No. L-11827. July 31, 1961.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a
FERNANDO A. GAITE, plaintiff-appellee, vs. ISABELO FONACIER,GEORGE
KRAKOWER,LARAP MINES &SMELTING CO., INC., SEGUNDINA VIVAS,FRANCISCO
DANTE,PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.
Obligations and Contracts; Conditional Obligations; Efficacy subordinated to the happening
of a future and uncertain event.—What characterizes a conditional obligation is the fact that
its efficacy or obligatory force is subordinated to the happening of a future and uncertain
event; so that if the suspensive condition does not take place, the parties would stand as if
the conditional obligation had never existed.
Sales; Commutative and onerous nature of contract of sale; Contingent character of
obligation must clearly appear.—A contract of sale is normally commutative and onerous;
not only does each of the parties assume a correlative obligation, but each party anticipates
performance by the other from the very start. Although the obligation of one party can be
lawfully subordinated to an uncertain event, so that the other understands that he assumes
the risk of receiving nothing for what he gives, it is not in the usual course of business to do
so; hence, the contingent character of the obligation must clearly appear.
Same; How doubt in the intention of parties is resolved.—Sale is essentially onerous, and if
there is doubt whether the parties intended a suspensive condition or a suspensive period
for the payment of the agreed price, the doubt shall be settled in favor of the greatest
reciprocity of interests, which will obtain if the buyer’s obligation is deemed to be actually
existing, with only its maturity postponed or deferred.
APPEAL from a decision of the Court of First Instance of Camarines Norte.
The facts are stated in the opinion of Court.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the claims involved
aggregate more than P200,000.00.
representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group,
situated in the municipality of Jose Panganiban, province of Camarines Norte.
By a “Deed of Assignment” dated September 29, 1952 (Exhibit “3”), Fonacier constituted
and appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact to
enter into a contract with any individual or juridical person for the exploration and
development of the mining claims aforementioned on a royalty basis of not less than P0.50
per ton of ore that might be extracted therefrom. On March 19, 1954, Gaite in turn
executed a general assignment (Record on Appeal, pp. 17-19) conveying the development
and exploitation of said mining claims into the Larap Iron Mines, a single proprietorship
owned solely by and belonging to him, on the same royalty basis provided for in Exhibit “3”.
Thereafter, Gaite embarked upon the development and exploitation of the mining claims in
question, opening and paving roads within and outside their boundaries, making other
improvements and installing facilities therein for use in the development of the mines, and
in time extracted therefrom what he claimed and estimated to be approximately 24,000
metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority granted by
him to Gaite to exploit and develop the mining claims in question, and Gaite assented
thereto subject to certain conditions. As a result, a document entitled “Revocation of Power
of Attorney and Contract” was executed on December 8, 1954 (Exhibit “A”), wherein Gaite
transferred to Fonacier, for the consideration of P20,000.00, plus 10% of the royalties that
Fonacier would receive from the mining claims, all his rights and interests on all the roads,
improvements, and facilities in or outside said claims, the right to use the business name
“Larap Iron Mines” and its goodwill, and all the records and documents relative to the
mines. In the same document, Gaite transferred to Fonacier all his rights and interests over
the “24,000 tons of iron ore, more or less” that the former had already extracted from the
mineral claims, in consideration of the sum of P75,000.00, P10,-000.00 of which was paid
upon the signing of the agreement, and
“b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out of
the first letter of credit covering the first shipment of iron ores and of the first amount
derived from the local sale of iron ore made by the Larap Mines & Smelting Co., Inc., its
assigns, administrators, or successors in interests.”
To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in
favor of Gaite a surety bond, and pursuant to the promise, Fonacier delivered to Gaite a
surety bond dated December 8, 1954 with himself (Fonacier) as principal and the Larap
Mines and Smelting Co. and its stockholders George Krakower, Segundina Vivas, Pacifico
Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit “A-1”). Gaite testified,
however, that when this bond was presented to him by Fonacier together with the
“Revocation of Power of Attorney and Contract”, Exhibit “A”, on December 8, 1954, he
refused to sign said Exhibit “A” unless another bond underwritten by a bonding company
was put up by defendants to secure the payment of the P65,000.00 balance of the price of
the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated
December 8, 1954 (Exhibit “B”), was executed by the same parties to the first bond Exhibit
“A-1”, with the Far Eastern Surety and Insurance Co. as additional surety, but it provided
that the liability of the surety company would attach only when there had been an actual
sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less than
P65,000.00, and that, furthermore, the liability of said surety company would automatically
expire on December 8, 1955. Both bonds were attached to the “Revocation of Power of
Attorney and Contract”, Exhibit “A”, and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two
executed and signed the “Revocation of Power of Attorney and Contract”, Exhibit “A”,
Fonacier entered into a “Contract of Mining Operation”, ceding, transferring, and conveying
unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and explore the
mining claims in question, together with the improvements therein and the use of the name
“Larap Iron Mines” and its goodwill, in consideration of certain royalties. Fonacier likewise
transferred, in the same document, the complete title to the approximately 24,000 tons of
iron ore which he acquired from Gaite, to the Larap Mines & Smelting Co., in consideration
for the signing by the company and its stockholders of the surety bonds delivered by
Fonacier to Gaite (Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit “B” expired with respect to the Far Eastern
Surety and Insurance Company, no sale of the approximately 24,000 tons of iron ore had
been made by the Larap Mines & Smelting Co., Inc., nor had the P65,000.00 balance of the
price of said ore been paid to Gaite by Fonacier and his sureties payment of said amount, on
the theory that they had lost right to make use of the period given them when their bond,
Exhibit “B” automatically expired (Exhibits “C” to “C-24”). And when Fonacier and his
sureties failed to pay as demanded by Gaite, the latter filed the present complaint against
them in the Court of First Instance of Manila (Civil Case No. 29310) for the payment of the
P65,000.00 balance of the price of the ore, consequential damages, and attorney’s fees.
All the defendants except Francisco Dante set up the uniform defense that the obligation
sued upon by Gaite was subject to a condition that the amount of P65,000.00 would be
payable out of the first letter of credit covering the first shipment of iron ore and/or the first
amount derived from the local sale of the iron ore by the Larap Mines & Smelting Co., Inc.;
that up to the time of the filing of the complaint, no sale of the iron ore had been made,
hence the condition had not yet been fulfilled; and that consequently, the obligation was
not yet due and demandable. Defendant Fonacier also contended that only 7,573 tons of
the estimated 24,000 tons of iron ore sold to him by Gaite was actually delivered, and
counterclaimed for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to two
issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00
become due and demandable when the defendants failed to renew the surety bond
underwritten by the Far Eastern Surety and Insurance Co., Inc. (Exhibit “B”), which expired
on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant
Fonacier were actually in existence in the mining claims when these parties executed the
“Revocation of Power of Attorney and Contract”, Exhibit “A”.
On the first question, the lower court held that the obligation of the defendants to pay
plaintiff the P65,000.00 balance of the price of the approximately 24,000 tons of iron ore
was one with a term: i.e., that it would be paid upon the sale of sufficient iron ore by
defendants, such sale to be effected within one year or before December 8, 1955; that the
giving of security was a condition precedent to Gaite’s giving of credit to defendants; and
that as the latter failed to put up a good and sufficient security in lieu of the Far Eastern
Surety bond (Exhibit “B”) which expired on December 8, 1955, the obligation became due
and demandable under Article 1198 of the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have approximately
24,000 tons of iron ore at the mining claims in question at the time of the execution of the
contract Exhibit “A”.
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay
him, jointly and severally, P65,000.00 with interest at 6% per annum from December 9, 1955
until full payment, plus costs. From this judgment, defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were presented for
resolution: a motion to declare the appellants Larap Mines & Smelting Co., Inc. and George
Krakower in contempt, filed by appellant Fonacier, and two motions to dismiss the appeal as
having become academic and a motion for new trial and/or to take judicial notice of certain
documents, filed by appellee Gaite. The motion for contempt is unmeritorious because the
main allegation therein that the appellants Larap Mines & Smelting Co., Inc. and Krakower
had sold the iron ore here in question, which allegedly is “property in litigation”, has not
been substantiated; and even if true, does not make these appellants guilty of contempt,
because what is under litigation in this appeal is appellee Gaite’s right to the payment of the
balance of the price of the ore, and not the iron ore itself. As for the several motions
presented by appellee Gaite, it is unnecessary to resolve these motions in view of the result
that we have reached in this case, which we shall hereafter discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay
appellee Gaite the P65,-000.00 (balance of the price of the iron ore in question) is one with
a period or term and not one with a suspensive condition, and that the term expired on
December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in the
stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract Exhibit
“A”:
“7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his
rights and interests over the 24,000 tons of iron ore, more or less, above-referred to
together with all his rights and interests to operate the mine in consideration of the sum of
SEVENTY-FIVE THOUSAND PESOS (P75,000.00) which the latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out of
the first letter of credit covering the first shipment of iron ores and/or the first amount
derived from the local sale of iron ore made by the Larap Mines & Smelting Co., Inc., its
assigns, administrators, or successors in interest.”
We find the court below to be legally correct in holding that the shipment or local sale of the
iron ore is not a condition precedent (or suspensive) to the payment of the balance of
P65,000.00, but was only a suspensive period or term. What characterizes a conditional
obligation is the fact that its efficacy or obligatory force (as distinguished from its
demandability) is subordinated to the happening of a future and uncertain event; so that if
the suspensive condition does not take place, the parties would stand as if the conditional
obligation had never existed. That the parties to the contract Exhibit “A” did not intend any
such state of things to prevail is supported by several circumstances:
1) The words of the contract express no contingency in the buyer‘s obligation to pay: “The
balance of SixtyFive Thousand Pesos (P65,000.00) will be paid out of the first letter of credit
covering the first shipment of iron ores x x x” etc. There is no uncertainty that the payment
will have to be made sooner or later; what is undetermined is merely the exact date at
which it will be made. By the very terms of the contract, therefore, the existence of the
obligation to pay is recognized; only its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does each one of the
parties assume a correlative obligation (the seller to deliver and transfer ownership of the
thing sold and the buyer to pay the price), but each party anticipates performance by the
other from the very start. While in a sale the obligation of one party can be lawfully
subordinated to an uncertain event, so that the other understands that he assumes the risk
of receiving nothing for what he gives (as in the case of a sale of hopes or expectations,
emptio spei), it is not in the usual course of business to do so; hence, the contingent
character of the obligation must clearly appear. Nothing is found in the record to evidence
that Gaite desired or assumed to run the risk of losing his right over the ore without getting
paid for it, or that Fonacier understood that Gaite assumed any such risk. This is proved by
the fact that Gaite insisted on a bond to guarantee payment of the P65,000.00, and not only
upon a bond by Fonacier, the Larap Mines & Smelting Co., and the company’s stockholders,
but also on one by a surety company; and the fact that appellants did put up such bonds
indicates that they admitted the definite existence of their obligation to pay the balance of
P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of
the ore as a condition precedent, would be tantamount to leaving the payment at the
discretion of the debtor, for the sale or shipment could not be made unless the appellants
took steps to sell the ore.
Appellants would thus be able to postpone payment indefinitely. The desirability of avoiding
such a construction of the contract Exhibit “A” needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract the parties
intended a suspensive condition or a suspensive period (dies ad quem) for the payment of
the P65,000.00, the rules of interpretation would incline the scales in favor of “the greater
reciprocity of interests”, since sale is essentially onerous. The Civil Code of the Philippines,
Article 1378, paragraph 1, in fine, provides:
“if the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of
interests.”
and there can be no question that greater reciprocity obtains if the buyer’s obligation is
deemed to be actually existing, with only its maturity (due date) postponed or deferred, that
if such obligation were viewed as non-existent or not binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on
credit, and not an aleatory contract where the transferor, Gaite, would assume the risk of
not being paid at all; and that the previous sale or shipment of the ore was not a suspensive
condition for the payment of the balance of the agreed price, but was intended merely to fix
the future date of the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties,
still have the right to insist that Gaite should wait for the sale or shipment of the ore before
receiving payment; or, in other words, whether or not they are entitled to take full
advantage of the period granted them for making the payment.
We agree with the court below that the appellants have forfeited the right to compel Gaite
to wait for the sale of the ore before receiving payment of the balance of P65,-000.00,
because of their failure to renew the bond of the Far Eastern Surety Company or else
replace it with an equivalent guarantee. The expiration of the bonding company’s
undertaking on December 8, 1955 substantially reduced the security of the vendor’s rights
as creditor for the unpaid P65,000.00, a security that Gaite considered essential and upon
which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit
“A”). The case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of
the Philippines:
(1) x x x
(2) When he does not furnish to the creditor the guaranties or securities which he has
promised.
(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory.”
Appellants’ failure to renew or extend the surety company’s bond upon its expiration plainly
impaired the securities given to the creditor (appellee Gaite), unless immediately renewed
or replaced.
There is no merit in appellants’ argument that Gaite’s acceptance of the surety company’s
bond with full knowledge that on its face it would automatically expire within one year was
a waiver of its renewal after the expiration date. No such waiver could have been intended,
for Gaite stood to lose and had nothing to gain barely; and if there was any, it could be
rationally explained only if the appellants had agreed to sell the ore and pay Gaite before
the surety company’s bond expired on December 8, 1955. But in the latter case the
defendants-appellants’ obligation to pay became absolute after one year from the transfer
of the ore to Fonacier by virtue of the deed Exhibit “A.”
All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in
demanding payment and instituting this action one year from and after the contract (Exhibit
“A”) was executed, either because the appellant debtors had impaired the securities
originally given and thereby forfeited any further time within which to pay; or because the
term of payment was originally of no more than one year, and the balance of P65,000.00
became due and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were really 24,000
tons of iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier, and whether,
if there had been a short-delivery as claimed by appellants, they are entitled to the payment
of damages, we must, at the outset, stress two things: first, that this is a case of a sale of a
specific mass of fungible goods for a single price or a lump sum, the quantity of “24,000 tons
of iron ore, more or less,” stated in the contract Exhibit “A”, being a mere estimate by the
parties of the total tonnage weight of the mass; and second, that the evidence shows that
neither of the parties had actually measured or weighed the mass, so that they both tried to
arrive at the total quantity by making an estimate of the volume thereof in cubic meters and
then multiplying it by the estimated weight per ton of each cubic meter.
The sale between the parties is a sale of a specific mass of iron ore because no provision was
made in their contract for the measuring or weighing of the ore sold in order to complete or
perfect the sale, nor was the price of P75,-000.00 agreed upon by the parties based upon
any such measurement. (see Art. 1480, second par., New Civil Code). The subject matter of
the sale is, therefore, a determinate object, the mass, and not the actual number of units or
tons contained therein, so that all that was required of the seller Gaite was to deliver in
good faith to his buyer all of the ore found in the mass, notwithstanding that the quantity
delivered is less than the amount estimated by them (Mobile Machinery & Supply Co., Inc.
vs. York Oilfield Salvage Co., Inc., 171 So. 872, applying art. 2459 of the Louisiana Civil Code).
There is no charge in this case that Gaite did not deliver to appellants all the ore found in the
stockpiles in the mining claims in question; Gaite had, therefore, complied with his promise
to deliver, and appellants in turn are bound to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a
definite mass, but approximately 24,000 tons of ore, so that any substantial difference in
this quantity promised and the quantity delivered would entitle the buyers to recover
damages for the short-delivery, was there really a short-delivery in this case?
We think not. As already stated, neither of the parties had actually measured or weighed
the whole mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate
their respective claims only upon an estimated number of cubic meters of ore multiplied by
the average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of
ore that he sold to Fonacier, while appellants contend that by actual measurement, their
witness Cipriano Manlangit found the total volume of ore in the stockpiles to be only 6.609
cubic meters. As to the average weight in tons per cubic meter, the parties are again in
disagreement, with appellants claiming the correct tonnage factor to be 2.18 tons to a cubic
meter, while appellee Gaite claims that the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage
factor of iron ore in this case to be that made by Leopoldo F. Abad, chief of the Mines and
Metallurgical Division of the Bureau of Mines, a government pensionado to the States and a
mining engineering graduate of the Universities of Nevada and California, with almost 22
years of experience in the Bureau of Mines. This witness placed the tonnage factor of every
cubic meter of iron ore at between 3 metric tons as minimum to 5 metric tons as maximum.
This estimate, in turn, closely corresponds to the average tonnage factor of 3.3 adopted in
his corrected report (Exhibits “FF” and “FF-1”) by engineer Nemesio Gamatero, who was
sent by the Bureau of Mines to the mining claims involved at the request of appellant
Krakower, precisely to make an official estimate of the amount of iron ore in Gaite’s
stockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by
appellants’ witness Cipriano Manlangit is correct, if we multiply it by the average tonnage
factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very far from
the estimate of 24,000 tons made by appellee Gaite, considering that actual weighing of
each unit of the mass was practically impossible, so that a reasonable percentage of error
should be allowed anyone making an estimate of the exact quantity in tons found in the
mass. It must stated the amount to be 24,000 tons, more or less. (ch. Pine River Logging &
Improvement Co. vs. U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the
payment of damages, nor could Gaite have been guilty of any fraud in making any
misrepresentation to appellants as to the total quantity of ore in the stockpiles of the mining
claims in question, as charged by appellants, since Gaite’s estimate appears to be
substantially correct.
WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same,
with costs against appellants.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and
Natividad, JJ., concur.
Decision affirmed.
Notes.—A contract whereby a party obligates himself to sell for a price certain specified
quantity of sugar of a given quality, without designating any particular lot of sugar, is not
perfected until the quantity agreed upon has been selected and is capable of being
physically designated and distinguished from all other sugar. Until thus segregated or
appropriated, the vendee does not assume the risk of loss as provided in Article 1452 (now
Art. 1480, N.C.C.) of the Civil Code. (Yu Tek & Co. v. Gonzales, 29 Phil. 384). Gaite vs.
Fonacier, 2 SCRA 830, No. L-11827 July 31, 1961

