-6584 October 16, 1911

TI AND CO., plaintiff-appellant,

OMWELL, Collector of Internal Revenue, defendant-appellee.

ann, Cohn & Fisher, for appellant.

rney-General Harvey, for appellee.

ND, J.:

appeal by the plaintiff from a judgment of the Court of First Instance of the city of Manila, the Hon. Simplicio del Rosario presiding,
the complaint upon the merits after trial, without costs.

resented 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

e 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
nt and on commission.

s customary to sell hemp in bales which are made by compressing the loose fiber by means of presses, covering two sides of the
matting, and fastening it by means of strips of rattan; that the operation of bailing hemp is designated among merchants by the word

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
picul, no mention being made of bailing; but with the tacit understanding, unless otherwise expressly agreed, that the hemp will be
n bales and that, according to the custom prevailing among hemp merchants and dealers in the Philippine Islands, a charge, the
which depends upon the then prevailing rate, is to be made against the buyer under the denomination of "prensaje." That this charge
the same manner in all cases, even when the operation of bailing was performed by the plaintiff or by its principal long before the
sale was made. Two specimens of the ordinary form of account used in these operations are hereunto appended, marked Exhibits A
pectively, and made a part hereof.

e amount of the charge made against hemp buyers by the plaintiff firm and other sellers of hemp under the denomination of
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
een (15) centavos and that the average total cost of bailing hemp is one (1) peso per bale.

surance companies in the Philippine Islands, in estimating the insurable value of hemp always add to the quoted price of same the
de by the seller under the denomination of "prensaje."

e average weight of a bale of hemp is two (2) piculs (126.5 kilograms).

tween the first day of January, 1905, and the 31st day of March, 1910, the plaintiff firm, in accordance with the custom mentioned in
V hereof, collected and received, under the denomination of "prensaje," from purchasers of hemp sold by the said firm for its own
addition to the price expressly agreed upon for the said hemp, sums aggregating P380,124.35; and between the 1st day of October,
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
said denomination of "prensaje," in addition to the price expressly agreed upon the said hemp, sums aggregating P31,080.

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
the total sum collected from the purchasers of the hemp, including the charge made in each case under the denomination of
e plaintiff has always paid to the defendant or to his predecessor in the office of the Collector of Internal Revenue the tax collectible
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
nt and on commission, but has not, until compelled to do so as hereinafter stated, paid the said tax upon sums received from the
of such hemp under the denomination of "prensaje."

the 29th day of April, 1910, the defendant, acting in his official capacity as Collector of Internal Revenue of the Philippine Islands,
and 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
nt on the sums of money mentioned in Paragraph IX hereof, and which the said defendant claimed to be entitled to receive, under the
of the said section 139 of Act No. 1189, upon the said sums of money so collected from purchasers of hemp under the denomination
e."

n 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
o the defendant as Collector of Internal Revenue, against the ruling by which the plaintiff firm was required to make said payment, but
overruled said protest and adversely decided said appeal, and refused and still refuses to return to plaintiff the said sum of P1,370.68
thereof.1awphil.net

the facts above set forth t is contended by the plaintiff that the tax of P1,370.68 assessed by the defendant upon the aggregate sum
rges made against said purchasers of hemp by the plaintiff during the period in question, under the denomination of "prensaje" as
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
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
paid to him under protest, together with all interest thereon at the legal rate since payment, and the costs of this action.

acts above stated it is the contention of the defendant that the said charge made under the denomination of "prensaje" is in truth and
rt 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.
lly accrued on said sums, that the collection thereof was lawfully and properly made and that therefore the plaintiff is not entitled to
ck said sum or any part thereof; and that the defendant should have judgment against plaintiff for his costs.

e 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
ry 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
ge dealers like the plaintiff in this case it is practically impossible to handle hemp without its being baled, and it is admitted by the
of facts, as well as demonstrated by the documentary proof introduced in the case, that if the plaintiff sold a quality of hemp it would
er standing, without words, that such hemp would be delivered in bales, and that the purchase price would include the cost and
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
arket 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
e plaintiff, which are the basis of the controversy here, there were n services performed by him for his vendee. There was agreement
es should be performed. Indeed, at the time of such sales it was not known by the vendee whether the hemp was then actually baled
hat 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
r him, nor did the plaintiff agree to do so. The contract was single and consisted solely in the sale and purchase of hemp. The
contracted for nothing else and the vendor agreed to deliver nothing else.

price" signifies the sum stipulated as the equivalent of the thing sold and also every incident taken into consideration for the fixing of
ut 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
d himself already paid the additional expense of baling as a part of the purchase price which he paid and that he himself had
e hemp baled from his vendor. It is quite possible also that such vendor of the plaintiff may have received the same hemp from his
aled form, that he paid the additions cost of baling as a part of the purchase price which he paid. In such case the plaintiff performed
whatever for his vendee, nor did the plaintiff's vendor perform any service for him.

tion between a contract of sale and one for work, labor, and materials is tested by the inquiry whether the thing transferred is one no
e 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
ubject of sale to some other person, even if the order had not been given. (Groves vs. Buck, 3 Maule & S., 178; Towers vs. Osborne,
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
, or, at least, would have been in existence even if none of the individual sales here in question had been consummated. It would
baled, nevertheless, for sale to someone else, since, according to the agreed statement of facts, it is customary to sell hemp in
en 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
 a contract of sale and not a contract for labor. It is otherwise when the article is made pursuant to agreement. (Lamb vs. Crafts, 12
Smith vs. N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where labor is employed on the materials of the seller he can not
n action for work and labor. (Atkinson vs. Bell, 8 Barn. & C., 277; Lee vs. Griffin, 30 L.J.N. S.Q.B., 252; Prescott vs. Locke, 51 N.H.,
article ordered by the purchaser is exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change or
n 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,
ant's order for it. (Garbutt s. Watson, 5 Barn. & Ald., 613; Gardner vs. Joy, 9 Met., 177; Lamb vs. Crafts, 12 Met., 353;
vs. Meigs, 4 Cush., 497., Clark vs. Nichols, 107 Mass., 547; May vs. Ward, 134 Mass., 127; Abbott vs.Gilchrist, 38 Me., 260;
. Scribner, 64 Me., 105; Pitkin vs. Noyes, 48 N. H., 294; Prescott vs. Locke, 51 N. H., 94; Ellison vs. Brigham, 38 Vt., 64.) It has been
ssachusetts that a contract to make is a contract of sale if the article ordered is already substantially in existence at the time of the
merely requires some alteration, modification, or adoption to the buyer's wishes or purposes. (Mixer vs. Howarth, 21 Pick., 205.) It is
n that state that a contract for the sale of an article which the vendor in the ordinary course of his business manufactures or procures
eral 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.
oods are to be manufactured especially for the purchaser and upon his special order, and not for the general market, the case is not
statute. (Goddard vs. Binney, 115 Mass., 450.)

o our minds that in the case at bar the baling was performed for the general market and was not something done by plaintiff which
lt of any peculiar wording of the particular contract between him and his vendee. It is undoubted that the plaintiff prepared his hemp
eral market. This would be necessary. One whose exposes goods for sale in the market must have them in marketable form. The
estion would not have been in that condition if it had not been baled. the baling, therefore, was nothing peculiar to the contract
e plaintiff and his vendee. It was precisely the same contract that was made by every other seller of hemp, engaged as was the
d resulted simply in the transfer of title to goods already prepared for the general market. The method of bookkeeping and form of the
ndered is not controlling as to the nature of the contract made. It is conceded in the case tat a separate entry and charge would have
e 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
is indicates of necessity tat the mere fact of entering a separate item for the baling of the hemp is formal rather than essential and in
ndicates in this case the real transaction between the parties. It is undisputable that, if the plaintiff had brought the hemp in question
ed, and that was the hemp the sale which formed the subject of this controversy, then the plaintiff would have performed no service
dee and could not, therefore, lawfully charge for the rendition of such service. It is, nevertheless, admitted that in spite of that fact he
have made the double entry in his invoice of sale to such vendee. This demonstrates the nature of the transaction and discloses, as
ready said, that the entry of a separate charge for baling does not accurately describe the transaction between the parties.

9 [Act No. 1189] of the Internal Revenue Law provides that:

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
es and merchandise sold, bartered or exchanged in the Philippine Islands, and that this tax shall be assessed on the actual selling
ich every such merchant or manufacturer disposes of his commodities.

ion of baling undoubtedly augments the value of the goods. We agree that there can be no question that, if the value of the hemp
ugmented 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
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
nsiders the bale of hemp worth P21. 75. It is agreed, as we have before stated, that hemp is sold in bales. Therefore, baling is
before the sale. The purchaser of hemp owes to the seller nothing whatever by reason of their contract except the value of the hemp
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
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
, unless he expressly stipulates that it shall be delivered to him in loose form, obligates himself to purchase and pay for baled hemp.
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
e purchaser, he has no right to insists thereafter that the seller shall furnish him with unbaled hemp. It is undoubted that the vendees,
s referred to in the case at bar, would have no right, after having made their contracts, to insists on the delivery of loose hemp with the
view themselves to perform the baling and thus save 75 centavos per bale. It is unquestioned that the seller, the plaintiff, would have
his original contract of sale, that is, the obligation to deliver baled hemp, and would have forced his vendees to accept baled hemp,
retaining among his own profits those which accrued from the proceed of baling.

he opinion that the judgment appealed from must be affirmed, without special finding as to costs, and it is so ordered.

pa, Johnson and Carson, JJ., concur.

G.R. No. 120747 September 21, 2000

VICENTE GOMEZ, as successor-in-interest of awardee LUISA GOMEZ, petitioner,

vs.
COURT OF APPEALS, City of MANILA acting thru the City Tenants Security Committee now the Urban Settlement
Office, Register of Deeds of Manila, respondents.

BUENA, J.:

Sought to be reversed in this petition for review on certiorari under Rule 45 of the Rules of Court is the decision1 of the Court of
Appeals in C.A. G.R. Sp. No. 32101 promulgated on 22 February 1995 which annulled and set aside the decision of the
Regional Trial Court of Manila, Branch 12 in Civil Case No. 51930.

