that is, the right to
call for and receive lands if he elects. The owner parts with his
right to sell his lands, except to the second party, for a limited
period. The second party receives this right, or, rather, from his
point of view, he receives the right to elect to buy.

But the two definitions above cited refer to the contract of option, or, what
amounts to the same thing, to the case where there was cause or consideration
for the obligation, the subject of the agreement made by the parties; while in
the case at bar there was no such cause or consideration. 16 (Emphasis ours.)

The rule so early established in this jurisdiction is that the deed of option or the
option clause in a contract, in order to be valid and enforceable, must, among other
things, indicate the definite price at which the person granting the option, is willing
to sell.

Notably, in one case we held that the lessee loses his right to buy the leased property for a
named price per square meter upon failure to make the purchase within the time
specified; 17 in one other case we freed the landowner from her promise to sell her land if
the prospective buyer could raise P4,500.00 in three weeks because such option was not
supported by a distinct consideration; 18 in the same vein in yet one other case, we also
invalidated an instrument entitled, "Option to Purchase" a parcel of land for the sum of
P1,510.00 because of lack of consideration; 19 and as an exception to the doctrine
enumerated in the two preceding cases, in another case, we ruled that the option to buy the
leased premises for P12,000.00 as stipulated in the lease contract, is not without
consideration for in reciprocal contracts, like lease, the obligation or promise of each party
is the consideration for that of the other. 20 In all these cases, the selling price of the object
thereof is always predetermined and specified in the option clause in the contract or in the
separate deed of option. We elucidated, thus, in the very recent case of Ang Yu Asuncion
vs. Court of Appeals 21 that:

. . . In sales, particularly, to which the topic for discussion about the case at
bench belongs, the contract is perfected when a person, called the seller,
obligates himself, for a price certain, to deliver and to transfer ownership of
a thing or right to another, called the buyer, over which the latter agrees.
Article 1458 of the Civil Code provides:

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.

When the sale is not absolute but conditional, such as in a "Contract to Sell"
where invariably the ownership of the thing sold in retained until the

63
fulfillment of a positive suspensive condition (normally, the full payment of
the purchase price), the breach of the condition will prevent the obligation to
convey title from acquiring an obligatory force. . . .

An unconditional mutual promise to buy and sell, as long as the object is

made determinate and the price is fixed, can be obligatory on the parties, and
compliance therewith may accordingly be exacted.

An accepted unilateral promise which specifies the thing to be sold and the
price to be paid, when coupled with a valuable consideration distinct and
separate from the price, is what may properly be termed a perfected contract
of option. This contract is legally binding, and in sales, it conforms with the
second paragraph of Article 1479 of the Civil Code, viz:

Art. 1479. . . .

An accepted unilateral promise to buy or to sell a determinate

thing for a price certain is binding upon the promisor if the
promise is supported by a consideration distinct from the price.
(1451a).

Observe, however, that the option is not the contract of sale itself. The
optionee has the right, but not the obligation, to buy. Once the option is
exercised timely, i.e., the offer is accepted before a breach of the option, a
bilateral promise to sell and to buy ensues and both parties are then
reciprocally bound to comply with their respective undertakings.

Let us elucidate a little. A negotiation is formally initiated by an offer. An

imperfect promise (policitacion) is merely an offer. Public advertisements or
solicitations and the like are ordinarily construed as mere invitations to make
offers or only as proposals. These relations, until a contract is perfected, are
not considered binding commitments. Thus, at any time prior to the
perfection of the contract, either negotiating party may stop the negotiation.
The offer, at this stage, may be withdrawn; the withdrawal is effective
immediately after its manifestation, such as by its mailing and not necessarily
when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270).
Where a period is given to the offeree within which to accept the offer, the
following rules generally govern:

(1) If the period is not itself founded upon or supported by a consideration,

the offeror is still free and has the right to withdraw the offer before its
acceptance, or if an acceptance has been made, before the offeror's coming
to know of such fact, by communicating that withdrawal to the offeree (see
Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948,
holding that this rule is applicable to a unilateral promise to sell under Art.
1479, modifying the previous decision in South Western Sugar vs. Atlantic
Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Parañaque,
Inc. vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The
right to withdraw, however, must not be exercised whimsically or arbitrarily;
otherwise, it could give rise to a damage claim under Article 19 of the Civil
Code which ordains that "every person must, in the exercise of his rights and
in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith."

64
 (2) If the period has a separate consideration, a contract of "option" deemed
perfected, and it would be a breach of that contract to withdraw the offer
during the agreed period. The option, however, is an independent contract by
itself; and it is to be distinguished from the projected main agreement
(subject matter of the option) which is obviously yet to be concluded. If, in
fact, the optioner-offeror withdraws the offer before its acceptance (exercise
of the option) by the optionee-offeree, the latter may not sue for specific
performance on the proposed contract ("object" of the option) since it has
failed to reach its own stage of perfection. The optioner-offeror, however,
renders himself liable for damages for breach of the opinion. . .

In the light of the foregoing disquisition and in view of the wording of the
questioned provision in the two lease contracts involved in the instant case, we so
hold that no option to purchase in contemplation of the second paragraph of Article
1479 of the Civil Code, has been granted to Mayfair under the said lease contracts.

Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the
right of first refusal to Mayfair and is not an option contract. It also correctly
reasoned that as such, the requirement of a separate consideration for the option, has
no applicability in the instant case.

There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March 31,
1969 contracts which would bring them into the ambit of the usual offer or option
requiring an independent consideration.

An option is a contract granting a privilege to buy or sell within an agreed time and
at a determined price. It is a separate and distinct contract from that which the parties
may enter into upon the consummation of the option. It must be supported by
consideration. 22 In the instant case, the right of first refusal is an integral part of the
contracts of lease. The consideration is built into the reciprocal obligations of the
parties.

To rule that a contractual stipulation such as that found in paragraph 8 of the

contracts is governed by Article 1324 on withdrawal of the offer or Article 1479 on
promise to buy and sell would render in effectual or "inutile" the provisions on right
of first refusal so commonly inserted in leases of real estate nowadays. The Court
of Appeals is correct in stating that Paragraph 8 was incorporated into the contracts
of lease for the benefit of Mayfair which wanted to be assured that it shall be given
the first crack or the first option to buy the property at the price which Carmelo is
willing to accept. It is not also correct to say that there is no consideration in an
agreement of right of first refusal. The stipulation is part and parcel of the entire
contract of lease. The consideration for the lease includes the consideration for the
right of first refusal. Thus, Mayfair is in effect stating that it consents to lease the
premises and to pay the price agreed upon provided the lessor also consents that,
should it sell the leased property, then, Mayfair shall be given the right to match the
offered purchase price and to buy the property at that price. As stated in Vda. De
Quirino vs. Palarca, 23 in reciprocal contract, the obligation or promise of each party
is the consideration for that of the other.

The respondent Court of Appeals was correct in ascertaining the true nature of the
aforecited paragraph 8 to be that of a contractual grant of the right of first refusal to
Mayfair.

65
We shall now determine the consequential rights, obligations and liabilities of
Carmelo, Mayfair and Equatorial.

The different facts and circumstances in this case call for an amplification of the
precedent in Ang Yu Asuncion vs. Court of Appeals. 24

First and foremost is that the petitioners acted in bad faith to render Paragraph 8
"inutile".

What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that
Mayfair will have the right of first refusal in the event Carmelo sells the leased
premises. It is undisputed that Carmelo did recognize this right of Mayfair, for it
informed the latter of its intention to sell the said property in 1974. There was an
exchange of letters evidencing the offer and counter-offers made by both parties.
Carmelo, however, did not pursue the exercise to its logical end. While it initially
recognized Mayfair's right of first refusal, Carmelo violated such right when without
affording its negotiations with Mayfair the full process to ripen to at least an
interface of a definite offer and a possible corresponding acceptance within the "30-
day exclusive option" time granted Mayfair, Carmelo abandoned negotiations, kept
a low profile for some time, and then sold, without prior notice to Mayfair, the entire
Claro M Recto property to Equatorial.

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the
property in question rescissible. We agree with respondent Appellate Court that the
records bear out the fact that Equatorial was aware of the lease contracts because its
lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot
tenably claim to be a purchaser in good faith, and, therefore, rescission lies.

. . . Contract of Sale was not voidable but rescissible. Under Article 1380 to
1381(3) of the Civil Code, a contract otherwise valid may nonetheless be
subsequently rescinded by reason of injury to third persons, like creditors.
The status of creditors could be validly accorded the Bonnevies for they had
substantial interests that were prejudiced by the sale of the subject property
to the petitioner without recognizing their right of first priority under the
Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the

contracting parties and even to third persons, to secure reparation for
damages caused to them by a contract, even if this should be valid, by means
of the restoration of things to their condition at the moment prior to the
celebration of said contract. It is a relief allowed for the protection of one of
the contracting parties and even third persons from all injury and damage the
contract may cause, or to protect some incompatible and preferent right
created by the contract. Rescission implies a contract which, even if initially
valid, produces a lesion or pecuniary damage to someone that justifies its
invalidation for reasons of equity.

It is true that the acquisition by a third person of the property subject of the
contract is an obstacle to the action for its rescission where it is shown that
such third person is in lawful possession of the subject of the contract and
that he did not act in bad faith. However, this rule is not applicable in the
case before us because the petitioner is not considered a third party in relation

66
 to the Contract of Sale nor may its possession of the subject property be
regarded as acquired lawfully and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale.
Moreover, the petitioner cannot be deemed a purchaser in good faith for the
record shows that it categorically admitted it was aware of the lease in favor
of the Bonnevies, who were actually occupying the subject property at the
time it was sold to it. Although the Contract of Lease was not annotated on
the transfer certificate of title in the name of the late Jose Reynoso and Africa
Reynoso, the petitioner cannot deny actual knowledge of such lease which
was equivalent to and indeed more binding than presumed notice by
registration.

A purchaser in good faith and for value is one who buys the property of
another without notice that some other person has a right to or interest in such
property and pays a full and fair price for the same at the time of such
purchase or before he has notice of the claim or interest of some other person
in the property. Good faith connotes an honest intention to abstain from
taking unconscientious advantage of another. Tested by these principles, the
petitioner cannot tenably claim to be a buyer in good faith as it had notice of
the lease of the property by the Bonnevies and such knowledge should have
cautioned it to look deeper into the agreement to determine if it involved
stipulations that would prejudice its own interests.

The petitioner insists that it was not aware of the right of first priority granted
by the Contract of Lease. Assuming this to be true, we nevertheless agree
with the observation of the respondent court that:

If Guzman-Bocaling failed to inquire about the terms of the

Lease Contract, which includes Par. 20 on priority right given
to the Bonnevies, it had only itself to blame. Having known
that the property it was buying was under lease, it behooved it
as a prudent person to have required Reynoso or the broker to
show to it the Contract of Lease in which Par. 20 is
contained. 25

Petitioners assert the alleged impossibility of performance because the entire

property is indivisible property. It was petitioner Carmelo which fixed the limits of
the property it was leasing out. Common sense and fairness dictate that instead of
nullifying the agreement on that basis, the stipulation should be given effect by
including the indivisible appurtenances in the sale of the dominant portion under the
right of first refusal. A valid and legal contract where the ascendant or the more
important of the two parties is the landowner should be given effect, if possible,
instead of being nullified on a selfish pretext posited by the owner. Following the
arguments of petitioners and the participation of the owner in the attempt to strip
Mayfair of its rights, the right of first refusal should include not only the property
specified in the contracts of lease but also the appurtenant portions sold to Equatorial
which are claimed by petitioners to be indivisible. Carmelo acted in bad faith when
it sold the entire property to Equatorial without informing Mayfair, a clear violation
of Mayfair's rights. While there was a series of exchanges of letters evidencing the
offer and counter-offers between the parties, Carmelo abandoned the negotiations
without giving Mayfair full opportunity to negotiate within the 30-day period.

67
Accordingly, even as it recognizes the right of first refusal, this Court should also
order that Mayfair be authorized to exercise its right of first refusal under the
contract to include the entirety of the indivisible property. The boundaries of the
property sold should be the boundaries of the offer under the right of first refusal.
As to the remedy to enforce Mayfair's right, the Court disagrees to a certain extent
with the concluding part of the dissenting opinion of Justice Vitug. The doctrine
enunciated in Ang Yu Asuncion vs. Court of Appeals should be modified, if not
amplified under the peculiar facts of this case.

As also earlier emphasized, the contract of sale between Equatorial and Carmelo is
characterized by bad faith, since it was knowingly entered into in violation of the
rights of and to the prejudice of Mayfair. In fact, as correctly observed by the Court
of Appeals, Equatorial admitted that its lawyers had studied the contract of lease
prior to the sale. Equatorial's knowledge of the stipulations therein should have
cautioned it to look further into the agreement to determine if it involved stipulations
that would prejudice its own interests.

Since Mayfair has a right of first refusal, it can exercise the right only if the
fraudulent sale is first set aside or rescinded. All of these matters are now before us
and so there should be no piecemeal determination of this case and leave festering
sores to deteriorate into endless litigation. The facts of the case and considerations
of justice and equity require that we order rescission here and now. Rescission is a
relief allowed for the protection of one of the contracting parties and even third
persons from all injury and damage the contract may cause or to protect some
incompatible and preferred right by the contract. 26 The sale of the subject real
property by Carmelo to Equatorial should now be rescinded considering that
Mayfair, which had substantial interest over the subject property, was prejudiced by
the sale of the subject property to Equatorial without Carmelo conferring to Mayfair
every opportunity to negotiate within the 30-day stipulated period. 27

This Court has always been against multiplicity of suits where all remedies
according to the facts and the law can be included. Since Carmelo sold the property
for P11,300,000.00 to Equatorial, the price at which Mayfair could have purchased
the property is, therefore, fixed. It can neither be more nor less. There is no dispute
over it. The damages which Mayfair suffered are in terms of actual injury and lost
opportunities. The fairest solution would be to allow Mayfair to exercise its right of
first refusal at the price which it was entitled to accept or reject which is
P11,300,000.00. This is clear from the records.

To follow an alternative solution that Carmelo and Mayfair may resume

negotiations for the sale to the latter of the disputed property would be unjust and
unkind to Mayfair because it is once more compelled to litigate to enforce its right.
It is not proper to give it an empty or vacuous victory in this case. From the
viewpoint of Carmelo, it is like asking a fish if it would accept the choice of being
thrown back into the river. Why should Carmelo be rewarded for and allowed to
profit from, its wrongdoing? Prices of real estate have skyrocketed. After having
sold the property for P11,300,000.00, why should it be given another chance to sell
it at an increased price?

Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that
there was nothing to execute because a contract over the right of first refusal belongs
to a class of preparatory juridical relations governed not by the law on contracts but
by the codal provisions on human relations. This may apply here if the contract is

68
 limited to the buying and selling of the real property. However, the obligation of
Carmelo to first offer the property to Mayfair is embodied in a contract. It is
Paragraph 8 on the right of first refusal which created the obligation. It should be
enforced according to the law on contracts instead of the panoramic and indefinite
rule on human relations. The latter remedy encourages multiplicity of suits. There
is something to execute and that is for Carmelo to comply with its obligation to the
property under the right of the first refusal according to the terms at which they
should have been offered then to Mayfair, at the price when that offer should have
been made. Also, Mayfair has to accept the offer. This juridical relation is not
amorphous nor is it merely preparatory. Paragraphs 8 of the two leases can be
executed according to their terms.

On the question of interest payments on the principal amount of P11,300,000.00, it

must be borne in mind that both Carmelo and Equatorial acted in bad faith. Carmelo
knowingly and deliberately broke a contract entered into with Mayfair. It sold the
property to Equatorial with purpose and intend to withhold any notice or knowledge
of the sale coming to the attention of Mayfair. All the circumstances point to a
calculated and contrived plan of non-compliance with the agreement of first refusal.

On the part of Equatorial, it cannot be a buyer in good faith because it bought the
property with notice and full knowledge that Mayfair had a right to or interest in the
property superior to its own. Carmelo and Equatorial took unconscientious
advantage of Mayfair.

Neither may Carmelo and Equatorial avail of considerations based on equity which
might warrant the grant of interests. The vendor received as payment from the
vendee what, at the time, was a full and fair price for the property. It has used the
P11,300,000.00 all these years earning income or interest from the amount.
Equatorial, on the other hand, has received rents and otherwise profited from the
use of the property turned over to it by Carmelo. In fact, during all the years that
this controversy was being litigated, Mayfair paid rentals regularly to the buyer who
had an inferior right to purchase the property. Mayfair is under no obligation to pay
any interests arising from this judgment to either Carmelo or Equatorial.

WHEREFORE, the petition for review of the decision of the Court of Appeals, dated
June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY DENIED. The Deed of
Absolute Sale between petitioners Equatorial Realty Development, Inc. and
Carmelo & Bauermann, Inc. is hereby deemed rescinded; petitioner Carmelo &
Bauermann is ordered to return to petitioner Equatorial Realty Development the
purchase price. The latter is directed to execute the deeds and documents necessary
to return ownership to Carmelo and Bauermann of the disputed lots. Carmelo &
Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots for
P11,300,000.00.

SO ORDERED.

Separate Opinions

PADILLA, J., concurring:

69
I am of the considered view (like Mr. Justice Jose A. R. Melo) that the Court in this case
should categorically recognize Mayfair's right of first refusal under its contract of lease
with Carmelo and Bauermann, Inc. (hereafter, Carmelo) and, because of Carmelo's and
Equatorial's bad faith in riding "roughshod" over Mayfair's right of first refusal, the Court
should order the rescission of the sale of the Claro M. Recto property by the latter to
Equatorial (Art. 1380-1381[3], Civil Code). The Court should, in this same case, to avoid
multiplicity of suits, likewise allow Mayfair to effectively exercise said right of first
refusal, by paying Carmelo the sum of P11,300,000.00 for the entire subject property,
without any need of instituting a separate action for damages against Carmelo and/or
Equatorial.

I do not agree with the proposition that, in addition to the aforesaid purchase price, Mayfair
should be required to pay a compounded interest of 12% per annum of said amount
computed from 1 August 1978. Under the Civil Code, a party to a contract may recover
interest as indemnity for damages in the following instances:

Art. 2209. If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per
annum.

Art. 2210. Interest may, in the discretion of the court, be allowed upon
damages awarded for breach of contract.

There appears to be no basis in law for adding 12% per annum compounded interest
to the purchase price of P11,300,000.00 payable by Mayfair to Carmelo since there
was no such stipulation in writing between the parties (Mayfair and Carmelo) but,
more importantly, because Mayfair neither incurred in delay in the performance of
its obligation nor committed any breach of contract. Indeed, why should Mayfair be
penalized by way of making it pay 12% per annum compounded interest when it
was Carmelo which violated Mayfair's right of first refusal under the contract?

The equities of the case support the foregoing legal disposition. During the intervening
years between 1 August 1978 and this date, Equatorial (after acquiring the C.M. Recto
property for the price of P11,300,000.00) had been leasing the property and deriving rental
income therefrom. In fact, one of the lessees in the property was Mayfair. Carmelo had, in
turn, been using the proceeds of the sale, investment-wise and/or operation-wise in its own
business.

It may appear, at first blush, that Mayfair is unduly favored by the solution submitted by
this opinion, because the price of P11,300,000.00 which it has to pay Carmelo in the
exercise of its right of first refusal, has been subjected to the inroads of inflation so that its
purchasing power today is less than when the same amount was paid by Equatorial to
Carmelo. But then it cannot be overlooked that it was Carmelo's breach of Mayfair's right
of first refusal that prevented Mayfair from paying the price of P11,300,000.00 to Carmelo
at about the same time the amount was paid by Equatorial to Carmelo. Moreover, it cannot
be ignored that Mayfair had also incurred consequential or "opportunity" losses by reason
of its failure to acquire and use the property under its right of first refusal. In fine, any loss
in purchasing power of the price of P11,300,000.00 is for Carmelo to incur or absorb on
account of its bad faith in breaching Mayfair's contractual right of first refusal to the subject
property.

70
ACCORDINGLY, I vote to order the rescission of the contract of sale between Carmelo
and Equatorial of the Claro M. Recto property in question, so that within thirty (30) days
from the finality of the Court's decision, the property should be retransferred and delivered
by Equatorial to Carmelo with the latter simultaneously returning to Equatorial the sum of
P11,300, 000.00.

I also vote to allow Mayfair to exercise its right of first refusal, by paying to Carmelo the
sum of P11,300,000.00 without interest for the entire subject property, within thirty (30)
days from re-acquisition by Carmelo of the titles to the property, with the corresponding
obligation of Carmelo to sell and transfer the property to Mayfair within the same period
of thirty (30) days.

PANGANIBAN, J., concurring:

In the main, I concur with the ponencia of my esteemed colleague, Mr. Justice Regino C.
Hermosisima, Jr., especially with the following doctrinal pronouncements:

1. That while no option to purchase within the meaning of the second

paragraph of Article 1479 of the Civil Code was given to Mayfair Theater,
Inc. ("Mayfair"), under the two lease contracts a right of first refusal was in
fact granted, for which no separate consideration is required by law to be
paid or given so as to make it binding upon Carmelo & Bauermann, Inc.
("Carmelo");

2. That such right was violated by the latter when it sold the entire property
to Equatorial Realty Development, Inc. ("Equatorial") on July 30, 1978, for
the sum of P11,300,000.00;

3. That Equatorial is a buyer in bad faith as it was aware of the lease contracts,
its own lawyers having studied said contracts prior to the sale; and

4. That, consequently, the contract of sale is rescissible.

5. That, finally, under the proven facts, the right of first refusal may be
enforced by an action for specific performance.

There appears to be unanimity in the Court insofar as items 1, 2 and 3 above are concerned.
It is in items 4 and 5 that there is a marked divergence of opinion. Hence, I shall limit the
discussion in this Separate Concurring Opinion to such issues, namely: Is the contract of
sale between Carmelo and Equatorial rescissible, and corollarily, may the right of first
refusal granted to Mayfair be enforced by an action for specific performance?

It is with a great amount of trepidation that I respectfully disagree with the legal proposition
espoused by two equally well-respected colleagues, Mme. Justice Flerida Ruth P. Romero
and Mr. Justice Jose C. Vitug — who are both acknowledged authorities on Civil Law —
that a breach of the covenanted right of first refusal, while warranting a suit for damages
under Article 19 of the Civil Code, cannot sanction an action for specific performance
without thereby negating the indispensable element of con-sensuality in the perfection of
contracts.

Ang Yu Asuncion Not In Point

71
Such statement is anchored upon a pronouncement in Ang Yu Asuncion vs. CA, 1 which
was penned by Mr. Justice Vitug himself. I respectfully submit, however, that that case
turned largely on the issue of whether or not the sale of an immovable in breach of a right
of first refusal that had been decreed in a final judgment would justify the issuance of
certain orders of execution in the same case. The validity of said orders was the subject of
the attack before this Court. These orders had not only directed the defendants to execute
a deed of sale in favor of the plaintiffs, when there was nothing in the judgment itself
decreeing it, but had also set aside the sale made in breach of said right of first refusal and
even canceled the title that had been issued to the buyer, who was not a party to the suit
and had obviously not been given its day in court. It was thus aptly held:

The final judgment in Civil Case No. 87-41058, it must be stressed, has
merely accorded a "right of first refusal" in favor of petitioners. The
consequence of such a declaration entails no more than what has heretofore
been said. In fine, if, as it is here so conveyed to us, petitioners are aggrieved
by the failure of private respondents to honor the right of first refusal, the
remedy is not a writ of execution on the judgment, since there is none to
execute, but an action for damages in a proper forum for the purpose.

Furthermore, whether private respondent Buen Realty Development

Corporation, the alleged purchaser of the property, has acted in good faith or
bad faith and whether or not it should, in any case, be considered bound to
respect the registration of the lis pendens in Civil Case No. 87-41058 are
matters that must be independently addressed in appropriate
proceedings. Buen Realty, not having been impleaded in Civil Case No. 87-
41058, cannot be held subject to the writ of execution issued by respondent
Judge, let alone ousted from the ownership and possession of the property,
without first being duly afforded its day in court. 2

In other words, the question of whether specific performance of one's right of first refusal
is available as a remedy in case of breach thereof was not before the Supreme Court at all
in Ang Yu Asuncion. Consequently, the pronouncements there made bearing on such
unlitigated question were mere obiter. Moreover, as will be shown later, the
pronouncement that a breach of the right of first refusal would not sanction an action for
specific performance but only an action for damages (at p. 615) is at best debatable (and in
my humble view, imprecise or incorrect), on top of its being contradicted by extant
jurisprudence.

Worth bearing in mind is the fact that two juridical relations, both contractual, are involved
in the instant case: (1) the deed of sale between the petitioners dated July 30, 1978, and (2)
the contract clause establishing Mayfair's right of first refusal which was violated by said
sale.

With respect to the sale of the property, Mayfair was not a party. It therefore had no
personality to sue for its annulment, since Art. 1397 of the Civil Code provides, inter alia,
that "(t)he action for the annulment of contracts may be instituted by all who are thereby
obliged principally or subsidiarily."

But the facts as alleged and proved clearly in the case at bar make out a case for rescission
under Art. 1177, in relation to Art. 1381(3), of the Civil Code, which pertinently read as
follows:

72
 Art. 1177. The creditors, after having pursued the property in possession of
the debtor to satisfy their claims, may exercise all the rights and bring all the
actions of the latter for the same purpose, save those which are inherent in
his person; they may also impugn the acts which the debtor may have done
to defraud them.

Art. 1381. The following contracts are rescissible:

xxx xxx xxx

(3) Those undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due them;

xxx xxx xxx

(emphasis supplied)

The term "creditors" as used in these provisions of the Civil Code is broad enough to
include the obligee under an option contract 3 as well as under a right of first refusal,
sometimes known as a right of first priority. 4 Thus, in Nietes, the Supreme Court, speaking
through then Mr. Chief Justice Roberto Concepcion, repeatedly referred to the grantee or
optionee as "the creditor" and to the grantor or optioner as "the debtor". 5 In any case, the
personal elements of an obligation are the active and passive subjects thereof, the former
being known as creditors or obligees and the latter as debtors or obligors. 6Insofar as the
right of first refusal is concerned, Mayfair is the obligee or creditor.

As such creditor, Mayfair had, therefore, the right to impugn the sale in question by way
of accion pauliana under the last clause of Art. 1177, aforequoted, because the sale was an
act done by the debtor to defraud him of his right to acquire the property. 7 Rescission was
also available under par. 3, Art. 1381, abovequoted, as was expressly held in Guzman,
Bocaling & Co., a case closely analogous to this one as it was also an action brought by
the lessee to enforce his "right of first priority" — which is just another name for the right
of first refusal — and to annul a sale made by the lessor in violation of such right. In said
case, this Court, speaking through Mr. Justice Isagani A. Cruz, affirmed the invalidation of
the sale and the enforcement of the lessee's right of first priority this wise: 8

The petitioner argues that assuming the Contract of Sale to be voidable, only
the parties thereto could bring an action to annul it pursuant to Article 1397
of the Civil Code. It is stressed that private respondents are strangers to that
agreement and therefore have no personality to seek its annulment.

The respondent court correctly held that the Contract of Sale was not
voidable but rescissible. Under Article(s) 1380 to 1381 (3) of the Civil Code,
a contract otherwise valid may nonetheless be subsequently rescinded by
reason of injury to third persons, like creditors. The status of creditors could
be validly accorded the Bonnevies for they had substantial interests that were
prejudiced by the sale of the subject property to the petitioner without
recognizing their right of first priority under the Contract of Lease.
(emphasis supplied)

By the same token, the status of a defrauded creditor can, and should, be granted to Mayfair,
for it certainly had substantial interests that were prejudiced by the sale of the subject

73
property to petitioner Equatorial in open violation of Mayfair's right of first refusal under
its existing contracts with Carmelo.

In fact, the parity between that case and the present one does not stop there but extends to
the crucial and critical fact that there was manifest bad faith on the part of the buyer. Thus,
in Guzman, this Court affirmed in toto the appealed judgment of the Court of Appeals
which, in turn, had affirmed the trial court's decision insofar as it invalidated the deed of
sale in favor of the petitioner-buyer, cancelled its TCT, and ordered the lessor to execute
a deed of sale over the leased property in favor of the lessee for the same price and "under
the same terms and conditions", aside from affirming as well the damages awarded, but at
a reduced amount. 9 In other words, the aggrieved party was allowed to acquire the property
itself.

The inescapable conclusion from all of the foregoing is not only that rescission is the proper
remedy but also — and more importantly — that specific performance was actually used
and given free rein as an effective remedy to enforce a right of first refusal in the wake of
its violation, in the cited case of Guzman.

On the other hand, and as already commented on above, the pronouncement in Ang Yu
Asuncion to the effect that specific performance is unavailable to enforce a violated right
of first refusal is at best a debatable legal proposition, aside from being contradicted by
extant jurisprudence. Let me explain why.

The consensuality required for a contract of sale is distinct from, and should not be
confused with, the consensuality attendant to the right of first refusal itself. While indeed,
prior to the actual sale of the property to Equatorial and the filing of Mayfair's complaint
for specific performance, no perfected contract of sale involving the property ever existed
between Carmelo as seller and Mayfair as buyer, there already was, in law and in fact, a
perfected contract between them which established a right of first refusal, or of first
priority.

Specific Performance Is
Viable Remedy

The question is: Can this right (of first refusal) be enforced by an action for specific
performance upon a showing of its breach by an actual sale of the property under
circumstances showing palpable bad faith on the part of both seller and buyer?

The answer, I respectfully submit, should be 'yes'.

As already noted, Mayfair's right of first refusal in the case before us is embodied in an
express covenant in the lease contracts between it as lessee and Carmelo as lessor, hence
the right created is one springing from contract. 10 Indubitably, this had the force of law
between the parties, who should thus comply with it in good faith. 11 Such right also
established a correlative obligation on the part of Carmelo to give or deliver to Mayfair a
formal offer of sale of the property in the event Carmelo decides to sell it. The decision to
sell was eventually made. But instead of giving or tendering to Mayfair the proper offer to
sell, Carmelo gave it to its now co-petitioner, Equatorial, with whom it eventually perfected
and consummated, on July 30, 1978, an absolute sale of the property, doing so within the
period of effectivity of Mayfair's right of first refusal. Less than two months later, or in
September 1978, with the lease still in full force, Mayfair filed the present suit.

74
Worth stressing at this juncture is the fact that Mayfair had the right to require that the offer
to sell the property be sent to it by Carmelo, and not to anybody else. This was violated
when the offer was made to Equatorial. Under its covenant with Carmelo, Mayfair had the
right, at that point, to sue for either specific performance or rescission, with damages in
either case, pursuant to Arts. 1165 and 1191, Civil Code. 12 An action for specific
performance and damages seasonably filed, fortified by a writ of preliminary injunction,
would have enabled Mayfair to prevent the sale to Equatorial from taking place and to
compel Carmelo to sell the property to Mayfair for the same terms and price, for the reason
that the filing of the action for specific performance may juridically be considered as a
solemn, formal, and unqualified acceptance by Mayfair of the specific terms of the offer of
sale. Note that by that time, the price and other terms of the proposed sale by Carmelo had
already been determined, being set forth in the offer of sale that had wrongfully been
directed to Equatorial.

As it turned out, however, Mayfair did not have a chance to file such suit, for it learned of
the sale to Equatorial only after it had taken place. But it did file the present action for
specific performance and for invalidation of the wrongful sale immediately after learning
about the latter act. The act of promptly filing this suit, coupled with the fact that it is one
for specific performance, indicates beyond cavil or doubt Mayfair's unqualified acceptance
of the misdirected offer of sale, giving rise, thereby, to a demandable obligation on the part
of Carmelo to execute the corresponding document of sale upon the payment of the price
of P11,300,000.00. In other words, the principle of consensuality of a contract of sale
should be deemed satisfied. The aggrieved party's consent to, or acceptance of, the
misdirected offer of sale should be legally presumed in the context of the proven facts.

To say, therefore, that the wrongful breach of a right of first refusal does not sanction an
action for specific performance simply because, factually, there was no meeting of the
minds as to the particulars of the sale since ostensibly no offer was ever made to, let alone
accepted by, Mayfair, is to ignore the proven fact of presumed consent. To repeat, that
consent was deemed given by Mayfair when it sued for invalidation of the sale and for
specific performance of Carmelo's obligation to Mayfair. Nothing in the law as it now
stands will be violated, or even simply emasculated, by this holding. On the contrary, the
decision in Guzman supports it.

Moreover, under the Civil Code provisions on the nature, effect and kinds of
obligations, 13 Mayfair's right of first refusal may be classified as one subject to a
suspensive condition — namely, if Carmelo should decide to sell the leased premises
during the life of the lease contracts, then it should make an offer of sale to Mayfair.
Futurity and uncertainty, which are the essential characteristics of a condition, 14 were
distinctly present. Before the decision to sell was made, Carmelo had absolutely no
obligation to sell the property to Mayfair, nor even to make an offer to sell, because in
conditional obligations, where the condition is suspensive, the acquisition of rights depends
upon the happening of the event which constitutes the condition. 15 Had the decision to sell
not been made at all, or had it been made after the expiry of the lease, the parties would
have stood as if the conditional obligation had never existed. 16 But the decision to sell was
in fact made. And it was made during the life and efficacy of the lease. Undoubtedly, the
condition was duly fulfilled; the right of first refusal effectively accrued and became
enforceable; and correlatively, Carmelo's obligation to make and send the offer to
Mayfair became immediately due and demandable. 17 That obligation was to deliver to
Mayfair an offer to sell a determinate thing for a determinate price. As things turned out, a
definite and specific offer to sell the entire property for the price of P11,300,000.00 was
actually made by Carmelo — but to the wrong party. It was that particular offer, and no
other, which Carmelo should have delivered to Mayfair, but failed to deliver. Hence, by
75
the time the obligation of Carmelo accrued through the fulfillment of the suspensive
condition, the offer to sell had become a determinate thing.

Art. 1165 of the Civil Code, earlier quoted in footnote 12, indicates the remedies available
to the creditor against the debtor, when it provides that "(w)hen what is to be delivered is
a determinate thing, the creditor, in addition to the right granted him by article 1170, may
compel the debtor to make the delivery," clearly authorizing not only the recovery of
damages under Art. 1170 but also an action for specific performance.

But even assuming that Carmelo's prestation did not involve the delivery of a determinate
offer but only a generic one, the second paragraph of Art. 1165 explicitly gives to the
creditor the right "to ask that the obligation be complied with at the expense of the debtor."
The availability of an action for specific performance is thus clear and beyond doubt. And
the correctness of Guzman becomes all the more manifest.

Upon the other hand, the obiter in Ang Yu Asuncion is further weakened by the fact that
the jurisprudence upon which it supposedly rests — namely, the cases of Madrigal &
CO. vs. Stevenson & Co. 18 and Salonga vs. Farrales19 — did NOT involve a right of first
refusal or of first priority. Nor did those two cases involve an option to buy. In Madrigal,
plaintiff sued defendant for damages claiming wrongful breach of an alleged contract of
sale of 2,000 tons of coal. The case was dismissed because "the minds of the parties never
met upon a contract of sale by defendant to plaintiff", 20 each party having signed the
broker's memorandum as buyer, erroneously thinking that the other party was the seller!
In Salonga, a lessee, who was one of several lessees ordered by final judgment to vacate
the leased premises, sued the lessor to compel the latter to sell the leased premises to him,
but his suit was not founded upon any right of first refusal and was therefore dismissed on
the ground that there was no perfected sale in his favor. He just thought that because the
lessor had decided to sell and in fact sold portions of the property to her other lessees, she
was likewise obligated to sell to him even in the absence of a perfected contract of sale. In
fine, neither of the two cases cited in support of the legal proposition that a breach of the
right of first refusal does not sanction an action for specific performance but, at best, only
one for damages, provides such support.

Finally, the fact that what was eventually sold to Equatorial was the entire property, not
just the portions leased to Mayfair, is no reason to deprive the latter of its right to receive
a formal and specific offer. The offer of a larger property might have led Mayfair to reject
the offer, but until and unless such rejection was actually made, its right of first refusal still
stood. Upon the other hand, an acceptance by Mayfair would have saved all concerned the
time, trouble, and expense of this protracted litigation. In any case, the disquisition by the
Court of Appeals on this point can hardly be faulted; in fact, it amply justifies the
conclusions reached in its decision, as well as the dispositions made therein.

IN VIEW OF THE FOREGOING, I vote to DENY the petition and to AFFIRM the assailed
Decision.

ROMERO, J., concurring and dissenting:

I share the opinion that the right granted to Mayfair Theater under the identical par 8 of the
June 1, 1967 and March 31, 1969 contracts constitute a right of first refusal.

76
An option is a privilege granted to buy a determinate thing at a price certain within a
specified time and is usually supported by a consideration which is why, it may be regarded
as a contract in itself. The option results in a perfected contract of sale once the person to
whom it is granted decides to exercise it. The right of first refusal is unlike an option which
requires a certainty as to the object and consideration of the anticipated contract. When the
right of first refusal is exercised, there is no perfected contract of sale because the other
terms of the sale have yet to be determined. Hence, in case the offeror reneges on his
promise to negotiate with offeree, the latter may only recover damages in the belief that a
contract could have been perfected under Article 19 of the New Civil Code.

I beg to disagree, however, with the majority opinion that the contract of sale entered into
by Carmelo and Bauermann, Inc. and Equatorial Realty Inc., should be rescinded. Justice
Hermosisima, in citing Art. 1381 (3) as ground for recission apparently relied on the case
of Guzman, Bocaling and Co. v. Bonnevie (206 SCRA 668 [1992]) where the offeree was
likened to the status of a creditor. The case, in citing Tolentino, stated that rescission is a
remedy granted by law to contracting parties and even to third persons, to secure reparation
for damages caused to them by a contract, even if this should be valid, by means of
restoration of things to their condition prior to celebration of the contract. It is my opinion
that "third persons" should be construed to refer to the wards, creditors, absentees, heirs
and others enumerated under the law who are prejudiced by the contract sought to be
rescinded.

It should be borne in mind that rescission is an extreme remedy which may be exercised
only in the specific instances provided by law. Article 1381 (3) specifically refers to
contracts undertaken in fraud of creditors when the latter cannot in any manner collect the
claims due them. If rescission were allowed for analogous cases, the law would have so
stated. While Article 1381 (5) itself says that rescission may be granted to all other
contracts specially declared by law to be subject to rescission, there is nothing in the law
that states that an offeree who failed to exercise his right of refusal because of bad faith on
the part of the offeror may rescind the subsequent contract entered into by the offeror and
a third person. Hence, there is no legal justification to rescind the contract between Carmelo
and Bauermann, Inc. and Equatorial Realty.

Neither do I agree with Justice Melo that Mayfair Theater should pay Carmelo and
Bauermann, Inc. the amount of P11,300,000.00 plus compounded interest of 12% p.a.
Justice Melo rationalized that had Carmelo and Bauermann sold the property to Mayfair,
the latter would have paid the property for the same price that Equatorial bought it. It bears
emphasis that Carmelo and Bauermann, Inc. and Mayfair never reached an agreement as
to the price of the property in dispute because the negotiations between the two parties
were not pursued to its very end. We cannot, even for reasons of equity, compel Carmelo
to sell the entire property to Mayfair at P11,300,000.00 without violating the consensual
nature of contracts.

I vote, therefore, not to rescind the contract of sale entered into by Carmelo and Bauermann,
Inc. and Equatorial Realty Development Corp.

VITUG, J., dissenting:

I share the opinion that the right granted to Mayfair Theater, Inc., is neither an offer nor an
option but merely a right of first refusal as has been so well and amply essayed in
the ponencia of our distinguished colleague Mr. Justice Regino C. Hermosisima, Jr.

77
Unfortunately, it would seem that Article 1381 (paragraph 3) of the Civil Code invoked to
be the statutory authority for the rescission of the contract of sale between Carmelo &
Bauermann, Inc., and Equatorial Realty Development, Inc., has been misapplied. The
action for rescission under that provision of the law, unlike in the resolution of reciprocal
obligations under Article 1191 of the Code, is merely subsidiary and relates to the specific
instance when a debtor, in an attempt to defraud his creditor, enters into a contract with
another that deprives the creditor to recover his just claim and leaves him with no other
legal means, than by rescission, to obtain reparation. Thus, the rescission is only to the
extent necessary to cover the damages caused (Article 1384, Civil Code) and, consistent
with its subsidiary nature, would require the debtor to be an indispensable party in the
action (see Gigante vs. Republic Savings Bank, 135 Phil. 359).

The concept of a right of first refusal as a simple juridical relation, and so governed
(basically) by the Civil Code's title on "Human Relations," is not altered by the fact alone
that it might be among the stipulated items in a separate document or even in another
contract. A "breach" of the right of first refusal can only give rise to an action for damages
primarily under Article 19 of the Civil Code, as well as its related provisions, but not to an
action for specific performance set out under Book IV of the Code on "Obligations and
Contracts." That right, standing by itself, is far distant from being the obligation referred
to in Article 1159 of the Code which would have the force of law sufficient to compel
compliance per se or to establish a creditor-debtor or obligee-obligor relation between the
parties. If, as it is rightly so, a right of first refusal cannot even be properly classed as an
offer or as an option, certainly, and with much greater reason, it cannot be the equivalent
of, nor be given the same legal effect as, a duly perfected contract. It is not possible to cross
out, such as we have said in Ang Yu Asuncion vs. Court of Appeals (238 SCRA 602), the
indispensable element of consensuality in the perfection of contracts. It is basic that without
mutual consent on the object and on the cause, a contract cannot exist (Art. 1305, Civil
Code); corollary to it, no one can be forced, least of all perhaps by a court, into a contract
against his will or compelled to perform thereunder.

It is sufficiently clear, I submit, that, there being no binding contract between Carmelo and
Mayfair, neither the rescission of the contract between Carmelo and Equatorial nor the
directive to Carmelo to sell the property to Mayfair would be legally appropriate.

My brief disquisition should have ended here except for some personal impressions
expressed by my esteemed colleague, Mr. Justice Artemio V. Panganiban, on the Ang
Yu decision which perhaps need to be addressed.

The discussion by the Court in Ang Yu on the right of first refusal is branded as a
mere obiter dictum. Justice Panganiban states: The case "turned largely on the issue of
whether or not the sale of an immovable in breach of a right of first refusal that had been
decreed in a final judgment would justify the issuance of certain orders of execution in the
same case. . . . . In other words, the question of whether specific performance of one's right
of first refusal is available as a remedy in case of breach thereof was not before the Supreme
Court at all in Ang Yu Asuncion."

Black defines an obiter dictum as "an opinion entirely unnecessary for the decision of the
case" and thus "are not binding as precedent." (Black's Law Dictionary, 6th edition, 1990).
A close look at the antecedents of Ang Yu as found by the Court of Appeals and as later
quoted by this Court would readily disclose that the "right of first refusal" was a major
point in the controversy. Indeed, the trial and the appellate courts had rule on it. With due
respect, I would not deem it "entirely unnecessary" for this Court to itself discuss the legal
connotation and significance of the decreed (confirmatory) right of first refusal. I should

78
add that when the ponencia recognized that, in the case of Buen Realty Development
Corporation (the alleged purchaser of the property), the latter could not be held subject of
the writ of execution and be ousted from the ownership and possession of the disputed
property without first affording it due process, the Court decided to simply put a cap in the
final disposition of the case but it could not have intended to thereby mitigate the import
of its basic ratio decidendi.

Justice Panganiban opines that the pronouncement in Ang Yu, i.e., that a breach of the right
of first refusal does not sanction an action for specific performance but only an action for
damages, "is at best debatable (. . . imprecise or incorrect), on to top of its being
contradicted by extant jurisprudence." He then comes up with the novel proposition that
"Mayfair's right of first refusal may be classified as one subject to a suspensive condition
— namely, if Carmelo should decide to sell the leased premises during the life of the lease
contracts, then it should make an offer of sale to Mayfair," presumably enforceable by
action for specific performance.

It would be perilous a journey, first of all, to try to seek out a common path for such juridical
relations as contracts, options, and rights of first refusal since they differ, substantially
enough, in their concepts, consequences and legal implications. Very briefly, in the area
on sales particularly, I borrow from Ang Yu, a unanimous decision of the Supreme Court En
Banc, which held:

In the law on sales, the so-called "right of first refusal" is an innovative

juridical relation. Needless to point out, it cannot be deemed a perfected
contract of sale under Article 1458 of the Civil Code. Neither can the right
of first refusal, understood in its normal concept, per se be brought within
the purview of an option under the second paragraph of Article 1479,
aforequoted, or possibly of an offer under Article 1319 of the same Code. An
option or an offer would require, among other things, a clear certainty on
both the object and the cause or consideration of the envisioned contract. In
a right of first refusal, while the object might be made determinate, the
exercise of the right, however, would be dependent not only on the grantor's
eventual intention to enter into a binding juridical relation with another but
also on terms, including the price, that obviously are yet to be later firmed
up. Prior thereto, it can at best be so described as merely belonging to a class
of preparatory juridical relations governed not by contracts (since the
essential elements to establish the vinculum juris would still be indefinite and
inconclusive) but by, among other laws of general application, the pertinent
scattered provisions of the Civil Code on human conduct.

An obligation, and so a conditional obligation as well (albeit subject to the occurrence of

the condition), in its context under Book IV of the Civil Code, can only be "a juridical
necessity to give, to do or not to do" (Art. 1156, Civil Code), and one that is constituted by
law, contracts, quasi-contracts, delicts and quasi-delicts (Art. 1157, Civil Code) which all
have their respective legal significance rather well settled in law. The law certainly must
have meant to provide congruous, albeit contextual, consequences to its
provisions. Interpretare et concordore legibus est optimus interpretendi. As a valid source
of an obligation, a contract must have the concurrence of (a) consent of the contracting
parties, (b) object certain (subject matter of the contract) and (c) cause (Art. 1318, Civil
Code). These requirements, clearly defined, are essential. The consent contemplated by the
law is that which is manifested by the meeting of the offer and of the acceptance upon the
object and the cause of the obligation. The offer must be certain and the acceptance absolute
(Article 1319 of the Civil Code). Thus, a right of first refusal cannot have the effect of a

79
contract because, by its very essence, certain basic terms would have yet to be determined
and fixed. How its "breach" be also its perfection escapes me. It is only when the elements
concur that the juridical act would have the force of law between the contracting parties
that must be complied with in good faith (Article 1159 of the Civil Code; see also Article
1308, of the Civil Code), and, in case of its breach, would allow the creditor or obligee (the
passive subject) to invoke the remedy that specifically appertains to it.

The judicial remedies, in general, would, of course, include: (a) The principal remedies (i)
of specific performance in obligations to give specific things (Articles 1165 and 1167 of
the Civil Code), substitute performance in an obligation to do or to deliver generic things
(Article 1165 of the Civil Code) and equivalent performance for damages (Articles 1168
and 1170 of the Civil Code); and (ii) of rescission or resolution of reciprocal obligations;
and (b) the subsidiary remedies that may be availed of when the principal remedies are
unavailable or ineffective such as (i) accion subrogatoria or subrogatory action (Article
1177 of the Civil Code; see also Articles 1729 and 1893 of the Civil Code); and (ii) accion
pauliana or rescissory action (Articles 1177 and 1381 of the Civil Code). And, in order to
secure the integrity of final judgments, such ancillary remedies as attachments, replevin,
garnishments, receivership, examination of the debtor, and similar remedies, are
additionally provided for in procedural law.

Might it be possible, however, that Justice Panganiban was referring to how Ang Yu could
relate to the instant case for, verily, his remark, earlier quoted, was followed by an
extensive discussion on the factual and case milieu of the present petition? If it were, then
I guess it was the applicability of the Ang Yu decision to the instant case that he questioned,
but that would not make Ang Yu "imprecise" or "incorrect."

Justice Panganiban would hold the Ang Yu ruling to be inconsistent with Guzman,
Bocaling & Co. vs. Bonnevie (206 SCRA 668). I would not be too hasty in concluding
similarly. In Guzman, the stipulation involved, although loosely termed a "right of first
priority," was, in fact, a contract of option. The provision in the agreement there stated:

20. — In case the LESSOR desires or decides to sell the leased property, the
LESSEES shall be given a first priority to purchase the same, all things and
considerations being equal.(At page 670; emphasis supplied.)

In the above stipulation, the Court ruled, in effect, that the basic terms had been
adequately, albeit briefly, spelled out with the lease consideration being deemed
likewise to be the essential cause for the option. The situation undoubtedly was not
the same that prevailed in Ang Yu or, for that matter, in the case at bar. The
stipulation between Mayfair Theater, Inc., and Carmelo & Bauermann, Inc., merely
read:

That if the LESSOR should desire to sell the leased premises, the LESSEE
shall be given 30-days exclusive option to purchase the same.

The provision was too indefinite to allow it to even come close to within the area of
the Guzman ruling.

Justice Panganiban was correct in saying that the "cases of Madrigal & Co. vs. Stevenson
& Co. and Salonga vs. Farrales (cited in Ang Yu) did NOT involve a right of first refusal
or of first priority. Nor did those two cases involve an option to buy." The two cases, to set
the record straight, were cited, not because they were thought to involve a right of first
refusal or an option to buy but to emphasize the indispensability of consensuality over the

80
object and cause of contracts in their perfection which would explain why, parallel
therewith, Articles 1315 and 1318 of the Civil Code were also mentioned.

One final note: A right of first refusal, in its proper usage, is not a contract; when parties
instead make certain the object and the cause thereof and support their understanding with
an adequate consideration, that juridical relation is not to be taken as just a right of first
refusal but as a contract in itself (termed an "option"). There is, unfortunately, in law a limit
to an unabated use of common parlance.

With all due respect, I hold that the judgment of the trial court, although not for all the
reasons it has advanced, should be REINSTATED.

Separate Opinions

PADILLA, J., concurring:

I am of the considered view (like Mr. Justice Jose A. R. Melo) that the Court in this case
should categorically recognize Mayfair's right of first refusal under its contract of lease
with Carmelo and Bauermann, Inc. (hereafter, Carmelo) and, because of Carmelo's and
Equatorial's bad faith in riding "roughshod" over Mayfair's right of first refusal, the Court
should order the rescission of the sale of the Claro M. Recto property by the latter to
Equatorial (Art. 1380-1381[3], Civil Code). The Court should, in this same case, to avoid
multiplicity of suits, likewise allow Mayfair to effectively exercise said right of first
refusal, by paying Carmelo the sum of P11,300,000.00 for the entire subject property,
without any need of instituting a separate action for damages against Carmelo and/or
Equatorial.

I do not agree with the proposition that, in addition to the aforesaid purchase price, Mayfair
should be required to pay a compounded interest of 12% per annum of said amount
computed from 1 August 1978. Under the Civil Code, a party to a contract may recover
interest as indemnity for damages in the following instances:

Art. 2209. If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per
annum.

Art. 2210. Interest may, in the discretion of the court, be allowed upon
damages awarded for breach of contract.

There appears to be no basis in law for adding 12% per annum compounded interest
to the purchase price of P11,300,000.00 payable by Mayfair to Carmelo since there
was no such stipulation in writing between the parties (Mayfair and Carmelo) but,
more importantly, because Mayfair neither incurred in delay in the performance of
its obligation nor committed any breach of contract. Indeed, why should Mayfair be
penalized by way of making it pay 12% per annum compounded interest when it
was Carmelo which violated Mayfair's right of first refusal under the contract?

The equities of the case support the foregoing legal disposition. During the intervening
years between 1 August 1978 and this date, Equatorial (after acquiring the C.M. Recto

81
property for the price of P11,300,000.00) had been leasing the property and deriving rental
income therefrom. In fact, one of the lessees in the property was Mayfair. Carmelo had, in
turn, been using the proceeds of the sale, investment-wise and/or operation-wise in its own
business.

It may appear, at first blush, that Mayfair is unduly favored by the solution submitted by
this opinion, because the price of P11,300,000.00 which it has to pay Carmelo in the
exercise of its right of first refusal, has been subjected to the inroads of inflation so that its
purchasing power today is less than when the same amount was paid by Equatorial to
Carmelo. But then it cannot be overlooked that it was Carmelo's breach of Mayfair's right
of first refusal that prevented Mayfair from paying the price of P11,300,000.00 to Carmelo
at about the same time the amount was paid by Equatorial to Carmelo. Moreover, it cannot
be ignored that Mayfair had also incurred consequential or "opportunity" losses by reason
of its failure to acquire and use the property under its right of first refusal. In fine, any loss
in purchasing power of the price of P11,300,000.00 is for Carmelo to incur or absorb on
account of its bad faith in breaching Mayfair's contractual right of first refusal to the subject
property.

ACCORDINGLY, I vote to order the rescission of the contract of sale between Carmelo
and Equatorial of the Claro M. Recto property in question, so that within thirty (30) days
from the finality of the Court's decision, the property should be retransferred and delivered
by Equatorial to Carmelo with the latter simultaneously returning to Equatorial the sum of
P11,300, 000.00.

I also vote to allow Mayfair to exercise its right of first refusal, by paying to Carmelo the
sum of P11,300,000.00 without interest for the entire subject property, within thirty (30)
days from re-acquisition by Carmelo of the titles to the property, with the corresponding
obligation of Carmelo to sell and transfer the property to Mayfair within the same period
of thirty (30) days.

PANGANIBAN, J., concurring:

In the main, I concur with the ponencia of my esteemed colleague, Mr. Justice Regino C.
Hermosisima, Jr., especially with the following doctrinal pronouncements:

1. That while no option to purchase within the meaning of the second

paragraph of Article 1479 of the Civil Code was given to Mayfair Theater,
Inc. ("Mayfair"), under the two lease contracts a right of first refusal was in
fact granted, for which no separate consideration is required by law to be
paid or given so as to make it binding upon Carmelo & Bauermann, Inc.
("Carmelo");

2. That such right was violated by the latter when it sold the entire property
to Equatorial Realty Development, Inc. ("Equatorial") on July 30, 1978, for
the sum of P11,300,000.00;

3. That Equatorial is a buyer in bad faith as it was aware of the lease contracts,
its own lawyers having studied said contracts prior to the sale; and

4. That, consequently, the contract of sale is rescissible.

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 5. That, finally, under the proven facts, the right of first refusal may be
enforced by an action for specific performance.

There appears to be unanimity in the Court insofar as items 1, 2 and 3 above are concerned.
It is in items 4 and 5 that there is a marked divergence of opinion. Hence, I shall limit the
discussion in this Separate Concurring Opinion to such issues, namely: Is the contract of
sale between Carmelo and Equatorial rescissible, and corollarily, may the right of first
refusal granted to Mayfair be enforced by an action for specific performance?

It is with a great amount of trepidation that I respectfully disagree with the legal proposition
espoused by two equally well-respected colleagues, Mme. Justice Flerida Ruth P. Romero
and Mr. Justice Jose C. Vitug — who are both acknowledged authorities on Civil Law —
that a breach of the covenanted right of first refusal, while warranting a suit for damages
under Article 19 of the Civil Code, cannot sanction an action for specific performance
without thereby negating the indispensable element of con-sensuality in the perfection of
contracts.