G.R. No. 126376. November 20, 2003.*

SPOUSES BERNARDO BUENAVENTURA and CONSOLACION JOAQUIN, SPOUSES JUANITO
EDRA and NORA JOAQUIN, SPOUSES RUFINO VALDOZ and EMMA JOAQUIN, and
NATIVIDAD JOAQUIN, petitioners, vs. COURT OF APPEALS, SPOUSES LEONARDO JOAQUIN
and FELICIANA LANDRITO, SPOUSES FIDEL JOAQUIN and CONCHITA BERNARDO, SPOUSES
TOMAS JOAQUIN and SOLEDAD ALCORAN, SPOUSES ARTEMIO JOAQUIN and SOCORRO
ANGELES, SPOUSES ALEXANDER MENDOZA and CLARITA JOAQUIN, SPOUSES TELESFORO
CARREON and FELICITAS JOAQUIN, SPOUSES DANILO VALDOZ and FE JOAQUIN, and
SPOUSES GAVINO JOAQUIN and LEA ASIS, respondents.
Remedial Law; Actions; Party-in-Interests; Petitioners are interested in the properties
subject of the Deeds of Sale, but they have failed to show any legal right to the properties;
An action must be prosecuted in the name of the real party-in-interest.—It is evident from
the records that petitioners are interested in the properties subject of the Deeds of Sale, but
they have failed to show any legal right to the properties. The trial and appellate courts
should have dismissed the action for this reason alone. An action must be prosecuted in the
name of the real party-in-interest.
Civil Law; Contracts; Sale; If there is a meeting of the minds of the parties as to the price, the
contract of sale is valid despite the manner of payment, or even the breach of that manner
of payment.—A contract of sale is not a real contract, but a consensual contract. As a
consensual contract, a contract of sale becomes a binding and valid contract upon the
meeting of the minds as to price. If there is a meeting of the minds of the parties as to the
price, the contract of sale is valid, despite the manner of payment, or even the breach of
that manner of payment. If the real price is not stated in the contract, then the contract of
sale is valid but subject to reformation. If there is no meeting of the minds of the parties as
to the price, because the price stipulated in the contract is simulated, then the contract is
void. Article 1471 of the Civil Code states that if the price in a contract of sale is simulated,
the sale is void.
Same; Same; Same; It is not the act of payment of price that determines the validity of a
contract of sale; Failure to pay the consideration is different from lack of consideration;
Failure to pay the consideration results in a right to demand the fulfillment or cancellation of
the obligation under an existing valid contract while lack of consideration prevents the
existence of a valid contract.—It is not the act of payment of price that determines the
validity of a contract of sale. Payment of the price has nothing to do with the perfection of
the contract. Payment of the price goes into the performance of the contract. Failure to pay
the consideration is different from lack of consideration. The former results in a right to
demand the fulfillment or cancellation of the obligation under an existing valid contract
while the latter prevents the existence of a valid contract.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Zosimo G. Linato for petitioners.
Gregorio M. Velasquez for private respondents.
CARPIO, J.:
The Case
This is a petition for review on certiorari1 to annul the Decision2 dated 26 June 1996 of the
Court of Appeals in CA-G.R. CV No. 41996. The Court of Appeals affirmed the Decision3
dated 18 February 1993 rendered by Branch 65 of the Regional Trial Court of Makati (“trial
court”) in Civil Case No. 89-5174. The trial court dismissed the case after it found that the
parties executed the Deeds of Sale for valid consideration and that the plaintiffs did not
have a cause of action against the defendants.
The Facts
The Court of Appeals summarized the facts of the case as follows:
Defendant spouses Leonardo Joaquin and Feliciana Landrito are the parents of plaintiffs
Consolacion, Nora, Emma and Natividad as well as of defendants Fidel, Tomas, Artemio,
Clarita, Felicitas, Fe, and Gavino, all surnamed JOAQUIN. The married Joaquin children are
joined in this action by their respective spouses.
Sought to be declared null and void ab initio are certain deeds of sale of real property
executed by defendant parents Leonardo Joaquin and Feliciana Landrito in favor of their co-
defendant children and the corresponding certificates of title issued in their names, to wit:
1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan (LRC) Psd-256395 executed
on 11 July 1978, in favor of defendant Felicitas Joaquin, for a consideration of P6,000.00
(Exh. “C”), pursuant to which TCT No. [36113/T-172] was issued in her name (Exh. “C-1”);
2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC) Psd-256394 executed
on 7 June 1979, in favor of defendant Clarita Joaquin, for a consideration of P1[2],000.00
(Exh. “D”), pursuant to which TCT No. S-109772 was issued in her name (Exh. “D-1”);
3. Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC) Psd-256394 executed
on 12 May 1988, in favor of defendant spouses Fidel Joaquin and Conchita Bernardo, for a
consideration of P54,[3]00.00 (Exh. “E”), pursuant to which TCT No. 155329 was issued to
them (Exh. “E-1”);
4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC) Psd-256394 executed
on 12 May 1988, in favor of defendant spouses Artemio Joaquin and Socorro Angeles, for a
consideration of P[54,3]00.00 (Exh. “F”), pursuant to which TCT No. 155330 was issued to
them (Exh. “F-1”); and
5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision plan (LRC) Psd-256395
executed on 9 September 1988, in favor of Tomas Joaquin, for a consideration of P20,000.00
(Exh. “G”), pursuant to which TCT No. 157203 was issued in her name (Exh. “G-1”).
[6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC) Psd-256395
executed on 7 October 1988, in favor of Gavino Joaquin, for a consideration of P25,000.00
(Exh. “K”), pursuant to which TCT No. 157779 was issued in his name (Exh. “K-1”).]
In seeking the declaration of nullity of the aforesaid deeds of sale and certificates of title,
plaintiffs, in their complaint, aver:
—XX—
The deeds of sale, Annexes “C,” “D,” “E,” “F,” and “G,” [and “K”] are simulated as they are,
are NULL AND VOID AB INITIO because—
a.Firstly, there was no actual valid consideration for the deeds of sale x x x over the
properties in litis;
b)Secondly, assuming that there was consideration in the sums reflected in the questioned
deeds, the properties are more than three-fold times more valuable than the measly sums
appearing therein;
c)Thirdly, the deeds of sale do not reflect and express the true intent of the parties (vendors
and vendees); and
d)Fourthly, the purported sale of the properties in litis was the result of a deliberate
conspiracy designed to unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of
their legitime.
—XXI—
Necessarily, and as an inevitable consequence, Transfer Certificates of Title Nos. 36113/T-
172, S-109772, 155329, 155330, 157203 [and 157779] issued by the Registrar of Deeds over
the properties in litis x x x are NULL AND VOID AB INITIO.
Defendants, on the other hand aver (1) that plaintiffs do not have a cause of action against
them as well as the requisite standing and interest to assail their titles over the properties in
litis; (2) that the sales were with sufficient considerations and made by defendants parents
voluntarily, in good faith, and with full knowledge of the consequences of their deeds of
sale; and (3) that the certificates of title were issued with sufficient factual and legal basis.4
(Emphasis in the original)
The Ruling of the Trial Court
Before the trial, the trial court ordered the dismissal of the case against defendant spouses
Gavino Joaquin and Lea Asis.5 Instead of filing an Answer with their co-defendants, Gavino
Joaquin and Lea Asis filed a Motion to Dismiss.6 In granting the dismissal to Gavino Joaquin
and Lea Asis, the trial court noted that “compulsory heirs have the right to a legitime but
such right is contingent since said right commences only from the moment of death of the
decedent pursuant to Article 777 of the Civil Code of the Philippines.”7
After trial, the trial court ruled in favor of the defendants and dismissed the complaint. The
trial court stated:
“In the first place, the testimony of the defendants, particularly that of the x x x father will
show that the Deeds of Sale were all executed for valuable consideration. This assertion
must prevail over the negative allegation of plaintiffs.
And then there is the argument that plaintiffs do not have a valid cause of action against
defendants since there can be no legitime to speak of prior to the death of their parents.
The court finds this contention tenable. In determining the legitime, the value of the
property left at the death of the testator shall be considered (Art. 908 of the New Civil
Code). Hence, the legitime of a compulsory heir is computed as of the time of the death of
the decedent. Plaintiffs therefore cannot claim an impairment of their legitime while their
parents live.
All the foregoing considered, this case is DISMISSED.
In order to preserve whatever is left of the ties that should bind families together, the
counterclaim is likewise DISMISSED.
No costs.
SO ORDERED.”8
The Ruling of the Court of Appeals
The Court of Appeals affirmed the decision of the trial court. The appellate court ruled:
To the mind of the Court, appellants are skirting the real and decisive issue in this case,
which is, whether x x x they have a cause of action against appellees.
Upon this point, there is no question that plaintiffs-appellants, like their defendant brothers
and sisters, are compulsory heirs of defendant spouses, Leonardo Joaquin and Feliciana
Landrito, who are their parents. However, their right to the properties of their defendant
parents, as compulsory heirs, is merely inchoate and vests only upon the latter’s death.
While still alive, defendant parents are free to dispose of their properties, provided that
such dispositions are not made in fraud of creditors.
Plaintiffs-appellants are definitely not parties to the deeds of sale in question. Neither do
they claim to be creditors of their defendant parents. Consequently, they cannot be
considered as real parties in interest to assail the validity of said deeds either for gross
inadequacy or lack of consideration or for failure to express the true intent of the parties. In
point is the ruling of the Supreme Court in Velarde, et al. vs. Paez, et al., 101 SCRA 376, thus:
The plaintiffs are not parties to the alleged deed of sale and are not principally or
subsidiarily bound thereby; hence, they have no legal capacity to challenge their validity.
Plaintiffs-appellants anchor their action on the supposed impairment of their legitime by the
dispositions made by their defendant parents in favor of their defendant brothers and
sisters. But, as correctly held by the court a quo, “the legitime of a compulsory heir is
computed as of the time of the death of the decedent. Plaintiffs therefore cannot claim an
impairment of their legitime while their parents live.”
With this posture taken by the Court, consideration of the errors assigned by plaintiffs-
appellants is inconsequential.
WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs against plaintiffs-
appellants.
SO ORDERED.9
Hence, the instant petition.
Issues
Petitioners assign the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE IN QUESTION
HAD NO VALID CONSIDERATION.
2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN ASSUMING THAT THERE
WAS A CONSIDERATION, THE SAME IS GROSSLY INADEQUATE.
3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE DEEDS OF SALE DO NOT
EXPRESS THE TRUE INTENT OF THE PARTIES.
4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE WAS PART AND
PARCEL OF A CONSPIRACY AIMED AT UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF
THE SPOUSES LEONARDO JOAQUIN AND FELICIANA LANDRITO OF THEIR INTEREST OVER THE
SUBJECT PROPERTIES.
5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS HAVE A GOOD,
SUFFICIENT AND VALID CAUSE OF ACTION AGAINST THE PRIVATE RESPONDENTS.10
The Ruling of the Court
We find the petition without merit.
We will discuss petitioners’ legal interest over the properties subject of the Deeds of Sale
before discussing the issues on the purported lack of consideration and gross inadequacy of
the prices of the Deeds of Sale.
Whether Petitioners have a legal interest over
the properties subject of the Deeds of Sale
Petitioners’ Complaint betrays their motive for filing this case. In their Complaint,
petitioners asserted that the “purported sale of the properties in litis was the result of a
deliberate conspiracy designed to unjustly deprive the rest of the compulsory heirs
(plaintiffs herein) of their legitime.” Petitioners’ strategy was to have the Deeds of Sale
declared void so that ownership of the lots would eventually revert to their respondent
parents. If their parents die still owning the lots, petitioners and their respondent siblings
will then co-own their parents’ estate by hereditary succession.11
It is evident from the records that petitioners are interested in the properties subject of the
Deeds of Sale, but they have failed to show any legal right to the properties. The trial and
appellate courts should have dismissed the action for this reason alone. An action must be
prosecuted in the name of the real party-in-interest.12
[T]he question as to “real party-in-interest” is whether he is “the party who would be
benefitted or injured by the judgment, or the ‘party entitled to the avails of the suit.’ ”
xxx
In actions for the annulment of contracts, such as this action, the real parties are those who
are parties to the agreement or are bound either principally or subsidiarily or are prejudiced
in their rights with respect to one of the contracting parties and can show the detriment
which would positively result to them from the contract even though they did not intervene
in it (Ibañez v. Hongkong & Shanghai Bank, 22 Phil. 572 [1912]) x x x.
These are parties with “a present substantial interest, as distinguished from a mere
expectancy or future, contingent, subordinate, or consequential interest. . . . The phrase
‘present substantial interest’ more concretely is meant such interest of a party in the subject
matter of the action as will entitle him, under the substantive law, to recover if the evidence
is sufficient, or that he has the legal title to demand and the defendant will be protected in a
payment to or recovery by him.”13
Petitioners do not have any legal interest over the properties subject of the Deeds of Sale.
As the appellate court stated, petitioners’ right to their parents’ properties is merely
inchoate and vests only upon their parents’ death. While still living, the parents of
petitioners are free to dispose of their properties. In their overzealousness to safeguard
their future legitime, petitioners forget that theoretically, the sale of the lots to their siblings
does not affect the value of their parents’ estate. While the sale of the lots reduced the
estate, cash of equivalent value replaced the lots taken from the estate.
Whether the Deeds of Sale are void
for lack of consideration
Petitioners assert that their respondent siblings did not actually pay the prices stated in the
Deeds of Sale to their respondent father. Thus, petitioners ask the court to declare the
Deeds of Sale void.
A contract of sale is not a real contract, but a consensual contract. As a consensual contract,
a contract of sale becomes a binding and valid contract upon the meeting of the minds as to
price. If there is a meeting of the minds of the parties as to the price, the contract of sale is
valid, despite the manner of payment, or even the breach of that manner of payment. If the
real price is not stated in the contract, then the contract of sale is valid but subject to
reformation. If there is no meeting of the minds of the parties as to the price, because the
price stipulated in the contract is simulated, then the contract is void.14 Article 1471 of the
Civil Code states that if the price in a contract of sale is simulated, the sale is void.
It is not the act of payment of price that determines the validity of a contract of sale.
Payment of the price has nothing to do with the perfection of the contract. Payment of the
price goes into the performance of the contract. Failure to pay the consideration is different
from lack of consideration. The former results in a right to demand the fulfillment or
cancellation of the obligation under an existing valid contract while the latter prevents the
existence of a valid contract.15
Petitioners failed to show that the prices in the Deeds of Sale were absolutely simulated. To
prove simulation, petitioners presented Emma Joaquin Valdoz’s testimony stating that their
father, respondent Leonardo Joaquin, told her that he would transfer a lot to her through a
deed of sale without need for her payment of the purchase price.16 The trial court did not
find the allegation of absolute simulation of price credible. Petitioners’ failure to prove
absolute simulation of price is magnified by their lack of knowledge of their respondent
siblings’ financial capacity to buy the questioned lots.17 On the other hand, the Deeds of
Sale which petitioners presented as evidence plainly showed the cost of each lot sold. Not
only did respondents’ minds meet as to the purchase price, but the real price was also
stated in the Deeds of Sale. As of the filing of the complaint, respondent siblings have also
fully paid the price to their respondent father.18
Whether the Deeds of Sale are void
for gross inadequacy of price
Petitioners ask that assuming that there is consideration, the same is grossly inadequate as
to invalidate the Deeds of Sale.
Articles 1355 of the Civil Code states:
an actionable wrong, before the courts are authorized to lay hold of the situation and
remedy it. (Emphasis in the original)
Moreover, the factual findings of the appellate court are conclusive on the parties and carry
greater weight when they coincide
with the factual findings of the trial court. This Court will not weigh the evidence all over
again unless there has been a showing that the findings of the lower court are totally devoid
of support or are clearly erroneous so as to constitute serious abuse of discretion.20 In the
instant case, the trial court found that the lots were sold for a valid consideration, and that
the defendant children actually paid the purchase price stipulated in their respective Deeds
of Sale. Actual payment of the purchase price by the buyer to the seller is a factual finding
that is now conclusive upon us.

Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.
a contract, unless there has been fraud, mistake or undue influence. (Emphasis supplied)
SO ORDERED.
Article 1470 of the Civil Code further provides:
Davide, Jr. (C.J., Chairman), Panganiban, Ynares-Santiago and Azcuna, JJ., concur.
Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as may
Judgment affirmed in toto.
indicate a defect in the consent, or that the parties really intended a donation or some other
act or contract. (Emphasis supplied) Note.—A contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price. (Delos Reyes vs. Court of
Petitioners failed to prove any of the instances mentioned in Articles 1355 and 1470 of the
Appeals, 313 SCRA 632 [1999]) Buenaventura vs. Court of Appeals, 416 SCRA 263, G.R. No.
Civil Code which would invalidate, or even affect, the Deeds of Sale. Indeed, there is no
126376 November 20, 2003
requirement that the price be equal to the exact value of the subject matter of sale. All the
respondents believed that they received the commutative value of what they gave. As we
stated in Vales v. Villa:19

Courts cannot follow one every step of his life and extricate him from bad bargains, protect
him from unwise investments, relieve him from one-sided contracts, or annul the effects of
foolish acts. Courts cannot constitute themselves guardians of persons who are not legally
incompetent. Courts operate not because one person has been defeated or overcome by
another, but because he has been defeated or overcome illegally. Men may do foolish
things, make ridiculous contracts, use miserable judgment, and lose money by them—
indeed, all they have in the world; but not for that alone can the law intervene and restore.
There must be, in addition, a violation of the law, the commission of what the law knows as
[No. L-8506. August 31, 1956]
CELESTINO Co & COMPANY, petitioner, vs. COLLECTOR OF INTEENAL REVENUE,
respondent.
MANUFACTURER; FILING ORDERS ACCORDING TO SPECIPICATIONS DOES NOT ALTER
CHARACTER OF ESTABLISHMENT.—A factory which habitually makes sash, windows and
doors, and sells the goods to the public is a manufacturer. The fact that the windows and
doors are made by it only when customers place their orders and according to such form or
combination. as suit the fancy of the purchasers does not alter the nature of the
establishment.
PETITION for review by certiorari of a decision of the Court of Tax Appeals.
The facts are stated in the opinion of the Court.
Solicitor General Ambrosio Podilla, First Assistant Solicitor General Gmllermo E. Torres and
Solicitor Federico V. Sian for respondent.
BENGZON, J.:
Appeal from a decision of the Court of Tax Appeals.
Celestino Co & Company is a duly registered general copartnership doing business under the
trade name of Celestino Co & Co. vs. Collector of Internal Revenue
"Oriental Sash Faetory". From 1946 to 1951 it paid percentage taxes of 7 per cent on the
gross receipts of its sash, door and window factory, in accordance with section one hundred
eighty-six of the National Revenue Code imposing taxes on sales of manufactured articles.
However in 1952 it began to claim liability only to the contractor's 3 per cent tax (instead of
7 per cent) under section 191 of the same Code; and having failed to convince the Bureau of
Internal Revenue, it brought the matter to the Court of Tax Appeals, where it also failed.
Said the Court:
"To support his contention that his client is an ordinary contractor * * * counsel presented *
* * duplicate copies of letters, sketches of doors and windows and price quotations
supposedly sent by the manager of the Oriental Sash Factory to four customers who
allegedly made special orders for doors and windows from the said factory. The conclusion
that counsel would like us to deduce from these few exhibits is that the Oriental Sash
Factory does not manufacture ready-made doors, sash and windows for the public but only
upon special order of its select eustomers, * * * I cannot believe that petitioner company
would take, as in fact it has taken, all the trouble and expense of registering a special trade
name for its sash business and then orders company stationery carrying the bold print
'Oriental Sash Factory (Celestino Go & Company, Prop.) 926 Raon St. Quiapo, Manila, Tel.
No. 33076, Manufacturers of all kinds of doors, windows, sashes, furnitures, etc. used
season-dried and kiln-dried lumber, of the best quality workmanship' solely for the purpose
of supplying the needs for doors, windows and sash of its special and limited customers.
One will note that petitioner has chosen for its tradename and has offered itself to the
public as a 'Factory', which means it is out to do business, in its chosen lines on a big scale.
As a general rule, sash factories receive orders for doors and windows of special design only
in particular cases but the bulk of their sales is derived from ready-made doors and windows
of standard sizes for the average home. Moreover, as shown from the investigation of
petitioner's books of accounts, during the period from January 1, 1952 to September 30,
1952, it sold sash, doors and windows worth F188,754.69. I find it difficult to believe that
this amount which runs to six figures was derived by petitioner entirely from its few
customers who made special orders for these items.
"Even if we were to believe petitioner's claim that it does not manufacture ready^made
sash, doors and windows for the public and that it makes these articles only upon special
order of its customers, that does not make it a contractor within the purview of section 191
of the National Intemal Revemie Code. There are no less than fifty occupations enumerated
in the aforesaid section of the National Internal Revenue Code subject to percentage tax and
after reading carefully each and every one of them, we cannot find one under which the
business enterprise of petitioner could appropriately fall. It would require a stretch of the
law and much effort to make the business of manufacturing sash, doors and windows upon
special order of customers fall under the category of 'road, building, navigation, artesian
well, water works and other construction work contractors; filling contractors' as
enumerated in the section being invoked by petitioner's counsel. Con^truction work
contractors are those who alter or repair buildings, structures, streets, highways, sewers,
street railways, railroads^ logging roads, electric, steam or water plants telegraph and
telephone plants and lines, electric lines or power lines, and includes any other work for the
construction, altering or repairing for which machinery driven by mechanical power is used.
(Payton vs. City of Anadardo 64 P. 2d 878, 880, 179 Okl. 68).
"Having thus eliminated the feasibility of taxing petitioner as a contractor under section 191
of the National Internal Revenue Code, this leaves us to decide the remaining issue whether
or not petitioner could be taxed with lesser strain and more accuracy as seller of its
manufactured articles undfer section 186 of the same code, as the respondent Collector of
Internal Revenue has in fact been doing since the Oriental Sash Factory was established in
1946.
"The percentage tax imposed in section 191 of our Tax Code is generally a tax on the sales of
services, in contradiction with the tax imposed in section 186 of the same Code which is a
tax on the original sales of articles by the manufacturer, producer or importer. (Formilleza's
Commentaries and Jurisprudence on the National Internal Reventie Code, Vol II, p. 744). The
fact that the articles sold are marmfactured by the seller does not exchange the contract
from the purview of section 186 of the National Intemal Revenue Code as a sale of articles."
There was a strong dissent; but upon careful consideration of the whole matter we are
inclined to accept tha above statement of the facts and the law. The important ^thing to
remember is that Celestino Co & Company habitually makes sash, windows and doors, as it
has represented in its stationery and advertisements to the public. That it "manufactures"
the same is practically admitted by appellant itself. The fact that windows and doors are
made by it only when customers place their orders, does not alter the nature of the
establishment, for it is obvious that it only aecepted such orders as called for the
employment of such materials-moulding, frames, panels-as it ordinarily manufactured or
was in a position habitually to manufacture.
Perhaps the following paragraph represents in brief the appellant's position in this Court:
"Since the petitioner, by clear proof of facts not disputed by the respondent, manufactures
sash, windows and doors only for' special customers and upon their special orders and in
accordance with the desired specifications of the persons ordering the same and not for the
general market: since the doors ordered by Don Toribio Teodoro & Sons, Inc., for instance,
are not in existence and which never would have existed but for the order of the party
desiring it; and since petitioner's contractual relation with his customers is that of a contract
for a piece of work or since petitioner is engaged in the sale of services, it follows that the
petitioner should be taxed under section 191 of the Tax Code and NOT under section 185 of
the same Code." (Appellant's brief, p. 11-12).
But the argument rests on a false foundation. Any builder or homeowner, with sufficient
money, may order windows or doors of the kind manufactured by this appellant. Therefore
it is not true that it serves special customers only or confines its services to them alone. And
anyone who ,sees, and likes, the doors ordered by Don Toribio Teodoro & Sons Inc. may
purchase from appellant doors of the same kind, provided he pays the price. Surely, the
appellant will not refuse, for it can easily duplicate or even mass-produce the same doors—
it is mechanically equipped to do so.
That the doors and windows must meet desired speci.fications is neither here nor there. If
these specifieations do not happen to be of the kind habitually manufaetured by appellant—
special forms of sash, mouldings or panels—it would not accept the order—and no sale is
made. If they do, the transaction would be no different from a purchasers of manufactured
goods held is stock for sale; they are bought because they meet the specifications desi^ed
by the purchaser.
No body will say that when a sawmill cuts lumber in accordance with the peculiar
specifications of a customer—sizes not previously held in stock for sale to the public—it
th£reby becomes an employee or servant of the customer,1 not the seller of lumber. The
same consideration applies to this sash manufaeturer.
The Oriental Sash Factory does nothing more than sell the goods that it mass-produces or
habitually makes; sash, panels, mouldings, frames, cutting them to such sizes^ and
combining them in such forms as its customers may desire.
On the other hand, petitioner's idea of being a contractor doing -construction jobs is
untenable. Nobodjr would regard the doing of two window panels as eonstruction work in
common parlance.2
Appellant invokes Article 1467 of the New Civil Code to bolster its contention that in filing
orders for windows and doors according to specifications, it did not sell, but merely
contracted for particular pieces of work or "merely sold its services".
Said article reads as follows:
"A contract for the delivery at a certain price of an article which the vendor in the ordinary
course of his business manufactures or procures for the generaj market, whether the same
is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured
specially for the customer and upon hi* special order, and not for the general market, it is
contract for a piece of work."

