SUPREME COURT

Manila
EN BANC
G.R. No. L-11827 July 31, 1961
FERNANDO A. GAITE, plaintiff-appellee,
vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO., INC., SEGUNDINA
VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and FERNANDO TY,defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the claims involved
aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a
representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated
in the municipality of Jose Panganiban, province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted and
appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter
into a contract with any individual or juridical person for the exploration and development of the
mining claims aforementioned on a royalty basis of not less than P0.50 per ton of ore that might
be extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment (Record
on Appeal, pp. 17-19) conveying the development and exploitation of said mining claims into the
Larap Iron Mines, a single proprietorship owned solely by and belonging to him, on the same
royalty basis provided for in Exhibit "3". Thereafter, Gaite embarked upon the development and
exploitation of the mining claims in question, opening and paving roads within and outside their
boundaries, making other improvements and installing facilities therein for use in the
development of the mines, and in time extracted therefrom what he claim and estimated to be
approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to
Gaite to exploit and develop the mining claims in question, and Gaite assented thereto subject
to certain conditions. As a result, a document entitled "Revocation of Power of Attorney and
Contract" was executed on December 8, 1954 (Exhibit "A"),wherein Gaite transferred to
Fonacier, for the consideration of P20,000.00, plus 10% of the royalties that Fonacier would
receive from the mining claims, all his rights and interests on all the roads, improvements, and
facilities in or outside said claims, the right to use the business name "Larap Iron Mines" and its
goodwill, and all the records and documents relative to the mines. In the same document, Gaite
transferred to Fonacier all his rights and interests over the "24,000 tons of iron ore, more or less"
that the former had already extracted from the mineral claims, in consideration of the sum of
P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out of the first
letter of credit covering the first shipment of iron ores and of the first amount derived from the
local sale of iron ore made by the Larap Mines & Smelting Co. Inc., its assigns, administrators, or
successors in interests.
To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor
of Gaite a surety bond, and pursuant to the promise, Fonacier delivered to Gaite a surety bond
dated December 8, 1954 with himself (Fonacier) as principal and the Larap Mines and Smelting
Co. and its stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante,
and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was
presented to him by Fonacier together with the "Revocation of Power of Attorney and Contract",
Exhibit "A", on December 8, 1954, he refused to sign said Exhibit "A" unless another bond under
written by a bonding company was put up by defendants to secure the payment of the
P65,000.00 balance of their price of the iron ore in the stockpiles in the mining claims. Hence, a
second bond, also dated December 8, 1954 (Exhibit "B"),was executed by the same parties to the
first bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional surety, but it
provided that the liability of the surety company would attach only when there had been an
actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less then
P65,000.00, and that, furthermore, the liability of said surety company would automatically
expire on December 8, 1955. Both bonds were attached to the "Revocation of Power of Attorney
and Contract", Exhibit "A", and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two
executed and signed the "Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier
entered into a "Contract of Mining Operation", ceding, transferring, and conveying unto the
Larap Mines and Smelting Co., Inc. the right to develop, exploit, and explore the mining claims in
question, together with the improvements therein and the use of the name "Larap Iron Mines"
and its good will, in consideration of certain royalties. Fonacier likewise transferred, in the same
document, the complete title to the approximately 24,000 tons of iron ore which he acquired
from Gaite, to the Larap & Smelting Co., in consideration for the signing by the company and its
stockholders of the surety bonds delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern
Surety and Insurance Company, no sale of the approximately 24,000 tons of iron ore had been
made by the Larap Mines & Smelting Co., Inc., nor had the P65,000.00 balance of the price of said
ore been paid to Gaite by Fonacier and his sureties payment of said amount, on the theory that
they had lost right to make use of the period given them when their bond, Exhibit "B"
automatically expired (Exhibits "C" to "C-24"). And when Fonacier and his sureties failed to pay
as demanded by Gaite, the latter filed the present complaint against them in the Court of First
Instance of Manila (Civil Case No. 29310) for the payment of the P65,000.00 balance of the price
of the ore, consequential damages, and attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that the obligation sued
upon by Gaite was subject to a condition that the amount of P65,000.00 would be payable out
of the first letter of credit covering the first shipment of iron ore and/or the first amount derived
from the local sale of the iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time of
the filing of the complaint, no sale of the iron ore had been made, hence the condition had not
yet been fulfilled; and that consequently, the obligation was not yet due and demandable.
Defendant Fonacier also contended that only 7,573 tons of the estimated 24,000 tons of iron ore
sold to him by Gaite was actually delivered, and counterclaimed for more than P200,000.00
damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00 become
due and demandable when the defendants failed to renew the surety bond underwritten by the
Far Eastern Surety and Insurance Co., Inc. (Exhibit "B"), which expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier
were actually in existence in the mining claims when these parties executed the "Revocation of
Power of Attorney and Contract", Exhibit "A."
On the first question, the lower court held that the obligation of the defendants to pay plaintiff
the P65,000.00 balance of the price of the approximately 24,000 tons of iron ore was one with a
term: i.e., that it would be paid upon the sale of sufficient iron ore by defendants, such sale to be
effected within one year or before December 8, 1955; that the giving of security was a condition
precedent to Gait's giving of credit to defendants; and that as the latter failed to put up a good
and sufficient security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired on
December 8, 1955, the obligation became due and demandable under Article 1198 of the New
Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have approximately
24,000 tons of iron ore at the mining claims in question at the time of the execution of the
contract Exhibit "A."
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him,
jointly and severally, P65,000.00 with interest at 6% per annum from December 9, 1955 until
payment, plus costs. From this judgment, defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were presented for resolution: a
motion to declare the appellants Larap Mines & Smelting Co., Inc. and George Krakower in
contempt, filed by appellant Fonacier, and two motions to dismiss the appeal as having become
academic and a motion for new trial and/or to take judicial notice of certain documents, filed by
appellee Gaite. The motion for contempt is unmeritorious because the main allegation therein
that the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in
question, which allegedly is "property in litigation", has not been substantiated; and even if true,
does not make these appellants guilty of contempt, because what is under litigation in this appeal
is appellee Gaite's right to the payment of the balance of the price of the ore, and not the iron
ore itself. As for the several motions presented by appellee Gaite, it is unnecessary to resolve
these motions in view of the results that we have reached in this case, which we shall hereafter
discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee
Gaite the P65,000.00 (balance of the price of the iron ore in question)is one with a period or term
and not one with a suspensive condition, and that the term expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles
of iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his rights
and interests over the 24,000 tons of iron ore, more or less, above-referred to together with all
his rights and interests to operate the mine in consideration of the sum of SEVENTY-FIVE
THOUSAND PESOS (P75,000.00) which the latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out of the first
letter of credit covering the first shipment of iron ore made by the Larap Mines & Smelting Co.,
Inc., its assigns, administrators, or successors in interest.
We find the court below to be legally correct in holding that the shipment or local sale of the iron
ore is not a condition precedent (or suspensive) to the payment of the balance of P65,000.00,
but was only a suspensive period or term. What characterizes a conditional obligation is the fact
that its efficacy or obligatory force (as distinguished from its demandability) is subordinated to
the happening of a future and uncertain event; so that if the suspensive condition does not take
place, the parties would stand as if the conditional obligation had never existed. That the parties
to the contract Exhibit "A" did not intend any such state of things to prevail is supported by
several circumstances:
1) The words of the contract express no contingency in the buyer's obligation to pay: "The
balance of Sixty-Five Thousand Pesos (P65,000.00) will be paid out of the first letter of credit
covering the first shipment of iron ores . . ." etc. There is no uncertainty that the payment will
have to be made sooner or later; what is undetermined is merely the exact date at which it will
be made. By the very terms of the contract, therefore, the existence of the obligation to pay is
recognized; only its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does each one of the parties
assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold and
the buyer to pay the price),but each party anticipates performance by the other from the very
start. While in a sale the obligation of one party can be lawfully subordinated to an uncertain
event, so that the other understands that he assumes the risk of receiving nothing for what he
gives (as in the case of a sale of hopes or expectations, emptio spei), it is not in the usual course
of business to do so; hence, the contingent character of the obligation must clearly appear.
Nothing is found in the record to evidence that Gaite desired or assumed to run the risk of losing
his right over the ore without getting paid for it, or that Fonacier understood that Gaite assumed
any such risk. This is proved by the fact that Gaite insisted on a bond a to guarantee payment of
the P65,000.00, an not only upon a bond by Fonacier, the Larap Mines & Smelting Co., and the
company's stockholders, but also on one by a surety company; and the fact that appellants did
put up such bonds indicates that they admitted the definite existence of their obligation to pay
the balance of P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of the
ore as a condition precedent, would be tantamount to leaving the payment at the discretion of
the debtor, for the sale or shipment could not be made unless the appellants took steps to sell
the ore. Appellants would thus be able to postpone payment indefinitely. The desireability of
avoiding such a construction of the contract Exhibit "A" needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract the parties
indented a suspensive condition or a suspensive period (dies ad quem) for the payment of the
P65,000.00, the rules of interpretation would incline the scales in favor of "the greater reciprocity
of interests", since sale is essentially onerous. The Civil Code of the Philippines, Article 1378,
paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of
interests.
and there can be no question that greater reciprocity obtains if the buyer' obligation is deemed
to be actually existing, with only its maturity (due date) postponed or deferred, that if such
obligation were viewed as non-existent or not binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit,
and not an aleatory contract where the transferor, Gaite, would assume the risk of not being paid
at all; and that the previous sale or shipment of the ore was not a suspensive condition for the
payment of the balance of the agreed price, but was intended merely to fix the future date of the
payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still
have the right to insist that Gaite should wait for the sale or shipment of the ore before receiving
payment; or, in other words, whether or not they are entitled to take full advantage of the period
granted them for making the payment.
We agree with the court below that the appellant have forfeited the right court below that the
appellants have forfeited the right to compel Gaite to wait for the sale of the ore before receiving
payment of the balance of P65,000.00, because of their failure to renew the bond of the Far
Eastern Surety Company or else replace it with an equivalent guarantee. The expiration of the
bonding company's undertaking on December 8, 1955 substantially reduced the security of the
vendor's rights as creditor for the unpaid P65,000.00, a security that Gaite considered essential
and upon which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit
"A"). The case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the
Philippines:
"ART. 1198. The debtor shall lose every right to make use of the period:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or securities which he has promised.
(3) When by his own acts he has impaired said guaranties or securities after their establishment,
and when through fortuitous event they disappear, unless he immediately gives new ones equally
satisfactory.
Appellants' failure to renew or extend the surety company's bond upon its expiration plainly
impaired the securities given to the creditor (appellee Gaite), unless immediately renewed or
replaced.
There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond
with full knowledge that on its face it would automatically expire within one year was a waiver
of its renewal after the expiration date. No such waiver could have been intended, for Gaite stood
to lose and had nothing to gain barely; and if there was any, it could be rationally explained only
if the appellants had agreed to sell the ore and pay Gaite before the surety company's bond
expired on December 8, 1955. But in the latter case the defendants-appellants' obligation to pay
became absolute after one year from the transfer of the ore to Fonacier by virtue of the deed
Exhibit "A.".
All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in
demanding payment and instituting this action one year from and after the contract (Exhibit "A")
was executed, either because the appellant debtors had impaired the securities originally given
and thereby forfeited any further time within which to pay; or because the term of payment was
originally of no more than one year, and the balance of P65,000.00 became due and payable
thereafter.
Coming now to the second issue in this appeal, which is whether there were really 24,000 tons
of iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier, and whether, if there
had been a short-delivery as claimed by appellants, they are entitled to the payment of damages,
we must, at the outset, stress two things: first, that this is a case of a sale of a specific mass of
fungible goods for a single price or a lump sum, the quantity of "24,000 tons of iron ore, more or
less," stated in the contract Exhibit "A," being a mere estimate by the parties of the total tonnage
weight of the mass; and second, that the evidence shows that neither of the parties had actually
measured of weighed the mass, so that they both tried to arrive at the total quantity by making
an estimate of the volume thereof in cubic meters and then multiplying it by the estimated
weight per ton of each cubic meter.
The sale between the parties is a sale of a specific mass or iron ore because no provision was
made in their contract for the measuring or weighing of the ore sold in order to complete or
perfect the sale, nor was the price of P75,000,00 agreed upon by the parties based upon any such
measurement.(see Art. 1480, second par., New Civil Code). The subject matter of the sale is,
therefore, a determinate object, the mass, and not the actual number of units or tons contained
therein, so that all that was required of the seller Gaite was to deliver in good faith to his buyer
all of the ore found in the mass, notwithstanding that the quantity delivered is less than the
amount estimated by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co.,
Inc. 171 So. 872, applying art. 2459 of the Louisiana Civil Code). There is no charge in this case
that Gaite did not deliver to appellants all the ore found in the stockpiles in the mining claims in
questions; Gaite had, therefore, complied with his promise to deliver, and appellants in turn are
bound to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite
mass, but approximately 24,000 tons of ore, so that any substantial difference in this quantity
delivered would entitle the buyers to recover damages for the short-delivery, was there really a
short-delivery in this case?
We think not. As already stated, neither of the parties had actually measured or weighed the
whole mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate their
respective claims only upon an estimated number of cubic meters of ore multiplied by the
average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore
that he sold to Fonacier, while appellants contend that by actual measurement, their witness
Cirpriano Manlañgit found the total volume of ore in the stockpiles to be only 6.609 cubic meters.
As to the average weight in tons per cubic meter, the parties are again in disagreement, with
appellants claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while appellee
Gaite claims that the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor
of iron ore in this case to be that made by Leopoldo F. Abad, chief of the Mines and Metallurgical
Division of the Bureau of Mines, a government pensionado to the States and a mining engineering
graduate of the Universities of Nevada and California, with almost 22 years of experience in the
Bureau of Mines. This witness placed the tonnage factor of every cubic meter of iron ore at
between 3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely
corresponds to the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF"
and FF-1") by engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining
claims involved at the request of appellant Krakower, precisely to make an official estimate of
the amount of iron ore in Gaite's stockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by
appellant's witness Cipriano Manlañgit is correct, if we multiply it by the average tonnage factor
of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very far from the estimate
of 24,000 tons made by appellee Gaite, considering that actual weighing of each unit of the mass
was practically impossible, so that a reasonable percentage of error should be allowed anyone
making an estimate of the exact quantity in tons found in the mass. It must not be forgotten that
the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (ch. Pine
River Logging & Improvement Co. vs U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the
payment of damages, nor could Gaite have been guilty of any fraud in making any
misrepresentation to appellants as to the total quantity of ore in the stockpiles of the mining
claims in question, as charged by appellants, since Gaite's estimate appears to be substantially
correct.
WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with
costs against appellants.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 118114 December 7, 1995

TEODORO ACAP, petitioner,

Vs.
COURT OF APPEALS and EDY DE LOS REYES, respondents.