Ang Yu Asuncion Not In Point

Such statement is anchored upon a pronouncement in Ang Yu Asuncion vs. CA, 1 which
was penned by Mr. Justice Vitug himself. I respectfully submit, however, that that case
turned largely on the issue of whether or not the sale of an immovable in breach of a right
of first refusal that had been decreed in a final judgment would justify the issuance of
certain orders of execution in the same case. The validity of said orders was the subject of
the attack before this Court. These orders had not only directed the defendants to execute
a deed of sale in favor of the plaintiffs, when there was nothing in the judgment itself
decreeing it, but had also set aside the sale made in breach of said right of first refusal and
even canceled the title that had been issued to the buyer, who was not a party to the suit
and had obviously not been given its day in court. It was thus aptly held:

The final judgment in Civil Case No. 87-41058, it must be stressed, has
merely accorded a "right of first refusal" in favor of petitioners. The
consequence of such a declaration entails no more than what has heretofore
been said. In fine, if, as it is here so conveyed to us, petitioners are aggrieved
by the failure of private respondents to honor the right of first refusal, the
remedy is not a writ of execution on the judgment, since there is none to
execute, but an action for damages in a proper forum for the purpose.

Furthermore, whether private respondent Buen Realty Development

Corporation, the alleged purchaser of the property, has acted in good faith or
bad faith and whether or not it should, in any case, be considered bound to
respect the registration of the lis pendens in Civil Case No. 87-41058 are
matters that must be independently addressed in appropriate
proceedings. Buen Realty, not having been impleaded in Civil Case No. 87-
41058, cannot be held subject to the writ of execution issued by respondent
Judge, let alone ousted from the ownership and possession of the property,
without first being duly afforded its day in court. 2

In other words, the question of whether specific performance of one's right of first refusal
is available as a remedy in case of breach thereof was not before the Supreme Court at all
in Ang Yu Asuncion. Consequently, the pronouncements there made bearing on such
unlitigated question were mere obiter. Moreover, as will be shown later, the
pronouncement that a breach of the right of first refusal would not sanction an action for

83
specific performance but only an action for damages (at p. 615) is at best debatable (and in
my humble view, imprecise or incorrect), on top of its being contradicted by extant
jurisprudence.

Worth bearing in mind is the fact that two juridical relations, both contractual, are involved
in the instant case: (1) the deed of sale between the petitioners dated July 30, 1978, and (2)
the contract clause establishing Mayfair's right of first refusal which was violated by said
sale.

With respect to the sale of the property, Mayfair was not a party. It therefore had no
personality to sue for its annulment, since Art. 1397 of the Civil Code provides, inter alia,
that "(t)he action for the annulment of contracts may be instituted by all who are thereby
obliged principally or subsidiarily."

But the facts as alleged and proved clearly in the case at bar make out a case for rescission
under Art. 1177, in relation to Art. 1381(3), of the Civil Code, which pertinently read as
follows:

Art. 1177. The creditors, after having pursued the property in possession of
the debtor to satisfy their claims, may exercise all the rights and bring all the
actions of the latter for the same purpose, save those which are inherent in
his person; they may also impugn the acts which the debtor may have done
to defraud them.

Art. 1381. The following contracts are rescissible:

xxx xxx xxx

(3) Those undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due them;

xxx xxx xxx

(emphasis supplied)

The term "creditors" as used in these provisions of the Civil Code is broad enough to
include the obligee under an option contract 3 as well as under a right of first refusal,
sometimes known as a right of first priority. 4 Thus, in Nietes, the Supreme Court, speaking
through then Mr. Chief Justice Roberto Concepcion, repeatedly referred to the grantee or
optionee as "the creditor" and to the grantor or optioner as "the debtor". 5 In any case, the
personal elements of an obligation are the active and passive subjects thereof, the former
being known as creditors or obligees and the latter as debtors or obligors. 6Insofar as the
right of first refusal is concerned, Mayfair is the obligee or creditor.

As such creditor, Mayfair had, therefore, the right to impugn the sale in question by way
of accion pauliana under the last clause of Art. 1177, aforequoted, because the sale was an
act done by the debtor to defraud him of his right to acquire the property. 7 Rescission was
also available under par. 3, Art. 1381, abovequoted, as was expressly held in Guzman,
Bocaling & Co., a case closely analogous to this one as it was also an action brought by
the lessee to enforce his "right of first priority" — which is just another name for the right
of first refusal — and to annul a sale made by the lessor in violation of such right. In said
case, this Court, speaking through Mr. Justice Isagani A. Cruz, affirmed the invalidation of
the sale and the enforcement of the lessee's right of first priority this wise: 8

84
 The petitioner argues that assuming the Contract of Sale to be voidable, only
the parties thereto could bring an action to annul it pursuant to Article 1397
of the Civil Code. It is stressed that private respondents are strangers to that
agreement and therefore have no personality to seek its annulment.

The respondent court correctly held that the Contract of Sale was not
voidable but rescissible. Under Article(s) 1380 to 1381 (3) of the Civil Code,
a contract otherwise valid may nonetheless be subsequently rescinded by
reason of injury to third persons, like creditors. The status of creditors could
be validly accorded the Bonnevies for they had substantial interests that were
prejudiced by the sale of the subject property to the petitioner without
recognizing their right of first priority under the Contract of Lease.
(emphasis supplied)

By the same token, the status of a defrauded creditor can, and should, be granted to Mayfair,
for it certainly had substantial interests that were prejudiced by the sale of the subject
property to petitioner Equatorial in open violation of Mayfair's right of first refusal under
its existing contracts with Carmelo.

In fact, the parity between that case and the present one does not stop there but extends to
the crucial and critical fact that there was manifest bad faith on the part of the buyer. Thus,
in Guzman, this Court affirmed in toto the appealed judgment of the Court of Appeals
which, in turn, had affirmed the trial court's decision insofar as it invalidated the deed of
sale in favor of the petitioner-buyer, cancelled its TCT, and ordered the lessor to execute
a deed of sale over the leased property in favor of the lessee for the same price and "under
the same terms and conditions", aside from affirming as well the damages awarded, but at
a reduced amount. 9 In other words, the aggrieved party was allowed to acquire the property
itself.

The inescapable conclusion from all of the foregoing is not only that rescission is the proper
remedy but also — and more importantly — that specific performance was actually used
and given free rein as an effective remedy to enforce a right of first refusal in the wake of
its violation, in the cited case of Guzman.

On the other hand, and as already commented on above, the pronouncement in Ang Yu
Asuncion to the effect that specific performance is unavailable to enforce a violated right
of first refusal is at best a debatable legal proposition, aside from being contradicted by
extant jurisprudence. Let me explain why.

The consensuality required for a contract of sale is distinct from, and should not be
confused with, the consensuality attendant to the right of first refusal itself. While indeed,
prior to the actual sale of the property to Equatorial and the filing of Mayfair's complaint
for specific performance, no perfected contract of sale involving the property ever existed
between Carmelo as seller and Mayfair as buyer, there already was, in law and in fact, a
perfected contract between them which established a right of first refusal, or of first
priority.

Specific Performance Is
Viable Remedy

The question is: Can this right (of first refusal) be enforced by an action for specific
performance upon a showing of its breach by an actual sale of the property under
circumstances showing palpable bad faith on the part of both seller and buyer?

85
The answer, I respectfully submit, should be 'yes'.

As already noted, Mayfair's right of first refusal in the case before us is embodied in an
express covenant in the lease contracts between it as lessee and Carmelo as lessor, hence
the right created is one springing from contract. 10 Indubitably, this had the force of law
between the parties, who should thus comply with it in good faith. 11 Such right also
established a correlative obligation on the part of Carmelo to give or deliver to Mayfair a
formal offer of sale of the property in the event Carmelo decides to sell it. The decision to
sell was eventually made. But instead of giving or tendering to Mayfair the proper offer to
sell, Carmelo gave it to its now co-petitioner, Equatorial, with whom it eventually perfected
and consummated, on July 30, 1978, an absolute sale of the property, doing so within the
period of effectivity of Mayfair's right of first refusal. Less than two months later, or in
September 1978, with the lease still in full force, Mayfair filed the present suit.

Worth stressing at this juncture is the fact that Mayfair had the right to require that the offer
to sell the property be sent to it by Carmelo, and not to anybody else. This was violated
when the offer was made to Equatorial. Under its covenant with Carmelo, Mayfair had the
right, at that point, to sue for either specific performance or rescission, with damages in
either case, pursuant to Arts. 1165 and 1191, Civil Code. 12 An action for specific
performance and damages seasonably filed, fortified by a writ of preliminary injunction,
would have enabled Mayfair to prevent the sale to Equatorial from taking place and to
compel Carmelo to sell the property to Mayfair for the same terms and price, for the reason
that the filing of the action for specific performance may juridically be considered as a
solemn, formal, and unqualified acceptance by Mayfair of the specific terms of the offer of
sale. Note that by that time, the price and other terms of the proposed sale by Carmelo had
already been determined, being set forth in the offer of sale that had wrongfully been
directed to Equatorial.

As it turned out, however, Mayfair did not have a chance to file such suit, for it learned of
the sale to Equatorial only after it had taken place. But it did file the present action for
specific performance and for invalidation of the wrongful sale immediately after learning
about the latter act. The act of promptly filing this suit, coupled with the fact that it is one
for specific performance, indicates beyond cavil or doubt Mayfair's unqualified acceptance
of the misdirected offer of sale, giving rise, thereby, to a demandable obligation on the part
of Carmelo to execute the corresponding document of sale upon the payment of the price
of P11,300,000.00. In other words, the principle of consensuality of a contract of sale
should be deemed satisfied. The aggrieved party's consent to, or acceptance of, the
misdirected offer of sale should be legally presumed in the context of the proven facts.

To say, therefore, that the wrongful breach of a right of first refusal does not sanction an
action for specific performance simply because, factually, there was no meeting of the
minds as to the particulars of the sale since ostensibly no offer was ever made to, let alone
accepted by, Mayfair, is to ignore the proven fact of presumed consent. To repeat, that
consent was deemed given by Mayfair when it sued for invalidation of the sale and for
specific performance of Carmelo's obligation to Mayfair. Nothing in the law as it now
stands will be violated, or even simply emasculated, by this holding. On the contrary, the
decision in Guzman supports it.

Moreover, under the Civil Code provisions on the nature, effect and kinds of
obligations, 13 Mayfair's right of first refusal may be classified as one subject to a
suspensive condition — namely, if Carmelo should decide to sell the leased premises
during the life of the lease contracts, then it should make an offer of sale to Mayfair.
Futurity and uncertainty, which are the essential characteristics of a condition, 14 were

86
distinctly present. Before the decision to sell was made, Carmelo had absolutely no
obligation to sell the property to Mayfair, nor even to make an offer to sell, because in
conditional obligations, where the condition is suspensive, the acquisition of rights depends
upon the happening of the event which constitutes the condition. 15 Had the decision to sell
not been made at all, or had it been made after the expiry of the lease, the parties would
have stood as if the conditional obligation had never existed. 16 But the decision to sell was
in fact made. And it was made during the life and efficacy of the lease. Undoubtedly, the
condition was duly fulfilled; the right of first refusal effectively accrued and became
enforceable; and correlatively, Carmelo's obligation to make and send the offer to
Mayfair became immediately due and demandable. 17 That obligation was to deliver to
Mayfair an offer to sell a determinate thing for a determinate price. As things turned out, a
definite and specific offer to sell the entire property for the price of P11,300,000.00 was
actually made by Carmelo — but to the wrong party. It was that particular offer, and no
other, which Carmelo should have delivered to Mayfair, but failed to deliver. Hence, by
the time the obligation of Carmelo accrued through the fulfillment of the suspensive
condition, the offer to sell had become a determinate thing.

Art. 1165 of the Civil Code, earlier quoted in footnote 12, indicates the remedies available
to the creditor against the debtor, when it provides that "(w)hen what is to be delivered is
a determinate thing, the creditor, in addition to the right granted him by article 1170, may
compel the debtor to make the delivery," clearly authorizing not only the recovery of
damages under Art. 1170 but also an action for specific performance.

But even assuming that Carmelo's prestation did not involve the delivery of a determinate
offer but only a generic one, the second paragraph of Art. 1165 explicitly gives to the
creditor the right "to ask that the obligation be complied with at the expense of the debtor."
The availability of an action for specific performance is thus clear and beyond doubt. And
the correctness of Guzman becomes all the more manifest.

Upon the other hand, the obiter in Ang Yu Asuncion is further weakened by the fact that
the jurisprudence upon which it supposedly rests — namely, the cases of Madrigal &
CO. vs. Stevenson & Co. 18 and Salonga vs. Farrales19 — did NOT involve a right of first
refusal or of first priority. Nor did those two cases involve an option to buy. In Madrigal,
plaintiff sued defendant for damages claiming wrongful breach of an alleged contract of
sale of 2,000 tons of coal. The case was dismissed because "the minds of the parties never
met upon a contract of sale by defendant to plaintiff", 20 each party having signed the
broker's memorandum as buyer, erroneously thinking that the other party was the seller!
In Salonga, a lessee, who was one of several lessees ordered by final judgment to vacate
the leased premises, sued the lessor to compel the latter to sell the leased premises to him,
but his suit was not founded upon any right of first refusal and was therefore dismissed on
the ground that there was no perfected sale in his favor. He just thought that because the
lessor had decided to sell and in fact sold portions of the property to her other lessees, she
was likewise obligated to sell to him even in the absence of a perfected contract of sale. In
fine, neither of the two cases cited in support of the legal proposition that a breach of the
right of first refusal does not sanction an action for specific performance but, at best, only
one for damages, provides such support.

Finally, the fact that what was eventually sold to Equatorial was the entire property, not
just the portions leased to Mayfair, is no reason to deprive the latter of its right to receive
a formal and specific offer. The offer of a larger property might have led Mayfair to reject
the offer, but until and unless such rejection was actually made, its right of first refusal still
stood. Upon the other hand, an acceptance by Mayfair would have saved all concerned the
time, trouble, and expense of this protracted litigation. In any case, the disquisition by the

87
Court of Appeals on this point can hardly be faulted; in fact, it amply justifies the
conclusions reached in its decision, as well as the dispositions made therein.

IN VIEW OF THE FOREGOING, I vote to DENY the petition and to AFFIRM the assailed
Decision.

ROMERO, J., concurring and dissenting:

I share the opinion that the right granted to Mayfair Theater under the identical par 8 of the
June 1, 1967 and March 31, 1969 contracts constitute a right of first refusal.

An option is a privilege granted to buy a determinate thing at a price certain within a

specified time and is usually supported by a consideration which is why, it may be regarded
as a contract in itself. The option results in a perfected contract of sale once the person to
whom it is granted decides to exercise it. The right of first refusal is unlike an option which
requires a certainty as to the object and consideration of the anticipated contract. When the
right of first refusal is exercised, there is no perfected contract of sale because the other
terms of the sale have yet to be determined. Hence, in case the offeror reneges on his
promise to negotiate with offeree, the latter may only recover damages in the belief that a
contract could have been perfected under Article 19 of the New Civil Code.

I beg to disagree, however, with the majority opinion that the contract of sale entered into
by Carmelo and Bauermann, Inc. and Equatorial Realty Inc., should be rescinded. Justice
Hermosisima, in citing Art. 1381 (3) as ground for recission apparently relied on the case
of Guzman, Bocaling and Co. v. Bonnevie (206 SCRA 668 [1992]) where the offeree was
likened to the status of a creditor. The case, in citing Tolentino, stated that rescission is a
remedy granted by law to contracting parties and even to third persons, to secure reparation
for damages caused to them by a contract, even if this should be valid, by means of
restoration of things to their condition prior to celebration of the contract. It is my opinion
that "third persons" should be construed to refer to the wards, creditors, absentees, heirs
and others enumerated under the law who are prejudiced by the contract sought to be
rescinded.

It should be borne in mind that rescission is an extreme remedy which may be exercised
only in the specific instances provided by law. Article 1381 (3) specifically refers to
contracts undertaken in fraud of creditors when the latter cannot in any manner collect the
claims due them. If rescission were allowed for analogous cases, the law would have so
stated. While Article 1381 (5) itself says that rescission may be granted to all other
contracts specially declared by law to be subject to rescission, there is nothing in the law
that states that an offeree who failed to exercise his right of refusal because of bad faith on
the part of the offeror may rescind the subsequent contract entered into by the offeror and
a third person. Hence, there is no legal justification to rescind the contract between Carmelo
and Bauermann, Inc. and Equatorial Realty.

Neither do I agree with Justice Melo that Mayfair Theater should pay Carmelo and
Bauermann, Inc. the amount of P11,300,000.00 plus compounded interest of 12% p.a.
Justice Melo rationalized that had Carmelo and Bauermann sold the property to Mayfair,
the latter would have paid the property for the same price that Equatorial bought it. It bears
emphasis that Carmelo and Bauermann, Inc. and Mayfair never reached an agreement as
to the price of the property in dispute because the negotiations between the two parties
were not pursued to its very end. We cannot, even for reasons of equity, compel Carmelo

88
to sell the entire property to Mayfair at P11,300,000.00 without violating the consensual
nature of contracts.

I vote, therefore, not to rescind the contract of sale entered into by Carmelo and Bauermann,
Inc. and Equatorial Realty Development Corp.

VITUG, J., dissenting:

I share the opinion that the right granted to Mayfair Theater, Inc., is neither an offer nor an
option but merely a right of first refusal as has been so well and amply essayed in
the ponencia of our distinguished colleague Mr. Justice Regino C. Hermosisima, Jr.

Unfortunately, it would seem that Article 1381 (paragraph 3) of the Civil Code invoked to
be the statutory authority for the rescission of the contract of sale between Carmelo &
Bauermann, Inc., and Equatorial Realty Development, Inc., has been misapplied. The
action for rescission under that provision of the law, unlike in the resolution of reciprocal
obligations under Article 1191 of the Code, is merely subsidiary and relates to the specific
instance when a debtor, in an attempt to defraud his creditor, enters into a contract with
another that deprives the creditor to recover his just claim and leaves him with no other
legal means, than by rescission, to obtain reparation. Thus, the rescission is only to the
extent necessary to cover the damages caused (Article 1384, Civil Code) and, consistent
with its subsidiary nature, would require the debtor to be an indispensable party in the
action (see Gigante vs. Republic Savings Bank, 135 Phil. 359).

The concept of a right of first refusal as a simple juridical relation, and so governed
(basically) by the Civil Code's title on "Human Relations," is not altered by the fact alone
that it might be among the stipulated items in a separate document or even in another
contract. A "breach" of the right of first refusal can only give rise to an action for damages
primarily under Article 19 of the Civil Code, as well as its related provisions, but not to an
action for specific performance set out under Book IV of the Code on "Obligations and
Contracts." That right, standing by itself, is far distant from being the obligation referred
to in Article 1159 of the Code which would have the force of law sufficient to compel
compliance per se or to establish a creditor-debtor or obligee-obligor relation between the
parties. If, as it is rightly so, a right of first refusal cannot even be properly classed as an
offer or as an option, certainly, and with much greater reason, it cannot be the equivalent
of, nor be given the same legal effect as, a duly perfected contract. It is not possible to cross
out, such as we have said in Ang Yu Asuncion vs. Court of Appeals (238 SCRA 602), the
indispensable element of consensuality in the perfection of contracts. It is basic that without
mutual consent on the object and on the cause, a contract cannot exist (Art. 1305, Civil
Code); corollary to it, no one can be forced, least of all perhaps by a court, into a contract
against his will or compelled to perform thereunder.

It is sufficiently clear, I submit, that, there being no binding contract between Carmelo and
Mayfair, neither the rescission of the contract between Carmelo and Equatorial nor the
directive to Carmelo to sell the property to Mayfair would be legally appropriate.

My brief disquisition should have ended here except for some personal impressions
expressed by my esteemed colleague, Mr. Justice Artemio V. Panganiban, on the Ang
Yu decision which perhaps need to be addressed.

89
The discussion by the Court in Ang Yu on the right of first refusal is branded as a
mere obiter dictum. Justice Panganiban states: The case "turned largely on the issue of
whether or not the sale of an immovable in breach of a right of first refusal that had been
decreed in a final judgment would justify the issuance of certain orders of execution in the
same case. . . . . In other words, the question of whether specific performance of one's right
of first refusal is available as a remedy in case of breach thereof was not before the Supreme
Court at all in Ang Yu Asuncion."

Black defines an obiter dictum as "an opinion entirely unnecessary for the decision of the
case" and thus "are not binding as precedent." (Black's Law Dictionary, 6th edition, 1990).
A close look at the antecedents of Ang Yu as found by the Court of Appeals and as later
quoted by this Court would readily disclose that the "right of first refusal" was a major
point in the controversy. Indeed, the trial and the appellate courts had rule on it. With due
respect, I would not deem it "entirely unnecessary" for this Court to itself discuss the legal
connotation and significance of the decreed (confirmatory) right of first refusal. I should
add that when the ponencia recognized that, in the case of Buen Realty Development
Corporation (the alleged purchaser of the property), the latter could not be held subject of
the writ of execution and be ousted from the ownership and possession of the disputed
property without first affording it due process, the Court decided to simply put a cap in the
final disposition of the case but it could not have intended to thereby mitigate the import
of its basic ratio decidendi.

Justice Panganiban opines that the pronouncement in Ang Yu, i.e., that a breach of the right
of first refusal does not sanction an action for specific performance but only an action for
damages, "is at best debatable (. . . imprecise or incorrect), on to top of its being
contradicted by extant jurisprudence." He then comes up with the novel proposition that
"Mayfair's right of first refusal may be classified as one subject to a suspensive condition
— namely, if Carmelo should decide to sell the leased premises during the life of the lease
contracts, then it should make an offer of sale to Mayfair," presumably enforceable by
action for specific performance.

It would be perilous a journey, first of all, to try to seek out a common path for such juridical
relations as contracts, options, and rights of first refusal since they differ, substantially
enough, in their concepts, consequences and legal implications. Very briefly, in the area
on sales particularly, I borrow from Ang Yu, a unanimous decision of the Supreme Court En
Banc, which held:

In the law on sales, the so-called "right of first refusal" is an innovative

juridical relation. Needless to point out, it cannot be deemed a perfected
contract of sale under Article 1458 of the Civil Code. Neither can the right
of first refusal, understood in its normal concept, per se be brought within
the purview of an option under the second paragraph of Article 1479,
aforequoted, or possibly of an offer under Article 1319 of the same Code. An
option or an offer would require, among other things, a clear certainty on
both the object and the cause or consideration of the envisioned contract. In
a right of first refusal, while the object might be made determinate, the
exercise of the right, however, would be dependent not only on the grantor's
eventual intention to enter into a binding juridical relation with another but
also on terms, including the price, that obviously are yet to be later firmed
up. Prior thereto, it can at best be so described as merely belonging to a class
of preparatory juridical relations governed not by contracts (since the
essential elements to establish the vinculum juris would still be indefinite and

90
 inconclusive) but by, among other laws of general application, the pertinent
scattered provisions of the Civil Code on human conduct.

An obligation, and so a conditional obligation as well (albeit subject to the occurrence of

the condition), in its context under Book IV of the Civil Code, can only be "a juridical
necessity to give, to do or not to do" (Art. 1156, Civil Code), and one that is constituted by
law, contracts, quasi-contracts, delicts and quasi-delicts (Art. 1157, Civil Code) which all
have their respective legal significance rather well settled in law. The law certainly must
have meant to provide congruous, albeit contextual, consequences to its
provisions. Interpretare et concordore legibus est optimus interpretendi. As a valid source
of an obligation, a contract must have the concurrence of (a) consent of the contracting
parties, (b) object certain (subject matter of the contract) and (c) cause (Art. 1318, Civil
Code). These requirements, clearly defined, are essential. The consent contemplated by the
law is that which is manifested by the meeting of the offer and of the acceptance upon the
object and the cause of the obligation. The offer must be certain and the acceptance absolute
(Article 1319 of the Civil Code). Thus, a right of first refusal cannot have the effect of a
contract because, by its very essence, certain basic terms would have yet to be determined
and fixed. How its "breach" be also its perfection escapes me. It is only when the elements
concur that the juridical act would have the force of law between the contracting parties
that must be complied with in good faith (Article 1159 of the Civil Code; see also Article
1308, of the Civil Code), and, in case of its breach, would allow the creditor or obligee (the
passive subject) to invoke the remedy that specifically appertains to it.

The judicial remedies, in general, would, of course, include: (a) The principal remedies (i)
of specific performance in obligations to give specific things (Articles 1165 and 1167 of
the Civil Code), substitute performance in an obligation to do or to deliver generic things
(Article 1165 of the Civil Code) and equivalent performance for damages (Articles 1168
and 1170 of the Civil Code); and (ii) of rescission or resolution of reciprocal obligations;
and (b) the subsidiary remedies that may be availed of when the principal remedies are
unavailable or ineffective such as (i) accion subrogatoria or subrogatory action (Article
1177 of the Civil Code; see also Articles 1729 and 1893 of the Civil Code); and (ii) accion
pauliana or rescissory action (Articles 1177 and 1381 of the Civil Code). And, in order to
secure the integrity of final judgments, such ancillary remedies as attachments, replevin,
garnishments, receivership, examination of the debtor, and similar remedies, are
additionally provided for in procedural law.

Might it be possible, however, that Justice Panganiban was referring to how Ang Yu could
relate to the instant case for, verily, his remark, earlier quoted, was followed by an
extensive discussion on the factual and case milieu of the present petition? If it were, then
I guess it was the applicability of the Ang Yu decision to the instant case that he questioned,
but that would not make Ang Yu "imprecise" or "incorrect."

Justice Panganiban would hold the Ang Yu ruling to be inconsistent with Guzman,
Bocaling & Co. vs. Bonnevie (206 SCRA 668). I would not be too hasty in concluding
similarly. In Guzman, the stipulation involved, although loosely termed a "right of first
priority," was, in fact, a contract of option. The provision in the agreement there stated:

20. — In case the LESSOR desires or decides to sell the leased property, the
LESSEES shall be given a first priority to purchase the same, all things and
considerations being equal.(At page 670; emphasis supplied.)

In the above stipulation, the Court ruled, in effect, that the basic terms had been
adequately, albeit briefly, spelled out with the lease consideration being deemed

91
 likewise to be the essential cause for the option. The situation undoubtedly was not
the same that prevailed in Ang Yu or, for that matter, in the case at bar. The
stipulation between Mayfair Theater, Inc., and Carmelo & Bauermann, Inc., merely
read:

That if the LESSOR should desire to sell the leased premises, the LESSEE
shall be given 30-days exclusive option to purchase the same.

The provision was too indefinite to allow it to even come close to within the area of
the Guzman ruling.

Justice Panganiban was correct in saying that the "cases of Madrigal & Co. vs. Stevenson
& Co. and Salonga vs. Farrales (cited in Ang Yu) did NOT involve a right of first refusal
or of first priority. Nor did those two cases involve an option to buy." The two cases, to set
the record straight, were cited, not because they were thought to involve a right of first
refusal or an option to buy but to emphasize the indispensability of consensuality over the
object and cause of contracts in their perfection which would explain why, parallel
therewith, Articles 1315 and 1318 of the Civil Code were also mentioned.

One final note: A right of first refusal, in its proper usage, is not a contract; when parties
instead make certain the object and the cause thereof and support their understanding with
an adequate consideration, that juridical relation is not to be taken as just a right of first
refusal but as a contract in itself (termed an "option"). There is, unfortunately, in law a limit
to an unabated use of common parlance.

With all due respect, I hold that the judgment of the trial court, although not for all the
reasons it has advanced, should be REINSTATED.

G.R. No. 109125 December 2, 1994

ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,

vs.
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT
CORPORATION, respondents.

Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04
December 1991, in CA-G.R. SP No. 26345 setting aside and declaring without force and
effect the orders of execution of the trial court, dated 30 August 1991 and 27 September
1991, in Civil Case No. 87-41058.

The antecedents are recited in good detail by the appellate court thusly:

On July 29, 1987 a Second Amended Complaint for Specific Performance

was filed by Ang Yu Asuncion and Keh Tiong, et al., against Bobby Cu
Unjieng, Rose Cu Unjieng and Jose Tan before the Regional Trial Court,

92
Branch 31, Manila in Civil Case No. 87-41058, alleging, among others, that
plaintiffs are tenants or lessees of residential and commercial spaces owned
by defendants described as Nos. 630-638 Ongpin Street, Binondo, Manila;
that they have occupied said spaces since 1935 and have been religiously
paying the rental and complying with all the conditions of the lease contract;
that on several occasions before October 9, 1986, defendants informed
plaintiffs that they are offering to sell the premises and are giving them
priority to acquire the same; that during the negotiations, Bobby Cu Unjieng
offered a price of P6-million while plaintiffs made a counter offer of P5-
million; that plaintiffs thereafter asked the defendants to put their offer in
writing to which request defendants acceded; that in reply to defendant's
letter, plaintiffs wrote them on October 24, 1986 asking that they specify the
terms and conditions of the offer to sell; that when plaintiffs did not receive
any reply, they sent another letter dated January 28, 1987 with the same
request; that since defendants failed to specify the terms and conditions of
the offer to sell and because of information received that defendants were
about to sell the property, plaintiffs were compelled to file the complaint to
compel defendants to sell the property to them.

Defendants filed their answer denying the material allegations of the

complaint and interposing a special defense of lack of cause of action.

After the issues were joined, defendants filed a motion for summary
judgment which was granted by the lower court. The trial court found that
defendants' offer to sell was never accepted by the plaintiffs for the reason
that the parties did not agree upon the terms and conditions of the proposed
sale, hence, there was no contract of sale at all. Nonetheless, the lower court
ruled that should the defendants subsequently offer their property for sale at
a price of P11-million or below, plaintiffs will have the right of first refusal.
Thus the dispositive portion of the decision states:

WHEREFORE, judgment is hereby rendered in favor of the

defendants and against the plaintiffs summarily dismissing the
complaint subject to the aforementioned condition that if the
defendants subsequently decide to offer their property for sale
for a purchase price of Eleven Million Pesos or lower, then the
plaintiffs has the option to purchase the property or of first
refusal, otherwise, defendants need not offer the property to the
plaintiffs if the purchase price is higher than Eleven Million
Pesos.

SO ORDERED.

Aggrieved by the decision, plaintiffs appealed to this Court in

CA-G.R. CV No. 21123. In a decision promulgated on September 21, 1990
(penned by Justice Segundino G. Chua and concurred in by Justices Vicente
V. Mendoza and Fernando A. Santiago), this Court affirmed with
modification the lower court's judgment, holding:

In resume, there was no meeting of the minds between the

parties concerning the sale of the property. Absent such
requirement, the claim for specific performance will not lie.
Appellants' demand for actual, moral and exemplary damages

93
 will likewise fail as there exists no justifiable ground for its
award. Summary judgment for defendants was properly
granted. Courts may render summary judgment when there is
no genuine issue as to any material fact and the moving party
is entitled to a judgment as a matter of law (Garcia vs. Court of
Appeals, 176 SCRA 815). All requisites obtaining, the decision
of the court a quo is legally justifiable.

WHEREFORE, finding the appeal unmeritorious, the

judgment appealed from is hereby AFFIRMED, but subject to
the following modification: The court a quo in the aforestated
decision gave the plaintiffs-appellants the right of first refusal
only if the property is sold for a purchase price of Eleven
Million pesos or lower; however, considering the mercurial
and uncertain forces in our market economy today. We find no
reason not to grant the same right of first refusal to herein
appellants in the event that the subject property is sold for a
price in excess of Eleven Million pesos. No pronouncement as
to costs.

SO ORDERED.

The decision of this Court was brought to the Supreme Court by petition for
review on certiorari. The Supreme Court denied the appeal on May 6, 1991
"for insufficiency in form and substances" (Annex H, Petition).

On November 15, 1990, while CA-G.R. CV No. 21123 was pending

consideration by this Court, the Cu Unjieng spouses executed a Deed of Sale
(Annex D, Petition) transferring the property in question to herein petitioner
Buen Realty and Development Corporation, subject to the following terms
and conditions:

1. That for and in consideration of the sum of FIFTEEN

MILLION PESOS (P15,000,000.00), receipt of which in full
is hereby acknowledged, the VENDORS hereby sells, transfers
and conveys for and in favor of the VENDEE, his heirs,
executors, administrators or assigns, the above-described
property with all the improvements found therein including all
the rights and interest in the said property free from all liens
and encumbrances of whatever nature, except the pending
ejectment proceeding;

2. That the VENDEE shall pay the Documentary Stamp Tax,

registration fees for the transfer of title in his favor and other
expenses incidental to the sale of above-described property
including capital gains tax and accrued real estate taxes.

As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu

Unjieng spouses was cancelled and, in lieu thereof, TCT No. 195816 was
issued in the name of petitioner on December 3, 1990.

On July 1, 1991, petitioner as the new owner of the subject property wrote a
letter to the lessees demanding that the latter vacate the premises.

94
On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner
brought the property subject to the notice of lis pendens regarding Civil Case
No. 87-41058 annotated on TCT No. 105254/T-881 in the name of the Cu
Unjiengs.

The lessees filed a Motion for Execution dated August 27, 1991 of the
Decision in Civil Case No. 87-41058 as modified by the Court of Appeals in
CA-G.R. CV No. 21123.

On August 30, 1991, respondent Judge issued an order (Annex A, Petition)

quoted as follows:

Presented before the Court is a Motion for Execution filed by

plaintiff represented by Atty. Antonio Albano. Both defendants
Bobby Cu Unjieng and Rose Cu Unjieng represented by Atty.
Vicente Sison and Atty. Anacleto Magno respectively were
duly notified in today's consideration of the motion as
evidenced by the rubber stamp and signatures upon the copy of
the Motion for Execution.

The gist of the motion is that the Decision of the Court dated
September 21, 1990 as modified by the Court of Appeals in its
decision in CA G.R. CV-21123, and elevated to the Supreme
Court upon the petition for review and that the same was
denied by the highest tribunal in its resolution dated May 6,
1991 in G.R. No.
L-97276, had now become final and executory. As a
consequence, there was an Entry of Judgment by the Supreme
Court as of June 6, 1991, stating that the aforesaid modified
decision had already become final and executory.

It is the observation of the Court that this property in dispute

was the subject of the Notice of Lis Pendens and that the
modified decision of this Court promulgated by the Court of
Appeals which had become final to the effect that should the
defendants decide to offer the property for sale for a price of
P11 Million or lower, and considering the mercurial and
uncertain forces in our market economy today, the same right
of first refusal to herein plaintiffs/appellants in the event that
the subject property is sold for a price in excess of Eleven
Million pesos or more.

WHEREFORE, defendants are hereby ordered to execute the

necessary Deed of Sale of the property in litigation in favor of
plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for the
consideration of P15 Million pesos in recognition of plaintiffs'
right of first refusal and that a new Transfer Certificate of Title
be issued in favor of the buyer.

All previous transactions involving the same property

notwithstanding the issuance of another title to Buen Realty
Corporation, is hereby set aside as having been executed in bad
faith.

95
 SO ORDERED.

On September 22, 1991 respondent Judge issued another order, the

dispositive portion of which reads:

WHEREFORE, let there be Writ of Execution issue in the

above-entitled case directing the Deputy Sheriff Ramon
Enriquez of this Court to implement said Writ of Execution
ordering the defendants among others to comply with the
aforesaid Order of this Court within a period of one (1) week
from receipt of this Order and for defendants to execute the
necessary Deed of Sale of the property in litigation in favor of
the plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for
the consideration of P15,000,000.00 and ordering the Register
of Deeds of the City of Manila, to cancel and set aside the title
already issued in favor of Buen Realty Corporation which was
previously executed between the latter and defendants and to
register the new title in favor of the aforesaid plaintiffs Ang Yu
Asuncion, Keh Tiong and Arthur Go.

SO ORDERED.

On the same day, September 27, 1991 the corresponding writ of execution
(Annex C, Petition) was issued. 1

On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside
and declared without force and effect the above questioned orders of the court a quo.

In this petition for review on certiorari, petitioners contend that Buen Realty can be held
bound by the writ of execution by virtue of the notice of lis pendens, carried over on TCT
No. 195816 issued in the name of Buen Realty, at the time of the latter's purchase of the
property on 15 November 1991 from the Cu Unjiengs.

We affirm the decision of the appellate court.

A not too recent development in real estate transactions is the adoption of such
arrangements as the right of first refusal, a purchase option and a contract to sell. For ready
reference, we might point out some fundamental precepts that may find some relevance to
this discussion.

An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The
obligation is constituted upon the concurrence of the essential elements thereof, viz: (a)
The vinculum juris or juridical tie which is the efficient cause established by the various
sources of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b)
the object which is the prestation or conduct; required to be observed (to give, to do or not
to do); and (c) the subject-persons who, viewed from the demandability of the obligation,
are the active (obligee) and the passive (obligor) subjects.

Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a
meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service (Art. 1305, Civil Code). A contract
undergoes various stages that include its negotiation or preparation, its perfection and,
finally, its consummation. Negotiation covers the period from the time the prospective

96
contracting parties indicate interest in the contract to the time the contract is concluded
(perfected). The perfection of the contract takes place upon the concurrence of the essential
elements thereof. A contract which is consensual as to perfection is so established upon a
mere meeting of minds, i.e., the concurrence of offer and acceptance, on the object and on
the cause thereof. A contract which requires, in addition to the above, the delivery of the
object of the agreement, as in a pledge or commodatum, is commonly referred to as
a real contract. In a solemn contract, compliance with certain formalities prescribed by
law, such as in a donation of real property, is essential in order to make the act valid, the
prescribed form being thereby an essential element thereof. The stage
of consummation begins when the parties perform their respective undertakings under the
contract culminating in the extinguishment thereof.

Until the contract is perfected, it cannot, as an independent source of obligation, serve as a

binding juridical relation. In sales, particularly, to which the topic for discussion about the
case at bench belongs, the contract is perfected when a person, called the seller, obligates
himself, for a price certain, to deliver and to transfer ownership of a thing or right to
another, called the buyer, over which the latter agrees. Article 1458 of the Civil Code
provides:

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.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where
invariably the ownership of the thing sold is retained until the fulfillment of a positive
suspensive condition (normally, the full payment of the purchase price), the breach of the
condition will prevent the obligation to convey title from acquiring an obligatory
force. 2 In Dignos vs. Court of Appeals (158 SCRA 375), we have said that, although
denominated a "Deed of Conditional Sale," a sale is still absolute where the contract is
devoid of any proviso that title is reserved or the right to unilaterally rescind is stipulated,
e.g., until or unless the price is paid. Ownership will then be transferred to the buyer upon
actual or constructive delivery (e.g., by the execution of a public document) of the property
sold. Where the condition is imposed upon the perfection of the contract itself, the failure
of the condition would prevent such perfection. 3 If the condition is imposed on the
obligation of a party which is not fulfilled, the other party may either waive the condition
or refuse to proceed with the sale (Art. 1545, Civil Code). 4

An unconditional mutual promise to buy and sell, as long as the object is made determinate
and the price is fixed, can be obligatory on the parties, and compliance therewith may
accordingly be exacted. 5

An accepted unilateral promise which specifies the thing to be sold and the price to
be paid, when coupled with a valuable consideration distinct and separate from the price,
is what may properly be termed a perfected contract of option. This contract is legally
binding, and in sales, it conforms with the second paragraph of Article 1479 of the Civil
Code, viz:

Art. 1479. . . .

97
 An accepted unilateral promise to buy or to sell a determinate thing for a
price certain is binding upon the promissor if the promise is supported by a
consideration distinct from the price. (1451a) 6

Observe, however, that the option is not the contract of sale itself. 7 The optionee has the
right, but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is
accepted before a breach of the option, a bilateral promise to sell and to buy ensues and
both parties are then reciprocally bound to comply with their respective undertakings. 8

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect

promise (policitacion) is merely an offer. Public advertisements or solicitations and the
like are ordinarily construed as mere invitations to make offers or only as proposals. These
relations, until a contract is perfected, are not considered binding commitments. Thus, at
any time prior to the perfection of the contract, either negotiating party may stop the
negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective
immediately after its manifestation, such as by its mailing and not necessarily when the
offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given
to the offeree within which to accept the offer, the following rules generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is
still free and has the right to withdraw the offer before its acceptance, or, if an acceptance
has been made, before the offeror's coming to know of such fact, by communicating that
withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua,
102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art.
1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil.
249; see also Art. 1319, Civil Code; Rural Bank of Parañaque, Inc., vs. Remolado, 135
SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not
be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim
under Article 19 of the Civil Code which ordains that "every person must, in the exercise
of his rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith."

(2) If the period has a separate consideration, a contract of "option" is deemed perfected,
and it would be a breach of that contract to withdraw the offer during the agreed period.
The option, however, is an independent contract by itself, and it is to be distinguished from
the projected main agreement (subject matter of the option) which is obviously yet to be
concluded. If, in fact, the optioner-offeror withdraws the offer before its
acceptance (exercise of the option) by the optionee-offeree, the latter may not sue
for specific performance on the proposed contract ("object" of the option) since it has failed
to reach its own stage of perfection. The optioner-offeror, however, renders himself liable
for damages for breach of the option. In these cases, care should be taken of the real nature
of the consideration given, for if, in fact, it has been intended to be part of the consideration
for the main contract with a right of withdrawal on the part of the optionee, the main
contract could be deemed perfected; a similar instance would be an "earnest money" in a
contract of sale that can evidence its perfection (Art. 1482, Civil Code).

In the law on sales, the so-called "right of first refusal" is an innovative juridical relation.
Needless to point out, it cannot be deemed a perfected contract of sale under Article 1458
of the Civil Code. Neither can the right of first refusal, understood in its normal
concept, per se be brought within the purview of an option under the second paragraph of
Article 1479, aforequoted, or possibly of an offer under Article 1319 9 of the same Code.
An option or an offer would require, among other things, 10 a clear certainty on both the
object and the cause or consideration of the envisioned contract. In a right of first refusal,

98
while the object might be made determinate, the exercise of the right, however, would be
dependent not only on the grantor's eventual intention to enter into a binding juridical
relation with another but also on terms, including the price, that obviously are yet to be
later firmed up. Prior thereto, it can at best be so described as merely belonging to a class
of preparatory juridical relations governed not by contracts (since the essential elements to
establish the vinculum juris would still be indefinite and inconclusive) but by, among other
laws of general application, the pertinent scattered provisions of the Civil Code on human
conduct.

Even on the premise that such right of first refusal has been decreed under a final judgment,
like here, its breach cannot justify correspondingly an issuance of a writ of execution under
a judgment that merely recognizes its existence, nor would it sanction an action for specific
performance without thereby negating the indispensable element of consensuality in the
perfection of contracts. 11 It is not to say, however, that the right of first refusal would be
inconsequential for, such as already intimated above, an unjustified disregard thereof,
given, for instance, the circumstances expressed in Article 19 12 of the Civil Code, can
warrant a recovery for damages.

The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a
"right of first refusal" in favor of petitioners. The consequence of such a declaration entails
no more than what has heretofore been said. In fine, if, as it is here so conveyed to us,
petitioners are aggrieved by the failure of private respondents to honor the right of first
refusal, the remedy is not a writ of execution on the judgment, since there is none to
execute, but an action for damages in a proper forum for the purpose.

Furthermore, whether private respondent Buen Realty Development Corporation, the

alleged purchaser of the property, has acted in good faith or bad faith and whether or not it
should, in any case, be considered bound to respect the registration of the lis pendens in
Civil Case No. 87-41058 are matters that must be independently addressed in appropriate
proceedings. Buen Realty, not having been impleaded in Civil Case No. 87-41058, cannot
be held subject to the writ of execution issued by respondent Judge, let alone ousted from
the ownership and possession of the property, without first being duly afforded its day in
court.

We are also unable to agree with petitioners that the Court of Appeals has erred in holding
that the writ of execution varies the terms of the judgment in Civil Case No. 87-41058,
later affirmed in CA-G.R. CV-21123. The Court of Appeals, in this regard, has observed:

Finally, the questioned writ of execution is in variance with the decision of

the trial court as modified by this Court. As already stated, there was nothing
in said decision 13 that decreed the execution of a deed of sale between the
Cu Unjiengs and respondent lessees, or the fixing of the price of the sale, or
the cancellation of title in the name of petitioner (Limpin vs. IAC, 147 SCRA
516; Pamantasan ng Lungsod ng Maynila vs. IAC, 143 SCRA 311; De
Guzman vs. CA, 137 SCRA 730; Pastor vs. CA, 122 SCRA 885).

It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not
have decreed at the time the execution of any deed of sale between the Cu Unjiengs and
petitioners.

WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the

questioned Orders, dated 30 August 1991 and 27 September 1991, of the court a quo. Costs
against petitioners.

99
SO ORDERED.

[G.R. No. 111538. February 26, 1997]

PARAŇAQUE KINGS ENTERPRISES, INCORPORATED, petitioner, vs. COURT

OF APPEALS, CATALINA L. SANTOS, represented by her attorney-in-fact,
LUZ B. PROTACIO, and DAVID A. RAYMUNDO, respondents.
Do allegations in a complaint showing violation of a contractual right of first option or
priority to buy the properties subject of the lease constitute a valid cause of action? Is the
grantee of such right entitled to be offered the same terms and conditions as those given to
a third party who eventually bought such properties? In short, is such right of first refusal
enforceable by an action for specific performance?
These questions are answered in the affirmative by this Court in resolving this petition
for review under Rule 45 of the Rules of Court challenging the Decision[1] of the Court of
Appeals[2] promulgated on March 29, 1993, in CA-G.R. CV No. 34987 entitled Paraaque
Kings Enterprises, Inc. vs. Catalina L. Santos, et al., which affirmed the order[3] of
September 2, 1991, of the Regional Trial Court of Makati, Branch 57,[4] dismissing Civil
Case No. 91-786 for lack of a valid cause of action.

100
Facts of the Case

On March 19, 1991, herein petitioner filed before the Regional Trial Court of Makati
a complaint,[5] which is reproduced in full below:

Plaintiff, by counsel, respectfully states that:

1. Plaintiff is a private corporation organized and existing under and by virtue of

the laws of the Philippines, with principal place of business of (sic) Dr. A. Santos
Avenue, Paraaque, Metro Manila, while defendant Catalina L. Santos, is of legal
age, widow, with residence and postal address at 444 Plato Street, Ct., Stockton,
California, USA, represented in this action by her attorney-in-fact, Luz B.
Protacio, with residence and postal address at No, 12, San Antonio Street,
Magallanes Village, Makati, Metro Manila, by virtue of a general power of
attorney. Defendant David A. Raymundo, is of legal age, single, with residence
and postal address at 1918 Kamias Street, Damarias Village, Makati, Metro
Manila, where they (sic) may be served with summons and other court
processes. Xerox copy of the general power of attorney is hereto attached as
Annex A.

2. Defendant Catalina L. Santos is the owner of eight (8) parcels of land located at
(sic) Paraaque, Metro Manila with transfer certificate of title nos. S-19637, S-
19638 and S-19643 to S-19648. Xerox copies of the said title (sic) are hereto
attached as Annexes B to I, respectively.

3. On November 28, 1977, a certain Frederick Chua leased the above-described

property from defendant Catalina L. Santos, the said lease was registered in the
Register of Deeds. Xerox copy of the lease is hereto attached as Annex J.

4. On February 12, 1979, Frederick Chua assigned all his rights and interest and
participation in the leased property to Lee Ching Bing, by virtue of a deed of
assignment and with the conformity of defendant Santos, the said assignment was
also registered. Xerox copy of the deed of assignment is hereto attached as Annex
K.

5. On August 6, 1979, Lee Ching Bing also assigned all his rights and interest in
the leased property to Paraaque Kings Enterprises, Incorporated by virtue of a
deed of assignment and with the conformity of defendant Santos, the same was
duly registered, Xerox copy of the deed of assignment is hereto attached as Annex
L.

6. Paragraph 9 of the assigned leased (sic) contract provides among others that:

9. That in case the properties subject of the lease agreement are sold or
encumbered, Lessors shall impose as a condition that the buyer or mortgagee
thereof shall recognize and be bound by all the terms and conditions of this
lease agreement and shall respect this Contract of Lease as if they are the
LESSORS thereof and in case of sale, LESSEE shall have the first option or
priority to buy the properties subject of the lease;

7. On September 21, 1988, defendant Santos sold the eight parcels of land subject
of the lease to defendant David Raymundo for a consideration of FIVE MILLION
(P5,000,000.00) PESOS. The said sale was in contravention of the contract of
101
lease, for the first option or priority to buy was not offered by defendant Santos to
the plaintiff. Xerox copy of the deed of sale is hereto attached as Annex M.

8. On March 5, 1989, defendant Santos wrote a letter to the plaintiff informing the
same of the sale of the properties to defendant Raymundo, the said letter was
personally handed by the attorney-in-fact of defendant Santos, Xerox copy of the
letter is hereto attached as Annex N.

9. Upon learning of this fact plaintiffs representative wrote a letter to defendant

Santos, requesting her to rectify the error and consequently realizing the error, she
had it reconveyed to her for the same consideration of FIVE MILLION
(P5,000,000.00) PESOS. Xerox copies of the letter and the deed of reconveyance
are hereto attached as Annexes O and P.

10. Subsequently the property was offered for sale to plaintiff by the defendant for
the sum of FIFTEEN MILLION (P15,000,000.00) PESOS. Plaintiff was given ten
(10) days to make good of the offer, but therefore (sic) the said period expired
another letter came from the counsel of defendant Santos, containing the same
tenor of (sic) the former letter. Xerox copies of the letters are hereto attached as
Annexes Q and R.

11. On May 8, 1989, before the period given in the letter offering the properties
for sale expired, plaintiffs counsel wrote counsel of defendant Santos offering to
buy the properties for FIVE MILLION (P5,000,000.00) PESOS. Xerox copy of
the letter is hereto attached as Annex S.

12. On May 15, 1989, before they replied to the offer to purchase, another deed of
sale was executed by defendant Santos (in favor of) defendant Raymundo for a
consideration of NINE MILLION (P9,000,000.00) PESOS. Xerox copy of the
second deed of sale is hereto attached as Annex T.

13. Defendant Santos violated again paragraph 9 of the contract of lease by

executing a second deed of sale to defendant Raymundo.

14. It was only on May 17, 1989, that defendant Santos replied to the letter of the
plaintiffs offer to buy or two days after she sold her properties. In her reply she
stated among others that the period has lapsed and the plaintiff is not a privy (sic)
to the contract. Xerox copy of the letter is hereto attached as Annex U.

15. On June 28, 1989, counsel for plaintiff informed counsel of defendant Santos
of the fact that plaintiff is the assignee of all rights and interest of the former
lessor. Xerox copy of the letter is hereto attached as Annex V.

16. On July 6, 1989, counsel for defendant Santos informed the plaintiff that the
new owner is defendant Raymundo. Xerox copy of the letter is hereto attached as
Annex W.

17. From the preceding facts it is clear that the sale was simulated and that there
was a collusion between the defendants in the sales of the leased properties, on the
ground that when plaintiff wrote a letter to defendant Santos to rectify the error,
she immediately have (sic) the property reconveyed it (sic) to her in a matter of
twelve (12) days.

102
 18. Defendants have the same counsel who represented both of them in their
exchange of communication with plaintiffs counsel, a fact that led to the
conclusion that a collusion exist (sic) between the defendants.

19. When the property was still registered in the name of defendant Santos, her
collector of the rental of the leased properties was her brother-in-law David Santos
and when it was transferred to defendant Raymundo the collector was still David
Santos up to the month of June, 1990. Xerox copies of cash vouchers are hereto
attached as Annexes X to HH, respectively.

20. The purpose of this unholy alliance between defendants Santos and Raymundo
is to mislead the plaintiff and make it appear that the price of the leased property
is much higher than its actual value of FIVE MILLION (P5,000,000.00) PESOS,
so that plaintiff would purchase the properties at a higher price.

21. Plaintiff has made considerable investments in the said leased property by
erecting a two (2) storey, six (6) doors commercial building amounting to THREE
MILLION (P3,000,000.00) PESOS. This considerable improvement was made on
the belief that eventually the said premises shall be sold to the plaintiff.

22. As a consequence of this unlawful act of the defendants, plaintiff will incurr
(sic) total loss of THREE MILLION (P3,000,000.00) PESOS as the actual cost of
the building and as such defendants should be charged of the same amount for
actual damages.

23. As a consequence of the collusion, evil design and illegal acts of the
defendants, plaintiff in the process suffered mental anguish, sleepless nights,
bismirched (sic) reputation which entitles plaintiff to moral damages in the amount
of FIVE MILLION (P5,000,000.00) PESOS.

24. The defendants acted in a wanton, fraudulent, reckless, oppressive or

malevolent manner and as a deterrent to the commission of similar acts, they
should be made to answer for exemplary damages, the amount left to the discretion
of the Court.

25. Plaintiff demanded from the defendants to rectify their unlawful acts that they
committed, but defendants refused and failed to comply with plaintiffs just and
valid and (sic) demands. Xerox copies of the demand letters are hereto attached as
Annexes KK to LL, respectively.

26. Despite repeated demands, defendants failed and refused without justifiable
cause to satisfy plaintiffs claim, and was constrained to engaged (sic) the services
of undersigned counsel to institute this action at a contract fee of P200,000.00, as
and for attorneys fees, exclusive of cost and expenses of litigation.

PRAYER

WHEREFORE, it is respectfully prayed, that judgment be rendered in favor of the

plaintiff and against defendants and ordering that:

a. The Deed of Sale between defendants dated May 15, 1989, be annulled and the
leased properties be sold to the plaintiff in the amount of P5,000,000.00;

103
 b. Dependants (sic) pay plaintiff the sum of P3,000,000.00 as actual damages;

c. Defendants pay the sum of P5,000,000.00 as moral damages;

d. Defendants pay exemplary damages left to the discretion of the Court;

e. Defendants pay the sum of not less than P200,000.00 as attorneys fees.

Plaintiff further prays for other just and equitable reliefs plus cost of suit.