Impugned similarly is the resolution2 of the Court of Appeals dated 29 June 1995 denying petitioner's motion for reconsideration.

From the records, we find the following antecedents:

Pursuant to the Land for the Landless Program of the City of Manila and in accordance with City Ordinance No. 6880, the Office
of City Mayor issued Resolution No. 16-A,3 Series of 1978, dated 17 May 1978, which effectively set guidelines and criteria for
the award of city home lots to qualified and deserving applicants. Attached to said resolution and made as integral part thereof
was a Contract to Sell4 that further laid down terms and conditions which the lot awardee must comply with.

On 30 June 1978, the City of Manila, through the City Tenants Security Committee (CTSC) presently known as the Urban
Settlement Office (URBAN), passed Resolution 17-785 which in effect awarded to 46 applicants, 37 homelots in the former
Ampil-Gorospe estate located in Tondo, Manila. Luisa Gomez, predecessor-in-interest of herein petitioner Vicente Gomez, was
awarded Lot 4, Block 1, subject to the provisions of Resolution No. 3-78 of the CTSC and building, subdivision and zoning rules
and regulations.

Consequently, a certificate of award6 dated 02 July 1978 was granted by the CTSC in favor of Luisa Gomez, who paid the
purchase price of the lot in the amount of P3,556.00 on installment basis, 7 said payments being duly covered by official receipts.

In 1979, Luisa Gomez traveled to the Unites States of America but returned to the Philippines in the same year.

On 18 January 1980, Luisa Gomez finally paid in full the P3,556.00 purchase price of the lot. Despite the full payment, Luisa still
paid in installment an amount of P8,244.00, in excess of the purchase price, which the City of Manila, through the CTSC,
accepted. Additionally, the lot was declared for taxation purposes and the corresponding real estate taxes thereon paid from
1980-1988. In 1982, Luisa, together with her spouse Daniel, left again for the United States of America where she died 8 on 09
January 1983. She is survived by her husband and four children, namely, Ramona G. Takorda, Edgardo Gomez, Erlinda G.
Pena, and Rebecca G. Dizon.9

Subsequently, in a memorandum dated 07 February 1984, the Urban Settlements Officer and Member-Executive Secretary of
the CTSC directed the Western Police District, City Hall Detachment, to conduct an investigation regarding reported violations of
the terms and conditions of the award committed by the lot awardees.

Thus, on 23 November 1984, a team headed by Pfc. Reynaldo Cristobal of the Western Police District, proceeded to the former
Ampil-Gorospe estate where the subject lots are located, and conducted an investigation of alleged violations thereat.

On 19 December 1984, team leader Pfc. Reynaldo Cristobal rendered an investigation report 10 addressed to the City Mayor of
Manila, as Chairman of the CTSC, stating, among others, the following findings:

". . . After the said operation, it was found out that of all the lot awardees in the said estate, the following were confirmed
to have violated the terms and conditions of their respective awards as indicated opposite their names, to wit:
 ". . . 2. Name of awardee: Daniel Gomez

Address: No. 2557-C Juan Luna St. Tondo, Manila

Violation: The place was found actually occupied by Mrs. Erlinda Perez and her family together with Mr.
Mignony Lorghas and family, who are paying monthly rentals of P210.00 each to Vicente Gomez, brother of
awardee. Daniel Gomez is now presently residing in the United States of America and only returns for vacation
once in a while as a 'Balikbayan' . . ."

Thus, on 01 July 1986, the CTSC, headed by then City Mayor Gemiliano Lopez, Jr. as Chairman, issued Resolution No. 015-
86,11 adopting the findings of the investigation report submitted by Pfc. Cristobal, and ordering the cancellation of the lot awards
of Daniel Gomez and other awardees who were found to have committed violations, and further declaring the forfeiture of
payments made by said awardees as reasonable compensation for the use of the homelots.

In a letter12 dated 04 August 1986, herein petitioner Vicente Gomez, acting as attorney-in-fact13 of his brother Daniel Gomez
(spouse of Luisa Gomez) asked for reconsideration of the CTSC resolution revoking the award of the lot.

On 28 June 1988, Daniel Gomez, spouse of awardee Luisa Gomez, died in the United States of America. Eventually, on 01
February 1989, the surviving children of the deceased spouses, who were American citizens and residents of the United States
of America, executed an affidavit of adjudication with deed of donation 14 disposing gratuitously Lot No. 1, Block 4, in-Favor of
their uncle Vicente Gomez.

On 20 February 1989, petitioner Vicente Gomez filed a memorandum 15 before the CTSC praying that Resolution 15-86 be set
aside and that the award of the lot be restored to Luisa Gomez, or her heirs or successor-in-interest, preferably Vicente Gomez.

Thereafter, two supplemental memoranda, dated 26 July 198916 and 10 January 1990,17 were submitted by petitioner before the
CTSC reiterating the prayer in the initial memorandum.

On 05 February 1990, herein petitioner filed before the Regional Trial Court (RTC) of Manila, Branch 12, a petition for certiorari,
prohibition and mandamus docketed as Civil Case No. 90-51930, entitled "Vicente Gomez, as successor-in-interest of Awardee,
Luisa Gomez, petitioner, versus City Tenant's Security Committee (now Urban Settlement Office) and Register of Deeds of
Manila, respondents."

In an order18 dated 24 April 1990, the lower court directed the petitioner to amend its petition so as to implead the proper
government agency.

Hence, petitioner filed an amended petition19 impleading the City of Manila as respondent, to which the latter submitted an
answer.20

Accordingly, after the presentation of evidence, the lower court promulgated its decision 2 1 dated 20 January 1993, the decretal
portion of which reads:

Wherefore, the petition is hereby granted:

"1. Ordering the City of Manila through its agency the City Tenants Security Committee (now Urban Settlement Office)
to set aside the order of cancellation of the award for Lot No. 4, Block 1 (formerly of the Ampil-Gorospe estate) in favor
of Luisa Gomez, her heirs and successor-in-interest, the herein petitioner;

"2. Prohibiting the City of Manila through its agency including the Register of Deeds of Manila from awarding the same
lot and issuing the corresponding certificate of title therefor to any other person;

"3. Ordering the City of Manila through its agency the City Tenant's Security Committee (now Urban Settlement Office)
to execute a Deed of Absolute Sale over the aforementioned lot in favor of the petitioner as successor-in-interest of the
 awardee and further ordering them to stop and/or refrain from disturbing the peaceful physical possession thereof of
(sic) the petitioner; and

"4. Ordering the City of Manila through its agency the City Tenant's Security Committee (now Urban Settlement Office)
to refund to the petitioner his overpayments amounting to P8,244.00 and to pay the costs of suit."

On appeal, the Court of Appeals reversed the lower court's decision prompting petitioner to file a motion for reconsideration
which the appellate court denied via its assailed resolution dated 29 June 1995.

Hence, the instant appeal where the core of controversy revolves around the propriety of CTSC's act of canceling the lot award,
through Resolution No. 015-86, and further declaring the forfeiture of amounts paid by the awardee, as reasonable
compensation for the use of the home lot.

The petition is unmeritorious.

A thorough scrutiny of the records and an even more exhaustive perusal of the evidence, both documentary and testimonial,
would lead to the inevitable conclusion that the fact of cancellation of the award covering Lot 4, Block 1, by the City of Manila,
acting through the CTSC, was properly exercised within the bounds of law and contractual stipulation between the parties.

Viewed broadly, petitioner anchors his case on the premise, albeit erroneous, that upon full payment of the purchase price of
the lot in January 1980, Luisa Gomez, actual awardee, already acquired a vested right over the real property subject of the
present controversy. Thus, according to petitioner, upon the death of Luisa Gomez on 09 January 1983, the alleged vested right
was transmitted by operation of law to her lawful heirs, pursuant to Article 777 of the Civil Code. Additionally, petitioner submits
that by virtue of the affidavit of adjudication with Deed of Donation executed on 01 February 1989 in his favor by the surviving
children of Luisa, he, in effect, became the successor-in-interest of Luisa and thus entitled to whatever rights enjoyed by the
latter over the property.

In the light of existing law and jurisprudence and based on the evidence adduced, this Court finds difficulty giving credence and
weight to petitioner's submissions. We therefore rule that the cancellation of the award of Lot 4, Block 1, through the expediency
of Resolution No. 015-86, was proper.

Primarily, it must be stressed that the contract entered into between the City of Manila and awardee Luisa Gomez was not one
of sale but a contract to sell, which, under both statutory and case law, has its own attributes, peculiarities and effects.

Speaking through Mr. Justice Florenz Regalado, this Court in Adelfa Properties, Inc. vs. Court of Appeals, 22 mapped out the
bold distinctions between these species of contracts, to wit:

"In a contract of sale, the title passes to the vendee upon the delivery of the thing sold; whereas in a contract to sell, by
agreement, the ownership is reserved in the vendor and is not to pass until the full payment of the price. In a contract of
sale, the vendor has lost and cannot recover ownership until and unless the contract is resolved or rescinded; whereas
in a contract to sell, title is retained by the vendor until the full payment of the purchase price, such payment being a
positive suspensive condition and failure of which is not a breach but an event that prevents the obligation of the vendor
to convey title from being effective. Thus, a deed of sale is considered absolute in nature where there is neither a
stipulation in the deed that title to the property sold is reserved in the seller until the full payment of the price, nor one
giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period."

To our mind, however, this pronouncement should not curtail the right of the parties in a contract to sell to provide additional
stipulations, nor bar them from imposing conditions relative to the transfer of ownership.

To be sure, a contract of sale may either be absolute or conditional. One form of conditional sales is what is now popularly
termed as a "Contract to Sell", where ownership or title is retained until the fulfillment of a positive suspensive condition normally
the payment of the purchase price in the manner agreed upon.23 (Emphasis ours)
From the above disquisition in Galang and applying Article 1306 of the Civil Code, the contracting parties are accorded the
liberality and freedom to establish such stipulations, clauses, terms and conditions as they may deem convenient, provided the
same are not contrary to law, morals, good custom, public order or public policy. In the law on contracts, such fundamental
principle is known as the autonomy of contracts.

Under the present circumstances, we see no hindrance that prohibits the parties from stipulating other lawful conditions, aside
from full payment of the purchase price, which they pledge to bind themselves and upon which transfer of ownership depends.