PADILLA, J.:

This is a petition for review on certiorari of the decision1 of the Court of Appeals, 2nd Division, in
CA-G.R. No. 36177, which affirmed the decision2 of the Regional Trial Court of Himamaylan,
Negros Occidental holding that private respondent Edy de los Reyes had acquired ownership of
Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros Occidental based on a document
entitled “Declaration of Heirship and Waiver of Rights”, and ordering the dispossession of
petitioner as leasehold tenant of the land for failure to pay rentals.

The facts of the case are as follows:

The title to Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros Occidental was evidenced
by OCT No. R-12179. The lot has an area of 13,720 sq. meters. The title was issued and is
registered in the name of spouses Santiago Vasquez and Lorenza Oruma. After both spouses died,
their only son Felixberto inherited the lot. In 1975, Felixberto executed a duly notarized
document entitled “Declaration of Heirship and Deed of Absolute Sale” in favor of Cosme Pido.

The evidence before the court a quo established that since 1960, petitioner Teodoro Acap had
been the tenant of a portion of the said land, covering an area of nine thousand five hundred
(9,500) meters. When ownership was transferred in 1975 by Felixberto to Cosme Pido, Acap
continued to be the registered tenant thereof and religiously paid his leasehold rentals to Pido
and thereafter, upon Pido’s death, to his widow Laurenciana.

The controversy began when Pido died intestate and on 27 November 1981, his surviving heirs
executed a notarized document denominated as “Declaration of Heirship and Waiver of Rights
of Lot No. 1130 Hinigaran Cadastre,” wherein they declared; to quote its pertinent portions, that:

. . . Cosme Pido died in the Municipality of Hinigaran, Negros Occidental, he died intestate and
without any known debts and obligations which the said parcel of land is (sic) held liable.

That Cosme Pido was survived by his/her legitimate heirs, namely: LAURENCIANA PIDO, wife, ELY,
ERVIN, ELMER, and ELECHOR all surnamed PIDO; children;

That invoking the provision of Section 1, Rule 74 of the Rules of Court, the above-mentioned heirs
do hereby declare unto [sic] ourselves the only heirs of the late Cosme Pido and that we hereby
adjudicate unto ourselves the above-mentioned parcel of land in equal shares.

Now, therefore, We LAURENCIANA3 , ELY, ELMER, ERVIN and ELECHOR all surnamed PIDO, do
hereby waive, quitclaim all our rights, interests and participation over the said parcel of land in
favor of EDY DE LOS REYES, of legal age, (f)ilipino, married to VIRGINIA DE LOS REYES, and resident
of Hinigaran, Negros Occidental, Philippines. . . .4 (Emphasis supplied)

The document was signed by all of Pido’s heirs. Private respondent Edy de los Reyes did not sign
said document.
It will be noted that at the time of Cosme Pido’s death, title to the property continued to be
registered in the name of the Vasquez spouses. Upon obtaining the Declaration of Heirship with
Waiver of Rights in his favor, private respondent Edy de los Reyes filed the same with the Registry
of Deeds as part of a notice of an adverse claim against the original certificate of title.

Thereafter, private respondent sought for petitioner (Acap) to personally inform him that he
(Edy) had become the new owner of the land and that the lease rentals thereon should be paid
to him. Private respondent further alleged that he and petitioner entered into an oral lease
agreement wherein petitioner agreed to pay ten (10) cavans of palay per annum as lease rental.
In 1982, petitioner allegedly complied with said obligation. In 1983, however, petitioner refused
to pay any further lease rentals on the land, prompting private respondent to seek the assistance
of the then Ministry of Agrarian Reform (MAR) in Hinigaran, Negros Occidental. The MAR invited
petitioner to a conference scheduled on 13 October 1983. Petitioner did not attend the
conference but sent his wife instead to the conference. During the meeting, an officer of the
Ministry informed Acap’s wife about private respondent’s ownership of the said land but she
stated that she and her husband (Teodoro) did not recognize private respondent’s claim of
ownership over the land.

On 28 April 1988, after the lapse of four (4) years, private respondent filed a complaint for
recovery of possession and damages against petitioner, alleging in the main that as his leasehold
tenant, petitioner refused and failed to pay the agreed annual rental of ten (10) cavans of palay
despite repeated demands.

During the trial before the court a quo, petitioner reiterated his refusal to recognize private
respondent’s ownership over the subject land. He averred that he continues to recognize Cosme
Pido as the owner of the said land, and having been a registered tenant therein since 1960, he
never reneged on his rental obligations. When Pido died, he continued to pay rentals to Pido’s
widow. When the latter left for abroad, she instructed him to stay in the landholding and to pay
the accumulated rentals upon her demand or return from abroad.

Petitioner further claimed before the trial court that he had no knowledge about any transfer or
sale of the lot to private respondent in 1981 and even the following year after Laurenciana’s
departure for abroad. He denied having entered into a verbal lease tenancy contract with private
respondent and that assuming that the said lot was indeed sold to private respondent without
his knowledge, R.A. 3844, as amended, grants him the right to redeem the same at a reasonable
price. Petitioner also bewailed private respondent’s ejectment action as a violation of his right to
security of tenure under P.D. 27.
On 20 August 1991, the lower court rendered a decision in favor of private respondent, the
dispositive part of which reads:

WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff, Edy de
los Reyes, and against the defendant, Teodoro Acap, ordering the following, to wit:

Declaring forfeiture of defendant’s preferred right to issuance of a Certificate of Land Transfer

under Presidential Decree No. 27 and his farmholdings;

Ordering the defendant Teodoro Acap to deliver possession of said farm to plaintiff, and;

Ordering the defendant to pay P5,000.00 as attorney’s fees, the sum of P1,000.00 as expenses of
litigation and the amount of P10,000.00 as actual damages.5

In arriving at the above-mentioned judgment, the trial court stated that the evidence had
established that the subject land was “sold” by the heirs of Cosme Pido to private respondent.
This is clear from the following disquisitions contained in the trial court’s six (6) page decision:

There is no doubt that defendant is a registered tenant of Cosme Pido. However, when the latter
died their tenancy relations changed since ownership of said land was passed on to his heirs who,
by executing a Deed of Sale, which defendant admitted in his affidavit, likewise passed on their
ownership of Lot 1130 to herein plaintiff (private respondent). As owner hereof, plaintiff has the
right to demand payment of rental and the tenant is obligated to pay rentals due from the time
demand is made. . . .6

Xxx xxx xxx

Certainly, the sale of the Pido family of Lot 1130 to herein plaintiff does not of itself extinguish
the relationship. There was only a change of the personality of the lessor in the person of herein
plaintiff Edy de los Reyes who being the purchaser or transferee, assumes the rights and
obligations of the former landowner to the tenant Teodoro Acap, herein defendant.7

Aggrieved, petitioner appealed to the Court of Appeals, imputing error to the lower court when
it ruled that private respondent acquired ownership of Lot No. 1130 and that he, as tenant,
should pay rentals to private respondent and that failing to pay the same from 1983 to 1987, his
right to a certificate of land transfer under P.D. 27 was deemed forfeited.

The Court of Appeals brushed aside petitioner’s argument that the Declaration of Heirship and
Waiver of Rights (Exhibit “D”), the document relied upon by private respondent to prove his
ownership to the lot, was excluded by the lower court in its order dated 27 August 1990. The
order indeed noted that the document was not identified by Cosme Pido’s heirs and was not
registered with the Registry of Deeds of Negros Occidental. According to respondent court,
however, since the Declaration of Heirship and Waiver of Rights appears to have been duly
notarized, no further proof of its due execution was necessary. Like the trial court, respondent
court was also convinced that the said document stands as prima facie proof of appellee’s
(private respondent’s) ownership of the land in dispute.

With respect to its non-registration, respondent court noted that petitioner had actual
knowledge of the subject sale of the land in dispute to private respondent because as early as
1983, he (petitioner) already knew of private respondent’s claim over the said land but which he
thereafter denied, and that in 1982, he (petitioner) actually paid rent to private respondent.
Otherwise stated, respondent court considered this fact of rental payment in 1982 as estoppel
on petitioner’s part to thereafter refute private respondent’s claim of ownership over the said
land. Under these circumstances, respondent court ruled that indeed there was deliberate
refusal by petitioner to pay rent for a continued period of five years that merited forfeiture of his
otherwise preferred right to the issuance of a certificate of land transfer.

In the present petition, petitioner impugns the decision of the Court of Appeals as not in accord
with the law and evidence when it rules that private respondent acquired ownership of Lot No.
1130 through the aforementioned Declaration of Heirship and Waiver of Rights.

Hence, the issues to be resolved presently are the following:

WHETHER OR NOT THE SUBJECT DECLARATION OF HEIRSHIP AND WAIVER OF RIGHTS IS A
RECOGNIZED MODE OF ACQUIRING OWNERSHIP BY PRIVATE RESPONDENT OVER THE LOT IN
QUESTION.

WHETHER OR NOT THE SAID DOCUMENT CAN BE CONSIDERED A DEED OF SALE IN FAVOR OF
PRIVATE RESPONDENT OF THE LOT IN QUESTION.

Petitioner argues that the Regional Trial Court, in its order dated 7 August 1990, explicitly
excluded the document marked as Exhibit “D” (Declaration of Heirship, etc.) as private
respondent’s evidence because it was not registered with the Registry of Deeds and was not
identified by anyone of the heirs of Cosme Pido. The Court of Appeals, however, held the same
to be admissible, it being a notarized document, hence, a prima facie proof of private
respondents’ ownership of the lot to which it refers.

Petitioner points out that the Declaration of Heirship and Waiver of Rights is not one of the
recognized modes of acquiring ownership under Article 712 of the Civil Code. Neither can the
same be considered a deed of sale so as to transfer ownership of the land to private respondent
because no consideration is stated in the contract (assuming it is a contract or deed of sale).

Private respondent defends the decision of respondent Court of Appeals as in accord with the
evidence and the law. He posits that while it may indeed be true that the trial court excluded his
Exhibit “D” which is the Declaration of Heirship and Waiver of Rights as part of his evidence, the
trial court declared him nonetheless owner of the subject lot based on other evidence adduced
during the trial, namely, the notice of adverse claim (Exhibit “E”) duly registered by him with the
Registry of Deeds, which contains the questioned Declaration of Heirship and Waiver of Rights as
an integral part thereof.

We find the petition impressed with merit.

In the first place, an asserted right or claim to ownership or a real right over a thing arising from
a juridical act, however justified, is not per se sufficient to give rise to ownership over the res.
That right or title must be completed by fulfilling certain conditions imposed by law. Hence,
ownership and real rights are acquired only pursuant to a legal mode or process. While title is
the juridical justification, mode is the actual process of acquisition or transfer of ownership over
a thing in question.8

Under Article 712 of the Civil Code, the modes of acquiring ownership are generally classified into
two (2) classes, namely, the original mode (i.e., through occupation, acquisitive prescription, law
or intellectual creation) and the derivative mode (i.e., through succession mortis causa or
tradition as a result of certain contracts, such as sale, barter, donation, assignment or mutuum).

In the case at bench, the trial court was obviously confused as to the nature and effect of the
Declaration of Heirship and Waiver of Rights, equating the same with a contract (deed) of sale.
They are not the same.