Instead of filing their respective answers, respondents filed motions to dismiss

anchored on the grounds of lack of cause of action, estoppel and laches.
On September 2, 1991, the trial court issued the order dismissing the complaint for
lack of a valid cause of action. It ratiocinated thus:

Upon the very face of the plaintiffs Complaint itself, it therefore indubitably appears that
the defendant Santos had verily complied with paragraph 9 of the Lease Agreement by
twice offering the properties for sale to the plaintiff for P15 M. The said offers, however,
were plainly rejected by the plaintiff which scorned the said offer as RIDICULOUS. There
was therefore a definite refusal on the part of the plaintiff to accept the offer of defendant
Santos. For in acquiring the said properties back to her name, and in so making the offers
to sell both by herself (attorney-in-fact) and through her counsel, defendant Santos was
indeed conscientiously complying with her obligation under paragraph 9 of the Lease
Agreement. x x x

xxxxxxxxx

This is indeed one instance where a Complaint, after barely commencing to create a cause
of action, neutralized itself by its subsequent averments which erased or extinguished its
earlier allegations of an impending wrong. Consequently, absent any actionable wrong in
the very face of the Complaint itself, the plaintiffs subsequent protestations of collusion is
bereft or devoid of any meaning or purpose. x x x

The inescapable result of the foregoing considerations point to no other conclusion than
that the Complaint actually does not contain any valid cause of action and should therefore
be as it is hereby ordered DISMISSED. The Court finds no further need to consider the
other grounds of estoppel and laches inasmuch as this resolution is sufficient to dispose the
matter.[6]

Petitioners appealed to the Court of Appeals which affirmed in toto the ruling of the
trial court, and further reasoned that:

x x x Appellants protestations that the P15 million price quoted by appellee Santos was
reduced to P9 million when she later resold the leased properties to Raymundo has no valid
legal moorings because appellant, as a prospective buyer, cannot dictate its own price and
forcibly ram it against appellee Santos, as owner, to buy off her leased properties
considering the total absence of any stipulation or agreement as to the price or as to how
the price should be computed under paragraph 9 of the lease contract, x x x[7]

Petitioner moved for reconsideration but was denied in an order dated August 20,
1993.[8]

104
 Hence this petition. Subsequently, petitioner filed an Urgent Motion for the Issuance
of Restraining Order and/or Writ of Preliminary Injunction and to Hold Respondent David
A. Raymundo in Contempt of Court.[9] The motion sought to enjoin respondent Raymundo
and his counsel from pursuing the ejectment complaint filed before the barangay captain
of San Isidro, Paraaque, Metro Manila; to direct the dismissal of said ejectment complaint
or of any similar action that may have been filed; and to require respondent Raymundo to
explain why he should not be held in contempt of court for forum-shopping. The ejectment
suit initiated by respondent Raymundo against petitioner arose from the expiration of the
lease contract covering the property subject of this case. The ejectment suit was decided in
favor of Raymundo, and the entry of final judgment in respect thereof renders the said
motion moot and academic.

Issue

The principal legal issue presented before us for resolution is whether the aforequoted
complaint alleging breach of the contractual right of first option or priority to buy states a
valid cause of action.
Petitioner contends that the trial court as well as the appellate tribunal erred in
dismissing the complaint because it in fact had not just one but at least three (3) valid causes
of action, to wit: (1) breach of contract, (2) its right of first refusal founded in law, and (3)
damages.
Respondents Santos and Raymundo, in their separate comments, aver that the petition
should be denied for not raising a question of law as the issue involved is purely factual --
whether respondent Santos complied with paragraph 9 of the lease agreement -- and for
not having complied with Section 2, Rule 45 of the Rules of Court, requiring the filing of
twelve (12) copies of the petitioners brief. Both maintain that the complaint filed by
petitioner before the Regional Trial Court of Makati stated no valid cause of action and
that petitioner failed to substantiate its claim that the lower courts decided the same in a
way not in accord with law and applicable decisions of the Supreme Court; or that the Court
of Appeals has sanctioned departure by a trial court from the accepted and usual course of
judicial proceedings so as to merit the exercise by this Court of the power of review under
Rule 45 of the Rules of Court. Furthermore, they reiterate estoppel and laches as grounds
for dismissal, claiming that petitioners payment of rentals of the leased property to
respondent Raymundo from June 15, 1989, to June 30, 1990, was an acknowledgment of
the latters status as new owner-lessor of said property, by virtue of which petitioner is
deemed to have waived or abandoned its first option to purchase.
Private respondents likewise contend that the deed of assignment of the lease
agreement did not include the assignment of the option to purchase. Respondent Raymundo
further avers that he was not privy to the contract of lease, being neither the lessor nor
lessee adverted to therein, hence he could not be held liable for violation thereof.

The Courts Ruling

Preliminary Issue: Failure to File Sufficient Copies of Brief

We first dispose of the procedural issue raised by respondents, particularly petitioners

failure to file twelve (12) copies of its brief. We have ruled that when non-compliance with

105
the Rules was not intended for delay or did not result in prejudice to the adverse party,
dismissal of appeal on mere technicalities in cases where appeal is a matter of right -- may
be stayed, in the exercise of the courts equity jurisdiction.[10] It does not appear that
respondents were unduly prejudiced by petitioners nonfeasance. Neither has it been shown
that such failure was intentional.

Main Issue: Validity of Cause of Action

We do not agree with respondents contention that the issue involved

is purely factual. The principal legal question, as stated earlier, is whether the complaint
filed by herein petitioner in the lower court states a valid cause of action. Since such
question assumes the facts alleged in the complaint as true, it follows that the determination
thereof is one of law, and not of facts. There is a question of law in a given case when the
doubt or difference arises as to what the law is on a certain state of facts, and there is a
question of fact when the doubt or difference arises as to the truth or the falsehood of
alleged facts.[11]
At the outset, petitioner concedes that when the ground for a motion to dismiss is lack
of cause of action, such ground must appear on the face of the complaint; that to determine
the sufficiency of a cause of action, only the facts alleged in the complaint and no others
should be considered; and that the test of sufficiency of the facts alleged in a petition or
complaint to constitute a cause of action is whether, admitting the facts alleged, the court
could render a valid judgment upon the same in accordance with the prayer of the petition
or complaint.
A cause of action exists if the following elements are present: (1) a right in favor of the
plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation
on the part of the named defendant to respect or not to violate such right, and (3) an act or
omission on the part of such defendant violative of the right of plaintiff or constituting a
breach of the obligation of defendant to the plaintiff for which the latter may maintain an
action for recovery of damages.[12]
In determining whether allegations of a complaint are sufficient to support a cause of
action, it must be borne in mind that the complaint does not have to establish or allege facts
proving the existence of a cause of action at the outset; this will have to be done at the trial
on the merits of the case. To sustain a motion to dismiss for lack of cause of action, the
complaint must show that the claim for relief does not exist, rather than that a claim has
been defectively stated, or is ambiguous, indefinite or uncertain.[13]
Equally important, a defendant moving to dismiss a complaint on the ground of lack
of cause of action is regarded as having hypothetically admitted all the averments
thereof.[14]
A careful examination of the complaint reveals that it sufficiently alleges an actionable
contractual breach on the part of private respondents. Under paragraph 9 of the contract of
lease between respondent Santos and petitioner, the latter was granted the first option or
priority to purchase the leased properties in case Santos decided to sell. If Santos never
decided to sell at all, there can never be a breach, much less an enforcement of such
right. But on September 21, 1988, Santos sold said properties to Respondent Raymundo
without first offering these to petitioner. Santos indeed realized her error, since she
repurchased the properties after petitioner complained. Thereafter, she offered to sell the
properties to petitioner for P15 million, which petitioner, however, rejected because of the
ridiculous price. But Santos again appeared to have violated the same provision of the lease
contract when she finally resold the properties to respondent Raymundo for only P9 million
106
without first offering them to petitioner at such price.Whether there was actual breach
which entitled petitioner to damages and/or other just or equitable relief, is a question
which can better be resolved after trial on the merits where each party can present evidence
to prove their respective allegations and defenses.[15]
The trial and appellate courts based their decision to sustain respondents motion to
dismiss on the allegations of Paraaque Kings Enterprises that Santos had actually offered
the subject properties for sale to it prior to the final sale in favor of Raymundo, but that the
offer was rejected. According to said courts, with such offer, Santos had verily complied
with her obligation to grant the right of first refusal to petitioner.
We hold, however, that in order to have full compliance with the contractual right
granting petitioner the first option to purchase, the sale of the properties for the amount
of P9 million, the price for which they were finally sold to respondent Raymundo, should
have likewise been first offered to petitioner.
The Court has made an extensive and lengthy discourse on the concept of, and
obligations under, a right of first refusal in the case of Guzman, Bocaling & Co. vs.
Bonnevie.[16] In that case, under a contract of lease, the lessees (Raul and Christopher
Bonnevie) were given a right of first priority to purchase the leased property in case the
lessor (Reynoso) decided to sell. The selling price quoted to the Bonnevies
was P600,000.00 to be fully paid in cash, less a mortgage lien of P100,000.00. On the other
hand, the selling price offered by Reynoso to and accepted by Guzman was
only P400,000.00 of which P137,500.00 was to be paid in cash while the balance was to
be paid only when the property was cleared of occupants. We held that even if the
Bonnevies could not buy it at the price quoted (P600,000.00), nonetheless, Reynoso could
not sell it to another for a lower price and under more favorable terms and conditions
without first offering said favorable terms and price to the Bonnevies as well. Only if the
Bonnevies failed to exercise their right of first priority could Reynoso thereafter lawfully
sell the subject property to others, and only under the same terms and conditions previously
offered to the Bonnevies.
Of course, under their contract, they specifically stipulated that the Bonnevies could
exercise the right of first priority, all things and conditions being equal. This Court
interpreted this proviso to mean that there should be identity of terms and conditions to be
offered to the Bonnevies and all other prospective buyers, with the Bonnevies to enjoy the
right of first priority. We hold that the same rule applies even without the same proviso if
the right of first refusal (or the first option to buy) is not to be rendered illusory.
From the foregoing, the basis of the right of the first refusal* must be the current offer
to sell of the seller or offer to purchase of any prospective buyer. Only after the
grantee** fails to exercise its right of first priority under the same terms and within the
period contemplated, could the owner validly offer to sell the property to a third person,
again, under the same terms as offered to the grantee***.
This principle was reiterated in the very recent case of Equatorial Realty vs. Mayfair
Theater, Inc.[17] which was decided en banc. This Court upheld the right of first refusal of
the lessee Mayfair, and rescinded the sale of the property by the lessor Carmelo to
Equatorial Realty considering that Mayfair, which had substantial interest over the subject
property, was prejudiced by its sale to Equatorial without Carmelo conferring to
Mayfair every opportunity to negotiate within the 30-day stipulated period (underscoring
supplied).
In that case, two contracts of lease between Carmelo and Mayfair provided that if the
LESSOR should desire to sell the leased premises, the LESSEE shall be given 30 days
exclusive option to purchase the same. Carmelo initially offered to sell the leased property

107
to Mayfair for six to seven million pesos. Mayfair indicated interest in purchasing the
property though it invoked the 30-day period. Nothing was heard thereafter from
Carmelo. Four years later, the latter sold its entire Recto Avenue property, including the
leased premises, to Equatorial for P11,300,000.00 without priorly informing Mayfair. The
Court held that both Carmelo and Equatorial acted in bad faith: Carmelo for knowingly
violating the right of first refusal* of Mayfair, and Equatorial for purchasing the property
despite being aware of the contract stipulation. In addition to rescission of the contract of
sale, the Court ordered Carmelo to allow Mayfair to buy the subject property at the same
price of P11,300,000.00.

No cause of action under P.D. 1517

Petitioner also invokes Presidential Decree No. 1517, or the Urban Land Reform Law,
as another source of its right of first refusal. It claims to be covered under said law, being
the rightful occupant of the land and its structures since it is the lawful lessee thereof by
reason of contract. Under the lease contract, petitioner would have occupied the property
for fourteen (14) years at the end of the contractual period.
Without probing into whether petitioner is rightfully a beneficiary under said law,
suffice it to say that this Court has previously ruled that under Section 6[18] of P.D. 1517,
the terms and conditions of the sale in the exercise of the lessees right of first refusal to
purchase shall be determined by the Urban Zone Expropriation and Land Management
Committee. Hence, x x x certain prerequisites must be complied with by anyone who
wishes to avail himself of the benefits of the decree.[19] There being no allegation in its
complaint that the prerequisites were complied with, it is clear that the complaint did fail
to state a cause of action on this ground.

Deed of Assignment included the option to purchase

Neither do we find merit in the contention of respondent Santos that the assignment of
the lease contract to petitioner did not include the option to purchase. The provisions of the
deeds of assignment with regard to matters assigned were very clear. Under the first
assignment between Frederick Chua as assignor and Lee Ching Bing as assignee, it was
expressly stated that:

x x x the ASSIGNOR hereby CEDES, TRANSFERS and ASSIGNS to herein

ASSIGNEE, all his rights, interest and participation over said premises afore-described, x
x x[20] (underscoring supplied)

And under the subsequent assignment executed between Lee Ching Bing as assignor
and the petitioner, represented by its Vice President Vicenta Lo Chiong, as assignee, it was
likewise expressly stipulated that:

x x x the ASSIGNOR hereby sells, transfers and assigns all his rights, interest and
participation over said leased premises, x x x[21] (underscoring supplied)

One of such rights included in the contract of lease and, therefore, in the assignments
of rights was the lessees right of first option or priority to buy the properties subject of the
lease, as provided in paragraph 9 of the assigned lease contract. The deed of assignment
need not be very specific as to which rights and obligations were passed on to the
assignee. It is understood in the general provision aforequoted that all specific rights and
108
obligations contained in the contract of lease are those referred to as being
assigned.Needless to state, respondent Santos gave her unqualified conformity to both
assignments of rights.

Respondent Raymundo privy to the Contract of Lease

With respect to the contention of respondent Raymundo that he is not privy to the lease
contract, not being the lessor nor the lessee referred to therein, he could thus not have
violated its provisions, but he is nevertheless a proper party. Clearly, he stepped into the
shoes of the owner-lessor of the land as, by virtue of his purchase, he assumed all the
obligations of the lessor under the lease contract. Moreover, he received benefits in the
form of rental payments. Furthermore, the complaint, as well as the petition, prayed for the
annulment of the sale of the properties to him. Both pleadings also alleged collusion
between him and respondent Santos which defeated the exercise by petitioner of its right
of first refusal.
In order then to accord complete relief to petitioner, respondent Raymundo was a
necessary, if not indispensable, party to the case.[22] A favorable judgment for the petitioner
will necessarily affect the rights of respondent Raymundo as the buyer of the property over
which petitioner would like to assert its right of first option to buy.
Having come to the conclusion that the complaint states a valid cause of action for
breach of the right of first refusal and that the trial court should thus not have dismissed
the complaint, we find no more need to pass upon the question of whether the complaint
states a cause of action for damages or whether the complaint is barred by estoppel or
laches. As these matters require presentation and/or determination of facts, they can be best
resolved after trial on the merits.
While the lower courts erred in dismissing the complaint, private respondents,
however, cannot be denied their day in court. While, in the resolution of a motion to
dismiss, the truth of the facts alleged in the complaint are theoretically admitted, such
admission is merely hypothetical and only for the purpose of resolving the motion. In case
of denial, the movant is not to be deprived of the right to submit its own case and to submit
evidence to rebut the allegations in the complaint. Neither will the grant of the motion by
a trial court and the ultimate reversal thereof by an appellate court have the effect of stifling
such right.[23] So too, the trial court should be given the opportunity to evaluate the
evidence, apply the law and decree the proper remedy. Hence, we remand the instant case
to the trial court to allow private respondents to have their day in court.
WHEREFORE, the petition is GRANTED. The assailed decisions of the trial court
and Court of Appeals are hereby REVERSED and SET ASIDE. The case is REMANDEDto
the Regional Trial Court of Makati for further proceedings.
SO ORDERED.

109
[G.R. No. 140479. March 8, 2001]

ROSENCOR DEVELOPMENT CORPORATION and RENE

JOAQUIN, petitioners, vs. PATERNO INQUING, IRENE GUILLERMO,
FEDERICO BANTUGAN, FERNANDO MAGBANUA and LIZZA
TIANGCO, respondents.
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking
reversal of the Decision[1] of the Court of Appeals dated June 25, 1999 in CA-G.R. CV No.
53963. The Court of Appeals decision reversed and set aside the Decision[2]dated May 13,
1996 of Branch 217 of the Regional Trial Court of Quezon City in Civil Case No. Q-93-
18582.
The case was originally filed on December 10, 1993 by Paterno Inquing, Irene
Guillermo and Federico Bantugan, herein respondents, against Rosencor Development
Corporation (hereinafter Rosencor), Rene Joaquin, and Eufrocina de Leon. Originally, the
complaint was one for annulment of absolute deed of sale but was later amended to one for
rescission of absolute deed of sale. A complaint-for intervention was thereafter filed by
respondents Fernando Magbanua and Danna Lizza Tiangco. The complaint-in-intervention
was admitted by the trial court in an Order dated May 4, 1994.[3]
The facts of the case, as stated by the trial court and adopted by the appellate court, are
as follows:

110
This action was originally for the annulment of the Deed of Absolute Sale dated September
4, 1990 between defendants Rosencor and Eufrocina de Leon but later amended (sic)
praying for the rescission of the deed of sale.

Plaintiffs and plaintiffs-intervenors averred that they are the lessees since 1971 of a two-
story residential apartment located at No. 150 Tomas Morato Ave., Quezon City covered
by TCT No. 96161 and owned by spouses Faustino and Cresencia Tiangco. The lease was
not covered by any contract. The lessees were renting the premises then for P150.00 a
month and were allegedly verbally granted by the lessors the pre-emptive right to purchase
the property if ever they decide to sell the same.

Upon the death of the spouses Tiangcos in 1975, the management of the property was
adjudicated to their heirs who were represented by Eufrocina de Leon. The lessees were
allegedly promised the same pre-emptive right by the heirs of Tiangcos since the latter had
knowledge that this right was extended to the former by the late spouses Tiangcos. The
lessees continued to stay in the premises and allegedly spent their own money amounting
from P50,000.00 to P100,000.00 for its upkeep. These expenses were never deducted from
the rentals which already increased to P1,000.00.

In June 1990, the lessees received a letter from Atty. Erlinda Aguila demanding that they
vacate the premises so that the demolition of the building be undertaken. They refused to
leave the premises. In that same month, de Leon refused to accept the lessees rental
payment claiming that they have run out of receipts and that a new collector has been
assigned to receive the payments.Thereafter, they received a letter from Eufrocina de Leon
offering to sell to them the property they were leasing for P2,000,000.00. xxx.

The lessees offered to buy the property from de Leon for the amount of P1,000,000.00. De
Leon told them that she will be submitting the offer to the other heirs. Since then, no answer
was given by de Leon as to their offer to buy the property. However, in November 1990,
Rene Joaquin came to the leased premises introducing himself as its new owner.

In January 1991, the lessees again received another letter from Atty. Aguila demanding
that they vacate the premises. A month thereafter, the lessees received a letter from de Leon
advising them that the heirs of the late spouses Tiangcos have already sold the property to
Rosencor. The following month Atty. Aguila wrote them another letter demanding the
rental payment and introducing herself as counsel for Rosencor/Rene Joaquin, the new
owners of the premises.

The lessees requested from de Leon why she had disregarded the pre-emptive right she and
the late Tiangcos have promised them. They also asked for a copy of the deed of sale
between her and the new owners thereof but she refused to heed their request. In the same
manner, when they asked Rene Joaquin a copy of the deed of sale, the latter turned down
their request and instead Atty. Aguila wrote them several letters demanding that they vacate
the premises. The lessees offered to tender their rental payment to de Leon but she refused
to accept the same.

In April 1992 before the demolition can be undertaken by the Buiding Official, the
barangay interceded between the parties herein after which Rosencor raised the issue as to
the rental payment of the premises. It was also at this instance that the lessees were
furnished with a copy of the Deed of Sale and discovered that they were deceived by de
Leon since the sale between her and Rene Joaquin/Rosencor took place in September 4,
1990 while de Leon made the offer to them only in October 1990 or after the sale with

111
Rosencor had been consummated. The lessees also noted that the property was sold only
for P726,000.00.

The lessees offered to reimburse de Leon the selling price of P726,000.00 plus an
additional P274,000.00 to complete their P1,000.000.00 earlier offer. When their offer was
refused, they filed the present action praying for the following: a) rescission of the Deed of
Absolute Sale between de Leon and Rosencor dated September 4, 1990; b) the defendants
Rosencor/Rene Joaquin be ordered to reconvey the property to de Leon; and c) de Leon be
ordered to reimburse the plaintiffs for the repairs of the property, or apply the said amount
as part of the price for the purchase of the property in the sum of P100,000.00.[4]

After trial on the merits, the Regional Trial Court rendered a Decision[5] dated May 13,
1996 dismissing the complaint. The trial court held that the right of redemption on which
the complaint was based was merely an oral one and as such, is unenforceable under the
law. The dispositive portion of the May 13, 1996 Decision is as follows:

WHEREFORE, in view of the foregoing, the Court DISMISSES the instant

action. Plaintiffs and plaintiffs-intervenors are hereby ordered to pay their respective
monthly rental of P1,000.00 per month reckoned from May 1990 up to the time they leave
the premises. No costs.

SO ORDERED.[6]

Not satisfied with the decision of the trial court, respondents herein filed a Notice of
Appeal dated June 3, 1996. On the same date, the trial court issued an Order for the
elevation of the records of the case to the Court of Appeals. On August 8, 1997,
respondents filed their appellate brief before the Court of Appeals.
On June 25, 1999, the Court of Appeals rendered its decision[7] reversing the decision
of the trial court. The dispositive portion of the June 25, 1999 decision is as follows:

WHEREFORE, premises considered, the appealed decision (dated May 13, 1996) of the
Regional Trial Court (Branch 217) in Quezon City in Case No. Q-93-18582 is hereby
REVERSED and SET ASIDE. In its stead, a new one is rendered ordering:

(1) The rescission of the Deed of Absolute Sale executed between the appellees on
September 4, 1990;
(2) The reconveyance of the subject premises to appellee Eufrocina de Leon;
(3) The heirs of Faustino and Crescencia Tiangco, thru appellee Eufrocina de
Leon, to afford the appellants thirty days within which to exercise their right of
first refusal by paying the amount of ONE MILLION PESOS (P1,000,000.00)
for the subject property; and
(4) The appellants to, in turn, pay the appellees back rentals from May 1990 up to
the time this decision is promulgated.

No pronouncement as to costs.

SO ORDERED.[8]

Petitioners herein filed a Motion for Reconsideration of the decision of the Court of
Appeals but the same was denied in a Resolution dated October 15, 1999.[9]

112
 Hence, this petition for review on certiorari where petitioners Rosencor Development
Corporation and Rene Joaquin raise the following assignment of errors[10]:
I.

THE COURT OF APPEALS GRAVELY ERRED WHEN IT ORDERED THE

RESCISSION OF THE ABSOLUTE DEED OF SALE BETWEEN EUFROCINA DE
LEON AND PETITIONER ROSENCOR.

II.

THE COURT OF APPEALS COMMITTED MANIFEST ERROR IN MANDATING

THAT EUFROCINA DE LEON AFFORD RESPONDENTS THE OPPORTUNITY
TO EXERCISE THEIR RIGHT OF FIRST REFUSAL.

III.

THE COURT OF APPEALS GRIEVOUSLY ERRED IN CONCLUDING THAT

RESPONDENTS HAVE ESTABLISHED THEIR RIGHT OF FIRST REFUSAL
DESPITE PETITIONERS RELIANCE ON THEIR DEFENSE BASED ON THE
STATUTE OF FRAUDS.

Eufrocina de Leon, for herself and for the heirs of the spouses Faustino and Crescencia
Tiangco, did not appeal the decision of the Court of Appeals.
At the onset, we note that both the Court of Appeals and the Regional Trial Court relied
on Article 1403 of the New Civil Code, more specifically the provisions on the statute of
frauds, in coming out with their respective decisions. The trial court, in denying the petition
for reconveyance, held that right of first refusal relied upon by petitioners was not reduced
to writing and as such, is unenforceable by virtue of the said article. The Court of Appeals,
on the other hand, also held that the statute of frauds governs the right of first refusal
claimed by respondents. However, the appellate court ruled that respondents had duly
proven the same by reason of petitioners waiver of the protection of the statute by reason
of their failure to object to the presentation of oral evidence of the said right.
Both the appellate court and the trial court failed to discuss, however, the threshold
issue of whether or not a right of first refusal is indeed covered by the provisions of the
New Civil Code on the statute of frauds. The resolution of the issue on the applicability of
the statute of frauds is important as it will determine the type of evidence which may be
considered by the trial court as proof of the alleged right of first refusal.
The term statute of frauds is descriptive of statutes which require certain classes of
contracts to be in writing. This statute does not deprive the parties of the right to contract
with respect to the matters therein involved, but merely regulates the formalities of the
contract necessary to render it enforceable. Thus, they are included in the provisions of the
New Civil Code regarding unenforceable contracts, more particularly Art. 1403, paragraph
2. Said article provides, as follows:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

xxx

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be in writing, and subscribed by the party

113
charged, or by his agent; evidence, therefore, of the agreement cannot be received without
the writing, or a secondary evidence of its contents:

a) An agreement that by its terms is not to be performed within a year from the making
thereof;

b) A special promise to answer for the debt, default, or miscarriage of another;

c) An agreement made in consideration of marriage, other than a mutual promise to marry;

d) An agreement for the sale of goods, chattels or things in action, at a price not less than
five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or
the evidences, or some of them, of such things in action, or pay at the time some part of the
purchase money; but when a sale is made by auction and entry is made by the auctioneer
in his sales book, at the time of the sale, of the amount and kind of property sold, terms of
sale, price, names of purchasers and person on whose account the sale is made, it is a
sufficient memorandum;

e) An agreement for the leasing of a longer period than one year, or for the sale of real
property or of an interest therein;

f) A representation to the credit of a third person.

The purpose of the statute is to prevent fraud and perjury in the enforcement of
obligations depending for their evidence on the unassisted memory of witnesses by
requiring certain enumerated contracts and transactions to be evidenced by a writing signed
by the party to be charged.[11] Moreover, the statute of frauds refers to specific kinds of
transactions and cannot apply to any other transaction that is not enumerated
therein.[12] The application of such statute presupposes the existence of a perfected
contract.[13]
The question now is whether a right of first refusal is among those enumerated in the
list of contracts covered by the Statute of Frauds. More specifically, is a right of first refusal
akin to an agreement for the leasing of a longer period than one year, or for the sale of real
property or of an interest therein as contemplated by Article 1403, par. 2(e) of the New
Civil Code.
We have previously held that not all agreements affecting land must be put into writing
to attain enforceability[14]. Thus, we have held that the setting up of boundaries,[15] the oral
partition of real property[16], and an agreement creating a right of way[17] are not covered
by the provisions of the statute of frauds. The reason simply is that these agreements are
not among those enumerated in Article 1403 of the New Civil Code.
A right of first refusal is not among those listed as unenforceable under the statute of
frauds. Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code
presupposes the existence of a perfected, albeit unwritten, contract of sale.[18] A right of
first refusal, such as the one involved in the instant case, is not by any means a perfected
contract of sale of real property.At best, it is a contractual grant, not of the sale of the real
property involved, but of the right of first refusal over the property sought to be sold[19]
It is thus evident that the statute of frauds does not contemplate cases involving a right
of first refusal. As such, a right of first refusal need not be written to be enforceable and
may be proven by oral evidence.

114
 The next question to be ascertained is whether or not respondents have satisfactorily
proven their right of first refusal over the property subject of the Deed of Absolute Sale
dated September 4, 1990 between petitioner Rosencor and Eufrocina de Leon.
On this point, we agree with the factual findings of the Court of Appeals that
respondents have adequately proven the existence of their right of first refusal. Federico
Bantugan, Irene Guillermo, and Paterno Inquing uniformly testified that they were
promised by the late spouses Faustino and Crescencia Tiangco and, later on, by their heirs
a right of first refusal over the property they were currently leasing should they decide to
sell the same. Moreover, respondents presented a letter[20] dated October 9, 1990 where
Eufrocina de Leon, the representative of the heirs of the spouses Tiangco, informed them
that they had received an offer to buy the disputed property for P2,000,000.00 and offered
to sell the same to the respondents at the same price if they were interested. Verily, if
Eufrocina de Leon did not recognize respondents right of first refusal over the property
they were leasing, then she would not have bothered to offer the property for sale to the
respondents.
It must be noted that petitioners did not present evidence before the trial court
contradicting the existence of the right of first refusal of respondents over the disputed
property. They only presented petitioner Rene Joaquin, the vice-president of petitioner
Rosencor, who admitted having no personal knowledge of the details of the sales
transaction between Rosencor and the heirs of the spouses Tiangco[21] They also dispensed
with the testimony of Eufrocina de Leon[22] who could have denied the existence or
knowledge of the right of first refusal. As such, there being no evidence to the contrary,
the right of first refusal claimed by respondents was substantially proven by respondents
before the lower court.
Having ruled upon the question as to the existence of respondents right of first refusal,
the next issue to be answered is whether or not the Court of Appeals erred in ordering the
rescission of the Deed of Absolute Sale dated September 4, 1990 between Rosencor and
Eufrocina de Leon and in decreeing that the heirs of the spouses Tiangco should afford
respondents the exercise of their right of first refusal. In other words, may a contract of sale
entered into in violation of a third partys right of first refusal be rescinded in order that
such third party can exercise said right?
The issue is not one of first impression.
In Guzman, Bocaling and Co, Inc. vs. Bonnevie[23], the Court upheld the decision of a
lower court ordering the rescission of a deed of sale which violated a right of first refusal
granted to one of the parties therein. The Court held:

xxx Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381 (3) of
the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by
reason of injury to third persons, like creditors. The status of creditors could be validly
accorded the Bonnevies for they had substantial interests that were prejudiced by the sale
of the subject property to the petitioner without recognizing their right of first priority under
the Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties

and even to third persons, to secure reparations for damages caused to them by a contract,
even if this should be valid, by means of the restoration of things to their condition at the
moment prior to the celebration of said contract. It is a relief allowed for the protection of
one of the contracting parties and even third persons from all injury and damage the
contract may cause, or to protect some incompatible and preferent right created by the

115
contract. Rescission implies a contract which, even if initially valid, produces a lesion or
pecuniary damage to someone that justifies its invalidation for reasons of equity.

It is true that the acquisition by a third person of the property subject of the contract is an
obstacle to the action for its rescission where it is shown that such third person is in lawful
possession of the subject of the contract and that he did not act in bad faith. However, this
rule is not applicable in the case before us because the petitioner is not considered a third
party in relation to the Contract of Sale nor may its possession of the subject property be
regarded as acquired lawfully and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the
petitioner cannot be deemed a purchaser in good faith for the record shows that it
categorically admitted that it was aware of the lease in favor of the Bonnevies, who were
actually occupying the subject property at the time it was sold to it. Although the Contract
of Lease was not annotated on the transfer certificate of title in the name of the late Jose
Reynoso and Africa Reynoso, the petitioner cannot deny actual knowledge of such lease
which was equivalent to and indeed more binding than presumed notice by registration.

A purchaser in good faith and for value is one who buys the property of another without
notice that some other person has a right to or interest in such property without and pays a
full and fair price for the same at the time of such purchase or before he has notice of the
claim or interest of some other person in the property. Good faith connotes an honest
intention to abstain from taking unconscientious advantage of another. Tested by these
principles, the petitioner cannot tenably claim to be a buyer in good faith as it had notice
of the lease of the property by the Bonnevies and such knowledge should have cautioned
it to look deeper into the agreement to determine if it involved stipulations that would
prejudice its own interests.

Subsequently[24] in Equatorial Realty and Development, Inc. vs. Mayfair Theater,

Inc.[25], the Court, en banc, with three justices dissenting,[26] ordered the rescission of a
contract entered into in violation of a right of first refusal. Using the ruling in Guzman
Bocaling & Co., Inc. vs. Bonnevie as basis, the Court decreed that since respondent therein
had a right of first refusal over the said property, it could only exercise the said right if the
fraudulent sale is first set aside or rescinded. Thus:

What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that
Mayfair will have the right of first refusal in the event Carmelo sells the leased premises. It
is undisputed that Carmelo did recognize this right of Mayfair, for it informed the latter of
its intention to sell the said property in 1974. There was an exchange of letters evidencing
the offer and counter-offers made by both parties. Carmelo, however, did not pursue the
exercise to its logical end. While it initially recognized Mayfairs right of first refusal,
Carmelo violated such right when without affording its negotiations with Mayfair the full
process to ripen to at least an interface of a definite offer and a possible corresponding
acceptance within the 30-day exclusive option time granted Mayfair, Carmelo abandoned
negotiations, kept a low profile for some time, and then sold, without prior notice to
Mayfair, the entire Claro M. Recto property to Equatorial.

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in
question, rescissible. We agree with respondent Appellate Court that the records bear out
the fact that Equatorial was aware of the lease contracts because its lawyers had, prior to
the sale, studied the said contracts. As such, Equatorial cannot tenably claim that to be a
purchaser in good faith, and, therefore, rescission lies.

116
XXX

As also earlier emphasized, the contract of sale between Equatorial and Carmelo is
characterized by bad faith, since it was knowingly entered into in violation of the rights of
and to the prejudice of Mayfair. In fact, as correctly observed by the Court of Appeals,
Equatorial admitted that its lawyers had studied the contract of lease prior to the
sale. Equatorials knowledge of the stipulations therein should have cautioned it to look
further into the agreement to determine if it involved stipulations that would prejudice its
own interests.

Since Mayfair had a right of first refusal, it can exercise the right only if the fraudulent sale
is first set aside or rescinded. All of these matters are now before us and so there should be
no piecemeal determination of this case and leave festering sores to deteriorate into endless
litigation. The facts of the case and considerations of justice and equity require that we
order rescission here and now. Rescission is a relief allowed for the protection of one of
the contracting parties and even third persons from all injury and damage the contract may
cause or to protect some incompatible and preferred right by the contract. The sale of the
subject real property should now be rescinded considering that Mayfair, which had
substantial interest over the subject property, was prejudiced by the sale of the subject
property to Equatorial without Carmelo conferring to Mayfair every opportunity to
negotiate within the 30-day stipulate period.[27]

In Paranaque Kings Enterprises, Inc. vs. Court of Appeals,[28] the Court held that the
allegations in a complaint showing violation of a contractual right of first option or priority
to buy the properties subject of the lease constitute a valid cause of action enforceable by
an action for specific performance. Summarizing the rulings in the two previously cited
cases, the Court affirmed the nature of and concomitant rights and obligations of parties
under a right of first refusal. Thus:

We hold however, that in order to have full compliance with the contractual right granting
petitioner the first option to purchase, the sale of the properties for the amount of
P9,000,000.00, the price for which they were finally sold to respondent Raymundo, should
have likewise been offered to petitioner.

The Court has made an extensive and lengthy discourse on the concept of, and obligations
under, a right of first refusal in the case of Guzman, Bocaling & Co. vs. Bonnevie. In that
case, under a contract of lease, the lessees (Raul and Christopher Bonnevie) were given a
"right of first priority" to purchase the leased property in case the lessor (Reynoso) decided
to sell. The selling price quoted to the Bonnevies was 600,000.00 to be fully paid in cash,
less a mortgage lien of P100,000.00. On the other hand, the selling price offered by
Reynoso to and accepted by Guzman was only P400,000.00 of which P137,500.00 was to
be paid in cash while the balance was to be paid only when the property was cleared of
occupants. We held that even if the Bonnevies could not buy it at the price quoted
(P600,000.00), nonetheless, Reynoso could not sell it to another for a lower price and under
more favorable terms and conditions without first offering said favorable terms and price
to the Bonnevies as well. Only if the Bonnevies failed to exercise their right of first priority
could Reynoso thereafter lawfully sell the subject property to others, and only under the
same terms and conditions previously offered to the Bonnevies.

XXX

This principle was reiterated in the very recent case of Equatorial Realty vs. Mayfair
Theater, Inc. which was decided en banc. This Court upheld the right of first refusal of the

117
lessee Mayfair, and rescinded the sale of the property by the lessor Carmelo to Equatorial
Realty "considering that Mayfair, which had substantial interest over the subject property,
was prejudiced by its sale to Equatorial without Carmelo conferring to Mayfair every
opportunity to negotiate within the 30-day stipulated period"

In that case, two contracts of lease between Carmelo and Mayfair provided "that if the
LESSOR should desire to sell the leased premises, the LESSEE shall be given 30 days
exclusive option to purchase the same." Carmelo initially offered to sell the leased property
to Mayfair for six to seven million pesos. Mayfair indicated interest in purchasing the
property though it invoked the 30-day period. Nothing was heard thereafter from
Carmelo. Four years later, the latter sold its entire Recto Avenue property, including the
leased premises, to Equatorial for P11,300,000.00 without priorly informing Mayfair. The
Court held that both Carmelo and Equatorial acted in bad faith: Carmelo for knowingly
violating the right of first option of Mayfair, and Equatorial for purchasing the property
despite being aware of the contract stipulation. In addition to rescission of the contract of
sale, the Court ordered Carmelo to allow Mayfair to buy the subject property at the same
price of P11,300,000.00.

In the recent case of Litonjua vs. L&R Corporation,[29] the Court, also citing the case
of Guzman, Bocaling & Co. vs. Bonnevie, held that the sale made therein in violation of a
right of first refusal embodied in a mortgage contract, was rescissible. Thus:

While petitioners question the validity of paragraph 8 of their mortgage contract, they
appear to be silent insofar as paragraph 9 thereof is concerned. Said paragraph 9 grants
upon L&R Corporation the right of first refusal over the mortgaged property in the event
the mortgagor decides to sell the same. We see nothing wrong in this provision. The right
of first refusal has long been recognized as valid in our jurisdiction. The consideration for
the loan mortgage includes the consideration for the right of first refusal. L&R Corporation
is in effect stating that it consents to lend out money to the spouses Litonjua provided that
in case they decide to sell the property mortgaged to it, then L&R Corporation shall be
given the right to match the offered purchase price and to buy the property at that
price. Thus, while the spouses Litonjua had every right to sell their mortgaged property to
PWHAS without securing the prior written consent of L&R Corporation, they had the
obligation under paragraph 9, which is a perfectly valid provision, to notify the latter of
their intention to sell the property and give it priority over other buyers. It is only upon the
failure of L&R Corporation to exercise its right of first refusal could the spouses Litonjua
validly sell the subject properties to the others, under the same terms and conditions offered
to L&R Corporation.

What then is the status of the sale made to PWHAS in violation of L & R Corporation's
contractual right of first refusal? On this score, we agree with the Amended Decision of
the Court of Appeals that the sale made to PWHAS is rescissible. The case of Guzman,
Bocaling & Co. v. Bonnevie is instructive on this point.

XXX

It was then held that the Contract of Sale there, which violated the right of first refusal, was
rescissible.

In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L
& R Corporation over the subject properties since the Deed of Real Estate Mortgage
containing such a provision was duly registered with the Register of Deeds. As such,

118
PWHAS is presumed to have been notified thereof by registration, which equates to notice
to the whole world.

XXX

All things considered, what then are the relative rights and obligations of the parties? To
recapitulate: the sale between the spouses Litonjua and PWHAS is valid, notwithstanding
the absence of L & R Corporation's prior written consent thereto. Inasmuch as the sale to
PWHAS was valid, its offer to redeem and its tender of the redemption price, as successor-
in-interest of the spouses Litonjua, within the one-year period should have been accepted
as valid by the L & R Corporation. However, while the sale is, indeed, valid, the same is
rescissible because it ignored L & R Corporation's right of first refusal.

Thus, the prevailing doctrine, as enunciated in the cited cases, is that a contract of sale
entered into in violation of a right of first refusal of another person, while valid, is
rescissible.
There is, however, a circumstance which prevents the application of this doctrine in
the case at bench. In the cases cited above, the Court ordered the rescission of sales made
in violation of a right of first refusal precisely because the vendees therein could not have
acted in good faith as they were aware or should have been aware of the right of first refusal
granted to another person by the vendors therein. The rationale for this is found in the
provisions of the New Civil Code on rescissible contracts. Under Article 1381 of the New
Civil Code, paragraph 3, a contract validly agreed upon may be rescinded if it is undertaken
in fraud of creditors when the latter cannot in any manner collect the claim due
them. Moreover, under Article 1385, rescission shall not take place when the things which
are the object of the contract are legally in the possession of third persons who did not act
in bad faith.[30]
It must be borne in mind that, unlike the cases cited above, the right of first refusal
involved in the instant case was an oral one given to respondents by the deceased spouses
Tiangco and subsequently recognized by their heirs. As such, in order to hold that
petitioners were in bad faith, there must be clear and convincing proof that petitioners were
made aware of the said right of first refusal either by the respondents or by the heirs of the
spouses Tiangco.
It is axiomatic that good faith is always presumed unless contrary evidence is
adduced.[31] A purchaser in good faith is one who buys the property of another without
notice that some other person has a right or interest in such a property and pays a full and
fair price at the time of the purchase or before he has notice of the claim or interest of some
other person in the property.[32] In this regard, the rule on constructive notice would be
inapplicable as it is undisputed that the right of first refusal was an oral one and that the
same was never reduced to writing, much less registered with the Registry of Deeds. In
fact, even the lease contract by which respondents derive their right to possess the property
involved was an oral one.
On this point, we hold that the evidence on record fails to show that petitioners acted
in bad faith in entering into the deed of sale over the disputed property with the heirs of the
spouses Tiangco. Respondents failed to present any evidence that prior to the sale of the
property on September 4, 1990, petitioners were aware or had notice of the oral right of
first refusal.
Respondents point to the letter dated June 1, 1990[33] as indicative of petitioners
knowledge of the said right. In this letter, a certain Atty. Erlinda Aguila demanded that

119
respondent Irene Guillermo vacate the structure they were occupying to make way for its
demolition.
We fail to see how the letter could give rise to bad faith on the part of the petitioner. No
mention is made of the right of first refusal granted to respondents. The name of petitioner
Rosencor or any of it officers did not appear on the letter and the letter did not state that
Atty. Aguila was writing in behalf of petitioner. In fact, Atty. Aguila stated during trial that
she wrote the letter in behalf of the heirs of the spouses Tiangco. Moreover, even assuming
that Atty. Aguila was indeed writing in behalf of petitioner Rosencor, there is no showing
that Rosencor was aware at that time that such a right of first refusal existed.
Neither was there any showing that after receipt of this June 1, 1990 letter, respondents
notified Rosencor or Atty. Aguila of their right of first refusal over the
property. Respondents did not try to communicate with Atty. Aguila and inform her about
their preferential right over the disputed property. There is even no showing that they
contacted the heirs of the spouses Tiangco after they received this letter to remind them of
their right over the property.
Respondents likewise point to the letter dated October 9, 1990 of Eufrocina de Leon,
where she recognized the right of first refusal of respondents, as indicative of the bad faith
of petitioners. We do not agree. Eufrocina de Leon wrote the letter on her own behalf and
not on behalf of petitioners and, as such, it only shows that Eufrocina de Leon was aware
of the existence of the oral right of first refusal. It does not show that petitioners were
likewise aware of the existence of the said right. Moreover, the letter was made a month
after the execution of the Deed of Absolute Sale on September 4, 1990 between petitioner
Rosencor and the heirs of the spouses Tiangco. There is no showing that prior to the date
of the execution of the said Deed, petitioners were put on notice of the existence of the
right of first refusal.
Clearly, if there was any indication of bad faith based on respondents evidence, it
would only be on the part of Eufrocina de Leon as she was aware of the right of first refusal
of respondents yet she still sold the disputed property to Rosencor. However, bad faith on
the part of Eufrocina de Leon does not mean that petitioner Rosencor likewise acted in bad
faith. There is no showing that prior to the execution of the Deed of Absolute Sale,
petitioners were made aware or put on notice of the existence of the oral right of first
refusal. Thus, absent clear and convincing evidence to the contrary, petitioner Rosencor
will be presumed to have acted in good faith in entering into the Deed of Absolute Sale
over the disputed property.
Considering that there is no showing of bad faith on the part of the petitioners, the
Court of Appeals thus erred in ordering the rescission of the Deed of Absolute Sale dated
September 4, 1990 between petitioner Rosencor and the heirs of the spouses Tiangco. The
acquisition by Rosencor of the property subject of the right of first refusal is an obstacle to
the action for its rescission where, as in this case, it was shown that Rosencor is in lawful
possession of the subject of the contract and that it did not act in bad faith.[34]
This does not mean however that respondents are left without any remedy for the
unjustified violation of their right of first refusal. Their remedy however is not an action
for the rescission of the Deed of Absolute Sale but an action for damages against the heirs
of the spouses Tiangco for the unjustified disregard of their right of first refusal[35].
WHEREFORE, premises considered, the decision of the Court of Appeals dated June
25, 1999 is REVERSED and SET ASIDE. The Decision dated May 13, 1996 of the Quezon
City Regional Trial Court, Branch 217 is hereby REINSTATED insofar as it dismisses the
action for rescission of the Deed of Absolute Sale dated September 4, 1990 and orders the

120
payment of monthly rentals of P1,000.00 per month reckoned from May 1990 up to the
time respondents leave the premises.
SO ORDERED.

G.R. No. 107207 November 23, 1995

VIRGILIO R. ROMERO, petitioner,

vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE
ONGSIONG, respondents.

The parties pose this question: May the vendor demand the rescission of a contract for the
sale of a parcel of land for a cause traceable to his own failure to have the squatters on the
subject property evicted within the contractually-stipulated period?

Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production,
manufacture and exportation of perlite filter aids, permalite insulation and processed perlite
ore. In 1988, petitioner and his foreign partners decided to put up a central warehouse in
Metro Manila on a land area of approximately 2,000 square meters. The project was made
known to several freelance real estate brokers.

A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker,
offered a parcel of land measuring 1,952 square meters. Located in Barangay San Dionisio,
Parañaque, Metro Manila, the lot was covered by TCT No. 361402 in the name of private
respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the property and, except
for the presence of squatters in the area, he found the place suitable for a central warehouse.

Later, the Flores spouses called on petitioner with a proposal that should he advance the
amount of P50,000.00 which could be used in taking up an ejectment case against the
squatters, private respondent would agree to sell the property for only P800.00 per square
meter. Petitioner expressed his concurrence. On 09 June 1988, a contract, denominated

121
"Deed of Conditional Sale," was executed between petitioner and private respondent. The
simply-drawn contract read:

DEED OF CONDITIONAL SALE

KNOW ALL MEN BY THESE PRESENTS:

This Contract, made and executed in the Municipality of Makati, Philippines

this 9th day of June, 1988 by and between:

ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age,

widow, Filipino and residing at 105 Simoun St., Quezon City,
Metro Manila, hereinafter referred to as the VENDOR;

-and-

VIRGILIO R. ROMERO, married to Severina L. Lat, of Legal

age, Filipino, and residing at 110 San Miguel St., Plainview
Subd., Mandaluyong Metro Manila, hereinafter referred to as
the VENDEE:

W I T N E S S E T H : That

WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total
area of ONE THOUSAND NINE HUNDRED FIFTY TWO (1,952)
SQUARE METERS, more or less, located in Barrio San Dionisio,
Municipality of Parañaque, Province of Rizal, covered by TCT No. 361402
issued by the Registry of Deeds of Pasig and more particularly described as
follows:

xxx xxx xxx

WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and
the VENDOR has accepted the offer, subject to the terms and conditions
hereinafter stipulated:

NOW, THEREFORE, for and in consideration of the sum of ONE MILLION

FIVE HUNDRED SIXTY ONE THOUSAND SIX HUNDRED PESOS
(P1,561,600.00) ONLY, Philippine Currency, payable by VENDEE to in to
(sic) manner set forth, the VENDOR agrees to sell to the VENDEE, their
heirs, successors, administrators, executors, assign, all her rights, titles and
interest in and to the property mentioned in the FIRST WHEREAS
CLAUSE, subject to the following terms and conditions:

1. That the sum of FIFTY THOUSAND PESOS (P50,000.00)

ONLY Philippine Currency, is to be paid upon signing and
execution of this instrument.

2. The balance of the purchase price in the amount of ONE

MILLION FIVE HUNDRED ELEVEN THOUSAND SIX
HUNDRED PESOS (P1,511,600.00) ONLY shall be paid 45
days after the removal of all squatters from the above described
property.

122
 3. Upon full payment of the overall purchase price as aforesaid,
VENDOR without necessity of demand shall immediately
sign, execute, acknowledged (sic) and deliver the
corresponding deed of absolute sale in favor of the VENDEE
free from all liens and encumbrances and all Real Estate taxes
are all paid and updated.

It is hereby agreed, covenanted and stipulated by and between the parties

hereto that if after 60 days from the date of the signing of this contract the
VENDOR shall not be able to remove the squatters from the property being
purchased, the downpayment made by the buyer shall be
returned/reimbursed by the VENDOR to the VENDEE.

That in the event that the VENDEE shall not be able to pay the VENDOR
the balance of the purchase price of ONE MILLION FIVE HUNDRED
ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY
after 45 days from written notification to the VENDEE of the removal of the
squatters from the property being purchased, the FIFTY THOUSAND
PESOS (P50,000.00) previously paid as downpayment shall be forfeited in
favor of the VENDOR.

Expenses for the registration such as registration fees, documentary stamp,

transfer fee, assurances and such other fees and expenses as may be necessary
to transfer the title to the name of the VENDEE shall be for the account of
the VENDEE while capital gains tax shall be paid by the VENDOR.

IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents

in the City of Makati MM, Philippines on this 9th day of June, 1988.

(Sgd.) (Sgd.)

VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.

DE ONGSIONG

Vendee Vendor

SIGNED IN THE PRESENCE OF:

(Sgd.) (Sgd.)

Rowena C. Ongsiong Jack M. Cruz 1

Alfonso Flores, in behalf of private respondent, forthwith received and

acknowledged a check for P50,000.00 2 from petitioner. 3

Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil Case
No. 7579) against Melchor Musa and 29 other squatter families with the Metropolitan Trial
Court of Parañaque. A few months later, or on 21 February 1989, judgment was rendered
ordering the defendants to vacate the premises. The decision was handed down beyond the
60-day period (expiring 09 August 1988) stipulated in the contract. The writ of execution
of the judgment was issued, still later, on 30 March 1989.

123
In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she
received from petitioner since, she said, she could not "get rid of the squatters" on the lot.
Atty. Sergio A.F. Apostol, counsel for petitioner, in his reply of 17 April 1989, refused the
tender and stated:.

Our client believes that with the exercise of reasonable diligence considering
the favorable decision rendered by the Court and the writ of execution issued
pursuant thereto, it is now possible to eject the squatters from the premises
of the subject property, for which reason, he proposes that he shall take it
upon himself to eject the squatters, provided, that expenses which shall be
incurred by reason thereof shall be chargeable to the purchase price of the
land. 4

Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its
Regional Director for Luzon, Farley O. Viloria, asked the Metropolitan Trial Court of
Parañaque for a grace period of 45 days from 21 April 1989 within which to relocate and
transfer the squatter families. Acting favorably on the request, the court suspended the
enforcement of the writ of execution accordingly.

On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day
grace period and his client's willingness to "underwrite the expenses for the execution of
the judgment and ejectment of the occupants." 5

In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent,
advised Atty. Apostol that the Deed of Conditional Sale had been rendered null and void by
virtue of his client's failure to evict the squatters from the premises within the agreed 60-
day period. He added that private respondent had "decided to retain the property." 6

On 23 June 1989, Atty. Apostol wrote back to explain:

The contract of sale between the parties was perfected from the very moment
that there was a meeting of the minds of the parties upon the subject lot and
the price in the amount of P1,561,600.00. Moreover, the contract had already
been partially fulfilled and executed upon receipt of the downpayment of
your client. Ms. Ongsiong is precluded from rejecting its binding effects
relying upon her inability to eject the squatters from the premises of subject
property during the agreed period. Suffice it to state that, the provision of the
Deed of Conditional Sale do not grant her the option or prerogative to rescind
the contract and to retain the property should she fail to comply with the
obligation she has assumed under the contract. In fact, a perusal of the terms
and conditions of the contract clearly shows that the right to rescind the
contract and to demand the return/reimbursement of the downpayment is
granted to our client for his protection.

Instead, however, of availing himself of the power to rescind the contract and
demand the return, reimbursement of the downpayment, our client had opted
to take it upon himself to eject the squatters from the premises. Precisely, we
refer you to our letters addressed to your client dated April 17, 1989 and June
8, 1989.

Moreover, it is basic under the law on contracts that the power to rescind is
given to the injured party. Undoubtedly, under the circumstances, our client
is the injured party.

124
 Furthermore, your client has not complied with her obligation under their
contract in good faith. It is undeniable that Ms. Ongsiong deliberately refused
to exert efforts to eject the squatters from the premises of the subject property
and her decision to retain the property was brought about by the sudden
increase in the value of realties in the surrounding areas.

Please consider this letter as a tender of payment to your client and a demand
to execute the absolute Deed of Sale. 7

A few days later (or on 27 June 1989), private respondent, prompted by petitioner's
continued refusal to accept the return of the P50,000.00 advance payment, filed with the
Regional Trial Court of Makati, Branch 133, Civil Case No. 89-4394 for rescission of the
deed of "conditional" sale, plus damages, and for the consignation of P50,000.00 cash.

Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of
execution in Civil Case No. 7579 on motion of private respondent but the squatters
apparently still stayed on.

Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of
Makati 8 rendered decision holding that private respondent had no right to rescind the
contract since it was she who "violated her obligation to eject the squatters from the subject
property" and that petitioner, being the injured party, was the party who could, under
Article 1191 of the Civil Code, rescind the agreement. The court ruled that the provisions
in the contract relating to (a) the return/reimbursement of the P50,000.00 if the vendor were
to fail in her obligation to free the property from squatters within the stipulated period or
(b), upon the other hand, the sum's forfeiture by the vendor if the vendee were to fail in
paying the agreed purchase price, amounted to "penalty clauses". The court added:

This Court is not convinced of the ground relied upon by the plaintiff in
seeking the rescission, namely: (1) he (sic) is afraid of the squatters; and (2)
she has spent so much to eject them from the premises (p. 6, tsn, ses. Jan. 3,
1990). Militating against her profession of good faith is plaintiffs conduct
which is not in accord with the rules of fair play and justice. Notably, she
caused the issuance of an alias writ of execution on August 25, 1989 (Exh.
6) in the ejectment suit which was almost two months after she filed the
complaint before this Court on June 27, 1989. If she were really afraid of the
squatters, then she should not have pursued the issuance of an alias writ of
execution. Besides, she did not even report to the police the alleged phone
threats from the squatters. To the mind of the Court, the so-called squatter
factor is simply factuitous (sic). 9

The lower court, accordingly, dismissed the complaint and ordered, instead, private
respondent to eject or cause the ejectment of the squatters from the property and to
execute the absolute deed of conveyance upon payment of the full purchase price
by petitioner.

Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court
rendered its decision. 10 It opined that the contract entered into by the parties was subject
to a resolutory condition, i.e., the ejectment of the squatters from the land, the non-
occurrence of which resulted in the failure of the object of the contract; that private
respondent substantially complied with her obligation to evict the squatters; that it was
petitioner who was not ready to pay the purchase price and fulfill his part of the contract,
and that the provision requiring a mandatory return/reimbursement of the P50,000.00 in

125
case private respondent would fail to eject the squatters within the 60-day period was not
a penal clause. Thus, it concluded.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE,

and a new one entered declaring the contract of conditional sale dated June
9, 1988 cancelled and ordering the defendant-appellee to accept the return of
the downpayment in the amount of P50,000.00 which was deposited in the
court below. No pronouncement as to costs. 11

Failing to obtain a reconsideration, petitioner filed this petition for review

on certiorari raising issues that, in fine, center on the nature of the contract adverted to and
the P50,000.00 remittance made by petitioner.