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

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

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

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

The appealed decision is consequently affirmed. So ordered.

Parás, C. J., Padilla, Montemayor, Bautista Angelo, Con~ cepcion, Reyes, J. B. L., and Felix, JJ.,
concur.

Decision affirmed. Celestino Co & Co. vs. Collector of Internal Revenue, 99 Phil. 841, No. L-
8506 August 31, 1956
No. L-27044. June 30, 1975.*
THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ENGINEERING EQUIPMENT
AND SUPPLY COMPANY AND THE COURT OF TAX APPEALS, respondents.
No. L-27452. June 30, 1975.*
ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner, vs. THE COMMISSIONER
OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, respondents.
Taxation; Contractor’s tax; Company engaged in the design and installation of central type
air conditioning system subject to contractor’s tax; Reasons.—The company did not
manufacture air conditioning units for sale to the general public, but imported some items
which were used in executing contracts entered into by it. It undertook negotiations and
execution of individual contracts for the design, supply and installation of air conditioning
units of the central type, taking into consideration in the process such factors as the area of
the space to be air conditioned; the number of persons occupying or would be occupying
the premises; the purpose for which the various air conditioning areas are to be used; and
the sources of heat gain or cooling loan on the plant such as sum load, lighting, and other
electrical appliances which are or may be in the plan. The company did not and was not
engaged in the manufacture of air conditioning units but had its services contracted for the
installation of a central system. The supply of air conditioning units to the company’s various
customers, whether the said machineries were on hand or not, was specially made for each
customer and installed in his building upon his special order. The company is a contractor
rather than a manufacturer, subject to the contractors tax prescribed by Section 191 of the
Code and not to the advance sales tax imposed by Section 185(m) in relation to Section 194
of the same Code.
Same; Same; Distinction between a contract of sale and a contract for furnishing services;
labor and materials.—The distinction between a contract of sale and one for work, labor and
materials is tested by the inquiry whether the thing transferred is one not in existence and
which never would have existed but for the order of the party desiring to acquire it, or a
thing which would have existed and has been the subject of sale to some other persons
even if the order had not been given. If the article ordered by the purchaser is exactly such
as the plaintiff makes and keeps on hand for sale to anyone, and no change or modification
of it is made at defendant’s request, it is a contract of sale, even though it may be entirely
made after, and in consequence of, the defendants order for it.
Same; Same; Test to determine whether a person a contractor or not.—The word
“contractor” has come to be used with special reference to a person who, in the pursuit of
the independent business, undertakes to do a specific job or piece of work for other
persons, using his own means and methods without submitting himself to control as to the
petty details. The true test of a contractor would seem to be that he renders service in the
course of an independent occupation, representing the will of his employer only as to the
result of his work, and not as to the means by which it is accomplished.
Same; Compensating tax; Compensating tax imposed on the user of imported goods not
subject to sales tax; Case at bar.—Since the company imported air conditioning units, parts
or accessories thereof for use in its construction business and these items were never sold,
resold, bartered or exchanged, it should be held liable to pay taxes prescribed under Section
190 of the Code. This compensating tax is not a tax on the importation of goods but a tax on
the use of imported goods not subject to sales tax.
Same; Surcharge; Payment of surcharge in ca.se a false or fraudulent return is filed or in
case of willful neglect to file a return; Reasons; Case at bar.—The company deliberately and
purposely misdeclared its importations to evade the payment of the 30% tax.
Since the commission of fraud is altogether too glaring, the company should not be absolved
from the 50% fraud surcharge, otherwise it would be giving premium to a plainly intolerable
act of tax evasion. Whether the company is subject to advance sales tax or compensating
tax, it is required by law to truly declare its importation in the import entries and internal
revenue declarations before the importations maybe released from customs custody. The
said entries are the very documents where the nature, quantity and value of the imported
goods are declared and where the customs duties, internal revenue taxes and other fees or
charges incident to the importation are computed. These entries, therefore, serve the same
purpose as the returns required by Section 183(a) of the Code.
Same: Surcharge for delinquency in the payment of compensating tax.—Section 190 of the
Tax Code, as amended, provides that if any article withdrawn from the customhouse or the
post office without payment of the compensating tax is subsequently used by the importer
for other purposes, corresponding entry should be made in the books of accounts if any are
kept or a written notice thereof sent to the Collector of Internal Revenue and payment of
the corresponding compensating tax made within 30 days from the date of such entry or
notice and if tax is not paid within such period the amount of the tax shall be increased by
25% the increment to be a part of the tax.
Same: Prescription; Assessment and collection of taxes in case a false or fraudulent return is
filed or in case of failure to file a return within 10 years after the discovery of the falsity,
fraud or omission.—In the case of a false or fraudulent return with intent to evade tax or of
a failure to file a return, the tax may be assessed, or a proceeding in court for the collection
of such tax may be begun without assessment at any time within ten years after the
discovery of the falsity, fraud or omission.
PETITION for review on certiorari of a decision of the Court of Tax Appeals.
The facts are stated in the opinion of the Court.
Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete,
Solicitor Lolita O. Gal-lang and Special Attorney Gemaliel H. Mantolino for Commissioner of
Internal Revenue, etc.
Melquiades C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J.R.
Balonkita for Engineering Equipment and Supply Company.
ESGUERRA, J.:
Petition for review on certiorari of the decision of the Court of Tax Appeals in CTA Case No.
681, dated November 29, 1966, assessing a compensating tax of P174,441.62 on the
Engineering Equipment and Supply Company.
As found by the Court of Tax Appeals, and as established by the evidence on record, the
facts of this case are as follows:
Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation, is an
engineering and machinery firm. As operator of an integrated engineering shop, it is
engaged, among others, in the design and installation of central type air conditioning
system, pumping plants and steel fabrications. (Vol. I pp. 12-16 T.S.N. August 23, 1960)
On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now Commissioner, of
Internal Revenue denouncing Engineering for tax evasion by misdeclaring its imported
articles and failing to pay the correct percentage taxes due thereon in connivance with its
foreign suppliers (Exh. “2” p. 1 BIR record Vol. I). Engineering was likewise denounced to the
Central Bank (CB) for alleged fraud in obtaining its dollar allocations. Acting on these
denunciations, a raid and search was conducted by a joint team of Central Bank, (CB),
National Bureau of Investigation (NBI) and Bureau of Internal Revenue (BIR) agents on
September 27, 1956, on which occasion voluminous records of the firm were seized and
confiscated. (pp. 173-177 T.S.N.)
On September 30, 1957, revenue examiners Quesada and Catudan reported and
recommended to the then Collector, now Commissioner, of Internal Revenue (hereinafter
referred to as Commissioner) that Engineering be assessed for P480,912.01 as deficiency
advance sales tax on the theory that it misdeclared its importation of air conditioning units
and parts and accessories thereof which are subject to tax under Section 185(m)1 of the Tax
Code, instead of Section 186 of the same Code. (Exh. “3” pp. 59-63 BIR rec. Vol. I) This
assessment was revised on January 23, 1959, in line with the observation of the Chief, BIR
Law Division, and was raised to P916,362.56 representing deficiency advance sales tax and
manufacturers sales tax, inclusive of the 25% and 50% surcharges, (pp. 72-80 BIR rec. Vol. I)
On March 3, 1959, the Commissioner assessed against, and demanded upon, Engineering
payment of the increased amount and suggested that P10,000 be paid as compromise in
extrajudicial settlement of Engineering’s penal liability for violation of the Tax Code. The
firm, however, contested the tax assessment and requested that it be furnished with the
details and particulars of the Commissioner’s assessment. (Exh. “B” and “15”, pp. 86-88 BIR
rec. Vol. I) The Commissioner replied that the assessment was in accordance with law and
the facts of the case.
On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and during the
pendency of the case the investigating revenue examiners reduced Engineering’s deficiency
tax liabilities from P916,362.65 to P740,587.86 (Exhs. “R” and “9” pp. 162-170, BIR rec.),
based on findings after conferences had with Engineering’s Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive
portion of which reads as follows:
“For ALL THE FOREGOING CONSIDERATIONS, the decision of respondent appealed from is
hereby modified, and petitioner, as a contractor, is declared exempt from the deficiency
manufacturers sales tax covering the period from June 1, 1948, to September 2, 1956.
However, petitioner is ordered to pay respondent, or his duly authorized collection agent,
the sum of P174,141.62 as compensating tax and 25% surcharge for the period from 1953 to
September 1956. With costs against petitioner.”
The Commissioner, not satisfied with the decision of the Court of Tax Appeals, appealed to
this Court on January 18, 1967, (G.R. No. L-27044). On the other hand, Engineering, on
January 4, 1967, filed with the Court of Tax Appeals a motion for reconsideration of the
decision abovementioned. This was denied on April 6, 1967, prompting Engineering to file
also with this Court its appeal, docketed as G.R. No. L-27452. Since the two cases, G.R. No. L-
27044 and G.R. No. L-27452, involve the same parties and issues, We have decided to
consolidate and jointly decide them.
Engineering in its petition claims that the Court of Tax Appeals committed the following
errors:
1. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable to the 30% compensating tax on its importations of equipment and ordinary articles
used in the central type air conditioning systems it designed, fabricated, constructed and
installed in the buildings and premises of its customers, rather than to the compensating tax
of only 7%;
2. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
guilty of fraud in effecting the said importations on the basis of incomplete quotations from
the contents of alleged photostat copies of documents seized illegally from Engineering
Equipment and Supply Company which should not have been admitted in evidence;
3. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable to the 25% surcharge prescribed in Section 190 of the Tax Code;
4. That the Court of Tax Appeals erred in holding the assessment as not having prescribed;
5. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable for the sum of P174,141.62 as 30% compensating tax and 25% surcharge instead of
completely absolving it from the deficiency assessment of the Commissioner.
The Commissioner on the other hand claims that the Court of Tax Appeals erred:
1. In holding that the respondent company is a contractor and not a manufacturer;
2 In holding respondent company liable to the 3% contractor’s tax imposed by Section 191
of the Tax Code instead of the 30% sales tax prescribed in Section 185(m) in relation to
Section 194(x) both of the same Code;
3 In holding that the respondent company is subject only to the 30% compensating tax
under Section 190 of the Tax Code and not to the 30% advance sales tax imposed by section
183 (b), in relation to section 185(m) both of the same Code, on its importations of parts
and accessories of air conditioning units;
4. In not holding the company liable to the 50% fraud surcharge under Section 183 of the
Tax Code on its importations of parts and accessories of air conditioning units,
notwithstanding the finding of said court that the respondent company fraudulently
misdeclared the said importations;
5. In holding the respondent company liable for P174,141.62 as compensating tax and 25%
surcharge instead of P740,587.86 as deficiency advance sales tax, deficiency manufacturers
tax and 25% and 50% surcharge for the period from June 1, 1948 to December 31 1956.
The main issue revolves on the question of whether or not Engineering is a manufacturer of
air conditioning units under Section 185(m), supra, in relation to Sections 183(b) and 194 of
the Code, or a contractor under Section 191 of the same Code.
The Commissioner contends that Engineering is a manufacturer and seller of air conditioning
units and parts or accessories thereof and, therefore, it is subject to the 30% advance sales
tax prescribed by Section 185(m) of the Tax Code, in relation to Section 194 of the same,
which defines a manufacturer as follows:
“Section 194.—Words and Phrases Defined.—In applying the provisions of this Title, words
and phrases shall be taken in the sense and extension indicated below:
xxx
(x) “Manufacturer” includes every person who by physical or chemical process alters the
exterior texture or form or inner substance of any raw material or manufactured or partially
manufactured products in such manner as to prepare it for a special use or uses to which it
could not have been put in its original condition, or who by any such process alters the
quality of any such material or manufactured or partially manufactured product so as to
reduce it to marketable shape, or prepare it for any of the uses of industry, or who by any
such process combines any such raw material or manufactured or partially manufactured
products with other materials or products of the same or of different kinds and in such
manner that the finished product of such process of manufacture can be put to special use
or uses to which such raw material or manufactured or partially manufactured products in
their original condition could not have been put, and who in addition alters such raw
material or manufactured or partially manufactured products, or combines the same to
produce such finished products for the purpose of their sale or distribution to others and Central vs. Trinidad 43, Phil. 816, 819, would seem to be that he renders service in the
not for his own use or consumption. course of an independent occupation, representing the will of his employer only as to the
result of his work, and not as to the means by which it is accomplished.
In answer to the above contention, Engineering claims that it is not a manufacturer and
seller of air-conditioning units and spare parts or accessories thereof subject to tax under With the foregoing criteria as guideposts, We shall now examine whether Engineering really
Section 185(m) of the Tax Code, but a contractor engaged in the design, supply and did “manufacture” and sell, as alleged by the Commissioner to hold it liable to the advance
installation of the central type of air-conditioning system subject to the 3% tax imposed by sales tax under Section 185(m), or it only had its services “contracted” for installation
Section 191 of the same Code, which is essentially a tax on the sale of services or labor of a purposes to hold it liable under section 198 of the Tax Code.
contractor rather than on the sale of articles subject to the tax referred to in Sections 184,
I
185 and 186 of the Code.
After going over the three volumes of stenographic notes and the voluminous record of the
The arguments of both the Engineering and the Commissioner call for a clarification of the
BIR and the CTA as well as the exhibits submitted by both parties, We find that Engineering
term contractor as well as the distinction between a contract of sale and contract for
did not manufacture air conditioning units for sale to the general public, but imported some
furnishing services, labor and materials. The distinction between a contract of sale and one
items (as refrigeration compressors in complete set, heat exchangers or coils, t.s.n. p. 39)
for work, labor and materials is tested by the inquiry whether the thing transferred is one
which were used in executing contracts entered into by it. Engineering, therefore,
not in existence and which never would have existed but for the order of the party desiring
undertook negotiations and execution of individual contracts for the design, supply and
to acquire it, or a thing which would have existed and has been the subject of sale to some
installation of air conditioning units of the central type (t.s.n. pp. 20-36; Exhs. “F”, “G”, “H”,
other persons even if the order had not been given.2 If the article ordered by the purchaser
“I”, “J”, “K”, “L”, and “M”), taking into consideration in the process such factors as the area
is exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change
of the space to be air conditioned; the number of persons occupying or would be occupying
or modification of it is made at defendant’s request, it is a contract of sale, even though it
the premises; the purpose for which the various air conditioning areas are to be used; and
may be entirely made after, and in consequence of, the defendants order for it.3
the sources of heat gain or cooling load on the plant such as sun load, lighting, and other
Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece of electrical appliances which are or may be in the plan, (t.s.n. p. 34, Vol. I) Engineering also
work thus: testified during the hearing in the Court of Tax Appeals that relative to the installation of air
conditioning system, Engineering designed and engineered complete each particular plant
“Art. 1467. A contract for the delivery at a certain price of an article which the vendor in the
and that no two plants were identical but each had to be engineered separately. As found by
ordinary course of his business manufactures or procures for the general market, whether
the lower court, which finding4 We adopt—
the same is on hand at the time or not, is a contract of sale, but if the goods are to be
manufactured specially for the customer and upon his special order and not for the general “Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of its
market, it is a contract for a piece of work.” various customers the central type air conditioning system; prepares the plans and
specifications therefor which are distinct and different from each other; the air conditioning
The word “contractor” has come to be used with special reference to a person who, in the
units and spare parts or accessories thereof used by petitioner are not the window type of
pursuit of the independent business, undertakes to do a specific job or piece of work for
air conditioner which are manufactured, assembled and produced locally for sale to the
other persons, using his own means and methods without submitting himself to control as
general market; and the imported air conditioning units and spare parts or accessories
to the petty details. (Arañas, Annotations and Jurisprudence on the National Internal
thereof are supplied and installed by petitioner upon previous orders of its customers
Revenue Code, p. 318, par. 191 (2), 1970 Ed.) The true test of a contractor as was held in the
conformably with their needs and requirements.”
cases of Luzon Stevedoring Co., vs. Trinidad 43, Phil. 803, 807-808, and La Carlota Sugar
The facts and circumstances aforequoted support the theory that Engineering is a contractor
rather than a manufacturer.
The Commissioner in his Brief argues that “it is more in accord with reason and sound
business management to say that anyone who desires to have air conditioning units
installed in his premises and who is in a position and willing to pay the price can order the
same from the company (Engineering) and, therefore, Engineering could have mass
produced and stockpiled air conditioning units for sale to the public or to any customer with
enough money to buy the same.” This is untenable in the light of the fact that air
conditioning units, packaged, or what we know as self-contained air conditioning units, are
distinct from the central system which Engineering dealt in. To Our mind, the distinction as