In a Contract of Sale, one of the contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the other party to pay a price certain in money or its
equivalent.9

Upon the other hand, a declaration of heirship and waiver of rights operates as a public
instrument when filed with the Registry of Deeds whereby the intestate heirs adjudicate and
divide the estate left by the decedent among themselves as they see fit. It is in effect an
extrajudicial settlement between the heirs under Rule 74 of the Rules of Court.10

Hence, there is a marked difference between a sale of hereditary rights and a waiver of hereditary
rights. The first presumes the existence of a contract or deed of sale between the parties.11 The
second is, technically speaking, a mode of extinction of ownership where there is an abdication
or intentional relinquishment of a known right with knowledge of its existence and intention to
relinquish it, in favor of other persons who are co-heirs in the succession.12 Private respondent,
being then a stranger to the succession of Cosme Pido, cannot conclusively claim ownership over
the subject lot on the sole basis of the waiver document which neither recites the elements of
either a sale,13 or a donation,14 or any other derivative mode of acquiring ownership.

Quite surprisingly, both the trial court and public respondent Court of Appeals concluded that a
“sale” transpired between Cosme Pido’s heirs and private respondent and that petitioner
acquired actual knowledge of said sale when he was summoned by the Ministry of Agrarian
Reform to discuss private respondent’s claim over the lot in question. This conclusion has no basis
both in fact and in law.

On record, Exhibit “D”, which is the “Declaration of Heirship and Waiver of Rights” was excluded
by the trial court in its order dated 27 August 1990 because the document was neither registered
with the Registry of Deeds nor identified by the heirs of Cosme Pido. There is no showing that
private respondent had the same document attached to or made part of the record. What the
trial court admitted was Annex “E”, a notice of adverse claim filed with the Registry of Deeds
which contained the Declaration of Heirship with Waiver of rights and was annotated at the back
of the Original Certificate of Title to the land in question.

A notice of adverse claim, by its nature, does not however prove private respondent’s ownership
over the tenanted lot. “A notice of adverse claim is nothing but a notice of a claim adverse to the
registered owner, the validity of which is yet to be established in court at some future date, and
is no better than a notice of lis pendens which is a notice of a case already pending in court.”15

It is to be noted that while the existence of said adverse claim was duly proven, there is no
evidence whatsoever that a deed of sale was executed between Cosme Pido’s heirs and private
respondent transferring the rights of Pido’s heirs to the land in favor of private respondent.
Private respondent’s right or interest therefore in the tenanted lot remains an adverse claim
which cannot by itself be sufficient to cancel the OCT to the land and title the same in private
respondent’s name.

Consequently, while the transaction between Pido’s heirs and private respondent may be binding
on both parties, the right of petitioner as a registered tenant to the land cannot be perfunctorily
forfeited on a mere allegation of private respondent’s ownership without the corresponding
proof thereof.

Petitioner had been a registered tenant in the subject land since 1960 and religiously paid lease
rentals thereon. In his mind, he continued to be the registered tenant of Cosme Pido and his
family (after Pido’s death), even if in 1982, private respondent allegedly informed petitioner that
he had become the new owner of the land.
Under the circumstances, petitioner may have, in good faith, assumed such statement of private
respondent to be true and may have in fact delivered 10 cavans of palay as annual rental for 1982
to private respondent. But in 1983, it is clear that petitioner had misgivings over private
respondent’s claim of ownership over the said land because in the October 1983 MAR
conference, his wife Laurenciana categorically denied all of private respondent’s allegations. In
fact, petitioner even secured a certificate from the MAR dated 9 May 1988 to the effect that he
continued to be the registered tenant of Cosme Pido and not of private respondent. The reason
is that private respondent never registered the Declaration of Heirship with Waiver of Rights with
the Registry of Deeds or with the MAR. Instead, he (private respondent) sought to do indirectly
what could not be done directly, i.e., file a notice of adverse claim on the said lot to establish
ownership thereover.

It stands to reason, therefore, to hold that there was no unjustified or deliberate refusal by
petitioner to pay the lease rentals or amortizations to the landowner/agricultural lessor which,
in this case, private respondent failed to establish in his favor by clear and convincing evidence.16

Consequently, the sanction of forfeiture of his preferred right to be issued a Certificate of Land
Transfer under P.D. 27 and to the possession of his farmholdings should not be applied against
petitioners, since private respondent has not established a cause of action for recovery of
possession against petitioner.

WHEREFORE, premises considered, the Court hereby GRANTS the petition and the decision of
the Court of Appeals dated 1 May 1994 which affirmed the decision of the RTC of Himamaylan,
Negros Occidental dated 20 August 1991 is hereby SET ASIDE. The private respondent’s complaint
for recovery of possession and damages against petitioner Acap is hereby DISMISSED for failure
to properly state a cause of action, without prejudice to private respondent taking the proper
legal steps to establish the legal mode by which he claims to have acquired ownership of the land
in question.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-12481 August 31, 1961

CO TUAN, petitioner,
Vs.
THE CITY OF MANILA, respondent.

Diokno and Sison for petitioner.

The City Fiscal of Manila for respondent.

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

Co Tuan applied for certiorari against the decision of the Court of Appeals in its case CA-G.R. No.
15341-R, reversing that of the Court of First Instance of Manila and dismissing his complaint for
the refund of P2,582.90 that he paid under protest to the City of Manila by way wholesale
dealer’s tax under Ordinance No. 3420, enacted pursuant to Section 18(o) of Republic Act No.
409. Considering, however, that the appeal involved the validity a tax or impost, and that,
pursuant to Section 17 of the Judiciary Act, the case lay within the exclusive jurisdiction of the
Supreme Court, our resolution of March 24, 1961 required the Clerk of the Court of Appeals to
forward to us the records and papers concerning this case, for an original review of both
questions of fact and law involved in the decision of the Court of First Instance that ordered the
City to refund the tax collected.1

Upon receipt of the records, the parties were required to state if they desired to submit new
arguments; but both submitted the case for decision upon the record and briefs already on file.
It is uncontested that Co Tuan owns and operates a soap factory at 349 Caballeros Street, Manila,
for which he was issued a manufacturer’s license, and has paid the corresponding license fees
described in Ordinance No. 3016, conformably with Section 18(m) of the Revised Charter of the
City of Manila. Besides the factory, petitioner maintains a store at 1109 M. de Santos Street, in
said City, four blocks away, where the soap he manufactures is sold, and for which he had paid
the license fee for retail business. The city inspectors, upon examination of the books and
invoices kept by this plaintiff at his store in M. de Santos Street, found that they covered
wholesale as well as retail sales. As a result, in October, 1951, Co Tuan was assessed by the city
a wholesale dealer’s tax in the amount of P2,582.90, which he paid under protest. This suit was
then filed in the Court of First Instance of Manila to recover said amount.

It is the plaintiff’s contention that the wholesale transactions were not made at the store, but at
the factory in Caballeros Street, being covered by the manufacturer’s tax he pays; that this is
evidenced by the rubber stamp mark of the invoices, “Factory Sales/Tax Included” (Exhibits P and
Q), and that if the invoices were found at the M. de Santos Store, it was because the invoices
were prepared and kept there due to lack of space at the factory. Plaintiff lone witness, factory
superintendent Caw Bun, testified that wholesale deals were exclusively contracted at the
factory, whereas retail sales were made at the store in M. de Santos Street; this witness also
pointed out that the invoices issued for the wholesale transactions are distinct and different from
those of the retail sales.

Q. Will you please tell us the difference between this invoice you are using at 1109 M. de Santos
and the invoice you are using at 346 Caballeros?

A. The invoice for the retail sales is much smaller and also; here is no stamp ‘factory sales’, while
the invoice we use in the factory, it bears the stamp ‘factory sales’. In other words, the sale is
conducted in the factory, we have to stamp the invoice with the statement “factory sale” in order
to distinguish from the retail sale which is done at M. de Santos. (t.s.n., p. 8)

In contrast, defendant City of Manila presented Antonio Lopena and Salvador Adao, both licensed
inspectors of the City Treasurer’s Office, who attested to the fact that only one kind of invoice
conducted their first investigation, the taxpayer’s copies of the invoices did not have the words
“FACTORY—346 CABALLEROS ST.” and “FACTORY SALES TAX INCLUDED” rubber stamped on
them, as they were later made to appear by the plaintiff. Evidently, the latter attempted to pass
off his store sales as factory sales; but the scheme was given away by the absence of such stamp
on the original invoices (Exhibit 2).

We agree with appellant City of Manila that plaintiff’s stand is not supported by the evidence.
Not only does the absence of the rubber-stamped words in the original invoices confirm the
testimony of the City Inspectors, but he invoices themselves fail to mention the address of the
factory at Caballeros Street, and only bear that of the retail store at M. de Santos. If, as testified
by Caw Bun, wholesale transactions were made only at the factory, it is logical to expect that the
invoices should indicate its address, so that the customers would know where to place repeat
orders. But they did not (Exhibit 2). And if, as also testified by Caw Bun, invoices for retail sales
the M. de Santos store differed in size from the invoices for wholesale transactions at the factory,
it is strange, to say the least, that plaintiff failed to introduce as sample, much less a booklet, of
such retail invoices. To cap it all, the invoice booklets, Exhibits P and Q, contain invoices for sales
for as low as P5.50 (Exhibits P, No. 11905), that could hardly be regarded as representing
wholesale transactions yet bear the “Factory Sales” stamp.

Our conclusion is that as, plaintiff has made sales at wholesale at his factory as he asserts, he
unquestionably also did make wholesale and retail sales at his store at M. de Santos Street,
covered by the examined invoices, and he is liable for wholesale dealer’s tax thereon.

The taxpayer next argues that assuming that such wholesale transactions were made at the
“retail” store, still, as a manufacturer, he should not be held taxable as a wholesale dealer if he
sells only his own products.

This contention is not novel. The arguments supporting plaintiffs stand have been raised and
overruled in previous cases appealed to this Court. Thus, in Cebu Portland Cement Co. vs. City of
Manila, G.R. No. L-14229, July 26, 1960, we held:

. . .On the other band, authorities seem not to conflict in excluding a manufacturer from coming
within the term ‘dealer’ for purposes of the imposition of a dealer’s tax or license fee where it
only deals on or sells its own products (see C.J.S. 672-674, 702-703; 37 C.J. 224, and cases cited
therein; City of Manila vs. Bugsuk Lumber Co., 53 Off. Gaz., 6111). The sole exception to this rule
appears to be when the manufacturer carries on the business of selling its own products at stores
or warehouses apart from its place of manufacture (see authorities cited, supra; Atlantic Refining
Co. vs. Van Walkenburg, 109 A. 208; Manila Tobacco Association, Inc. vs. City of Manila, et al.,
G.R. No. L-9549, December 21, 1957). (Emphasis supplied)
To the same effect is Central Azucarera Don Pedro vs. City of Manila, G.R. No. L-7669, September
29, 1955, wherein it was expressly ruled that —

The manufacturer becomes a dealer if he carries on the business of selling goods or his product
manufactured by him at a store or warehouse apart from his Own shop or manufactory . . ..

We see no adequate reason for altering the rule thus far consistently applied, particularly since
in this case, plaintiff’s own witnesses admit that sales at wholesale are also made at the factory
site, besides those at the retail store.

Our reliance in previous rulings upon Atlantic Refining Co. vs. Van Walkenburg case (supra) is now
questioned upon the ground that the statute therein involved expressly provided that a
manufacturer “having a store or warehouse apart from his manufactory . . . for the purpose of
vending goods” shall be classified and required to pay in annual license and mercantile tax. But,
although worded differently, a similar provision exists in the Revised ordinances of the City of
Manila:

Sec. 585. Separate license for different business and locations.—No person shall conduct more
than one kind of business acquiring a license, or conduct business at more than one place luring
the term of license, without obtaining a separate license for each business and place of business
so licensed. All licenses shall be strictly limited to the time, place, and person or thing named
therein.

The apparent intent of the Manila city council, as expressed in the ordinance, was to treat one
aspect (called by the appellee “integral part”) of the business (wholesale dealing )as an
independent enterprise in itself, if it is carried on in a place separate or apart from the other
(manufacturing). It is not pretended that the city has no power to limit license “to the time, place
and person or thing named therein.”

Admittedly, American authorities are in conflict, but the rule is now well settled by our previous
decisions. It may be pointed out that in States vs. Holt, 38 So. 2d 598, invoked by plaintiff,
defendant operated sawmills at his timber stand and then “all the lumber that was cut at the saw
mill . . . was conveyed to its planning plant and there resawed it required, trimmed, planned,
sized and dried. In its finished state, it was for the most part sold at wholesale.” It is thus obvious
that part of the manufacturing process occurred at the planning plant, and sale therein were
actually factory sales covered by the manufacturing tax. The result would be the same under our
own rulings.

It may be added that if every manufacturing had the Tight to maintain separate stores for the
sale of its products without paying a wholesaler’s tax, then there would be no limit to the number
of store outlets it could maintain free from that tax. Not even the plaintiff concedes that a
multiplicity of stores would be taxable.

Plaintiff finally maintains that Section 18 (o) of the Revised Charter of the City of Manila —

(o) To tax and fix the license fee on dealers in general merchandise, including importers and
indentors, except those dealers who may be expressly subject to the payment of some other
municipal tax under the provisions of this section.

Exempts him from the payment of the dealer’s tax, since he has been already taxed as a
manufacturer under the provisions of Section 18(m) of the city charter. The tax exemption
invoked clearly refers to dealers who are previously taxed as such dealers under some other
provision of Section 18; for instance, dealers in second hand merchandise junk dealers, etc., who
are expressly mentioned under Section 18 (1), (m) and (p) of said Republic Act No. 409.

WHEREFORE, the judgment of the Court of First Instance of Manila appealed from is reversed
and plaintiff’s complaint ordered dismissed with costs against appellee Co Tuan.