A perfected contract of sale may either be absolute or conditional 12 depending on whether

the agreement is devoid of, or subject to, any condition imposed on the passing of title of
the thing to be conveyed or on the obligation of a party thereto. When ownership is retained
until the fulfillment of a positive condition the breach of the condition will simply prevent
the duty to convey title from acquiring an obligatory force. If the condition is imposed on
an obligation of a party which is not complied with, the other party may either refuse to
proceed or waive said condition (Art. 1545, Civil Code). Where, of course, the condition
is imposed upon the perfection of the contract itself, the failure of such condition would
prevent the juridical relation itself from coming into existence. 13

In determining the real character of the contract, the title given to it by the parties is not
as much significant as its substance. For example, a deed of sale, although denominated
as a deed of conditional sale, may be treated as absolute in nature, if title to the property
sold is not reserved in the vendor or if the vendor is not granted the right to unilaterally
rescind the contract predicated on the fulfillment or non-fulfillment, as the case may be,
of the prescribed condition. 14

The term "condition" in the context of a perfected contract of sale pertains, in reality, to
the compliance by one party of an undertaking the fulfillment of which would beckon, in
turn, the demandability of the reciprocal prestation of the other party. The reciprocal
obligations referred to would normally be, in the case of vendee, the payment of the agreed
purchase price and, in the case of the vendor, the fulfillment of certain express warranties
(which, in the case at bench is the timely eviction of the squatters on the property).

It would be futile to challenge the agreement here in question as not being a duly perfected
contract. A sale is at once perfected when a person (the seller) obligates himself, for a price
certain, to deliver and to transfer ownership of a specified thing or right to another (the
buyer) over which the latter agrees. 15

The object of the sale, in the case before us, was specifically identified to be a 1,952-square
meter lot in San Dionisio, Parañaque, Rizal, covered by Transfer Certificate of Title No.
361402 of the Registry of Deeds for Pasig and therein technically described. The purchase
price was fixed at P1,561,600.00, of which P50,000.00 was to be paid upon the execution
of the document of sale and the balance of P1,511,600.00 payable "45 days after the
removal of all squatters from the above described property."

From the moment the contract is perfected, the parties are bound not only to the fulfillment
of what has been expressly stipulated but also to all the consequences which, according to
their nature, may be in keeping with good faith, usage and law. Under the agreement,
private respondent is obligated to evict the squatters on the property. The ejectment of the

126
squatters is a condition the operative act of which sets into motion the period of compliance
by petitioner of his own obligation, i.e., to pay the balance of the purchase price. Private
respondent's failure "to remove the squatters from the property" within the stipulated period
gives petitioner the right to either refuse to proceed with the agreement or waive that
condition in consonance with Article 1545 of the Civil Code. 16This option clearly belongs
to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private
respondent does not constitute a "potestative condition dependent solely on his will" that
might, otherwise, be void in accordance with Article 1182 of the Civil Code 17 but a
"mixed" condition "dependent not on the will of the vendor alone but also of third persons
like the squatters and government agencies and personnel concerned." 18 We must hasten
to add, however, that where the so-called "potestative condition" is imposed not on the
birth of the obligation but on its fulfillment, only the obligation is avoided, leaving
unaffected the obligation itself. 19

In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the
obligee to choose between proceeding with the agreement or waiving the performance of
the condition. It is this provision which is the pertinent rule in the case at bench. Here,
evidently, petitioner has waived the performance of the condition imposed on private
respondent to free the property from squatters. 20

In any case, private respondent's action for rescission is not warranted. She is not the
injured party. 21 The right of resolution of a party to an obligation under Article 1191 of the
Civil Code is predicated on a breach of faith by the other party that violates the reciprocity
between them. 22 It is private respondent who has failed in her obligation under the contract.
Petitioner did not breach the agreement. He has agreed, in fact, to shoulder the expenses of
the execution of the judgment in the ejectment case and to make arrangements with the
sheriff to effect such execution. In his letter of 23 June 1989, counsel for petitioner has
tendered payment and demanded forthwith the execution of the deed of absolute sale.
Parenthetically, this offer to pay, having been made prior to the demand for rescission,
assuming for the sake of argument that such a demand is proper under Article 1592 23 of
the Civil Code, would likewise suffice to defeat private respondent's prerogative to rescind
thereunder.

There is no need to still belabor the question of whether the P50,000.00 advance payment
is reimbursable to petitioner or forfeitable by private respondent, since, on the basis of our
foregoing conclusions, the matter has ceased to be an issue. Suffice it to say that petitioner
having opted to proceed with the sale, neither may petitioner demand its reimbursement
from private respondent nor may private respondent subject it to forfeiture.

WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED

AND SET ASIDE, and another is entered ordering petitioner to pay private respondent the
balance of the purchase price and the latter to execute the deed of absolute sale in favor of
petitioner. No costs.

SO ORDERED.

127
G.R. No. 102606 July 3, 1992

LINO R. TOPACIO, petitioner,

vs.
HON. COURT OF APPEALS, BPI INVESTMENT CORP., respondents.

This is an appeal by way of certiorari from the decision 1 in CA G.R. CV 23258 which
reversed the decision 2 of the Regional Trial Court, Branch 98, Quezon City in Civil Case
No. 51954.

On March 9, 1988, the parties submitted the following stipulation of facts:

1. The parties admit the personal and corporate circumstances of each other
as found in the complaint.

2. The spouses Juan P. de Villa, Jr. and Rosalia de Villa, parents-in-law of

the plaintiff, were the former owners of Lot No. 13, Block 21-A, covered by
TCT No. 280808 of the Registry of Deeds of Quezon City. This property was
previously mortgaged to the Ayala Investment and Development
Corporation to secure an obligation of P500,000.00. For failure of the said
mortgagors to pay upon maturity, the mortgage was foreclosed and
consequently, defendant acquired the property as highest bidder in the
auction sale, following the foreclosure. No redemption having been exercised
by the mortgagors, the defendant was able to consolidate its title over the
property.

3. Plaintiff, who lives with his in-laws, negotiated to purchase the property
from defendant. He first made an offer on August 9, 1985 (Annex A,
complaint) for P900,000.00 but defendant asked plaintiff to improve his
offer. Subsequently, the plaintiff and Mr. Manuel Ablan, then Manager of
the Loans Adjustment and Special Asset Department of the defendant arrived
at P1,250,000.00 as the purchase price, with 30% downpayment, and the
balance, payable in cash, upon execution of the Deed of Sale. Plaintiff
confirmed his offer in his letter to the defendant dated November 27, 1985
(Annex B, complaint; Annex, 1, Answer), with his check payment of
P375,000.00.

4. Defendant received plaintiff's initial payment of P375,000.00 on

November 28, 1985, for which a receipt was issued under defendant's
Official Receipt No. 112375 (Annex C, Complaint).

128
5. On December 4, 1985, defendant wrote to the plaintiff, informing him of
the terms and conditions of the sale, as approved by the management of
defendant, which, among other things, gives plaintiff up to January 4, 1986
within which to pay the balance of P875,000.00 (Annex D, Complaint,
Annex 2, Answer).

6. Plaintiff asked for extensions within which to pay the balance. The first
was made on January 8, 1986 (Annex 3, Answer), another on April 22, 1986
(Annex 4, Answer). Defendant agreed to extend the payment up to June 30,
1986, in accordance with defendant's letter dated May 5, 1986, requiring
plaintiff, in addition, to pay interest at 24% per annum on the unpaid balance
(Annex 5, Answer).

7. Plaintiff, not having been able to meet defendant's deadline (June 30,
1986), defendant wrote a letter to plaintiff dated September 6, 1986 (Annex
6, Answer) declaring itself (defendant) free to sell the property to other
buyers and informing plaintiff that he could already claim his initial payment
of P375,000.00

8. In response, plaintiff, in its letter dated October 22, 1986 (Annex 7,

Answer), asked for an extension of another six (6) months, within which to
pay the balance of P875,000.00. Defendant denied plaintiff's request and
asked plaintiff to get back his P375,000.00, in defendant's letter to plaintiff
dated November 7, 1986 (Annex 8, Answer).

9. On January 5, 1987, defendant wrote plaintiff, reiterating its request that

plaintiff get back his P375,000.00 (Annex 9, Answer) and on February 12,
1987 (Annex E, Complaint, Annex 10, Answer), defendant mailed to
plaintiff a cashier's check for P375,000.00, payable to him. Plaintiff replied
in March 6, 1987 (Annex F, Complaint, Annex 11, Answer), declining
acceptance of the P375,000.00 and insisting therein the defendant allow
plaintiff to pay the balance of P875,000.00.

10. Subsequently, defendant informed plaintiff that the property is being sold
for P1,600.00, in its Answer. Plaintiff then wrote on April 1, 1987 to Mr.
Xavier Loinaz of defendant (Annex 13, Answer) asking that original price of
P1,250,000.00 be maintained. Defendant again wrote to plaintiff on May 29,
1987 (Annex 14, Answer) reiterating its position that defendant was willing
to sell at P1,600,000.00.

11. Plaintiff, in its letter to defendant dated July 21, 1987, (Annex G,
Complaint, Annex 15, Answer), returned the cashier's check earlier issued
by defendant in favor of plaintiff. Defendant acknowledged receipt of said
letter but declined to take back the said check as expressed in defendant's
letter of the same date (Annex 16, Answer).

12. The cashier's check of P375,000.00 payable to plaintiff remains uncashed

to date and is still in the hands of the plaintiff, after defendant refused to
accept its return.

13. Plaintiff admits that Annexes 1 to 16 attached to the Answer are true and
faithful copies of the originals. Defendant likewise admits that Annexes A to
G attached to the complaint are true and faithful copies of the originals. Said

129
 Annexes are hereby adopted by the parties as part of this Stipulation of Facts
and may be received in evidence without further authentication or
identification. (Rollo, pp. 21-24)

On the basis of the foregoing stipulation, the trial court rendered judgment in favor of the
petitioner, finding that there is a perfected contract of sale which is still enforceable because
the respondent failed to rescind either by judicial or notarial rescission.

The dispositive portion of the trial court's decision is quoted hereunder:

Samakatwid, iginagawad ng hukumang ito ang pasiya para sa nagsasakdal at

ipinag-uutos sa ipinagsakdal na BPI Investment Corporation na tanggapin
mula sa nagsasakdal.

Una — Ang tsekeng P375,000.00 bilang paunang bayad na tatlumpung

porsiento ng buong halaga.

Pangalawa — Ang hulihang P875,000.00 na may kalakip na interes na

labindalawang (12%) porsiento simula sa ika-lima ng Oktubre, 1987
hanggang mabayaran ito;

Pangatlo — At isagawa ng nasasakdal na BPI Investment Corporation ang

pagsasalin ng ari-arian na nabanggit sa dakong itaas sa pamamagitan ng isang
bilihan tuluyan sa kapakanan ng nasasakdal na si Lino Topacio at kanyang
may-bahay.

Ang gastos ay dapat bayaran ng ipinagsasakdal.

IPINAG-UUTOS. (Rollo, p. 24)

The Court of Appeals, on appeal, reversed the trial court's decision stating that the letter
dated December 4, 1985, sent by BPI to the petitioner reveals that the contract entered into
by them is a contract to sell, not a contract of sale.

The letter of December 4, 1985 is hereby quoted as follows:

We are pleased to inform you that the managament has approved for the sale
for the above property to you under the following terms and conditions:

1. Selling price of P1,250,000.00 is on CASH basis;

2. Execution of a Deed of Absolute Sale;

3. All expenses relative to the sale/transfer of title shall be for the account of
the buyer;

4. Eviction of tenants, if any, shall be for the account of the buyer;

5. Sale of the property is on as-is where-is basis.

If you are agreeable to the foregoing, kindly indicate your conformity by

signing on the space provided below and return the copies to us together with
your balance of P875,000.00. The validity of the above approval is good up
to January 4, 1986. (Rollo, pp. 7-8)
130
The petition is impressed with merit.

The payment by petitioner of P375,000.00 on November 28, 1991 which respondent

accepted, and for which an official receipt was issued, the body of which hereby quoted:

Partial payment for the purchase of real property, formerly owned by Juan
de Villa.

P375,000.00

was the operative act that gave rise to a perfected contract of sale between the
parties. Article 1482 of the Civil Code provides:

Art. 1482. Whenever earnest money is given in a contract of sale, it shall be

considered as part of the price and as proof of the perfection of the contract.

Earnest money is something of value to show that the buyer was really in earnest,
and given to the seller to bind the bargain. Under the Civil Code, earnest money is
considered part of the purchase price and as proof of the perfection of the contract.
The P375,000.00 given by the petitioner representing 30% of the purchase price is
earnest money.

Furthermore, Article 1475 of the Civil Code states:

Art. 1475. The contract of sale is perfected at the moment there is a meeting
of the minds upon the thing which is the object of the contract and upon the
price.

From the moment, the parties may reciprocally demand performance, subject
to the provisions of the law governing the form of contracts.

Based on the aforecited article, the parties have agreed on the object of the contract
which is the house and lot located at No. 32 Whitefield St., White Plains, Quezon
City and even before November 27, 1985, (the date petitioner sent his letter together
with the 30% downpayment), the parties have agreed on the price which is
P1,250,000.00.

Nowhere in the transaction indicates that BPI reserved its title property nor did it provide
for any automatic rescission in case of default. So when petitioner failed to pay the balance
of P875,000.00 despite several extensions given by private respondent, the latter could not
validly rescind the contract without complying with the provision of Article 1592 or Article
1191 on notarial or judicial rescission respectively. The ruling in Taguba v. Vda. de
Leon, 132 SCRA 722 applies in the case at bar, to wit:

Considering, therefore the nature of the transaction between petitioner

Taguba and private respondent, which We affirm and sustain to be a contract
of sale, absolute in nature the applicable provisions of Article 1592 of the
New Civil Code which states:

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

131
 period, as long as no demand for rescission of the contract has
been made upon him either judicially or by notarial act. After
the demand the court may not grant him a new term.

In the case at bar, it is undisputed that the petitioner Taguba never notified
private respondent by notarial act that he was rescinding the contract, and
neither had he filed suit in suit court to rescind the sale.

Respondent cannot just consider the sale cancelled by simply returning the
downpayment which petitioner refused to accept.

WHEREFORE, the appealed decision of the Court of Appeals is hereby REVERSED and
SET ASIDE and the decision of the Regional Trial Court of Quezon City, Branch 89, dated
April 10, 1989 is AFFIRMED with costs against respondent.

SO ORDERED.

132
G.R. No. 19009 September 26, 1922

E.C. MCCULLOUGH & CO., plaintiff-appelle, vs. S. M. BERGER, Defendant-

Appellant.

Fisher & DeWitt for appellant.

Perkins & Kincaid for appellee.

STATEMENT

For cause of action it is alleged that in the month of February, 1918, plaintiff and defendant
and defendant entered into an agreement by which the defendant was to deliver plaintiff
501 bales of tobacco of New York City in good condition. That delivery was made and the
plaintiff paid the full purchase price. That upon an examination later the tobacco was found
to be in must condition, and its value was $12,000 less than it would have been if the
tobacco had been in the condition which defendant agreed that it should be, as a result of
which plaintiff claims damages for P12,000, United States currency, or P24,000, Philippine
currency. That when the condition of the tobacco was discovered, plaintiff promptly
notified the defendant, who ignored the protest. Wherefore, the plaintiff prays judgment
for the amount of P24,000, Philippine currency, for costs and general
relief.chanroblesvirtualawlibrary chanrobles virtual law library

For answer, the defendant denies all the material allegation of the complaint, and, as a
further and separate defense, alleges that on August 15, 1918, he was advised by the
plaintiff that the latter was dissatisfied with the quality of the tobacco, and he made him a
formal written offer to repurchase the tobacco at the original selling price with accrued
interest, and that plaintiff rejected the offer.chanroblesvirtualawlibrary chanrobles virtual
law library

That defendant has been ready and willing at all reasonable times to accept the return of
the tobacco and to return the amount of the purchase price with legal interest, and has a
repeatedly tendered to the plaintiff such purchase price in exchange for the return of the
tobacco, and that plaintiff had refused to return it. That any damages which plaintiff may
have suffered have been wholly due to his willful refusal to return and redeliver the
tobacco.chanroblesvirtualawlibrary chanrobles virtual law library

Upon such issues there was a stipulation of facts, and after trial the lower court rendered
judgment against the defendant and in favor of the plaintiff for the sum of P11,867.98 or
P23,735.96 with legal interest from January 6, 192, and costs, from which, after his motion
for a new trial was overruled, the defendant appeals, claiming that the court erred: First, in
finding that the tobacco was not in good condition when it arrived in New York; second,
in holding that the plaintiff is entitled to maintain an action for breach of contract after
having agreed with the defendant to rescind and to make restitution of the subject-matter
and the price after a violation of the agreement; third in holding that the plaintiff, having
elected to rescind and notified the defendant of such an election, may now refused it and

133
affirm the same and recover from the alleged breach of warranty; fourth, in holding that
this action should be maintained, no claim having been made for the alleged breach of
warranty of quality within the statutory period; and, fifth, in overruling the defendant's
motion for a new trial.

JOHNS, J.:

In February, 1918, the defendant met the plaintiff in the city of Manila and advised him
that he had made a shipment of 501 bales of tobacco to new York City consigned to S.
Lowenthal & Sons, who had refused to honor the draft which was drawn upon them. He
asked the plaintiff whether he could use the tobacco provided it was "perfectly sound." At
the plaintiff's request the defendant made and signed a writing as follows:

Referring to the shipment of 501 bales of tobacco sold you consisting of 188 200-pound
bales of scrap and 313 200-pound bales of booked tobacco, I beg to confirm my verbal
conversation with you in stating that I guarantee the arrival of the tobacco in New York in
good condition, subject, of course, to conditions arising after its departure from Manila,
which contingencies are covered by adequate insurance. (Stipulation par. 1.)

Upon the strength of this the plaintiff cabled his New York office to honor the defendant's
draft, which was ninety days' sight for $33,109, and was the same draft and amount which
had been refused by S. Lowenthal & Sons. The draft was honored by his New York office
at plaintiff's request. The shipment consisted of 188 bales of "scrap," invoiced at 28 cents,
gold, per pound, and 313 bales of "striped" and "booked" at 36 cents, gold, per pound, and
was made c.i.f. New York. Before its arrival in New York the plaintiff had found
purchasers for a large portion of it with whom he had made contracts for sale subject to
examination as to condition. The tobacco arrived in two shipments. The first of 213 bales
on April 26, and the second of 288 bales on May 18, 1918, and it was at once placed in
warehouses by plaintiff. With the exception of four or five bales, it appeared from an
examination that the tobacco was well baled, and to all outward appearances was in good
condition after the shipment. After it was placed in the warehouse, the tobacco itself was
examined as to its condition and quality by the different buyers to whom the plaintiff had
contracted to sell it, and after such physical inspection, they refused to accept it and
complete their purchase because it was "musty." It appears that the plaintiff had sold 188
bales of the tobacco before its arrival in New York to a customer in Red Lion,
Pennsylvania, to whom he shipped 75 bales of it after its arrival. This customer refused to
receive any of the remaining bales which he had purchased, and the plaintiff was compelled
to again reship it back to New York. Complying with his agreement, on May 21, 1918, the
plaintiff paid the defendant's draft which he had previously accepted, thus completing his
part of the contract with the defendant.chanroblesvirtualawlibrary chanrobles virtual law
library

On May 23, 1918, and as a result of physical inspection, the plaintiff cabled the defendant
that the tobacco was unsatisfactory, and on June 13, he again cabled that there would likely
be a loss. On June 28, 1918, the plaintiff wrote a letter to the defendant in which, among
other things, he says:

. . . The tobacco has a very strong ground smell and somewhat of a musty smell as though
it had been mixed up with must tobacco. In other words, it appears like this tobacco assorted
from bales which were mildewed and this is that part of the bale which was not mildewed.

134
It does not seem possible that this odor, or musty smell, could have developed in transit as
it seems perfectly clear that the tobacco was packed in that same condition. In all the bales
which we have examined, which have been considerable, the tobacco seems to be perfectly
dry. In view of that I can see nothing but every indication that the tobacco was originally a
bad lot.

In this letter he also advised the defendant that he was doing everything he could to sell the
tobacco, and that he did not have any prospective buyer even at a loss of 25 per
cent.chanroblesvirtualawlibrary chanrobles virtual law library

August 9, 1918, the defendant acknowledge the receipt of the letter and cables, saying that
he was "not in a position to lose between seventeen and twenty thousand pesos, and that
he would consent to a reduction of four thousand pesos, if that was acceptable, and, if it
was not, to have the bank pay back the amount of the draft with interest and take charge of
the tobacco until the defendant would arrive in New York." The plaintiff did not receive
this cable until August 21, when he cabled in reply that he would turn the tobacco over to
the defendant, and that he "awaited telegraphic instruction in regard to it. That at least
twenty dealers had passed on the tobacco." At that time the plaintiff had sold 66 bales of
scattered samples from which, with the 75 bales sold to the Red Lion customer, he realized
$9,031.71.chanroblesvirtualawlibrary chanrobles virtual law library

September 5, 1918, the defendant wrote the New York Agency of the Philippine National
Bank in which he said that the plaintiff had advised him that the tobacco on arrival was
satisfactory, and that there would be a loss, and that the had assured its arrival at destination
"in good condition." That he was taking it back. That the bank should pay plaintiff $33,109
plus interest upon delivery to it of the 501 bales. That "on no account should they agree to
accept any shortage in the number of bales."chanrobles virtual law library

October 18, 1918, without any knowledge of the defendant's instruction to the bank, the
plaintiff wrote him that his proposition to take the tobacco back was satisfactory in which
he said that he had not heard from the bank "at the time of writing with reference to taking
back of the tobacco."chanrobles virtual law library

October 30, 1918, the bank wrote the plaintiff that it would take back the identical 501
bales, and pay him the amount of the draft and interest. The plaintiff then wrote the bank a
complete history of the transaction, and explained why the identical 501 bales could not be
returned. That he had realized $9,031.71 from 141 bales of it which he had sold, for which
he would account and return the balance of the tobacco which was then unsold and in the
New York warehouse. The $9,031.71 was more than the actual agreed purchase price of
the 141 bales. This offer was cabled to the defendant, who replied:

The instructions given you in my letter dated September 5, 1918, will not be modified.

The bank notified the plaintiff of the receipt of this cable, and in turn notified the plaintiff
of the receipt of this cable, and in turn notified the plaintiff of the receipt of this cable,
and in turn notified the defendant that the plaintiff would sell the tobacco at public
auction, and then sue him for the balance of the purchase price, and later the plaintiff did
sell the remainder of the tobacco upon which there was a net actual loss to him of
$11,867.98, over and above all actual charges and expenses.

Although at the time of the making of the contract between them the plaintiff and defendant
were in Manila, the tobacco involved was on the high seas in transit to New York. From
necessity the plaintiff could not see or examine it and would not know anything about its

135
grade or quality, and, for that reason, insisted that the defendant should make and sign the
writing above quoted in which he says:

I guarantee the arrival of the tobacco in New York in good condition, subject, of course to,
to conditions arising after its departure from Manila, which contingencies are covered by
adequate insurance.

The trial court found and the testimony is conclusive that the tobacco did not arrive in New
York "in good condition," and that , as a matter of fact, it was not "in good condition" when
it left Manila.

The plaintiff and defendant had known each other for about ten years, and had mutual
confidence in each other, and were experienced business men.

Defendant's draft of the tobacco had been dishonored. Plaintiff was willing to take the
tobacco and honor the draft, with the proviso that the defendant would guarantee its arrival
"in good condition."

The evidence shows that in the whole transaction, the plaintiff acted in good faith and made
an earnest effort to protect the defendant and minimized his loss. Defendant knew that in
the very nature of things the plaintiff bought the tobacco for the purpose of resale, and that
in the ordinary course of business, he would resell it. The record shows that he found
purchasers for portions of it before its arrival in New York. The only reason why plaintiff's
sales were not consummated was because the tobacco did not stand inspection and was not
"in good condition" at the time of its arrival in New York. In other words, plaintiff bought
and paid the defendant for tobacco which was not "in good condition," and bought it for
the purpose of resale. In the very nature of things, the defendant knew that the plaintiff
bought the tobacco for the purpose of resale, and he also knew that , if the tobacco was not
"in good condition," it was not worth the amount of the purchase price which plaintiff paid.
The defense cites and relies upon articles 336 and 342 of the Code of Commerce which are
as follows:

A purchaser who, at the time of receiving the merchandise, fully examines the vendor,
alleging a defect in the quantity or quality of the merchandise.

A purchaser shall have a right of action against a vendor for defects in the quantity or
quality of merchandise receive in bales or packages, provided he brings his action within
the four days following it receipt, and that the damage is not due to accident or to natural
defect of the merchandise or to fraud.

In such cases the purchaser may choose between the rescission of the contract or its
fulfillment in accordance with what has been agreed upon, but always with the payment of
the damages he may have suffered by reason of the defects or faults.

The vendor may avoid this claim by demanding when making the delivery that the
merchandise be examined by the purchaser for his satisfaction with regard to the quantity
and quality thereof.

Article 342:

A purchaser who has not made any claim based on the inherent defects in the article sold,
within the thirty days following its delivery, shall lose all rights of action against the vendor
for such defects.

136
Whatever may be the rule as to sales which are completed within the jurisdiction of the
Philippine Islands, those sections do not, and were never intended to, apply to a case
founded upon the facts shown in the record. Although it is true that the contract between
the plaintiff and the defendant was made in Manila, yet at the time it was made the tobacco
was on the high seas, and under the contract, it was to be delivered "in good condition" in
the City of New York, in consideration of which the plaintiff agreed to pay the draft. That
is to say, the transaction was not complete until after the arrival of the tobacco in New York
"in good condition," and the payment of the draft. It must be conceded that if, for any
reason, the tobacco did not arrive in New York, the defendant could not recover upon the
draft from the plaintiff. Hence, it must follow that the delivery of the tobacco at New York
was a condition precedent which devolved upon the defendant to perform without which
he would not have a cause of action against the plaintiff.

It is true that the writing recites "the shipment of 501 bales of tobacco sold you." Yet, the
fact remains that it was necessary to deliver the tobacco in New York to complete the sale.

Contracts of this nature should be construed with reference to the surrounding conditions
and the relative situation of the parties.

At the time this contract was made both parties were in Manila, the tobacco was in transit
to New York, and the defendant knew that the plaintiff entered into the contract for the
purpose of a resale. Soon after the contract was made, the plaintiff left Manila and went to
New York where, relying upon this contract with the defendant, he found purchasers for
the tobacco on the assumption that it was "in good condition."

Although the word "sold" is used in the written contract, the transaction shows that the
sale was not complete until the arrival of the goods in New York.

The case of Middleton vs. Ballingall (1 Cal., 446), is somewhat in point, in which the court
says:

I think that the fair construction to be put upon the contract is, that on the arrival of the ship
containing the goods, the defendants should deliver them, and the plaintiffs should pay the
contract price. And the authorities hold that the arrival of the goods, in such case, is a
condition precedent, which must be shown to have taken place before either party can bring
suit.

In the instant case, the contract was at least executory as to the delivery of the tobacco in
New York.

Cyc., vol. 35, pp. 274, 275 and 276, says:

In order to pass the title to goods as against the seller or those claiming under him there
must be a valid existing and completed contract of sale. Under a complete contract of sale
the property in the goods passes at once from the seller to the buyer, at the place where the
contract becomes complete, and for this reason the agreement is frequently called an
executed contract. The sale is, however, an executory contract, if the seller merely promises
to transfer the property at some future day, or the agreement contemplates the performance
of some act or condition necessary to complete the transfer. Under such a contract until the
act is performed or the condition fulfilled which is necessary to convert the executory into
an executed contract, no title passes to the buyer as against the seller or persons claiming
under him. While certain terms and expressions standing alone import an executed or
executory contract, they are by no means conclusive but must be construed with reference

137
to other provisions of the contract and according to what appears to have been the real
intention of the parties, and so a mere recital in the writing evidencing the contract that the
article is "sold" or that the buyer has "purchased" it does not necessarily make the contract
executed; while on the other hand a recital that the seller "agrees to sell" is not conclusive
that the title was not intended to pass immediately.

The trial court found and the evidence sustains the finding that that plaintiff acted in good
faith. The contract was made in February, 1918 the draft was payable ninety days after
date; the first shipment of 213 bales arrived on April 26, and the second of 288 bales on
May 18, and the plaintiff the draft on May 21 1918, and the transaction between the parties
then became complete. On May 23, he cabled the defendant that the tobacco was
unsatisfactory. On June 13, he cabled that there would be a loss. On June 28, he wrote the
letter above quoted. September 5, the defendant wrote the New York Agency of the
Philippine National Bank that he would take the tobacco back on condition that there was
not any shortage in the number of bales. During all of this time, the defendant had the use
of plaintiff's money. It is true that the defendant offered to take the tobacco back and refund
the money, but this offer was not actually made to the plaintiff until October , and was
upon the condition that the full amount of the 501 bales should be returned, which was an
impossible condition for the plaintiff to perform. But the plaintiff did offer to account to
the defendant for the tobacco which he had sold and to return all of the unsold tobacco
which was then in his warehouse, and the defendant declined the offer. As a business man,
he knew that the plaintiff has then purchased the tobacco for the purpose of a resale, and
that the tobacco had arrived at New York about five months before the offer was made,
and he also knew that the plaintiff was using every effort to sell it and convert it into money,
and that he would sell the whole or any part of it if a purchaser could be found at a
reasonable price. At the time the defendant's offer was communicated to the plaintiff by
the bank the plaintiff in turn offered to account to the defendant for the entire proceeds of
the 141 bales which he had already sold, and to deliver to him all of the unsold tobacco.
This was all that the plaintiff could do under the existing conditions. The fact that the
defendant did not accept this offer is strong evidence that he was seeking an undue
advantage, and that his offer to plaintiff was not made in good faith.

The second shipment arrived in New York on May 18, and the plaintiff could not be
expected to take any final action until the las shipment arrived. On learning the true
condition of the tobacco, the plaintiff cabled the defendant on May 23 that it was
unsatisfactory, and again on June 13, that there would be a substantial loss, which was
followed by the letter of June 28th above quoted.

The defects in the tobacco were inherent and could not be ascertained without opening the
bales and making a physical examination. When this was done, the plaintiff promptly
cabled the defendant that the tobacco was not satisfactory. In the nature of things, the
plaintiff could not then render the defendant a statement of the amount of this claim. By
the terms of the contract, the defendant guaranteed the arrival of the tobacco in New York
"in good condition."

Plaintiff's first cable sent ten days after the arrival of the tobacco advised the defendant that
it was unsatisfactory, and the second, twenty-six days after its arrival, advised him that
there would be a loss.

Appellant's attorneys have submitted a very able and adroit brief in which they severely
criticize the evidence on the part of the plaintiff. Upon all of the material questions of fact,
the trial court found for the plaintiff, and, in our opinion, the evidence sustains the findings.

138
It must be remembered that during all these times there was about ten thousand miles of
ocean between them.

The plaintiff had parted with his money and honored the draft, expecting to sell the tobacco
and get his money back with a profit.

The testimony is conclusive that the plaintiff in good faith tried to sell the tobacco, and
that he sold the 141 bales at the best obtainable price; that the only reason why he did not
sell the remainder was because the tobacco was not "in good condition;" and that when he
first knew that it was not "in good condition," he promptly cabled that defendant that it was
unsatisfactory.

As we construe the record, after the tobacco was inspected, the plaintiff promptly advised
the defendant that it was unsatisfactory, and that he would have to sustain a loss, and in
goo faith undertook to protect the defendant and to minimize the loss, and plaintiff's claim
is not barred by the provisions of either article 336 or 342 of the Code of Commerce.

The judgment is affirmed, with costs. So ordered.

Separate Opinions

STREET, J., concurring:chanrobles virtual law library

I concur in the conclusion reached in this case and in accord with most that is said in the
opinion. But in the view I take of the case, it ought not to be said that the sale was not
complete until the arrival of the tobacco in New York.

In view of the express guaranty given by the defendant to the effect that the tobacco would
arrive in good condition, barring certain contingencies, and it having been clearly proved
that the tobacco was not in good condition upon arrival there, a right of action accrued to
the plaintiff to be indemnified to the extent allowed, and this independently of article 342
of the Code of Commerce. But, even supposing this provision to be applicable, claim was
made within thirty days after complete delivery had been effected. The maneuvers of the
defendant relative to taking back the tobacco - on terms which he must have believed would
be impossible of fulfillment - were ruse to gain an advantage in the impending legal
controversy; and the contention that there was a rescission, or accepted offer or rescission,
is untenable.

139
[G.R. No. 137552. June 16, 2000]

ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, MICHAEL Z.

LAFORTEZA, DENNIS Z. LAFORTEZA, and LEA Z. LAFORTEZA, petitioners,
vs. ALONZO MACHUCA, respondent.

This Petition for Review on Certiorari seeks the reversal of the Decision of the Court of
Appeals[1] in CA G.R. CV No. 47457 entitled "ALONZO MACHUCA versus ROBERTO
Z. LAFORTEZA, GONZALO Z. LAFORTEZA, LEA ZULUETA-LAFORTEZA
MICHAEL Z. LAFORTEZA, and DENNIS Z. LAFORTEZA".

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

"The property involved consists of a house and lot located at No. 7757
Sherwood Street, Marcelo Green Village, Paraaque, Metro Manila, covered
by Transfer Certificate of Title (TCT) No. (220656) 8941 of the Registered
of Deeds of Paraaque (Exhibit "D", Plaintiff, record, pp. 331-332). The
subject property is registered in the name of the late Francisco Q. Laforteza,
although it is conjugal in nature (Exhibit "8", Defendants, record pp. 331-
386).

On August 2, 1988, defendant Lea Zulueta-Laforteza executed a Special

Power of Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo
Z. Laforteza, Jr., appointing both as her Attorney-in-fact authorizing them
jointly to sell the subject property and sign any document for the settlement
of the estate of the late Francisco Q. Laforteza (Exh. "A", Plaintiff, record,
pp. 323-325).

Likewise on the same day, defendant Michael Z. Laforteza executed a

Special Power of Attorney in favor of defendants Roberto Z. Laforteza and
Gonzalo Laforteza, Jr., likewise, granting the same authority (Exh. "B",
record, pp. 326-328). Both agency instruments contained a provision that in
any document or paper to exercise authority granted, the signature of both
attorneys-in-fact must be affixed.

On October 27, 1988, defendant Dennis Z. Laforteza executed a Special

Power of Attorney in favor of defendant Roberto Z. Laforteza for the purpose
of selling the subject property (Exh. "C", Plaintiff, record, pp. 329-330). A
year later, on October 30, 1989, Dennis Z. Laforteza executed another
Special Power of Attorney in favor of defendants Roberto Z. Laforteza and
Gonzalo Laforteza, Jr. naming both attorneys-in-fact for the purpose of
selling the subject property and signing any document for the settlement of
the estate of the late Francisco Q. Laforteza. The subsequent agency
instrument (Exh. "2", record, pp. 371-373) contained similar provisions that
both attorneys-in-fact should sign any document or paper executed in the
exercise of their authority.

In the exercise of the above authority, on January 20, 1989, the heirs of the
late Francisco Q. Laforteza represented by Roberto Z. Laforteza and Gonzalo
Z. Laforteza, Jr. entered into a Memorandum of Agreement (Contract to Sell)
with the plaintiff[2] over the subject property for the sum of SIX HUNDRED
THIRTY THOUSAND PESOS (P630,000.00) payable as follows:

140
(a) P30,000.00 as earnest money, to be forfeited in favor of the defendants if
the sale is not effected due to the fault of the plaintiff;

(b) P600,000.00 upon issuance of the new certificate of title in the name of
the late Francisco Q. Laforteza and upon execution of an extra-judicial
settlement of the decedents estate with sale in favor of the plaintiff (Par. 2,
Exh. "E", record, pp. 335-336).

Significantly, the fourth paragraph of the Memorandum of Agreement

(Contract to Sell) dated January 20, 1989 (Exh. "E", supra.) contained a
provision as follows:

xxx. Upon issuance by the proper Court of the new title, the BUYER-
LESSEE shall be notified in writing and said BUYER-LESSEE shall
have thirty (30) days to produce the balance of P600,000.00 which
shall be paid to the SELLER-LESSORS upon the execution of the
Extrajudicial Settlement with sale.

On January 20, 1989, plaintiff paid the earnest money of THIRTY

THOUSAND PESOS (P30,000.00), plus rentals for the subject property
(Exh. "F", Plaintiff, record, p. 339).

On September 18, 1998[3], defendant heirs, through their counsel wrote a

letter (Exh. 1, Defendants, record, p. 370) to the plaintiff furnishing the latter
a copy of the reconstituted title to the subject property, advising him that he
had thirty (3) days to produce the balance of SIX HUNDRED PESOS (sic)
(P600,000.00) under the Memorandum of Agreement which plaintiff
received on the same date.

On October 18, 1989, plaintiff sent the defendant heirs a letter requesting for
an extension of the THIRTY (30) DAYS deadline up to November 15, 1989
within which to produce the balance of SIX HUNDRED THOUSAND
PESOS (P600,000.00) (Exh. "G", Plaintiff, record, pp. 341-342). Defendant
Roberto Z. Laforteza, assisted by his counsel Atty. Romeo L. Gutierrez,
signed his conformity to the plaintiffs letter request (Exh. "G-1 and "G-2",
Plaintiff, record, p. 342). The extension, however, does not appear to have
been approved by Gonzalo Z. Laforteza, the second attorney-in-fact as his
conformity does not appear to have been secured.

On November 15, 1989, plaintiff informed the defendant heirs, through

defendant Roberto Z. Laforteza, that he already had the balance of SIX
HUNDRED THOUSAND PESOS (P600,000.00) covered by United
Coconut Planters Bank Managers Check No. 000814 dated November 15,
1989 (TSN, August 25, 1992, p. 11; Exhs. "H", record, pp. 343-344; "M",
records p. 350; and "N", record, p. 351). However, the defendants, refused to
accept the balance (TSN, August 24, 1992, p. 14; Exhs. "M-1", Plaintiff,
record, p. 350; and "N-1", Plaintiff, record, p. 351). Defendant Roberto Z.
Laforteza had told him that the subject property was no longer for sale (TSN,
October 20, 1992, p. 19; Exh. "J", record, p. 347).

On November 20, 1998[4], defendants informed the plaintiff that they were
canceling the Memorandum of Agreement (Contract to Sell) in view of the
plaintiffs failure to comply with his contractual obligations (Exh. "3").

141
 Thereafter, plaintiff reiterated his request to tender payment of the balance
of SIX HUNDRED THOUSAND PESOS (P600,000.00). Defendants,
however, insisted on the rescission of the Memorandum of Agreement.
Thereafter, plaintiff filed the instant action for specific performance. The
lower court rendered judgment on July 6, 1994 in favor of the plaintiff, the
dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff

Alonzo Machuca and against the defendant heirs of the late Francisco
Q. Laforteza, ordering the said defendants.

(a) To accept the balance of P600,000.00 as full payment of the consideration

for the purchase of the house and lot located at No. 7757 Sherwood Street,
Marcelo Green Village, Paraaque, Metro Manila, covered by Transfer
Certificate of Title No. (220656) 8941 of the Registry of Deeds of Rizal
Paraaque, Branch;

(b) To execute a registrable deed of absolute sale over the subject property
in favor of the plaintiff;

(c) Jointly and severally to pay the plaintiff the sum of P20,000.00 as
attorneys fees plus cost of suit.

SO ORDERED. (Rollo, pp. 74-75)."[5]

Petitioners appealed to the Court of Appeals, which affirmed with modification the
decision of the lower court; the dispositive portion of the Decision reads:

"WHEREFORE, the questioned decision of the lower court is hereby

AFFIRMED with the MODIFICATION that defendant heirs Lea Zulueta-
Laforteza, Michael Z. Laforteza, Dennis Z. Laforteza and Roberto Z.
Laforteza including Gonzalo Z. Laforteza, Jr. are hereby ordered to pay
jointly and severally the sum of FIFTY THOUSAND PESOS (P50,000.00)
as moral damages.

SO ORDERED."[6]

Motion for Reconsideration was denied but the Decision was modified so as to absolve
Gonzalo Z. Laforteza, Jr. from liability for the payment of moral damages.[7] Hence this
petition wherein the petitioners raise the following issues:

"I. WHETHER THE TRIAL AND APPELLATE COURTS

CORRECTLY CONSTRUED THE MEMORANDUM OF
AGREEMENT AS IMPOSING RECIPROCAL OBLIGATIONS.

II. WHETHER THE COURTS A QUO CORRECTLY RULED THAT

RESCISSION WILL NOT LIE IN THE INSTANT CASE.

III. WHETHER THE RESPONDENT IS UNDER ESTOPPEL FROM

RAISING THE ALLEGED DEFECT IN THE SPECIAL POWER OF
ATTORNEY DATED 30 OCTOBER 1989 EXECUTED BY DENNIS
LAFORTEZA.

142
 IV. SUPPOSING EX GRATIA ARGUMENTI THE MEMORANDUM
OF AGREEMENT IMPOSES RECIPROCAL OBLIGATIONS,
WHETHER THE PETITIONERS MAY BE COMPELLED TO SELL
THE SUBJECT PROPERTY WHEN THE RESPONDENT FAILED
TO MAKE A JUDICIAL CONSIGNATION OF THE PURCHASE
PRICE?

V. WHETHER THE PETITIONERS ARE IN BAD FAITH SO TO AS

MAKE THEM LIABLE FOR MORAL DAMAGES?"[8]

The petitioners contend that the Memorandum of Agreement is merely a lease agreement
with "option to purchase". As it was merely an option, it only gave the respondent a right
to purchase the subject property within a limited period without imposing upon them any
obligation to purchase it. Since the respondents tender of payment was made after the lapse
of the option agreement, his tender did not give rise to the perfection of a contract of sale.

It is further maintained by the petitioners that the Court of Appeals erred in ruling that
rescission of the contract was already out of the question. Rescission implies that a contract
of sale was perfected unlike the Memorandum of Agreement in question which as
previously stated is allegedly only an option contract.

Petitioner adds that at most, the Memorandum of Agreement (Contract to Sell) is a mere
contract to sell, as indicated in its title. The obligation of the petitioners to sell the property
to the respondent was conditioned upon the issuance of a new certificate of title and the
execution of the extrajudicial partition with sale and payment of the P600,000.00. This is
why possession of the subject property was not delivered to the respondent as the owner of
the property but only as the lessee thereof. And the failure of the respondent to pay the
purchase price in full prevented the petitioners obligation to convey title from acquiring
obligatory force.

Petitioners also allege that assuming for the sake of argument that a contract of sale was
indeed perfected, the Court of Appeals still erred in holding that respondents failure to pay
the purchase price of P600,000.00 was only a "slight or casual breach".

The petitioners also claim that the Court of Appeals erred in ruling that they were not ready
to comply with their obligation to execute the extrajudicial settlement. The Power of
Attorney to execute a Deed of Sale made by Dennis Z. Laforteza was sufficient and
necessarily included the power to execute an extrajudicial settlement. At any rate, the
respondent is estopped from claiming that the petitioners were not ready to comply with
their obligation for he acknowledged the petitioners ability to do so when he requested for
an extension of time within which to pay the purchase price. Had he truly believed that the
petitioners were not ready, he would not have needed to ask for said extension.

Finally, the petitioners allege that the respondents uncorroborated testimony that third
persons offered a higher price for the property is hearsay and should not be given any
evidentiary weight. Thus, the order of the lower court awarding moral damages was
without any legal basis.

The appeal is bereft of merit.

A perusal of the Memorandum Agreement shows that the transaction between the
petitioners and the respondent was one of sale and lease. The terms of the agreement read:

143
 "1. For and in consideration of the sum of PESOS: SIX HUNDRED THIRTY
THOUSAND (P630,000.00) payable in a manner herein below indicated,
SELLER-LESSOR hereby agree to sell unto BUYER-LESSEE the property
described in the first WHEREAS of this Agreement within six (6) months
from the execution date hereof, or upon issuance by the Court of a new
owners certificate of title and the execution of extrajudicial partition with
sale of the estate of Francisco Laforteza, whichever is earlier;

2. The above-mentioned sum of PESOS: SIX HUNDRED THIRTY

THOUSAND (P630,000.00) shall be paid in the following manner:

P30,000.00- as earnest money and as consideration for this

Agreement, which amount shall be forfeited in favor of SELLER-
LESSORS if the sale is not effected because of the fault or option of
BUYER-LESSEE;

P600,000.00- upon the issuance of the new certificate of title in the

name of the late Francisco Laforteza and upon the execution of an
Extrajudicial Settlement of his estate with sale in favor of BUYER-
LESSEE free from lien or any encumbrances.

3. Parties reasonably estimate that the issuance of a new title in place of the
lost one, as well as the execution of extrajudicial settlement of estate with
sale to herein BUYER-LESSEE will be completed within six (6) months
from the execution of this Agreement. It is therefore agreed that during the
six months period, BUYER-LESSEE will be leasing the subject property for
six months period at the monthly rate of PESOS: THREE THOUSAND
FIVE HUNDRED (P3,500.00). Provided however, that if the issuance of
new title and the execution of Extrajudicial Partition is completed prior to
the expiration of the six months period, BUYER-LESSEE shall only be liable
for rentals for the corresponding period commencing from his occupancy of
the premises to the execution and completion of the Extrajudicial Settlement
of the estate, provided further that if after the expiration of six (6) months,
the lost title is not yet replaced and the extra judicial partition is not executed,
BUYER-LESSEE shall no longer be required to pay rentals and shall
continue to occupy, and use the premises until subject condition is complied
by SELLER-LESSOR;

4. It is hereby agreed that within reasonable time from the execution of this
Agreement and the payment by BUYER-LESSEE of the amount of
P30,000.00 as herein above provided, SELLER-LESSORS shall
immediately file the corresponding petition for the issuance of a new title in
lieu of the lost one in the proper Courts. Upon issuance by the proper Courts
of the new title, the BUYER-LESSEE shall have thirty (30) days to produce
the balance of P600,000.00 which shall be paid to the SELLER-LESSORS
upon the execution of the Extrajudicial Settlement with sale."[9]

A contract of sale is a consensual contract and is perfected at the moment there is a meeting
of the minds upon the thing which is the object of the contract and upon the price.[10] From
that moment the parties may reciprocally demand performance subject to the provisions of
the law governing the form of contracts.[11] The elements of a valid contract of sale under
Article 1458 of the Civil Code are (1) consent or meeting of the minds; (2) determinate
subject matter and (3) price certain in money or its equivalent.[12]

144
In the case at bench, there was a perfected agreement between the petitioners and the
respondent whereby the petitioners obligated themselves to transfer the ownership of and
deliver the house and lot located at 7757 Sherwood St., Marcelo Green Village, Paraaque
and the respondent to pay the price amounting to six hundred thousand pesos
(P600,000.00). All the elements of a contract of sale were thus present. However, the
balance of the purchase price was to be paid only upon the issuance of the new certificate
of title in lieu of the one in the name of the late Francisco Laforteza and upon the execution
of an extrajudicial settlement of his estate. Prior to the issuance of the "reconstituted" title,
the respondent was already placed in possession of the house and lot as lessee thereof for
six months at a monthly rate of three thousand five hundred pesos (P3,500.00). It was
stipulated that should the issuance of the new title and the execution of the extrajudicial
settlement be completed prior to expiration of the six-month period, the respondent would
be liable only for the rentals pertaining to the period commencing from the date of the
execution of the agreement up to the execution of the extrajudicial settlement. It was also
expressly stipulated that if after the expiration of the six month period, the lost title was not
yet replaced and the extrajudicial partition was not yet executed, the respondent would no
longer be required to pay rentals and would continue to occupy and use the premises until
the subject condition was complied with by the petitioners.

The six-month period during which the respondent would be in possession of the property
as lessee, was clearly not a period within which to exercise an option. An option is a
contract granting a privilege to buy or sell within an agreed time and at a determined price.
An option contract is a separate and distinct contract from that which the parties may enter
into upon the consummation of the option.[13] An option must be supported by
consideration.[14] An option contract is governed by the second paragraph of Article 1479
of the Civil Code[15], which reads:

"Article 1479. xxx

An accepted unilateral promise to buy or to sell a determinate thing for a

price certain is binding upon the promissor if the promise is supported by a
consideration distinct from the price."

In the present case, the six-month period merely delayed the demandability of the contract
of sale and did not determine its perfection for after the expiration of the six-month period,
there was an absolute obligation on the part of the petitioners and the respondent to comply
with the terms of the sale. The parties made a "reasonable estimate" that the reconstitution
of the lost title of the house and lot would take approximately six months and thus presumed
that after six months, both parties would be able to comply with what was reciprocally
incumbent upon them. The fact that after the expiration of the six-month period, the
respondent would retain possession of the house and lot without need of paying rentals for
the use therefor, clearly indicated that the parties contemplated that ownership over the
property would already be transferred by that time.

The issuance of the new certificate of title in the name of the late Francisco Laforteza and
the execution of an extrajudicial settlement of his estate was not a condition which
determined the perfection of the contract of sale. Petitioners contention that since the
condition was not met, they no longer had an obligation to proceed with the sale of the
house and lot is unconvincing. The petitioners fail to distinguish between a condition
imposed upon the perfection of the contract and a condition imposed on the performance
of an obligation. Failure to comply with the first condition results in the failure of a
contract, while the failure to comply with the second condition only gives the other party

145
the option either to refuse to proceed with the sale or to waive the condition. Thus, Art.
1545 of the Civil Code states:

"Art. 1545. Where the obligation of either party to a contract of sale is subject
to any condition which is not performed, such party may refuse to proceed
with the contract or he may waive performance of the condition. If the other
party has promised that the condition should happen or be performed, such
first mentioned party may also treat the nonperformance of the condition as
a breach of warranty.

Where the ownership in the things has not passed, the buyer may treat the
fulfillment by the seller of his obligation to deliver the same as described and
as warranted expressly or by implication in the contract of sale as a condition
of the obligation of the buyer to perform his promise to accept and pay for
the thing."[16]

In the case at bar, there was already a perfected contract. The condition was imposed only
on the performance of the obligations contained therein. Considering however that the title
was eventually "reconstituted" and that the petitioners admit their ability to execute the
extrajudicial settlement of their fathers estate, the respondent had a right to demand
fulfillment of the petitioners obligation to deliver and transfer ownership of the house and
lot.

What further militates against petitioners argument that they did not enter into a contract
of sale is the fact that the respondent paid thirty thousand pesos (P30,000.00) as earnest
money. Earnest money is something of value to show that the buyer was really in earnest,
and given to the seller to bind the bargain.[17] Whenever earnest money is given in a
contract of sale, it is considered as part of the purchase price and proof of the perfection of
the contract.[18]

We do not subscribe to the petitioners view that the Memorandum Agreement was a
contract to sell. There is nothing contained in the Memorandum Agreement from which it
can reasonably be deduced that the parties intended to enter into a contract to sell, i.e. one
whereby the prospective seller would explicitly reserve the transfer of title to the
prospective buyer, meaning, the prospective seller does not as yet agree or consent to
transfer ownership of the property subject of the contract to sell until the full payment of
the price, such payment being a positive suspensive condition, the failure of which is not
considered a breach, casual or serious, but simply an event which prevented the obligation
from acquiring any obligatory force.[19] There is clearly no express reservation of title made
by the petitioners over the property, or any provision which would impose non-payment of
the price as a condition for the contracts entering into force. Although the memorandum
agreement was also denominated as a "Contract to Sell", we hold that the parties
contemplated a contract of sale. A deed of sale is absolute in nature although denominated
a conditional sale in the absence of a stipulation reserving title in the petitioners until full
payment of the purchase price.[20] In such cases, ownership of the thing sold passes to the
vendee upon actual or constructive delivery thereof.[21] The mere fact that the obligation of
the respondent to pay the balance of the purchase price was made subject to the condition
that the petitioners first deliver the reconstituted title of the house and lot does not make
the contract a contract to sell for such condition is not inconsistent with a contract of sale.[22]

The next issue to be addressed is whether the failure of the respondent to pay the balance
of the purchase price within the period allowed is fatal to his right to enforce the agreement.

146
We rule in the negative.

Admittedly, the failure of the respondent to pay the balance of the purchase price was a
breach of the contract and was a ground for rescission thereof. The extension of thirty (30)
days allegedly granted to the respondent by Roberto Z. Laforteza (assisted by his counsel
Attorney Romeo Gutierrez) was correctly found by the Court of Appeals to be ineffective
inasmuch as the signature of Gonzalo Z. Laforteza did not appear thereon as required by
the Special Powers of Attorney.[23] However, the evidence reveals that after the expiration
of the six-month period provided for in the contract, the petitioners were not ready to
comply with what was incumbent upon them, i.e. the delivery of the reconstituted title of
the house and lot. It was only on September 18, 1989 or nearly eight months after the
execution of the Memorandum of Agreement when the petitioners informed the respondent
that they already had a copy of the reconstituted title and demanded the payment of the
balance of the purchase price. The respondent could not therefore be considered in delay
for in reciprocal obligations, neither party incurs in delay if the other party does not comply
or is not ready to comply in a proper manner with what was incumbent upon him.[24]

Even assuming for the sake of argument that the petitioners were ready to comply with
their obligation, we find that rescission of the contract will still not prosper. The rescission
of a sale of an immovable property is specifically governed by Article 1592 of the New
Civil Code, which reads:

"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."[25]

It is not disputed that the petitioners did not make a judicial or notarial demand for
rescission. The November 20, 1989 letter of the petitioners informing the respondent of the
automatic rescission of the agreement did not amount to a demand for rescission, as it was
not notarized.[26] It was also made five days after the respondents attempt to make the
payment of the purchase price. This offer to pay prior to the demand for rescission is
sufficient to defeat the petitioners right under article 1592 of the Civil Code.[27] Besides,
the Memorandum Agreement between the parties did not contain a clause expressly
authorizing the automatic cancellation of the contract without court intervention in the
event that the terms thereof were violated. A seller cannot unilaterally and extrajudicially
rescind a contract of sale where there is no express stipulation authorizing him to
extrajudicially rescind.[28] Neither was there a judicial demand for the rescission thereof.
Thus, when the respondent filed his complaint for specific performance, the agreement was
still in force inasmuch as the contract was not yet rescinded. At any rate, considering that
the six-month period was merely an approximation of the time it would take to reconstitute
the lost title and was not a condition imposed on the perfection of the contract and
considering further that the delay in payment was only thirty days which was caused by
the respondents justified but mistaken belief that an extension to pay was granted to him,
we agree with the Court of Appeals that the delay of one month in payment was a mere
casual breach that would not entitle the respondents to rescind the contract. Rescission of
a contract will not be permitted for a slight or casual breach, but only such substantial and
fundamental breach as would defeat the very object of the parties in making the
agreement.[29]

147
Petitioners insistence that the respondent should have consignated the amount is not
determinative of whether respondents action for specific performance will lie. Petitioners
themselves point out that the effect of consignation is to extinguish the obligation. It
releases the debtor from responsibility therefor.[30] The failure of the respondent to
consignate the P600,000.00 is not tantamount to a breach of the contract for by the fact of
tendering payment, he was willing and able to comply with his obligation.