In the instant case, we uphold the Contract to Sell, duly annexed and attached to Resolution 16-A, which explicitly provides for
additional terms and conditions upon which the lot awardees are bound. Although unsigned, the Contract to Sell, in addition to
the provisions of Resolution 16-A, constitutes the law between the contracting parties. After all, under the law there exists a
binding contract between the parties whose minds have met on a certain matter notwithstanding that they did not affix their
signatures to its written form.24

For a contract, like a contract to sell, involves a meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service. Contracts, in general, are perfected by mere consent, 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.25

As to the matter of acceptance, the same may be evidenced by some acts, or conduct, communicated to the offeror, either in a
formal or an informal manner, that clearly manifest the intention or determination to accept the offer to buy or sell.26

In the case at bar, acceptance on the part of the vendee was manifested through a plethora of acts, such as payment of the
purchase price, declaration of the property for taxation purposes, and payment of real estate taxes thereon, and similar acts
showing vendee's assent to the contract.

Verily, Resolution 16-A and the Contract to Sell which was annexed, attached and made to form part of said resolution, clearly
laid down the terms and conditions which the awardee-vendee must comply with. Accordingly, as an awardee, Luisa Gomez,
her heirs and successors-in-interest alike, are duty-bound to perform the correlative obligations embodied in Resolution 16-A
and the Contract to-Sell.

Resolution 16-A, Series of 1978, explicitly provides that aside from the requirement of Filipino citizenship and legal age, the
basic criteria for award of the lot pursuant to the Land for the Landless Program of the City of Manila shall be the following:

"a) Occupancy — The applicant must be the legal and actual or physical occupant of the lot in question at the time of its
acquisition by the City. He must be the owner of the house and lot, must be using the same for his residential purposes,
and must have had a lessee-lessor relationship with the previous owner of the land or landed estate of which the
subject lot is a part.

"b) Non-ownership of land — The applicant and/or his spouse, if he is married, must not be an owner of any parcel of
land in Manila, Metropolitan Manila or elsewhere in the Philippines. Neither must he and/or his spouse be a prospective
owner or a buyer on installment basis of any lot other than that which he is occupying and for which he is applying for
award from the City.

"c) Capacity to pay — The applicant must have such financial means and/or support as will enable him to make regular
payments of amortizations or installments for the lot if the same is awarded to him."

Of equal importance are the essential terms and conditions embraced in the Contract to Sell, which awardee Luisa Gomez, her
heirs and successors-in-interest, violated, to wit:

". . . Par.(3). The vendee shall occupy and use the lot exclusively for his/her residential purpose . . .
 ". . . Par. (5). The vendee hereby warrants and declares under oath that he/she is a bona fide and actual occupant and
tenant of the lot; . . . and that he/she fully understands that any false statement or misrepresentation hereof (sic) shall
be sufficient cause for the automatic cancellation of his/her rights under this agreement as well as ground for criminal
prosecution.

"Par. (6). Until complete payment of the purchase price and compliance with all the vendee's obligations herein, title to
the lot remains in the name of the owner. During the effectivity of this agreement, however, the owner may transfer its
title or assign its rights and interest under this agreement to any person, corporation, bank or financial institution.

"Title shall pass to the vendee upon execution of a final deed of sale in his/her favor. . . .

"Par. (8). In order not to defeat the purpose of this social land reform program of the City of Manila. and to prevent real
estate speculations within twenty years from complete payment of the purchase price and execution of the final deed of
sale, the lot and residential house or improvement thereon shall not be sold, transferred, mortgaged, leased or
otherwise alienated or encumbered without the written consent of the City Mayor.

"Par. (9). During the effectivity of this agreement, the residential house or improvement thereon shall not be leased,
sold, transferred or otherwise alienated by the vendee without the written consent of the owner. . .

"Par. (14). In the event that the vendee dies before full payment of the purchase price of the lot, his/her surviving
spouse, children heirs and/or successors-in-interest shall succeed in all his/her rights and interest, as well as assume
all/his/her obligations under this agreement.

"Par. (15). This agreement shall be binding upon the heirs. executors and administrators of the vendee." (emphasis
ours)

Petitioner urges that awardee Luisa Gomez did not commit any violation of the lot award. On the contrary, the records would
indubitably show that Luisa Gomez, including her heirs and successors-in-interest, have performed acts that constitute gross, if
not brazen, violation of the aforementioned terms and conditions of the award, as evidenced by the investigation report
submitted by Pfc. Cristobal, dated 19 December 1984.

Results of the investigation conducted on 23 November 1984, reveal that the lot was actually occupied and leased by a certain
Erlinda Perez and Mignony Lorghas, together with their respective families, who were paying rentals to petitioner Vicente
Gomez for the lease of the subject premises.

Moreover, in a conference held on 13 January 1989 at the Office of the Acting Urban Settlement Officer, Lorghas admitted that
she has been leasing the property and paying rent to petitioner Vicente Gomez, thus:27

"Atty. Bernardo:

Mrs. Lorghas, how long have you been renting the property?

Mrs. Lorghas:

I was living there since 1960 until today. I was renting a small room downfloor (sic). When the family of Mr.
Gomez died, kami na ang tumira sa itaas until now.

Atty. Bernardo:

Magkano ang upa mo?

Mrs. Lorghas:
 P300 a month.

Atty. Bernardo:

Kanino?

Mrs. Lorghas:

Kay Vicente Gomez.

Atty. Bernardo:

Meron bang resibo?

Mrs. Lorghas:

Wala po.

Atty. Bernardo:

Noong 1973, kayo na rin ang nakatira sa lugar ni Gomez.

Mrs. Lorghas:

Opo."

Certainly, said acts constitute a brazen transgression of Resolution 16-A and clear contravention of the Contract to Sell,
specifically par. (3), (8) and (9) thereof.

The contract provides in no uncertain terms, that the abovementioned terms and conditions shall bind the heirs, executors and
administrators of the vendee. The contract further states that breach thereof would result to the automatic cancellation of the
vendee's rights thereunder.

Thus, par.(10) (b) (a) of the Contract to Sell, which reads:

". . . any violation of the terms and conditions of this agreement shall automatically cause the cancellation of the
vendee's rights under this agreement without necessity of prior notice or judicial declaration . . ."

Such kind of stipulation was upheld by this Court in the Adelfa case where we categorically declared that Article 1592 of the Civil
Code, which requires rescission either by judicial action, or notarial act, does not apply to a contract to sell. 28

Moreover, judicial action for rescission of a contract is not necessary where the contract provides for automatic rescission in
case of breach,29 as in the contract involved in the present controversy.

Likewise, this Court sustains the forfeiture of the payments made by awardee as reasonable compensation for the use of the lot.
At this juncture, par. (1) of the Contract to Sell furnishes support to this conclusion:

". . . In case of the cancellation of the vendee's rights under this agreement as hereinafter stipulated, all payments made
by him/her shall be forfeited and considered as rentals for the use of the lot . . . "
Further, Article 1486 of the Civil Code provides that a stipulation that the installments or rents paid shall not be returned to the
vendee or lessee shall be valid insofar as the same may not be unconscionable under the circumstances. 30

Applying the foregoing, we are of the considered view that the payment of the purchase price of P3,556.00, constitutes fair and
reasonable rental for the period in which said property was under the control of awardee Luisa Gomez, her heirs and
successors-in-interest. Undeniably, the awardee together with her heirs and successors-in-interest, have gained benefits,
financial or otherwise, for a period of eight years — from the time of actual award of the lot to the time of cancellation thereof
(1978-1986).

Nonetheless, we ought to stress that in the present case, forfeiture of the installments paid as rentals, only applies to the
purchase price of P3,556.00 and not to the overpayment of the amount of P8,244.00.

Under these circumstances, the vendor should refund the amount of P8,244.00 representing the overpayment made, plus
interest, to be computed in accordance with the "rule of thumb" enunciated in the landmark case of Eastern Shipping Lines, Inc.
vs. Court of Appeals 31 and reiterated in the case of Philippine National Bank vs. Court of Appeals.32

For us to uphold the forfeiture of the amount representing the overpayment would be to revolt against the dictates of justice and
fairness. A contrary ruling would unjustly enrich the vendor to the prejudice of the vendee.

In the same vein, the provisions of Article 777 of the Civil Code notwithstanding, we hold that the surviving children of awardee
Luisa Gomez are not qualified transferees of Lot 4, Block 1 for failure to conform with the prerequisites set by Resolution 16-A,
to wit, Filipino citizenship and actual occupancy, which in the present case, are basic criteria for the award of the lot, pursuant to
the "Land for the Landless Program" of the City of Manila.

The records reveal that the children of Luisa Gomez are American citizens and permanent residents of the United States of
America. Notably, Resolution 16-A specifically enumerates Filipino citizenship and actual occupancy of the lot for residential
purposes, as qualifications for entitlement to the lot award. For this court to consider said surviving children as qualified
awardee-transferees would render illusory the purposes for which Resolution 16-A and the "Land for the Landless Program" of
the City of Manila were adopted.

Even assuming arguendo that the surviving children of Luisa Gomez are entitled to the lot by virtue of Article 777 of the Civil
Code, said heirs nevertheless abandoned their right when they violated the terms and conditions of the award by donating the
subject property to petitioner Vicente Gomez.

As paragraph (15) of the agreement provides that the heirs of the vendee shall be bound thereby, it is then incumbent upon said
heirs to render strict compliance with the provisions thereof.

In particular, paragraph (8) of the Contract proscribes the sale, transfer, mortgage, lease, alienation or encumbrance of the lot,
residential house, or improvement thereon, without the written consent of the City Mayor, within a period of twenty (20) years
from complete payment of the purchase price and execution of the final deed of sale. The execution of the Deed of Donation by
the surviving children of Luisa Gomez on February 1, 1989, in favor of Vicente Gomez, was clearly within the prohibited period
of 20 years from the full payment of the purchase price on January 18, 1980.

Without doubt, the prohibition applies to them.

Furthermore, the subject lot and residential house were occupied by, and leased to, third persons, in crystalline and evident
derogation of the terms of the award.