explained by Engineering, in its Brief, quoting from books, is not an idle play of words as
claimed by the Commissioner, but a significant fact which We just cannot ignore. As quoted
by Engineering Equipment & Supply Co., from an Engineering handbook by L.C. Morrow, and
which We reproduce hereunder for easy reference:
“x x x there is a great variety of equipment in use to do this job (of air conditioning). Some
devices are designed to serve a specific type of space; others to perform a specific function;
and still others as components to be assembled into a tailor-made system to fit a particular
building. Generally, however, they may be grouped into two classifications—unitary and
central system.
“The unitary equipment classification includes those designs such as room air conditioner,
where all of the functional components are included in one or two packages, and installation
involves only making service connection such as electricity, water and drains. Central-station
systems, often referred to as applied or built-up systems, require the installation of
components at different points in a building and their interconnection.
“The room air conditioner is a unitary equipment designed specifically for a room or similar
small space. It is unique among air conditioning equipment in two respects: It is in the
electrical appliance classification, and it is made by a great number of manufacturers.”
There is also the testimony of one Carlos Navarro, a licensed Mechanical and Electrical
Engineer, who was once the Chairman of the Board of Examiners for Mechanical Engineers
and who was allegedly responsible for the preparation of the refrigeration and air
conditioning code of the City of Manila, who said that “the central type air conditioning
system is an engineering job that requires planning and meticulous layout due to the fact
that usually architects assign definite space and usually the spaces they assign are very small
and of various sizes. Continuing further, he testified:
“I don’t think I have seen central type of air conditioning machinery room that are exactly
alike because all our buildings here are designed by architects dissimilar to existing
buildings, and usually they don’t coordinate and get the advice of air conditioning and
refrigerating engineers so much so that when we come to design, we have to make use of
the available space that they are assigning to us so that we have to design the different
component parts of the air conditioning system in such a way that will be accommodated in
the space assigned and afterwards the system may be considered as a definite portion of
the building. x x x”
Definitely there is quite a big difference in the operation because the window type air
conditioner is a sort of compromise. In fact, it cannot control humidity to the desired level;
rather the manufacturers, by hit and miss, were able to satisfy themselves that the desired
comfort within a room could be made by a definite setting of the machine as it comes from
the factory; whereas the central type system definitely requires an intelligent operator.”
(t.s.n. pp. 301-335, Vol. II)
The point, therefore, is this—Engineering definitely did not and was not engaged in the
manufacture of air conditioning units but had its services contracted for the installation of a
central system. The cases cited by the Commissioner (Advertising Associates, Inc. vs.
Collector of Customs, 97, Phil. 636; Celestino Co & Co. vs. Collector of Internal Revenue, 99
Phil. 841 and Manila Trading & Supply Co. vs. City of Manila, 56 O.G. 3629), are not in point.
Neither are they applicable because the facts in all the cases cited are entirely different.
Take for instance the case of Celestino Co where this Court held the taxpayer to be a
manufacturer rather than a contractor of sash, doors and windows manufactured in its
factory. Indeed, from the very start, Celestino Co intended itself to be a manufacturer of
doors, windows, sashes etc. as it did register a special trade name for its sash business and
ordered company stationery carrying the bold print “ORIENTAL SASH FACTORY (CELESTINO
CO AND COMPANY, PROP.) 926 Raon St., Quiapo, Manila, Tel. No. etc., Manufacturers of All
Kinds of Doors, Windows x x x.” Likewise, Celestino Co never put up a contractor’s bond as
required by Article 1729 of the Civil Code. Also, as a general rule, sash factories receive
orders for doors and windows of special design only in particular cases, but the bulk of their
sales is derived from ready-made doors and windows of standard sizes for the average
home, which “sales” were reflected in their books of accounts totalling P118,754.69 for the
period from January, 1952 to September 30, 1952, or for a period of only nine (9) months.
This Court found said sum difficult to have been derived from its few customers who placed
special orders for these items. Applying the abovestated facts to the case at bar, We found
them to be inapposite. Engineering advertised itself as Engineering Equipment and Supply
Company, Machinery Mechanical Supplies, Engineers, Contractors, 174 Marques de
Comillas, Manila (Exh. “B” and “15” BIR rec. p. 186), and not as manufacturers. It likewise
paid the contractors tax on all the contracts for the design and construction of central
system as testified to by Mr. Rey Parker, its President and General Manager, (t.s.n. p. 102,
103) Similarly, Engineering did not have ready-made air conditioning units for sale but as per
testimony of Mr. Parker upon inquiry of Judge Luciano of the CTA—
Q—“Aside from the general components, which go into air conditioning plant or system of
the central type which your company undertakes, and the procedure followed by you in
obtaining and executing contracts which you have already testified to in previous hearing,
would you say that the covering contracts for these different projects listed . . . referred to
in the list, Exh. “F” are identical in every respect? I mean every plan or system covered by
these different contracts are identical in standard in every respect, so that you can
reproduce them?
A—“No, sir. They are not all standard. On the contrary, none of them are the same. Each
one must be designed and constructed to meet the particular requirements, whether the
application is to be operated. (t.s.n. pp. 101-102)
What We consider as on all fours with the case at bar is the case of S.M. Lawrence Co. vs.
McFarland, Commissioner of Internal Revenue of the State of Tennessee and McCanless,
355 SW 2d, 100, 101, “where the cause presents the question of whether one engaged in
the business of contracting for the establishment of air conditioning system in buildings,
which work requires, in addition to the furnishing of a cooling unit, the connection of such
unit with electrical and plumbing facilities and the installation of ducts within and through
walls, ceilings and floors to convey cool air to various parts of the building, is liable for sale
or use tax as a contractor rather than a retailer of tangible personal property. Appellee took
the position that appellant was not engaged in the business of selling air conditioning
equipment as such but in the furnishing to its customers of completed air conditioning
systems pursuant to contract, was a contractor engaged in the construction or improvement
of real property, and as such was liable for sales or use tax as the consumer of materials and
equipment used in the consummation of contracts, irrespective of the tax status of its
contractors. To transmit the warm or cool air over the buildings, the appellant installed
system of ducts running from the basic units through walls, ceilings and floors to registers.
The contract called for completed air conditioning systems which became permanent part of
the buildings and improvements to the realty.” The Court held the appellant a contractor
which used the materials and the equipment upon the value of which the tax herein
imposed was levied in the performance of its contracts with its customers, and that the
customers did not purchase the equipment and have the same installed.
Applying the facts of the aforementioned case to the present case, We see that the supply
of air conditioning units to Engineer’s various customers, whether the said machineries were
in hand or not, was especially made for each customer and installed in his building upon his
special order. The air conditioning units installed in a central type of air conditioning system
would not have existed but for the order of the party desiring to acquire it and if it existed
without the special order of Engineering’s customer, the said air conditioning units were not
intended for sale to the general public. Therefore, We have but to affirm the conclusion of
the Court of Tax Appeals that Engineering is a contractor rather than a manufacturer,
subject to the contractors tax prescribed by Section 191 of the Code and not to the advance
sales tax imposed by Section 185(m) in relation to Section 194 of the same Code. Since it has
been proved to Our satisfaction that Engineering imported air conditioning units, parts or
accessories thereof for use in its construction business and these items were never sold,
resold, bartered or exchanged, Engineering should be held liable to pay taxes prescribed
under Section 1905 of the Code. This compensating tax is not a tax on the importation of
goods but a tax on the use of imported goods riot subject to sales tax. Engineering,
therefore, should be held liable to the payment of 30% compensating tax in accordance with
Section 190 of the Tax Code in relation to Section 185(m) of the same, but without the 50%
mark up provided in Section 183(b).
II We take up next the issue of fraud. The Commissioner charged Engineering with
misdeclaration of the imported air conditioning units and parts or accessories thereof so as
to make them subject to a lower rate of percentage tax (7%) under Section 186 of the Tax
Code, when they are allegedly subject to a higher rate of tax (30%) under its Section 185(m).
This charge of fraud was denied by Engineering but the Court of Tax Appeals in its decision
found adversely and said:
“x x x We are amply convinced from the evidence presented by respondent that petitioner
deliberately and purposely misdeclared its importations. This evidence consists of letters
written by petitioner to its foreign suppliers, instructing them on how to invoice and
describe the air conditioning units ordered by petitioner. x x x” (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals absolved Engineering from
paying the 50% surcharge prescribe by Section 183(a) of the Tax Code by reasoning out as
follows:
“The imposition of the 50% surcharge prescribed by Section 183(a) of the Tax Code is based
on willful neglect to file the monthly return within 20 days after the end of each month or in
case a false or fraudulent return is willfully made, it can readily be seen that petitioner
cannot legally be held subject to the 50% surcharge imposed by Section 183(a) of the Tax
Code. Neither can petitioner be held subject to the 50% surcharge under Section 190 of the
Tax Code dealing on compensating tax because the provisions thereof do not include the
50% surcharge. Where a particular provision of the Tax Code does not impose the 50%
surcharge as fraud penalty we cannot enforce a non-existing provision of law
notwithstanding the assessment of respondent to the contrary. Instances of the exclusion in
the Tax Code of the 50% surcharge are those dealing on tax on banks, taxes on receipts of
insurance companies, and franchise tax. However, if the Tax Code imposes the 50%
surcharge as fraud penalty, it expressly so provides as in the cases of income tax, estate and
inheritance taxes, gift taxes, mining tax, amusement tax and the monthly percentage taxes.
Accordingly, we hold that petitioner is not subject to the 50% surcharge despite the
existence of fraud in the absence of legal basis to support the importation thereof.” (p. 228
CTA rec.)
We have gone over the exhibits submitted by the Commissioner evidencing fraud
committed by Engineering and We reproduce some of them hereunder for clarity.
As early as March 18, 1953, Engineering in a letter of even date wrote to Trane Co. (Exh. “3-
K” pp. 152-155, BIR rec.) viz:
“Your invoices should be made in the name of Madrigal & Co., Inc., Manila, Philippines, c/o
Engineering Equipment & Supply Co., Manila, Philippines—forwarding all correspondence
and shipping papers concerning this order to us only and not to the customer.
“When invoicing, your invoices should be exactly as detailed in the customer’s Letter Order
dated March 14th, 1953 attached. This is in accordance with the Philippine import licenses
granted to Madrigal & Co., Inc. and such details must only be shown on all papers and
shipping documents for this shipment. No mention of the words air conditioning equipment
should be made on any shipping documents as well an on the cases. Please give this matter
your careful attention, otherwise great difficulties will be encountered with the Philippine
Bureau of Customs when clearing the shipment on its arrival in Manila. All invoices and
cases should be marked ‘THIS EQUIPMENT FOR RIZAL CEMENT CO.’ “
The same instruction was made to Acme Industries, Inc., San Francisco, California in a letter
dated March 19, 1953 (Exh. “3-J-1” pp. 150-151, BIR rec.)
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York, U.S.A.
(Exh. “3-1” pp. 147-149, BIR rec.) also enjoining the latter from mentioning or referring’ to
the term ‘air conditioning’ and to describe the goods on order as Fiberglass pipe and pipe
fitting insulation instead. Likewise on April 30, 1953, Engineering threatened to discontinue
the forwarding service of Universal Transcontinental Corporation when it wrote Trane Co.
(Exh. “3-H” p. 146, BIR rec.):
“It will be noted that the Universal Transcontinental Corporation is not following through on
the instructions which have been covered by the above correspondence, and which
indicates the necessity of discontinuing the use of the term “Air conditioning Machinery or
Air Coolers”. Our instructions concerning this general situation have been sent to you in
ample time to have avoided this error in terminology, and we will ask that on receipt of this
letter that you again write to
Universal Transcontinental Corp. and inform them that, if in the future, they are unable to
cooperate with us on this requirement, we will thereafter be unable to utilize their
forwarding service. Please inform them that we will not tolerate another failure to follow
our requirements.”
And on July 17, 1953 (Exh. “3-g”, p. 145, BIR rec.) Engineering wrote Trane Co. another
letter, viz:
“In the past, we have always paid the airconditioning tax on climate changers and that mark
is recognized in the Philippines as air conditioning equipment. This matter of avoiding any
tie-in on air conditioning is very important to us, and we are again asking that from hereon
that whoever takes care of the processing of our orders be carefully instructed so as to
avoid again using the term ‘climate changers’ or in any way referring to the equipment as
‘air conditioning.’
And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953, suggesting a
solution, viz:
“We feel that we can probably solve all the problems by following the procedure outlined in
your letter of March 25, 1953, wherein you stated that in all future jobs you would enclose
photostatic copies of your import license so that we might make up two sets of invoices: one
set describing equipment ordered simply according to the way that they are listed on the
import license and another according to our ordinary regular methods of order write-up. We
would then include the set made up according to the import license in the shipping boxes
themselves and use those items as our actual shipping documents and invoices, and we will
send the other regular invoice to you, by separate correspondence. (Exh. No. “3F-1”, p. 144
BIR rec.)
Another interesting letter of Engineering is one dated August 27, 1955 (Exh. “3-C” p. 141 BIR
rec.)
“In the process of clearing the shipment from the piers, one of the Customs inspectors
requested to see the packing list. Upon locating the packing list, it was discovered that the
same was prepared on a copy of your letterhead which indicated that the Trane Co.
manufactured air conditioning, heating and heat transfer equipment. Accordingly, the
inspectors insisted that this equipment was being imported for air conditioning purposes. To
date, we have not been able to clear the shipment and it is possible that we will be required
to pay heavy taxes on the equipment.
“The purpose of this letter is to request that in the future, no documents of any kind should
be sent with the order that indicate in any way that the equipment could possibly be used
for air conditioning.
“It is realized that this is a broad request and fairly difficult to accomplish and administer,
but we believe with proper caution it can be executed. Your cooperation and close
supervision concerning those matters will be appreciated.” (Italics supplied)
The aforequoted communications are strongly indicative of the fraudulent intent of
Engineering to misdeclare its importation of air conditioning units and spare parts or
accessories thereof to evade payment of the 30% tax. And since the commission of fraud is
altogether too glaring, We cannot agree with the Court of Tax Appeals in absolving
Engineering from the 50% fraud surcharge, otherwise We will be giving premium to a plainly
intolerable act of tax evasion. As aptly stated by then Solicitor General, now Justice, Antonio
P. Barredo: ‘this circumstance will not free it from the 50% surcharge because in any case
whether it is subject to advance sales tax or compensating tax, it is required by law to truly
declare its importation in the import entries and internal revenue declarations before the
importations maybe released from customs custody. The said entries are the very
documents where the nature, quantity and value of the imported goods are declared and
where the customs duties, internal revenue taxes and other fees or charges incident to the
importation are computed. These entries, therefore, serve the same purpose as the returns
required by Section 183(a) of the Code.’
Anent the 25% delinquency surcharge, We fully agree to the ruling made by the Court of Tax
Appeals and hold Engineering liable for the same. As held by the lower court:
“At first blush it would seem that the contention of petitioner that it is not subject to the
delinquency surcharge of 25% is sound, valid and tenable. However, a serious study and
critical analysis of the historical provisions of Section 190 of the Tax Code dealing on
compensating tax in relation to Section 183 (a) of the same Code, will show that the
contention of petitioner is without merit. The original text of Section 190 of Commonwealth
Act 466, otherwise known as the National Internal Revenue Code, as amended by
Commonwealth Act No. 503, effective on October 1, 1939, does not provide for the filing of’
a compensating tax return and payment of the 25% surcharge for late payment thereof.
Under the original text of Section 190 of the Tax Code, as amended by Commonwealth Act
No. 503, the contention of the petitioner that it is not subject to the 25% surcharge appears
to be legally tenable. However, Section 190 of the Tax Code was subsequently amended by
Republic Acts Nos. 48, 253, 361, 1511 and 1612 effective October 1, 1946, July 1, 1948, June
9, 1949, June 16, 1956 and August 24, 1956 respectively, which invariably provides among
others, the following:
“x x x If any article withdrawn from the customhouse or the post office without payment of
the compensating tax is subsequently used by the importer for other purposes,
corresponding entry should be made in the books of accounts if any are kept or a written
notice thereof sent to the Collector of Internal Revenue and payment of the corresponding
compensating tax made within 30 days from the date of such entry or notice and if tax is not
paid within such period the amount of the tax shall be increased by 25% the increment to be
a part of the tax.”
“Since the imported air conditioning units and spare parts or accessories thereof are subject
to the compensating tax of 30% as the same were used in the construction business of
Engineering, it is incumbent upon the latter to comply with the aforequoted requirement of
Section 190 of the Code, by posting in its books of accounts or notifying the Collector of
Internal Revenue that the imported articles were used for other purposes within 30 days. x x
x Consequently, as the 30% compensating tax was not paid by petitioner within the time
prescribed by Section 190 of the Tax Code as amended, it is therefore subject to the 25%
surcharge for delinquency in the payment of the said tax.” (pp. 224-226 CTA rec.)
undertakes to do a specific piece or job of work for other persons, using his own means and
methods without submitting himself to control as to the petty details. The true test of a
‘contractor’ would seem to be that he renders the service in the course of an independent
occupation, representing the will of his employer only as to the result of his work, and not as
to the means by which it is accomplished. (Luzon Stevedoring Co. vs. Trinidad, L-18316,
September 23, 1922).

