Republic of the Philippine1

Republic of the Philippines SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 156171 Spouses RICARDO and FERMA PORTIC,

Petitioners, - versus– ANASTACIA CRISTOBAL,

Respondent. Promulgated: April 22, 2005 DECISION PANGANIBAN, J.: An agreement in which ownership is reserved in the vendor and is not to pass to the vendee until full payment of the purchase price is known as a contract to sell. The absence of full payment suspends the vendors obligation to convey title. This principle holds true between the parties, even if the sale has already been registered. Registration does not vest, but merely serves as evidence of, title to a particular property. Our land registration laws do not give title holders any better ownership than what they actually had prior to registration.

The Case Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, challenging the January 29, 2002 Decision[2] and the November 18, 2002 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 66393. The assailed Decision disposed as follows: WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE. A new one is hereby entered ORDERING defendant-appellant to pay the unpaid balance of P55,000.00 plus legal interest of 6% per annum counted from the filing of this case. The ownership of defendant-appellant over the subject property is hereby confirmed. No pronouncement as to costs.[4]

In the challenged Resolution,[5] the CA denied petitioners Motion for Partial Reconsideration. The Facts

The facts were summarized by the appellate court as follows: Spouses Clodualdo Alcantara and Candelaria Edrosalam were the

original registered owners of a parcel of land with three-door apartment, located at No. 9, 1st Street BBB, Marulas, Valenzuela City. Transfer Certificate of Title No. T-71316 was issued in the names of spouses Clodualdo Alcantara and Candelaria Edrosalam.

On October 2, 1968, spouses Clodualdo Alcantara and Candelaria

Edrosalam sold the subject property in favor of [petitioners] with the

condition that the latter shall assume the mortgage executed over the subject property by spouses Clodualdo Alcantara and Candelaria Edrosalam in favor of the Social Security System.

[Petitioners] defaulted in the payment of the monthly

amortizations due on the mortgage. The Social Security System foreclosed the mortgage and sold the subject property at public auction with the Social Security System as the highest bidder.

On May 22, 1984, before the expiration of the redemption period,

[petitioners] sold the subject property in favor of [respondent] in consideration of P200,025.89. Among others, the parties agreed that [respondent] shall pay the sum of P45,025.89 as down payment and the balance of P155,000.00 shall be paid on or before May 22, 1985. The parties further agreed that in case [respondent] should fail to comply with the conditions, the sale shall be considered void and [petitioners] shall reimburse [respondent] of whatever amount already paid.

On the same date, [petitioners] and [respondent] executed a Deed

of Sale with Assumption of Mortgage whereby [petitioners] sold the subject property in favor of [respondent] in consideration of P80,000.00, P45,000.00 thereof shall be paid to the Social Security System.

On July 30, 1984, spouses Clodualdo Alcantara and Candelaria

Edrosalam, the original owners of the subject property, sold the subject property in favor of [respondent] for P50,000.00.

On the same date, [respondent] executed a Deed of Mortgage

whereby [respondent] constituted a mortgage over the subject property to secure a P150,000.00 indebtedness in favor of [petitioners].

[Respondent] paid the indebtedness due over the subject property

to the Social Security System. On August 6, 1984, Transfer Certificate of Title No. T-71316 in the

names of spouses Clodualdo Alcantara and Candelaria Edrosalam was cancelled and in lieu thereof Transfer Certificate of Title No. T-113299 was issued in the name of [respondent].

On May 20, 1996, [petitioners] demanded from [respondent] the

alleged unpaid balance of P55,000.00. [Respondent] refused to pay. On June 6, 1996, [petitioners] filed this instant civil case against

[respondent] to remove the cloud created by the issuance of TCT No. T-113299 in favor of [respondent]. [Petitioners] claimed that they sold the subject property to [respondent] on the condition that [respondent] shall pay the balance on or before May 22, 1985; that in case of failure to pay, the sale shall be considered void and [petitioners] shall reimburse [respondent] of the amounts already paid; that [respondent] failed to fully

pay the purchase price within the period; that on account of this failure, the sale of the subject property by [petitioners] to [respondent] is void; that in spite of this failure, [respondent] required [petitioners] to sign a lease contract over the apartment which [petitioners] occupy; that [respondent] should be required to reconvey back the title to the subject property to [petitioners].