For want of jurisdiction, the decision of the Court of Appeals in C.A. G.R. 15341-R is declared null
and void.
SONNY LO vs KJS ECO-FORMWORK SYSTEM PHIL, INC. (no full text)
Facts:
Lo, doing business under the name San’s Enterprises, ordered scaffolding equipments from KJS
worth P540,425.80. Lo paid a downpayment of P150,000 and the balance was to be paid in 10
monthly installments.
KJS delivered the scaffoldings to Lo, who paid the first two installments. However, his business
encountered financial difficulties and he was unable to settle his obligation despite oral and
written demands.
Lo and KJS executed a Deed of Assignment, whereby Lo assigned to KJS his receivables in the
amount of P335,462.14 from Jomero Realty Corporation. The agreement also stipulated: “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.”
When KJS tried to collect the said credit from Jomero, it refused to honor the Deed of Assignment
because it claimed that Lo was also indebted to it. KJS sent a letter to Lo demanding payment but
he refused claiming that his obligation had been extinguished when they executed the Deed of
Assignment.
KJS filed an action for recovery of a sum of money against Lo with the RTC, which dismissed the
complaint on the ground that the assignment of credit extinguished the obligation. However, the
CA held that the Deed of Assignment did not extinguish the obligation of Lo.

Issue: W/N the Deed of Assignment extinguished Lo’s obligation.

Held:
NO, he failed to comply with his warranty. 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. The undertaking really partakes in one sense of the nature of sale – the creditor
is really buying the thing or property of the debtor, payment for which is to be charged against
the debtor’s debt.
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. Paragraph 1 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.
Lo, as 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 Lo since the latter also
had an unpaid obligation to it, it essentially meant that its obligation to Lo has been extinguished
by compensation. As a result, KJS alleged the non-existence of the credit and asserted its claim
to Lo’s warranty under the assignment. Lo was therefore required to make good its warranty and
pay the obligation.
Furthermore, Lo breached his obligation under the Deed of Assignment as he did not “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.” By warranting the existence of the credit, Lo should have
ensured its performance in case it is found to be inexistent. He should be held liable to pay to KJS
the amount of his indebtedness
Judgment Affirmed.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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

CELESTINO CO & COMPANY, petitioner,

Vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

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

BENGZON, J.:

Appeal from a decision of the Court of Tax Appeals.

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

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

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

Having thus eliminated the feasibility off taxing petitioner as a contractor under 191 of the
national Internal Revenue Code, this leaves us to decide the remaining issue whether or not
petitioner could be taxed with lesser strain and more accuracy as seller of its manufactured
articles under section 186 of the same code, as the respondent Collector of Internal Revenue has
in fact been doing the Oriental Sash Factory was established in 1946.
The percentage tax imposed in section 191 of our Tax Code is generally a tax on the sales of
services, in contradiction with the tax imposed in section 186 of the same Code which is a tax on
the original sales of articles by the manufacturer, producer or importer. (Formilleza’s
Commentaries and Jurisprudence on the National Internal Revenue Code, Vol. II, p. 744). The fact
that the articles sold are manufactured by the seller does not exchange the contract from the
purview of section 186 of the National Internal Revenue Code as a sale of articles.

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

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

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

But the argument rests on a false foundation. Any builder or homeowner, with sufficient money,
may order windows or doors of the kind manufactured by this appellant. Therefore it is not true
that it serves special customers only or confines its services to them alone. And anyone who sees,
and likes, the doors ordered by Don Toribio Teodoro & Sons Inc. may purchase from appellant
doors of the same kind, provided he pays the price. Surely, the appellant will not refuse, for it
can easily duplicate or even mass-produce the same doors-it is mechanically equipped to do so.
That the doors and windows must meet desired specifications is neither here nor there. If these
specifications do not happen to be of the kind habitually manufactured by appellant — special
forms for sash, mouldings of panels — it would not accept the order — and no sale is made. If
they do, the transaction would be no different from a purchasers of manufactured goods held is
stock for sale; they are bought because they meet the specifications desired by the purchaser.

Nobody will say that when a sawmill cuts lumber in accordance with the peculiar specifications
of a customer-sizes not previously held in stock for sale to the public-it thereby becomes an
employee or servant of the customer,1 not the seller of lumber. The same consideration applies
to this sash manufacturer.

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

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

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

Said article reads as follows:

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

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

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

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

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

The appealed decision is consequently affirmed. So ordered.

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

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,

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

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

ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner,

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

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete,
Solicitor Lolita O. Gal-lang, and Special Attorney Gemaliel H. Montalino for Commissioner of
Internal Revenue, etc.

Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J.R. Balonkita for
Engineering and Supply Company.

ESGUERRA, J.:

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

As found by the Court of Tax Appeals, and as established by the evidence on record, the facts of
this case are as follows:
Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation, is an
engineering and machinery firm. As operator of an integrated engineering shop, it is engaged,
among others, in the design and installation of central type air conditioning system, pumping
plants and steel fabrications. (Vol. I pp. 12-16 T.S.N. August 23, 1960)

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

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

On March 3, 1959. The Commissioner assessed against, and demanded upon, Engineering
payment of the increased amount and suggested that P10,000 be paid as compromise in
extrajudicial settlement of Engineering’s penal liability for violation of the Tax Code. The firm,
however, contested the tax assessment and requested that it be furnished with the details and
particulars of the Commissioner’s assessment. (Exh. “B” and “15”, pp. 86-88 BIR rec. Vol. I) The
Commissioner replied that the assessment was in accordance with law and the facts of the case.

On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals and during the
pendency of the case the investigating revenue examiners reduced Engineering’s deficiency tax
liabilities from P916,362.65 to P740,587.86 (Exhs. “R” and “9” pp. 162-170, BIR rec.), based on
findings after conferences had with Engineering’s Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals rendered its decision, the dispositive portion of
which reads as follows:

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

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

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

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

1. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable to the 30% compensating tax on its importations of equipment and ordinary articles
used in the central type air conditioning systems it designed, fabricated, constructed and
installed in the buildings and premises of its customers, rather than to the compensating
tax of only 7%;

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

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

5. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company
liable for the sum of P174,141.62 as 30% compensating tax and 25% surcharge instead of
completely absolving it from the deficiency assessment of the Commissioner.

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

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

2. In holding respondent company liable to the 3% contractor’s tax imposed by Section 191
of the Tax Code instead of the 30% sales tax prescribed in Section 185(m) in relation to
Section 194(x) both of the same Code;

3. In holding that the respondent company is subject only to the 30% compensating tax
under Section 190 of the Tax Code and not to the 30% advance sales tax imposed by
section 183 (b), in relation to section 185(m) both of the same Code, on its importations
of parts and accessories of air conditioning units;

4. In not holding the company liable to the 50% fraud surcharge under Section 183 of the
Tax Code on its importations of parts and accessories of air conditioning units,
notwithstanding the finding of said court that the respondent company fraudulently
misdeclared the said importations;
 5. In holding the respondent company liable for P174,141.62 as compensating tax and 25%
surcharge instead of P740,587.86 as deficiency advance sales tax, deficiency
manufacturers tax and 25% and 50% surcharge for the period from June 1, 1948 to
December 31, 1956.

The main issue revolves on the question of whether or not Engineering is a manufacturer of air
conditioning units under Section 185(m), supra, in relation to Sections 183(b) and 194 of the
Code, or a contractor under Section 191 of the same Code.

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

Section 194. — Words and Phrases Defined. — In applying the provisions of this Title, words and
phrases shall be taken in the sense and extension indicated below:

Xxx xxx xxx

(x) “Manufacturer” includes every person who by physical or chemical process alters the
exterior texture or form or inner substance of any raw material or manufactured or partially
manufactured products in such manner as to prepare it for a special use or uses to which it could
not have been put in its original condition, or who by any such process alters the quality of any
such material or manufactured or partially manufactured product so as to reduce it to marketable
shape, or prepare it for any of the uses of industry, or who by any such process combines any
such raw material or manufactured or partially manufactured products with other materials or
products of the same or of different kinds and in such manner that the finished product of such
process of manufacture can be put to special use or uses to which such raw material or
manufactured or partially manufactured products in their original condition could not have been
put, and who in addition alters such raw material or manufactured or partially manufactured
products, or combines the same to produce such finished products for the purpose of their sale
or distribution to others and not for his own use or consumption.
In answer to the above contention, Engineering claims that it is not a manufacturer and setter of
air-conditioning units and spare parts or accessories thereof subject to tax under Section 185(m)
of the Tax Code, but a contractor engaged in the design, supply and installation of the central
type of air-conditioning system subject to the 3% tax imposed by Section 191 of the same Code,
which is essentially a tax on the sale of services or labor of a contractor rather than on the sale
of articles subject to the tax referred to in Sections 184, 185 and 186 of the Code.

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

Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece of work
thus:

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

The word “contractor” has come to be used with special reference to a person who, in the pursuit
of the independent business, undertakes to do a specific job or piece of work for other persons,
using his own means and methods without submitting himself to control as to the petty details.
(Arañas, Annotations and Jurisprudence on the National Internal Revenue Code, p. 318, par. 191
(2), 1970 Ed.) The true test of a contractor as was held in the cases of Luzon Stevedoring Co., vs.
Trinidad, 43, Phil. 803, 807-808, and La Carlota Sugar Central vs. Trinidad, 43, Phil. 816, 819,
would seem to be that he renders service in the course of an independent occupation,
representing the will of his employer only as to the result of his work, and not as to the means
by which it is accomplished.
With the foregoing criteria as guideposts, We shall now examine whether Engineering really did
“manufacture” and sell, as alleged by the Commissioner to hold it liable to the advance sales tax
under Section 185(m), or it only had its services “contracted” for installation purposes to hold it
liable under section 198 of the Tax Code.

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

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

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

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

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

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

The room air conditioner is a unitary equipment designed specifically for a room or similar small
space. It is unique among air conditioning equipment in two respects: It is in the electrical
appliance classification, and it is made by a great number of manufacturers.

There is also the testimony of one Carlos Navarro, a licensed Mechanical and Electrical Engineer,
who was once the Chairman of the Board of Examiners for Mechanical Engineers and who was
allegedly responsible for the preparation of the refrigeration and air conditioning code of the City
of Manila, who said that “the central type air conditioning system is an engineering job that
requires planning and meticulous layout due to the fact that usually architects assign definite
space and usually the spaces they assign are very small and of various sizes. Continuing further,
he testified:

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

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

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

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

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

What We consider as on all fours with the case at bar is the case of S.M. Lawrence Co. vs.
McFarland, Commissioner of Internal Revenue of the State of Tennessee and McCanless, 355 SW
2d, 100, 101, “where the cause presents the question of whether one engaged in the business of
contracting for the establishment of air conditioning system in buildings, which work requires, in
addition to the furnishing of a cooling unit, the connection of such unit with electrical and
plumbing facilities and the installation of ducts within and through walls, ceilings and floors to
convey cool air to various parts of the building, is liable for sale or use tax as a contractor rather
than a retailer of tangible personal property. Appellee took the Position that appellant was not
engaged in the business of selling air conditioning equipment as such but in the furnishing to its
customers of completed air conditioning systems pursuant to contract, was a contractor engaged
in the construction or improvement of real property, and as such was liable for sales or use tax
as the consumer of materials and equipment used in the consummation of contracts, irrespective
of the tax status of its contractors. To transmit the warm or cool air over the buildings, the
appellant installed system of ducts running from the basic units through walls, ceilings and floors
to registers. The contract called for completed air conditioning systems which became
permanent part of the buildings and improvements to the realty.” The Court held the appellant
a contractor which used the materials and the equipment upon the value of which the tax herein
imposed was levied in the performance of its contracts with its customers, and that the
customers did not purchase the equipment and have the same installed.
Applying the facts of the aforementioned case to the present case, We see that the supply of air
conditioning units to Engineer’s various customers, whether the said machineries were in hand
or not, was especially made for each customer and installed in his building upon his special order.
The air conditioning units installed in a central type of air conditioning system would not have
existed but for the order of the party desiring to acquire it and if it existed without the special
order of Engineering’s customer, the said air conditioning units were not intended for sale to the
general public. Therefore, We have but to affirm the conclusion of the Court of Tax Appeals that
Engineering is a contractor rather than a manufacturer, subject to the contractors tax prescribed
by Section 191 of the Code and not to the advance sales tax imposed by Section 185(m) in relation
to Section 194 of the same Code. Since it has been proved to Our satisfaction that Engineering
imported air conditioning units, parts or accessories thereof for use in its construction business
and these items were never sold, resold, bartered or exchanged, Engineering should be held
liable to pay taxes prescribed under Section 1905 of the Code. This compensating tax is not a tax
on the importation of goods but a tax on the use of imported goods not subject to sales tax.
Engineering, therefore, should be held liable to the payment of 30% compensating tax in
accordance with Section 190 of the Tax Code in relation to Section 185(m) of the same, but
without the 50% mark up provided in Section 183(b).