WHEREFORE, premises considered, the instant petition is DISMISSED for lack of merit, and the assailed decision of the Court
of Appeals with respect to the cancellation of the award of Lot 4, Block 1, is AFFIRMED SUBJECT TO MODIFICATION as to
the forfeiture of amounts paid by the vendee.
As modified, the City of Manila, is hereby ordered to refund with dispatch the amount of P8,244.00 representing the
overpayment made by petitioner plus interest.

SO ORDERED.

Bellosillo, Mendoza, Quisumbing and De Leon, Jr., JJ ., concur.

G.R. No. 108346 July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,

vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract, entitled the
injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a mutual restitution of
benefits received.

The Case

Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court of Appeals (CA) in CA-GR CV No. 32991
dated October 9, 1992, as well as its Resolution3 dated December 29, 1992 denying petitioner's motion for reconsideration. 4

The dispositive portion of the assailed Decision reads:

"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the Decision dated
November 14, 1990 dismissing the [C]omplaint is RESINSTATED. The bonds posted by plaintiffs-appellees and
defendants-appellants are hereby RELEASED."5

The Facts

The factual antecedents of the case, as found by the CA, are as follows:

"x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel of land, together
with the house and other improvements thereon, located at 1918 Kamias St., Dasmariñas Village, Makati and covered
by TCT No. 142177. Defendant George Raymundo [herein private petitioners] is David's father who negotiated with
plaintiffs Avelina and Mariano Velarde [herein petitioners] for the sale of said property, which was, however, under lease
(Exh. '6', p. 232, Record of Civil Case No. 15952).

"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 11-12, Record) was executed
by defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee, with the following terms and
conditions:

'x x x xxx xxx

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, receipt of which in full is hereby acknowledged by the VENDOR from the VENDEE, to his
 entire and complete satisfaction, by these presents the VENDOR hereby SELLS, CEDES, TRANSFERS,
CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a legal and valid title as provided by
law, unto the VENDEE, her heirs, successors and assigns, the parcel of land mentioned and described above,
together with the house and other improvements thereon.

'That the aforesaid parcel of land, together with the house and other improvements thereon, were mortgaged by
the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila to secure the payment of a
loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, as
evidenced by a Real Estate Mortgage signed and executed by the VENDOR in favor of the said Bank of the
Philippine Islands, on _____ and which Real Estate Mortgage was ratified before Notary Public for Makati,
_____, as Doc. No. ______, Page No. _____, Book No. ___, Series of 1986 of his Notarial Register.

'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage obligations on
the property herein sold in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, in favor of Bank of Philippine Islands, in the name of the VENDOR, and
further agrees to strictly and faithfully comply with all the terms and conditions appearing in the Real Estate
Mortgage signed and executed by the VENDOR in favor of BPI, including interests and other charges for late
payment levied by the Bank, as if the same were originally signed and executed by the VENDEE.

'It is further agreed and understood by the parties herein that the capital gains tax and documentary stamps on
the sale shall be for the account of the VENDOR; whereas, the registration fees and transfer tax thereon shall
be the account of the VENDEE.' (Exh. 'A', pp. 11-12, Record).'

"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her husband,
Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).'

'x x x xxx xxx

'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the sum of EIGHT
HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage obligations on
the property with the Bank of the Philippine Islands in the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with the terms and conditions of the
Deed of Real Estate Mortgage dated _____, signed and executed by Mr. David A. Raymundo with the said
Bank, acknowledged before Notary Public for Makati, _____, as Doc. No. _____, Page No. _____, Book No.
_____, Series of 1986 of his Notarial Register.

'WHEREAS, while my application for the assumption of the mortgage obligations on the property is not yet
approved by the mortgagee Bank, I have agreed to pay the mortgage obligations on the property with the Bank
in the name of Mr. David A. Raymundo, in accordance with the terms and conditions of the said Deed of Real
Estate Mortgage, including all interests and other charges for late payment.

'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of attesting
and confirming our private understanding concerning the said mortgage obligations to be assumed.

'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of the mortgage
obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency,
with the bank of the Philippine Islands, I, Mrs, Avelina D, Velarde with the consent of my husband, Mariano Z.
Velardo, do hereby bind and obligate myself, my heirs, successors and assigns, to strictly and faithfully comply
with the following terms and conditions:

'1. That until such time as my assumption of the mortgage obligations on the property purchased is approved by
the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the said loan in accordance with
the terms and conditions of the Deed of Real Estate Mortgage in the name of Mr. David A. Raymundo, the
original Mortgagor.
 '2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate Mortgage, I
hereby agree that my downpayment of P800,000.00, plus all payments made with the Bank of the Philippine
Islands on the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as and by way of liquidated
damages, without necessity of notice or any judicial declaration to that effect, and Mr. David A. Raymundo shall
resume total and complete ownership and possession of the property sold by way of Deed of Sale with
Assumption of Mortgage, and the same shall be deemed automatically cancelled and be of no further force or
effect, in the same manner as it (the) same had never been executed or entered into.

'3. That I am executing the Undertaking for purposes of binding myself, my heirs, successors and assigns, to
strictly and faithfully comply with the terms and conditions of the mortgage obligations with the Bank of the
Philippine Islands, and the covenants, stipulations and provisions of this Undertaking.

'That, David A. Raymundo, the vendor of the property mentioned and identified above, [does] hereby confirm
and agree to the undertakings of the Vendee pertinent to the assumption of the mortgage obligations by the
Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14, Record).'

"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

"It appears that the negotiated terms for the payment of the balance of P1.8 million was from the proceeds of a loan that
plaintiffs were to secure from a bank with defendant's help. Defendants had a standing approved credit line with the
Bank of the Philippine Islands (BPI). The parties agreed to avail of this, subject to BPI's approval of an application for
assumption of mortgage by plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to continue paying the
monthly interests of the loan secured by a real estate mortgage.

"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the aforementioned
mortgage for three (3) months as follows: September 19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and
November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record).

"On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with BPI, was not
approved (Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any further payment.

"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-payment to the
mortgage bank constitute[d] non-performance of their obligation (Exh. '3', p. 220, Record).

"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:

'This is to advise you, therefore, that our client is willing to pay the balance in cash not later than January 21,
1987 provided: (a) you deliver actual possession of the property to her not later than January 15, 1987 for her
immediate occupancy; (b) you cause the re- lease of title and mortgage from the Bank of P.I. and make the title
available and free from any liens and encumbrances; and (c) you execute an absolute deed of sale in her favor
free from any liens or encumbrances not later than January 21, 1987.' (Exhs. 'k', '4', p. 223, Record).

"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of the intended saleof the
subject property allegedly due to the latter's failure to comply with the terms and conditions of the Deed of Sale with
Assumption of Mortgage and the Undertaking (Exh. '5', pp. 225-226, Record)."6

Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for specific performance, nullity of
cancellation, writ of possession and damages. This was docketed as Civil Case No. 15952 at the Regional Trial Court of Makati,
Branch 149. The case was tried and heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this Court),
who dismissed the Complaint in a Decision dated November 14, 1990.7 Thereafter, petitioners filed a Motion for
Reconsideration.8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador S. A. Abad Santos was
assigned to the sala she vacated. In an Order dated May 15, 1991,9 Judge Abad Santos granted petitioner's Motion for
Reconsideration and directed the parties to proceed with the sale. He instructed petitioners to pay the balance of P1.8 million to
private respondents who, in turn, were ordered to execute a deed of absolute sale and to surrender possession of the disputed
property to petitioners.

Private respondents appealed to the CA.

Ruling of the Court of Appeal

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's earlier Decision dismissing
petitioners' Complaint. Upholding the validity of the rescission made by private respondents, the CA explained its ruling in this
wise:

"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the consideration of this sale, the
VENDEE (Velarde)' would assume to pay the mortgage obligation on the subject property in the amount of P 1.8 million
in favor of BPI in the name of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde includes the
downpayment of P800,000.00 and the balance of Pl.8 million, and the balance of Pl.8 million cannot be paid in cash,
Vendee Velarde, as part of the consideration of the sale, had to assume the mortgage obligation on the subject
property. In other words, the assumption of the mortgage obligation is part of the obligation of Velarde, as vendee,
under the contract. Velarde further agreed 'to strictly and faithfully comply with all the terms and conditions appearing in
the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same were originally
signed and executed by the Vendee. (p. 2, thereof, p. 12, Record). This was reiterated by Velarde in the document
entitled 'Undertaking' wherein the latter agreed to continue paying said loan in accordance with the terms and conditions
of the Deed of Real Estate Mortgage in the name of Raymundo. Moreover, it was stipulated that in the event of violation
by Velarde of any terms and conditions of said deed of real estate mortgage, the downpayment of P800,000.00 plus all
payments made with BPI or the mortgage loan would be forfeited and the [D]eed of [S]ale with [A]ssumption of
[M]ortgage would thereby be Cancelled automatically and of no force and effect (pars. 2 & 3, thereof, pp 13-14,
Record).

"From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumption by Velarde
of the mortgage obligation of Raymundo in the amount of Pl.8 million. This would mean that Velarde had to make
payments to BPI under the [D]eed of [R]eal [E]state [M]ortgage the name of Raymundo. The application with BPI for the
approval of the assumption of mortgage would mean that, in case of approval, payment of the mortgage obligation will
now be in the name of Velarde. And in the event said application is disapproved, Velarde had to pay in full. This is
alleged and admitted in Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing on
September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the
case, the non-payment of the mortgage obligation would result in a violation of the contract. And, upon Velarde's failure
to pay the agreed price, the[n] Raymundo may choose either of two (2) actions - (1) demand fulfillment of the contract,
or (2) demand its rescission (Article 1191, Civil Code).

"The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse for Velarde's non-
payment of the balance of the purchase price. As borne out by the evidence, Velarde had to pay in full in case of BPI's
disapproval of the application for assumption of mortgage. What Velarde should have done was to pay the balance of
P1.8 million. Instead, Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly given
weight by the lower court in reversing the decision rendered by then Judge Ynares-Santiago. In said letter, Velarde
registered their willingness to pay the balance in cash but enumerated 3 new conditions which, to the mind of this Court,
would constitute a new undertaking or new agreement which is subject to the consent or approval of Raymundo. These
3 conditions were not among those previously agreed upon by Velarde and Raymundo. These are mere offers or, at
most, an attempt to novate. But then again, there can be no novation because there was no agreement of all the parties
to the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).