[Respondent] on her part claimed that her title over the subject

property is already indefeasible; that the true agreement of the parties is that embodied in the Deed of Absolute Sale with Assumption of Mortgage; that [respondent] had fully paid the purchase price; that [respondent] is the true owner of the subject property; that [petitioners] claim is already barred by laches.[6]

After trial, the Regional Trial Court (RTC) of Valenzuela City rendered this judgment in favor of petitioners:

WHEREFORE, premises considered, this Court hereby adjudicates on this case as follows:

1.) The Court hereby orders the quieting of title or removal of cloud over the [petitioners] parcel of land and three (3) door apartment now covered by Transfer Certificate of Title No. T-113299 of the Registry of Deeds for Caloocan City and Tax Declaration Nos. C-018-00235 & C-031-012077 respectively, of Valenzuela City;

2.) The Court hereby orders the [respondent] to reconvey in favor of the [petitioners] the parcel of land and three (3) door apartment now covered by Transfer Certificate of Title No. T-113299 of the Registry of Deeds of Caloocan City after reimbursement by the [petitioners] of the amount actually paid by the [respondent] in the total amount of P145,025.89;

3.) The Court hereby DENIES damages as claimed by both parties.[7]

Ruling of the Court of Appeals

The Court of Appeals opined that the first Memorandum of Agreement (MOA) embodied the real agreement between the parties, and that the subsequent Deeds were executed merely to secure their respective rights over the property.[8] The MOA state that Cristobal had not fully paid the purchase price. Although this statement might have given rise to a cause of action to annul the Deed of Sale, prescription already set in because the case had been filed beyond the ten-year reglementary period,[9] as observed by the CA. Nonetheless, in conformity with the principle of unjust enrichment, the appellate court ordered respondent to pay petitioners the remaining balance of the purchase price.[10]

In their Motion for Partial Reconsideration, petitioners contended that their

action was not one for the enforcement of a written contract, but one for the quieting of title -- an action that was imprescriptible as long as they remained in possession of the premises.[11] The CA held, however, that the agreement between the parties was valid, and that respondents title to the property was amply supported by the evidence.[12] Therefore, their action for the quieting of title would not prosper, because they failed to show the invalidity of the cloud on their title.

Hence, this Petition.[13] The Issue In its Memorandum, petitioners raise the following issues for our consideration: (1) Whether or not the [petitioners] cause of action is for quieting of title. (2) Whether or not the [petitioners] cause of action has prescribed.[14]

The main issue revolves around the characterization of the parties agreement and the viability of petitioners cause of action. This Court’s Ruling The Petition has merit. Main Issue:

Nature of the Action: Quieting of Title or Enforcement of a Written Contract

Petitioners argue that the action they filed in the RTC was for the quieting of title. Respondents demand that they desist from entering into new lease agreements with the tenants of the property allegedly attests to the fact of their possession of the

subject premises.[15] Further, they point to the existence of Civil Case No. 7446, an action for unlawful detainer that respondent filed against them,[16] as further proof of that fact. Being in continuous possession of the property, they argue that their action for the quieting of title has not prescribed.[17]

On the other hand, respondent joins the appellate court in characterizing the

action petitioners filed in the RTC as one for the enforcement of the MOA. Being based on a written instrument, such action has already prescribed, respondent claims.[18] She adds that petitioners could not have been in continuous possession of the subject property because, under a duly notarized lease agreement, they have been paying her a monthly rental fee of P500, which was later increased to P800.

Two questions need to be answered to resolve the present case; namely, (1)

whether Cristobals title to the property is valid; and (2) whether the Portics are in possession of the premises, a fact that would render the action for quieting of title imprescriptible. Validity of Title

The CA held that the action for the quieting of title could not prosper, because Cristobals title to the property was amply supported by evidence.

Article 476 of the Civil Code provides as follows:

Whenever there is a cloud on title to real property or any interest

therein, by reason of any instrument, record, claim, encumbrance or proceeding which is apparently valid or effective but is in truth and in fact invalid, ineffective, voidable, or unenforceable, and may be prejudicial to said title, an action may be brought to remove such cloud or to quiet the title.

An action may also be brought to prevent a cloud from being cast

upon title to real property or any interest therein.

Suits to quiet title are characterized as proceedings quasi in rem.[19]

Technically, they are neither in rem nor in personam. In an action quasi in rem, an individual is named as defendant.[20] However, unlike suits in rem, a quasi in rem judgment is conclusive only between the parties.[21]

Generally, the registered owner of a property is the proper party to bring an

action to quiet title. However, it has been held that this remedy may also be availed of by a person other than the registered owner because, in the Article reproduced above, title does not necessarily refer to the original or transfer certificate of title.[22] Thus, lack of an actual certificate of title to a property does not necessarily bar an action to quiet title. As will be shown later, petitioners have not turned over and have thus retained their title to the property.

On the other hand, the claim of respondent cannot be sustained. The transfer

of ownership of the premises in her favor was subject to the suspensive condition stipulated by the parties in paragraph 3 of the MOA, which states as follows:

3. That while the balance of P155,000.00 has not yet been fully

paid the FIRST PARTY OWNERS shall retain the ownership of the above described parcel of land together with its improvements but the SECOND PARTY BUYER shall have the right to collect the monthly rentals due on the first door (13-A) of the said apartment;[23]

The above-cited provision characterizes the agreement between the parties as a

contract to sell, not a contract of sale. Ownership is retained by the vendors, the Portics; it will not be passed to the vendee, the Cristobals, until the full payment of the purchase price. Such payment is a positive suspensive condition, and failure to comply with it is not a breach of obligation; it is merely an event that prevents the effectivity of the obligation of the vendor to convey the title.[24] In short, until the full price is paid, the vendor retains ownership.