II

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

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

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

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

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

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

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

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

The same instruction was made to Acme Industries, Inc., San Francisco, California in a letter dated
March 19, 1953 (Exh. “3-J-1” pp. 150-151, BIR rec.)
On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York, U.S.A. (Exh.
“3-1” pp. 147-149, BIR rec.) also enjoining the latter from mentioning or referring to the term ‘air
conditioning’ and to describe the goods on order as Fiberglass pipe and pipe fitting insulation
instead. Likewise on April 30, 1953, Engineering threatened to discontinue the forwarding service
of Universal Transcontinental Corporation when it wrote Trane Co. (Exh. “3-H” p. 146, BIR rec.):

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

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

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

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

We feel that we can probably solve all the problems by following the procedure outlined in your
letter of March 25, 1953 wherein you stated that in all future jobs you would enclose photostatic
copies of your import license so that we might make up two sets of invoices: one set describing
equipment ordered simply according to the way that they are listed on the import license and
another according to our ordinary regular methods of order write-up. We would then include the
set made up according to the import license in the shipping boxes themselves and use those
items as our actual shipping documents and invoices, and we will send the other regular invoice
to you, by separate correspondence. (Exh- No. “3-F-1”, p. 144 BIR rec.)
Another interesting letter of Engineering is one dated August 27, 1955 (Exh. “3-C” p. 141 BIR rec.)

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

The purpose of this letter is to request that in the future, no documents of any kind should be
sent with the order that indicate in any way that the equipment could possibly be used for air
conditioning.

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

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

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

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

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

III

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

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

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

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

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

SO ORDERED.
[G.R. NO. 149756 : February 11, 2005]

MYRNA RAMOS, Petitioner, v. SUSANA S. SARAO and JONAS RAMOS, Respondents.

DECISION

PANGANIBAN, J.:

Although the parties in the instant case denominated their contract as a “DEED OF SALE UNDER
PACTO DE RETRO,” the “sellers” have continued to possess and to reside at the subject house
and lot up to the present. This evident factual circumstance was plainly overlooked by the trial
and the appellate courts, thereby justifying a review of this case. This overlooked fact clearly
shows that the petitioner intended merely to secure a loan, not to sell the property. Thus, the
contract should be deemed an equitable mortgage.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the August 31,
2001 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 50095, which disposed as follows:

“WHEREFORE, the instant appeal is DISMISSED for lack of merit. The decision dated January 19,
1995 of the Regional Trial Court, Branch 145, Makati City is AFFIRMEDin toto.”3

The Facts

On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a contract over their
conjugal house and lot in favor of Susana S. Sarao for and in consideration of P1,310,430.4
Entitled “DEED OF SALE UNDER PACTO DE RETRO,” the contract, inter alia, granted the Ramos
spouses the option to repurchase the property within six months from February 21, 1991, for
P1,310,430 plus an interest of 4.5 percent a month.5 It was further agreed that should the
spouses fail to pay the monthly interest or to exercise the right to repurchase within the
stipulated period, the conveyance would be deemed an absolute sale.6

On July 30, 1991, Myrna Ramos tendered to Sarao the amount of P1,633,034.20 in the form of
two manager’s checks, which the latter refused to accept for being allegedly insufficient.7 On
August 8, 1991, Myrna filed a Complaint for the redemption of the property and moral damages
plus attorney’s fees.8 The suit was docketed as Civil Case No. 91-2188 and raffled to Branch 145
of the Regional Trial Court (RTC) of Makati City. On August 13, 1991, she deposited with the RTC
two checks that Sarao refused to accept.9

On December 21, 1991, Sarao filed against the Ramos spouses a Petition “for consolidation of
ownership in pacto de retro sale” docketed as Civil Case No. 91-3434 and raffled to Branch 61 of
the RTC of Makati City.10 Civil Case Nos. 91-2188 and 91-3434 were later consolidated and jointly
tried before Branch 145 of the said Makati RTC.11

The two lower courts narrated the trial in this manner:

“x x x Myrna [Ramos] testified as follows: On February 21, 1991, she and her husband borrowed
from Sarao the amount of P1,234,000.00, payable within six (6) months, with an interest thereon
at 4.5% compounded monthly from said date until August 21, 1991, in order for them to pay [the]
mortgage on their house. For and in consideration of the said amount, they executed a deed of
sale under a [pacto de retro] in favor of Sarao over their conjugal house and lot registered under
TCT No. 151784 of the Registry of Deeds of Makati (Exhibit A). She further claimed that Sarao will
keep the torrens title until the lapse of the 6-month period, in which case she will redeem [the]
subject property and the torrens title covering it. When asked why it was the amount of
P1,310,430 instead of the aforestated amount which appeared in the deed, she explained that
upon signing of the deed in question, the sum of P20,000.00 representing attorney’s fees was
added, and its total amount was multiplied with 4.5% interest rate, so that they could pay in
advance the compounded interest. She also stated that although the market value of the subject
property as of February 1991 [was] calculated to [be] more or less P10 million, it was offered [for]
only P1,310,430.00 for the reason that they intended nothing but to redeem the same. In May
1991, she wrote a letter to Atty. Mario Aguinaldo requesting him to give a computation of the
loan obligation, and [expressed] her intention to redeem the subject property, but she received
no reply to her letter. Instead, she, through her husband, secured directly from Sarao a
handwritten computation of their loan obligation, the total of which amount[ed] to
P1,562,712.14. Later, she sent several letters to Sarao, [furnishing] Atty. Aguinaldo with copies,
asking them for the updated computation of their loan obligation as of July 1991, but [no reply
was again received]. During the hearing of February 17, 1992, she admitted receiving a letter
dated July 23, 1991 from Atty. Aguinaldo which show[ed] the computation of their loan obligation
[totaling] to P2,911,579.22 (Exhs. 6, 6-A). On July 30, 1991, she claimed that she offered the
redemption price in the form of two (2) manager’s checks amounting to P1,633,034.20 (Exhs. H-
1 & H-2) to Atty. Aguinaldo, but the latter refused to accept them because they [were] not
enough to pay the loan obligation. Having refused acceptance of the said checks covering the
redemption price, on August 13, 1991 she came to Court to consign the checks (Exhs. L-4 and L-
5). Subsequently, she proceeded to the Register of Deeds to cause the annotation of lis pendens
on TCT No. 151784 (Exh. B-1-A). Hence, she filed the x x x civil case against Sarao.

“On the other hand, Sarao testified as follows: On February 21, 1991, spouses Ramos together
with a certain Linda Tolentino and her husband, Nestor Tolentino approached her and offered
transaction involv[ing a] sale of property[. S]he consulted her lawyer, Atty. Aguinaldo, and on the
same date a corresponding deed of sale under pacto de retro was executed and signed (Exh. 1) .
Later on, she sent, through her lawyer, a demand letter dated June 10, 1991 (Exh. 6) in view of
Myrna’s failure to pay the monthly interest of 4.5% as agreed upon under the deed[. O]n June
14, 1991 Jonas replied to said demand letter (Exh. 8); in the reply Jonas admitted that he no
longer ha[d] the capacity to redeem the property and to pay the interest. In view of the said reply
of Jonas, [Sarao] filed the corresponding consolidation proceedings. She [further claimed] that
before filing said action she incurred expenses including payment of real estate taxes in arrears,
x x x transfer tax and capital [gains] tax, and [expenses] for [the] consolidated proceedings, for
which these expenses were accordingly receipted (Exhs. 6, 6-1 to 6-0). She also presented a
modified computation of the expenses she had incurred in connection with the execution of the
subject deed (Exh. 9). She also testified that Myrna did not tender payment of the correct and
sufficient price for said real property within the 6-month period as stipulated in the contract,
despite her having been shown the computation of the loan obligation, inclusive of capital gains
tax, real estate tax, transfer tax and other expenses. She admitted though that Myrna has
tendered payment amounting to P1,633,034.20 in the form of two manager’s checks, but these
were refused acceptance for being insufficient. She also claimed that several letters (Exhs. 2, 4
and 5) were sent to Myrna and her lawyer, informing them of the computation of the loan
obligation inclusive of said expenses. Finally, she denied the allegations made in the complaint
that she allied herself with Jonas, and claimed that she ha[d] no knowledge about said
allegation.”12

After trial, the RTC dismissed the Complaint and granted the prayer of Sarao to consolidate the
title of the property in her favor.13 Aggrieved, Myrna elevated the case to the CA.

Ruling of the Court of Appeals

The appellate court sustained the RTC’s finding that the disputed contract was a bonafide pacto
de retro sale, not a mortgage to secure a loan.14 It ruled that Myrna Ramos had failed to exercise
the right of repurchase, as the consignation of the two manager’s checks was deemed invalid.
She allegedly failed (1) to deposit the correct repurchase price and (2) to comply with the
required notice of consignation.15

Hence, this Petition.16

The Issues

Petitioner raises the following issues for our consideration:

“1. Whether or not the honorable appellate court erred in ruling the subject Deed of Sale under
Pacto de Retro was, and is in reality and under the law an equitable mortgage;

“2. Whether or not the honorable appellate court erred in affirming the ruling of the court a quo
that there was no valid tender of payment of the redemption price neither [sic] a valid
consignation in the instant case; andcralawlibrary

“3. Whether or not [the] honorable appellate court erred in affirming the ruling of the court a
quo denying the claim of petitioner for damages and attorney’s fees.”17

The Court’s Ruling

The Petition is meritorious in regard to Issues 1 and 2.

First Issue:

A Pacto de Retro Sale

Or an Equitable Mortgage?

Respondent Sarao avers that the herein Petition should have been dismissed outright, because
petitioner (1) failed to show proof that she had served a copy of it to the Court of Appeals and
(2) raised questions of fact that were not proper issues in a petition under Rule 45 of the Rules
of Court.18 This Court, however, disregarded the first ground; otherwise, substantial injustice
would have been inflicted on petitioner. Since the Court of Appeals is not a party here, failure to
serve it a copy of the Petition would not violate any right of respondent. Service to the CA is
indeed mentioned in the Rules, but only to inform it of the pendency of the appeal before this
Court.

As regards Item 2, there are exceptions to the general rule barring a review of questions of fact.19
The Court reviewed the factual findings in the present case, because the CA had manifestly
overlooked certain relevant and undisputed facts which, after being considered, justified a
different conclusion.20

Pacto de Retro Sale Distinguished

From Equitable Mortgage

The pivotal issue in the instant case is whether the parties intended the contract to be a bona
fide pacto de retro sale or an equitable mortgage.

In a pacto de retro, ownership of the property sold is immediately transferred to the vendee a
retro, subject only to the repurchase by the vendor a retro within the stipulated period.21 The
vendor a retro’s failure to exercise the right of repurchase within the agreed time vests upon the
vendee a retro, by operation of law, absolute title to the property.22 Such title is not impaired
even if the vendee a retro fails to consolidate title under Article 1607 of the Civil Code.23

On the other hand, an equitable mortgage is a contract that - - although lacking the formality,
the form or words, or other requisites demanded by a statute - - nevertheless reveals the
intention of the parties to burden a piece or pieces of real property as security for a debt.24 The
essential requisites of such a contract are as follows: (1) the parties enter into what appears to
be a contract of sale, but (2) their intention is to secure an existing debt by way of a mortgage.25
The nonpayment of the debt when due gives the mortgagee the right to foreclose the mortgage,
sell the property, and apply the proceeds of the sale to the satisfaction of the loan obligation.26

This Court has consistently decreed that the nomenclature used by the contracting parties to
describe a contract does not determine its nature.27 The decisive factor is their intention - - as
shown by their conduct, words, actions and deeds - - prior to, during, and after executing the
agreement.28 This juristic principle is supported by the following provision of law:

Article 1371. In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered.29

Even if a contract is denominated as a pacto de retro, the owner of the property may still disprove
it by means of parol evidence,30 provided that the nature of the agreement is placed in issue by
the pleadings filed with the trial court.31

There is no single conclusive test to determine whether a deed absolute on its face is really a
simple loan accommodation secured by a mortgage.32 However, the law enumerates several
instances that show when a contract is presumed to be an equitable mortgage, as follows:

Article 1602. The contract shall be presumed to be an equitable mortgage, in any of the following
cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
 (4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is
that the transaction shall secure the payment of a debt or the performance of any other
obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as
rent or otherwise shall be considered as interest which shall be subject to the usury laws.33

Furthermore, a contract purporting to be a pacto de retro is construed as an equitable mortgage

when the terms of the document and the surrounding circumstances so require.34 The law
discourages the use of a pacto de retro, because this scheme is frequently used to circumvent a
contract known as a pactum commissorium. The Court has frequently noted that a pacto de retro
is used to conceal a contract of loan secured by a mortgage.35 Such construction is consistent
with the doctrine that the law favors the least transmission of rights.36

Equitable Mortgage Presumed

To be Favored by Law

Jurisprudence has consistently declared that the presence of even just one of the circumstances
set forth in the forgoing Civil Code provision suffices to convert a contract to an equitable
mortgage.37 Article 1602 specifically states that the equitable presumption applies to any of the
cases therein enumerated.

In the present factual milieu, the vendor retained possession of the property allegedly sold.38
Petitioner and her children continued to use it as their residence, even after Jonas Ramos had
abandoned them.39 In fact, it remained as her address for the service of court orders and copies
of Respondent Sarao’s pleadings.40
The presumption of equitable mortgage imposes a burden on Sarao to present clear evidence to
rebut it. Corollary to this principle, the favored party need not introduce proof to establish such
presumption; the party challenging it must overthrow it, lest it persist.41 To overturn that prima
facie fact that operated against her, Sarao needed to adduce substantial and credible evidence
to prove that the contract was a bona fide pacto de retro. This evidentiary burden she miserably
failed to discharge.