The Court of Appeals correctly found the petitioners guilty of bad faith and awarded moral
damages to the respondent. As found by the said Court, the petitioners refused to comply
with their obligation for the reason that they were offered a higher price therefor and the
respondent was even offered P100,000.00 by the petitioners lawyer, Attorney Gutierrez, to
relinquish his rights over the property. The award of moral damages is in accordance with
Article 1191[31] of the Civil Code pursuant to Article 2220 which provides that moral
damages may be awarded in case of a breach of contract where the defendant acted in bad
faith. The amount awarded depends on the discretion of the court based on the
circumstances of each case.[32] Under the circumstances, the award given by the Court of
Appeals amounting to P50,000.00 appears to us to be fair and reasonable.

ACCORDINGLY, the decision of the Court of Appeals in CA G.R. CV No. 47457 is

AFFIRMED and the instant petition is hereby DENIED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. L-17441 July 31, 1962

WELGO DICHOSO, ET AL., plaintiffs-appellees,

vs.
LAURA ROXAS, ET AL., defendants,
CELSO BORJA and NELIA ALANGUILAN, defendants-appellants.

148
Appeal from the following decision of the Court of First Instance of Laguna:

WHEREFORE, the Court renders judgment ordering the plaintiffs to deposit with
the Clerk of this Court for the account of defendant Laura A. Roxas the amount of
P320.00 and, upon the deposit of the said amount, defendant Laura A. Roxas is
ordered to execute a document transferring her rights, title and interest in the land
in controversy to plaintiffs Welgo Dichoso and Emilia Hernandez within five (5)
days from such deposit. In the event that Laura A. Roxas fails to execute the
document within the aforementioned period, the same shall executed by the Clerk
of Court in her behalf.

Defendants Celso Borja and Nelia Alanguilan are order to execute a deed of re-sale
of the land in controversy and the improvements thereon in favor of plaintiffs Welgo
Dichoso and Emilia Hernandez within five (5) days after the document transfer has
been executed by or on behalf of Laura A. Roxas. If defendants Celso Borja and
Nelia Alanguilan fail to do so, the Clerk of Court shall execute the document in their
behalf. At any time after the execution of the deed of re-sale, defendants Celso Borja
and Nelia Alanguilan may withdraw from the People's Bank and Trust Company of
San Pablo City the amount of P850.00 which had been deposited by plaintiff Welgo
Dichoso as repurchase price and the People's Bank & Tru Company is ordered to
deliver the said amount to the aforementioned defendants.

The Court considers defendants Celso Borja and Nelia Alanguilan as possessors in
good faith and are not required account for the fruits that they have received from
the Ian it controversy up to the time this decision becomes final.

Laura A. Roxas is ordered to return to defendants Celso Borja and Nelia Alanguilan
the amount of P1,684.00 which she received as additional purchase price for the
land in controversy.

All defendants are jointly and severally ordered to pay the costs.

The complaint alleged, in substance, that on December 13, 1954, Laura A. Roxas sold to
appellants for the sum of P850.00 a parcel of unregistered coconut land with an area of
16,965 square meters and with 393 coconut trees, situated in Barrio San Diego, San Pablo,
Laguna, subject to the condition, inter alia, that the vendor could repurchase it for the same
amount within five years, but not earlier than three years, from the date of the sale, which
was evidenced by a public document attached to the complaint as Annex A; that from
November 26, 1955 to July 5, 1957, Roxas had received from appellees several sums of
money amounting to P770.00, their agreement being that after December 13, 1957, Roxas
would sell the same property, by absolute sale, to appellees for the total sum of P2,000.00,
the aforesaid sum of P770.00 to be considered as initial or advance payment on the
purchase price; that out of the balance of P1,230.00, appellees would use the sum of
P850.00 to repurchase the property from appellants after December 13, 1954 but within the
five years stipulated for the exercise of Roxas' right to repurchase; that on October 22,
1957, pursuant to Roxas' request made on July 23, 1957, appellees sent her a check for the
sum of P320.00 "in full payment of the P2,000.00 consideration for the deed of absolute
sale" and thereafter they informed appellants of their readiness to repurchase the property;
that on November 29, 1957 Roxas sent them back the check just referred to with the request
that they endorse the same to appellants when they made the repurchase, because it
appeared that, aside from the P850.00 consideration of the pacto de retro sale, Roxas had
received additional sums from appellants; that again, after December 13, 1957, appellees
made representations to appellants that they were ready to make the repurchase, as well as

149
to Roxas for the latter to be ready to execute the corresponding deed of absolute sale in
their favor after they had made the repurchase; that notwithstanding these demand and
representations, Roxas and appellants had deliberately failed to execute the corresponding
deed of absolute sale and deed of resale already mentioned.

On January 8, 1958 appellants filed a motion to dismiss the complaint upon the ground that
appellees had no cause of action against them because their contract was not them but with
Laura A. Roxas. After due hearing, lower court sustained the motion and dismissed the
complaint because, according to the same, "there exists no written contract of assignment
of rights executed by Laura A. Roxas in favor of the herein plaintiffs concerning property
which said Laura A. Roxas sold to her co-defendants under a deed of pacto de retro sale,
and that the purpose of the present action is precisely to compel Laura A. Roxas to execute
the corresponding deed of assignment."

However, on July 31, 1958, over appellants' objection, the lower court admitted the
amended complaint previously filed by appellees. The principal amendment introduced
consisted in the allegation that on July 5, 1957, for sum of P770.00, Laura A. Roxas had
ceded to appellees her right to repurchase the property from appellants; that on November
29, 1957, Roxas had "ordered and author the said plaintiffs spouses to repurchase the said
parcel land from the defendants vendee-a-retro after the 3 years period, which would
terminate on December 13, 1957," and that on December 13, 1957, appellees tendered to
appellants the required sum with which to effect the repurchase, but that the latter refused
to accept the same, thus compelling appellees to consign the amount with the Office of
Clerk, Court of First Instance of Laguna.

Upon petition of appellants, the lower court on August 18, 1958, ordered appellees to
furnish, and the latter furnished appellants, with a copy of the alleged deed of assignment
dated July 8, 1958, referred to in paragraph 4 of the amended complaint, which deed reads
as follows:

TALASTASIN NG SINO MAN:

Tinangap ko ngayong Julio 5, 1957 ang halagang Pit Dean at Pitong Pong (P770.00)
peso cuartang pang kasal yan sa mag- asawa ni Welgo Dichoso at Emilia Hernandez,
lang paunang bayad sa isang puesto kong lupa humigit kumulang sa apat na raang
tanim na niog.

Ang aming pinagkasondoan pag dating ng dalagang wang libong (P2,000.00)

pesong pagkakautang pate tobos walong daan at limang pong (P850.00) peso sa
pagka pag na mabibiling muli o sanla) sa magasawa ni Celso Borja Nelia Alanguilan
ay mag gagawaan ng documento o kasulatan bilihang toloyan o bintarial absoluta
sa halagang dalawang libong (P2,000.00) peso na nasabe sa itaas nito.

Ang nasabing lupa ay nakatayo sa Salang lupa kung tawagin Bo. San Diego sakop
ng Ciudad ng San Pablo. Sa katonayan na hinde ako sisira sa pinagusapan ay
lumagda ako ng pangalan at apellido na kaharap ang isang testigo.

(Lgda.) Cosme Punto (Lgda.) Laura A. Roxas

A motion to dismiss the amended complaint was denied by the lower court for the reason
that the grounds relied upon therein did not appear to be indubitable and their consideration
was deferred until after trial on the merits. Thereafter appellants filed their answer in which,

150
after making specific denial of some facts averred in the amended complaint, they alleged
the following affirmative defenses:

1. That the alleged transfer of right to repurchase supposedly executed by defendant

Laura A. Roxas in favor of plaintiffs herein is not in any manner a transfer of right
to repurchase but at most a receipt of indebtedness;

2. That even assuming although not admitting that there was a transfer of right to
repurchase made by the defendant Laura A. Roxas in favor of the plaintiffs
regarding the property in question, yet said right to repurchase could not be
exercised by the plaintiffs considering that before December 13, 1957 arrived, the
period within which the repurchase might be made, said land in question had already
become the absolute and exclusive property of the answering defendants herein.

3. That defendants spouses in the exercise of the rights of dominion over the
property, had since December 13, 1957 harvested and are harvesting the fruits to
date; and paid the taxes therefor; and had attended to the disposition of the pro.
proceeds therefrom;

4. That whatever alleged agreement may have been entered into between plaintiffs
and defendant Laura Roxas cannot in any way affect third persons like defendants
spouses Celso Boria and Nelia Alanguilan, unless the same is in a public document;

5. That even assuming, although not admitting, that the Plaintiffs tendered into the
answering defendants the repurchase price of the land in question on or immediately
after December 13, 1947, yet the answering defendants have all the reasons and are
justified in refusing to accept the said repurchase price considering that before said
date of December 13, 1957, answering defendants were already the absolute and
exclusive owners of the land in question, subject to no other conditions.

As counterclaim, appellants alleged in their answer following facts:

1. That the answering defendants incorporate and part hereof paragraph 1 of the
plaintiffs' amended complaint;

2. That before this case was filed, plaintiffs knew f well that the property in question
is already owned absolute by answering defendants; and which therefore, cannot be
subject of repurchase anymore;

3. That plaintiff Welgo Dichoso was the agent who responsible for the
consummation of the sale with right to purchase as a matter of fact he was the
witness to the s document;

4. That a parcel of land abutting this parcel in quest was likewise offered by plaintiff
Welgo Dichoso to defend spouses who acceded to buy the same on the
representation the former Dichoso that inasmuch as answering defendant are now
the owners of the land in question, this smaller if united with the bigger piece of
property here in quest would not only enhance agriculture but would afford t greater
benefits as to two parcels are adjoining to each other.

5. Defendants spouses would not have bought the p property in question if not for
the assurance of Welgo Dichoso t co- defendant would sooner or later sell same to
them by of absolute sale;

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 6. That in filing this case, plaintiffs have acted w evident bad faith, considering that
this case was only intended to harass answering defendants who are his first cousins
a therefore ore must be required to pay answering defendants amount of P500.00 as
exemplary damages;

7. That because of the unwarranted and unjustified filing this case, the answering
defendants suffered damages in amount of P500.00 and will continue to suffer the
same by of litigation expenses; and at the same time were compel to retain the
services of counsel and are obliged to pay amount of P1,000.00 in the concept of
attorney's fees,

On September 19, 1958, appellees filed a reply in which they alleged, inter alia, that when
they offered to repurchase the property from appellants, on behalf of La A. Roxas,
appellants had not become absolute and exclusive owners of the property in question; that
after the offer to repurchase made on December 13, 1957, appellate became possessors in
bad faith and were in duty bound to account for the fruits of the property; that although the
agreement between appellees, on the ore hand, a Roxas, on the other, was not contained in
a public instrument appellants were bound by it because they knew the agreement.
Appellees also denied the facts alleged in the counterclaim.

On April 1, 1959, appellees filed a supplementary complaint wherein, on the claim that
after July 23, 1958 the price of coconuts had considerably gone up, they prayed that the
judgment for damages they sought in the amended complaint be increased in amount
accordingly.

After trial upon the issues stated above, the lower court rendered the appealed judgment,
from which the Borja spouses appealed claiming that the court committed the following
errors:

1. In not finding defendant-appellants Celso Boria and Nelia Alanguilan as the true,
lawful and absolute owners of the land in question, their title thereto being
evidenced by public and private documents coupled by possession in good faith and
for value.

2. In not finding appellants Celso Borja and Nelia Alanguilan possessors as absolute
owners from December 8, 1957, the date of the execution of the deed of absolute
sale (Exh. "7") in their favor.

3. In not giving weight to the deed of confirmation (Exh. "8"), a public document
executed to cure defects in proof only.

4. In construing Exhibit "I" (a private document) as a document of sale and in

extending its effects to third parties (appellants) who are total strangers to it.

5. In not sustaining the plea of res judicata by the defendant-appellants.

The pertinent portions of the decision appealed from are the following:

It appears from the evidence that Laura A. Roxas had sold her rights to the land in
controversy to two (2) different parties. The first one was on July 5, 1957, in favor
of the plaintiffs Welgo Dichoso and Emilia Hernandez (Exh. "I"), and the second
one allegedly on December 8, 1957 in favor of defendants Celso Borja and Nelia
Alanguilan (Exh. "7"). The principal question to be determined is which of these

152
 two documents shall prevail. Both the documents in favor of the plaintiffs Exh. "I"
and that in favor of the defendants Exh. "7" are private documents same not having
been acknowledged before a Notary Public.

The Court is of the opinion that the document in favor of the plaintiffs being of an
earlier date than the document in favor of the defendants shall prevail in accordance
with the provisions of paragraph 3 of Article 1544 of the Civil Code of the
Philippines which read as follows:

'If the same thing should have been sold to different vendees, the ownership
shall be transferred to the person who may have first taken possession thereof
in good faith, if it should be movable property.

'Should there be no inscription, the ownership shall pertain to the person

who in good faith was first in the possession; and, in the absence thereof, to
the person who presents the oldest title, provided there is good
faith. (Emphasis supplied)

While it may be true that the defendants were in possession of the land in
controversy at the time Laura A. Roxas executed the deed of sale in favor of the
plaintiffs, such possession was merely that of a "vendee a retro" and not as vendee
in an absolute sale. It has also been held that with reference to unregistered lands,
an earlier instrument, be it a sale or a mortgage, shall prevail over a later one, and
the registration of any one of them is immaterial (Nisce vs. Milo, G.R. No. 42546,
Jan. 1936; Nota vs. Concepcion, 56 Phil. 712, cited in Noblejas, Land Titles and
Deeds, 1955 ed., p. 207).

The deed of confirmation of sale executed by Laura A. Roxas in favor of defendants

Celso Borja and Nelia Alanguilan on September 5, 1958, Exhibits "8", cannot in
any manner prejudice the rights of the plaintiffs because the said deed of
confirmation was made more than nine (9) months after this case was filed. If the
execution of the said deed of confirmation. It also proves the joint efforts of all the
"I" executed by Laura A. Roxas in plaintiffs' favor.

It is obvious that, in deciding the case, the lower court failed to give due weight to the
private document Exhibit 7 (deed of absolute sale) executed by Laura A. Roxas in favor of
appellants on December 8, 1957 — in effect superseding the pacto de retro sale mentioned
heretofore for a total consideration of P1,684.00, of which the amount of P850.00 paid as
consideration for the pacto de retro sale was considered as a part. There is no dispute at all
as to the genuineness of this private deed of absolute sale nor as to its execution on
December 8, 1957. that is, five days prior to December 13, 1957, when. according to
appellees themselves, they made the first attempt to repurchase the property in question,
and on which occasion appellants refused to allow the repurchase "because Laura A. Roxas
was not with them", according to the lower court. After December 8, 1957, appellants'
rights were no longer based on the superseded pacto de retro sale but on the aforesaid deed
of absolute sale — which was a perfectly valid contract as between the parties. In plain
words, after that date Laura A. Roxas no longer had any right to repurchase the property.

Upon the other hand, appellees' contention that appellants were aware of their agreement
with Laura A. Roxas has not been sufficiently substantiated. Appellees' own evidence
shows that appellants became aware of their claim to the property when they tried, for the
first time, to exercise the right to repurchase on December 18, 1957 five days after the deed
of absolute sale in favor of said appellants. After a careful consideration of the issues and

153
the evidence, we believe that the lower court also erred in considering Exhibit I, executed
on July 5, 1957, as a deed of sale of the land in question in favor of appellees.

In the first place, the phraseology employed therein shows that the contract between the
parties was a mere promise to sell, on the part of Roxas, because the latter merely promised
to execute a deed of absolute sale upon appellees complaining payment to her of the total
sum of P2,000.00, of which the P850.00 to be paid to appellants for the repurchase of the
property would be an integral part. This repurchase had not yet been made on July 5, 1957,
when this Exhibit I was executed. In the second place, an that date all that Roxas could
possibly sell or convey in relation to the property in question was her right to repurchase
the same from appellants. Consequently, the best consideration that could be given to the
private document Exhibit I is that it was an assignment by Roxas to appellees of her right
to repurchase of which — according to the evidence — appellants had no knowledge until
December 13, 1957 when appellees attempted to make the repurchase. Such being its
condition, it could not possibly give rise to the case of one and the same property having
been sold to two different purchasers. The salt — in favor of appellants was of the property
itself, while the one in favor of appellees, if not a mere promise to assign, was at most an
actual assignment of the right to repurchase the same property. The provisions of paragraph
3, Article 1544 of the Civil Code of the Philippines do not, therefore, apply.

Having arrived at the above conclusions, we are constrained to hold that, upon the facts of
the case, appellees are not entitled to the reliefs sought in their amended complaint and that
whatever remedy they have is exclusively against Laura A. Roxas to recover from her,
among other things, what they paid as consideration for the execution of the private
document Exhibit I.

WHEREFORE, the decision appealed from is reversed, with the result that this case is
dismissed, with costs, reserving to appellees, however, the right to file a separate action
against Laura A. Roxas to enforce whatever rights they may have against her in consonance
with this decision.

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.

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

154
 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.

155
 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

156
 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;

157
 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

158
(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.

159
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). 1 (Emphasis 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

160
 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 2 upholding the power of promisors under
contracts to sell in case 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

161
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.

Concepcion, C.J., Makalintal, Zaldivar, Castro, Teehankee, Barredo, Villamor and

Makasiar, JJ., concur.

Fernando, J., took no part.

Footnotes

1 Ponce Enrile vs. Court of Appeals, L-27549, 30 September 1969; Froilan

vs. Pan Oriental Shipping Co., L-11897, 31 October 1964; De la Rama
Steamship Co., Inc. vs. Tan, L-8784, 21 May 1956; Taylor vs. Uy Teng Piao,
43 Phil. 873; University of the Philippines vs. Judge de los Angeles, L-
28602, 29 September 1970.

2 Manila Racing Club vs. Manila Jockey Club, 69 Phil. 57; Caridad Estates
vs. Santero, 71 Phil. 114; Miranda vs. Caridad Estates, L-2077, 3 October
1950; Jocson v. Capitol Subdivision, L-6573, 28 February 1955; Manuel vs.
Rodriguez, 109 Phil. 1. See also Sing Yee Cuan, Inc. vs. Santos (C. App.) 47
OG 6372.

162
AFP MUTUAL BENEFIT ASSOCIATION, INC., petitioner, vs. COURT OF
APPEALS, SOLID HOMES, INC., INVESTCO, INC., and REGISTER OF
DEEDS OF MARIKINA, respondents.

[G.R. No. 135016. September 10, 2001]

SOLID HOMES, INC., petitioner, vs. INVESTCO, INC., substituted by

ARMED FORCES OF THE PHILIPPINES MUTUAL BENEFIT
ASSOCIATION, INC., respondent.
What is before the Court is Solid Homes, Inc.s motion for reconsideration of the
decision promulgated on March 3, 2000, reversing the decision of the Court of Appeals and
ordering the Register of Deeds to cancel the notice of lis pendens on the titles issued to
petitioner AFP Mutual Benefit Association, Inc. (AFPMBAI), declaring it as buyer in good
faith and for value.
We have defined a purchaser in good faith and for value as one who buys the property
of another without notice that some other person has a right to or interest in such property
and pays a full and fair price for the same, at the time of such purchase, or before he has
notice of the claim or interest of some other person in the property.[1]
Solid Homes, Inc.s motion for reconsideration is based on the following grounds: (1)
that the Court erred in ruling that petitioner was a purchaser in good faith and for value;
(2) that the Court erred in failing to appreciate Solid Homes, Inc.s cause of action (in Civil
Case No. 52999); and (3) that the Court erred in denying Solid Homes, Inc.s petition (in
163
G. R. No. 135016) to set aside the trial courts order denying its motion to execute the
decision in Civil Case No. 40615.
We find the motion without merit.
1. Solid Homes, Inc.s position is anchored on the preposition that a notice of lis
pendens was duly annotated on the vendors title that must be deemed carried over to the
titles issued to AFPMBAI, subjecting it to the final result of the litigation[2] as a
transferee pendente lite.
However, the law is clear.[3] The Revised Rules of Court[4] allows the annotation of a
notice of lis pendens in actions affecting the title or right of possession of real
property,[5] or an interest in such real property.[6] We further declared that the rule of lis
pendens applied to suits brought to establish an equitable estate, interest, or right in specific
real property or to enforce any lien, charge, or encumbrance against it x x x.[7]
Pencil markings, which even Solid Homes, Inc. admits to be provisional,[8] are not an
accepted form of annotating a notice of lis pendens. The Court cannot accept the argument
that such pencil annotation can be considered as a valid annotation of notice of lis
pendens, and thus an effective notice to the whole world as to the status of the title to the
land. The law requires proper annotation, not provisional annotation of a notice of lis
pendens.
If we allow provisional annotations as a valid form of annotation of notice of lis
pendens, we would be eroding the very value of the indefeasibility of the torrens system. If
there were a valid annotation of notice of lis pendens, the same would have been carried
over to the titles issued to AFPMBAI. As it is, the transfer certificates of titles of the vendor
Investco, Inc. conveyed to AFPMBAI were clean and without any encumbrance.
In the present case, there could be no valid annotation on the titles issued to AFPMBAI
because the case used as basis of the annotation pending with the trial court was an action
for collection of a sum of money and did not involve the titles to, possession or ownership
of the subject property or an interest therein. This Court, in its final decision on the case
categorized the action initiated by Investco, Inc. against Solid Homes, Inc. (Civil Case No.
40615 of the Regional Trial Court, Pasig, Metro Manila) as:

An action for collection of sums of money, damages and attorneys fees was filed with
the Regional Trial Court (Civil Case No. 40615) of Pasig by private respondents Investco,
Angela Perez Staley and Antonio Perez, Jr. against petitioner Solid Homes, Inc.[9]

Unquestionably, such action did not directly involve titles to, ownership or possession
of the subject property, and, therefore, was not a proper subject of a notice of lis pendens.
The Torrens System was adopted in this country because it was believed to be the most
effective measure to guarantee the integrity of land titles and to protect their indefeasibility
once the claim of ownership is established and recognized. If a person purchases a piece of
land on the assurance that the sellers title thereto is valid, he should not run the risk of being
told later that his acquisition was ineffectual after all. This would not only be unfair to him.
What is worse is that if this were permitted, public confidence in the system would be
eroded and land transactions would be attended by complicated and not necessarily
conclusive investigations and proof of ownership. The further consequence would be that
land conflicts could be even more numerous and complex than they are now and possibly
also more abrasive, if not even violent.[10]
Prevailing jurisprudence recognizes that All persons dealing with property covered by
the torrens certificate of title are not required to go beyond what appears on the face of the
title.[11] The buyer is not even obligated to look beyond the certificate to investigate the

164
titles of the seller appearing on the face of the certificate.[12] Hence, we ruled that
AFPMBAI is a buyer in good faith and for value.
Consequently, we reject movant Solid Homes, Inc.s contention that AFPMBAI is a
transferee pendente lite of Investco, Inc.
2. It should be emphasized that the contractual relation between Investco, Inc. and
Solid Homes, Inc., is based on an agreement executed in 1976 as a contract to sell and to
buy. AFPMBAI never figured in this contract. The relationship between AFPMBAI and
Investco, Inc. arose out of a contract of absolute sale after Solid Homes, Inc. reneged or
defaulted on its contract to sell, and Investco, Inc. rescinded extra-legally such contact to
sell with Solid Homes, Inc. AFPMBAI did not acquire from Solid Homes, Inc. its rights or
interest over the property in question; Investco, Inc. sold the property itself which
AFPMBAI paid for in full, thus causing the transfer of titles in the name of AFPMBAI.
When the contract was entered into between Solid Homes, Inc. and Investco, Inc. in
September 1976, the titles to the Quezon City and Marikina property had not been
transferred in the name of Investco, Inc. as assignee of the owners. Hence, Investco, Inc.
merely agreed to sell, and Solid Homes, Inc. to buy, the formers rights and interest in the
subject property which at the time was still registered in the names of Angela Perez Staley
and Antonio Perez, Investco, Inc.s predecessors-in-interest.
Under the contract to sell and buy, the vendors bound themselves to cause the titles to
the land to be transferred in the name of Investco, Inc. after which, should Solid Homes,
Inc. complete the installment payments, Investco, Inc. would execute a Deed of Absolute
Sale in favor of Solid Homes, Inc. and the latter would execute a first preferred mortgage
in favor of Investco, Inc. The deed of absolute sale would replace the contract to sell. Only
then would Solid Homes, Inc. be entitled to take possession of the Quezon City and
Marikina parcels of land and introduce improvements thereon.
On or about March 21, 1979, the titles to the Marikina property were issued in the
name of Investco, Inc. However, Investco, Inc. did not execute a deed of absolute sale in
favor of Solid Homes, Inc. because Solid Homes, Inc. never paid in full its stipulated
obligation payable in installments. In fact, Solid Homes, Inc. did not even bother to register
its contract to sell with the Register of Deeds pursuant to Presidential Decree 1529, also
known as the Property Registration Decree.
We find untenable Solid Homes, Inc.s contention that the transaction between
AFPMBAI, Investco, Inc. and Solid Homes, Inc. is in the nature of a double sale. The
transaction between Investco, Inc. and Solid Homes, Inc. was
a contract to sell and to buy that was not fully paid because Solid Homes, Inc. defaulted on
its payments. On the other hand, the contract between Investco, Inc. and AFPMBAI was
an absolute sale that culminated in the registration of the deeds and the issuance of
certificate of titles in favor of AFPMBAI.
In Salazar v. Court of Appeals,[13] we explained the distinction between a contract to
sell and a contract of sale:

In a contract of sale, the title to the property passes to the vendee upon the delivery of the
thing sold; in a contract to sell, ownership is, by agreement, reserved in the vendor and is
not to pass to the vendee until full payment of the purchase price. Otherwise stated, in a
contract of sale, the vendor loses ownership over the property and cannot recover it until
and unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained
by the vendor until full payment of the price. In the latter contract, payment of the price is
a positive suspensive condition, failure of which is not a breach but an event that prevents
the obligation of the vendor to convey title from becoming effective.[14]

165
 Upon Solid Homes, Inc.s failure to comply with its obligation thereunder, there was
no need to judicially rescind the contract to sell. Failure by one of the parties to abide by
the conditions in a contract to sell resulted in the rescission of the
contract.[15] Unquestionably, Solid Homes, Inc. reneged on its obligation to pay the
installments for the purchase of the Quezon City and Marikina property of Investco, Inc.
on the dates specified in the contract to sell.
4. Movant Solid Homes, Inc. finally contends that when the decision in Civil Case No.
40615 became final, there was no one to move for execution of the decision since Investco,
Inc. had absconded, and had in fact re-sold the property in question to AFPMBAI. We find
the contention without merit. Investco, Inc. was the prevailing party which had the right to
demand execution.[16] Once a judgment becomes final and executory, the prevailing
party can have it executed as a matter of right, and the issuance of a writ of execution
becomes a ministerial duty of the court.[17] In fact, the prevailing party is the one really
entitled to file a motion for the issuance of a writ of execution. Yet, in this case, it was
Solid Homes, Inc. that filed on June 19, 1996, a motion for execution of judgment in the
court of origin (RTC Pasig, Branch 157). The trial court denied the motion. Hence, on
September 11, 1998, Solid Homes, Inc. filed a petition for certiorari with this Court.[18]
Assuming that AFPMBAI was bound by the judgment in Civil Case No. 40615, and
be substituted for Investco, Inc., it is clear that Investco, Inc. prevailed in the case. It was
the winning party.[19] It is the prevailing party which is entitled as a matter of right to a
writ of execution in its favor.[20] It is not an option of the losing party to file a motion for
execution of judgment to compel the winning party to take the judgment. As the losing
party in Civil Case No. 40615, Solid Homes, Inc. can not now insist on the performance of
the very contract on which it defaulted for more than fourteen (14) years. Hence, Solid
Homes, Inc. has no personality to move for execution of the final judgment in Civil Case
No. 40615. The trial court correctly denied its motion for execution.
It would be the height of unfairness if Solid Homes, Inc. which has failed to pay
anything since 1981 and defaulted since 1982, would now get the property by performance
of the very contract which it violated. With the passage of time, more than fourteen (14)
years, and appreciation in the value of real estate, the property is now worth billions of
pesos,[21] thus enriching Solid Homes, Inc. for its violation of the contract and default on
its obligation.
IN VIEW WHEREOF, we DENY Solid Homes, Inc.s motion for reconsideration, for
lack of merit. The denial is final.
SO ORDERED.

166
[G.R. No. 6584. October 16, 1911.]

INCHAUSTI & CO., Plaintiff-Appellant, v. ELLIS CROMWELL, Collector of

Internal Revenue, Defendant-Appellee.

SYLLABUS

1. TAXATION; SALE OF HEMP; TAXABLE VALUE. — Where it is admitted by the

parties that it is customary to sell hemp in the market baled and not loose, it will be
presumed that the price at which hemp is quoted in the market is the price of baled hemp;
and that prices stipulated in contracts for the purchase and sale of hemp include the cost
and expense of baling where the contracts are silent upon that subject.

2. ID.; ID.; ID.; BALING EXPENSE PART OF PRICE. — Under such conditions the cost
and expense of baling the hemp is a part of the purchase price and subject to a tax imposed
by law on the gross amount of sales of the dealers, and is not a sum paid for work, labor,
and materials performed and furnished by the vendor for the vendee.

3. ID.; ID.; ID.; "PRICE" DEFINED. — The word "price" signifies the sum stipulated as
the equivalent of the thing sold and also every incident taken into consideration for the
fixing of the price put to the debit of the vendee and agreed to by him.

4. ID.; ID.; ID.; DISTINCTION BETWEEN SALE AND CONTRACT FOR 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 would never have existed but for the order of the party desiring to acquire it, or
a thing which would have existed and been the subject of sale to some other person, even
if the order had not been given.

5. ID.; ID.; ID.; FUTURE SALES. — When a person stipulates for the future sale of
articles which he is habitually making, and which at the time are not made or finished, it is

167
essentially a contract of sale and not a contract for labor. It is otherwise where the article
would not have been made but for the agreement; and where the article ordered by the
purchase is exactly such as the vendor makes and keeps on hand for sale to anyone, and no
change or modification of it is made at the vendee’s request, it is a contract of sale even
though it be entirely made after and in consequence of the vendee’s order for it.

6. ID.; ID.; ID.; BALING FOR GENERAL MARKET. — In this case the baling was done
for the general market and was not something done by the plaintiff as a result of the
particular contract between him and his vendee.

DECISION

MORELAND, J.:

This is an appeal by the plaintiff from a judgment of the Court of First Instance of the city
of Manila, the Hon. Simplicio del Rosario presiding, dismissing the complaint upon the
merits after trial, without costs.

The facts presented to this court are agreed upon by both parties, consisting, in so far as
they are material to a decision of the case, in the following:jgc:chanrobles.com.ph

"III. That the plaintiff firm for many years past has been and now is engaged in the
business of buying and selling at wholesale hemp, both for its own account and on
commission.

"IV. That it is customary to sell hemp in bales which are made by compressing the loose
fiber by means of presses, covering two sides of the bale with matting, and fastening it by
means of strips of rattan; that the operation of baling hemp is designated among
merchants by the word ’prensaje.

"V. That in all sales of hemp by the plaintiff firm, whether for its own account or on
commission for others, the price is quoted to the buyer at so much per picul, no mention
being made of baling; but with the tacit understanding, unless otherwise expressly agreed,
that the hemp will be delivered in bales and that, according to the custom prevailing
among hemp merchants and dealers in the Philippine Islands, a charge, the amount of
which depends upon the then prevailing rate, is to be made against the buyer under the
denomination of ’prensaje.’ That this charge is made in the same manner in all cases,
even when the operation of baling was performed by the plaintiff or by its principal long
before the contract of sale was made. Two specimens of the ordinary form of account
used in these operations are hereunto appended, marked Exhibits A and B, respectively,
and made a part hereof.

"VI. That the amount of the charge made against hemp buyers by the plaintiff firm and
other sellers of hemp under the denomination of ’prensaje’ during the period involved in
this litigation was P1.75 per bale; that the average cost of the rattan and matting used on
each bale of hemp is fifteen (15) centavos and that the average total cost of baling hemp
is one (1) peso per bale.

"VII. That insurance companies in the Philippine Islands, in estimating the insurable

168
value of hemp always add to the quoted price of same the charge made by the seller
under the denomination of ’prensaje.’

"VIII. That the average weight of a bale of hemp is two (2) piculs (126.5 kilograms).

"IX. That between the first day of January, 1905, and the 31st day of March, 1910, the
plaintiff firm, in accordance with the custom mentioned in paragraph V hereof, collected
and received, under the denomination of ’prensaje,’ from purchasers of hemp sold by the
said firm for its own account, in addition to the price expressly agreed upon for the said
hemp, sums aggregating P380,124.35; and between the 1st day of October, 1908, and the
1st day of March, 1910, collected for the account of the owners of hemp sold by the
plaintiff firm in Manila on commission, and under the said denomination of ’prensaje,’ in
addition to the price expressly agreed upon for said hemp, sums aggregating P31,080.

"X. That the plaintiff firm in estimating the amount due it as commissions on sales of
hemp made by it for its principals has always based the said amount on the total sum
collected from the purchasers of the hemp, including the charge made in each case under
the denomination of ’prensaje.

"XI. That the plaintiff has always paid to the defendant or to his predecessor in the office
of the Collector of Internal Revenue the tax collectible under the provisions of section
139 of Act No. 1189 upon the selling price expressly agreed upon for all hemp sold by
the plaintiff firm both for its own account and on commission, but has not, until
compelled to do so as hereinafter stated, paid the said tax upon sums received from the
purchaser of such hemp under the denomination of ’prensaje.’

"XII. That on the 29th day of April, 1910, the defendant, acting in his official capacity as
Collector of Internal Revenue of the Philippine Islands, made demand in writing upon the
plaintiff firm for the payment within the period of five (5) days of the sum of P1,370.68
as a tax of one-third of one per cent on the sums of money mentioned in Paragraph IX
hereof, and which the said defendant claimed to be entitled to receive, under the
provisions of the said section 139 of Act No. 1189, upon the said sums of money so
collected from purchasers of hemp under the denomination of ’prensaje.’

"XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the defendant under
protest the said sum of P1,370.69, and on the same date appealed to the defendant as
Collector of Internal Revenue, against the ruling by which the plaintiff firm was required
to make said payment, but defendant overruled said protest and adversely decided said
appeal, and refused and still refuses to return to plaintiff the said sum of P1,370.68 or any
part thereof.

"XIV. Upon the facts above set forth it is contended by the plaintiff that the tax of
P1,370.68 assessed by the defendant upon the aggregate sum of said charges made
against said purchasers of hemp by the plaintiff during the period in question, under the
denomination of ’prensaje’ as aforesaid, namely, P411,204.35, is illegal upon the ground
that the said charge does not constitute a part of the selling price of the hemp, but is a
charge made for the service of baling the hemp, and that the plaintiff firm is therefore
entitled to recover of the defendant the said sum of P1,370.68 paid to him under protest,
together with all interest thereon at the legal rate since its payment. and the costs of this
action.

"Upon the facts above stated it is the contention of the defendant that the said charge

169
made under the denomination of ’prensaje’ is in truth and in fact a part of the gross value
of the hemp sold and of its actual selling price, and that therefore the tax imposed by
section 139 of Act No. 1189 lawfully accrued on said sums, that the collection thereof
was lawfully and properly made and that therefore the plaintiff is not entitled to recover
back said sum or any part thereof; and that the defendant should have judgment against
plaintiff for his costs."cralaw virtua1aw library

Under these facts we are of the opinion that the judgment of the court below was right. It
is one of the stipulations in the statement of facts that it is customary to sell hemp in
bales, and that the price quoted in the market for hemp per picul is the price for the hemp
baled. The fact is that among large dealers like the plaintiff in this case it is practically
impossible to handle hemp without its being baled, and it is admitted by the statement of
facts, as well as demonstrated by the documentary proof introduced in the case, that if the
plaintiff sold a quantity of hemp it would be the understanding, without words, that such
hemp would be delivered in bales, and that the purchase price would include the cost and
expense of baling. In other words, it is the fact as stipulated, as well as it would be the
fact of necessity, that in all dealings in hemp in the general market the selling price
consists of the value of the hemp loose plus the cost and expense of putting it into
marketable form. In the sales made by the plaintiff, which are the basis of the controversy
here, there were no services performed by him for his vendee. There was agreement that
services should be performed. Indeed, at the time of such sales it was not known by the
vendee whether the hemp was then actually baled or not. All that he knew and all that
concerned him was that the hemp should be delivered to him baled. He did not ask the
plaintiff to perform services for him, nor did the plaintiff agree to do so. The contract was
single and consisted solely in the sale and purchase of hemp. The purchaser contracted
for nothing else and the vendor agreed to deliver nothing else.

The word "price" signifies the sum stipulated as the equivalent of the thing sold and also
every incident taken into consideration for the fixing of the price, put to the debit of the
vendee and agreed to by him. It is quite possible that the plaintiff, in this case in
connection with the hemp which he sold, had himself already paid the additional expense
of baling as a part of the purchase price which he paid and that he himself had received
the hemp baled from his vendor. It is quite possible also that such vendor of the plaintiff
may have received the same hemp from his vendor in baled form, that he paid the
additional cost of baling as a part of the purchase price which he paid. In such case the
plaintiff performed no service whatever for his vendee, nor did, the plaintiff’s vendor
perform any service for him.

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 been the subject of sale to some other person. even if the order
had not been given. (Groves v. Buck, 3 Maule & S., 178; Towers v. Osborne, 1 Strange,
506; Benjamin on Sales, 90.) It is clear that in the case at bar the hemp was in existence
in baled form before the agreements of sale were made, or, at least, would have been in
existence even if none of the individual sales here in question had been consummated. It
would have been baled, nevertheless, for sale to someone else, since, according to the
agreed statement of facts, it is customary to sell hemp in bales. When a person stipulates
for the future sale of articles which he is habitually making, and which at the time are not
made or finished, it is essentially a contract of sale and not a contract for labor. It is
otherwise when the article is made pursuant to agreement. (Lamb v. Crafts, 12 Met., 353;
Smith v. N. Y. C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where labor is

170
employed on the materials of the seller he can not maintain an action for work and labor.
(Atkinson v. Bell, 8 Barn. & C., 277; Lee v. Griffin, 30 L. J. N. S. Q. B., 252; Prescott v.
Locke, 51 N. H., 94.) If the article ordered by the purchaser is exactly such as the plaintiff
makes and keeps on hand for sale to anyone, and no change or modification of it is made
at the defendant’s request, it is a contract of sale, even though it may be entirely made
after, and in consequence of, the defendant’s order for it. (Garbutt v. Watson, 5 Barn. &
Ald., 613; Gardner v. Joy, 9 Met., 177; Lamb v. Crafts, 12 Met., 353; Waterman v.
Meiks, 4 Cush., 497; Clark v. Nichols, 107 Mass., 547; May v. Ward, 134 Mass., 127;
Abbott v. Gilchrist, 38 Me., 260; Crocket v. Scribner, 64 Me., 105; Pitkin v. Noyes, 48 N.
H., 294; Prescott v. Locke, 51 N. H., 94; Ellison v. Brigham, 38 Vt., 64.) It has been held
in Massachusetts that a contract to make is a contract of sale if the article ordered is
already substantially in existence at the time of the order and merely requires some
alteration, modification, or adaptation to the buyer’s wishes or purposes. (Mixer v.
Howarth, 21 Pick., 205.) It is also held in that state that a contract for the sale 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 for the sale
of goods to which the statute of frauds applies. But if the goods are to be manufactured
especially for the purchaser and upon his special order, and not for the general market,
the case is not within the statute. (Goddard v. Binney, 115 Mass., 450.)

It is clear to our minds that in the case at bar the baling was performed for the general
market and was not something done by plaintiff which was a result of any peculiar
wording of the particular contract between him and his vendee. It is undoubted that the
plaintiff prepared his hemp for the general market. This would be necessary One who
exposes goods for sale in the market must have them in marketable form. The hemp in
question would not have been in that condition if it had not been baled. The baling,
therefore, was nothing peculiar to the contract between the plaintiff and his vendee. It
was precisely the same contract that was made by every other seller of hemp, engaged as
was the plaintiff, and resulted simply in the transfer of title to goods already prepared for
the general market. The method of bookkeeping and form of the account rendered is not
controlling as to the nature of the contract made. It is conceded in the case that a separate
entry and charge would have been made for the baling even if the plaintiff had not been
the one who baled the hemp but, instead, had received it already baled from his vendor.
This indicates of necessity that the mere fact of entering a separate item for the baling of
the hemp is formal rather than essential and in no sense indicates in this case the real
transaction between the parties. It is indisputable that, if the plaintiff had bought the hemp
in question already baled, and that that was the hemp the sale of which formed the subject
of this controversy, then the plaintiff would have performed no service for his vendee and
could not, therefore, lawfully charge for the rendition of such service. It is, nevertheless,
admitted that in spite of that fact he would still have made the double entry in his invoice
of sale to such vendee. This demonstrates the nature of the transaction and discloses, as
we have already said, that the entry of a separate charge for baling does not accurately
describe the transaction between the parties.

Section 139 [Act No. 1189] of the Internal Revenue Law provides
that:jgc:chanrobles.com.ph

"There shall be paid by each merchant and manufacturer a tax at the rate of one-third of
one per centum on the gross value in money of all goods, wares and merchandise sold,
bartered or exchanged in the Philippine Islands, and that this tax shall be assessed on the
actual selling price at which every such merchant or manufacturer disposes of his
commodities."cralaw virtua1aw library

171
The operation of baling undoubtedly augments the value of the goods. We agree that
there can be no question that, if the value of the hemp were not augmented to the amount
of P1.75 per bale by said operation, the purchaser would not pay that sum. If one buys a
bale of hemp at a stipulated price of P20, well knowing that there is an agreement on his
part, express or implied, to pay an additional amount of P1.75 for that bale, he considers
the bale of hemp worth P21.75. It is agreed, as we have before stated, that hemp is sold in
bales. Therefore, baling is performed before the sale. The purchaser of hemp owes to the
seller nothing whatever by reason of their contract except the value of the hemp
delivered. That value, that sum which the purchaser pays to the vendee, is the true selling
price of the hemp, and every item which enters into such price is a part of such selling
price. By force of the custom prevailing among hemp dealers in the Philippine Islands, a
purchaser of hemp in the market, unless he expressly stipulates that it shall be delivered
to him in loose form, obligates himself to purchase and pay for baled hemp. Whether or
not such agreement is express or implied, whether it is actual or tacit, it has the same
force. After such an agreement has once been made by the purchaser, he has no right to
insist thereafter that the seller shall furnish him with unbaled hemp. It is undoubted that
the vendees, in the sales referred to in the case at bar, would have had no right, after
having made their contracts, to insist on the delivery of loose hemp with the purpose in
view themselves to perform the baling and thus save 75 centavos per bale. It is
unquestioned that the seller, the plaintiff, would have stood upon his original contract of
sale, that is, the obligation to deliver baled hemp, and would have forced his vendees to
accept baled hemp, he himself retaining among his own profits those which accrued from
the process of baling.

We are of the opinion that the judgment appealed from must be affirmed, without special
finding as to costs, and it is so ordered.

Torres, Mapa, Johnson and Carson, JJ., concur.

172
G.R. No. L-8506 August 31, 1956

CELESTINO CO & COMPANY, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

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

173
 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:

174
 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

175
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.

176
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.

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.)

177
On September 30, 1957, revenue examiners Quesada and Catudan reported and
recommended to the then Collector, now Commissioner, of Internal Revenue (hereinafter
referred to as Commissioner) that Engineering be assessed for P480,912.01 as deficiency
advance sales tax on the theory that it misdeclared its importation of air conditioning units
and parts and accessories thereof which are subject to tax under Section 185(m) 1 of the
Tax Code, instead of Section 186 of the same Code. (Exh. "3" pp. 59-63 BIR rec. Vol. I)
This assessment was revised on January 23, 1959, in line with the observation of the Chief,
BIR Law Division, and was raised to P916,362.56 representing deficiency advance sales
tax and manufacturers sales tax, inclusive of the 25% and 50% surcharges. (pp. 72-80 BIR
rec. Vol. I)

On March 3, 1959. the Commissioner assessed against, and demanded upon, Engineering
payment of the increased amount and suggested that P10,000 be paid as compromise in
extrajudicial settlement of Engineering's penal liability for violation of the Tax Code. The
firm, however, contested the tax assessment and requested that it be furnished with the
details and particulars of the Commissioner's assessment. (Exh. "B" and "15", pp. 86-88
BIR rec. Vol. I) The Commissioner replied that the assessment was in accordance with law
and the facts of the case.

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

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

For ALL THE FOREGOING CONSIDERATIONS, the decision of

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

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

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

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

1. That the Court of Tax Appeals erred in holding Engineering Equipment &
Supply Company liable to the 30% compensating tax on its importations of
equipment and ordinary articles used in the central type air conditioning
systems it designed, fabricated, constructed and installed in the buildings and
premises of its customers, rather than to the compensating tax of only 7%;

178
 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:

179
 Section 194. — Words and Phrases Defined. — In applying the provisions
of this Title, words and phrases shall be taken in the sense and extension
indicated below:

xxx xxx xxx

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

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

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

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

Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece
of work thus:

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

180
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 4 We adopt —

Engineering, in a nutshell, fabricates, assembles, supplies and installs in the

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

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

The Commissioner in his Brief argues that "it is more in accord with reason and sound
business management to say that anyone who desires to have air conditioning units
installed in his premises and who is in a position and willing to pay the price can order the
same from the company (Engineering) and, therefore, Engineering could have mass

181
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)

182
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
183
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 5 of the Code. This compensating tax is not a tax
on the importation of goods but a tax on the use of imported goods not subject to sales tax.
Engineering, therefore, should be held liable to the payment of 30% compensating tax in
accordance with Section 190 of the Tax Code in relation to Section 185(m) of the same,
but without the 50% mark up provided in Section 183(b).

II

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

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

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

The imposition of the 50% surcharge prescribed by Section 183(a) of the Tax
Code is based on willful neglect to file the monthly return within 20 days
after the end of each month or in case a false or fraudulent return is willfully

184
 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

185
 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)

186
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

187
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.

188
G.R. No. 18316 September 23, 1922

LUZON STEVEDORING COMPANY, Plaintiff-Appellee, vs. WENCESLAO

TRINIDAD, Collector of Internal Revenue, Defendant-Appellant.

JOHNSON, J.:

This action was commenced in the Court of First Instance of the City of Manila on the 18th
day of May, 1921. Its purpose was to recover of the defendant as Internal Revenue
Collector, the sum of P2,422.81, which sum had been paid by the plaintiff by the plaintiff
to the defendant under protest. The defendant presented a demurrer to the complaint, which
was overruled, and later answered. The answer contained a general and special defense. In
his special defense the defendant alleged that during the first quarter of the year 1921 the
plaintiff was engaged in business as a contractor, its gross receipts from said business
during said quarter amounting to P242,281.33, and that the defendant, under the provisions
of section 1462 of Act No. 2711, levied and assessed on the above-mentioned amount the
percentage tax amounting to P2,422.81, which the plaintiff paid on April 18, 1921, under
protest, this protest having been duly overruled by the
defendant.chanroblesvirtualawlibrarychanrobles virtual law library

Upon the issue thus presented, the Honorable Pedro Concepcion, judge, for the reasons
given in his decision, rendered a judgment in favor of the plaintiff and against the defendant
for the said sum of P2,422.81, without any finding as to costs or interest. From that
judgment the defendant appealed. The appellant contends that the lower court committed
an error in holding that the plaintiff is not a contractor and in rendering a judgment in favor
of the plaintiff.chanroblesvirtualawlibrary chanrobles virtual law library

From an examination of the evidence adduced during the trial of the cause and from the
agreement of the parties, it appears that the plaintiff is and was a corporation duly organized
under the laws of the Philippine Islands and doing business in the City of Manila; that it as
engaged in the stevedoring business in said city, and said business consisting of loading
and unloading cargo from vessels in port, at certain rates of charge per unit of cargo; that
all the work done by it is conducted under the direct supervision of the officers of the ships
and under the instruction given to plaintiff's men by the captain and officers of said ships;
that no liability attaches to the plaintiff for the improper loading or unloading of vessels,
the captain being responsible for said work; that the captain answers for all the cargo placed
on board and for the manner in which said cargo is loaded; that, while it is true that the
plaintiff undertakes to work in the loading or unloading of cargo from any vessel in port,
yet it always does the work under the direct supervision of the officers of the vessel; that
said supervision is so effective that, while the loading is made, plaintiff's laborers are under
the direct control of the officers of the ship; and that said supervision is so direct, that no
discretion is left to the plaintiff nor its men. It was mutually agreed at the time of the trial
that the provisions of section 1462 of Act No. 2711 had been in force for a period of eight
years (section 43, Act No. 2339; section 1617, Act No. 2657; section 1462, Act NO. 2711)
before the defendant made any effort to collect the taxes in
question.chanroblesvirtualawlibrary chanrobles virtual law library

The only question presented by the appellant upon the foregoing facts is: Is the plaintiff a
contractor? Generally speaking, every person who enters into a contract may be

189
denominated a contractor, but evidently the Legislature did not mean to apply the word
"contractor," as used in said section 1462, to every person, partnership or corporation who
entered into a contract; or, otherwise, it would not have been necessary to have mentioned
in the same section other classes of business, such as warehousemen, proprietors of
dockyards and persons selling light, heat, or power, as well as persons engaged in
conducting telephone or telegraph line or exchanges, and proprietors of steam laundries
and of shops for the constructions and repair of bicycles or vehicles of any kind, and
keepers of hotels and restaurants, etc. If the word "contractor" in said section 1462 meant
every person who entered into a contract, then it would have included warehousemen, and
the other classes of business mentioned in said section, for the reason that every transaction
by the other persons mentioned in said section is by virtue of an express or implied contract.
the same thing might be said with reference to section 1463, where keepers of every stables
and garages, transportation contractors, persons who transport passengers or freight for
hire, and common carriers, etc. are also subject to an internal revenue tax. If the Legislature
had intended the word "contractor," as used in section 1462, to cover all persons who
entered into a contract then it would have been unnecessary to have mentioned the other
persons referred to in sections 1462 and 1463.chanroblesvirtualawlibrary chanrobles
virtual law library

Moreover, if the general and broad meaning is to be given to the word "contractor" as used
in said section 1462, it would include banders, merchants, brokers, lawyers, farmers in the
sale of their product, and every person who enter into a contractor of whatever nature or
character. It would also include school-teachers in the public and private schools as well
as common laborers who work by the day under a contract. It would also apply to all
persons loaning money upon promissory notes, for the reason that their transaction is a
contract and the parties thereto, broadly speaking, are
contractors.chanroblesvirtualawlibrary chanrobles virtual law library

From all of the foregoing it does appear that the word "contractor," as used in said section
1462, must have a limited and a very restricted meaning. It cannot have the broad meaning
which would include every person who entered into a contract. The lower court in holding
that the plaintiff was not a contractor in the sense that that word is used in said section,
relied upon the definition given in vol. 13 Corpus Juris, page 211, where we find a
"contractor" defined. The definition is: "One who agrees to do anything for another; one
who executes plans under a contract; one who contracts or covenants, whether with a
government or other public body or with private parties, to furnish supplies, or to construct
works, or to erect buildings, or to perform any work or service, at a certain price to rate, as
a paving contractor, or a labor contractor; one who contracts to perform work, or supply
articles on a large scale, at a certain price or rate, as in building houses or provisioning
troops, or constructing a railroad. Although, in a general sense, every person who enters
into a contract may be called a contractor, yet the word, for want of a better one, has come
to be used with special reference to a person who, in the pursuit of an independent business,
undertakes to do a specific piece or job or work for other persons,using his own means and
methods without submitting himself to control as to the petty details. The true test of a
'contractor' would seem to be that he renders the service in the course of an independent
occupation, representing the will of his employer only as to the result of his work, and not
as to the means by which it is accomplished." ( In re Unger, 22 Okla., 755;
State vs. McNally, 45 La. ann., 44, 46; Ney vs. Dubuque, etc., Railroad Co., 20 Iowa, 347,
352; Lehigh, etc., Co. vs. Central Railroad Co. of New Jersey, 29 N. J. Equity, 252, 255;
State vs. Emerson, 72 Me., 455, 456; Todd vs. Kentucky Union Ry, Co., 52 Fed. Rep., 241,
247 [18 L. R. A., 305]; Hale vs. Johnson, 80 Ill., 185.)chanrobles virtual law library

190
The general rule, variously stated, is that when a person lets out work to another, the
contractee reserving no control over the work or workmen, the relation of contractor and
contractee exists and not that of master and servant, and the contractee is not liable for the
negligence or improper execution of the work by the contractor. (Laffery vs. United States
Gypsum Co., 83 Kan., 349, 354.)chanrobles virtual law library

It the one rendering service submits himself to the direction of his employer as to the details
of the work, fulfilling his will not merely as to the result but also as to the means by which
that result is to be attained, the contractor becomes a servant and is not a contractor in
respect to that work. (Shearman and R. on Negligence, sec. 77; Knoxvill Iron
Co. vs. Dobson, 7 Lea [Tenn. Rep.], 367, 374.)chanrobles virtual law library

If on the other hand a person is engaged under a contract in an independent operation not
subject to the direction and control of his employer, the relation is not regarded as that of
master and servant, but is said, in modern phrase, to be that of contractor and contractee.
(Campfield vs. Lang, 25 Fed. Rep., 128, 131.)chanrobles virtual law library

The case of Brown vs. German-American, etc. Co. (174 Pa., 443) gave a definition for a
contractor, which was adopted with approval in the case of In re Unger (22 Okla., 755) "as
one who contracts or covenants either with . . . a public body or private parties . . . to . . .
contract works or erect buildings . . . at a certain price or rate." Said definition was adopted
from the Century Dictionary. The definition of lexicographers, however, cannot always be
adopted as a correct meaning for statutory words and phrases. The intention of the
Legislature and the object which it intended to attain must be taken into consideration for
the purpose of determining the meaning of words and phrases used, rather than the set
definition of lexicographers. Moreover, revenue laws imposing taxes on business must be
strictly construed in favor of the citizen. In construing a word or expression in the statute
susceptible of two or more meanings, the court will adopt that interpretation most in accord
with the manifest purpose of the statute as gathered from the context. Where a particular
word is obscure or of doubtful meaning, taken by itself, its obscurity or doubt may be
removed by reference to associate words. (25 Ruling Case Law, 994, 995.)chanrobles
virtual law library

If the question presented in the interpretation of a tariff law is one of doubt, the doubt would
be resolved in favor of the importer, as duties are never imposed upon citizens upon vague
and doubtful interpretation. (Hart Ranft vs. Wiegman, 129 U.S., 609; Zamboanga Mutual
Bldg. & Loan Association vs. Rafferty, 24 Phil., 408.)chanrobles virtual law library

A very instructive decision on the question of who is a contractor, is found in the very well
reasoned case of Caldwell vs. Atlantic B.& A. Ry. Co., (161 Ala., 395). In the course of
that decision the Supreme Court of Alabama said: "'The true test of a "Contractor" would
seem to be that he renders the service in the course of an independent occupation,
representing the will of his employer only as to the result of his work, and not as to the
means by which it is accomplished."' (Halstead vs. Stahl, 47 Ind. App. 600; Johns' Admr.,
etc. vs. Wm. H. McKnight & Co., 117 Ky., 655; Pitssburg Construction Co. vs. West Side,
etc. R. Co., 232 Pa., 578; Freidman vs. Hampden County, 204 Mass., 494; Attorney-
General vs. Detroit Board of Education, 154 Mich., 584.)chanrobles virtual law library

The appellant lays great stress upon the decision in the case of Murray vs. Currie (65
L.R.A., 470) as well as the case of Rankin vs. Merchants, etc. Co. (54 Am. Rep., 874, 876).
In the first case, however, from a reading of the decision it will appear that "Kennedy, the
stevedore, undertook to execute the work of unloading the ship, and for that purpose a
steam winch belonging to the ship was placed at his disposal. The work of unloading was

191
done by Kennedy under a special contract. He was acting on his own behalf, and did not in
any sense stand in the relation of servant to the defendant. He had entire control over the
work which he was doing." In the second case (Rankin vs. Merchants, etc. Co., supra) there
is nothing in the case which does not show that the stevedore was not acting under the
ship's order. The case of Haas vs. Philadelphia, etc. Co. (32 Am. Rep., 462) shows that the
ship's company had no control over the stevedore or his men or their work. The cases
therefore relied upon as authority by the appellant do not support his contention in view of
the definition of a "contractor" which is, by a large weight of authority,
accepted.chanroblesvirtualawlibrary chanrobles virtual law library

From all of the foregoing it seems clear to us that the plaintiff is not a contractor in the
sense that that word is used in said section 1462 of Act No. 2711, and therefore the tax paid
by the plaintiff under protest was illegally collected and should be repaid. For all of the
foregoing reasons, we are of the opinion, and so declare, that that judgement appealed from
should be affirmed. So ordered.chanroblesvirtualawlibrary chanrobles virtual law library

Araullo, C.J., Street, Malcolm, Avanceña, Villamor, Ostrand, Johns and

Romualdez, JJ., concur.