The mere issuance of the Certificate of Title in favor of Cristobal did not vest

ownership in her. Neither did it validate the alleged absolute purchase of the lot. Time and time again, this Court has stressed that registration does not vest, but merely serves as evidence of, title. Our land registration laws do not give the holders any better title than that which they actually have prior to registration. [25]

Under Article 1544 of the Civil Code, mere registration is not enough to acquire

a new title. Good faith must concur.[26] Clearly, respondent has not yet fully paid the purchase price. Hence, as long as it remains unpaid, she cannot feign good faith. She is also precluded from asserting ownership against petitioners. The appellate courts finding that she had a valid title to the property must, therefore, be set aside. Continuous Possession

The issue of whether the Portics have been in actual, continuous possession of the premises is necessarily a question of fact. Well-entrenched is the rule that findings of fact of the Court of Appeals, when supported by substantial evidence, are final and conclusive and may not be reviewed on appeal.[27] This Court finds no cogent reason to disturb the CAs findings sustaining those of the trial court, which held that petitioners had been in continuous possession of the premises. For this reason, the action to quiet title has not prescribed.

WHEREFORE, the Petition is GRANTED. The challenged Decision and

Resolution of the Court of Appeals are REVERSEDand SET ASIDE.The Decision of the RTC of Valenzuela City in Civil Case No. 4935-V-96, dated September 23, 1999, is hereby REINSTATED. No pronouncement as to costs. SO ORDERED.

SECOND DIVISION [G.R. No. 158646. June 23, 2005] HEIRS OF JESUS M. MASCUANA, represented by JOSE MA. R. MASCUANA,

petitioners, vs.

COURT OF APPEALS, AQUILINO BARTE, and SPOUSES RODOLFO and CORAZON LAYUMAS,

respondents. D E C I S I O N CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 53117 affirming the Decision[2] of the Regional Trial Court (RTC) of San Carlos City, Negros Occidental, which ordered the dismissal of the petitioners complaint for recovery of possession and damages.

The Antecedents

Gertrudis Wuthrich and her six other siblings were the co-owners of a parcel of land identified as Lot No. 124 of the San Carlos City, Negros Occidental Cadastre, with an area of 1,729 square meters and covered by Transfer Certificate of Title (TCT) No. 1453-R (T-29937)-38.[3] Over time, Gertrudis and two other co-owners sold each of their one-seventh (1/7) shares, or a total area of 741 square meters, to Jesus Mascuana. The latter then sold a portion of his 140-square-meter undivided share of the property to Diosdado Sumilhig. Mascuana later sold an additional 160-square-meter portion to Sumilhig on April 7, 1961. However, the parties agreed to revoke the said deed of sale and, in lieu thereof, executed a Deed of Absolute Sale on August 12, 1961. In the said deed, Mascuana, as vendor, sold an undivided 469-square-meter portion of the property for P4,690.00, with P3,690.00 as down payment, and under the following terms of payment:

That the balance of ONE THOUSAND PESOS (P1,000.00) shall be paid by the VENDEE unto the VENDOR as soon as the above-portions of Lot 124 shall have been surveyed in the name of the VENDEE and all papers pertinent and necessary to the issuance of a separate Certificate of Title in the name of the VENDEE shall have been prepared.[4]

On December 31, 1961, Mascuana and Jose G. Estabillo executed a Deed of Exchange and Absolute Sale of Real Estate,[5] in which Estabillo deeded to Mascuana a portion of his property abutting that of Sumilhig on the southeast.

In the meantime, a survey was conducted for the co-owners of Lot No. 124 on July 9, 1962. The subdivision plan of the said lot was approved by the Director of Lands on August 2, 1962. The portion of the property deeded to Sumilhig was identified in the said plan as Lot No. 124-B.[6]

Meanwhile, Mascuana died intestate on April 20, 1965 and was survived by his heirs, Eva M. Ellisin, Renee Hewlett, Carmen Vda. de Opea, Marilou Dy and Jose Ma. R. Mascuana.

On April 24, 1968, Sumilhig executed a Deed of Sale of Real Property[7] on a portion of Lot No. 124-B with an area of 469 square meters and the improvements thereon, in favor of Corazon Layumas, the wife of Judge Rodolfo Layumas, for the price of P11,000.00. The spouses Layumas then had the property subdivided into two lots: Lot No. 124-B-2 with an area of 71 square meters under the name of Jesus Mascuana, and Lot No. 124-B-1, with an area of 469 square meters under their names.[8] The spouses Layumas took possession of the property and caused the cutting of tall grasses thereon. Upon the plea of a religious organization, they allowed a chapel to be constructed on a portion of the property.[9] In January 1985, the spouses Layumas allowed Aquilino Barte to stay on a portion of the property to ward

off squatters.[10] Barte and his kin, Rostom Barte, then had their houses constructed on the property.