Contrary to Sarao’s bare assertions, a meticulous review of the evidence reveals that the alleged
contract was executed merely as security for a loan.

The July 23, 1991 letter of Respondent Sarao’s lawyer had required petitioner to pay a computed
amount - - under the heading “House and Lot Loan”42 - - to enable the latter to repurchase the
property. In effect, respondent would resell the property to petitioner, once the latter’s loan
obligation would have been paid. This explicit requirement was a clear indication that the
property was to be used as security for a loan.

The loan obligation was clear from Sarao’s evidence as found by the trial court, which we quote:

“x x x [Sarao] also testified that Myrna did not tender payment of the correct and sufficient price
for said real property within the 6-month period as stipulated in the contract, despite her having
been shown the computation of the loan obligation, inclusive of capital gains tax, real estate tax,
transfer tax and other expenses. She admitted though that Myrna has tendered payment
amounting to P1,633,034.20 in the form of two manager’s checks, but these were refused
acceptance for being insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were
sent to Myrna and her lawyer, informing them of the computation of the loan obligation inclusive
of said expenses. X x x.”43

Respondent herself stressed that the pacto de retro had been entered into on the very same day
that the property was to be foreclosed by a commercial bank.44 Such circumstance proves that
the spouses direly needed funds to avert a foreclosure sale. Had they intended to sell the
property just to realize some profit, as Sarao suggests,45 they would not have retained
possession of the house and continued to live there. Clearly, the spouses had entered into the
alleged pacto de retro sale to secure a loan obligation, not to transfer ownership of the property.
Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to her lawyer that the
contract was a pacto de retro.46 That letter, however, cannot override the finding that the pacto
de retro was executed merely as security for a loan obligation. Moreover, on May 17, 1991, prior
to the transmittal of the letter, petitioner had already sent a letter to Sarao’s lawyer expressing
the former’s desire to settle the mortgage on the property.47 Considering that she had already
denominated the transaction with Sarao as a mortgage, petitioner cannot be prejudiced by her
husband’s alleged admission, especially at a time when they were already estranged.48

Inasmuch as the contract between the parties was an equitable mortgage, Respondent Sarao’s
remedy was to recover the loan amount from petitioner by filing an action for the amount due
or by foreclosing the property.49

Second Issue:

Propriety of Tender of
Payment and Consignation

Tender of payment is the manifestation by debtors of their desire to comply with or to pay their
obligation.50 If the creditor refuses the tender of payment without just cause, the debtors are
discharged from the obligation by the consignation of the sum due.51 Consignation is made by
depositing the proper amount to the judicial authority, before whom the tender of payment and
the announcement of the consignation shall be proved.52 All interested parties are to be notified
of the consignation.53 Compliance with these requisites is mandatory.54

The trial and the appellate courts held that there was no valid consignation, because petitioner
had failed to offer the correct amount and to provide ample consignation notice to Sarao.55 This
conclusion is incorrect.

Note that the principal loan was P1,310,430 plus 4.5 per cent monthly interest compounded for
six months. Expressing her desire to pay in the fifth month, petitioner averred that the total
amount due was P1,633,034.19, based on the computation of Sarao herself.56 The amount of
P2,911,579.22 that the latter demanded from her to settle the loan obligation was plainly
exorbitant, since this sum included other items not covered by the agreement. The property had
been used solely as secure ty for the P1,310,430 loan; it was therefore improper to include in
that amount payments for gasoline and miscellaneous expenses, taxes, attorney’s fees, and other
alleged loans. When Sarao unjustly refused the tender of payment in the amount of
P1,633,034.20, petitioner correctly filed suit and consigned the amount in order to be released
from the latter’s obligation.

The two lower courts cited Article 1257 of the Civil Code to justify their ruling that petitioner had
failed to notify Respondent Sarao of the consignation. This provision of law states that the obligor
may be released, provided the consignation is first announced to the parties interested in the
fulfillment of the obligation.

The facts show that the notice requirement was complied with. In her August 1, 1991 letter,
petitioner said that should the respondent fail to accept payment, the former would consign the
amount.57 This statement was an unequivocal announcement of consignation. Concededly,
sending to the creditor a tender of payment and notice of consignation - - which was precisely
what petitioner did - - may be done in the same act.58

Because petitioners’ consignation of the amount of P1,633,034.20 was valid, it produced the
effect of payment.59 “The consignation, however, has a retroactive effect, and the payment is
deemed to have been made at the time of the deposit of the thing in court or when it was placed
at the disposal of the judicial authority.”60 “The rationale for consignation is to avoid making the
performance of an obligation more onerous to the debtor by reason of causes not imputable to
him.”61

Third Issue:

Moral Damages and Attorney’s Fees

Petitioner seeks moral damages in the amount of P500,000 for alleged sleepless nights and
anxiety over being homeless.62 Her bare assertions are insufficient to prove the legal basis for
granting any award under Article 2219 of the Civil Code.63 Verily, an award of moral damages is
uncalled for, considering that it was Respondent Sarao’s accommodation that settled the earlier
obligation of the spouses with the commercial bank and allowed them to retain ownership of the
property.

Neither have attorney’s fees been shown to be proper.64 As a general rule, in the absence of a
contractual or statutory liability therefor, sound public policy frowns on penalizing the right to
litigate.65 This policy applies especially to the present case, because there is a need to determine
whether the disputed contract was a pacto de retro sale or an equitable mortgage.

Other Matters

In a belated Manifestation filed on October 19, 2004, Sarao declared that she was the “owner of
the one-half share of Jonas Ramos in the conjugal property,” because of his alleged failure to file
a timely appeal with the CA.66 Such declaration of ownership has no basis in law, considering
that the present suit being pursued by petitioner pertains to a mortgage covering the whole
property.

Besides, it is basic that defenses and issues not raised below cannot be considered on appeal.67

The Court, however, observes that Respondent Sarao paid real property taxes amounting to
P67,567.10 to halt the auction sale scheduled for October 8, 2004, by the City of Muntinlupa.68
Her payment was made in good faith and benefited petitioner. Accordingly, Sarao should be
reimbursed; otherwise, petitioner would be unjustly enriched,69 under Article 2175 of the Civil
Code which provides:

Art. 2175. Any person who is constrained to pay the taxes of another shall be entitled to
reimbursement from the latter.

WHEREFORE, the Petition is partly GRANTED and the assailed Decision SET ASIDE. Judgment is
hereby rendered:

(1) DECLARING (a) the disputed contract as an equitable mortgage, (b) petitioner’s loan to
Respondent Sarao to be in the amount of P1,633,034.19 as of July 30, 1991; and (c) the
 mortgage on the property - - covered by TCT No. 151784 in the name of the Ramos
spouses and issued by the Register of Deeds of Makati City - -as discharged

(2) ORDERING the RTC to release to Sarao the consigned amount of P1,633,034.19

(3) COMMANDING Respondent Sarao to return to petitioner the owner’s copy of TCT No.
151784 in the name of the Ramos spouses and issued by the Register of Deeds of Makati
City

(4) DIRECTING the Register of Deeds of Makati City to cancel Entry No. 24057, the annotation
appearing on TCT No. 151784

(5) ORDERING petitioner to pay Sarao in the amount of P67,567.10 as reimbursement for real
property taxes

No pronouncement as to costs.

SO ORDERED.
G.R. No. 160408, January 11, 2016

SPOUSES ROBERTO AND ADELAIDA PEN, Petitioners, v. SPOUSES SANTOS AND LINDA JULIAN,
Respondents.

DECISION

BERSAMIN, J.:

The petitioners who were the buyers of the mortgaged property of the respondents seek the
reversal of the decision promulgated on October 20, 2003,1 whereby the Court of Appeals (CA)
affirmed with modification the adverse judgment rendered on August 30, 1999 by the Regional
Trial Court (RTC), Branch 77, in Quezon City.2 In their respective rulings, the CA and the RTC both
declared the deed of sale respecting the respondents’ property as void and inexistent, albeit
premised upon different reasons.chanRoblesvirtualLawlibrary

Antecedents

The CA summarized the antecedent facts and procedural matters in its assailed decision as
follows:

On April 9, 1986, the appellees (the Julians) obtained a P60,000.00 loan from appellant Adelaida
Pen. On May 23, 1986 and on the (sic) May 27, 1986, they were again extended loans in the
amounts of P50,000.00 and PI0,000.00, respectively by appellant Adelaida. The initial interests
were deducted by appellant Adelaida, (1) P3,600.00 from the P60,000.00 loan; (2) P2,400.00 from
the P50,000.00 loan; and (3) P600.00 from the PI0,000.00 loan. Two (2) promissory notes were
executed by the appellees in favor of appellant Adelaida to evidence the foregoing loans, one
dated April 9, 1986 and payable on June 15, 1986 for the P60,000.00 loan and another dated May
22, 1986 payable on July 22, 1986 for the P50,000.00 loan. Both loans were charged interest at
6% per month. As security, on May 23, 1986, the appellees executed a Real Estate Mortgage over
their property covered by TCT No. 327733 registered under the name of appellee Santos Julian,
Jr. The owner’s duplicate of TCT No. 327733 was delivered to the appellants.
Appellant’s version of the subsequent events run as follows: When the loans became due and
demandable, appellees failed to pay despite several demands. As such, appellant Adelaida
decided to institute foreclosure proceedings. However, she was prevailed upon by appellee Linda
not to foreclose the property because of the cost of litigation and since it would cause her
embarrassment as the proceedings will be announced in public places at the City Hall, where she
has many friends. Instead, appellee Linda offered their mortgaged property as payment in kind.
After the ocular inspection, the parties agreed to have the property valued at P70,000.00.
Thereafter, on October 22, 1986 appellee executed a two (2) page Deed of Sale duly signed by
her on the left margin and over her printed name. After the execution of the Deed of Sale,
appellant Pen paid the capital gains tax and the required real property tax. Title to the property
was transferred to the appellants by the issuance of TCT No. 364880 on July 17, 1987. A
reconstituted title was also issued to the appellants on July 09, 1994 when the Quezon City
Register of Deeds was burned (sic).

On July 1989, appellants allege that appellee Linda offered to repurchase the property to which
the former agreed at the repurchase price of P436,115.00 payable in cash on July 31, 1989. The
appellees failed to repurchase on the agreed date. On February 1990, appellees again offered to
repurchase the property for the same amount, but they still failed to repurchase. On June 28,
1990, another offer was made to repurchase the property for the same amount. Appellee Linda
offered to pay P100,000.00 in cash as sign of good faith. The offer was rejected by appellant
Adelaida. The latter held the money only for safekeeping upon the pleading of appellee Linda.
Upon the agreement of the parties, the amount of P100,000.00 was deducted from the balance
of the appellees’ indebtedness, so that as of October 15, 1997, their unpaid balance amounted
to P319,065.00. Appellants allege that instead of paying [the] said balance, the appellees
instituted on September 8, 1994 the civil complaint and filed an adverse claim and lis pendens
which were annotated at the back of the title to the property.

On the other hand, the appellees aver the following: At the time the mortgage was executed,
they were likewise required by the appellant Adelaida to sign a one (1) page document
purportedly an “Absolute Deed of Sale”. Said document did not contain any consideration, and
was “undated, unfilled and unnotarized”. They allege that their total payments amounted to
P115,400.00 and that their last payment was on June 28, 1990 in the amount of P100,000.00.

In December 1992, appellee Linda Julian offered to pay appellant Adelaida the amount of
PI50,000.00. The latter refused to accept the offer and demanded that she be paid the amount
of P250,000.00. Unable to meet the demand, appellee Linda desisted from the offer and
requested that she be shown the land title which she conveyed to the appellee Adelaida, but the
latter refused. Upon verification with the Registry of Deeds of Quezon City, she was informed
that the title to the mortgaged property had already been registered in the name of appellee
Adelaida under TCT No. 364880, and that the transfer was entered on July 17, 1987. A
reconstituted title, TCT No. RT-45272 (364880), also appeared on file in the Registry of Deeds
replacing TCT No. 364880.

By reason of the foregoing discoveries, appellee filed an Affidavit of Adverse Claim on January
1993. Counsel for the appellees, on August 12, 1994, formally demanded the reconveyance of
the title and/or the property to them, but the appellants refused. In the process of obtaining
other documents; the appellees also discovered that the appellants have obtained several
Declarations of Real Property, and a Deed of Sale consisting of two (2) pages which was notarized
by one Atty. Cesar Ching. Said document indicates a consideration of P70,000.00 for the lot, and
was made to appear as having been executed on October 22, 1986. On September 8, 1994,
appellees filed a suit for the Cancellation of Sale, Cancellation of Title issued to the appellants;
Recovery of Possession; Damages with Prayer for Preliminary Injunction. The complaint alleged
that appellant Adelaida, through obvious bad faith, maliciously typed, unilaterally filled up, and
caused to be notarized the Deed of Sale earlier signed by appellee Julian, and used this spurious
deed of sale as the vehicle for her fraudulent transfer unto herself the parcel of land covered by
TCT No. 327733.3chanroblesvirtuallawlibrary

Judgment of the RTC

In its judgment rendered on August 30, 1999,4 the RTC ruled in favor of the respondents.
According greater credence to the version of the respondents on the true nature of their
transaction, the trial court concluded that they had not agreed on the consideration for the sale
at the time they signed the deed of sale; that in the absence of the consideration, the sale lacked
one of the essential requisites of a valid contract; that the defense of prescription was rejected
because the action to impugn the void contract was imprescriptible; and that the promissory
notes and the real estate mortgage in favor of the petitioners were nonetheless valid, rendering
the respondents liable to still pay their outstanding obligation with interest.