"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with Assumption of
Mortgage would be deemed 'automatically cancelled and of no further force and effect, as if the same had never been
 executed or entered into.' While it is true that even if the contract expressly provided for automatic rescission upon
failure to pay the price, the vendee may still pay, he may do so only for as long as no demand for rescission of the
contract has been made upon him either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar,
Raymundo sent Velarde notarial notice dated January 8, 1987 of cancellation/rescission of the contract due to the
latter's failure to comply with their obligation. The rescission was justified in view of Velarde's failure to pay the price
(balance) which is substantial and fundamental as to defeat the object of the parties in making the agreement. As
adverted to above, the agreement of the parties involved a reciprocal obligation wherein the obligation of one is a
resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to rescind the
contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage obligation by appellees Velarde
would create a right to demand payment or to rescind the contract, or to criminal prosecution (Edca Publishing &
Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellee's failure, therefore, to pay the balance, the contract
was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees Velarde having violated the contract,
they have lost their right to its enforcement and hence, cannot avail of the action for specific performance (Voysaw vs.
Interphil Promotions, Inc., 148 SCRA 635)."10

Hence, this appeal. 11

The Issues

Petitioners, in their Memorandum,12 interpose the following assignment of errors:

"I.

The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in a breach of the
contract.

"II

The Court of Appeals erred in holding that the rescission (resolution) of the contract by private respondents was
justified.

"III

The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new conditions' constituting
mere offers or an attempt to novate necessitating a new agreement between the parties."

The Court's Ruling

The Petition is partially meritorious.

First Issue:

Breach of Contract

Petitioner aver that their nonpayment of private respondents' mortgage obligation did not constitute a breach of contract,
considering that their request to assume the obligation had been disapproved by the mortgagee bank. Accordingly, payment of
the monthly amortizations ceased to be their obligation and, instead, it devolved upon private respondents again.

However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the purchase
price. As admitted by both parties, their agreement mandated that petitioners should pay the purchase price balance of P1.8
million to private respondents in case the request to assume the mortgage would be disapproved. Thus, on December 15, 1986,
when petitioners received notice of the bank's disapproval of their application to assume respondents' mortgage, they should
have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only upon the fulfillment of
certain conditions not originally agreed upon in the contract of sale. Such conditional offer to pay cannot take the place of actual
payment as would discharge the obligation of a buyer under a contract of sale.

In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate things, and the buyer to pay
therefor a price certain in money or its equivalent.13

Private respondents had already performed their obligation through the execution of the Deed of Sale, which effectively
transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery or possession is not
legally required, and the execution of the Deed of Sale is deemed equivalent to delivery. 14

Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price in the manner agreed
upon. Worse, they wanted private respondents to perform obligations beyond those stipulated in the contract before fulfilling
their own obligation to pay the full purchase price.

Second Issue

Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as the former
had signified their willingness to pay the balance of the purchase price only a little over a month from the time they were notified
of the disapproval of their application for assumption of mortgage. Petitioners also aver that the breach of the contract was not
substantial as would warrant a rescission. They cite several cases15 in which this Court declared that rescission of a contract
would not be permitted for a slight or casual breach. Finally, they argue that they have substantially performed their obligation in
good faith, considering that they have already made the initial payment of P800,000 and three (3) monthly mortgage payments.

As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the mortgage obligations, as
their nonperformance of their reciprocal obligation to pay the purchase price under the contract of sale. Private respondents'
right to rescind the contract finds basis in Article 1191 of the Civil Code, which explicitly provides as follows:

"Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between fulfillment and the rescission of the obligation, with the payment of damages in
either case. He may also seek rescission even after he has chosen fulfillment, if the latter should become impossible."

The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the
other party who violates the reciprocity between them.16 The breach contemplated in the said provision is the obligor's failure to
comply with an existing obligation.17 When the obligor cannot comply with what is incumbent upon it, the obligee may seek
rescission and, in the absence of any just cause for the court to determine the period of compliance, the court shall decree the
rescission.18

In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of petitioners
to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very essence of
reciprocity in the contract of sale, a violation that consequently gave rise to private respondent's right to rescind the same in
accordance with law.

True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became due; however,
this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal obligation. Moreover, the
offer to pay was conditioned on the performance by private respondents of additional burdens that had not been agreed upon in
the original contract. Thus, it cannot be said that the breach committed by petitioners was merely slight or casual as would
preclude the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumstances in those cases are not analogous
to those in the present one. In Song Fo there was, on the part of the buyer, only a delay of twenty (20) days to pay for the goods
delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the seller.

In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which was actually paid.

In Tan, the alleged breach was private respondent's delay of only a few days, which was for the purpose of clearing the title to
the property; there was no reference whatsoever to the nonpayment of the contract price.

In the instant case, the breach committed did not merely consist of a slight delay in payment or an irregularity; such breach
would not normally defeat the intention of the parties to the contract. Here, petitioners not only failed to pay the P1.8 million
balance, but they also imposed upon private respondents new obligations as preconditions to the performance of their own
obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally due and demandable
under the contract of sale. Hence, private respondents were left with the legal option of seeking rescission to protect their own
interest.

Mutual Restitution

Required in Rescission

As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of
the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses
stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this
controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to bring
back the parties to their original situation prior to the inception of the contract. Accordingly, the initial payment of P800,000 and
the corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by
petitioners should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands
rescission can return whatever he may be obliged to restore.20 To rescind is to declare a contract void at its inception and to put
an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other,
but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made.21

Third Issue

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue raised by petitioners. Suffice
it to say that the three conditions appearing on the January 7, 1987 letter of petitioners to private respondents were not part of
the original contract. By that time, it was already incumbent upon the former to pay the balance of the sale price. They had no
right to demand preconditions to the fulfillment of their obligation, which had become due.

WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private respondents are ordered to
return to petitioners the amount of P874,150, which the latter paid as a consequence of the rescinded contract, with legal
interest thereon from January 8, 1987, the date of rescission. No pronouncement as to costs.SO ORDERED.1âwphi1.nêt

Melo, Vitug, and Sandoval-Gutierrez, JJ., concur.

G.R. No. 143513 November 14, 2001

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and FIRESTONE CERAMICS, INC., respondents.

x---------------------------------------------------------x

G.R. No. 143590 November 14, 2001

NATIONAL DEVELOPMENT CORPORATION, petitioner,

vs.
FIRESTONE CERAMICS, INC., respondents.

BELLOSILLO, J.:

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 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-hectare8property 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
29,00010 square meters, whose contract with NDC was set to expire on 31 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.

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 (italics 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 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.

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 NDC's 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 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 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. CA41 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.

Mendoza, Buena, and De Leon, Jr., JJ., concur.

Quisumbing, J., no part due to prior close relations.
G.R. No. 115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY, respondents.

PANGANIBAN, J.:

In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine Culture, is the
Ateneo de Manila University performing the work of an independent contractor and thus taxable within the purview of then
Section 205 of the National Internal Revenue Code levying a three percent contractor's tax? This question is answer by the
Court in the negative as it resolves this petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP No.
31790 promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed by the
parties.

Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality
separate and distinct from that of private respondent. The IPC is a Philippine unit engaged in social science
studies of Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from
international organizations, private foundations and government agencies.

On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a demand letter
dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor's
tax, and an assessment dated June 27, 1983 in the sum of P1,141,837 for alleged deficiency income tax, both
for the fiscal year ended March 31, 1978. Denying said tax liabilities, private respondent sent petitioner a letter-
protest and subsequently filed with the latter a memorandum contesting the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency income tax
but modifying the assessment for deficiency contractor's tax by increasing the amount due to P193,475.55.
Unsatisfied, private respondent requested for a reconsideration or reinvestigation of the modified assessment.
At the same time, it filed in the respondent court a petition for review of the said letter-decision of the petitioner.
While the petition was pending before the respondent court, petitioner issued a final decision dated August 3,
1988 reducing the assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of
surcharge and interest.

On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads:

WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency
contractor's tax assessment in the amount of P46,516.41 exclusive of surcharge and interest
for the fiscal year ended March 31, 1978 is hereby CANCELED. No pronouncement as to cost.

SO ORDERED.

Not in accord with said decision, petitioner has come to this Court via the present petition for review raising the following
issues:
 1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF
INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX

UNDER SECTION 205 OF THE TAX CODE.

The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:

Sec. 205. Contractor, proprietors or operators of dockyards, and others. — A contractor's tax of threeper
centum of the gross receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors and except gross receipts of or from a pioneer industry registered with the Board of
Investments under Republic Act No. 5186:

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless
of whether or not the performance of the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.

xxx xxx xxx

Petitioner contends that the respondent court erred in holding that private respondent is not an "independent
contractor" within the purview of Section 205 of the Tax Code. To petitioner, the term "independent contractor",
as defined by the Code, encompasses all kinds of services rendered for a fee and that the only exceptions are
the following:

a. Persons, association and corporations under contract for embroidery and apparel for export and gross
receipts of or from pioneer industry registered with the Board of Investment under R.A. No. 5186;

b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b] of the Tax
Code); and

c. Regional or area headquarters established in the Philippines by multinational corporations, including their
alien executives, and which headquarters do not earn or derive income from the Philippines and which act as
supervisory, communication and coordinating centers for their affiliates, subsidiaries or branches in the Asia
Pacific Region (Section 205 of the Tax Code).

Petitioner thus submits that since private respondent falls under the definition of an "independent contractor"
and is not among the aforementioned exceptions, private respondent is therefore subject to the 3% contractor's
tax imposed under the same Code. 4

The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed decision of the
Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for review.

The Issues
Petitioner submits before us the following issues:

1) Whether or not private respondent falls under the purview of independent contractor pursuant to Section 205
of the Tax Code.

2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax Code. 5

In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch — the
Institute of Philippine Culture — performing the work of an independent contractor and, thus, subject to the three percent
contractor's tax levied by then Section 205 of the National Internal Revenue Code?

The Court's Ruling

The petition is unmeritorious.