III Lastly the question of prescription of the tax assessment has been put in issue.
Engineering contends that it was not guilty of tax fraud in effecting the importations and,
therefore, Section 332(a) prescribing ten years is inapplicable, claiming that the pertinent
prescriptive period is five years from the date the questioned importations were made. A
review of the record however reveals that Engineering did file a tax return or declaration
with the Bureau of Customs before it paid the advance sales tax of 7%. And the declaration
filed reveals that it did in fact misdeclare its importations. Section 332 of the Tax Code which
provides:
b) When return considered sufficient.—A return need not be complete in all particulars. It is
sufficient if it complies substantially with the law. There is substantial compliance (1) when
the return is made in good faith and is not false or fraudulent; (2) when it covers the entire
period involved; and (3) when it contains information as to the various items of income,
deductions and credits with such definiteness as to permit the computation and assessment
of the tax. (Commissioner of Internal Revenue vs. Lilia Yusay Gonzales, L-19495, Nov. 24,
1966). Commissioner of Internal Revenue vs. Engineering Equipment and Supply Company,
64 SCRA 590, No. L-27044, No. L-27452 June 30, 1975

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

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

is applicable, considering the preponderance of evidence of fraud with the intent to evade
the higher rate of percentage tax due from Engineering. The tax assessment was made
within the period prescribed by law and prescription had not set in against the Government.

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

SO ORDERED.

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

Decision affirmed with modification.

Notes.—a) Contractor defined.—Although, in a general sense, every person who enters into
a contract may be called a contractor, yet the word, for want of a better one, has come to
be used with special reference to a person who, in the pursuit of an independent business,
[No. 11491. August 23, 1918.] but if the plaintiff consents to fill them, he waives his right and cannot complain for having
acted thus at his own free will.
ANDRES QUIROGA, plaintiff and appellant, vs. PARSONS HARDWARE Co., defendant and
appellee. APPEAL from a judgment of the Court of First Instance of Manija. Abreu, J.