G.R. No. 18154 September 26, 1922

192
LA CARLOTA SUGAR CENTRAL, plaintiff-appellant,
vs.
WENCESLAO TRINIDAD, as Collector of Internal Revenue, defendant-appellee.

This action was commenced in the Court of First Instance of the city of Manila on the 15th
day of August, 1921. Its purpose was to recover of the defendant the sum of P19,638.25,
sum paid by the plaintiff to the defendant under protest, as internal revenue, under and by
virtue of the provisions of section 1462 of Act No. 2711. To the petitioner the defendant
demurred upon the ground that the complaint did not state facts sufficient to constitute a
cause of action. The demurrer was sustained and the plaintiff was ordered to amend its
complaint. The plaintiff refused to amend its complaint and it was dismissed. While the
record fails to show that the lower count finally rendered an order dismissing the complaint,
in view of the fact that neither the appellant nor the appellee raises any question concerning
that failure we will assume for the purpose of this decision that a final judgment was
rendered.

From the judgment sustaining the demurrer the plaintiff appealed and now contends; first,
that the lower court committed an error in declaring that the plaintiff is a "contractor." as
that term is used under section 1462 of Act No. 2711.

By reason of the demurrer, the facts alleged in the complaint are admitted to be true. They
may be stated briefly as follows: That the plaintiff is a corporation organized and existing
under the laws of the Philippine Islands; that the defendant is the Internal Revenue
Collector of the Philippine Islands; that the plaintiff is the owner of a sugar mill located at
La Carlota, Province of Occidental Negros, Philippine Islands, established for the purpose
of producing raw centrifugal sugar from can delivered to it by sugar cane growers; that all
the sugar produced at said mill is under an agreement with the growers of sugar cane, by
virtue of which agreement the plaintiff receives for its work 45 per centum of the sugar
produced and the owner of the cane receives 55 per centum of the same; that during the
first and second quarters of the year 1921 the plaintiff shipped from the Philippine Islands,
for sale abroad, raw centrifugal sugar as its share of the sugar produced in said mill, of the
value of P1,963,825; and that the defendant as Collector of Internal Revenue, claiming to
be authorized so to do by section 1462 of Act No. 2711, treated the plaintiff share of the
raw sugar so produced, as gross receipts subject to taxation under the provisions of said
section, and levied, assessed, and collected by way of percentage tax from the plaintiff,
under protest, the sum of p19,638.25.

The theory of the defendant is that, under the facts stated in the complaint, the plaintiff is
a "contractor" and therefore subject to be taxed under the provisions of said section 1462.
Said section 1462 provides for a tax of one per cent upon the gross receipts of contractors,
warehousemen, and others. Said section provides that: "Contractors, warehousemen,
proprietors of dockyards, and persons selling light, heat, or power, as well as persons
engaged in conducting telephone or telegraph lines, or exchanges, and proprietors of steam
laundries, and of shops for the construction and repair of bicycles or vehicles of any kind,
and keepers of hotels and restaurants shall pay a tax equivalent to one per centum of their
gross receipts."

If the plaintiff is a contractor, and if the sum of P1,963,825 is its gross receipts for the
period mentioned in the complaint, then the tax collected was legally collected and cannot
be recovered. Upon the other hand, if the plaintiff is not a contractor, then the tax collected
upon said sum was illegally collected and should be ordered returned to the plaintiff.

193
Generally speaking, the only question presented by the appellant is: Is it a contractor under
the facts alleged in the complaint? Generally speaking, every person who enters into a
contract may be denominated a contractor, but evidently the legislature did not mean to
apply the word "contractor," as used in section 1462, to every person, partnership, or
corporation who enters into a contract; or, otherwise, it would not have been necessary to
have mentioned in the same section other classes of business, such as warehousemen,
proprietors of dockyards, and persons selling light, heat, or power, etc., etc. If the word
"contractor" in said section means every person who enters into a contract, then it would
have included warehousemen and the other classes of business mentioned in said section,
for the reason that every transaction by the other persons mentioned in said section is by
virtue of an express or implied contract. If the Legislative had intended the word
"contractor," as used in said section, to cover all persons who enter into a contract, then it
would have been unnecessary to have mentioned the other persons referred to in said
section.

Moreover, if the general and broad meaning is to be given to the word "contractor" as used
in said section, it would include bankers, merchants, brokers, lawyers, farmers in the sale
of their product, and every person who enters into a contract of whatever nature or
character. It would also include school teachers in the public and private schools, as well
as common laborers who work by the day under a contract and, in the absence of
exceptions, would in fact apply to all persons loaning money upon promissory notes, for
the reason that their transaction is a contract and that the parties thereto, speaking broadly,
are contractors.

In a general sense, every person who enters into a contract may be called a contractor, yet
the word, for want to a better one, has come to be used special reference to a person who,
in the pursuit of an independent business, undertakes to do a specific piece or job of work
for other persons, using his own means and methods without submitting himself to control
as to the petty details. The true test of a "contractor" would seem to be that he renders the
service in the course of an employer only as to the result of his work, and not as to the
means by which it is accomplished. (Luzon Stevedoring Company vs. Trinidad, p.
803, ante). A "contractor" is defined by the "Century Dictionary" to be one who contracts
or covenants, either with a public body or private parties, to construct works or erect
buildings at a certain price or rate. The definition of lexicographers, however, cannot
always be adopted as a correct meaning for a statutory word or phrase. The intention of the
legislature and the object which it intended to attain must be taken into consideration for
the purpose of determining the meaning of words and phrases used in a statute rather than
the set definition of lexicographers.

Every transaction entered into by bankers, merchants, importers and exporters, brokers,
persons engaged in the purchase and sale of real estate or of agricultural products, etc., etc.,
is by virtue of a contract, and the parties to such transaction are contractors in the broad
sense of that term. Yet it will hardly be contended that the word "contractor," as used in
said section 1462, is applicable to them.

Two persons enter into a contract, by virtue of which the first furnishes the material and
the second, the labor, upon condition that they divide the proceeds of the finishes product
in proportion to the value of the material and labor. Are such persons contractors, falling
under the provisions of said section? The answer must be in the negative. They are partners
and are, in no sense, contractors under the meaning of that word as used in said section.

Is not the agreement between the plaintiff herein and the growers of the sugar cane more
analogous to that of a partnership than to that of a contractor and a contractee? One

194
furnishes the material for the sugar; the other furnishes the labor and the means necessary
to produce the sugar. They agree to divide the product, evidently in proportion to the value
of the raw material with that of the finished product. Is not the relation of the plaintiff with
the growers of the sugar cane more nearly that of a partnership or "de una sociedad de
cuentas en participacion?" If that is so, the plaintiff cannot be regarded as a contractor
either in the general or special signification of that term. While it may be true that the
plaintiff used its own means and methods for the production of sugar, without submitting
itself to the control as to petty details by the growers of the sugar cane, yet by virtue of the
very terms of the agreement if cannot be regarded as a contractor for the reason that, by
virtue of the terms of the agreement, both the plaintiff and the growers of the sugar cane
are joint owners in the proportion agreed upon of the finished product. While perhaps they
cannot be technically regarded as partners, their relation is more like that of a partnership
that of contractor and contractee.

Section 1462 of Act No. 2711 having been brought forward from Act No. 2339, has been
force for a period of more than eight years. No attempt prior to the present action was made
to apply its provisions to cases like the present. Evidently the internal revenue department
of the Government had some doubt its application. Suppose, for example, A is the owner
of a tobacco plantation. He enters into a contract with B, by virtue of which the latter uses
the tobacco produced for the purpose of manufacturing the same into cigars, upon
conditions that the amount received from the sale of the cigars should be divided between
them proportionally upon the basis of the comparative costs of production and
manufacture. Can A and B be regarded as contractors? We are very much inclined to
answer that question in the negative. We see no difference in the relation between A and B
in this illustration, and the relation between the plaintiff herein and the growers of the sugar
can. We are of the opinion that the plaintiff in its agreement with the growers of the sugar
cane is not a contractor in the sense that that word is used in section 1462.

In every case, in the interpretation of a tarrif law where a doubt is presented as to the
meaning of the law, the doubt must be resolved in favor of the person upon whom the tax
is to be levied.

A further illustration might be given which, we think, is analogous to the case before us. It
is: A is the owner of a farm and rents the same to B under a written contract, conditioned
that B is to cultivate the same and plant it to sugar cane, and that he is to harvest the same
and to deliver to A 55 per cent of the value of the cane reserving to himself but 45 per cent,
thus dividing the sugar cane in proportion to the value of the farm with the labor performed.
Is B a contractor in the sense that that term is used in section 1462? If B is a contractor in
that sense, then A is a contractor also and they each must pay the tax under said section.
Would it make any difference in the analogy if B contracted not only to cultivate, plant,
and harvest the cane but also to reduce it to sugar and to divide the sugar in the same
proportion.?

Suppose, in the present case, the plaintiff's contract was not only to cultivate the land of
the farmers, but to harvest and grind the cane and to divide the sugar, would that make any
difference in this relation with the owners of the land? Would it be any job or less of a
contract under those circumstance that it is now? Is it not clear that their relation is more
like that of a partnership than a contractor and contractee? Moreover, in the present case
and in the examples just given, if the tenant or the plaintiff are contractors in the sense that
that word is used in said section 1462, then the owners who furnished the land in each of
said illustrations would also be a contractor because they have each made a contract.

195
It is a common practice in the Philippine Islands for the owner of the land to produce the
sugar cane, and then in order to have the same ground, to enter into an arraignment with
the owner of a sugar mill for that purpose, and to divide the sugar in equitable proportion.
The same might be said of rice producers who are not owners of mills for the purpose of
cleaning the same. They enter into a contract with the owner of a mill for cleaning rice, for
the purpose of cleaning the same. They enter into a contract with the owner of a mill for
cleaning rice, for the purpose of cleaning it, and either to pay a fixed amount per cavan or
to divide the rice so cleansed in a certain proportion. We cannot bring ourselves to believe
that the legislature intended that the word contractor used in said section should include
the plaintiff under the facts in the present case.

The appellant further contends that it is also exempt from the payment of the tax in
question, by virtue of section 1460 of Act No. 2711. The appellee admits that the appellant
is not liable under that section. For that reason we deem it unnecesary to discuss the second
assignment of error presented by the appellant.

For all of the foregoing, we are fully persuaded that it was not the intention of the
Legislature to apply the word "contractor" as used in section 1462, to a business like that
in which the plaintiff is engaged, and that the same is therefore not applicable to the
plaintiff. Therefore, the judgment of the lower court is hereby revoked, without any finding
as to costs; and it is hereby ordered and decreed that the record be returned to the lower
court, with permission on the part of the defendant to answer, if he so desires, within a
period of five days. I no answer is presented within that time let a final judgment be
rendered in favor of the plaintiff and against the defendant for the sum of P19,638.25. So
ordered.

Araullo, C.J., Street, Malcolm, Avanceña, Villamor, Ostrand, Johns, Johns and
Romualdez, JJ., concur.

G.R. No. L-45955 April 5, 1939

TEODORICA R. VIUDA DE JOSE, petitioner,

vs.
JULIO VELOSO BARRUECO, respondent.

196
The petitioner-appellant brought this case before this court thru petition for a writ
of certiorari to review the decision of the Court of Appeals promulgated on October 30,
1937.

Mary Ando leased from Julio Barrueco a China cabinet valued T P70. She undertook, under
the lease, to pay P14 upon signing the contract and P5 monthly thereafter for a period not
specified but extendible at the owner's pleasure. The contract of lease further provided that
upon leasee's default, the contract would be rescinded; that the leasee was not liberty to
remove said cabinet from house No 1030 Misericordia Street where she lived, and that
upon failure to comply with the terms of the lease, the owner could immediately take
possession of the property leased. Under similar terms and conditions, Mary Ando also
leased from said store a narra wardrobe valued at P120, paying P24 cash and P10 monthly.

Unable to pay the rent of the house, Mary Ando attempted to move therefrom, taking with
her the cabinet and the wardrobe. She was presented from doing so by Teodorica R. Viuda
de Jose, the owner of the house, who claimed to be entitled to said personal properties in
lieu of rents due.

Upon a complaint filed by Julio Veloso Barrueco to recover the properties in question from
Teodorica R. Viuda de Jose, the Court of First Instance of Manila held that the contracts
of lease (Exhibits A and B) were fictitious, and that the real contract between the plaintiff
and Mary Ando was one of sale on the installment basis, wherefore, the complaint was
dismissed and defendant declared entitled to the properties in litigation. Brought to the
Court of Appeals, the judgment was reversed, and the contracts between plaintiff and Mary
Ando held to be those of lease.

The case is here on petition, by defendant Teodorica R. Viuda de Jose, now petitioner,
contending that the decision of the Court of Appeals is erroneous for the following reasons:

(a) Resumiendo las condiciones de ambas escrituras de "arrendamiento," Exhibits

A y B, extractadas en la parte de la decision recurrida arriba acotada, se destacan
estos datos:

Valor del Primer Precio Alquiler Periodo necesario

Exhibit
mueble pago restante mensual de pago
A
P70.00 P14.00 P56.00 P5.00 Once meses
.............
B
120.00 24.00 96.00 10.00 Diez meses
.............

(b) Al otorgarse la escritura hay inmediatamente pagos de P14 y P24, que no son
alquileres, y que no tienen otro significado sino pagos a cuenta del precio de los
muebles. Estas candidades representan exactamente el pago anticipado del 20 por
ciento, o una quinta parte del valor.

(c) Los cuatro quintos restantes del valor son pagaderos en forma de mensualidades
dentro de un periodo de 10 a 11 meses. Si este alquiler no es a cuenta del importe
del mueble, el contrato sera escandalosamente inmoral, por usurario y opresivo.

(d) Es indudable que estos pagos son para cubrir el precio estipulado, pues el
recurrido admite que la consideracion de la venta ulterior son las mismas

197
 mensualidades, y la "arrendataria" dice que "los alquileres . . . eran a cuenta del
importe total," "como pago a plazos".

(e) Los precios de los muebles fijados en las escrituras guardan armonia con la
indole de venta a plazos, pues esta aumentado considerablemente. En el mismo dia
en que el asunto se vio en el Juzgado Municipal de Manila, la apelada-recurrente
tomo precious en los establecimientos de muebles identicos, y hallo que solo valen
P61 en total, en vez de P190 (n. t., p. 21). Esta prueba no ha sido contradicha.

(f ) Las partes no solo se han obligado, el uno a entregar los muebles, y la otra, a
pagarlos. En efecto, la cosa ha sido entregada, y parte del precio fue pagado.

(g) La decision dice que no es venta a plazos, sino arrendamiento con opcion de
compra, pero si la consideracion del arrendamiento y la de la compra es una y la
misma, como ocurre en el presente caso, segun la misma decision recurrida,
entonces no existe contrato doble, sino uno y simple, de venta condicional o a
plazos. Para que sea arrendamiento con opcion de compra debe haber un precio para
la compra distinta del precio de arrendamiento, que no occurre en el presente caso.

A perusal of the record of this case shows that in Exhibit A, the amount of P70 was fixed
as the cost price for the cupboard, P14 as the down payment made at the signing of the
contract and P5 as the monthly rentals of said furniture. In Exhibit B the amount of P120
was also fixed as the cost price of the modern narra wardrobe, the down payment made as
P24 and the monthly rental at P10. These Exhibits A and B are
denominated CONTRACTS OF LEASE, the monthly payments for both pieces of
furniture are called rentals, and Mary Ando is mentioned as "leasee." What is the nature of
these contracts? The answer to this question is not to be found in any denomination which
the parties may have given to the instruments, and not alone in any particular provision it
contains, disconnected from all others, but in the ruling intention of the parties, gathered
from the language they have used. It is the legal effect of the whole which is to be sought
for. The form of the instrument is of little account. (See Herryford vs. Davis, 26 Law. ed. [
U. S.], pp. 160, 162.).

We find that the parties intended to have the ownership of the furniture transferred to Mary
Ando upon the latter complying with the conditions of the contract. (Testimony of plaintiff,
p. 9, s. n.; and Mary Ando, p. 17, s. n.) Cf. Valdez vs. Sibal 1.º, 46 Phil., 930.)

In H. E. Heacock Co. vs. Buntal Manufacturing Co. (G. R. No. 44471, promulgated
September 26, 1938), we said:

A mayor abundamiento debemos decir que el hecho de haberse fijado el precio de

la maquina en el contrato, hace que este no sea de arrendamiento sino de
compraventa, porque en los contratos de arrendamiento, a diferencia de los contratos
de compraventa, es redunduncia injustifiable, fijar o hacer mencion siguiera del
precio de la cosa que se da en arrendamiento. (Arts. 1445, 1543, Codigo Civil.)
Cuando los terminos de un contrato no son claros o son contradictorios entre si,
como lo son los del Exhibit A, debe darse efecto a la intencion de las partes (art
1281 del Codigo Civil), y la intencion de la demandante y de los demandados en
esta causa segun la vemos impresa en el contrato Exhibit A, considerando en
conjunto todos sus terminos y clausulas es que el contrato por ellos celebrado fue el
de compraventa a plazos, y no de arrendamiento.

198
In Manila Gas Corporation vs. Calupitan (G.R. No. 46378, promulgated December 17,
1938), we also observed:

Por las consideraciones arriba expuestas, somos de opinion, y asi declaramos, que
cuando en un contrato que se titula de arrendamiento de cosa mueble se estipula que
el supuesto arrendatario pagara cierta cantidad al firmarse el contrato, y en o antes
del dia 5 de cada mes, otra cantidad determinada, en concepto de alguiler, dando al
supuesto arrendatario derecho de opcion para comprar la citada cosa mueble antes
de expirar el plazo del arrendamiento, que es el tiempo que se necesita para pagar
dicho importe a razon de un tanto al mes, descontando los pagos hechos en concepto
de adelanto y de supuestos alquileres mensuales, y dicho supuesto arrendatario hace
el adelanto y paga varias mensualidades, haciendose constar en su cuenta y en los
recibos que se le expiden que dichos pagos son a cuenta del importe de la cosa
mueble supuestamente arrendada, dicho contrato tiene el concepto de venta a plazo
y no de arrendamiento.

Sellers desirous of making conditional sales of their goods, but who do not wish openly to
make a bargain in that form, for one reason or another, have frequently resorted to the
device of making contracts in the form of leases either with options to the buyer to purchase
for a small consideration at the end of term, provided the so-called rent has been duly paid,
or with stipulations that if the rent throughout the term is paid, title shall thereupon vest in
the lessee. It is obvious that such transactions are leases only in name. The so-called rent
must necessarily be regarded as payment of the price in installments since the due payment
of the agreed amount results, by the terms of the bargain, in the transfer of title to the lessee.

The writ of certiorari is granted, and the judgement of the Court of Appeals is reserved
and that of the Court of First Instance of Manila declared in full force and effect. With out
costs. So ordered.

Avanceña, C.J., Villa-Real, Imperial, Diaz and Concepcion, JJ., concur.

G.R. No. 34574 September 19, 1931

CIRILO ABELLA, Plaintiff-Appellant, vs. MARIANO GONZAGA, Defendant-

Appellant.

VILLAMOR, J.:

The plaintiff demands specific performance of the contract entered into with the defendant
on April 15, 1921, which reads as follows:

(Exhibit A)

199
SPECIAL CONTRACT OF LEASE

Mariano Gonzaga, land-owner, and Cirilo Abella, tenant, do hereby enter into a contract
of lease under the following conditions:

First. Mariano Gonzaga, as land-owner, does hereby lease the following-described parcel
of land situate within the jurisdiction of San Felipe Neri to Cirilo Abella to use with all
the active and passive easements thereof, to wit: etc. The surveyed parcel contains an area
of one hectare, seventy-eight ares, and fifty-eight centares.

Second. This lease shall run for five years: from March 5, 1921 to March 5, 1926.

Third. The rent shall be one thousand one hundred fourteen pesos and 34/100 (P1,114.34)
per annum payable in advance at the house of the undersigned on the 5th of March every
year.

Fourth. In consideration of the sum of one thousand three hundred ninety-two pesos and
92/100 (P1,392.92) which the tenant has now paid, and his promise to pay the rent of the
remaining nineteen quarters at the periods fixed in the preceding clause, the owner
undertakes at the termination of this contract to transfer free of charge to the tenant the full
ownership of the leased property, provided the tenant has made the aforesaid payments.

Fifth. The costs of surveying, fixing the boundaries, registering the title and other expenses,
shall be charged to the tenant's account.chanroblesvirtualawlibrary chanrobles virtual law
library

Sixth. Failure to comply with any stipulation herein shall deprive the tenant of any right he
may have under this contract, and he shall lose all the amounts paid: but the owner shall
not collect from him the pending rent, but may only eject him from the land.

Seventh. The tenant may assign this contract, or sublet the leased property, with the written
consent of the owner.

Eight. When the leased property is to be transferred to the tenant, as provided in the fourth
clause, the land shall be surveyed and any excess or shortage in area shall be charged for
at the rate of P __________ per square meter.

Ninth. ____________________________ undertakes to cultivate the land as a regular

farmer, preserving the metes and bounds, and all the easements, active, passive, and
otherwise, so working the land in such a manner as not to impair in any way its condition,
state, or value; he also binds himself to preserve, for during the lease they shall belong to
the owner of the land, and the tenant shall have no right to them whatever. The lessor
reserves the right to open up a quarry, and the lessee is therefore prohibited from opening
up a quarry on said land; but he may make use of stones to supply the needs of the land
leased and within the boundaries thereof; in such cases, however, he must first secure
permission in writing, and neither said lessee nor his workmen may traffic in them or give
them to any other person under any pretext whatsoever.

Tenth. The lessee expressly waives his right to a reduction of the stipulated price in view
of the lack of fertility of the soil, or the total or partial loss of the products owing to a
fortuitous event, ordinary or extraordinary, foreseen or unforeseen.

200
Eleventh. Every betterment, of whatever class or nature, made by the lessee upon the leased
land, shall accrue to the owner, and no indemnity need be paid by the owners on that
account, when the former leaves the land, for any reason whatsoever.

Twelfth. The lessee shall within the briefest time possible advise the lessors of any
usurpation or adverse act performed or about to be performed by third persons upon the
leased property, and shall be liable in damages for their neglect in this behalf to the owners
of the land.

The lessees of parcels abutting upon the boundaries of the property shall be bound to notify
the owner of any defect they may note in the boundary marks, ditches, streams, etc.

Thirteenth. Notwithstanding the foregoing clause, in case of mere disturbance of

possession, the lessee shall bring the proper action to protect his own rights.

Fourteenth. All expenses that the lessor may have to incur in order to enforce his right and
compel the lessee to fulfill these stipulations, even if he should have to go to court for that
purpose, shall be for the account of said lessee, who shall under no circumstances be
allowed to avoid reimbursement.

Signed and executed in duplicate at the undersigned's home in San Felipe Neri on the 15th
of April, 1921. (Sgd.) M. GONZAGA, land-owner - witnesses: J. MENDIOLA, etc. (Sgd.)
CIRILO ABELLA, lessee.

The defendant contends in his answer that the plaintiff's right to compel him to make the
transfer of the land in question is not absolute, but conditional; that the conditions have not
been complied with, but violated by the plaintiff, who made the last payment over a year
after the obligation had become due, that is, on March 27, 1927, instead of March 5, 1926.

This case was heard in the Court of First Instance of Rizal; both parties adduced evidence
and the court entered a decision requiring the defendant: ( a) To execute the deed of transfer
of the land described in the complaint to the plaintiff, after redeeming to the Mandaluyong
Estate, i.e., about P21,000; ( b) to pay the plaintiff the sum of P21,000 or the proportional
part thereof necessary to redeem the land described in this complaint from the mortgage to
the Mandaluyong Estate, if the defendant should fail to pay said Mandaluyong Estate the
amount of the aforementioned mortgage; and ( c) to pay the costs of the action.

The defendant appealed from this judgment, alleging that the trial court erred:

1. In not finding that the plaintiff has no cause of action against the defendant.

2. In holding that the special contract of lease, Exhibit A, is a contract of sale on

installments.

3. In applying to this case the rulings cited in its decision.

4. In requiring the defendant to redeem the mortgage on the land in question, or else to
indemnify the plaintiff for the amount he may pay in redeeming it himself.

5. In rendering judgment against the defendant.

6. In denying the defendant's motion for a new trial.

201
The parties submitted the following agreed statement of facts to the court for consideration:

1. That about the month of February, 1921, the defendant, Mariano Gonzaga, agreed to
purchase 70 parcels of land from the Mandaluyong Estate, including lot No. 9, with an area
of 17,558 square meters, which is the subject matter of the complaint, and is a subdivision
of lot No. 18; its technical description may be found in certificate of title No. 7379, issued
by the registrar of deeds of the Province of Rizal.

2. That in pursuance of the agreement with the owners of the estate, Mr. Gonzaga made
several payments on account of said seventy parcels of land.

3. That on December 16, 1922, Mr. Gonzaga agreed with the owners of the Mandaluyong
Estate to apply thirteen thousand five hundred sixty-three pesos and twenty centavos
(P13,563.20) of the amount he had paid to the payment in full of the price of twenty-two
parcels of land, and these terms were set out in the deed executed on that date, December
16, 1922.

4. That it was also agreed to apply the six hundred fifty-two pesos and fifty centavos
(652.50) the balance of the amount paid by Gonzaga, to the payment of a portion of the
price of the 48 remaining parcels of land, another deed of sale having been executed in
favor of said Mr. Gonzaga by Messrs. Whitaker and Ortigas, before the Notary D.
Geronimo J. Garcia, on the same day, December 16, 1922, whereby Mr. Gonzaga bound
himself to pay the balance of the price, or fifty-five thousand three hundred fifty-two pesos
(P55,352) as follows: P18,909.26 in May, 1923; P11,930.08 in May, 1924; P11,930 in
May, 1925; and P11,930.08 in May, 1926, all of which is set forth in the certificate of title
issued by the registrar of deeds of Province of Rizal to the defendant Mariano Gonzaga,
which also mentioned the mortgage on said 48 parcels to secure the payment of the debt
with interest.

5. That the defendant Mariano Gonzaga is at present indebted to Messrs. Whitaker and
Ortigas for principal and interest computed until December 31, 1929, in the sum of twenty-
one thousand and two pesos and sixty-nine centavos (P21,002.69), as the outstanding
balance to be paid upon the mortgage mentioned in the preceding paragraph.

6. That Messrs. Whitaker and Ortigas, as mortgagees have cancelled the mortgage upon
several of the 48 parcels of land mortgaged to them by the defendant Mariano Gonzaga, in
view of the fact that a part of the amount of the mortgage has been paid up.

7. That among the parcels of land still subject to the mortgage given by the defendant
Mariano Gonzaga to Messrs. Whitaker and Ortigas, is lot No. 9, a subdivision of lot No.
18, containing 17,558 square meters, which is the land here in question, the technical
description of which may be found in certificate of title No. 7379 issued by the registrar of
deeds of the Province of Rizal.

The decision of this case depends upon the interpretation of the contract, Exhibit A, quoted
above. The plaintiff contends that it is a contract of sale on installments, while the
defendant holds that it is really a contract of lease. If the contract is a lease, it is plain that
the plaintiff has no right to the relief he seeks; but if the contract is a sale on installments
and the plaintiffs has paid all the installments, it is obvious he has a right to demand that
the defendant execute the proper deed to transfer the ownership to him.

Upon this point the trial court held in its judgment after an examination of the evidence
that the contract in question is clearly a sale on its installments, and we believe it was quite

202
right in so holding. The document, Exhibit A, is entitled "Special Contract of Lease," and
the special quality consists in the stipulation found in clause IV, to wit: that in consideration
of the sum of P1,392.92 which the plaintiff had just paid to the defendant, and of his
promise to pay the rental of the remaining 19 quarters within the time stipulated, the owner
bound himself at the termination of said contract to transfer to the tenant free of charge the
full ownership of the property leased, provided the said tenant has paid all those
installments. If the contract were really a lease, we are at loss to explain how such a clause
was inserted therein. If we take into account the other condition that the expenses of
surveying, fixing the boundaries, registering the title and other expenses should be for the
account of the tenant, the fact that in the five receipts, Exhibits C, D, E, F, and G, the
defendant himself stated that the amounts paid were on account of the first, second, third,
fourth, and fifth installments, and further fact that in his answer the defendant filed no claim
for alleged rental of the land subsequent to the year, when the plaintiff paid the last
installment, we arrive at the inevitable conclusion that although in the contract Exhibit A
the usual words "lease," "lessee," and "lessor" were employed, that is no obstacle to
holding, as we do hereby hold, that said contract was a sale on installments, for such was
the evident intention of the parties in entering into said contract. (Art. 1281, par. 2, of the
Civil Code, as interpreted by this court in the cases of Reyes vs. Limjap, 15 Phil., 420; and
De la Vega vs. Ballilos, 34 Phil., 683.)

As we understand the evidence, the land in question was a part of the estate denominated
the Mandaluyong Estate. The defendant-appellant had an understanding with the owners
to purchase a large tract of it including the land now in question. Pending proceedings for
the registration of the land which the defendant desired to purchase, he entered into an
agreement with the plaintiff evidenced by the contract Exhibit A, called "Special Contract
of Lease." The parties had agreed upon the sale of the land for about P7,000. The plaintiff
then paid P1,392.92 (Exhibit B), and the remainder was to be paid in five yearly
installments of P1,114,34 each. These installments were paid, according to Exhibits C, D,
E, F, and G. Some of these yearly payments were delayed somewhat, but the defendant
admitted the payment, according to said receipts, for, as the plaintiff stated, he agreed to
pay ten per cent interest upon the arrearage, and this statement was admitted by the court
below.

It is argued that at the time when the contract Exhibit A was entered into (April 15, 1921),
the defendant was not the owner of the land in question, inasmuch as he acquired the
ownership on December 16, 1922, as shown by a deed executed on that date to him by
virtue of which certificate of title No. 7379 was issued to him, and that he could not bind
himself to transfer the ownership of the land after the period of five years of the alleged
contract of lease. In this contract of lease the defendant, Mariano Gonzaga, it will be
observed, considered himself the owner of the land, and in this capacity he entered into the
contract; therefore, he cannot now be heard to say that he was not the owner of said land,
after inducing the plaintiff to believe that he was. But assuming that when the contract
Exhibit A was entered into the title to the land had not yet been issued to the defendant,
and that he subsequently acquired the ownership thereof, the doctrine laid down in
Llacer vs. Muñoz de Bustillo and Achaval (12 Phil., 328) must be followed, to the effect
that when a person who is not the owner of a piece of land conveys it to another, and
thereafter acquires title to it, such subsequent ownership gives effect to the
conveyance.chanroblesvirtualawlibrary chanrobles virtual law library

Since the plaintiff has fulfilled his obligations under that contract of sale called "Special
Contract of Lease," we are of the opinion that he may compel the defendant to execute the
proper deed of transfer of the full ownership of the property in
question.chanroblesvirtualawlibrary chanrobles virtual law library
203
But as it appears from paragraph V of the agreed statement of facts that the property in
question is at present subject to a mortgage given by said defendant to the owners of the
Mandaluyong Estate, Whitaker and Ortigas, said defendant must first free the land of this
encumbrance, and then execute the proper deed of conveyance of the property to the
plaintiff.chanroblesvirtualawlibrary chanrobles virtual law library

Wherefore, the judgment appealed from is hereby affirmed, with costs against the
appellant. So ordered.chanroblesvirtualawlibrary chanrobles virtual law library

Johnson, Street, Malcolm, Ostrand, Romualdez, Villa-Real, and Imperial, JJ., concur.

G.R. No. L-46378 December 17, 1938

MANILA GAS CORPORATION, plaintiff-appellee,

vs.
ALFREDO B. CALUPITAN, defendant-appellant.

Alfredo B. Calupitan in his own behalf.

DeWitt, Perkins and Ponce Enrile for appellee.

VILLA-REAL, J.:

The defendant, Alfredo B. Calupitan, appeals to this court from the decision of the Court
of First Instance of Manila, the dispositive part of which reads:

204
 Judgment is therefore rendered, sentencing the defendant to return the stove and the
gas water heater described in the complaint, and to pay for the use of the gas water
heater the sum of P5 a month from June, 1934, and for the use of the Krefft Stove
the sum of P4 a month from January, 1934, until they are returned, with costs of
suit.

In support of his appeal the appellant assigns six errors allegedly committed by the trial
court in its decision, on which we shall dwell in the course of this decision.

From the evidence of record are gathered the following facts:

On May 3, 1933, the Manila Corporation and the defendant-appellant, Alfredo B.

Calupitan, entered into a contract (Exhibit A), containing the following pertinent recitals:

LEASE AGREEMENT

This agreement, made in the City of Manila, P. I., this 3rd day of May, 1933,
between the Manila Gas Corporation, a domestic corporation duly organized and
existing under and by virtue of the laws of the Philippine Islands, and having its
principal place of business therein in the City of Manila, with its main office at Calle
Otis, Paco, in said City of Manila, hereinafter called the "OWNER", and Alfredo B.
Calupitan, of age and a resident of No. 9 Baldwin, Sta. Cruz, P. I., hereinafter called
the "LESSEE".

WITNESSETH: That

1. The Owner hereby leases unto the Lessee and the Lessee hereby hires from the
Owner, for a term of . . . months, which term may be extended at the will of the
Owner, the following described personal property, to wit:

1. No. 234 Krefft stove of 4 brs. S. H. which the Lessee acknowledges having
received in good state and condition, and the value of which is hereby mutually
agreed to be P60, subject to and under the terms and conditions hereinafter specified.

2. The Lessee hereby agrees —

(a) To pay to the Owner, at its office above stated, for the use of the above described
property, the sum of P5, upon the signing of this agreement, and a monthly rental of
P4, on or before the 5th day of each succeeding month, beginning with the month
next ensuing the date thereof.

xxx xxx xxx

4. The Owner agrees that at any time before the expiration of the terms of this lease,
the Lessee may purchase the said property by paying to the owner, in cash, the full
value under as above fixed, less all payments theretofore made under this
agreement, for the use of said property.

On March 3, 1934, that is, ten months after the execution of the contract Exhibit A, above-
quoted, the same parties entered into another contract (Exhibit B) of the same tenor, except
with respect to the article and the terms of payment, which are as follows:

205
 1. No. 400 Piccolo Inst. Water Heater which the Lessee acknowledges having
received in good state and condition, and the value of which is hereby mutually
agreed to be P95, subject to and under the terms and conditions hereinafter specified.

2. Lessee hereby agrees —

(1) to pay to the Owner, at its office above stated, for the use of the above described
property, the sum of P5 upon the signing of this agreement, and a monthly rental of
P5, on or before the 5th day of each succeeding month, beginning with the month
next ensuing the date thereof.

In accordance with the terms of both contracts, the said defendant paid to the plaintiff,
when the latter delivered to him the stove, the sum of P5, and another sum of P5 when the
water heater "Piccolo Inst. Water Heater" was delivered to him, and monthly thereafter,
the total of said payments amounting to P42: P27 by virtue of the contract Exhibit A and
P15 by virtue of the contract Exhibit B, for which receipts were issued in the following
form (Exhibit 1):lawphil.net

Received from Mr. Alfredo Calupitan .......... pesos (P.........) as partial payment on
Gas appliance Bill No. ......... leaving a balance thereon of P......

MANILA GAS CORPORATION

Cashier

Collector

Notwithstanding repeated demands to pay alleged rentals, due and unpaid for months, or
to return the stove and the water heater, the said defendant paid no heed to said demands
and continued to make use of the said articles for more than five years without
compensation of any kind.

Inasmuch as the said defendant neither paid what he owed to the plaintiff for the stove and
the water heater nor returned them to the latter, the said plaintiff filed the re-amended
complaint found in the bill of exceptions, with the following prayer:

Wherefore, the plaintiff demands judgment against the defendant for the delivery to
the plaintiff of said stove and Piccolo Water Heater above described and for the sum
of P267 as rentals for the use of the same by the plaintiff, or for their values in the
total sum of P155 in case delivery cannot be made, and for costs of this suit and for
such further and other relief as this court may deem just and equitable.lawphil.net

Being one of procedure, we shall first consider the question raised in the fourth assignment
of error, wherein it is alleged that the trial court erred in taking cognizance of the present
case and in not dismissing the same despite the fact that the amount involved in each
contract is within the exclusive jurisdiction of the municipal court of Manila.

206
Upon the said ground the defendant interposed a demur which was overruled by the lower
court, this action of the court being the subject matter of the assignment of error under
consideration.

By the filing of the said demurrer the defendant admitted hypothetically that the contract
entered into between him and the plaintiff is one of lease of personal property; that the
kitchen stove and the water heater belong to the said plaintiff; and that he has neither paid
the stipulated rentals nor returned the said goods.

The complaint has to do not only with the collection of rentals, but also, implicitly, with
the rescission of the two contracts of lease of personal property for non-compliance with
the obligation to pay rentals (art. 1124, Civil Code),and the personal delivery thereof (sec.
262, Act No. 190). With respect to the complaint for the rescission of the contract of lease
of personal property and the personal delivery thereof, the Court of First Instance of Manila
has original exclusive jurisdiction to take cognizance thereof irrespective of the amount of
the due and unpaid rentals.

The trial court, therefore, had original jurisdiction to take cognizance of the complaint.

As to the first assignment of error, wherein it is alleged that the trial court erred in holding
that the two contracts Exhibits A and B are contracts of lease and not of sale of personal
property on installment, we have seen above that in both contracts the defendant, Alfredo
B. Calupitan, paid in advance P5 for the kitchen stove (Exhibit A) and another P5 for the
water heater (Exhibit B), plus P4 and P5 every month for said stove and water heater,
respectively. The price of the stove is P60 and that of the water heater, P95, the said
defendant being able to purchase said goods at said price respectively, before the expiration
of the period of the alleged lease, deducting in each case the amounts, already paid therefor.
The periods of the alleged leases have not been fixed in the contracts; but considering the
prices of the goods and monthly payments to be made, said periods are the number of
months which would result by dividing P60 by P4, which is the supposed monthly rental
of the stove, and P95 by P5, which is supposed to be the monthly rental of the water heater,
that is, 15 and 18 months, respectively. In the accounts Exhibit A-1 and B-1 of the said
defendant, which the plaintiff carries, the monthly payments made by the former to the
latter for said goods were made to appear as paid upon the account of their value and were
deducted therefrom, stating the balances after each monthly payment; and in the receipt
issued to the said defendant on March 8, 1935 (Exhibit 1) there was noted the payment of
P3 made by him as "partial payment on Gas Appliance Bill No. 63781 leaving a balance
of P33." None of the advance and monthly payments made by Alfredo B. Calupitan has
been stated as having been made by way of advance payment of rentals, or of deposit to
secure said payment, or of monthly rentals. The P5 which the plaintiff demanded of the
defendant to pay upon signing the contract Exhibit A could not be by way of advance
payment of rentals, inasmuch as the rental for the use of the stove was P4. Neither could it
be by way of deposit to secure the payment of rental, as it does not appear that such was
the intention of the parties. Moreover, according to the contracts, in case the defendant
should elect to purchase the goods, the said amount of P5 would be deducted from the cost
of the stove and that of the water heater, together with the alleged monthly rentals which
had been paid for each of them. The P4 which the defendant should pay on or before the
5th of each month for the stove and the P5 for the water heater, while they are said to be
for rentals in the respective contracts, are in reality part payments of the prices of the
respective kitchen and bathroom articles, as shown by the lists of payment Exhibit A-1 and
B-1 and the receipt Exhibit 1 which we have above described.

207
What has gone before shows that the contracts entered into between the plaintiff and the
defendant with respect to the kitchen stove and the water heater are those of sale on
installment rather than of lease. The first assignment of alleged error is, therefore, well-
founded.

Having reached this conclusion, we do not find it necessary to discuss the remaining
assignments of error which have been impliedly resolved.

For the foregoing considerations, we are of the opinion and so hold, that when in a so-
called contract of lease of personal property it is stipulated that the alleged lessee shall pay
a certain amount upon signing the contract, and on or before the 5th of every month, another
specific amount, by way of rental, giving the alleged lessee the right of option to buy the
said personal property before the expiration of the period of lease, which is the period
necessary for the payment of the said amount at the rate of so much a month, deducting the
payments made by way of advance and alleged monthly rentals, and the said alleged lessee
makes the advance payment and other monthly installments, noting in his account and in
the receipts issued to him that said payments are on account of the price of the personal
property allegedly leased, said contract is one of sale on installment and not of lease.

Wherefore, the appealed decision is reversed and it is held that the contracts Exhibits A
and B, entered into between the plaintiff Manila Gas Corporation, and the defendant,
Alfredo B. Calupitan, are those of sale on installment; and the said defendant having failed
to comply with the terms of payment, the plaintiff may elect between compliance with or
rescission of the obligation, with indemnity for damages and interest in either case, without
special pronouncement as to the costs. So ordered.

G.R. No. 44471 September 26, 1938

H. E. HEACOCK COMPANY, Plaintiff-Appellee, vs. BUNTAL MANUFACTURING

COMPANY, GREGORIO NIEVA, and MARIA A. DE NIEVA Defendants-Appellant.

Crispin Oben for appellants.

Eulalio Chavez for appellee.

DIAZ, J.:

The main, if not the sole, question raised by the appeal taken by defendants from the
judgment of the lower court is the following:chanrobles virtual law library

Is the document Exhibit A which plaintiff and the first two defendants executed on May
12, 1931 a contract for the lease of an adding and calculating machine therein described,
with option to purchase by defendants; or is it, on the contrary, a contract of purchase and

208
sale on installments in which said defendants were vendees and plaintiff,
vendor?chanrobles virtual law library

The lower court held that it was one of lease and thereafter decided that since defendants
failed to pay plaintiff the rents which they had bound themselves to pay it, at the rate of
P35 a month from August, 1931, and which then amounted to P555, they should deliver to
plaintiff the aforesaid sum with costs. This it resolved notwithstanding that it had been
shown at the trial that upon plaintiff's demand in its complaint for preliminary attachment,
defendants had to return to it the said machine which it accepted to its satisfaction, without
the necessity of making use of the writ of attachment. Said acts of defendants constituted
compliance with the prayer in plaintiff's complaint that one of these things, and not both at
the same time, be done: "The delivery of said personal property, and if delivery cannot be
effected then judgment for the rents in arrears." chanrobles virtual law library

Defendants chose to make delivery so as to dispose of the question in this

manner.chanroblesvirtualawlibrary chanrobles virtual law library

Defendants maintain that in deciding the case in the way it has done, the lower court
erred in the following respects:

I. In granting plaintiff's petition that it be allowed to file an amended complaint after

defendants had been declared in default with respect to the original
complaint.chanroblesvirtualawlibrary chanrobles virtual law library

II. In granting plaintiff the two alternative remedies for which it had prayed in its original
complaint upon its asking for both in the amended
complaint.chanroblesvirtualawlibrary chanrobles virtual law library

III. In not holding that the contract entered into between the parties was one of purchase
and sale on installments and that once the same was rescinded by plaintiff upon its taking
the machine which is the subject matter thereof, it lost all right to recover from them the
balance of its price.

1. Two hearings were held in the case: The first took place in the absence and default of
defendants, and the second after the original complaint had been amended and the answer
of defendants filed. Upon the objection of the latter's attorney, who appeared in the first
trial, upon the ground that plaintiff could have no other relief than the confirmation of its
possession of the machine in question after it had taken and received the same from
defendants for the reason that the prayer for relief in the complaint did not ask for more
than "the delivery of said personal property" (referring to the machine in question), or for
"judgment for the rents in arrears," "if delivery cannot be effected then," plaintiff decided
to ask for, which it did and obtained, leave from the lower court to amend its complaint in
the sense of eliminating from the prayer thereof the phrase "if delivery cannot be effected
then." This it did, no doubt, so as to be able to secure two things at the same time: The
return of its machine and the amount it claimed as rents. After amendment of the complaint
a second hearing was held in which the lower court rendered the judgment appealed from.
We find no error in the act of the lower court granting leave to plaintiff to amend its
complaint, which error may be considered prejudicial to defendants. There was no attempt
to amend an essential part of the complaint, but only a part of its prayer for relief; and it is
known that the prayer for relief is not the complaint itself nor is it a part of the allegations
which state the cause or causes of action submitted to the consideration of the court for its
resolution. (Aguilar vs. Rubiato and Gonzalez Vila, 40 Phil., 570;
Campomanes vs. Bartolome and German and Co., 38 Phil., 808; Rosales vs. Reyes and

209
Ordoveza, 25 Phil., 495.) Moreover, the amendment was made substantially in accordance
with the provisions of sections 109 and 110 of Act No. 190. The first error attributed to the
lower court, is therefore, without merit.chanroblesvirtualawlibrary chanrobles virtual law
library

2. The determination of the other error alleged to have been committed by the lower court
depends upon our consideration of the nature of the contract Exhibit A and upon the
conclusion which we may reach with respect thereto. If it is a lease, then said errors can
not exist.chanroblesvirtualawlibrary chanrobles virtual law library

Among the clauses appearing in the contract in question, there are several showing that it
is not really a contract of lease but of purchase and sale on installments. Said clauses are
the following:

That the owner hereby leases unto the hirer and the hirer P860.00
hereby hires from the owner one Dalton adding,
calculating and posting machine, Multiplex Model 490-
180 Serial No. 4-103493
To credit one Dalton adding machine S. H. Serial No. 160.00
116182 for P110 and by cash P50. Initial payment
Balance due 700.00

which the hirer acknowledges having received in good state and condition, for the term of
20 calendar months from the date hereof at the rental of P35 per calendar month, and . . .
calendar months at the rental . . . subject to the following terms and conditions:

1. The hirer agrees with the owner as follows:chanrobles virtual law library

( a) To pay the owner at its office at 122 Escolta, the said hire monthly on the 12th day of
every month within three days thereafter.chanroblesvirtualawlibrary chanrobles virtual law
library

6. In consideration of the sum of P160 to it in hand paid by the hirer, the owner hereby
grants to the hirer the option to purchase, while the present lease is in force and effect, the
property made the subject of this agreement, at the purchase price of P860. In the event of
the exercise of said option, the hirer shall be entitled to a credit on the purchase price for
an amount equal to the rentals actually paid hereunder and the payment made under this
paragraph; it being expressly understood and agreed, however, that the said chattel shall
remain the property of the owner until after the complete exercise of such option, and the
payment in full of the purchase price agreed upon, and, until such time the hirer shall not
have any property right in said chattel or be deemed to have purchased or obligated to
purchase the same. Should the hirer not exercise the option herein granted, the amount paid
by him for said option under this paragraph shall become forfeited to the owner.

In the first clause above-quoted it appears that defendants paid the amount of P160 on
account of the price of the machine which was fixed at P860. It is therein stated that said
amount was delivered to plaintiff as "initial payment." It was for this reason that upon the
signing of the contract care was taken to express therein that the balance which defendants
were bound to pay to plaintiff for the machine was only P700. So as to facilitate the
payment of this amount by defendants, it was agreed between them and plaintiff that the
former would complete the same in twenty monthly installments of P35. Dividing P700 by

210
20, the resulting amount is exactly P35.chanroblesvirtualawlibrary chanrobles virtual law
library

It is true that in the contract it is often stated that plaintiff leased the machine to defendants,
giving them the option to buy it upon their paying it the sum of P860 and crediting them
with so much as they might be able to pay as rents at the above rate of P35 a month. It
should be noted, however, that in the clause aforementioned, it is clearly stated that
defendant paid the sum of P160 on account of the price of the machine. This payment
shows that the real contract between the parties was that of purchase and sale on
installments and not a lease. In spite of any effort to prove the contrary, the aforesaid
amount of P160 can not be understood to constitute payment in advance of the rents agreed
upon for there is nothing in the contract to indicate that it was and because, according to
the contract itself, the rents could not be more nor less than P35 a month, payable monthly.
Following the theory of plaintiff and in accordance with the sound principles of accounting,
the amount of P160 can not be considered as payment of rents in advance; otherwise we
would reach the conclusion that defendants, without being bound to do so and in violation
of the terms of the contract, paid plaintiff rents not monthly but from day to day inasmuch
as said sum corresponds to four months and twenty days. Furthermore, it must be borne in
mind that the mention in the aforesaid contract of the fact that the sum of P160 constituted
an "initial payment" on account of the price of the machine in question can have no other
effect than to contradict and nullify that stated in clause 6, which is one of those above-
quoted, to the effect that the same is the consideration by virtue of which plaintiff granted
defendants the option to buy the machine. Defendants did not have to pay anything for the
option for the reason that they made the payment of P160 to buy the machine on
installments, binding themselves to pay the balance by delivering to plaintiff the sum of
P35 a month. It should be stated, moreover, that the fact that the price of the machine was
fixed in the contract makes the latter not a lease but a purchase and sale because in contracts
of lease, as distinguished from those of purchase and sale, it is plain redundancy to fix or
make any mention of the price of the thing given in lease (article 1445, 1543, Civil Code).
When the terms of a contract are not clear or conflict with each other, as those appearing
in Exhibit A, effect must be given to the intention of the parties (article 1281, Civil Code);
and the intention of plaintiff and defendants in this case as we gather it from Exhibit A,
considered in connection with all its terms and clauses, is that the contract entered into
between them is one of purchase and sale on installments and not a
lease.chanroblesvirtualawlibrary chanrobles virtual law library

Accordingly, the act of plaintiff in requiring, as it did, the return of the machine in question,
receiving and accepting the same thereafter from defendants when the latter voluntarily
returned it, shows that plaintiff not only consented to, but desired the rescission of the
contract it had entered with defendants, specially when it is taken into consideration that it
thus expressed itself in its original complaint wherein it prayed not for the return of the
machine and payment of supposed rents due at the same time, but only for one of these
things. Upon taking the machine under such circumstances plaintiff performed a positive
act indicating its intention to rescind the contract, and having done so and retained what
defendants had up to then paid to it, amounting to P305 without any objection on their part,
it can not and must not have any right to anything more. Its right was reduced to demanding
compliance with the terms of Exhibit A as contract of purchase and sale or to rescind the
same, and it chose the latter alternative and to retain the aforesaid sum of P305 (articles
1506 and 1124, Civil Code).chanroblesvirtualawlibrary chanrobles virtual law library

In conclusion we hold that the contract Exhibit A is that of purchase and sale on
installments; that said contract was rescinded without objection on the part of defendants;

211
and that the appeal of the latter is well taken.chanroblesvirtualawlibrary chanrobles virtual
law library

Wherefore, declaring Exhibit A rescinded, the judgment appealed from is reversed,

absolving defendants from the complaint and sentencing plaintiff to pay the costs in both
instances. So ordered.chanroblesvirtualawlibrary chanrobles virtual law library

Avanceña, C.J., Villa-Real, Abad Santos, Imperial, Laurel and Concepcion, JJ., concur.

[G.R. No. 109966. May 31, 1999]

ELISCO TOOL MANUFACTURING CORPORATION, petitioner, vs. COURT OF

APPEALS, ROLANDO LANTAN, and RINA LANTAN, respondents

DECISION
MENDOZA, J.:

This is a petition for review of the decision[1] of the Court of Appeals which affirmed in
toto the decision of the Regional Trial Court of Pasig, Branch 51, declaring respondent
spouses Rolando Lantan and Rina Lantan owners of a 1979 model 2-door Colt Lancer car
which they had acquired under a car plan for top employees of the Elizalde group of
companies.
The facts are as follows:

212
 Private respondent Rolando Lantan was employed at the Elisco Tool Manufacturing
Corporation as head of its cash department. On January 9, 1980, he entered into an
agreement with the company which provided as follows:[2]

That, EMPLOYER is the owner of a car Colt Lancer 2 door, Model 1979, with Serial No.
3403 under LTC Registration Certificate No. 0526558;

That, for and in consideration of a monthly rental of ONE THOUSAND TEN & 65/100
ONLY (P1,010.65) Philippine Currency, EMPLOYER desire to lease and EMPLOYEE
accept in lease the motor vehicle aforementioned for a period of FIVE (5) years;

That, the EMPLOYEE agree as he hereby agreed to pay the lease rental thru salary
deduction from his monthly remuneration in the amount as above specified for a period of
FIVE (5) years;

That, for the duration of the lease contract, all expenses and costs of registration, insurance,
repair and maintenance, gasoline, oil, part replacement inclusive of all expenses necessary
to maintain the vehicle in top condition shall be for the account of the EMPLOYEE;

That, at the end of FIVE (5) year period or upon payment of the 60th monthly rental,
EMPLOYEE may exercise the option to purchase the motor vehicle from the EMPLOYER
and all monthly rentals shall be applied to the payment of the full purchase price of the car
and further, should EMPLOYEE desire to exercise this option before the 5-year period
lapse, he may do so upon payment of the remaining balance on the five year rental unto the
EMPLOYER, it being understood however that the option is limited to the EMPLOYEE;

That, upon failure of the EMPLOYEE to pay THREE (3) accumulated monthly rentals will
vest upon the EMPLOYER the full right to lease the vehicle to another EMPLOYEE;

That, in the event of resignation and or dismissal from the service, the EMPLOYEE shall
return the subject motor vehicle to the EMPLOYER in its compound at Kalawaan Sur,
Pasig, Metro Manila in good working and body condition.