Interpretation of Tax Laws

The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:

Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of threeper
centum of the gross receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors, except persons, associations and corporations under
contract for embroidery and apparel for export, as well as their agents and contractors, and except gross
receipts of or from a pioneer industry registered with the Board of Investments under the provisions of Republic
Act No. 5186;

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of
the service calls for the exercise or use of the physical or mental faculties of such contractors or their
employees.

The term "independent contractor" shall not include regional or area headquarters established in the Philippines
by multinational corporations, including their alien executives, and which headquarters do not earn or derive
income from the Philippines and which act as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region.

The term "gross receipts" means all amounts received by the prime or principal contractor as the total contract
price, undiminished by amount paid to the subcontractor, shall be excluded from the taxable gross receipts of
the subcontractor.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls within the
definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is properly a subject of the
three percent contractor's tax levied by the foregoing provision of law. 6 Petitioner states that the "term 'independent contractor'
is not specifically defined so as to delimit the scope thereof, so much so that any person who . . . renders physical and mental
service for a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax." 7 According to
petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first
applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to
determine who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should
have determined first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing
taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion
to reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless
it does so clearly, expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express words for that
purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness
to tax lawsand the provisions of a taxing act are not to be extended by implication." 8 Parenthetically, in answering the question
of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed
beyond what statutes expressly and clearly import." 9

To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor be
engaged in the business of selling its services. Hence, to impose the three percent contractor's tax on Ateneo's Institute of
Philippine Culture, it should be sufficiently proven that the private respondent is indeed selling its services for a fee in pursuit of
an independent business. And it is only after private respondent has been found clearly to be subject to the provisions of Sec.
205 that the question of exemption therefrom would arise. Only after such coverage is shown does the rule of construction —
that tax exemptions are to be strictly construed against the taxpayer — come into play, contrary to petitioner's position. This is
the main line of reasoning of the Court of Tax Appeals in its decision, 10 which was affirmed by the CA.

The Ateneo de Manila University Did Not Contract

for the Sale of the Service of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its services
for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university.

Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner Commissioner of Internal
Revenue contends that "the tax is due on its activity of conducting researches for a fee. The tax is due on the gross receipts
made in favor of IPC pursuant to the contracts the latter entered to conduct researches for the benefit primarily of its clients. The
tax is imposed on the exercise of a taxable activity. . . . [T]he sale of services of private respondent is made under a contract
and the various contracts entered into between private respondent and its clients are almost of the same terms, showing,
among others, the compensation and terms of payment." 11(Emphasis supplied.)

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that Ateneo's IPC in fact
contracted to sell its research services for a fee. Clearly then, as found by the Court of Appeals and the Court of Tax Appeals,
petitioner's theory is inapplicable to the established factual milieu obtaining in the instant case.

In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed, contracts for sale of
services were ever entered into by the private respondent. As appropriately pointed out by the latter:

An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals shows that
only the following documentary evidence was presented:

Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field Audit Report

3 Adjustments to Sales/Receipts

4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.

 None of the foregoing evidence even comes close to purport to be contracts between private respondent and
third parties. 12

Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the Ateneo de Manila
University are technically not a fee. They may however fall as gifts or donations which are tax-exempt" as shown by private
respondent's compliance with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption
of such gifts to an educational institution. 13

Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:

To our mind, private respondent hardly fits into the definition of an "independent contractor".

For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in business.
Undisputedly, private respondent is mandated by law to undertake research activities to maintain its university
status. In fact, the research activities being carried out by the IPC is focused not on business or profit but on
social sciences studies of Philippine society and culture. Since it can only finance a limited number of IPC's
research projects, private respondent occasionally accepts sponsorship for unfunded IPC research projects
from international organizations, private foundations and governmental agencies. However, such sponsorships
are subject to private respondent's terms and conditions, among which are, that the research is confined to
topics consistent with the private respondent's academic agenda; that no proprietary or commercial purpose
research is done; and that private respondent retains not only the absolute right to publish but also the
ownership of the results of the research conducted by the IPC. Quite clearly, the aforementioned terms and
conditions belie the allegation that private respondent is a contractor or is engaged in business.

For another, it bears stressing that private respondent is a non-stock, non-profit educational corporation. The
fact that it accepted sponsorship for IPC's unfunded projects is merely incidental. For, the main function of the
IPC is to undertake research projects under the academic agenda of the private respondent. Moreover the
records do not show that in accepting sponsorship of research work, IPC realized profits from such work. On
the contrary, the evidence shows that for about 30 years, IPC had continuously operated at a loss, which
means that sponsored funds are less than actual expenses for its research projects. That IPC has been
operating at a loss loudly bespeaks of the fact that education and not profit is the motive for undertaking the
research projects.

Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact still remains
that there is no proof that part of such earnings or profits was ever distributed as dividends to any stockholder,
as in fact none was so distributed because they accrued to the benefit of the private respondent which is a non-
profit educational institution. 14

Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of a fee or
price in exchange for the performance of a service or delivery of an object. Rather, the amounts are in the nature of an
endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the research with no strings
attached. As found by the two courts below, such sponsorships are subject to IPC's terms and conditions. No proprietary or
commercial research is done, and IPC retains the ownership of the results of the research, including the absolute right to publish
the same. The copyrights over the results of the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15 The amounts given to IPC, therefore,
may not be deemed, it bears stressing as fees or gross receipts that can be subjected to the three percent contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a
contract of sale or a contract of a piece of work. "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." 16 By its very nature, a contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code
"expressly makes the obligation to transfer ownership as an essential element of the contract of sale, following modern codes,
such as the German and the Swiss. Even in the absence of this express requirement, however, most writers, including Sanchez
Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered such transfer of ownership as the primary purpose of
sale. Perez and Alguer follow the same view, stating that the delivery of the thing does not mean a mere physical transfer, but is
a means of transmitting ownership. Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the
essence of sale." 17 In the case of a contract for a piece of work, "the contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation. . . . If the contractor agrees to produce the work from materials
furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the thing, . . ." 18 Ineludably,
whether the contract be one of sale or one for a piece of work, a transfer of ownership is involved and a party necessarily walks
away with an object. 19 In the case at bench, it is clear from the evidence on record that there was no sale either of objects or
services because, as adverted to earlier, there was no transfer of ownership over the research data obtained or the results of
research projects undertaken by the Institute of Philippine Culture.

Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of maintaining
Ateneo's university status and not in the course of an independent business of selling such research with profit in mind. This is
clear from a reading of the regulations governing universities:

31. In addition to the legal requisites an institution must meet, among others, the following requirements before
an application for university status shall be considered:

xxx xxx xxx

(e) The institution must undertake research and operate with a competent qualified staff at least three graduate
departments in accordance with the rules and standards for graduate education. One of the departments shall
be science and technology. The competence of the staff shall be judged by their effective teaching, scholarly
publications and research activities published in its school journal as well as their leadership activities in the
profession.

(f) The institution must show evidence of adequate and stable financial resources and support, a reasonable
portion of which should be devoted to institutional development and research. (emphasis supplied)

xxx xxx xxx

32. University status may be withdrawn, after due notice and hearing, for failure to maintain satisfactorily the
standards and requirements therefor. 20

Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently erroneous
because the former is not an independent juridical entity that is separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally Conclusive

In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for the purpose of
reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether" 21 Ateneo de Manila
University may be deemed a subject of the three percent contractor's tax "through the evidence presented before it."
Consequently, "as a matter of principle, this Court will not set aside the conclusion reached by . . . the Court of Tax Appeals
which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority . .
." 22 This point becomes more evident in the case before us where the findings and conclusions of both the Court of Tax
Appeals and the Court of Appeals appear untainted by any abuse of authority, much less grave abuse of discretion. Thus, we
find the decision of the latter affirming that of the former free from any palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it was
Ateneo de Manila University itself that had funded the research projects of the institute, and it was only when Ateneo
 could no longer produce the needed funds that the institute sought funding from outside. The testimony of Ateneo's
Director for Accounting Services, Ms. Leonor Wijangco, provides significant insight on the academic and nonprofit
nature of the institute's research activities done in furtherance of the university's purposes, as follows:

Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of Philippine Culture) that as far as
grants from sponsored research it is possible that the grant sometimes is less than the actual cost. Will you please tell us in this
case when the actual cost is a lot less than the grant who shoulders the additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university has to have its own research institute. 24

So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine Culture when it
undisputedly loses not an insignificant amount in the process? The plain and simple answer is that private respondent is not a
contractor selling its services for a fee but an academic institution conducting these researches pursuant to its commitments to
education and, ultimately, to public service. For the institute to have tenaciously continued operating for so long despite its
accumulation of significant losses, we can only agree with both the Court of Tax Appeals and the Court of Appeals that
"education and not profit is [IPC's] motive for undertaking the research
projects." 25

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is hereby
AFFIRMED in full.

SO ORDERED.

Narvasa, C.J., Davide, Jr., Melo and Francisco JJ., concur.

G.R. No. 82508 September 29, 1989

FILINVEST CREDIT CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, JOSE SY BANG and ILUMINADA TAN SY BANG,*respondents.

Labaquis, Loyola, Angara and Associates for petitioner.

Alfredo 1. Raya for private respondents.