The RTC disposed thusly:

WHEREFORE, judgment is hereby rendered:

Declaring the Deed of Sale, dated October 22, 1986, void or inexistent;

Cancelling TCT No. RT-45272 (364480) and declaring it to be of no further legal force and effect;

Ordering the defendants to reconvcy the subject property to the plaintiiTs and to deliver to them
the possession thereof; and

Ordering the plaintiffs to pay to the defendants the unpaid balance of their indebtedness plus
accrued interest totaling P319,065.00 as of October 15, 1997, plus interests at the legal rate
counted from the date of filing of the complaint and until the full payment thereof, without
prejudice to the right of the defendants to foreclose the mortgage in the event that plaintiiTs will
foil to pay their obligation.
No pronouncement as to cost.

SO ORDERED.5chanroblesvirtuallawlibrary

Decision of the CA

On appeal by the petitioners, the CA affirmed the RTC with modification under its assailed
decision of October 20, 2003,6 decreeing:

WHEREFORE, premises considered, the Decision of the Regional Trial Court of Quezon City is
AFFIRMED WITH modification. Judgement is hereby rendered:ChanRoblesVirtualawlibrary
Declaring the Deed of Sale, dated October 22, 1986, void or inexistent;

Cancelling TCT No. RT-45272 (364880) and declaring it to be of no further legal force and effect;

Ordering the appellants-defendants to reconvey the subject property to the plaintitTs-appellees

and to deliver to them the possession thereof; and
Ordering the plaintiffs-appellees to pay to the defendants the unpaid balance of their
indebtedness, P43,492.15 as of June 28, 1990, plus interests at the legal rate of 12% per annum
from said date and until the full payment thereof, without prejudice to the right of the
defendants to foreclose the mortgage in the event that plaintiffs-appellees will fail to pay their
obligation.
SO ORDERED.7chanroblesvirtuallawlibrary

The CA pronounced the deed of sale as void but not because of the supposed lack of
consideration as the RTC had indicated, but because of the deed of sale having been executed at
the same time as the real estate mortgage, which rendered the sale as a prohibited pactum
commissorium in light of the fact that the deed of sale was blank as to the consideration and the
date, which details would be filled out upon the default by the respondents; that the promissory
notes contained no stipulation on the payment of interest on the obligation, for which reason no
monetary interest could be imposed for the use of money; and that compensatory interest
should instead be imposed as a form of damages arising from Linda’s failure to pay the
outstanding obligation.chanRoblesvirtualLawlibrary

Issues

In this appeal, the petitioners posit the following issues, namely: (1) whether or not the CA erred
in ruling against the validity of the deed of sale; and (2) whether or not the CA erred in ruling that
no monetary interest was due for Linda’s use of Adelaida’s money.chanRoblesvirtualLawlibrary

Ruling of the Court

The appeal is partly meritorious.

That the petitioners are raising factual issues about the true nature of their transaction with the
respondent is already of itself, sufficient reason to forthwith deny due course to the petition for
review on certiorari. They cannot ignore that any appeal to the Court is limited to questions of
law because the Court is not a trier of facts. As such, the factual findings of the CA should be
respected and accorded great weight, and even finality when supported by the substantial
evidence on record.8 Moreover, in view of the unanimity between the RTC and the CA on the
deed of sale being void, varying only in their justifications, the Court affirms the CA, and adopts
its conclusions on the invalidity of the deed of sale.

Nonetheless, We will take the occasion to explain why we concur with the CA’s justification in
discrediting the deed of sale between the parties as pactum commissorium.

Article 2088 of the Civil Code prohibits the creditor from appropriating the things given by way
of pledge or mortgage, or from disposing of them; any stipulation to the contrary is null and void.
The elements for pactum commissorium to exist are as follows, to wit: (a) that there should be a
pledge or mortgage wherein property is pledged or mortgaged by way of security for the
payment of the principal obligation; and (b) that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of
the principal obligation within the stipulated period.9 The first element was present considering
that the property of the respondents was mortgaged by Linda in favor of Adelaida as security for
the former’s indebtedness. As to the second, the authorization for Adelaida to appropriate the
property subject of the mortgage upon Linda’s default was implied from Linda’s having signed
the blank deed of sale simultaneously with her signing of the real estate mortgage. The haste
with which the transfer of property was made upon the default by Linda on her obligation, and
the eventual transfer of the property in a manner not in the form of a valid dacion en pago
ultimately confirmed the nature of the transaction as a pactum commissorium.

It is notable that in reaching its conclusion that Linda’s deed of sale had been executed
simultaneously with the real estate mortgage, the CA first compared the unfilled deed of sale
presented by Linda with the notarized deed of sale adduced by Adelaida. The CA justly deduced
that the completion and execution of the deed of sale had been conditioned on the non-payment
of the debt by Linda, and reasonably pronounced that such circumstances rendered the
transaction pactum commissorium. The Court should not disturb or undo the CA’s conclusion in
the absence of the clear showing of abuse, arbitrariness or capriciousness on the part of the
CA.10chanroblesvirtuallawlibrary

The petitioners have theorized that their transaction with the respondents was a valid dacion en
pago by highlighting that it was Linda who had offered to sell her property upon her default. Their
theory cannot stand scrutiny. Dacion en pago is in the nature of a sale because property is
alienated in favor of the creditor in satisfaction of a debt in money.11 For a valid dacion en pago
to transpire, however, the attendance of the following elements must be established, namely:
(a) the existence of a money obligation; (b) the alienation to the creditor of a property by the
debtor with the consent of the former; and (c) the satisfaction of the money obligation of the
debtor.12 To have a valid dacion en pago, therefore, the alienation of the property must fully
extinguish the debt. Yet, the debt of the respondents subsisted despite the transfer of the
property in favor of Adelaida.

The petitioners insist that the parties agreed that the deed of sale would not yet contain the date
and the consideration because they had still to agree on the price.13 Their insistence is not
supported by the established circumstances. It appears that two days after the loan fell due on
October 15, 1986,14 Linda offered to sell the mortgaged property;15 hence, the parties made
the ocular inspection of the premises on October 18, 1986. By that time, Adelaida had already
become aware that the appraiser had valued the property at P70,000.00. If that was so, there
was no plausible reason for still leaving the consideration on the deed of sale blank if the deed
was drafted by Adelaida on October 20, 1986, especially considering that they could have
conveniently communicated with each other in the meanwhile on this significant aspect of their
transaction. It was also improbable for Adelaida to still hand the unfilled deed of sale to Linda as
her copy if, after all, the deed of sale would be eventually notarized on October 22, 1986.

According to Article 1318 of the Civil Code, the requisites for any contract to be valid are, namely:
(a) the consent of the contracting parties; (b) the object; and (c) the consideration. There is a
perfection of a contract when there is a meeting of the minds of the parties on each of these
requisites.16 The following passage has fittingly discussed the process of perfection in Moreno,
Jr. v. Private Management Office:17chanroblesvirtuallawlibrary

To reach that moment of perfection, the parties must agree on the same thing in the same sense,
so that their minds meet as to all the terms. They must have a distinct intention common to both
and without doubt or difference; until all understand alike, there can be no assent, and therefore
no contract. The minds of parties must meet at every point; nothing can be left open for further
arrangement. So long as there is any uncertainty or indefiniteness, or future negotiations or
considerations to be had between the parties, there is not a completed contract, and in fact,
there is no contract at all.18chanrobleslaw

In a sale, the contract is perfected at the moment when the seller obligates herself to deliver and
to transfer ownership of a thing or right to the buyer for a price certain, as to which the latter
agrees.19 The absence of the consideration from Linda’s copy of the deed of sale was credible
proof of the lack of an essential requisite for the sale. In other words, the meeting of the minds
of the parties so vital in the perfection of the contract of sale did not transpire. And, even
assuming that Linda’s leaving the consideration blank implied the authority of Adelaida to fill in
that essential detail in the deed of sale upon Linda’s default on the loan, the conclusion of the CA
that the deed of sale was a pactum commisorium still holds, for, as earlier mentioned, all the
elements of pactum commisorium were present.

Anent interest, the CA deleted the imposition of monetary interest but decreed compensatory
interest of 12% per annum.

Interest that is the compensation fixed by the parties for the use or forbearance of money is
referred to as monetary interest. On the other hand, interest that may be imposed by law or by
the courts as penalty or indemnity for damages is called compensatory interest. In other words,
the right to recover interest arises only either by virtue of a contract or as damages for delay or
failure to pay the principal loan on which the interest is demanded.20chanroblesvirtuallawlibrary

The CA correctly deleted the monetary interest from the judgment. Pursuant to Article 1956 of
the Civil Code, no interest shall be due unless it has been expressly stipulated in writing. In order
for monetary interest to be imposed, therefore, two requirements must be present, specifically:
(a) that there has been an express stipulation for the payment of interest; and (b) that the
agreement for the payment of interest has been reduced in writing.21 Considering that the
promissory notes contained no stipulation on the payment of monetary interest, monetary
interest cannot be validly imposed.

The CA properly imposed compensatory interest to offset the delay in the respondents’
performance of their obligation. Nonetheless, the imposition of the legal rate of interest should
be modified to conform to the prevailing jurisprudence. The rate of 12% per annum imposed by
the CA was the rate set in accordance with Eastern Shipping Lines, Inc., v. Court of Appeals.22 In
the meanwhile, Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796 dated May 16,
2013, amending Section 2 of Circular No. 905, Series of 1982, and Circular No. 799, Series of 2013,
has lowered to 6% per annum the legal rate of interest for a loan or forbearance of money, goods
or credit starting July 1, 2013. This revision is expressly recognized in Nacar v. Gallery Frames.23
It should be noted, however, that imposition of the legal rate of interest at 6% per annum is
prospective in application.

Accordingly, the legal rate of interest on the outstanding obligation of P43,492.15 as of June 28,
1990, as the CA found, should be as follows: (a) from the time of demand on October 13, 1994
until June 30, 2013, the legal rate of interest was 12% per annum conformably with Eastern
Shipping Lines; and (b) following Nacar, from July 1, 2013 until full payment, the legal interest is
6% per annum.

WHEREFORE, the Court AFFIRMS the decision promulgated on October 20, 2003 subject to the
MODIFICATION that the amount of P43,492.15 due from the respondents shall earn legal interest
of 12% per annum reckoned from October 13, 1994 until June 30, 2013, and 6% per annum from
July 1, 2013 until full payment.

Without pronouncement on costs of suit.

SO ORDERED.cralawlawlibrary
G.R. No. 162421 August 31, 2007

NELSON CABALES and RITO CABALES, Petitioners,

Vs.
COURT OF APPEALS, JESUS FELIANO and ANUNCIACION FELIANO, Respondents.

DECISION

PUNO, C.J.:

This is a petition for review on certiorari seeking the reversal of the decision1 of the Court of
Appeals dated October 27, 2003, in CA-G.R. CV No. 68319 entitled “Nelson Cabales and Rito
Cabales v. Jesus Feliano and Anunciacion Feliano,” which affirmed with modification the
decision2 of the Regional Trial Court of Maasin, Southern Leyte, Branch 25, dated August 11,
2000, in Civil Case No. R-2878. The resolution of the Court of Appeals dated February 23, 2004,
which denied petitioners’ motion for reconsideration, is likewise herein assailed.

The facts as found by the trial court and the appellate court are well established.

Rufino Cabales died on July 4, 1966 and left a 5,714-square meter parcel of land located in Brgy.
Rizal, Sogod, Southern Leyte, covered by Tax Declaration No. 17270 to his surviving wife
Saturnina and children Bonifacio, Albino, Francisco, Leonora, Alberto and petitioner Rito.

On July 26, 1971, brothers and co-owners Bonifacio, Albino and Alberto sold the subject property
to Dr. Cayetano Corrompido for ₱2,000.00, with right to repurchase within eight (8) years. The
three (3) siblings divided the proceeds of the sale among themselves, each getting a share of
₱666.66.

The following month or on August 18, 1971, Alberto secured a note (“vale”) from Dr. Corrompido
in the amount of ₱300.00.
In 1972, Alberto died leaving his wife and son, petitioner Nelson.

On December 18, 1975, within the eight-year redemption period, Bonifacio and Albino tendered
their payment of ₱666.66 each to Dr. Corrompido. But Dr. Corrompido only released the
document of sale with pacto de retro after Saturnina paid for the share of her deceased son,
Alberto, including his “vale” of ₱300.00.

On even date, Saturnina and her four (4) children Bonifacio, Albino, Francisco and Leonora sold
the subject parcel of land to respondents-spouses Jesus and Anunciacion Feliano for ₱8,000.00.
The Deed of Sale provided in its last paragraph, thus:

It is hereby declared and understood that the amount of TWO THOUSAND TWO HUNDRED
EIGHTY SIX PESOS (P2,286.00) corresponding and belonging to the Heirs of Alberto Cabales and
to Rito Cabales who are still minors upon the execution of this instrument are held

In trust by the VENDEE and to be paid and delivered only to them upon reaching the age of 21.