1.SALES; INTERPRETATION OF CONTRACT.—For the classification of contracts, due regard The facts are stated in the opinion of the court.
must be paid to their essential clauses. In the contract in the instant case, what was
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.
essential, constituting its cause and subject matter, was that the plaintiff was to furnish the
defendant with the beds which the latter might order, at the stipulated price, and that the Crossfield & O'Brien for appellee.
defendant was to pay this price in the manner agreed upon. These are precisely the
essential features of a contract of purchase and sale. There was the obligation on the part of AVANCENA, J.:
the plaintiff to supply the beds, and, on that of the defendant, to pay their price. These On January 24, 1911, in this city of Manila, a contract in the following tenor was entered
features exclude the legal conception of an agency or order to sell whereby the mandatary into by and between the plaintiff, as party of the first part, and J. Parsons (to whose rights
or agent receives the thing to sell it, and does not pay its price, but delivers to the principal and obligations the present defendant later subrogated itself), as party of the second. part:
the price he obtains from the sale of the thing to a third person, and if he does not succeed
in selling it, he returns it. Held: That this contract is one of purchase and sale, and not of "CONTBACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND
commercial agency. J. PAKSONS, BOTH MERCHANTS ESTABLISHED IN MANILA,
2.ID.; ID.—The testimony of the person who drafted this contract, to the effect that his FOR THE EXCLUSIVE SALE OF 'QUIROGA' BEDS IN THE VI
purpose was to be an agent for the beds and to collect a commission on the sales, is of no
importance to prove that the contract was one of agency, inasmuch as the agreements SAYAN ISLANDS.
contained in the contract constitute, according to law, covenants of purchase and sale, and
"ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the Visayan
not of commercial agency. It must be understood that a contract is what the law defines it
Islands to J. Parsons under the following conditions:
to be, and not what it is called by the contracting parties.
" (A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the latter's
3.ID.; ID.—The fact that the contracting parties did not; perform the contract in accordance
establishment in Iloilo, and shall invoice them at the same price he has fixed for sales, in
with its terms, only shows mutual tolerance and gives no right to have the contract
Manila, and, in the invoices, shall make an allowance of a discount of 25 per cent of the
considered, not as the parties stipulated it, but as they performed it.
invoiced. prices, as commission on the sales; and, Mr. Parsons shall order the beds by the
4.ID.; ID.—Only the acts of the contracting parties, subsequent to, and in connection with, dozen, whether of the same or of different styles.
the performance of the contract must be considered in the interpretation of the contract,
"(B) Mr, Parsons binds himself to pay Mr. Quiroga for the beds received, within a period of
when such interpretation is necessary, but not when, as in the instant case, its essential
sixty days from the date of their shipment.
agreements are clearly set forth and plainly show that the- contract belongs to a certain kind
and not to another. "(C) The expenses for transportation and shipment shall be borne by M. Quiroga, and the
freight, insurance, and cost of unloading from the vessel at the point where the beds are
5.ID.; ID.—The defendant obligated itself to order the beds from the plaintiff by the dozen.
received, shall be paid by Mr. Parsons.
Held: That the effect of a breach of this clause by the defendant would only entitle the
plaintiff to disregard the orders which the defendant might place under other conditions;
"(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said payment
when made shall be considered as a prompt payment, and as such a deduction of 2 per cent
shall be made f rom the amount of the invoice. "The same discount shall be made on the
amount of any invoice which Mr. Parsons may deem convenient to pay in cash.
"(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of any
alteration in price which he may plan to make in respect to his beds, and agrees that if on
the date when such alteration takes effect he should have any order pending to be served to
Mr. Parsons, such order shall enjoy the advantage of the alteration if the price thereby be
lowered, but shall not be affected by said alteration if the price thereby be increased, for, in
this latter case, Mr. Quiroga assumed the obligation to invoice the beds at the price at which
the order was given.
"(F) Mr. Parsons binds himself not to sell any other kind except the 'Quiroga' beds.
"ART. 2. In compensation for the expenses of advertisement which, for the benefit of both
contracting parties, Mr. Parsons may find himself obliged to make, Mr. Quiroga assumes the
obligation to offer and give the preference to Mr. Parsons in case anyone should apply for
the exclusive agency for any island not comprised within the Visayan group.
"ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of 'Quiroga'
beds in all the towns of the Archipelago where there are no exclusive agents, and shall
immediately report such action to Mr. Quiroga for his approval
"ART. 4. This contract is made for an unlimited period, and may be terminated by either of
the contracting parties on a previous notice of ninety days to the other party."
Of the three causes of action alleged by the plaintiff in his complaint, only two of them
constitute the subject matter of this appeal and both substantially amount to the averment
that the defendant violated the following obligations: not to sell the beds at higher prices
than those of the invoices; to have an open establishment in Iloilo; itself to conduct the
agency; to keep the beds on public exhibition, and to pay for the advertisement expenses
for the same; and to order the beds by the dozen and in no other manner. As may be seen,
with the exception of the obligation on the part of the defendant to order the beds by the
dozen and in no other manner, none of the obligations imputed to the defendant in the two
causes of action are expressly set forth in the contract. But the plaintiff alleged that the
defendant was his agent for the sale of his beds in Iloilo, and that said obligations are
implied in a contract of commercial agency. The whole question, therefore, reduces itself to
a determination as to whether the defendant, by reason of the contract hereinbefore
transcribed, was a purchaser or an agent of the plaintiff f or the sale of his beds.
In order to classify a contract, due regard must be given to its essential clauses. In the
contract in question, what was essential, as constituting its cause and subject matter, is that
the plaintiff was to furnish the defendant with the beds which the latter might order, at the
price stipulated, and that the defendant was to pay the price in the manner stipulated. The
price agreed upon was the one determined by the plaintiff for the sale of these beds in
Manila, with a discount of from 20 to 25 per cent, according to their class. Payment was to
be made at the end of sixty days, or before, at the plaintiff s request, or in cash, if the
defendant so preferred, and in these last two cases an additional discount was to be allowed
for prompt payment. These are precisely the essential features of a contract of purchase
and sale. There was the obligation on the part of the plaintiff to supply the beds, and, on the
part of the defendant, to pay their price. These features exclude the legal conception of an
agency or order to sell whereby the mandatory or agent received the thing to sell it, and,
does not pay its price, but delivers to the principal the price he obtains from the sale of the
thing to a third person, and if he does not succeed in selling if, he returns it. By virtue of the
contract between the plaintiff and the defendant, the latter, on receiving the beds, was
necessarily obliged to pay their price within the term fixed, without any other consideration
and regardless as to whether he had or had not sold the beds.
It would be enough to held, as we do, that the contract by and between the defendant and
the plaintiff is one of purchase and sale, in order to show that it was not one made on the
basis of a commission on sales, as the plaintiff claims it was, for these contracts are
incompatible with each other. But, besides, examining the clauses of this contract, none of
them is found that substantially supports the plaintiff's contention. Not a single one of these
clauses necessarily conveys the idea of an agency. The words commission on sales used in
clause (A) of article 1 mean nothing else, as stated. in the contract itself, than a mere
discount on the invoice price. The word agency, also used in articles 2 and 3, only expresses
that the defendant was the only one that could sell the plaintiff's beds in the Visayan
IslandsT. With regard to the remaining clauses, the least that can be said is that they are not
incompatible with the contract of purchase and sale.
The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the
defendant corporation and who established and managed the latter's business in Iloilo. It
appears that this witness, prior to the time of his testimony, had serious trouble with the
defendant, had maintained a civil suit against it, and had even accused one of its partners, advertisement of the plaintiff's beds, such sales were to be considered as a result of that
Guillermo Parsons, of falsification. He testified that it was he who drafted the contract advertisement.
Exhibit A, and, when questioned as to what was his purpose in contracting with the plaintiff,
In respect to the defendant's obligation to order by the dozen, the only one expressly
replied that it was to be an agent for his beds and to collect a, commission on sales.
imposed by the contract, the effect of its breach would only entitle the plaintiff to disregard
However, according to the def endant's evidence, it was Mariano Lopez Santos, a director of
the orders which the defendant might place under other conditions; but if the plaintiff
the corporation, who prepared Exhibit A. But, even supposing that Ernesto Vidal has stated
consents to fill them, he waives his right and cannot complain for having acted thus at his
the truth, his statement as to what was his idea in contracting with the plaintiff is of no
own free will.
importance, inasmuch a$ the agreements contained in Exhibit A which he claims to have
drafted, constitute, as we have said, a contract of purchase and sale, and not one of For the foregoing reasons, we are of opinion that the contract by and between the plaintiff
commercial agency. This only means that Ernesto Vidal was mistaken in his classification of and the defendant was one of purchase and sale, and that the obligations the breach of
the contract. But it must be understood that a contract is what the law defines it to be, and which is alleged as a cause of action are not imposed upon the defendant, either by
not what it is called by the contracting parties. agreement or by law.
The plaintiff also endeavored to prove that the defendant had returned beds that it could The judgment appealed from is affirmed, with costs against the appellant. So ordered.
not sell; that, without previous notice, it forwarded to the defendant the beds that it
wanted; and that the defendant received its commission for the beds sold by the plaintiff Arellano, C. J., Torres, Johnson, Street, and Malcolm, JJ., concur.
directly to persons in Iloilo. But all this, at the most only shows that, on the part of both of Judgment affirmed. QUIROGA vs. PARSONS HARDWARE Co., 38 Phil. 501, No. 11491 August
them, there was mutual tolerance in the performance of the contract in disregard of its 23, 1918
terms; and it gives no right to have the contract considered, not as the parties stipulated it,
but as they performed it. Only the acts of the contracting parties, subsequent to, and in
connection with, the execution of the contract, must be considered for the purpose of
interpreting the contract, when such interpretation is necessary, but not when, as in the
instant case, its essential agreements are clearly set forth and plainly show that the contract
belongs to a certain kind and not to another. Furthermore, the return made was of certain
brass beds, and was not effected in exchange for the price paid for them, but was for other
beds of another kind; and for the purpose of making this return, the defendant, in its letter
Exhibit L-1, requested the plaintiff s prior consent with respect to said beds, which shows
that it was not considered that the defendant had a right, by virtue of the contract, to make
this return. As regards the shipment of beds without previous notice, it is insinuated in the
record that these brass beds were precisely the ones so shipped, and that, for this very
reason, the plaintiff agreed to their return. And with respect to the so-called commissions,
we have said that they merely constituted a discount on the invoice price, and the reason
for applying this benefit to the beds sold directly by the plaintiff to persons in Iloilo was
because, as the defendant obligated itself in the contract to incur the expenses of
[No. 47538. June 20, 1941]
GONZALO PUYAT & SONS, INC., petitioner, vs. ARCO AMUSEMENT COMPANY (formerly
known as Teatro Arco), respondent.
CONTRACTS; PURCHASE AND SALE; INTERPRETATION.—The contract is the law between the
parties and should include all the things they are supposed to have been agreed upon. What
does not appear on the face of the contract should be regarded merely as "dealer's" or
"trader's talk", which can not bind either party. (Nolbrook v. Conner, 56 So., 576; 11 Am.
Rep., 212; Bank v. Brosscell, 120 111., 161; Bank v. Palmer, 47 111., 92; Hosser v. Copper, 8
Allen, 334; Doles v. Merrill, 173 Mass., 411.) The letters, Exhíbits 1 and 2, by which the
respondent accepted the prices of $1,700 and $1,600, respectively, for the sound
reproducing equipment subject of its contract with the petitioner, are clear in their terms
and admit of no other interpretation than that the respondent agreed to purchase from the
petitioner the equipment in question at the prices indicated which are fixed and
determinate. The respondent admitted in its complaint filed with the Court of First Instance
of Manila that the petitioner agreed to sell to it the first sound reproducing equipment and
machinery.
PETITION for review on certiorari.
The facts are stated in the opinion of the court.
Feria & La O for petitioner.
J. W. Ferrier and Daniel Me. Gomez for respondent.
LAUREL, J.:
This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the
purpose of reviewing its decision in civil case G. R. No. 1023, entitled "Arco Amusement
Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat and Sons,
Inc., defendant-appellee."
It appears that the respondent herein brought an action against the herein petitioner in the
Court of First Instance of Manila to secure a reimbursement of certain amounts allegedly
overpaid by it on account of the purchase price of sound reproducing equipment and
machinery ordered by the petitioner from the Starr Piano Company of Richmond, Indiana, U.
S. A. The facts of the case as found by the trial court and confirmed by the appellate court,
which are admitted by the respondent, are as follows:
"In the year 1929, the 'Teatro Arco', a corporation duly organized under the laws of the
Philippine Islands, with its office in Manila, was engaged in the business of operating
cinematographs. In 1930, its name was changed to Arco Amusement Company. C. S. Salmon
was the president, while A. B. Coulette was the business manager. About the same time,
Gonzalo Puyat & Sons, Inc., another corporation doing business in the Philippine Islands,
with office in Manila, in addition to its other business, was acting as exclusive agents in the
Philippines for the Starr Piano Company of Richmond, Indiana, U. S. A. It would seem that
this last company dealt in cinematograph equipment and machinery, and the Arco
Amusement Company desiring to equip its cinematograph with sound reproducing devices,
approached Gonzalo Puyat & Sons, Inc., thru its then president and acting manager, Gil
Puyat, and an employee named Santos. After some negotiations, it was agreed between the
parties, that is to say, Salmon and Coulette on one side, representing the plaintiff, and Gil
Puyat on the other, representing the defendant, that the latter would, on hebalf of the
plaintiff, order sound reproducing equipment from the Star Piano Company and that the
plaintiff would pay the defendant, in addition to the price of the equipment, a 10 per cent
commission, plus all expenses, such as, freight, insurance, banking charges, cables, etc. At
the expense of the plaintiff, the defendant sent a cable, Exhibit '3', to the Starr Piano
Company, inquiring about the equipment desired and making the said company to quote its
price without discount. A reply was received by Gonzalo Puyat & Sons, Inc., with the price,
evidently the list price of $1,700 f. o. b. factory Richmond, Indiana. The defendant did not
show the plaintiff the cable of inquiry nor the reply but merely informed the plaintiff of the
price of $1,700. Being agreeable to this price, the plaintiff, by means of Exhibit '1', which is a
letter. signed by C. S. Salmon dated November 19, 1929, formally authorized the order. The
equipment arrived about the end of the year 1929, and upon delivery of the same to the
plaintiff and the presentation of necessary papers, the price of $1,700, plus the 10 per cent
commission agreed upon and plus all the expenses and charges, was duly paid by the
plaintiff to the defendant.
"Sometime the following year, and after some negotiations between the same parties,
plaintiff and defendant, another order for sound reproducing equipment was placed by the
plaintiff with the defendant, on the same terms as the first order. This agreement or order
was confirmed by the plaintiff by its letter Exhibit '2', without date, that is to say, that the
plaintiff would pay for the equipment the amount of $1,600, which was supposed to be the
price quoted by the Starr Piano Company, plus 10 per cent commission, plus all expenses
incurred. The equipment under the second order arrived in due time, and the defendant
was duly paid the price. of $1,600 with its 10 per cent commission, and $160, for all
expenses and charges. This amount of $160 does not represent actual out-of-pocket
expenses paid by the defendant, but a mere flat charge and rough estimate made by the
defendant equivalent to 10 per cent of the price of $1,600 of the equipment.
"About three years later, in connection with a civil case in Vigan, filed by one Fidel Reyes
against the defendant herein Gonzalo Puyat & Sons, Inc., the officials of the Arco
Amusement Company discovered that the price quoted to them by the defendant with
regard to their two orders above mentioned was not the net price but rather the list price,
and that the defendant had obtained a discount from the Starr Piano Company. Moreover,
by reading reviews and literature on prices of machinery and cinematograph equipment,
said officials of the plaintiff were convinced that the prices charged them by the defendant
were much too high including the charges for out-of-pocket expenses. For these reasons,
they sought to obtain a reduction from the defendant or rather a reimbursement, and failing
in this they brought the present action."
The trial court held that the contract between the petitioner and the respondent was one of
outright purchase and sale, and absolved that petitioner from the complaint. The appellate
court, however,—by a division of four, with one justice dissenting—held that the relation
between petitioner and respondent was that of agent and principal, the petitioner acting as
agent of the respondent in the purchase of the equipment in question, and sentenced the
petitioner to pay the respondent alleged overpayments in the total sum of $1,335.52 or
P2,671.04, together with legal interest thereon from the date of the filing of the complaint
until said amount is fully paid, as well as to pay the costs of the suit in both instances. The
appellate court f urther argued that even if the contract between the petitioner and the
respondent was one of purchase and sale, the petitioner was guilty of fraud in concealing
the true price and hence would still be liable to reimburse the respondent for-the
overpayments made by the latter.