On the same day, January 9, 1980, private respondent executed a promissory note
reading as follows:[3]

PROMISSORY NOTE

P60,639.00

FOR VALUE RECEIVED, we promise to pay [to] the order of ELISCO TOOL MFG.
CORP. SPECIAL PROJECT, at its office at Napindan, Taguig, Metro Manila, Philippines,
the sum of ONE THOUSAND TEN & 65/100 PESOS (P1,010.65), Philippine Currency,
beginning January 9, 1980, without the necessity of notice or demand in accordance with
the schedule of payment hereto attached as an integral part hereof.

In case of default in the payment of any installment on the stipulated due date, we agree to
pay as liquidated damages 2% of the amount due and unpaid for every thirty (30) days of
default or fraction thereof. Where the default covers two successive installments, the entire
unpaid balance shall automatically become due and payable.

It is further agreed that if upon such default attorneys services are availed of, an additional
sum equal to TWENTY (20%) percent of the total amount due thereon, but in no case be

213
less than P1,000.00 shall be paid to holder(s) hereof as attorneys fees in addition to the
legal costs provided for by law. We agree to submit to the jurisdiction of the proper courts
of Makati, Metro Manila or the Province of Rizal, at the option of the holder(s) waiving
for this purpose any other venue.

In case extraordinary inflation or deflation of the currency stipulated should occur before
this obligation is paid in full, the value of the currency at the time of the establishment of
the obligation will be the basis of payment.

Holder(s) may accept partial payment reserving his right of recourse against each and all
endorsers who hereby waive DEMAND PRESENTMENT and NOTICE.

Acceptance by the holder(s) of payment or any part thereof after due date shall not be
considered as extending the time for the payment of the aforesaid obligation or as a
modification of any of the condition hereof.

After taking possession of the car, private respondent installed accessories therein
worth P15,000.00.
In 1981, Elisco Tool ceased operations, as a result of which private respondent Rolando
Lantan was laid off. Nonetheless, as of December 4, 1984, private respondent was able to
make payments for the car in the total amount of P61,070.94.
On June 6, 1986, petitioner filed a complaint, entitled replevin plus sum of money,
against private respondent Rolando Lantan, his wife Rina, and two other persons, identified
only as John and Susan Doe, before the Regional Trial Court of Pasig, Metro
Manila. Petitioner alleged that private respondents failed to pay the monthly rentals which,
as of May 1986, totalled P39,054.86; that despite demands, private respondents failed to
settle their obligation thereby entitling petitioner to the possession of the car; that petitioner
was ready to post a bond in an amount double the value of the car, which was P60,000; and
that in case private respondents could not return the car, they should be held liable for the
amount of P60,000 plus the accrued monthly rentals thereof, with interest at the rate of
14% per annum, until fully paid. Petitioners complaint contained the following prayer:

WHEREFORE, plaintiffs prays that judgment be rendered as follows:

ON THE FIRST CAUSE OF ACTION

Ordering defendant Rolando Lantan to pay the plaintiff the sum of P39,054.86 plus legal
interest from the date of demand until the whole obligation is fully paid;

ON THE SECOND CAUSE OF ACTION

To forthwith issue a Writ of Replevin ordering the seizure of the motor vehicle more
particularly described in paragraph 3 of the Complaint, from defendant Rolando Lantan
and/or defendants Rina Lantan, John Doe, Susan Doe and other person or persons in whose
possession the said motor vehicle may be found, complete with accessories and equipment,
and direct deliver thereof to plaintiff in accordance with law, and after due hearing to
confirm said seizure and plaintiffs possession over the same;

ON THE ALTERNATIVE CAUSE OF ACTION

In the event that manual delivery of the subject motor vehicle cannot be effected for any
reason, to render judgment in favor of plaintiff and against defendant Rolando Lantan

214
ordering the latter to pay the sum of SIXTY THOUSAND PESOS (P60,000.00) which is
the estimated actual value of the above-described motor vehicle, plus the accrued monthly
rentals thereof with interests at the rate of fourteen percent (14%) per annum until fully
paid;

PRAYER COMMON TO ALL CAUSES OF ACTION

1. Ordering the defendant Rolando Lantan to pay the plaintiff an amount equivalent to
twenty-five percent (25%) of his outstanding obligation, for and as attorneys fees;

2. Ordering defendants to pay the cost or expenses of collection, repossession, bonding

fees and other incidental expenses to be proved during the trial; and

3. Ordering defendants to pay the costs of suit.

Plaintiff also prays for such further reliefs as this Honorable Court may deem just and
equitable under the premises.

Upon petitioners posting a bond in the amount of P120,000, the sheriff took possession
of the car in question and after five (5) days turned it over to petitioner.[4]
In due time, private respondents filed their answer. They claimed that the agreement
on which the complaint was based had not been signed by petitioners representative, Jose
Ma. S. del Gallego, although it had been signed by private respondent Rolando Lantan;
that their true agreement was to buy and sell and not lease with option to buy the car in
question at a monthly amortization of P1,000; and that petitioner accepted the installment
payments made by them and, in January 1986, agreed that the balance of the purchase price
would be paid on or before December 31, 1986. Private respondents cited the provision of
the agreement making respondent Rolando Lantan liable for the expenses for registration,
insurance, repair and maintenance, gasoline, oil and part replacements, inclusive of all
necessary expenses, as evidence that the transaction was one of sale. Private respondents
further alleged that, in any event, petitioner had waived its rights under the agreement
because of the following circumstances: (a) while the parties agreed that payment was to
be made through salary deduction, petitioner accepted payments in cash or checks; (b)
although they agreed that upon the employees resignation, the car should be returned to the
employer, private respondent Rolando Lantan was not required to do so when he resigned
in September 1982; (c) petitioner did not lease the vehicle to another employee after private
respondent Rolando Lantan had allegedly failed to pay three monthly rentals; and (d)
petitioner failed to enforce the manner of payment under the agreement by its acceptance
of payments in various amounts and on different dates.
In its reply, petitioner maintained that the contract between the parties was one of lease
with option to purchase and that the promissory note was merely a nominal security for the
agreement.It contended that the mere acceptance of the amounts paid by private
respondents and for indefinite periods of time was not evidence that the parties agreement
was one of purchase and sale.Neither was it guilty of laches because, under the law, an
action based on a written contract can be brought within ten (10) years from the time the
action accrues. On August 31, 1987, the trial court[5] rendered its decision.
The trial court sustained private respondents claim that the agreement in question was
one of sale and held that the latter had fully paid the price of the car having paid the total
amount of P61,070.94 aside from installing accessories in the car worth P15,000.00. Said
the trial court:

215
Plaintiff now comes claiming ownership of the car in question and has succeeded in
repossessing the same by virtue of the writ of seizure issued in this case on July 29,
1986. Not content with recovering possession of the said car, plaintiff still asks that
defendants should pay it the sum of P39,054.86, allegedly representing the rentals due on
the car from the time of the last payment made by defendants to its repossession
thereof. This is indeed a classic case of one having his cake and eating it too! Under the
Recto law (Arts. 1484 & 1485, Civil Code), the vendor who repossesses the goods sold on
installments, has no right to sue the vendee for the unpaid balance thereof.

The Court can take judicial notice of the practice wherein executives enjoy car plans in
progressive companies. The agreement of January 9, 1980 between the parties is one such
car plan. If defendant Rolando Lantan failed to keep up with his amortizations on the car
in question, it was not because of his own liking but rather he was pushed to it by
circumstances when his employer folded up and sent him to the streets. That plaintiff was
giving all the chance to defendants to pay the value of the car and acquire full ownership
thereof is shown by the delay in instituting the instant case. . . .

The court likewise found that the amount of P61,070.94 included a 2% penalty for late
payments for which there was no stipulation in the agreement:

. . . The agreement and defendant Rolando Lantans promissory note of January 9, 1980 do
not provide even for interest on the remaining balance of the purchase price of the car. This
privilege extended by corporations to their top executives is considered additional
emolument to them. And so the reason for the lack of provision for interest, much less
penalty charges. Therefore, all payments made by defendant should be applied to the
principal account. Since the principal was only P60,639.00, the defendants have made an
overpayment of P431.94 which should be returned to defendant by plaintiff.

For this reason, it ordered petitioner to pay private respondents the amount of P431.94 as
excess payment, as well as rentals at the rate of P1,000 a month for depriving private
respondents of the use of their car, and moral damages for the worry, embarrassment, and
mental torture suffered by them on account of the repossession of the car.
The dispositive portion of the trial courts decision reads as follows:

WHEREFORE, judgment is hereby rendered in favor of defendants and against plaintiff,

dismissing plaintiffs complaint; declaring defendants the lawful owners of that Colt Lancer
2-door, Model 1979 with Serial No. 3403 under Registration Certificate No. 0526558;
ordering plaintiff to deliver to defendants the aforesaid motor vehicle complete with all the
accessories installed therein by defendants; should for any reason plaintiff is unable to
deliver the said car to defendants, plaintiff is ordered to pay to defendants the value of said
car in the sum of P60,639.00 plus P15,000.00, the value of the accessories, plus interest of
12% on the said sums from August 6, 1986; and sentencing plaintiff to pay defendants the
following sums:

a) P12,431.94 as actual damages broken down as follows:

1) P431.94 overpayment made by defendants to plaintiff; and

2) P12,000.00 rental on the car in question from August 6, 1986 to August 5, 1987, plus
the sum of P1,000.00 a month beginning August 6, 1987 until the car is returned by plaintiff
to, and is received by, defendant;

b) the sum of P20,000.00 as moral damages;

216
c) the sum of P5,000.00 as exemplary damages; and

d) the sum of P5,000.00 as attorneys fees.

Costs against the plaintiff.

SO ORDERED.

Petitioner appealed to the Court of Appeals. On the other hand, private respondents
filed a motion for execution pending appeal. In its resolution of March 9, 1989, the Court
of Appeals granted private respondents motion and, upon the filing of a bond, in the amount
of P70,000.00, it issued a writ of execution, pursuant to which the car was delivered to
private respondents on April 16, 1989.[6]
On August 26, 1992, the Court of Appeals rendered its decision, affirming in toto the
decision of the trial court. Hence, the instant petition for review on certiorari.
Petitioner contends that the Court of Appeals erred -
(a) in disregarding the admission in the pleadings as to what documents contain
the terms of the parties agreement.
(b) in holding that the interest stipulation in respondents Promissory Note was not
valid and binding.
(c) in holding that respondents had fully paid their obligations.
It further argues that -

On the assumption that the Lease Agreement with option to buy in this case may be treated
as a sale on installments, the respondent Court of Appeals nonetheless erred in not finding
that the parties have validly agreed that the petitioner as seller may [i] cancel the contract
upon the respondents default on three or more installments, [ii] retake possession of the
personalty, and [iii] keep the rents already paid.

First. Petitioner does not deny that private respondent Rolando Lantan acquired the
vehicle in question under a car plan for executives of the Elizalde group of companies.
Under a typical car plan, the company advances the purchase price of a car to be paid back
by the employee through monthly deductions from his salary. The company retains
ownership of the motor vehicle until it shall have been fully paid for.[7] However, retention
of registration of the car in the companys name is only a form of a lien on the vehicle in
the event that the employee would abscond before he has fully paid for it. There are also
stipulations in car plan agreements to the effect that should the employment of the
employee concerned be terminated before all installments are fully paid, the vehicle will
be taken by the employer and all installments paid shall be considered rentals per
agreement.[8]
This Court has long been aware of the practice of vendors of personal property of
denominating a contract of sale on installment as one of lease to prevent the ownership of
the object of the sale from passing to the vendee until and unless the price is fully paid. As
this Court noted in Vda. de Jose v. Barrueco:[9]

Sellers desirous of making conditional sales of their goods, but who do not wish openly to
make a bargain in that form, for one reason or another, have frequently resorted to the
device of making contracts in the form of leases either with options to the buyer to purchase
for a small consideration at the end of term, provided the so-called rent has been duly paid,
or with stipulations that if the rent throughout the term is paid, title shall thereupon vest in
217
the lessee. It is obvious that such transactions are leases only in name. The so-called rent
must necessarily be regarded as payment of the price in installments since the due payment
of the agreed amount results, by the terms of the bargain, in the transfer of title to the lessee.

In an earlier case, Manila Gas Corporation v. Calupitan,[10] which involved a lease

agreement of a stove and a water heater, the Court said:

. . . [W]e are of the opinion, and so hold, that when in a so-called contract of lease of
personal property it is stipulated that the alleged lessee shall pay a certain amount upon
signing the contract, and on or before the 5th of every month, another specific amount, by
way of rental, giving the alleged lessee the right of option to buy the said personal property
before the expiration of the period of lease, which is the period necessary for the payment
of the said amount at the rate of so much a month, deducting the payments made by way
of advance and alleged monthly rentals, and the said alleged lessee makes the advance
payment and other monthly installments, noting in his account and in the receipts issued to
him that said payments are on account of the price of the personal property allegedly leased,
said contract is one of sale on installment and not of lease.[11]

In U.S. Commercial v. Halili,[12] a lease agreement was declared to be in fact a sale of

personal property by installment. Said the Court:[13]

. . . There can hardly be any question that the so-called contracts of lease on which the
present action is based were veritable leases of personal property with option to purchase,
and as such come within the purview of the above article [Art. 1454-A of the old Civil
Code on sale of personal property by installment]. In fact the instruments (exhibits `A and
`B) embodying the contracts bear the heading or title `Lease-Sale (Lease-Sale of
Transportation and/or Mechanical Equipment). The contracts fix the value of the vehicles
conveyed to the lessee and expressly refer to the remainder of said value after deduction of
the down payment made by the lessee as `the unpaid balance of the purchase price of the
leased equipment. The contracts also provide that upon the full value (plus stipulated
interest) being paid, the lease would terminate and title to the leased property would be
transferred to the lessee. Indeed, as the defendant-appellant points out, the inclusion of a
clause waiving benefit of article 1454-A of the old Civil Code is conclusive proof of the
parties understanding that they were entering into a lease contract with option to purchase
which come within the purview of said article.

Being leases of personal property with option to purchase as contemplated in the above
article, the contracts in question are subject to the provision that when the lessor in such
case has chosen to deprive the lessee of the enjoyment of such personal property, he shall
have no further action against the lessee for the recovery of any unpaid balance owing by
the latter, agreement to the contrary being null and void.

It was held that in choosing to deprive the defendant of possession of the leased
vehicles, the plaintiff waived its right to bring an action to recover unpaid rentals on the
said vehicles.
In the case at bar, although the agreement provides for the payment by private
respondents of monthly rentals, the fifth paragraph thereof gives them the option to
purchase the motor vehicle at the end of the 5th year or upon payment of the 60th monthly
rental when all monthly rentals shall be applied to the payment of the full purchase price
of the car. It is clear that the transaction in this case is a lease in name only. The so-called
monthly rentals are in truth monthly amortizations on the price of the car.

218
 Second. The contract being one of sale on installment, the Court of Appeals correctly
applied to it the following provisions of the Civil Code:

ART. 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendees failure to pay cover two or more
installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted,
should the vendees failure to pay cover two or more installments. In this case,
he shall have no further action against the purchaser to recover any unpaid
balance of the price. Any agreement to the contrary shall be void.

ART. 1485. The preceding article shall be applied to contracts purporting to be leases of
personal property with option to buy, when the lessor has deprived the lessee of the
possession or enjoyment of the thing.

The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise
of one bars the exercise of the others.[14] This limitation applies to contracts purporting to
be leases of personal property with option to buy by virtue of Art. 1485.[15] The condition
that the lessor has deprived the lessee of possession or enjoyment of the thing for the
purpose of applying Art. 1485 was fulfilled in this case by the filing by petitioner of the
complaint for replevin to recover possession of movable property. By virtue of the writ of
seizure issued by the trial court, the deputy sheriff seized the vehicle on August 6, 1986
and thereby deprived private respondents of its use.[16] The car was not returned to private
respondent until April 16, 1989, after two (2) years and eight (8) months, upon issuance by
the Court of Appeals of a writ of execution.[17]
Petitioner prayed that private respondents be made to pay the sum of P39,054.86, the
amount that they were supposed to pay as of May 1986, plus interest at the legal rate.[18] At
the same time, it prayed for the issuance of a writ of replevin or the delivery to it of the
motor vehicle complete with accessories and equipment.[19] In the event the car could not
be delivered to petitioner, it was prayed that private respondent Rolando Lantan be made
to pay petitioner the amount of P60,000.00, the estimated actual value of the car, plus
accrued monthly rentals thereof with interests at the rate of fourteen percent (14%) per
annum until fully paid.[20] This prayer of course cannot be granted, even assuming that
private respondents have defaulted in the payment of their obligation. This led the trial
court to say that petitioner wanted to eat its cake and have it too.
Notwithstanding this impossibility in petitioners choice of remedy, this case should be
considered as one for specific performance, pursuant to Art. 1484(1), consistent with its
prayer with respect to the unpaid installments as of May 1986. In this view, the prayer for
the issuance of a writ of replevin is only for the purpose of insuring specific performance
by private respondents.
Both the trial court and the Court of Appeals correctly ruled that private respondents
could no longer be held liable for the amounts of P39,054.86 or P60,000.00 because private
respondents had fulfilled their part of the obligation. The agreement does not provide for
the payment of interest on unpaid monthly rentals or installments because it was entered
into in pursuance of a car plan adopted by the company for the benefit of its deserving
employees. As the trial court correctly noted, the car plan was intended to give additional
benefits to executives of the Elizalde group of companies.

219
 Petitioner contends that the promissory note provides for such interest
payment. However, as the Court of Appeals held:

The promissory note in which the 2% monthly interest on delayed payments appears does
not form part of the contract. There is no consideration for the promissory note. There is
nothing to show that plaintiff advanced the purchase price of the vehicle for Lantan so as
to make the latter indebted to the former for the amount stated in the promissory note. Thus,
as stated in the complaint: That sometime in January, 1980, defendant Rolando Lantan
entered into an agreement with the plaintiff for the lease of a motor vehicle supplied by the
latter, with the option to purchase at the end of the period of lease . . . . In other words,
plaintiff did not buy the vehicle for Rolando Lantan, advancing the purchase price for that
purpose. There is nothing in the complaint or in the evidence to show such
arrangement. Therefore, there was no indebtedness secured by a promissory note to speak
of. There being no consideration for the promissory note, the same, including the penalty
clause contained thereon, has no binding effect.[21]

There is no evidence that private respondents received the amount of P60,639.00

indicated in the promissory note as its value. What was proven below is the fact that private
respondents received from petitioner the 2-door Colt Lancer car which was valued at
P60,000 and for which private respondent Rolando Lantan paid monthly amortizations of
P1,010.65 through salary deductions.
Indeed, as already stated, private respondents default in paying installments was due
to the cessation of operations of Elizalde Steel Corporation, petitioners sister
company. Petitioners acceptance of payments made by private respondents through cash
and checks could have been impelled solely by petitioners inability to deduct the
amortizations from private respondent Rolando Lantans salary which he stopped receiving
when his employment was terminated in September 1982. Apparently, to minimize the
adverse consequences of the termination of private respondents employment, petitioner
accepted even late payments. That petitioner accepted payments from private respondent
Rolando Lantan more than two (2) years after the latters employment had been terminated
constitutes a waiver of petitioners right to collect interest upon the delayed payments. The
2% surcharge is not provided for in the agreement. Its collection by the company would in
fact run counter to the purpose of providing added emoluments to its deserving
employees. Consequently, the total amount of P61,070.94 already paid to petitioner should
be considered payment of the full purchase price of the car or the total installments paid.
Third. Private respondents presented evidence that they felt bad, were worried,
embarrassed and mentally tortured by the repossession of the car.[22] This has not been
rebutted by petitioner.There is thus a factual basis for the award of moral damages. In
addition, petitioner acted in a wanton, fraudulent, reckless and oppressive manner in filing
the instant case, hence, the award of exemplary damages is justified.[23] The award of
attorneys fees is likewise proper considering that private respondents were compelled to
incur expenses to protect their rights.[24]
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with costs
against petitioner.
SO ORDERED.

220
G.R. No. L-11491 August 23, 1918

ANDRES QUIROGA, plaintiff-appellant,

vs.
PARSONS HARDWARE CO., defendant-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.

221
 (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

222
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
223
another kind; and for the letter Exhibit L-1, requested the plaintiff's prior consent with
respect to said beds, which shows that it was not considered that the defendant had a right,
by virtue of the contract, to make this return. As regards the shipment of beds without
previous notice, it is insinuated in the record that these brass beds were precisely the ones
so shipped, and that, for this very reason, the plaintiff agreed to their return. And with
respect to the so-called commissions, we have said that they merely constituted a discount
on the invoice price, and the reason for applying this benefit to the beds sold directly by
the plaintiff to persons in Iloilo was because, as the defendant obligated itself in the contract
to incur the expenses of advertisement of the plaintiff's beds, such sales were to be
considered as a result of that advertisement.

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

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

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

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

224
G.R. No. L-47538 June 20, 1941

GONZALO PUYAT & SONS, INC., petitioner,

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

LAUREL, J.:

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

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

In the year 1929, the "Teatro Arco", a corporation duly organized under the laws of
the Philippine Islands, with its office in Manila, was engaged in the business of
operating cinematographs. In 1930, its name was changed to Arco Amusement
Company. C. S. Salmon was the president, while A. B. Coulette was the business
manager. About the same time, Gonzalo Puyat & Sons, Inc., another corporation
doing business in the Philippine Islands, with office in Manila, in addition to its
other business, was acting as exclusive agents in the Philippines for the Starr Piano
Company of Richmond, Indiana, U.S. A. It would seem that this last company dealt
in cinematographer equipment and machinery, and the Arco Amusement Company
desiring to equipt its cinematograph with sound reproducing devices, approached
Gonzalo Puyat & Sons, Inc., thru its then president and acting manager, Gil Puyat,
and an employee named Santos. After some negotiations, it was agreed between the
parties, that is to say, Salmon and Coulette on one side, representing the plaintiff,
and Gil Puyat on the other, representing the defendant, that the latter would, on

225
 behalf of the plaintiff, order sound reproducing equipment from the Starr Piano
Company and that the plaintiff would pay the defendant, in addition to the price of
the equipment, a 10 per cent commission, plus all expenses, such as, freight,
insurance, banking charges, cables, etc. At the expense of the plaintiff, the defendant
sent a cable, Exhibit "3", to the Starr Piano Company, inquiring about the equipment
desired and making the said company to quote its price without discount. A reply
was received by Gonzalo Puyat & Sons, Inc., with the price, evidently the list price
of $1,700 f.o.b. factory Richmond, Indiana. The defendant did not show the plaintiff
the cable of inquiry nor the reply but merely informed the plaintiff of the price of
$1,700. Being agreeable to this price, the plaintiff, by means of Exhibit "1", which
is a letter signed by C. S. Salmon dated November 19, 1929, formally authorized
the order. The equipment arrived about the end of the year 1929, and upon delivery
of the same to the plaintiff and the presentation of necessary papers, the price of
$1.700, plus the 10 per cent commission agreed upon and plus all the expenses and
charges, was duly paid by the plaintiff to the defendant.

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

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

The trial court held that the contract between the petitioner and the respondent was one of
outright purchase and sale, and absolved that petitioner from the complaint. The appellate
court, however, — by a division of four, with one justice dissenting — held that the relation
between petitioner and respondent was that of agent and principal, the petitioner acting as
agent of the respondent in the purchase of the equipment in question, and sentenced the
petitioner to pay the respondent alleged overpayments in the total sum of $1,335.52 or
P2,671.04, together with legal interest thereon from the date of the filing of the complaint
until said amount is fully paid, as well as to pay the costs of the suit in both instances. The
appellate court further argued that even if the contract between the petitioner and the
respondent was one of purchase and sale, the petitioner was guilty of fraud in concealing
the true price and hence would still be liable to reimburse the respondent for the
overpayments made by the latter.
226
The petitioner now claims that the following errors have been incurred by the appellate
court:

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

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

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

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

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

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

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

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

227
While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten per cent (10%)
commission, this does not necessarily make the petitioner an agent of the respondent, as
this provision is only an additional price which the respondent bound itself to pay, and
which stipulation is not incompatible with the contract of purchase and sale.
(See Quiroga vs. Parsons Hardware Co., 38 Phil., 501.)

In the second place, to hold the petitioner an agent of the respondent in the purchase of
equipment and machinery from the Starr Piano Company of Richmond, Indiana, is
incompatible with the admitted fact that the petitioner is the exclusive agent of the same
company in the Philippines. It is out of the ordinary for one to be the agent of both the
vendor and the purchaser. The facts and circumstances indicated do not point to anything
but plain ordinary transaction where the respondent enters into a contract of purchase and
sale with the petitioner, the latter as exclusive agent of the Starr Piano Company in the
United States.

It follows that the petitioner as vendor is not bound to reimburse the respondent as vendee
for any difference between the cost price and the sales price which represents the profit
realized by the vendor out of the transaction. This is the very essence of commerce without
which merchants or middleman would not exist.

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

The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court
is accordingly reversed and the petitioner is absolved from the respondent's complaint in

228
G. R. No. 1023, entitled "Arco Amusement Company (formerly known as Teatro Arco),
plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc., defendants-appellee," without
pronouncement regarding costs. So ordered.

Avanceña, C.J., Diaz, Moran and Horrilleno, JJ., concur.

G.R. No. L-25926 February 27, 1970

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
CIRILO D. CONSTANTINO AND COURT OF TAX APPEALS, respondents.

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

Appeal from the decision of the Court of Tax Appeals, in its CTA Case No. 1016, holding
that the respondent, Cirilo D. Constantino, is not a commercial broker, as defined by
Section 194(t) of the National Internal Revenue Code, providing as follows:

"Commercial broker" includes all persons, other than importers,

manufacturers, producers, or bona fide employees, who, for compensation or
profit, sell or bring about sales or purchases of merchandise for other persons
or bring proposed buyers and sellers together, or negotiate freights or other
business for owners of vessels or other means of transportation, or for the
shippers, or consignors or consignees of freight carried by vessels or other
means of transportation. The term includes commission merchants.

and declaring him not liable to pay the commercial broker's percentage tax.

Petitioner Commissioner of Internal Revenue assessed against and demanded from

respondent Constantino the commercial broker's percentage tax of 6% on his gross
compensation for 1956, as dealer or distributor of the products of International Harvester,
Macleod, Inc. (IHM for short). The tax was computed as follows:

Total discount for 1956 P38,390.40

6% broker's percentage tax due thereon 2,303.4
25% surcharge 575.85
Compromise penalty 100.00

Total amount due and collection P2,979.25

Constantino protested the assessment on the ground that he is not a commercial broker. On
his protest being overruled, he filed a petition for review with the Court of Tax Appeals,

229
which, after trial, found for him. Upon his reversal by the tax court, the revenue
Commissioner interposed the present appeal.

The issue here is whether the relationship between IHM and the respondent is one of
principal and agent, as maintained by the Commissioner, or one of vendor and vendee, as
maintained by the respondent taxpayer.

Respondent Cirilo D. Constantino is a businessman with a business establishment in San

Pablo City known as "C. C. Motor Service", where he stores, displays and sells trucks,
machineries, equipment, spare parts and accessories shipped to him by International
Harvester, Macleod, Inc., (formerly International Harvester Company of the Philippines)
in accordance with their "Dealer Sales and Service Agreement", Exhibit "A", designating
the said respondent as exclusive dealer of the products of the company within a prescribed
territory. According to respondent's counsel, who is also the legal counsel and secretary of
the company, the company sells its products through its dealers for purposes of economy
and that since it may not be allowed to retail under the retail trade law, it sells by wholesale
to its dealers (T.s.n., pages 49, 52-53).

In classifying himself as an independent merchant instead of a commercial broker,

respondent Constantino cites the following facts: that under the "Dealer Sales and Service
Agreement" that he signed with IHM he may buy, on cash basis or credit terms, IHM
products, such as trucks, tractors, other types of machinery and equipment and spare parts
and accessories for Resale to his customers within his designated territory; that under a
"Schedule of Discounts and Terms", Exhibit "B", he is granted trade discounts of 16% for
trucks, tractors and other heavy equipment and 30% for service parts; that he is also given
a cash discount of 5% under certain conditions; that the terms and conditions on his credit
purchases are governed by a "Retail Financing Agreement", Exhibit "C"; that he may
purchase service parts on open credit account or on a 30-day term; and that he sold service
parts to his customers on cash basis (T.s.n., pages 9-10). He states that his purchases of
heavy equipment are commenced by his filing with the company a "Dealer Order for
Goods", Exhibit "G" (BIR Record, page 153, after Exhibit "B", as the numbering of pages
is inverted); if on credit, he executes a chattel mortgage in favor of IHM Exhibit "L"; and,
if he sells to his customer on credit, he requires said customer to execute also a chattel
mortgage in his favor and he (respondent Constantino) then executes an "Indenture of
Assignment", Exhibit "M-I," in favor of IHM.

Constantino also cites the fact that his purchases are covered by IHM's sales invoices, and
when he re-sells he issues his own sales invoice; that delivery of his purchases from IHM
are accepted by him "ex-bodega" in Manila, after which he services the heavy equipment
at his establishment in San Pablo before delivery to his customer (T.s.n., page 26) ; that has
credit purchases of trucks and other heavy equipment are insured by IHM and, in case, of
loss, the insurance proceeds belong to both in proportion to their interests, but the
premiums are for his own account; that he insures himself the goods that he purchases on
cash basis; and that at the end of each calendar year he includes in the inventory that he
submits to the Bureau of Internal Revenue unsold stocks that he had purchased from IHM.

Without considering the forms and documents that petitioner Commissioner of Internal
Revenue alluded to in his brief (forms and documents that were only annexed to his
memorandum submitted to the tax court and not formally offered in evidence) but
considering the entirety of respondent Constantino's own evidence, this Court is of the
opinion that, for taxation purposes, he is not an independent merchant but an agent of IHM
or a commercial broker, as defined by the tax code, selling or bringing about sales and
purchases of IHM's merchandise. A casual examination of respondent's evidence may give

230
the impression that this relationship with the company is that of vendor and vendee, but a
closer look into the actual legal effect of the terms and conditions embodied, rather than
the names of the contracts used or the terminologies employed, in the chain of
documents 1 shows that the relation between the company and the respondent is one of
principal and agent.

From his own evidence and statement of facts, if Constantino wishes to "buy" from IHM,
either on "cash basis" or on credit, he files a "Dealer Order for Goods", Exhibit "G". He
failed to state or notice, however, the condition in the said order, which is in small print,
that:

the title of the goods delivered under this order shall remain in International
Harvester Company of the Philippines until the full purchase price shall
have been paid in cash or acceptable security. Upon receipt of the subject
equipment, the undersigned agrees to execute a chattel mortgage or other
security instrument covering the goods ordered herein to secure the payment
therefor, and prior to full payment of the purchase price, the
undersigned shall have no right to sell or dispose of any goods delivered
under this order except in the ordinary course of retail trade for their
reasonable value, and upon the express condition that before delivery to a
Purchaser, the undersigned shall secure from the Purchaser full settlement,
and the proceeds of such resale, whether in cash, property or an obligation
of the Purchaser, shall be considered the property of International Harvester
Company of the Philippines, and shall be held in trust for the Company and
subject to its order. (Emphasis supplied)

In plain language, the effect of the afore-quoted condition is that the title to goods sold by
the Dealer to his "customer" passes directly to the latter from IHM and that the price of
such goods, even if previously shipped to the dealer upon his order, belongs to IHM not to
the dealer, who merely collects and holds the proceeds in trust. Hence, in the "Dealer Order
for Goods", the dealer does not make purchase orders; he merely orders for shipment to
himself the goods specified therein. And while in the "Dealer Sales and Service
Agreement" the contractual provisions on orders for goods refer or use terms like
"purchase", "obligation to sell" and "obligation to buy", the said Dealer Sales and Service
Agreement expressly binds the dealer, when ordering goods, to place his orders "upon
forms furnished by the Company" (Exhibit "A", page 4), and the form furnished is the
"Dealer Order for Goods", with the clause previously quoted.

Where the transaction between Constantino and his customer is on credit, Constantino
requires his customer to execute a chattel mortgage in his favor but then he must assign in
favor of IHM, by an "Indenture of Assignment", all his rights, interest and participation in
the goods theretofore mortgaged to himself for the same amount. When the goods are
delivered by IHM to the dealer, the dealer does not acquire ownership of the goods upon
such delivery; and when the dealer "sells" the goods to his customer, the customer does not
acquire ownership thereof upon such "sale", because the "Dealer Order for Goods"
expressly stipulates that "title of the goods delivered under this order shall remain until the
purchase price shall have been paid ... ." And the fact that the customer is made to execute
a chattel mortgage does not make him the owner, because when the goods were "sold" to
him by the dealer the latter did not own the goods. That the dealer should issue his own
sales invoice to the customer is neither a means of acquiring ownership nor is it proof of
ownership.

231
In the "Retail Financing Agreement" that the dealer enters into with the company, when he
"buys" goods on credit for "resale" to customers, the dealer does not "buy" with his own
funds, as the agreement expressly prohibits him from advancing the down payment and
any installment to his customer, and when he "sells" to his customer, the "retail contract"
a well as the customer's credit is subject to approval by the company (Exhibit "C", page 3,
paragraph 4). The effect of such an arrangement is that it is the very customer who buys on
credit because the purchase money comes from him, not the dealer, and the credit that is
financed is the credit of the customer, not that of the dealer.

If the transaction is on "cash basis", a procedure similar to transactions on credit is

followed; the dealer orders specific goods for shipment to himself by filing the "Dealer
Order for Goods"; if his order is accepted by the company, the company ships the goods
and issues a delivery receipt (Exhibit "D"), not a cash invoice, as the respondent contends
in his brief. Under such a delivery receipt, the goods are termed "Sold to Mr. Cirilo D.
Constantino" for "Cash"; but the same receipt also indicates that it is for the supposed
vendee's "order", obviously referring to the "Dealer Order for Goods", and that the
shipment is "Due and payable first day of month following shipment". It is, therefore, clear
that even when the company ships the goods to the dealer on a supposed "cash basis" it is
payable in cash but it does not prove that cash or money was paid ... payment is not yet due
cash or money was paid — payment is not yet due — and that the company shipped the
goods but retained ownership of the same, in accordance with the "order."

Since the company retained ownership of the goods, even as it delivered possession unto
the dealer for resale to customers, the price and terms of which were subject to the
company's control, the relationship between the company and the dealer is one of agency,
tested under the following criterion:

The difficulty in distinguishing between contracts of sale and the creation of

an agency to sell has led to the establishment of rules by the application of
which this difficulty may be solved. The decisions say the transfer of title or
agreement to transfer it for a price paid or promised is the essence of sale. If
such transfer puts the transferee in the attitude or position of an owner and
makes him liable to the transferor as a debtor for the agreed price, and not
merely as an agent who must account for the proceeds of a resale, the
transaction is a sale; while the essence of an agency to sell is the delivery to
an agent, not as his property, but as the property of the principal, who remains
the owner and has the right to control sales, fix the price, and terms, demand
and receive the proceeds less the agent's commission upon sales made. 1
Mechem on Sales, Sec. 43; 1 Mechem on Agency, Sec. 48; Williston on
Sales, 1; Tiedeman on Sales, 1. (Salisbury v. Brooks, 94 SE 117, 118-119)

It is contended that the respondent is not an agent of IHM because their "Dealer Sales and
Service Agreement" expressly provide that he "is not the Company's agent in any respect
... ", but the control by the company of the resale made (or agreed upon to be made) by the
dealer is so pervasive as to exclude the idea of the latter being an independent merchant.
The extent of his dependence upon and control by the company is shown in the provisions
of the "Dealer Sales, and Service Agreement":

An order for goods by the dealer "shall not be considered as accepted until written
acceptance ... is given to the Dealer, or delivery has been made to the Dealer ... ." "Prices,
discounts and terms ... shall be those established by the Company ..." which are "subject to
change at any time without notice." Places of delivery "shall be those established by the
Company ..." and the dealer "will accept delivery at points of delivery selected by the

232
Company and pay all transportation charges thereon ... ." "Prior to full payment of the
purchase price to the Company, the Dealer shall have no right to sell or dispose of any
goods ... without first securing the written approval of the Company." At any reasonable
time, the company may enter the dealer's premises "to examine his books and records ... ."
The dealer is bound "to provide and maintain adequate physical facilities acceptable to the
Company ... ." He it agrees to maintain accounting records", "to furnish monthly operating
statements" and "a complete detailed financial statement." He "Shall properly store and
care for all goods purchased ... and protect the same from injury or damage from any
cause." The quantity of goods alloted to the dealer "shall be determined solely by the
Company." "The dealer agrees, in reselling goods ... to enter into a Sales Contract with
each customer on one of the current printed blank forms furnished by the Company for that
purpose and to give no different or additional allowances, warranties or guaranties on
behalf of the Company beyond those included in the Sales Contract." The agreement "may
be terminated at any time by either party without cause ..." and since "this is a personal
agreement, it shall automatically terminate upon the death of the Dealer." The agreement
involves "mutual confidence and trust, and it may not be assigned by either party." Now,
to insure "the faithful performance on the Dealer's part of the conditions of this agreement,"
the dealer is required to put up a bond, which is in the amount of P30,000.00.

As respondent is not an independent merchant, but an agent, the discount of 16% that he
receives is not a "trade discount" but a compensation or profit for selling or bringing about
sales or purchases of merchandise for the company.

The assessment made by petitioner Commissioner of Internal Revenue against respondent

Constantino does not include the 30% discount that the respondent is entitled to or
benefited from his sales of service parts; even so, the sales of or transactions on service
parts is covered by stipulations between the company and the respondent different from
those on heavy machineries or big items; for these reasons, it is unnecessary to pass upon
the taxability of said 30% discount.

FOR THE FOREGOING REASONS, the appealed decision is hereby reversed, and
another one entered affirming the assessment and ordering the respondent to pay the same,
with costs against the respondent.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo

and Villamor, JJ., concur.

233
G.R. No. L-20871 April 30, 1971

KER & CO., LTD., petitioner,

vs.
JOSE B. LINGAD, as Acting Commissioner of Internal Revenue, respondent.

FERNANDO, J.:

Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals,
holding it liable as a commercial broker under Section 194 (t) of the National Internal
Revenue Code. Its plea, notwithstanding the vigorous effort of its counsel, is not
sufficiently persuasive. An obstacle, well-nigh insuperable stands in the way. The decision
under review conforms to and is in accordance with the controlling doctrine announced in
the recent case of Commissioner of Internal Revenue v. Constantino. 1 The decisive test, as
therein set forth, is the retention of the ownership of the goods delivered to the possession
of the dealer, like herein petitioner, for resale to customers, the price and terms remaining
subject to the control of the firm consigning such goods. The facts, as found by respondent
Court, to which we defer, unmistakably indicate that such a situation does exist. The
juridical consequences must inevitably follow. We affirm.

It was shown that petitioner was assessed by the then Commissioner of Internal Revenue
Melecio R. Domingo the sum of P20,272.33 as the commercial broker's percentage tax,
surcharge, and compromise penalty for the period from July 1, 1949 to December 31, 1953.
There was a request on the part of petitioner for the cancellation of such assessment, which
request was turned down. As a result, it filed a petition for review with the Court of Tax
Appeals. In its answer, the then Commissioner Domingo maintained his stand that
petitioner should be taxed in such amount as a commercial broker. In the decision now
under review, promulgated on October 19, 1962, the Court of Tax Appeals held petitioner
taxable except as to the compromise penalty of P500.00, the amount due from it being fixed
at P19,772.33.

Such liability arose from a contract of petitioner with the United States Rubber
International, the former being referred to as the Distributor and the latter specifically
designated as the Company. The contract was to apply to transactions between the former
and petitioner, as Distributor, from July 1, 1948 to continue in force until terminated by
either party giving to the other sixty days' notice. 2 The shipments would cover products
"for consumption in Cebu, Bohol, Leyte, Samar, Jolo, Negros Oriental, and Mindanao

234
except [the] province of Davao", petitioner, as Distributor, being precluded from disposing
such products elsewhere than in the above places unless written consent would first be
obtained from the Company. 3 Petitioner, as Distributor, is required to exert every effort to
have the shipment of the products in the maximum quantity and to promote in every way
the sale thereof. 4 The prices, discounts, terms of payment, terms of delivery and other
conditions of sale were subject to change in the discretion of the Company. 5

Then came this crucial stipulation: "The Company shall from time to time consign to the
Distributor and the Distributor will receive, accept and/or hold upon consignment the
products specified under the terms of this agreement in such quantities as in the judgment
of the Company may be necessary for the successful solicitation and maintenance of
business in the territory, and the Distributor agrees that responsibility for the final sole of
all goods delivered shall rest with him. All goods on consignment shall remain the property
of the Company until sold by the Distributor to the purchaser or purchasers, but all sales
made by the Distributor shall be in his name, in which the sale price of all goods sold less
the discount given to the Distributor by the Company in accordance with the provision of
paragraph 13 of this agreement, whether or not such sale price shall have been collected by
the Distributor from the purchaser or purchasers, shall immediately be paid and remitted
by the Distributor to the Company. It is further agreed that this agreement does not
constitute Distributor the agent or legal representative 4 of the Company for any purpose
whatsoever. Distributor is not granted any right or authority to assume or to create any
obligation or responsibility, express or implied, in behalf of or in the name of the Company,
or to bind the Company in any manner or thing whatsoever." 6

All specifications for the goods ordered were subject to acceptance by the Company with
petitioner, as Distributor, required to accept such goods shipped as well as to clear the same
through customs and to arrange for delivery in its warehouse in Cebu City. Moreover,
orders are to be filled in whole or in part from the stocks carried by the Company's
neighboring branches, subsidiaries or other sources of Company's brands. 7 Shipments
were to be invoiced at prices to be agreed upon, with the customs duties being paid by
petitioner, as Distributor, for account of the Company. 8 Moreover, all resale prices, lists,
discounts and general terms and conditions of local resale were to be subject to the approval
of the Company and to change from time to time in its discretion. 9 The dealer, as
Distributor, is allowed a discount of ten percent on the net amount of sales of merchandise
made under such agreement. 10 On a date to be determined by the Company, the petitioner,
as Distributor, was required to report to it data showing in detail all sales during the month
immediately preceding, specifying therein the quantities, sizes and types together with such
information as may be required for accounting purposes, with the Company rendering an
invoice on sales as described to be dated as of the date of inventory and sales report. As
Distributor, petitioner had to make payment on such invoice or invoices on due date with
the Company being privileged at its option to terminate and cancel the agreement forthwith
upon the failure to comply with this obligation. 11 The Company, at its own expense, was
to keep the consigned stock fully insured against loss or damage by fire or as a result of
fire, the policy of such insurance to be payable to it in the event of loss. Petitioner, as
Distributor, assumed full responsibility with reference to the stock and its safety at all
times; and upon request of the Company at any time, it was to render inventory of the
existing stock which could be subject to change. 12 There was furthermore this equally tell-
tale covenant: "Upon the termination or any cancellation of this agreement all goods held
on consignment shall be held by the Distributor for the account of the Company, without
expense to the Company, until such time as provision can be made by the Company for
disposition." 13

235
The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus
created is one of vendor and vendee or of broker and principal. Not that there would have
been the slightest doubt were it not for the categorical denial in the contract that petitioner
was not constituted as "the agent or legal representative of the Company for any purpose
whatsoever." It would be, however, to impart to such an express disclaimer a meaning it
should not possess to ignore what is manifestly the role assigned to petitioner considering
the instrument as a whole. That would be to lose sight altogether of what has been agreed
upon. The Court of Tax Appeals was not misled in the language of the decision now on
appeal: "That the petitioner Ker & Co., Ltd. is, by contractual stipulation, an agent of U.S.
Rubber International is borne out by the facts that petitioner can dispose of the products of
the Company only to certain persons or entities and within stipulated limits, unless
excepted by the contract or by the Rubber Company (Par. 2); that it merely receives,
accepts and/or holds upon consignment the products, which remain properties of the latter
company (Par. 8); that every effort shall be made by petitioner to promote in every way the
sale of the products (Par. 3); that sales made by petitioner are subject to approval by the
company (Par. 12); that on dates determined by the rubber company, petitioner shall render
a detailed report showing sales during the month (Par. 14); that the rubber company shall
invoice the sales as of the dates of inventory and sales report (Par. 14); that the rubber
company agrees to keep the consigned goods fully insured under insurance policies payable
to it in case of loss (Par. 15); that upon request of the rubber company at any time, petitioner
shall render an inventory of the existing stock which may be checked by an authorized
representative of the former (Par. 15); and that upon termination or cancellation of the
Agreement, all goods held on consignment shall be held by petitioner for the account of
the rubber company until their disposition is provided for by the latter (Par. 19). All these
circumstances are irreconcilably antagonistic to the idea of an independent
merchant." 14 Hence its conclusion: "However, upon analysis of the contract, as a whole,
together with the actual conduct of the parties in respect thereto, we have arrived at the
conclusion that the relationship between them is one of brokerage or agency." 15 We find
ourselves in agreement, notwithstanding the able brief filed on behalf of petitioner by its
counsel. As noted at the outset, we cannot heed petitioner's plea for reversal.

1. According to the National Internal Revenue Code, a commercial broker "includes all
persons, other than importers, manufacturers, producers, or bona fide employees, who, for
compensation or profit, sell or bring about sales or purchases of merchandise for other
persons or bring proposed buyers and sellers together, or negotiate freights or other
business for owners of vessels or other means of transportation, or for the shippers, or
consignors or consignees of freight carried by vessels or other means of transportation. The
term includes commission merchants." 16 The controlling decision as to the test to be
followed as to who falls within the above definition of a commercial broker is that
of Commissioner of Internal Revenue v. Constantino. 17 In the language of Justice J. B. L.
Reyes, who penned the opinion: "Since the company retained ownership of the goods, even
as it delivered possession unto the dealer for resale to customers, the price and terms of
which were subject to the company's control, the relationship between the company and
the dealer is one of agency, ... ." 18 An excerpt from Salisbury v. Brooks 19 cited in support
of such a view follows: " 'The difficulty in distinguishing between contracts of sale and the
creation of an agency to sell has led to the establishment of rules by the application of
which this difficulty may be solved. The decisions say the transfer of title or agreement to
transfer it for a price paid or promised is the essence of sale. If such transfer puts the
transferee in the attitude or position of an owner and makes him liable to the transferor as
a debtor for the agreed price, and not merely as an agent who must account for the proceeds
of a resale, the transaction is a sale; while the essence of an agency to sell is the delivery
to an agent, not as his property, but as the property of the principal, who remains the owner
and has the right to control sales, fix the price, and terms, demand and receive the proceeds
236
less the agent's commission upon sales made.' " 20 The opinion relied on the work of
Mechem on Sales as well as Mechem on Agency. Williston and Tiedman both of whom
wrote treatises on Sales, were likewise referred to.

Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or
appreciate the necessity or presence of these mutual requirements and obligations on any
theory other than that of a contract of agency. Salisbury was to furnish the mill and put the
timber owned by him into a marketable condition in the form of lumber; Brooks was to
furnish the funds necessary for that purpose, sell the manufactured product, and account
therefor to Salisbury upon the specific terms of the agreement, less the compensation fixed
by the parties in lieu of interest on the money advanced and for services as agent. These
requirements and stipulations are in tent with any other conception of the contract. If it
constitutes an agreement to sell, they are meaningless. But they cannot be ignored. They
were placed there for some purpose, doubtless as the result of definite antecedent
negotiations therefore, consummated by the final written expression of the
agreement." 21 Hence the Constantino opinion could categorically affirm that the mere
disclaimer in a contract that an entity like petitioner is not "the agent or legal representative
for any purpose whatsoever" does not suffice to yield the conclusion that it is an
independent merchant if the control over the goods for resale of the goods consigned is
pervasive in character. The Court of Tax Appeals decision now under review pays fealty
to such an applicable doctrine.

2. No merit therefore attaches to the first error imputed by petitioner to the Court of Tax
Appeals. Neither did such Court fail to appreciate in its true significance the act and
conduct pursued in the implementation of the contract by both the United States Rubber
International and petitioner, as was contended in the second assignment of error. Petitioner
ought to have been aware that there was no need for such an inquiry. The terms of the
contract, as noted, speak quite clearly. There is lacking that degree of ambiguity sufficient
to give rise to serious doubt as to what was contemplated by the parties. A reading thereof
discloses that the relationship arising therefrom was not one of seller and purchaser. If it
were thus intended, then it would not have included covenants which in their totality would
negate the concept of a firm acquiring as vendee goods from another. Instead, the
stipulations were so worded as to lead to no other conclusion than that the control by the
United States Rubber International over the goods in question is, in the language of the
Constantino opinion, "pervasive". The insistence on a relationship opposed to that apparent
from the language employed might even yield the impression that such a mode of
construction was resorted to in order that the applicability of a taxing statute might be
rendered nugatory. Certainly, such a result is to be avoided.

Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax Appeals
which has developed an expertise in view of its function being limited solely to the
interpretation of revenue laws, this Court is not prepared to substitute its own judgment
unless a grave abuse of discretion is manifest. It would be to frustrate the objective for
which administrative tribunals are created if the judiciary, absent such a showing, is to
ignore their appraisal on a matter that forms the staple of their specialized competence.
While it is to be admitted that counsel for petitioner did scrutinize with care the decision
under review with a view to exposing what was considered its flaws, it cannot be said that
there was such a failure to apply what the law commands as to call for its reversal. Instead,
what cannot be denied is that the Court of Tax Appeals reached a result to which the Court
in the recent Constantino decision gave the imprimatur of its approval.

WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With
costs against petitioner.

237
G.R. No. L-16691 July 31, 1963

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
RAMCAR, INC., respondent.

BARRERA, J.:

This is an appeal by the Commissioner of Internal Revenue from the decision of the Court
of Tax Appeals (in CTA Case No. 175), ordering the withdrawal and cancellation of the
deficiency percentage sales tax assessment against RAMCAR, Inc., during the period of
from 1953 to the first quarter of 1954, in the total sum of P19,592.93. The facts of the case
may be briefly stated, thus:

Ramcar, Inc., a domestic corporation organized for and engaged in the importation,
manufacturing, selling and dealing of automobiles, trucks and spare parts, had a contract
with Rootes Limited of London, wherein the former agreed to assemble and sell locally for
the latter "Hillman Minx" automobiles. On February 1, 1953, Ramcar, Inc., in turn entered
into a contract with Henderson Trippe (Phil.) Inc., another domestic corporation, whereby
the latter was designated the exclusive distributor of Hillman Minx automobiles in the
Philippines. Pertinent provisions of said agreement are reproduced hereunder, to wit:

AGREEMENT

. . . . WHEREAS, the Company (RAMCAR, Inc.) has granted to the

DISTRIBUTOR (Henderson Trippe, Inc.) the exclusive distribution in the
Philippines of the Hillman Minx Cars, assembled by the COMPANY in the
Philippines, and whereas the DISTRIBUTOR will take delivery of all Hillman Minx
cars assembled here, and has accepted and agreed to establish and properly maintain
Show Room, Sales Force, Agencies, or branches for the adequate distribution of the
said Hillman Minx cars in the Philippines. NOW IT IS HEREBY AGREED
between the parties hereto as follows:

xxx xxx xxx

CLAUSE 2. TERRITORY .

xxx xxx xxx

238
 The COMPANY reserves the right to withdraw, by giving two months' notice, any
part of the DISTRIBUTOR'S territory, if in their judgment the DISTRIBUTOR fails
to maintain satisfactory representation therein, and on expiration of such notice and
rights of the DISTRIBUTOR hereunder shall cease as regards the territory or the
part thereof to which the notice relates.

xxx xxx xxx

CLAUSE 4. PRICES AND DISCOUNTS.

The COMPANY shall invoice the vehicles to the DISTRIBUTOR at least wholesale
price established from time to time and prevailing at the time of delivery, and
nothing in this AGREEMENT shall entitle the DISTRIBUTOR to any discount,
rebate or other deduction from such price.

xxx xxx xxx

"CLAUSE 5. TERMS OF PAYMENT.

"The COMPANY agrees to deliver to the DISTRIBUTOR twelve (12) fully

assembled vehicles per month, and the DISTRIBUTOR shall pay the COMPANY
for twelve (12) vehicles per month CASH ON DELIVERY, and shall take delivery
as said vehicles are assembled by the COMPANY, should it be mutually agreed by
both the DISTRIBUTOR and the COMPANY that the DISTRIBUTOR shall take
deliver of more than twelve (12) vehicles per month, such agreement in letter form
shall be sufficient.

xxx xxx xxx

CLAUSE 7. REPAIR AND MAINTENANCE SERVICE.

It is also agreed that the COMPANY will perform any repair or maintenance service
which may be required on the Hillman Minx cars and on the products of ROOTES
GROUP OF COMPANIES, at charges which are fair and reasonable.

xxx xxx xxx

CLAUSE 8. POLICY .

a.) The COMPANY reserves the option and the right to keep and dispose at his
convenience one (1) Hillman Minx car for every twelve (12) assembled.

xxx xxx xxx

Pursuant to the above agreement, for the period of from the first quarter of 1953 to the first
quarter of 1954, RAMCAR sold to Henderson Trippe twenty locally assembled Hillman
Minx automobiles at the wholesale price of P4,950.00 per unit. The latter, in turn, sold the
said cars to third parties at prices ranging from P5,670.00 to P6,300.00 per unit.

For these transactions with Henderson Trippe, (RAMCAR paid tax at the rate of thirty per
centum (30%)of the wholesale price of P4,950.00 per unit, in accordance with Section
184(a) of the National International Revenue Code. The Collector of Internal Revenue,
however, ruling, after investigation, that Henderson Trippe acted merely as agent of

239
RAMCAR, assessed and demanded of the latter of deficiency sales tax, based on 50% of
the gross sales at from P5,670.00 to P6,300.00 per unit, the selling price paid by the
ultimate buyers, in the total sum of P18,592.93 exclusive of the compromise penalty of
P1,000.00. RAMCAR's petition for reconsideration of said assessment having been denied,
the matter was appealed to the Court of Tax Appeals.