On October 1, 1985, the spouses Layumas received a Letter[11] from the counsel of Renee Tedrew, offering to buy their share of the property for US$1,000.00. For her part, Corazon Layumas wrote Pepito Mascuana, offering to pay the amount of P1,000.00, the balance of the purchase price of the property under the deed of absolute sale executed by Mascuana and Sumilhig on August 12, 1961.[12] However, the addressee refused to receive the mail matter.[13]

Unknown to the spouses Layumas, TCT No. 8986[14] was issued over Lot No. 124-B in the name of Jesus Mascuana on March 17, 1986.

On November 17, 1986, the heirs of Mascuana filed a Complaint[15] for recovery of possession of Lot No. 124-B and damages with a writ of preliminary injunction, alleging that they owned the subject lot by virtue of successional rights from their deceased father. They averred that Barte surreptitiously entered the premises, fenced the area and constructed a house thereon without their consent.

Attached as annexes to the complaint were TCT No. 8986 and a certification[16] from the Office of the City Treasurer, Land Tax Division, vouching that the property in question was owned by the petitioners and that they had paid the taxes thereon until 1992.

In his answer to the complaint, Barte admitted having occupied a portion of Lot No. 124-B, but claimed that he secured the permission of Rodolfo Layumas, the owner of the subject property. He added that he did not fence the property, and that the petitioners did not use the same as a passageway in going to Broce Street from their house. Barte raised the following special defenses: (a) the petitioners were estopped from asserting ownership over the lot in question because they did not object when he occupied the said portion of the lot; (b) neither did the petitioners protest when a church was built on the property, or when residential houses were constructed thereon; (c) the petitioners still asked Barte and the other occupants whether they had notified Rodolfo Layumas of the constructions on the property; and (d) the heirs of Mascuana, through the lawyer of Mrs. Renee M. Tedrew, even wrote a letter[17] to Rodolfo Layumas on October 1, 1985, expressing her willingness to buy the subject property for US$1,000.00.

On April 8, 1991, the spouses Layumas filed a Motion for Leave to Intervene,[18] alleging therein that they had a legal interest in Lot No. 124-B-1 as its buyers from Sumilhig, who in turn purchased the same from Mascuana. In their answer in intervention,[19] the spouses Layumas alleged that they were the true owners of the subject property and that they had wanted to pay the taxes thereon, but the Land Tax clerk refused to receive their payments on account that the petitioners had already made such payment. The spouses Layumas further maintained that the petitioners had no cause of action against Barte, as they had authorized him to occupy a portion of Lot No. 124-B-1. The spouses Layumas also averred that the petitioners were estopped from denying their right of ownership and possession of the subject lot, as one of them had even offered to repurchase a portion of Lot No. 124-B

via letter. The said spouses interposed a counterclaim for damages, claiming ownership over the property, and prayed, thus:

WHEREFORE, it is most respectfully prayed that this HONORABLE COURT render judgment in favor of the Intervenors and the defendant Aquilino Barte, ordering:

1. That the complaint against Aquilino Barte be dismissed with costs against the plaintiff;

2. That the Intervenors spouses Judge Rodolfo S. Layumas and Corazon A. Layumas be declared as the legal and true owners of Lot 124-B;

3. That the plaintiffs should deliver immediately to the Intervenors, TCT No. 8986 which is in their possession;

4. That the plaintiffs be made to pay to the Intervenors the sum of THIRTY THOUSAND (P30,000.00) PESOS moral damages; TEN THOUSAND (P10,000.00) PESOS attorneys fees plus THREE HUNDRED (P300.00) PESOS as appearance fee per hearing.

Intervenors pray for such other relief and remedies as may be deemed by this Honorable Court as just and equitable in the premises.

At the trial, intervenor Rodolfo Layumas testified that he and his wife bought the subject property in 1968, and that nobody objected to their possession of the land, including the petitioners. In 1970, a religious organization asked his permission to construct a chapel on the disputed lot; he allowed the construction since the same would be used for the fiesta. He further declared that part of the chapel still stood on the property. In 1985, a fire razed the towns public market, thereby dislocating numerous people. Barte was one of the fire victims, who also happened to be a good friend and political supporter of Rodolfo. Out of goodwill, Barte was allowed to occupy a portion of the said lot, along with some other fire victims. Rodolfo clarified that the others were to stay there only on a temporary basis, but admitted that Bartes children

also stayed in the subject property.[20]