On December 17, 1985, the Register of Deeds of Southern Leyte issued Original Certificate of Title
No. 17035 over the purchased land in the names of respondents-spouses.

On December 30, 1985, Saturnina and her four (4) children executed an affidavit to the effect
that petitioner Nelson would only receive the amount of ₱176.34 from respondents-spouses
when he reaches the age of 21 considering that Saturnina paid Dr. Corrompido ₱966.66 for the
obligation of petitioner Nelson’s late father Alberto, i.e., ₱666.66 for his share in the redemption
of the sale with pacto de retro as well as his “vale” of ₱300.00.

On July 24, 1986, 24-year old petitioner Rito Cabales acknowledged receipt of the sum of
₱1,143.00 from respondent Jesus Feliano, representing the former’s share in the proceeds of the
sale of subject property.

In 1988, Saturnina died. Petitioner Nelson, then residing in Manila, went back to his father’s
hometown in Southern Leyte. That same year, he learned from his uncle, petitioner Rito, of the
sale of subject property. In 1993, he signified his intention to redeem the subject land during a
barangay conciliation process that he initiated.

On January 12, 1995, contending that they could not have sold their respective shares in subject
property when they were minors, petitioners filed before the Regional Trial Court of Maasin,
Southern Leyte, a complaint for redemption of the subject land plus damages.

In their answer, respondents-spouses maintained that petitioners were estopped from claiming
any right over subject property considering that (1) petitioner Rito had already received the
amount corresponding to his share of the proceeds of the sale of subject property, and (2) that
petitioner Nelson failed to consign to the court the total amount of the redemption price
necessary for legal redemption. They prayed for the dismissal of the case on the grounds of laches
and prescription.

No amicable settlement was reached at pre-trial. Trial ensued and on August 11, 2000, the trial
court ruled against petitioners. It held that (1) Alberto or, by his death, any of his heirs including
petitioner Nelson lost their right to subject land when not one of them repurchased it from Dr.
Corrompido; (2) Saturnina was effectively subrogated to the rights and interests of Alberto when
she paid for Alberto’s share as well as his obligation to Dr. Corrompido; and (3) petitioner Rito
had no more right to redeem his share to subject property as the sale by Saturnina, his legal
guardian pursuant to Section 7, Rule 93 of the Rules of Court, was perfectly valid; and it was
shown that he received his share of the proceeds of the sale on July 24, 1986, when he was 24
years old.

On appeal, the Court of Appeals modified the decision of the trial court. It held that the sale by
Saturnina of petitioner Rito’s undivided share to the property was unenforceable for lack of
authority or legal representation but that the contract was effectively ratified by petitioner Rito’s
receipt of the proceeds on July 24, 1986. The appellate court also ruled that petitioner Nelson is
co-owner to the extent of one-seventh (1/7) of subject property as Saturnina was not subrogated
to Alberto’s rights when she repurchased his share to the property. It further directed petitioner
Nelson to pay the estate of the late Saturnina Cabales the amount of ₱966.66, representing the
amount which the latter paid for the obligation of petitioner Nelson’s late father Alberto. Finally,
however, it denied petitioner Nelson’s claim for redemption for his failure to tender or consign
in court the redemption money within the period prescribed by law.
In this petition for review on certiorari, petitioners contend that the Court of Appeals erred in (1)
recognizing petitioner Nelson Cabales as co-owner of subject land but denied him the right of
legal redemption, and (2) not recognizing petitioner Rito Cabales as co-owner of subject land with
similar right of legal redemption.

First, we shall delineate the rights of petitioners to subject land.

When Rufino Cabales died intestate, his wife Saturnina and his six (6) children, Bonifacio, Albino,
Francisco, Leonora, Alberto and petitioner Rito, survived and succeeded him. Article 996 of the
New Civil Code provides that “[i]f a widow or widower and legitimate children or descendants
are left, the surviving spouse has in the succession the same share as that of each of the children.”
Verily, the seven (7) heirs inherited equally on subject property. Petitioner Rito and Alberto,
petitioner Nelson’s father, inherited in their own rights and with equal shares as the others.

But before partition of subject land was effected, Alberto died. By operation of law, his rights and
obligations to one-seventh of subject land were transferred to his legal heirs – his wife and his
son petitioner Nelson.

We shall now discuss the effects of the two (2) sales of subject land to the rights of the parties.

The first sale with pacto de retro to Dr. Corrompido by the brothers and co-owners Bonifacio,
Albino and Alberto was valid but only as to their pro-indiviso shares to the land. When Alberto
died prior to repurchasing his share, his rights and obligations were transferred to and assumed
by his heirs, namely his wife and his son, petitioner Nelson. But the records show that it was
Saturnina, Alberto’s mother, and not his heirs, who repurchased for him. As correctly ruled by
the Court of Appeals, Saturnina was not subrogated to Alberto’s or his heirs’ rights to the
property when she repurchased the share.

In Paulmitan v. Court of Appeals,3 we held that a co-owner who redeemed the property in its
entirety did not make her the owner of all of it. The property remained in a condition of co-
ownership as the redemption did not provide for a mode of terminating a co-ownership.4 But
the one who redeemed had the right to be reimbursed for the redemption price and until
reimbursed, holds a lien upon the subject property for the amount due.5 Necessarily, when
Saturnina redeemed for Alberto’s heirs who had then acquired his pro-indiviso share in subject
property, it did not vest in her ownership over the pro-indiviso share she redeemed. But she had
the right to be reimbursed for the redemption price and held a lien upon the property for the
amount due until reimbursement. The result is that the heirs of Alberto, i.e., his wife and his son
petitioner Nelson, retained ownership over their pro-indiviso share.

Upon redemption from Dr. Corrompido, the subject property was resold to respondents-spouses
by the co-owners. Petitioners Rito and Nelson were then minors and as indicated in the Deed of
Sale, their shares in the proceeds were held in trust by respondents-spouses to be paid and
delivered to them upon reaching the age of majority.

As to petitioner Rito, the contract of sale was unenforceable as correctly held by the Court of
Appeals. Articles 320 and 326 of the New Civil Code6 state that:

Art. 320. The father, or in his absence the mother, is the legal administrator of the property
pertaining to the child under parental authority. If the property is worth more than two thousand
pesos, the father or mother shall give a bond subject to the approval of the Court of First Instance.

Art. 326. When the property of the child is worth more than two thousand pesos, the father or
mother shall be considered a guardian of the child’s property, subject to the duties and
obligations of guardians under the Rules of Court.

In other words, the father, or, in his absence, the mother, is considered legal administrator of the
property pertaining to the child under his or her parental authority without need of giving a bond
in case the amount of the property of the child does not exceed two thousand pesos.7 Corollary
to this, Rule 93, Section 7 of the Revised Rules of Court of 1964, applicable to this case,
automatically designates the parent as legal guardian of the child without need of any judicial
appointment in case the latter’s property does not exceed two thousand pesos,8 thus:

Sec. 7. Parents as guardians. – When the property of the child under parental authority is worth
two thousand pesos or less, the father or the mother, without the necessity of court
appointment, shall be his legal guardian x x x x9
Saturnina was clearly petitioner Rito’s legal guardian without necessity of court appointment
considering that the amount of his property or one-seventh of subject property was ₱1,143.00,
which is less than two thousand pesos. However, Rule 96, Sec. 110 provides that:

Section 1. To what guardianship shall extend. – A guardian appointed shall have the care and
custody of the person of his ward, and the management of his estate, or the management of the
estate only, as the case may be. The guardian of the estate of a nonresident shall have the
management of all the estate of the ward within the Philippines, and no court other than that in
which such guardian was appointed shall have jurisdiction over the guardianship.

Indeed, the legal guardian only has the plenary power of administration of the minor’s property.
It does not include the power of alienation which needs judicial authority.11 Thus, when
Saturnina, as legal guardian of petitioner Rito, sold the latter’s pro-indiviso share in subject land,
she did not have the legal authority to do so.

Article 1403 of the New Civil Code provides, thus:

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

(1) Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers;

Xxxx

Accordingly, the contract of sale as to the pro-indiviso share of petitioner Rito was unenforceable.
However, when he acknowledged receipt of the proceeds of the sale on July 24, 1986, petitioner
Rito effectively ratified it. This act of ratification rendered the sale valid and binding as to him.

With respect to petitioner Nelson, on the other hand, the contract of sale was void. He was a
minor at the time of the sale. Saturnina or any and all the other co-owners were not his legal
guardians with judicial authority to alienate or encumber his property. It was his mother who was
his legal guardian and, if duly authorized by the courts, could validly sell his undivided share to
the property. She did not. Necessarily, when Saturnina and the others sold the subject property
in its entirety to respondents-spouses, they only sold and transferred title to their pro-indiviso
shares and not that part which pertained to petitioner Nelson and his mother. Consequently,
petitioner Nelson and his mother retained ownership over their undivided share of subject
property.12

But may petitioners redeem the subject land from respondents-spouses? Articles 1088 and 1623
of the New Civil Code are pertinent:

Art. 1088. Should any of the heirs sell his hereditary rights to a stranger before the partition, any
or all of the co-heirs may be subrogated to the rights of the purchaser by reimbursing him for the
price of the sale, provided they do so within the period of one month from the time they were
notified in writing of the sale by the vendor.

Art. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty
days from the notice in writing by the prospective vendor, or by the vendor, as the case may be.
The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an
affidavit of the vendor that he has given written notice thereof to all possible redemptioners.

The right of redemption of co-owners excludes that of adjoining owners.

Clearly, legal redemption may only be exercised by the co-owner or co-owners who did not part
with his or their pro-indiviso share in the property held in common. As demonstrated, the sale as
to the undivided share of petitioner Rito became valid and binding upon his ratification on July
24, 1986. As a result, he lost his right to redeem subject property.

However, as likewise established, the sale as to the undivided share of petitioner Nelson and his
mother was not valid such that they were not divested of their ownership thereto. Necessarily,
they may redeem the subject property from respondents-spouses. But they must do so within
thirty days from notice in writing of the sale by their co-owners vendors. In reckoning this period,
we held in Alonzo v. Intermediate Appellate Court,13 thus:
X x x we test a law by its results; and likewise, we may add, by its purposes. It is a cardinal rule
that, in seeking the meaning of the law, the first concern of the judge should be to discover in its
provisions the intent of the lawmaker. Unquestionably, the law should never be interpreted in
such a way as to cause injustice as this is never within the legislative intent. An indispensable part
of that intent, in fact, for we presume the good motives of the legislature, is to render justice.

Thus, we interpret and apply the law not independently of but in consonance with justice. Law
and justice are inseparable, and we must keep them so. X x x x

X x x x While we may not read into the law a purpose that is not there, we nevertheless have the
right to read out of it the reason for its enactment. In doing so, we defer not to “the letter that
killeth” but to “the spirit that vivifieth,” to give effect to the lawmaker’s will.

In requiring written notice, Article 1088 (and Article 1623 for that matter)14 seeks to ensure that
the redemptioner is properly notified of the sale and to indicate the date of such notice as the
starting time of the 30-day period of redemption. Considering the shortness of the period, it is
really necessary, as a general rule, to pinpoint the precise date it is supposed to begin, to obviate
the problem of alleged delays, sometimes consisting of only a day or two.1awph!1

In the instant case, the right of redemption was invoked not days but years after the sale was
made in 1978. We are not unmindful of the fact that petitioner Nelson was a minor when the
sale was perfected. Nevertheless, the records show that in 1988, petitioner Nelson, then of
majority age, was informed of the sale of subject property. Moreover, it was noted by the
appellate court that petitioner Nelson was likewise informed thereof in 1993 and he signified his
intention to redeem subject property during a barangay conciliation process. But he only filed
the complaint for legal redemption and damages on January 12, 1995, certainly more than thirty
days from learning about the sale.

In the face of the established facts, petitioner Nelson cannot feign ignorance of the sale of subject
property in 1978. To require strict proof of written notice of the sale would be to countenance
an obvious false claim of lack of knowledge thereof, thus commending the letter of the law over
its purpose, i.e., the notification of redemptioners.
The Court is satisfied that there was sufficient notice of the sale to petitioner Nelson. The thirty-
day redemption period commenced in 1993, after petitioner Nelson sought the barangay
conciliation process to redeem his property. By January 12, 1995, when petitioner Nelson filed a
complaint for legal redemption and damages, it is clear that the thirty-day period had already
expired.

As in Alonzo, the Court, after due consideration of the facts of the instant case, hereby interprets
the law in a way that will render justice.15

Petitioner Nelson, as correctly held by the Court of Appeals, can no longer redeem subject
property. But he and his mother remain co-owners thereof with respondents-spouses.
Accordingly, title to subject property must include them.

IN VIEW WHEREOF, the petition is DENIED. The assailed decision and resolution of the Court of
Appeals of October 27, 2003 and February 23, 2004 are AFFIRMED WITH MODIFICATION. The
Register of Deeds of Southern Leyte is ORDERED to cancel Original Certificate of Title No. 17035
and to issue in lieu thereof a new certificate of title in the name of respondents-spouses Jesus
and Anunciacion Feliano for the 6/7 portion, and petitioner Nelson Cabales and his mother for
the remaining 1/7 portion, pro indiviso.

SO ORDERED.