After due hearing, the Tax Court rendered a decision, as already stated, ordering the
cancellation and withdrawal of the disputed assessment, for the reason that the contract
between RAMCAR and Henderson Trippe being one of sale, and not of agency as claimed
by the Commissioner of Internal Revenue, the percentage sales tax due from said taxpayer
should be based on the wholesale price given to Henderson Trippe and not on the buying
price paid by the ultimate purchasers. It is from this decision that the Commissioner of
Internal Revenue interposed this appeal by way of a petition for certiorari. Petitioner
claims in this instance that the agreement between RAMCAR and Henderson Trippe, Inc.,
is actually one of agency and not of purchase and sale. To this end, he points to RAMCAR's
failure to deliver a certain number of cars a month; the appointment of other distributors in
Iloilo and Baguio City; the failure of Henderson-Trippe, to maintain a show room; the fact
that although in the receipts and sales invoices the cars appeared to have been sold by
Henderson-Trippe, the same were actually delivered by respondent RAMCAR direct to the
ultimate buyers; that payments or deposits on account of the cars were made by the ultimate
buyers direct to respondent RAMCAR; that the dates of the alleged sales by respondent to
Henderson-Trippe of the cars in question are the same as the dates of the alleged sales of
the same cars by Henderson-Trippe to the ultimate buyers. It is thus contended, that the
percentage tax should have been imposable on the buying price of the third parties (which
would be 50% thereof, said buying price being in excess of P5,000.00).1äwphï1.ñët

Even considering the foregoing contentions of petitioner, it is clear that the issue in this
case hinges on the determination of the nature of the contract or agreement between
RAMCAR and Henderson-Trippe. Taking into account the terms and conditions of the
aforesaid contract, reproduced at the start of this opinion, and the explanation given by
respondent which was satisfactory to the Tax Court, we also find no reason to disturb the
ruling made therein. For instance, with respect to respondent's failure to deliver 12 cars a
month, this was explained to have been caused by the imposition of controls by the Central
Bank on certain importation. Non-compliance of this term of the agreement on this point
was therefore due to reasons beyond the control of the parties. As to the alleged direct
deliveries of the cars made by RAMCAR to the ultimate buyers, what actually occurred
was that because of the inability of Henderson-Trippe to put up its own show-room after
the execution of the distribution contract, the parties had a temporary arrangement by
which the cars purchased by Henderson Trippe were displayed in the showroom of
respondent. Consequently, the direct buyers of Henderson-Trippe had to take place for only
six months. Mention was made, too, of the receipt by RAMCAR of some deposits made
by the ultimate buyers. This, again, was satisfactorily explained by respondent by showing
that said deposits were made in 4 of the 20 transactions involved herein, and effected under
special circumstances, because the buyers happened to be friends of Mr. Ramon Caro. The
fact that 2 other distributors were appointed in Iloilo and Baguio City is not a violation of
the contract, because it was made in the exercise of respondent's right to withdraw from
the distributor's territory any part thereof under conditions authorized by Clause 2 of the
same contract hereinabove quoted. As heretofore stated, these explanations were found
satisfactory by the Tax Court and insufficient to justify the conclusion that the agreement
in question which is one of purchase and sale was a mere subterfuge to avoid payment of
higher taxes. And, we find no valid reason to disturb such ruling.

WHEREFORE, the decision appealed from is hereby affirmed, without costs. So ordered.
240
G.R. No. L-2870 September 19, 1950

CHUA NGO, plaintiff-appellee,

vs.
UNIVERSAL TRADING CO., INC., defendant-appellant.

BENGZON, J.:

Chua Ngo delivered, in Manila, to the Universal Trading Company, Inc., a local
corporation, the price 300 boxes of Sunkist oranges to be gotten from the United States.
The latter ordered the said boxes from Gabuardi Company of San Francisco, and in due
course, the goods were shipped from that port to Manila "F. O. B. San Francisco." One
hundred eighty boxes were lost in transit, and were never delivered to Chua Ngo.

This suit by Chua Ngo is to recover the corresponding price he had paid in advance.

Universal Trading Company refused to pay, alleging it merely acted as agent of Chua Ngo
in purchasing the oranges. Chua Ngo maintains he bought the oranges from Universal
Trading Company, and, therefore, is entitled to the return of the price corresponding to the
undelivered fruit.

From a judgment for plaintiff, the defendant appealed.

It appears that on January 14, 1946, the herein litigants signed the document Exhibit 1,
which reads as follows:

UNIVERSAL TRADING COMPANY, INC.

Far Eastern Division
R-236-238 Ayala Building
Juan Luna, Manila

CONTRACT NO. 632 14 January 1946

Agreement is hereby made between Messrs. Chua Ngo of 753 Folgueras, Manila,
and the Universal Trading Company, Inc., Manila, for order as follows and under
the following terms:

Quantity Merchandise and description Unit Unit price Amount

300 Sunkist oranges, wrapped
Grade No. 1 .................... .......... ................ .................
Navel, 220 to case ............ Case $6.30 $1,890.00
300 Onions, Australian
Browns, 90 lbs. to case Case $6.82 $2,046.00

We are advised by the supplier that the charges to bring these goods to Manila are:

241
 Oranges......................................................... $3.06
per
case
Onions $1.83
........................................................... per
case.

Deposit of 40% of the contract price plus the above charges to be payable
immediately upon receipt of telegraphic confirmation. Balance payable upon arrival
of goods in Manila. If balance is not paid within 48 hours of notification
merchandise may be resold by Universal Trading Co., Inc. and the deposit forfeited.

NOTE: —

Onions canceled by supplier.

(Initialed) R. E. H.

Total amount of order .................................................................................. $3,936

Agreed and accepted:

(Sgd.) CHUA NGO

Confirmed and approved:

(Sgd.) RALPH E. HOLMES

Sales manager

Universal Trading Company, Inc.

(See terms of agreement on reverse side.)

On the same date, the defendant forwarded and order to Gabuardi Company of San
Francisco, U. S. A., which in part says:

ORDER NO. 707

TO GABUARDI COMPANY OF CALIFORNIA

258 Market Street
San Francisco, California

Please send for our account, subject to conditions on the back of this order, the
following merchandise enumerated below:

Shipping instructions
Via San Francisco, California

Terms: F. O. B.
San Francisco

Quantity Articles Unit Unit price Total price

300 Sunkist oranges wrapped

242
 Grade No 1 ............... ............ ..........
Navel, 220 to case ...... Case $6.00 $1,800.00.

xxx xxx xxx

Approved:

Universal Trading Company, Inc.

(Sgd.) RALPH R. HOLMES
Sales Manager

xxx xxx xxx

On January 16 and January 19, 1946, the Universal Trading Co., Inc., wrote Chua Ngo
two letters informing him that the contract for oranges (and onions) had been confirmed
by the supplier — i. e., could be fulfilled — and asking for deposit of 65% of the price
and certain additional charges.

On January 21, 1946, Chua Ngo deposited with the defendant, on account of the Sunkist
oranges, the amount of P3,650, and later (March 9, 1946), delivered the additional sum of
P2,822.43 to complete the price, as follows:

300 cases of oranges at P6,616.00

$9.36..................................
Bank charges 196.56
................................................................
Custom charges, etc. 270.00
..................................................
Delivery charges 171.00
..........................................................
3 ½ percent sales tax 218.00
...................................................
P6,253.56
Less deposit R. No. 1062 3,650.00
................
P2,822,43
=========

The 300 cases of oranges ordered by the defendant from Gabuardi Company were loaded
in good condition on board the S/S Silversandal in the port of San Francisco, together
with other oranges (totaling 6,380 cases) for other customers. They were all marked
"UTC Manila" and were consigned to defendant. The Silversandal arrived at the port of
Manila on March 7, 1946. And out of the 6,380 boxes of oranges, 607 cases were short
short landed for causes beyond defendant's control. Consequently, defendant failed to
deliver to Chua Ngo 180 cases of the 300 cases contracted for. The total cost of such 180
cases (received by defendant) is admittedly P3,882.60.

243
The above are the main facts according to the stipulation of the parties. Uncontradicted
additional evidence was introduced that the mark "UTC Manila" written on all the boxes
means "Universal Trading Company, Manila"; that the defendant paid in its own name to
Gabuardi Company the shipment of oranges, and made claims for the lost oranges to the
steamship company that insured the shipment company and the insurance company that
insured the shipment; and finally, that in the transaction between plaintiff and defendant,
the latter received no commission.

The crucial question is: Did Universal Trading Company merely agree to buy for and on
behalf of Chua Ngo the 300 boxes of oranges, or did it agree to sell — and sold — the
oranges to Chua Ngo? If the first, the judgment m ust be reversed; if the latter, it should be
affirmed.

In our opinion, the circumstances of record sufficiently indicate a sale. First, no

commission was paid. Second, Exhibit 1 says that "if balance is not paid within 48 hours
of notification, merchandise may be resold by the Universal Trading Company and the
deposit forfeited." "Resold" implies the goods had been sold to Chua Ngo. And forfeiture
of the deposit is incompatible with a contract of agency. Third, immediately after executing
Exhibit 1 wherein oranges were quoted at $6.30 per box, Universal Trading placed an order
for purchase of the same with Gabuardi Company at $6 per box. If Universal Trading
Gabuardi Company was agent of Chua Ngo, it could not properly do that. Inasmuch as
good faith is to be presumed, we must hold that Universal Trading acted thus because it
was not acting as agent of Chua Ngo, but as independent purchaser from Gabuardi
Company. Fourth, the defendant charged the plaintiff the sum of P218.87 for 3 ½ percent
sales tax, thereby implying that their transaction was a sale. Fifth, if the purchase of the
oranges had been made on behalf of Chua Ngo, all claims for losses thereof against the
insurance company and against the shipping company should have been assigned to Chua
Ngo. Instead, the defendant has been pressing such claims for itself.

In our opinion, the arrangement between the parties was this: Chua Ngo purchased from
Universal Trading Company, 300 boxes of oranges at $6.30 plus. In turn, the latter
purchased from Gabuardi Company at $6 plus, sufficient fruit to comply with its contract
with Chua Ngo.

Unfortunately, however, part of the orange consignment from San Francisco was lost in
transit. Who is to suffer that loss? Naturally, whoever was the owner of the oranges at the
time of such loss. It could not be Chua Ngo because the fruit had not been delivered to him.
As between Gabuardi and the Universal Trading, inasmuch as the goods had been sold "F.
O. B. San Francisco", the loss must be borne by the latter, because under the law, said
goods had been delivered to the purchaser at San Francisco on board the vessel
Silversandal.1 That is why the Universal has been trying to recover the loss from both the
steamship company and the insurer.

Now, as Chua Ngo has paid for 300 boxes and has received 120 boxes only, the price of
180 boxes undelivered must be paid back to him.

It appears that whereas in the lower court defendant sustained the theory that it acted as
agent of plaintiff, in this Court the additional theory is advanced that it acted as agent of
Gabuardi Company. This obviously has no merit.

As to the contention that defendant incurred no liability because it is admitted that the
oranges were lost due to causes beyond the control of the defendant, and the oranges were
shipped "F. O. B. San Francisco, the answer is that such contention is based on the

244
assumption — which we reject — that defendant merely acted as agent of plaintiff in the
purchase of the oranges from Gabuardi.

In view of the foregoing, the appealed judgment for plaintiff in the sum of P3,882.60 is
affirmed with costs.

[G.R. No. L-7144. May 31, 1955.]

FAR EASTERN EXPORT & IMPORT CO., Petitioner, v. LIM TECK

SUAN, Respondent.

Juan Nabong and Crisolito Pascual for Petitioner.

Jose P. Laurel, Marciano Almario and Jose T. Lojom for Respondent.

SYLLABUS

1. PURCHASE AND SALE; WHEN TRANSACTION NOT AN AGENCY OR

BROKERAGE. — Where the agreement speaks of the items (merchandise) therein
involved as sold and the sale was even confirmed by the export company, the agents U.T.
Co. and S. without expressly indicating or revealing their principals, there was no privity
of contract between the buyers S. and V. and the suppliers F.I.C. and A.J.W. C.,
respectively, no commission or monetary consideration was paid or agreed to be paid by
the buyers to the export company and the U.T. Co., proof that there was no agency or
borkerage and that the profit the latter undoubtedly the difference between the price listed
to the buyers and the net special price quoted to the sellers, by the suppliers. Held; that the
transaction entered into is one of purchase and sale.

2. PRINCIPAL AND AGENT; AGENT OF FOREIGN COMPANY MAY NOT ACT AS

AGENT OF LOCAL BUYERS. — Where a foreign company has an agent here selling its
goods and merchandise, that same agent could not very act as agent for local buyers,
because the interests of his foreign principal and those of the buyers would be in direct
conflict. He could not serve two masters at the same time. (The doctrine in Gonzalo Puyat
& Sons, Inc., vs Arco Amusement, 72 Phil. 402, reiterated.)

MONTEMAYOR, J.:

This is a petition for certiorari to review a decision of the Court of Appeals dated
September 25, 1953, reversing the decision of the Court of First Instance of Manila, and
sentencing the defendant- petitioner Far Eastern Export & Import Co. later referred to as
export company, to pay the plaintiff-respondent Lim Teck Suan later to be referred to as
Suan, the sum of P11,476.60, with legal interest from the date of the filing of the
complaint and to pay the costs.

As to the facts and the issue in the case we are reproducing the findings of the Court of
Appeals, which findings are binding on this Tribunal in case of similar
appeals:jgc:chanrobles.com.ph
245
"Sometime in November, 1948, Ignacio Delizalde, an agent of the Far Eastern Export &
Import Company, went to the store of Lim Teck Suan situated at 267 San Vicente Street,
Manila, and offered to sell textile, showing samples thereof, and having arrived at an
agreement with Bernardo Lim, the General Manager of Lim Teck Suan, Delisalde
returned on November 17 with the buyer’s order, Exhibit A, already prepared which
reads:chanrob1es virtual 1aw library

FAR EASTERN EXPORT & IMPORT COMPANY

75 Escolta 2nd Floor Brias Roxas Bldg., Manila.

Ship to LIM TECK SUAN Date Written 11/17/48

475 Nueva St., Manila Your No.

Our No. 276.

I hereby commission you to procure for me the following merchandise, subject to the
terms and conditions listed below:chanrob1es virtual 1aw library

====================================================

Quantity Unit Particulars Amount

__________________________________________________________

10,000 — yds Ashtone Acetate & Rayon — No. 13472

Width: 41/42 inches; Weight: Ap-

proximately 8 oz. per yd; Ten (10)

colors, buyers choice, as per attached

samples, equally assorted; at $1.13

per yard F.A.S. New York U. S $11,500.00

Item herein sold are FOB — FAS X C. & F

CIF

====================================================

TERMS AND CONDITIONS

Acceptance

This Buyer’s Order is subject to confirmation by the exporter.

Shipment

246
Period of Shipment is to be within December. Bank Documents should be for a line of 45
days to allow for presentation and payment against "ON BOARD" bills of lading. Partial
shipments permitted.

Payment

Payment will be by "Confirmed Irrevocable Letter of Credit" to be opened in favor of

Frenkel International Corporation, 52 Broadway, New York, 4, N.Y.

for the full amount of the above cost of merchandise plus (approximately) for export
packing: insurance, freight, documentation, forwarding, etc. which are for the buyers
accounts, IMMEDIATELY upon written Confirmation.

Our Guarantee

In case shipment is not effected, seller agrees to reimburse buyer for all banking
expenses.

Signed Nov. 17, 1948

Authorized official

Confirmed

Accepted (Sgd.) Illegible Date Nov. 1948 to be signed by our representative upon
confirmation.

"In accordance with said Exhibit A, plaintiff established a letter of credit No. 6390
(Exhibit B) in favor of Frenkel International Corporation through the Hongkong and
Shanghai Banking Corporation, attached to the agreed statement of facts. On February
11, 1949, the textile arrived at Manila on board the vessel M.S. Arnold Maersk, covered
by bill of lading No. 125 (Exhibit C), Invoice No. 1684-M (Exhibit D) issued by Frenkel
International Corporation direct to the plaintiff. The plaintiff complained to the defendant
of the inferior quality of the textile received by him and had them examined by Marine
Surveyor Del Pan & Company. Said surveyor took swatches of the textile and had the
same analyzed by the Institute of Science (Exhibit E-1) and submitted a report of survey
under date of April 9, 1949 (Exhibit E). Upon instructions of the defendants plaintiff
deposited the goods with the United Warehouse Corporation (Exhibits H, H-1 to H-6. As
per suggestion of the Far Eastern Export and Import Company contained in its letter
dated June 16, 1949, plaintiff withdrew from the United Bonded Warehouse, Port Area,
Manila, the fifteen cases of Ashtone Acetate and Rayon Suiting for the purpose of
offering them for sale which netted P11,907.30. Deducting this amount from the sum of
P23,686.96 which included the amount paid by plaintiff for said textile and the
warehouse expenses, a difference of P11,476.66 is left, representing the net direct loss.

"The defense set up is that the Far Eastern Export and Import Company only acted as a
broker in this transaction; that after placing the order the defendants took no further
action and the cargo was taken directly by the buyer Lim Teck Suan, the shipment having
been made to him and all the documents were also handled by him directly without any
intervention on the part of the defendants; that upon receipt of Lim Teck Suan’s
complaint the defendants passed it to its principal, Frenkel International Corporation, for

247
comment, and the latter maintained that the merchandise was up to standard called for.

"The lower court acquitted the defendants from the complaint asking for damages in the
sum of P19,500.00 representing the difference in price between the textile ordered and
those received, plus profits unrealized and the cost of this suit, and dismissed the
counterclaim filed by the defendants without pronouncement as to costs."cralaw
virtua1aw library

As already stated, the Court of Appeals reversed the judgment entered by the Court of
First Instance of Manila, basing its decision of reversal on the case of Jose Velasco, v.
Universal Trading Co., Inc., 45 Off. Gaz. 4504 where the transaction therein involved
was found by the court to be one of purchase and sale and not of brokerage or agency.
We have carefully examined the Velasco case and we agree with the Court of Appeals
that the facts in that case are very similar to those in the present case. In the case of
Velasco, we have the following statement by the court itself which we reproduced
below:jgc:chanrobles.com.ph

"Prior to November 8, 1945 a salesman or agent of the Universal Trading Co., Inc.
informed Jose Velasco, Jr. that his company was in a position to accept and fill in orders
for Panamanian Agewood Bourbon Whisky because there were several thousand cases of
this article ready for shipment to the company by its principal office in America. Acting
upon this offer and representation Velasco went to the Universal Trading Co., Inc., and
after a conversation with the latter’s official entered into an agreement couched in the
following terms:chanrob1es virtual 1aw library

‘Agreement is hereby made between Messrs. Jose Velasco, Jr., 340 Echague, Manila, and
the Universal Trading Company, Manila, for order as follows and under the following
terms:chanrob1es virtual 1aw library

Merchandise

Quantity and Unit Unit Amount

Description Price

100 Panamanian Agewood Bourbon

Whisky Case $17.00 $1,700

________

Total amount of order $1,700

Terms of Agreement:chanrob1es virtual 1aw library

‘1. That the Universal Trading Company agrees to order the above merchandise from
their Los Angeles Office at the price quoted above, C.I.F. Manila, for December
shipment;

‘2. That Messrs. Jose Velasco, Jr., 340 Echague, Manila, obligates myself/themselves to
take the above merchandise when advised of its arrival from the United States and to pay
in cash the full amount of the order in Philippine Currency at the office of the Universal

248
Trading Company;

‘3. This order may be subject to delay because of uncertain shipping conditions. War risk
insurance, transhipping charges, if any, port charges, and any storage that may be
incurred due to your not taking delivery of the order upon being notified by us that the
order is ready for delivery, and government taxes, are all for your account;

‘4. The terms of this agreement will be either of the following:chanrob1es virtual 1aw
library

‘a. To open up irrevocable letter of credit for the value of the order with any of the local
banks, or thru bills of lading payable to A. J. Wilson Company, 1263 South North
Avenue, Los Angeles, California;

‘b. To put up a cash deposit equivalent to 50% of the order;

‘5. Reasonable substitute, whenever possible, will be shipped in lieu of items called for, if
order is not available.’

"Accordingly, Velasco deposited with the defendant the sum of $1,700 which is 50% of
the price of the whisky pursuant to agreement made, instead of ’to open up irrevocable
letter of credit for the value of the order with any of the local banks, or through bills of
lading payable to A. J. Wilson Company.’ On November 6, 1945, the same date that the
contract or agreement, Exhibit A, was signed an invoice under the name of the Universal
Trading Co., Inc. was issued to Velasco for the 100 cases of Panamanian Agewood
Bourbon Whisky for the price of $1,700 which invoice manifested that the article was
sold to Jose Velasco, Jr. On January 15, 1946 another invoice was issued containing
besides the list price of $1,700 or P3,400, a statement of bank charges, customs duties,
internal revenue taxes, etc., giving a total amount of P5,690.10 which after deducting the
deposit of $1,700, gives a balance of P3,990.01.

"On January 25, 1946 the Universal Trading Co., Inc. wrote Exhibit 4 to Mr. Velasco
advising him that the S.S. Manoeran had docked and that they would appreciate it if he
would pay the amount of P3,990.10 direct to them. It turned out, however, that after the
ship arrived, what the Universal Trading Co., Inc. tried to deliver to Velasco was not
Panamanian Agewood Bourbon Whisky but Panamanian Agewood Blended Whisky.
Velasco refused to receive the shipment and in turn filed action against the defendant for
the return of his deposit of $1,700 with interest. For its defense, defendant contends that it
merely acted as agent for Velasco and could not be held responsible for the substitution
of Blended Whisky for Bourbon Whisky and that furthermore the Blended Whisky was a
reasonable substitute for Bourbon. After due hearing the Court of First Instance of Manila
held that the transaction was purchase and sale and ordered the defendant to refund to the
plaintiff his deposit of P1,700 with legal interest from the date of the filing of the suit
with costs, which decision on appeal was affirmed by this Court."cralaw virtua1aw
library

We notice the following similarities. In the present case, the export company acted as
agent for Frenkel International Corporation, presumably the supplier of the textile sold. In
the Velasco case, the Universal Trading Co., was acting as agent for A. J. Wilson
Company, also the supplier of the whisky sold. In the present case, Suan according to the
first part of the agreement is said merely to be commissioning the Export Company to
procure for him the merchandise in question, just as in the other case, Velasco was

249
supposed to be ordering the whisky thru the Universal Trading Co. In the present case,
the price of the merchandise bought was paid for by Suan by means of an irrevocable
letter of credit opened in favor of the supplier, Frenkel International Corporation. In the
Velasco case, Velasco was given the choice of either opening a similar irrevocable letter
of credit in favor of the supplier A. J. Wilson Company or making a cash deposit. It is
true that in the Velasco case, upon the arrival of the whisky and because it did not
conform to specifications, Velasco refused to receive it; but in the present case although
Suan received the merchandise he immediately protested its poor quality and it was
deposited in the warehouse and later withdrawn and sold for the best price possible, all at
the suggestion of the Export company. The present case is in our opinion a stronger one
than that of Velasco for holding the transaction as one of purchase and sale because as
may be noticed from the agreement (Exhibit "A"), the same speaks of the items
(merchandise) therein involved as sold, and the sale was even confirmed by the Export
company. In both cases, the agents Universal Trading Co. and the export company dealt
directly with the local merchants Velasco and Suan without expressly indicating or
revealing their principals. In both cases there was no privity of contract between the
buyers — Suan and Velasco and the suppliers Frenkel International Corporation and A. J.
Wilson Company, respectively. In both cases no commission or monetary consideration
was paid or agreed to be paid by the buyers to the Export company and the Universal
Trading Co., proof that there was no agency or brokerage, and that the profit of the latter
was undoutedly the difference between the price listed to the buyers and the net or special
price quoted to the sellers, by the suppliers. As already stated, it was held in the Velasco
case that the transaction therein entered into was one of purchase and sale, and for the
same reasons given there, we agree with the Court of Appeals that the transaction entered
into here is one of purchase and sale.

As was held by this Tribunal in the case of Gonzalo Puyat & Sons Incorporated v. Arco
Amusement, 72 Phil. 402, where a foreign company has an agent here selling its goods
and merchandise, that same agent could not very well act as agent for local buyers,
because the interests or his foreign principal and those of the buyer would be in direct
conflict. He could not serve two masters at the same time. In the present case, the Export
company being an agent of Frenkel International Corporation could not, as it claims, have
acted as an agent or broker for Suan.

Finding no reversible error in the decision appealed from, the same is hereby affirmed,
with costs.

Pablo, Bengzon, Reyes, A., Bautista Angelo, Labrador, Concepcion and Reyes,
J.B.L., JJ., concur.

250
[G.R. No. 112212. March 2, 1998]

GREGORIO FULE, petitioner, vs. COURT OF APPEALS, NINEVETCH CRUZ and

JUAN BELARMINO, respondents.

DECISION
ROMERO, J.:

This petition for review on certiorari questions the affirmance by the Court of Appeals
of the decision[1] of the Regional Trial Court of San Pablo City, Branch 30, dismissing the
complaint that prayed for the nullification of a contract of sale of a 10-hectare property in
Tanay, Rizal in consideration of the amount of P40,000.00 and a 2.5 carat emerald-cut
diamond (Civil Case No. SP-2455). The lower courts decision disposed of the case as
follows:

WHEREFORE, premises considered, the Court hereby renders judgment dismissing the
complaint for lack of merit and ordering plaintiff to pay:

1. Defendant Dra. Ninevetch M. Cruz the sum of P300,000.00 as and for moral damages
and the sum of P100,000.00 as and for exemplary damages;

2. Defendant Atty. Juan Belarmino the sum of P250,000.00 as and for moral damages and
the sum of P150,000.00 as and for exemplary damages;

3. Defendant Dra. Cruz and Atty. Belarmino the sum of P25,000.00 each as and for
attorneys fees and litigation expenses; and

4. The costs of suit.

SO ORDERED.

As found by the Court of Appeals and the lower court, the antecedent facts of this case
are as follows:

Petitioner Gregorio Fule, a banker by profession and a jeweler at the same time, acquired
a 10-hectare property in Tanay, Rizal (hereinafter Tanay property), covered by Transfer
Certificate of Title No. 320725 which used to be under the name of Fr. Antonio Jacobe. The
latter had mortgaged it earlier to the Rural Bank of Alaminos (the Bank), Laguna, Inc. to
secure a loan in the amount of P10,000.00, but the mortgage was later foreclosed and the
property offered for public auction upon his default.

In July 1984, petitioner, as corporate secretary of the bank, asked Remelia Dichoso and
Oliva Mendoza to look for a buyer who might be interested in the Tanay property.The two
found one in the person of herein private respondent Dr. Ninevetch Cruz. It so happened
that at the time, petitioner had shown interest in buying a pair of emerald-cut diamond

251
earrings owned by Dr. Cruz which he had seen in January of the same year when his mother
examined and appraised them as genuine. Dr. Cruz, however, declined petitioners offer to
buy the jewelry for P100,000.00. Petitioner then made another bid to buy them for
US$6,000.00 at the exchange rate of $1.00 to P25.00. At this point, petitioner inspected
said jewelry at the lobby of the Prudential Bank branch in San Pablo City and then made a
sketch thereof. Having sketched the jewelry for twenty to thirty minutes, petitioner gave
them back to Dr. Cruz who again refused to sell them since the exchange rate of the peso
at the time appreciated to P19.00 to a dollar.
Subsequently, however, negotiations for the barter of the jewelry and the Tanay
property ensued. Dr. Cruz requested herein private respondent Atty. Juan Belarmino to
check the property who, in turn, found out that no sale or barter was feasible because the
one-year period for redemption of the said property had not yet expired at the time.
In an effort to cut through any legal impediment, petitioner executed on October 19,
1984, a deed of redemption on behalf of Fr. Jacobe purportedly in the amount
of P15,987.78, and on even date, Fr. Jacobe sold the property to petitioner
for P75,000.00. The haste with which the two deeds were executed is shown by the fact
that the deed of sale was notarized ahead of the deed of redemption. As Dr. Cruz had
already agreed to the proposed barter, petitioner went to Prudential Bank once again to take
a look at the jewelry.
In the afternoon of October 23, 1984, petitioner met Atty. Belarmino at the latters
residence to prepare the documents of sale.[2] Dr. Cruz herself was not around but Atty.
Belarmino was aware that she and petitioner had previously agreed to exchange a pair of
emerald-cut diamond earrings for the Tanay property. Atty. Belarmino accordingly caused
the preparation of a deed of absolute sale while petitioner and Dr. Cruz attended to the
safekeeping of the jewelry.
The following day, petitioner, together with Dichoso and Mendoza, arrived at the
residence of Atty. Belarmino to finally execute a deed of absolute sale. Petitioner signed
the deed and gave Atty. Belarmino the amount of P13,700.00 for necessary expenses in the
transfer of title over the Tanay property. Petitioner also issued a certification to the effect
that the actual consideration of the sale was P200,000.00 and not P80,000.00 as indicated
in the deed of absolute sale. The disparity between the actual contract price and the one
indicated on the deed of absolute sale was purportedly aimed at minimizing the amount of
the capital gains tax that petitioner would have to shoulder. Since the jewelry was appraised
only at P160,000.00, the parties agreed that the balance of P40,000.00 would just be paid
later in cash.
As pre-arranged, petitioner left Atty. Belarminos residence with Dichoso and Mendoza
and headed for the bank, arriving there at past 5:00 p.m. Dr. Cruz also arrived shortly
thereafter, but the cashier who kept the other key to the deposit box had already left the
bank. Dr. Cruz and Dichoso, therefore, looked for said cashier and found him having a
haircut. As soon as his haircut was finished, the cashier returned to the bank and arrived
there at 5:48 p.m., ahead of Dr. Cruz and Dichoso who arrived at 5:55 p.m. Dr. Cruz and
the cashier then opened the safety deposit box, the former retrieving a transparent plastic
or cellophane bag with the jewelry inside and handing over the same to petitioner.The latter
took the jewelry from the bag, went near the electric light at the banks lobby, held the
jewelry against the light and examined it for ten to fifteen minutes. After a while, Dr. Cruz
asked, Okay na ba iyan? Petitioner expressed his satisfaction by nodding his head.
For services rendered, petitioner paid the agents, Dichoso and Mendoza, the amount
of US$300.00 and some pieces of jewelry. He did not, however, give them half of the pair
of earrings in question which he had earlier promised.

252
 Later, at about 8:00 oclock in the evening of the same day, petitioner arrived at the
residence of Atty. Belarmino complaining that the jewelry given to him was fake. He then
used a tester to prove the alleged fakery. Meanwhile, at 8:30 p.m., Dichoso and Mendoza
went to the residence of Dr. Cruz to borrow her car so that, with Atty. Belarmino, they
could register the Tanay property. After Dr. Cruz had agreed to lend her car, Dichoso called
up Atty. Belarmino. The latter, however, instructed Dichoso to proceed immediately to his
residence because petitioner was there. Believing that petitioner had finally agreed to give
them half of the pair of earrings, Dichoso went posthaste to the residence of Atty.
Belarmino only to find petitioner already demonstrating with a tester that the earrings were
fake. Petitioner then accused Dichoso and Mendoza of deceiving him which they, however,
denied. They countered that petitioner could not have been fooled because he had vast
experience regarding jewelry. Petitioner nonetheless took back the US$300.00 and jewelry
he had given them.
Thereafter, the group decided to go to the house of a certain Macario Dimayuga, a
jeweler, to have the earrings tested. Dimayuga, after taking one look at the earrings,
immediately declared them counterfeit. At around 9:30 p.m., petitioner went to one Atty.
Reynaldo Alcantara residing at Lakeside Subdivision in San Pablo City, complaining about
the fake jewelry. Upon being advised by the latter, petitioner reported the matter to the
police station where Dichoso and Mendoza likewise executed sworn statements.
On October 26, 1984, petitioner filed a complaint before the Regional Trial Court of
San Pablo City against private respondents praying, among other things, that the contract
of sale over the Tanay property be declared null and void on the ground of fraud and deceit.
On October 30, 1984, the lower court issued a temporary restraining order directing
the Register of Deeds of Rizal to refrain from acting on the pertinent documents involved
in the transaction. On November 20, 1984, however, the same court lifted its previous order
and denied the prayer for a writ of preliminary injunction.
After trial, the lower court rendered its decision on March 7, 1989. Confronting the
issue of whether or not the genuine pair of earrings used as consideration for the sale was
delivered by Dr. Cruz to petitioner, the lower court said:

The Court finds that the answer is definitely in the affirmative. Indeed, Dra. Cruz delivered
(the) subject jewelries (sic) into the hands of plaintiff who even raised the same nearer to
the lights of the lobby of the bank near the door. When asked by Dra. Cruz if everything
was in order, plaintiff even nodded his satisfaction (Hearing of Feb. 24, 1988). At that
instance, plaintiff did not protest, complain or beg for additional time to examine further
the jewelries (sic). Being a professional banker and engaged in the jewelry business
plaintiff is conversant and competent to detect a fake diamond from the real thing. Plaintiff
was accorded the reasonable time and opportunity to ascertain and inspect the jewelries
(sic) in accordance with Article 1584 of the Civil Code. Plaintiff took delivery of the
subject jewelries (sic) before 6:00 p.m. of October 24, 1984. When he went at 8:00 p.m.
that same day to the residence of Atty. Belarmino already with a tester complaining about
some fake jewelries (sic), there was already undue delay because of the lapse of a
considerable length of time since he got hold of subject jewelries (sic). The lapse of two
(2) hours more or less before plaintiff complained is considered by the Court as
unreasonable delay.[3]

The lower court further ruled that all the elements of a valid contract under Article
1458 of the Civil Code were present, namely: (a) consent or meeting of the minds; (b)
determinate subject matter, and (c) price certain in money or its equivalent. The same
elements, according to the lower court, were present despite the fact that the agreement

253
between petitioner and Dr. Cruz was principally a barter contract. The lower court
explained thus:

x x x. Plaintiffs ownership over the Tanay property passed unto Dra. Cruz upon the
constructive delivery thereof by virtue of the Deed of Absolute Sale (Exh. D). On the other
hand, the ownership of Dra. Cruz over the subject jewelries (sic) transferred to the plaintiff
upon her actual personal delivery to him at the lobby of the Prudential Bank. It is expressly
provided by law that the thing sold shall be understood as delivered, when it is placed in
the control and possession of the vendee (Art. 1497, Civil Code; Kuenzle & Straff vs.
Watson & Co. 13 Phil. 26). The ownership and/or title over the jewelries (sic) was
transmitted immediately before 6:00 p.m. of October 24, 1984. Plaintiff signified his
approval by nodding his head. Delivery or tradition, is one of the modes of acquiring
ownership (Art. 712, Civil Code).

Similarly, when Exhibit D was executed, it was equivalent to the delivery of the Tanay
property in favor of Dra. Cruz. The execution of the public instrument (Exh. D) operates
as a formal or symbolic delivery of the Tanay property and authorizes the buyer, Dra. Cruz
to use the document as proof of ownership (Florendo v. Foz, 20 Phil. 399).More so, since
Exhibit D does not contain any proviso or stipulation to the effect that title to the property
is reserved with 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. vs. Maritime Building Co. Inc. 86 SCRA 305; Froilan v. Pan Oriental
Shipping Co. et al. 12 SCRA 276).[4]
Aside from concluding that the contract of barter or sale had in fact been consummated
when petitioner and Dr. Cruz parted ways at the bank, the trial court likewise dwelt on the
unexplained delay with which petitioner complained about the alleged fakery. Thus:
x x x. Verily, plaintiff is already estopped to come back after the lapse of considerable
length of time to claim that what he got was fake. He is a Business Management graduate
of La Salle University, Class 1978-79, a professional banker as well as a jeweler in his own
right. Two hours is more than enough time to make a switch of a Russian diamond with
the real diamond. It must be remembered that in July 1984 plaintiff made a sketch of the
subject jewelries (sic) at the Prudential Bank. Plaintiff had a tester at 8:00 p.m. at the
residence of Atty. Belarmino. Why then did he not bring it out when he was examining the
subject jewelries (sic) at about 6:00 p.m. in the banks lobby? Obviously, he had no need
for it after being satisfied of the genuineness of the subject jewelries (sic). When Dra. Cruz
and plaintiff left the bank both of them had fully performed their respective
prestations. Once a contract is shown to have been consummated or fully performed by the
parties thereto, its existence and binding effect can no longer be disputed. It is irrelevant
and immaterial to dispute the due execution of a contract if both of them have in fact
performed their obligations thereunder and their respective signatures and those of their
witnesses appear upon the face of the document (Weldon Construction v. CA G.R. No. L-
35721, Oct. 12, 1987).[5]
Finally, in awarding damages to the defendants, the lower court remarked:

The Court finds that plaintiff acted in wanton bad faith. Exhibit 2-Belarmino purports to
show that the Tanay property is worth P25,000.00. However, also on that same day it was
executed, the propertys worth was magnified at P75,000.00 (Exh. 3-Belarmino). How
could in less than a day (Oct. 19, 1984) the value would (sic) triple under normal
circumstances? Plaintiff, with the assistance of his agents, was able to exchange the Tanay
property which his bank valued only at P25,000.00 in exchange for a genuine pair of

254
emerald cut diamond worth P200,000.00 belonging to Dra. Cruz. He also retrieved the
US$300.00 and jewelries (sic) from his agents. But he was not satisfied in being able to get
subject jewelries for a song. He had to file a malicious and unfounded case against Dra.
Cruz and Atty. Belarmino who are well known, respected and held in high esteem in San
Pablo City where everybody practically knows everybody. Plaintiff came to Court with
unclean hands dragging the defendants and soiling their clean and good name in the
process. Both of them are near the twilight of their lives after maintaining and nurturing
their good reputation in the community only to be stunned with a court case. Since the
filing of this case on October 26, 1984 up to the present they were living under a pall of
doubt. Surely, this affected not only their earning capacity in their practice of their
respective professions, but also they suffered besmirched reputations. Dra. Cruz runs her
own hospital and defendant Belarmino is a well respected legal practitioner.

The length of time this case dragged on during which period their reputation were (sic)
tarnished and their names maligned by the pendency of the case, the Court is of the belief
that some of the damages they prayed for in their answers to the complaint are reasonably
proportionate to the sufferings they underwent (Art. 2219, New Civil Code).Moreover,
because of the falsity, malice and baseless nature of the complaint defendants were
compelled to litigate. Hence, the award of attorneys fees is warranted under the
circumstances (Art. 2208, New Civil Code).[6]
From the trial courts adverse decision, petitioner elevated the matter to the Court of
Appeals. On October 20, 1992, the Court of Appeals, however, rendered a
decision[7]affirming in toto the lower courts decision. His motion for reconsideration
having been denied on October 19, 1993, petitioner now files the instant petition alleging
that:
I. THE TRIAL COURT ERRED IN DISMISSING PLAINTIFFS COMPLAINT
AND IN HOLDING THAT THE PLAINTIFF ACTUALLY RECEIVED A
GENUINE PAIR OF EMERALD CUT DIAMOND EARRING(S) FROM
DEFENDANT CRUZ x x x;
II. THE TRIAL COURT ERRED IN AWARDING MORAL AND
EXEMPLARY DAMAGES AND ATTORNEYS FEES IN FAVOR OF
DEFENDANTS AND AGAINST THE PLAINTIFF IN THIS CASE; and
III.THE TRIAL COURT ERRED IN NOT DECLARING THE DEED OF SALE
OF THE TANAY PROPERTY (EXH. `D) AS NULL AND VOID OR IN NOT
ANNULLING THE SAME, AND IN FAILING TO GRANT REASONABLE
DAMAGES IN FAVOR OF THE PLAINTIFF.[8]
As to the first allegation, the Court observes that petitioner is essentially raising a
factual issue as it invites us to examine and weigh anew the facts regarding the genuineness
of the earrings bartered in exchange for the Tanay property. This, of course, we cannot do
without unduly transcending the limits of our review power in petitions of this nature which
are confined merely to pure questions of law. We accord, as a general rule, conclusiveness
to a lower courts findings of fact unless it is shown, inter alia, that: (1) the conclusion is a
finding grounded on speculations, surmises or conjectures; (2) the inference
is manifestly mistaken, absurd and impossible; (3) when there is a grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the
findings of fact are conflicting; and (6) when the Court of Appeals, in making its findings,
went beyond the issues of the case and the same is contrary to the admission of both
parties.[9] We find nothing, however, that warrants the application of any of these
exceptions.

255
 Consequently, this Court upholds the appellate courts findings of fact especially
because these concur with those of the trial court which, upon a thorough scrutiny of the
records, are firmly grounded on evidence presented at the trial.[10] To reiterate, this Courts
jurisdiction is only limited to reviewing errors of law in the absence of any showing that
the findings complained of are totally devoid of support in the record or that they are
glaringly erroneous as to constitute serious abuse of discretion.[11]
Nonetheless, this Court has to closely delve into petitioners allegation that the lower
courts decision of March 7, 1989 is a ready-made one because it was handed down a day
after the last date of the trial of the case.[12] Petitioner, in this
regard, finds it incredible that Judge J. Ausberto Jaramillo was able to write a 12-page
single-spaced decision, type it and release it on March 7, 1989, less than a day after the
last hearing on March 6, 1989. He stressed that Judge Jaramillo replaced Judge Salvador
de Guzman and heard only his rebuttal testimony.
This allegation is obviously no more than a desperate effort on the part of petitioner to
disparage the lower courts findings of fact in order to convince this Court to review the
same. It is noteworthy that Atty. Belarmino clarified that Judge Jaramillo had issued the
first order in the case as early as March 9, 1987 or two years before the rendition of the
decision. In fact, Atty. Belarmino terminated presentation of evidence on October 13, 1987,
while Dr. Cruz finished hers on February 4, 1989, or more than a month prior to the
rendition of the judgment. The March 6, 1989 hearing was conducted solely for the
presentation of petitioner's rebuttal testimony.[13] In other words, Judge Jaramillo had
ample time to study the case and write the decision because the rebuttal evidence would
only serve to confirm or verify the facts already presented by the parties.
The Court finds nothing anomalous in the said situation. No proof has been adduced
that Judge Jaramillo was motivated by a malicious or sinister intent in disposing of the case
with dispatch. Neither is there proof that someone else wrote the decision for him. The
immediate rendition of the decision was no more than Judge Jaramillos compliance with
his duty as a judge to dispose of the courts business promptly and decide cases within the
required periods.[14] The two-year period within which Judge Jaramillo handled the case
provided him with all the time to study it and even write down its facts as soon as these
were presented to court. In fact, this Court does not see anything wrong in the practice of
writing a decision days before the scheduled promulgation of judgment and leaving the
dispositive portion for typing at a time close to the date of promulgation, provided that no
malice or any wrongful conduct attends its adoption.[15] The practice serves the dual
purposes of safeguarding the confidentiality of draft decisions and rendering decisions with
promptness. Neither can Judge Jaramillo be made administratively answerable for the
immediate rendition of the decision. The acts of a judge which pertain to his judicial
functions are not subject to disciplinary power unless they are committed with fraud,
dishonesty, corruption or bad faith.[16] Hence, in the absence of sufficient proof to the
contrary, Judge Jaramillo is presumed to have performed his job in accordance with law
and should instead be commended for his close attention to duty.
Having disposed of petitioners first contention, we now come to the core issue of this
petition which is whether the Court of Appeals erred in upholding the validity of the
contract of barter or sale under the circumstances of this case.
The Civil Code provides that contracts are perfected by mere consent. From this
moment, the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their nature, may be in
keeping with good faith, usage and law.[17] A contract of sale is perfected at the moment
there is a meeting of the minds upon the thing which is the object of the contract and upon
the price.[18] Being consensual, a contract of sale has the force of law between the

256
contracting parties and they are expected to abide in good faith by their respective
contractual commitments. Article 1358 of the Civil Code which requires the embodiment
of certain contracts in a public instrument, is only for convenience,[19] and registration of
the instrument only adversely affects third parties.[20] Formal requirements are, therefore,
for the benefit of third parties. Non-compliance therewith does not adversely affect the
validity of the contract nor the contractual rights and obligations of the parties thereunder.
It is evident from the facts of the case that there was a meeting of the minds between
petitioner and Dr. Cruz. As such, they are bound by the contract unless there are reasons
or circumstances that warrant its nullification. Hence, the problem that should be addressed
in this case is whether or not under the facts duly established herein, the contract can be
voided in accordance with law so as to compel the parties to restore to each other the things
that have been the subject of the contract with their fruits, and the price with interest.[21]
Contracts that are voidable or annullable, even though there may have been no damage
to the contracting parties are: (1) those where one of the parties is incapable of giving
consent to a contract; and (2) those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.[22] Accordingly, petitioner now stresses before this
Court that he entered into the contract in the belief that the pair of emerald-cut diamond
earrings was genuine. On the pretext that those pieces of jewelry turned out to be
counterfeit, however, petitioner subsequently sought the nullification of said contract on
the ground that it was, in fact, tainted with fraud[23] such that his consent was vitiated.
There is fraud when, through the insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without them, he
would not have agreed to.[24] The records, however, are bare of any evidence manifesting
that private respondents employed such insidious words or machinations to entice
petitioner into entering the contract of barter. Neither is there any evidence showing that
Dr. Cruz induced petitioner to sell his Tanay property or that she cajoled him to take the
earrings in exchange for said property. On the contrary, Dr. Cruz did not initially accede
to petitioners proposal to buy the said jewelry. Rather, it appears that it was petitioner,
through his agents, who led Dr. Cruz to believe that the Tanay property was worth
exchanging for her jewelry as he represented that its value was P400,000.00 or more than
double that of the jewelry which was valued only at P160,000.00. If indeed petitioners
property was truly worth that much, it was certainly contrary to the nature of a
businessman-banker like him to have parted with his real estate for half its price. In short,
it was in fact petitioner who resorted to machinations to convince Dr. Cruz to exchange her
jewelry for the Tanay property.
Moreover, petitioner did not clearly allege mistake as a ground for nullification of the
contract of sale. Even assuming that he did, petitioner cannot successfully invoke the
same. To invalidate a contract, mistake must refer to the substance of the thing that is the
object of the contract, or to those conditions which have principally moved one or both
parties to enter into the contract.[25] An example of mistake as to the object of the contract
is the substitution of a specific thing contemplated by the parties with another.[26] In his
allegations in the complaint, petitioner insinuated that an inferior one or one that had only
Russian diamonds was substituted for the jewelry he wanted to exchange with his 10-
hectare land. He, however, failed to prove the fact that prior to the delivery of the jewelry
to him, private respondents endeavored to make such substitution.
Likewise, the facts as proven do not support the allegation that petitioner himself could
be excused for the mistake. On account of his work as a banker-jeweler, it can be rightfully
assumed that he was an expert on matters regarding gems. He had the intellectual capacity
and the business acumen as a banker to take precautionary measures to avert such a
mistake, considering the value of both the jewelry and his land. The fact that he had seen

257
the jewelry before October 24, 1984 should not have precluded him from having its
genuineness tested in the presence of Dr. Cruz. Had he done so, he could have avoided the
present situation that he himself brought about. Indeed, the finger of suspicion of switching
the genuine jewelry for a fake inevitably points to him. Such a mistake caused by manifest
negligence cannot invalidate a juridical act.[27] As the Civil Code provides, (t)here is no
mistake if the party alleging it knew the doubt, contingency or risk affecting the object of
the contract.[28]
Furthermore, petitioner was afforded the reasonable opportunity required in Article
1584 of the Civil Code within which to examine the jewelry as he in fact accepted them
when asked by Dr. Cruz if he was satisfied with the same.[29] By taking the jewelry outside
the bank, petitioner executed an act which was more consistent with his exercise of
ownership over it. This gains credence when it is borne in mind that he himself had earlier
delivered the Tanay property to Dr. Cruz by affixing his signature to the contract of
sale. That after two hours he later claimed that the jewelry was not the one he intended in
exchange for his Tanay property, could not sever the juridical tie that now bound him and
Dr. Cruz. The nature and value of the thing he had taken preclude its return after that
supervening period within which anything could have happened, not excluding the
alteration of the jewelry or its being switched with an inferior kind.
Both the trial and appellate courts, therefore, correctly ruled that there were no legal
bases for the nullification of the contract of sale. Ownership over the parcel of land and the
pair of emerald-cut diamond earrings had been transferred to Dr. Cruz and petitioner,
respectively, upon the actual and constructive delivery thereof.[30] Said contract of sale
being absolute in nature, title passed to the vendee upon delivery of the thing sold since
there was no stipulation in the contract that title to the property sold has been reserved in
the seller until full payment of the price or that the vendor has the right to unilaterally
resolve the contract the moment the buyer fails to pay within a fixed period.[31] Such
stipulations are not manifest in the contract of sale.
While it is true that the amount of P40,000.00 forming part of the consideration was
still payable to petitioner, its nonpayment by Dr. Cruz is not a sufficient cause to invalidate
the contract or bar the transfer of ownership and possession of the things exchanged
considering the fact that their contract is silent as to when it becomes due and
demandable.[32]
Neither may such failure to pay the balance of the purchase price result in the payment
of interest thereon. Article 1589 of the Civil Code prescribes the payment of interest by the
vendee for the period between the delivery of the thing and the payment of the price in the
following cases:
(1) Should it have been so stipulated;
(2) Should the thing sold and delivered produce fruits or income;
(3) Should he be in default, from the time of judicial or extrajudicial demand for
the payment of the price.
Not one of these cases obtains here. This case should, of course, be distinguished from De
la Cruz v. Legaspi,[33] where the court held that failure to pay the consideration after the
notarization of the contract as previously promised resulted in the vendees liability for
payment of interest. In the case at bar, there is no stipulation for the payment of interest in
the contract of sale nor proof that the Tanay property produced fruits or income. Neither
did petitioner demand payment of the price as in fact he filed an action to nullify the
contract of sale.

258
 All told, petitioner appears to have elevated this case to this Court for the principal
reason of mitigating the amount of damages awarded to both private respondents which
petitioner considers as exorbitant. He contends that private respondents do not deserve at
all the award of damages. In fact, he pleads for the total deletion of the award as regards
private respondent Belarmino whom he considers a mere nominal party because no specific
claim for damages against him was alleged in the complaint. When he filed the case, all
that petitioner wanted was that Atty. Belarmino should return to him the owners duplicate
copy of TCT No. 320725, the deed of sale executed by Fr. Antonio Jacobe, the deed of
redemption and the check alloted for expenses. Petitioner alleges further that Atty.
Belarmino should not have delivered all those documents to Dr. Cruz because as the lawyer
for both the seller and the buyer in the sale contract, he should have protected the rights of
both parties. Moreover, petitioner asserts that there was no firm basis for damages except
for Atty. Belarminos uncorroborated testimony.[34]
Moral and exemplary damages may be awarded without proof of pecuniary loss. In
awarding such damages, the court shall take into account the circumstances obtaining in
the case and assess damages according to its discretion.[35] To warrant the award of
damages, it must be shown that the person to whom these are awarded has sustained
injury. He must likewise establish sufficient data upon which the court can properly base
its estimate of the amount of damages.[36] Statements of facts should establish such data
rather than mere conclusions or opinions of witnesses.[37] Thus:
x x x. For moral damages to be awarded, it is essential that the claimant must have
satisfactorily proved during the trial the existence of the factual basis of the
damages and its causal connection with the adverse partys acts. If the court has no
proof or evidence upon which the claim for moral damages could be based, such
indemnity could not be outrightly awarded. The same holds true with respect to the
award of exemplary damages where it must be shown that the party acted in a
wanton, oppressive or malevolent manner.[38]
In this regard, the lower court appeared to have awarded damages on a ground
analogous to malicious prosecution under Article 2219(8) of the Civil Code[39] as shown
by (1) petitioners wanton bad faith in bloating the value of the Tanay property which he
exchanged for a genuine pair of emerald-cut diamond worth P200,000.00; and (2) his filing
of a malicious and unfounded case against private respondents who were well known,
respected and held in high esteem in San Pablo City where everybody practically knows
everybody and whose good names in the twilight of their lives were soiled by petitioners
coming to court with unclean hands, thereby affecting their earning capacity in the exercise
of their respective professions and besmirching their reputation.
For its part, the Court of Appeals affirmed the award of damages to private respondents
for these reasons:
The malice with which Fule filed this case is apparent. Having taken possession of
the genuine jewelry of Dra. Cruz, Fule now wishes to return a fake jewelry to Dra.
Cruz and, more than that, get back the real property, which his bank owns. Fule
has obtained a genuine jewelry which he could sell anytime, anywhere and to
anybody, without the same being traced to the original owner for practically
nothing. This is plain and simple, unjust enrichment.[40]
While, as a rule, moral damages cannot be recovered from a person who has filed a
complaint against another in good faith because it is not sound policy to place a penalty on
the right to litigate,[41] the same, however, cannot apply in the case at bar. The factual
findings of the courts a quo to the effect that petitioner filed this case because he was the
victim of fraud; that he could not have been such a victim because he should have examined
the jewelry in question before accepting delivery thereof, considering his exposure to the
259
banking and jewelry businesses; and that he filed the action for the nullification of the
contract of sale with unclean hands, all deserve full faith and credit to support the
conclusion that petitioner was motivated more by ill will than a sincere attempt to protect
his rights in commencing suit against respondents.
As pointed out earlier, a closer scrutiny of the chain of events immediately prior to and
on October 24, 1984 itself would amply demonstrate that petitioner was not simply
negligent in failing to exercise due diligence to assure himself that what he was taking in
exchange for his property were genuine diamonds. He had rather placed himself in a
situation from which it preponderantly appears that his seeming ignorance was actually
just a ruse. Indeed, he had unnecessarily dragged respondents to face the travails of
litigation in speculating at the possible favorable outcome of his complaint when he should
have realized that his supposed predicament was his own making. We, therefore, see here
no semblance of an honest and sincere belief on his part that he was swindled by
respondents which would entitle him to redress in court. It must be noted that before
petitioner was able to convince Dr. Cruz to exchange her jewelry for the Tanay property,
petitioner took pains to thoroughly examine said jewelry, even going to the extent of
sketching their appearance. Why at the precise moment when he was about to take physical
possession thereof he failed to exert extra efforts to check their genuineness despite the
large consideration involved has never been explained at all by petitioner. His acts thus
failed to accord with what an ordinary prudent man would have done in the same situation.
Being an experienced banker and a businessman himself who deliberately skirted a legal
impediment in the sale of the Tanay property and to minimize the capital gains tax for its
exchange, it was actually gross recklessness for him to have merely conducted a cursory
examination of the jewelry when every opportunity for doing so was not denied him.
Apparently, he carried on his person a tester which he later used to prove the alleged fakery
but which he did not use at the time when it was most needed. Furthermore, it took him
two more hours of unexplained delay before he complained that the jewelry he received
were counterfeit. Hence, we stated earlier that anything could have happened during all the
time that petitioner was in complete possession and control of the jewelry, including the
possibility of substituting them with fake ones, against which respondents would have a
great deal of difficulty defending themselves. The truth is that petitioner even failed to
successfully prove during trial that the jewelry he received from Dr. Cruz were not
genuine. Add to that the fact that he had been shrewd enough to bloat the Tanay propertys
price only a few days after he purchased it at a much lower value. Thus, it is our considered
view that if this slew of circumstances were connected, like pieces of fabric sewn into a
quilt, they would sufficiently demonstrate that his acts were not merely negligent but rather
studied and deliberate.
We do not have here, therefore, a situation where petitioners complaint was simply
found later to be based on an erroneous ground which, under settled jurisprudence, would
not have been a reason for awarding moral and exemplary damages.[42] Instead, the cause
of action of the instant case appears to have been contrived by petitioner himself. In other
words, he was placed in a situation where he could not honestly evaluate whether his cause
of action has a semblance of merit, such that it would require the expertise of the courts to
put it to a test. His insistent pursuit of such case then coupled with circumstances showing
that he himself was guilty in bringing about the supposed wrongdoing on which he
anchored his cause of action would render him answerable for all damages the defendant
may suffer because of it. This is precisely what took place in the petition at bar and we find
no cogent reason to disturb the findings of the courts below that respondents in this case
suffered considerable damages due to petitioners unwarranted action.
WHEREFORE, the decision of the Court of Appeals dated October 20, 1992 is hereby AFFIRMED in toto. Dr.
Cruz, however, is ordered to pay petitioner the balance of the purchase price of P40,000.00 within ten (10) days from
the finality of this decision. Costs against petitioner.

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