Rodolfo Layumas further narrated that in 1987, Corazon wrote one of the petitioners-heirs, Pepito Mascuana, requesting that the title of the lot be transferred in Sumilhigs name so that they could likewise arrange for the conveyance of the title in their names. Pepito failed to claim the letter, and thereafter, filed a case of ejectment against Barte and Rodolfo Layumas brother-in-law, Pepito Antonio. The case, the witness added, was dismissed as against the two parties. Offered in evidence were the following: a Sworn Statement on the Current and Fair Market Value of the Real Property issued in 1973 as required by Presidential Decree No. 76, and tax receipts.[21]

Rodolfo Layumas admitted on cross-examination that at the time they bought the property from Sumilhig, the title was still in the possession of the Wuthrich family. He added that he filed an adverse claim before the Register of Deeds of San Carlos City, Negros Occidental, on Lot No. 124-B in January 1986, or after the case had already been filed in court. Lastly, the witness deposed that he did not fence the property after buying the same, but that his brother-in-law constructed a coco-lumber yard thereon upon his authority.[22]

On January 30, 1996, the trial court rendered judgment in favor of Barte and the spouses Layumas. The fallo of the decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of Intervenors-counterclaimants and defendant and against plaintiffs-counterclaim defendants ordering as follows:

1. The dismissal of the plaintiffs complaint with costs against them;

2. The plaintiffs to jointly pay Intervenors-counterclaimants now RTC Judge

Rodolfo S. Layumas and Corazon A. Layumas:

(a) P10,000.00 for attorney’s fees; and (b) P30,000.00 as moral damages;

3. The plaintiffs, as counterclaim defendants, to comply with the above-stated obligation of their late father, Mr. Jesus Mascuana, under the Deed of Absolute Sale, Exh. 3, pp. 92-93, Exp., thru plaintiff Mr. Jose Mascuana, including the desegragation (sic) survey to desegregate the 469-square-meter portion of said Lot No. 124-B, San Carlos Cadastre, this province, sold to the late Diosdado Sumilhig, if the same has not yet been done despite what has been said herein earlier to said effect, and the execution of the Final Deed of Sale in their capacity as the heirs and successors-in-interest of the late Mr. Jesus Mascuana, thru Mr. Jose Mascuana, covering the 469-square-meter desegregated portion of said Lot No. 124-B, within sixty (60) days counted from the finality of this Decision, in favor of the Intervenors-spouses, after which the said Intervenors-spouses shall pay them, thru Mr. Jose Mascuana, the

P1,000.00 balance due to them as successors-in-interest of the late Mr. Jesus Mascuana;

4. In case plaintiffs fail to comply with what are herein ordered for them to do, the Clerk of Court V of this Court to do all that they were to do as herein ordered in the text and dispositive portion hereof, at the expense of Intervenors spouses to be later reimbursed by plaintiffs, including the desegregation (sic) survey of said 469-square-meter portion of said Lot [No.] 124-B, San Carlos Cadastre, Negros Occidental, if the same has not yet been done and the execution of the Final Deed of Sale on behalf of all the plaintiffs as heirs and successors-in-interest of the late Mr. Jesus Mascuana covering the said desegregated portion of 469 square meters of the aforesaid lot, in favor of Intervenors spouses, to the end that separate title therefor may be issued in their names, after they shall have paid the P1,000.00 balance due plaintiffs under said Deed of Absolute Sale, Exh. 3.

SO ORDERED.[23]

Forthwith, the petitioners appealed the case to the CA, raising the following

issues of fact and law:

a. Whether or not the contract of alienation of Lot No. 124-B in favor of Diosdado Sumilhig in 1961 was a contract to sell or a contract of sale;

b. Whether or not Diosdado Sumilhig had any right to sell Lot No. 124-B in favor of intervenor Corazon Layumas in 1968.[24]

On May 5, 2003, the CA affirmed the decision of the trial court. It ruled that the contract between the petitioners father and Sumilhig was one of sale. Foremost, the CA explained, the contract was denominated as a Deed of Absolute Sale. The stipulations in the contract likewise revealed the clear intention on the part of the vendor (Mascuana) to alienate the property in favor of the vendee (Sumilhig). In three various documents, the late Mascuana even made declarations that Sumilhig was already the owner of the disputed land. The CA added that the admission may be given in evidence against Mascuana and his predecessors-in-interest under Section 26, Rule 130 of the Revised Rules on Evidence. As to the argument that the contract between Mascuana and Sumilhig was not effective because it was subject to a suspensive condition that did not occur, the CA ruled that the condition referred to by the petitioners refers only to the payment of the balance of the purchase price and not to the effectivity of the contract.

As to the petitioners contention that even if the contract were one of sale, ownership cannot be transferred to Sumilhig because Mascuana was not yet the owner of the lot at the time of the alleged sale, the appellate court ruled that the registration of the land to be sold is not a prerequisite to a contract of sale.