SARMIENTO, J.:

This is a petition for review on certiorari of the decision, 1 dated March 17, 1988, of the Court of Appeals which affirmed with
modification the decision 2 of the Regional Trial Court of Quezon, Branch LIX, Lucena City. The controversy stemmed from the
following facts: The private respondents, the spouses Jose Sy Bang and Iluminada Tan, were engaged in the sale of gravel
produced from crushed rocks and used for construction purposes. In order to increase their production, they engaged the
services of Mr. Ruben Mercurio, the proprietor of Gemini Motor Sales in Lucena City, to look for a rock crusher which they could
buy. Mr. Mercurio referred the private respondents to the Rizal Consolidated Corporation which then had for sale one such
machinery described as:

ONE UNIT LIPPMAN PORTABLE CRUSHING PLANT (RECONDITIONED) [sic]

 JAW CRUSHER-10xl6 DOUBLE ROLL CRUSHER 16x16

3 UNITS PRODUCT CONVEYOR

75 HP ELECTRIC MOTOR

8 PCS. BRAND NEW TIRES CHASSIS NO. 19696 GOOD RUNNING CONDITION 3

Oscar Sy Bang, a brother of private respondent Jose Sy Bang, went to inspect the machine at the Rizal Consolidated's plant
site. Apparently satisfied with the machine, the private respondents signified their intent to purchase the same. They were
however confronted with a problem-the rock crusher carried a cash price tag of P 550,000.00. Bent on acquiring the machinery,
the private respondents applied for financial assistance from the petitioner, Filinvest Credit Corporation. The petitioner agreed to
extend to the private respondents financial aid on the following conditions: that the machinery be purchased in the petitioner's
name; that it be leased (with option to purchase upon the termination of the lease period) to the private respondents; and that
the private respondents execute a real estate mortgage in favor of the petitioner as security for the amount advanced by the
latter. Accordingly, on May 18,1981, a contract of lease of machinery (with option to purchase) was entered into by the parties
whereby the private respondents agreed to lease from the petitioner the rock crusher for two years starting from July 5, 1 981
payable as follows:

P10,000.00 - first 3 months

23,000.00 - next 6 months

24,800.00 - next 15 months

The contract likewise stipulated that at the end of the two-year period, the machine would be owned by the private respondents.
Thus, the private respondents issued in favor of the petitioner a check for P150,550.00, as initial rental (or guaranty deposit),
and twenty-four (24) postdated checks corresponding to the 24 monthly rentals. In addition, to guarantee their compliance with
the lease contract, the private respondents executed a real estate mortgage over two parcels of land in favor of the petitioner.
The rock crusher was delivered to the private respondents on June 9, 1981. Three months from the date of delivery, or on
September 7, 1981, however, the private respondents, claiming that they had only tested the machine that month, sent a letter-
complaint to the petitioner, alleging that contrary to the 20 to 40 tons per hour capacity of the machine as stated in the lease
contract, the machine could only process 5 tons of rocks and stones per hour. They then demanded that the petitioner make
good the stipulation in the lease contract. They followed that up with similar written complaints to the petitioner, but the latter did
not, however, act on them. Subsequently, the private respondents stopped payment on the remaining checks they had issued to
the petitioner. 5

As a consequence of the non-payment by the private respondents of the rentals on the rock crusher as they fell due despite the
repeated written demands, the petitioner extrajudicially foreclosed the real estate mortgage. 6 On April 18, 1983, the private
respondents received a Sheriff s Notice of Auction Sale informing them that their mortgaged properties were going to be sold at
a public auction on May 25, 1983 at 10:00 o'clock in the morning at the Office of the Provincial Sheriff in Lucena City to satisfy
their indebtedness to the petitioner. 7 To thwart the impending auction of their properties, the private respondents filed before
the Regional Trial Court of Quezon, on May 4, 1983, 8 a complaint against the petitioner, for the rescission of the contract of
lease, annullment of the real estate mortgage, and for injunction and damages, with prayer for the issuance of a writ of
preliminary injunction.9 On May 23, 1983, three days before the scheduled auction sale, the trial court issued a temporary
restraining order commanding the Provincial Sheriff of Quezon, and the petitioner, to refrain and desist from proceeding with the
public auction. 10 Two years later, on September 4, 1985, the trial court rendered a decision in favor of the private respondents,
the dispositive portion of which reads:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

1. making the injunction permanent;

 2. rescinding the contract of lease of the machinery and equipment and ordering the plaintiffs to return to the
defendant corporation the machinery subject of the lease contract, and the defendant corporation to return to
plaintiffs the sum of P470,950.00 it received from the latter as guaranty deposit and rentals with legal interest
thereon until the amount is fully restituted;

3. annulling the real estate mortgage constituted over the properties of the plaintiffs covered by Transfer
Certificate of Title Nos. T32480 and T-5779 of the Registry of Deeds of Lucena City;

4. ordering the defendant corporation to pay plaintiffs P30,000.00 as attorney's fees and the costs of the suit.

SO ORDERED. 11

Dissatisfied with the trial court's decision, the petitioner elevated the case to the respondent Court of Appeals.

On March 17, 1988, the appellate court, finding no error in the appealed judgment, affirmed the same in toto. 12Hence, this
petition.

Before us, the petitioner reasserts that the private respondents' cause of action is not against it (the petitioner), but against
either the Rizal Consolidated Corporation, the original owner-seller of the subject rock crusher, or Gemini Motors Sales which
served as a conduit facilitator of the purchase of the said machine. The petitioner argues that it is a financing institution engaged
in quasi-banking activities, primarily the lending of money to entrepreneurs such as the private respondents and the general
public, but certainly not the leasing or selling of heavy machineries like the subject rock crusher. The petitioner denies being the
seller of the rock crusher and only admits having financed its acquisition by the private respondents. Further, the petitioner
absolves itself of any liability arising out of the lease contract it signed with the private respondents due to the waiver of warranty
made by the latter. The petitioner likewise maintains that the private respondents being presumed to be knowledgeable about
machineries, should be held responsible for the detection of defects in the machine they had acquired, and on account of that,
they are estopped from claiming any breach of warranty. Finally, the petitioner interposed the defense of prescription, invoking
Article 1571 of the Civil Code, which provides:

Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six months, from the delivery of
the thing sold.

We find the petitioner's first contention untenable. While it is accepted that the petitioner is a financing institution, it is not,
however, immune from any recourse by the private respondents. Notwithstanding the testimony of private respondent Jose Sy
Bang that he did not purchase the rock crusher from the petitioner, the fact that the rock crusher was purchased from Rizal
Consolidated Corporation in the name and with the funds of the petitioner proves beyond doubt that the ownership thereof was
effectively transferred to it. It is precisely this ownership which enabled the petitioner to enter into the "Contract of Lease of
Machinery and Equipment" with the private respondents.

Be that as it may, the real intention of the parties should prevail. The nomenclature of the agreement cannot change its true
essence, i.e., a sale on installments. It is basic that a contract is what the law defines it and the parties intend it to be, not what it
is called by the parties. 13 It is apparent here thatthe intent of the parties to the subject contract is for the so-called rentals to be
the installment payments. Upon the completion of the payments, then the rock crusher, subject matter of the contract, would
become the property of the private respondents. This form of agreement has been criticized as a lease only in name. Thus
in Vda. de Jose v. Barrueco 14 we stated:

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 bargain, in the transfer of title to the lessee. 15
The importance of the criticism is heightened in the light of Article 1484 of the new Civil Code which provides for the remedies of
an unpaid seller of movables on installment basis.

Article 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 vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee's 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.

Under the aforequoted provision, the seller of movables in installments, in case the buyer fails to pay two or more installments
may elect to pursue either of the following remedies: (1) exact fulfillment by the purchaser of the obligation; (2) cancel the sale;
or (3) foreclose the mortgage on the purchased property if one was constituted thereon. It is now settled that the said remedies
are alternative and not cumulative and therefore, the exercise of one bars the exercise of the others.

Indubitably, the device contract of lease with option to buy is at times resorted to as a means to circumvent Article 1484,
particularly paragraph (3) thereof.Through the set-up, the vendor, by retaining ownership over the property in the guise of being
the lessor, retains, likewise, the right to repossess the same, without going through the process of foreclosure, in the event the
vendee-lessee defaults in the payment of the installments. There arises therefore no need to constitute a chattel mortgage over
the movable sold. More important, the vendor, after repossessing the property and, in effect, canceling the contract of sale, gets
to keep all the installments-cum-rentals already paid. It is thus for these reasons that Article 1485 of the new Civil Code provides
that:

Article 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 possession or enjoyment of the thing. (Emphasis
ours.)

Unfortunately, even with the foregoing findings, we however fail to find any reason to hold the petitioner liable for the rock
crusher's failure to produce in accordance with its described capacity. According to the petitioner, it was the private respondents
who chose, inspected, and tested the subject machinery. It was only after they had inspected and tested the machine, and
found it to their satisfaction, that the private respondents sought financial aid from the petitioner. These allegations of the
petitioner had never been rebutted by the private respondents. In fact, they were even admitted by the private respondents in
the contract they signed. Thus:

LESSEE'S SELECTION, INSPECTION AND VERIFICATION.-The LESSEE hereby confirms and acknowledges that he has
independently inspected and verified the leased property and has selected and received the same from the Dealer of his own
choosing in good order and excellent running and operating condition and on the basis of such verification, etc. the LESSEE
has agreed to enter into this Contract." 16

Moreover, considering that between the parties, it is the private respondents, by reason of their business, who are presumed to
be more knowledgeable, if not experts, on the machinery subject of the contract, they should not therefore be heard now to
complain of any alleged deficiency of the said machinery. It is their failure or neglect to exercise the caution and prudence of an
expert, or, at least, of a prudent man, in the selection, testing, and inspection of the rock crusher that gave rise to their difficulty
and to this conflict. A well- established principle in law is that between two parties, he, who by his negligence caused the loss,
shall bear the same.

At any rate, even if the private respondents could not be adjudged as negligent, they still are precluded from imputing any
liability on the petitioner. One of the stipulations in the contract they entered into with the petitioner is an express waiver of
warranties in favor of the latter. By so signing the agreement, the private respondents absolved the petitioner from any liability
arising from any defect or deficiency of the machinery they bought. The stipulation on the machine's production capacity being
"typewritten" and that of the waiver being "printed" does not militate against the latter's effectivity. As such, whether "a capacity
of 20 to 40 tons per hour" is a condition or a description is of no moment. What stands is that the private respondents had
expressly exempted the petitioner from any warranty whatsoever. Their Contract of Lease Of Machinery And Equipment states:

WARRANTY-LESSEE absolutely releases the lessor from any liability whatsoever as to any and all matters in relation to
warranty in accordance with the provisions hereinafter stipulated. 17

Taking into account that due to the nature of its business and its mode of providing financial assistance to clients, the petitioner
deals in goods over which it has no sufficient know-how or expertise, and the selection of a particular item is left to the client
concerned, the latter, therefore, shoulders the responsibility of protecting himself against product defects. This is where the
waiver of warranties is of paramount importance. Common sense dictates that a buyer inspects a product before purchasing it
(under the principle of caveat emptor or "buyer beware") and does not return it for defects discovered later on, particularly if the
return of the product is not covered by or stipulated in a contract or warranty. In the case at bar, to declare the waiver as non-
effective, as the lower courts did, would impair the obligation of contracts. Certainly, the waiver in question could not be
considered a mere surplusage in the contract between the parties. Moreover, nowhere is it shown in the records of the case that
the private respondent has argued for its nullity or illegality. In any event, we find no ambiguity in the language of the waiver or
the release of warranty. There is therefore no room for any interpretation as to its effect or applicability vis-a- vis the deficient
output of the rock crusher. Suffice it to say that the private respondents have validly excused the petitioner from any warranty on
the rock crusher. Hence, they should bear the loss for any defect found therein.