The petitioner now claims that the following errors have been incurred by the appellate
court:
"I. El Tribunal de Apelaciones incurrió en error de derecho al declarar que, según hechos,
entre la recurrente y la recurrida existía una relación implicita de mandataria a mandante en
la transacción de que se trata, en vez de la de vendedora a compradora como ha declarado
el Juzgado de Primera Instancia de Manila, presidido entonces por el hoy Magistrado
Honorable Marceliano Montemayor.
"II. El Tribunal de Apelaciones incurrió en error de derecho al declarar que, suponiendo que
dicha relación fuera de vendedora a compradora, la recurrente obtuvo, mediante dolo, el
consentimiento de la recurrida en cuanto al precio de $1,700 y $1,600 de las maquinarias y
equipos en cuestión, y condenar a la recurrente a devolver a la recurrida la diferencia o
descuento de 25 por ciento que la recurrente ha obtenido de la Starr Piano Company of
Richmond, Indiana."
We sustain the theory of the trial court that the contract between the petitioner and the
respondent was one of purchase and sale, and not one of agency, for the reasons now to be
stated.
In the first place, the contract is the law between the parties and should include all the
things they are supposed to have been agreed upon. What does not appear on the face of
the contract should be regarded merely as "dealer's" or "trader's talk", which can not bind
either party. (Nolbrook v. Conner, 56 So., 576, 11 Am. Rep., 212; Bank v. Brosscell, 120 111.,
161; Bank v. Palmer, 47 111., 92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass.,
411.) The letters, Exhibits 1 and 2, by which the respondent accepted the prices of $1,700
and $1,600, respectively, for the sound reproducing equipment subject of its contract with
the petitioner, are clear in their terms and admit of no other interpretation than that the
respondent agreed to purchase from the petitioner the equipment in question at the prices
indicated which are fixed and determinate. The respondent admitted in its complaint filed
with the Court of First Instance of Manila that the petitioner agreed to sell to it the first
sound reproducing equipment and machinery. The third paragraph of the respondent's
cause of action states:
"3. That on or about November 19, 1929, the herein plaintiff (respondent) and defendant
(petitioner) entered into an agreement, under and by virtue of which the herein defendant
was to secure from the United States, and sell and deliver to the herein plaintiff, certain
sound reproducing equipment and machinery, for which the said defendant, under and by
virtue of said agreement, was to receive the actual cost price plus ten per cent (10%), and
was also to be reimbursed for all out of pocket expenses in connection with the purchase
and delivery of such equipment, such as costs of telegrams, freight, and similar expenses."
(Italics ours.)
We agree with the trial judge that "whatever unforseen events might have taken place
unfavorable to the defendant (petitioner), such as change in prices, mistake in their
quotation, loss of the goods not covered by insurance or failure of the Starr Piano Company
to properly fill the orders as per specifications, the plaintiff (respondent) might still legally
hold the defendant (petitioner) to the prices fixed of $1,700 and $1,600." This is
incompatible with the pretended relation of agency between the petitioner and the
respondent, because in agency, the agent is exempted from all liability in the discharge of
his commission provided he acts in accordance with the instructions received from his
principal (section 254, Code of Commerce), and the principal must indemnify the agent for
all damages which the latter may incur in carrying out the agency without fault or
imprudence on his part (article 1729, Civil Code).
While the letters, Exhibits 1 and 2, state that the petitioner was to receive ten per cent
(10%) commission, this does not necessarily make the petitioner an agent of the
respondent, as this provision is only an additional price which the respondent bound itself to
pay, and which stipulation is not incompatible with the contract of purchase and sale. (See
Quiroga vs. Parsons Hardware Co., 38 Phil., 501.)
In the second place, to hold the petitioner an agent of the respondent in the purchase of
equipment and machinery from the Starr Piano Company of Richmond, Indiana, is
incompatible with the admitted fact that the petitioner is the exclusive agent of the same
company in the Philippines. It is out of the ordinary for one to be the agent of both the
vendor and the purchaser. The facts and circumstances indicated do not point to anything
but plain ordinary transaction where the respondent enters into a contract of purchase and
sale with the petitioner, the latter as exclusive agent of the Starr Piano Company in the
United States.
It follows that the petitioner as vendor is not bound to reimburse the respondent as vendee
for any difference between the cost price and the sales price which represents the profit
realized by the vendor out of the transaction. This is the very essence of commerce without
which merchants or middleman would not exist,
The respondent contends that it merely agreed to pay the cost price as distinguished from
the list price, plus ten per cent (10%) commission and all out-of-pocket expenses incurred by
the petitioner. The distinction which the respondent seeks to draw between the cost price
and the list price we consider to be spacious. It is to be observed that the twenty-five per
cent (25%) discount granted by the Starr Piano Company to the petitioner is available only
to the latter as the former's exclusive agent in the Philippines. The respondent could not
have secured this discount from the Starr Piano Company and neither was the petitioner
willing to waive that discount in favor of the respondent. As a matter of fact, no reason is
advanced by the respondent why the petitioner should waive the 25 per cent discount
granted it by the Starr Piano Company in exchange for the 10 per cent commission offered
by the respondent. Moreover, the petitioner was not duty bound to reveal the private
arrangement it had with the Starr Piano Company relative to such discount to its
prospective customers, and the respondent was not even aware of such an arrangement.
The respondent, therefore, could not have offered to pay a 10 per cent commission to the
petitioner provided it was given the benefit of the 25 per cent discount enjoyed by the
petitioner. It is well known that local dealers acting as agents of foreign manufacturers,
aside from obtaining a discount from the home office, sometimes add to the list price when
they resell to local purchasers. It was apparently to guard against an exhorbitant additional
price that the respondent sought to limit it to 10 per cent, and the respondent is estopped
from questioning that additional price. If the respondent later on discovers itself at the short
end of a bad bargain, it alone must bear the blame, and it cannot rescind the contract, much
less compel a reimbursement of the excess price, on that ground alone. The respondent
could not secure equipment and machinery manufactured by the Starr Piano Company
except from the petitioner alone; it willingly paid the price quoted; it received the
equipment and machinery as represented; and that was the end of the matter as far as the
respondent was concerned. The fact that the petitioner obtained more or less profit than
the respondent calculated before entering into the contract of purchase and sale, is no
ground for rescinding the contract or reducing the price agreed upon between the
petitioner and the respondent. Not every concealment is fraud; and short of fraud, it were
better that, within certain limits, business acumen permit of the loosening of the sleeves
and of the sharpening of the intellect of men and women in the business world.
The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court
is accordingly reversed and the petitioner is absolved from the respondent's complaint in G.
R. No. 1023, entitled "Arco Amusement Company (formerly known as Teatro Arco), plaintiff-
appellant, vs. Gonzalo Puyat and Sons, Inc., defendant-appellee," without pronouncement
regarding costs. So ordered
G.R. No. 149420. October 8, 2003.*
SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.
Civil Law; Sales; Obligations; Assignment of Credit; Definition of an assignment of credit.—
An assignment of credit is an agreement by virtue of which the owner of a credit, known as
the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and
without the consent of the debtor, transfers his credit and accessory rights to another,
known as the assignee, who acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor.
Same; Same; Same; Dacion En Pago; In dacion en pago, as a special mode of payment, the
debtor offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt; Requisites in order that there be a valid dation in payment.—Corollary
thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to
the creditor who accepts it as equivalent of payment of an outstanding debt. In order that
there be a valid dation in payment, the following are the requisites: (1) There must be the
performance of the prestation in lieu of payment (animo solvendi) which may consist in the
delivery of a corporeal thing or a real right or a credit against the third person; (2) There
must be some difference between the prestation due and that which is given in substitution
(aliud pro alio); (3) There must be an agreement between the creditor and debtor that the
obligation is immediately extinguished by reason of the performance of a prestation
different from that due.
Same; Same; Same; Same; The assignment of credit, which is in the nature of a sale of
personal property, produced the effects of a dation in payment which may extinguish the
obligation.—It may well be that the assignment of credit, which is in the nature of a sale of
personal property, produced the effects of a dation in payment which may extinguish the
obligation. However, as in any other contract of sale, the vendor or assignor is bound by
certain warranties. More specifically, the first paragraph of Article 1628 of the Civil Code
provides: The vendor in good faith shall be responsible for the existence and legality of the
credit at the time of the sale, unless it should have been sold as doubtful; but not for the
solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency
was prior to the sale and of common knowledge.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Arturo S. Santos for petitioner.
E.P. Mallari & Associates for private respondent.
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of
steel scaffoldings, while petitioner Sonny L. Lo, doing business under the name and style
San’s Enterprises, is a building contractor. On February 22, 1990, petitioner ordered
scaffolding equipments from respondent worth P540,425.80.1 He paid a downpayment in
the amount of P150,000.00. The balance was made payable in ten monthly installments.
Respondent delivered the scaffoldings to petitioner.2 Petitioner was able to pay the first
two monthly installments. His business, however, encountered financial difficulties and he
was unable to settle his obligation to respondent despite oral and written demands made
against him.3
On October 11, 1990, petitioner and respondent executed a Deed of Assignment,4 whereby
petitioner assigned to respondent his receivables in the amount of P335,462.14 from
Jomero Realty Corporation. Pertinent portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house
located at Greenmeadow Avenue, Quezon City owned by Jomero Realty Corporation;
WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR
purchased on account scaffolding equipments from the ASSIGNEE payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE for the
purchase of the aforementioned scaffoldings now in the amount of Three Hundred Thirty
Five Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five
Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14), Philippine Currency
which represents part of the ASSIGNOR’S collectible from Jomero Realty Corp., said
ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles
amounting to the said amount of P335,462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the full
power and authority to demand, collect, receive, compound, compromise and give
acquittance for the same or any part thereof, and in the name and stead of the said
ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its
successors and assigns that said debt is justly owing and due to the ASSIGNOR for Jomero
Realty Corporation and that said ASSIGNOR has not done and will not cause anything to be
done to diminish or discharge said debt, or delay or to prevent the ASSIGNEE, its successors
or assigns, from collecting the same;
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his
heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request
of said ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such
further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE
to recover whatever collectibles said ASSIGNOR has in accordance with the true intent and
meaning of these presents. x x x5 (Italics supplied)
However, when respondent tried to collect the said credit from Jomero Realty Corporation,
the latter refused to honor the Deed of Assignment because it claimed that petitioner was
also indebted to it.6 On November 26, 1990, respondent sent a letter7 to petitioner
demanding payment of his obligation, but petitioner refused to pay claiming that his
obligation had been extinguished when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of
money against the petitioner before the Regional Trial Court of Makati, Branch 147, which
was docketed as Civil Case No. 91-074.8
During the trial, petitioner argued that his obligation was extinguished with the execution of
the Deed of Assignment of credit. Respondent, for its part, presented the testimony of its
employee, Almeda Bañaga, who testified that Jomero ‘Realty refused to honor the
assignment of credit because it claimed that petitioner had an outstanding indebtedness to
it.
On August 25, 1994, the trial court rendered a decision9 dismissing the complaint on the
ground that the assignment of credit extinguished the obligation. The decretal portion
thereof provides:
“WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the
defendant and against the plaintiff, dismissing the complaint and ordering the plaintiff to
pay the defendant attorney’s fees in the amount of P25,000.00.”
Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate
court rendered a decision,10 the dispositive portion of which reads:
“WHEREFORE, finding merit in this appeal, the court REVERSES the appealed Decision and
enters judgment ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS
ECO-FORMWORK SYSTEM PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four
Hundred Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum from
January 10, 1991 (filing of the Complaint) until fully paid and attorney’s fees equivalent to
10% of the amount due and-costs of the suit.
SO ORDERED.”11
In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to
the respondent, the Court of Appeals held that (1) petitioner failed to comply with his
warranty under the Deed; (2) the object of the Deed did not exist at the time of the
transaction, rendering it void pursuant to Article 1409 of the Civil Code; and (3) petitioner
violated the terms of the Deed of Assignment when he failed to execute and do all acts and
deeds as shall be necessary to effectually enable the respondent to recover the
collectibles.12
Petitioner filed a motion for reconsideration of the said decision, which was denied by the
Court of Appeals.13
In this petition for review, petitioner assigns the following errors:
I THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN DECLARING THE
DEED OF ASSIGNMENT (EXH. “4”) AS NULL AND VOID FOR LACK OF OBJECT ON THE BASIS OF
A MERE HEARSAY CLAIM.
II THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF
ASSIGNMENT (EXH. “4”) DID NOT EXTINGUISH PETITIONER’S OBLIGATION ON THE WRONG
NOTION THAT PETITIONER FAILED TO COMPLY WITH HIS WARRANTY THEREUNDER.
III THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE TRIAL
COURT AND IN ORDERING PAYMENT OF INTERESTS AND ATTORNEY’S FEES.14
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as
the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and
without the consent of the debtor, transfers his credit and accessory rights to another,
known as the assignee, who acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor.15
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers
another thing to the creditor who accepts it as equivalent of payment of an outstanding
debt.16 In order that there be a valid dation in payment, the following are the requisites: (1)
There must be the performance of the prestation in lieu of payment (animo solvendi) which
may consist in the delivery of a corporeal thing or a real right or a credit against the third
person; (2) There must be some difference between the prestation due and that which is
given in substitution (aliud pro alio); (3) There must be an agreement between the creditor
and debtor that the obligation is immediately extinguished by reason of the performance of
a prestation different from that due.17 The undertaking really partakes in one sense of the
nature of sale, that is, the creditor is really buying the thing or property of the debtor,
payment for which is to be charged against the debtor’s debt. As such, the vendor in good
faith shall be responsible, for the existence and legality of the credit at the time of the sale
but not for the solvency of the debtor, in specified circumstances.18
Hence, it may well be that the assignment of credit, which is in the nature of a sale of
personal property,19 produced the effects of a dation in payment which may extinguish the
obligation.20 However, as in any other contract of sale, the vendor or assignor is bound by
certain warranties. More specifically, the first paragraph of Article 1628 of the Civil Code
provides:
The vendor in good faith shall be responsible for the existence and legality of the credit at
the time of the sale, unless it should have been sold as doubtful; but not for the solvency of
the debtor, unless it has been so expressly stipulated or unless the insolvency was prior to
the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant the
existence and legality of the credit at the time of the sale or assignment. When Jomero
claimed that it was no longer indebted to petitioner since the latter also had an unpaid
obligation to it, it essentially meant that its obligation to petitioner has been extinguished by
compensation.21 In other words, respondent alleged the non-existence of the credit and
asserted its claim to petitioner’s warranty under the assignment. Therefore, it behooved on
petitioner to make good its warranty and paid the obligation.
Furthermore, we find that petitioner breached his obligation under the Deed of Assignment,
to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his
heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request
of said ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such
further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE
to recover whatever collectibles said ASSIGNOR has in accordance with the true intent and
meaning of these presents.22 (italics ours)
Indeed, by warranting the existence of the credit, petitioner should be deemed to have
ensured the performance thereof in case the same is later found to be inexistent. He should
be held liable to pay to respondent the amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent
the sum of P335,462.14 with legal interest thereon. However, we find that the award by the
Court of Appeals of attorney’s fees is without factual basis. No evidence or testimony was
presented to substantiate this claim. Attorney’s fees, being in the nature of actual damages,
must be duly substantiated by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19,
2001 in CA-G.R. CV No. 47713, ordering petitioner to pay respondent the sum of
P335,462.14 with legal interest of 6% per annum from January 10, 1991 until fully paid is
AFFIRMED with MODIFICATION. Upon finality of this Decision, the rate of legal interest shall
be 12% per annum, inasmuch as the obligation shall thereafter become equivalent to a
forbearance of credit.23 The award of attorney’s fees is DELETED for lack of evidentiary
basis.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Vitug, Carpio and Azcuna, JJ., concur.
Judgment affirmed with modification.