The Present Petition

Aggrieved, the petitioners filed the instant petition for review on certiorari with this

Court, where the following lone legal issue was raised:

WAS THE SALE OF LOT NO. 124-B MADE BY JESUS M. MASCUANA IN FAVOR OF DIOSDADO SUMILHIG A CONTRACT TO SELL OR CONTRACT OF SALE?[25]

We note that the original action of the petitioners against Aquilino Barte was one for recovery of possession of Lot No. 124-B. With the intervention of the respondents Rodolfo and Corazon Layumas who claimed ownership over the property, and the acquiescence of the parties, evidence was adduced to prove who, between the petitioners (as plaintiffs) and the respondents (as defendants-intervenors) were the lawful owners of the subject property and entitled to its possession.

The petitioners resolutely contend that the Deed of Absolute Sale dated August 12, 1961 between their father and Sumilhig was a mere contract to sell because at the time of the said sale, the late Mascuana was not yet the registered owner of Lot No.

124 or any of its portions. They assert that Sumilhig could not have acquired any rights over the lot due to the fact that a person can only sell what he owns or is authorized to sell, and the buyer can acquire no more than what the seller can transfer legally. Finally, the petitioners insist that the document in controversy was subject to a suspensive condition, not a resolutory condition, which is a typical attribute of a contract of sale.

The petition is denied for lack of merit.

The issues raised by the petitioners in this case are factual, and under Rule 45 of the Rules of Court, only questions of law may be raised in this Court, the reason being that this Court is not a trier of facts. It is not to re-examine the evidence on record and to calibrate the same. Moreover, the findings and conclusions of the trial court as affirmed by the CA are conclusive on the Court, absent of any evidence that the trial court, as well as the CA ignored, misinterpreted and misconstrued facts and circumstances of substance which, if considered, would alter or reverse the outcome of the case.[26]

We have reviewed the records and find no justification for a reversal or even a modification of the assailed decision of the CA.

Even on the merits of the petition, the Court finds that the decision of the trial court as well as the ruling of the CA are based on the evidence on record and the applicable law.

The petitioners reiterated their pose that the deed of absolute sale over the property executed by their father, Jesus Mascuana, as vendor, and Diosdado Sumilhig as vendee, was a contract to sell and not a contract of sale. They assert that on its face, the contract appears to be a contract to sell, because the payment of the P1,000.00 balance of the purchase price was subject to a suspensive condition: the survey of the property, the segregation of the portion thereof subject of the sale, and the completion of the documents necessary for the issuance of a Torrens title over the property to and in the name of Sumilhig who was the vendee. The petitioners assert that Sumilhig never paid the aforesaid amount to the vendor; hence, the obligation of the latter and his predecessors-in-interest (herein petitioners) to execute a final deed of sale never arose. As such, they aver, title to the property remained reserved in the vendor and his heirs even after his death. There was no need for the vendor to rescind the deed or collect the said amount of P1,000.00 under Article 1191 of the New Civil Code because such a remedy applies only to contracts of sale. The petitioners insist that Sumilhig never acquired title over the property; he could not have transferred any title to the respondents. Sumilhig could not have transferred that which he did not own.

The petitioners contention has no factual and legal bases.

The deed of absolute sale executed by Jesus Mascuana and Sumilhig, provides, thus:

That the VENDOR is the true and absolute owner of a parcel of land known as Lot No. 124 of the Cadastral Survey of San Carlos, situated at Broce Street and is free from liens and encumbrances, and covered by O.C.T. No. T-299[3]7 (R-1453) of Reg. of Deeds, Negros Occ.

That for and in consideration of the sum of FOUR THOUSAND SIX HUNDRED NINETY PESOS (P4,690.00), Philippine Currency, to be paid by the VENDEE in the manner hereinafter stated, the VENDOR does hereby sell, transfer, cede and convey, a portion of the above-described property containing an area of 469 square meters, the sketch of which can be found at the back of this document and having a frontage at Broce Street of around 14 meters, and from the Broce Street to the interior on its Southwest side with a length of 30.9 meters, with a length of 24.8 meters on its Northeast side where it turned to the right with a length of 2.8 meters and continuing to Northwest with a length of 6.72 meters, the backyard dimension is 17.5 meters to the Northwest, unto the VENDEE, his heirs and assigns, by way of Absolute Sale, upon the receipt of the down payment of THREE THOUSAND SIX HUNDRED NINETY

PESOS (P3,690.00), which is hereby acknowledged by the VENDOR as received by him.

That the balance of ONE THOUSAND PESOS (P1,000.00) shall be paid by the VENDEE unto the VENDOR as soon as the above-portions of Lot 124 shall have been surveyed in the name of the VENDEE and all papers pertinent and necessary to the issuance of a separate Certificate of Title in the name of the VENDEE shall have been prepared.