WHEREFORE, the Petition is GRANTED; the Decision of the Court of Appeals dated March 17, 1988 is hereby REVERSED
AND SET ASIDE, and another one rendered DISMISSING the complaint. Costs against the private respondents.

SO ORDERED.

Melencio-Herrera (Chairperson), Paras and Regalado, ii., concur,

Padilla, J.,took no part

G.R. No. 130972 January 23, 2002

PHILIPPINE LAWIN BUS, CO., MASTER TOURS & TRAVEL CORP., MARCIANO TAN, ISIDRO TAN, ESTEBAN TAN and
HENRY TAN, petitioners,
vs.
COURT OF APPEALS and ADVANCE CAPITAL CORPORATION, respondents.

DECISION

PARDO, J.:

The Case

The case is a petition for review via certiorari of the decision of the Court of Appeals,1 reversing that of the trial court2and
sentencing petitioners as follows:

"WHEREFORE, the appealed decision should be, as it is hereby REVERSED and SET ASIDE. In lieu thereof, a new one is
hereby rendered ordering the defendants-appellees to pay, jointly and solidarily, in favor of plaintiff-appellant Advance Capital
Corporation, the following amounts:

"1. P16,484,994.42, the principal obligation under the two promissory note Nos. 003 and 00037 plus interest and
penalties;
 "2. P100,000.00 for loss of goodwill and good reputation;

"3. An amount equivalent to 10% of the collectible amount, plus P50,000, as acceptance fee and P500 per appearance,
as and for attorney’s fees: and

"4. P100,000 as litigation expenses.

"Costs shall be taxed against defendant-appellees.

"SO ORDERED."3

The Facts

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

"On 7 August 1990 plaintiff Advance Capital Corporation, a licensed lending investor, extended a loan to defendant Philippine
Lawin Bus Company (hereafter referred to as LAWIN), in the amount of P8,000,000.00 payable within a period of one (1) year,
as evidenced by a Credit Agreement (Exhibits "B" to "B-4-B"). The defendant, through Marciano Tan, its Executive Vice
President, executed Promissory Note No. 003, for the amount of P8,000,000.00 (Exhs. "C" to "C-1").

"To guarantee payment of the loan, defendant Lawin executed in favor of plaintiff the following documents: (1) A Deed of Chattel
Mortgage wherein 9 units of buses were constituted as collaterals (Exhibits "F" to "F-7"): (2) A joint and several UNDERTAKING
of defendant Master Tours and Travel Corporation dated 07 August 1990, signed by Isidro Tan and Marciano Tan (Exhs. "H" to
"H-1): and (3) A joint and several UNDERTAKING dated 21 August 1990, executed and signed by Esteban, Isidro, Marciano
and Henry, all surnamed Tan (Exhs. "I" to "I-6").

"Out of the P8,000,000.00 loan, P1,800,000.00 was paid. Thus, on 02 November 1990, defendant Bus Company was able to
avail an additional loan of P2,000,000.00 for one (1) month under Promissory Note 00028 (Exhs. "J"-"J-1").

"Defendant LAWIN failed to pay the aforementioned promissory note and the same was renewed on 03 December 1990 to
become due on or before 01 February 1991, under Promissory Note 00037 (Exh. "K").

"On 15 May 1991 for failure to pay the two promissory notes, defendant LAWIN was granted a loan re-structuring for two (2)
months to mature on 31 July 1991.

"Despite the restructuring, defendant LAWIN failed to pay. Thus, plaintiff foreclosed the mortgaged buses and as the sole bidder
thereof, the amount of P2,000,000.00 was accepted by the deputy sheriff conducting the sale and credited to the account of
defendant LAWIN.

"Thereafter, on 27 May 1992, identical demand letters were sent to the defendants to pay their obligation (Exhs. "X" to "CC").
Despite repeated demands, the defendants failed to pay their indebtedness which totaled of P16,484,992.42 as of 31 July 1992
(Exhs. "DD"-"DD-1").

"Thus, the suit for sum of money, wherein the plaintiff prays that defendants solidarily pay plaintiff as of July 31, 1992 the sum of
(a) P16,484,994.12 as principal obligation under the two promissory notes Nos. 003 and 00037, plus interests and penalties: (b)
P300,000.00 for loss of good will and good business reputation: (c) attorney’s fees amounting to P100,000.00 as acceptance
fee and a sum equivalent to 10% of the collectible amount, and P500.00 as appearance fee; (d) P200,000.00 as litigation
expenses; (e) exemplary damages in an amount to be awarded at the court’s discretion; and (f) the costs.

"On 04 September 1993, a writ of preliminary injunction was issued with respect to movable and immovable properties of the
defendants.
"In answer to the complaint, defendants-appellees assert by way of special and affirmative defense, that there was already an
arrangement as to the full settlement of the loan obligation by way of:

"17.A. Sale of the nine (9) units passenger buses the proceeds of which will be credited against the loan amount as full payment
thereof; or in the alternative.

"17.B. Plaintiff will shoulder and bear the cost of rehabilitating the buses, with the amount thereof to be included in the total
obligation of defendant Lawin and the bus operated, with the earnings thereof to be applied to the loan obligation of defendant
Lawin." (p. 4 Answer; p. 166, rec.)

"Defendants further assert that the foreclosure sale was in violation of the aforequoted arrangement and prayed for the
nullification of the same and the dismissal of the complaint."4

On 28 June 1995, the trial court rendered a decision dismissing the complaint, as follows:

"WHEREFORE, judgment is rendered as follows:

"1. Dismissing the complaint for lack of merit;

"2. Declaring the foreclosure and auction sale null and void;

"3. Declaring the obligation or indebtedness of defendants EXTINGUISHED;

"4. Declaring the writ of attachment issued in this case null and void and, therefore, is hereby declared dissolved; and

"5. Ordering the Sheriff of this Branch or whoever is in possession, to return all the personal properties attached in this
case to the owner/s thereof within one (1) week from the finality of this decision;

"6. Dismissing defendant’s counterclaim for lack of sufficient merit.

"No pronouncement as to costs.

"SO ORDERED."5

In time, respondent Advance Capital Corporation appealed from the decision to the Court of Appeals. 6

On 30 September 1997, the Court of Appeals promulgated a decision reversing that of the trial court, the dispositive portion of
which is set out in the opening paragraph of this decision.

Hence, this appeal.7

The Issue

The issue raised is whether there was dacion en pago between the parties upon the surrender or transfer of the mortgaged
buses to the respondent.8

The Court’s Ruling

We deny the petition, with modification.

The issue raised is factual. In an appeal via certiorari, we may not review the factual findings of the Court of Appeals.9 When
supported by substantial evidence, the findings of fact of the Court of Appeals are conclusive and binding on the parties and are
not reviewable by this Court,10 unless the case falls under any of the recognized exceptions to the rule.11

Petitioner failed to prove that the case falls within the exceptions. 12 The Supreme Court is not a trier of facts.13 It is not our
function to review, examine and evaluate or weigh the probative value of the evidence presented. 14 A question of fact would
arise in such event.15

Nonetheless, we agree with the Court of Appeals that there was no dacion en pago that took place between the parties.

In dacion en pago, property is alienated to the creditor in satisfaction of a debt in money.16 It is "the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation."17 It
"extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally extinguished."18

Article 1245 of the Civil Code provides that the law on sales shall govern an agreement of dacion en pago. A contract of sale is
perfected at the moment there is a meeting of the minds of the parties thereto upon the thing which is the object of the contract
and upon the price.19 In Filinvest Credit Corporation v. Philippine Acetylene Co., Inc., we said:

"x x x. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding obligation. The undertaking really partakes in one sense of the nature of sale, that is,
the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor’s
debt.1âwphi1 As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration
must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation
where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract
of sale, while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale
or novation, to have the effect of totally extinguishing the debt or obligation." 20

In this case, there was no meeting of the minds between the parties on whether the loan of the petitioners would be
extinguished by dacion en pago. The petitioners anchor their claim solely on the testimony of Marciano Tan that he proposed to
extinguish petitioners’ obligation by the surrender of the nine buses to the respondent acceded to as shown by receipts its
representative made.21 However, the receipts executed by respondent’s representative as proof of an agreement of the parties
that delivery of the buses to private respondent would result in extinguishing petitioner’s obligation do not in any way reflect the
intention of the parties that ownership thereof by respondent would be complete and absolute. The receipts show that the two
buses were delivered to respondent in order that it would take custody for the purpose of selling the same. The receipts
themselves in fact show that petitioners deemed respondent as their agent in the sale of the two vehicles whereby the proceeds
thereof would be applied in payment of petitioners’ indebtedness to respondent. Such an agreement negates transfer of
absolute ownership over the property to respondent, as in a sale. Thus, in Philippine National Bank v. Pineda22 we held that
where machinery and equipment were repossessed to secure the payment of a loan obligation and not for the purpose of
transferring ownership thereof to the creditor in satisfaction of said loan, no dacion en pago was ever accomplished.1âwphi1

The Fallo

IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision of the Court of Appeals23 with MODIFICATION
as follows:WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE. In lieu thereof, judgment is hereby
rendered ordering defendants-appellees to pay, jointly and severally, plaintiff-appellant Advance Capital Corp. the following
amounts:(1) P16,484,994.42, the principal obligation under the two promissory notes plus 12% per annum from the finality of
this decision until fully paid;

(2) P50,000.00 as attorney’s fees;

(3) Costs of suit.All other monetary awards are deleted.SO ORDERED.