The evidence on record shows that during the lifetime of vendor Jesus Mascuana, and even after his death, his heirs, the petitioners herein, unequivocably declared that Diosdado Sumilhig was the owner of the property subject of this case, and that the respondents acquired title over the property, having purchased the same via a deed of absolute sale from Diosdado Sumilhig. Thus, on December 31, 1961, Jesus Mascuana and Jose Estabillo executed a Deed of Exchange and Absolute Sale of Real Estate, in which both parties declared that they were co-owners of portions of Lot No. 124 abutted by the property owned by Diosdado Sumilhig.[27]

In the subdivision plan of Lot No. 124, signed by Ricardo Quilop, Private Land Surveyor, following his survey of Lot No. 124 on July 9, 1962 for and in behalf of Jesus Mascuana, et al., it appears that Lot No. 124-B with an area of 540 square meters belonged to Diosdado Sumilhig,[28] which is abutted by Lot No. 124-C, owned by Jesus Mascuana.

On October 1, 1985, long after the death of Jesus Mascuana, one of his heirs, petitioner Renee Tedrew, through counsel, wrote respondent Rodolfo Layumas offering to buy the property occupied by his overseer Aquilino Barte for US$1,000.00:

ATTY. RODOLFO S. LAYUMAS San Carlos City Negros Occidental

Dear Atty. Layumas:

This has reference to the lot located at Broce Street, portions of which are presently occupied by Mr. Barte.

Mrs. Renee Tedrew (nee Agapuyan), who is now in the United States, would like to offer the amount of $1,000.00 to buy your share of the said lot.

If you are amenable, kindly inform the undersigned for him to communicate [with] Mrs. Tedrew in California.

Very truly yours,

(Sgd.) SAMUEL SM LEZAMA[29]

It was only after the respondents rejected the proposal of petitioner Renee Tedrew that the petitioners secured title over the property on March 17, 1986 in the name of Jesus Mascuana (already deceased at the time), canceling TCT No. 967 issued on July 6, 1962 under the name of Jesus Mascuana, who appears to be a co-owner of Lot No. 124 with an undivided two-seventh (2/7) portion thereof.[30]

While it is true that Jesus Mascuana executed the deed of absolute sale over the property on August 12, 1961 in favor of Diosdado Sumilhig for P4,690.00, and that it was only on July 6, 1962 that TCT No. 967 was issued in his name as one of the co-owners of Lot No. 124, Diosdado Sumilhig and the respondents nevertheless acquired ownership over the property. The deed of sale executed by Jesus Mascuana in favor of Diosdado Sumilhig on August 12, 1961 was a perfected contract of sale over the property. It is settled that a perfected contract of sale cannot be challenged on the ground of the non-transfer of ownership of the property sold at that time of the perfection of the contract, since it is consummated upon delivery of the property to the vendee. It is through tradition or delivery that the buyer acquires ownership of the

property sold. As provided in Article 1458 of the New Civil Code, when the sale is made through a public instrument, the execution thereof is equivalent to the delivery of the thing which is the object of the contract, unless the contrary appears or can be inferred. The record of the sale with the Register of Deeds and the issuance of the certificate of title in the name of the buyer over the property merely bind third parties to the sale. As between the seller and the buyer, the transfer of ownership takes effect upon the execution of a public instrument covering the real property.[31] Long before the petitioners secured a Torrens title over the property, the respondents had been in actual possession of the property and had designated Barte as their overseer.

Article 1458 of the New Civil Code provides:

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

A contract of sale may be absolute or conditional.

Thus, there are three essential elements of sale, to wit:

a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the price;

b) Determinate subject matter; and

c) Price certain in money or its equivalent.[32]

In this case, there was a meeting of the minds between the vendor and the vendee, when the vendor undertook to deliver and transfer ownership over the property covered by the deed of absolute sale to the vendee for the price of P4,690.00 of which P3,690.00 was paid by the vendee to the vendor as down payment. The vendor undertook to have the property sold, surveyed and segregated and a separate title therefor issued in the name of the vendee, upon which the latter would be obliged to pay the balance of P1,000.00. There was no stipulation in the deed that the title to the property remained with the vendor, or that the right to unilaterally resolve the contract upon the buyers failure to pay within a fixed period was given to such vendor. Patently, the contract executed by the parties is a deed of sale and not a contract to sell. As the Court ruled in a recent case:

In Dignos v. Court of Appeals (158 SCRA 375), we have said that, although denominated a Deed of Conditional Sale, a sale is still absolute where the contract is devoid of any proviso that title is reserved or the right to unilaterally rescind is stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to the buyer upon actual or constructive delivery (e.g. by the execution of a public document) of the property sold. Where the condition is imposed upon the perfection of the contract itself, the failure of the condition would prevent such perfection. If the condition is imposed on the obligation of a party which is not fulfilled, the other party may either waive the condition or refuse to proceed with the sale. (Art. 1545, Civil Code)

Thus, in one case, when the sellers declared in a Receipt of Down Payment that they received an amount as purchase price for a house and lot without any reservation of title until full payment of the entire purchase price, the implication was that they sold their property. In Peoples Industrial and Commercial Corporation v. Court of Appeals, it was stated:

A deed of sale is considered absolute in nature where there is neither a stipulation in the deed that title to the property sold is reserved in the seller until full payment of the price, nor one giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period.

Applying these principles to this case, it cannot be gainsaid that the contract of sale between the parties is absolute, not conditional. There is no reservation of ownership nor a stipulation providing for a unilateral rescission by either party. In

fact, the sale was consummated upon the delivery of the lot to respondent. Thus, Art. 1477 provides that the ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof.[33]

The condition in the deed that the balance of P1,000.00 shall be paid to the vendor by the vendee as soon as the property sold shall have been surveyed in the name of the vendee and all papers pertinent and necessary to the issuance of a separate certificate of title in the name of the vendee shall have been prepared is not a condition which prevented the efficacy of the contract of sale. It merely provides the manner by which the total purchase price of the property is to be paid. The condition did not prevent the contract from being in full force and effect:

The stipulation that the payment of the full consideration based on a survey shall be due and payable in five (5) years from the execution of a formal deed of sale is not a condition which affects the efficacy of the contract of sale. It merely provides the manner by which the full consideration is to be computed and the time within which the same is to be paid. But it does not affect in any manner the effectivity of the contract. [34]

In a contract to sell, ownership is retained by a seller and is not to be transferred to the vendee until full payment of the price. Such payment is a positive suspensive condition, the failure of which is not a breach of contract but simply an event that prevented the obligation from acquiring binding force.[35]

It bears stressing that in a contract of sale, the non-payment of the price is a resolutory condition which extinguishes the transaction that, for a time, existed and discharges the obligation created under the transaction.[36] A seller cannot unilaterally and extrajudicially rescind a contract of sale unless there is an express stipulation authorizing it. In such case, the vendor may file an action for specific performance or judicial rescission.[37]

Article 1169 of the New Civil Code provides that in reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him; from the moment one of the parties fulfills his obligation, delay by the other begins. In this case, the vendor (Jesus Mascuana) failed to comply with his obligation of segregating Lot No. 124-B and the issuance of a Torrens title over the property in favor of the vendee, or the latters successors-in-interest, the respondents herein. Worse, petitioner Jose Mascuana was able to secure title over the property under the name of his deceased father.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the petitioners.

SO ORDERED.

SECOND DIVISION

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court seeking the reversal of the Decision[1] of the Court of Appeals (CA) dated June 28, 1999 and the Resolution dated January 31, 2000 denying petitioners motion for reconsideration.[2]

These are the facts:

The spouses Jesus and Cristita Moneset (Monesets) are the registered owners of a 333-square meter land together with a house thereon situated at Sitio Laguna, Basak, Cebu City covered by Transfer Certificate of Title No. 78374.[3] On January 9, 1985, they executed a Contract to Sell Lot & House in favor of petitioner Winifreda Ursal (Ursal), with the following terms and conditions:

That the VENDOR (Cristita R. Moneset) offers to SELL and the VENDEE accepts to BUY at the agreed lump sum price of P130,000.00 payable on the installment basis as follows: 1. That on the date of the signing of this agreement, the VENDEE will tender an earnest money or downpayment of P50,000.00 to the VENDOR, and by these presents, the latter hereby acknowledges receipt of said amount from the former;

2. That the balance of the selling price of P80,000.00 shall be paid by the

VENDEE to the VENDOR in equal monthly installments of P3,000.00 starting the month of February, 1985, until said balance of the selling price shall be fully paid;

3. That if the VENDEE shall fail or in default to pay six (6) monthly installments to the VENDOR the herein agreement is deemed cancelled, terminated and/or rescinded and in such event, the VENDEE (sic) binds to refund to the VENDOR (sic) the deposit of P50,000.00 and with the latters (sic) obligation to pay the former (sic) as a corresponding refund for cost of improvements made in the premises by VENDEE;

4. That on the date of receipt of the downpayment of P50,000.00 by the VENDOR, it is mutually agreed for VENDEE to occupy and take physical possession of the premises as well as for the latter (VENDEE) to keep and hold in possession the corresponding transfer certificate of title No. ______ of the land in question which is the subject of this agreement;

WINIFREDA URSAL, G.R. No. 142411 Petitioner, Present: PUNO, Chairman,

- versus - AUSTRIA-MARTINEZ, CALLEJO, SR.,

TINGA, and CHICO-NAZARIO, JJ. COURT OF APPEALS, THE RURAL BANK OF LARENA (SIQUIJOR), INC. and SPOUSES JESUS MONESET and CRISTITA MONESET, Respondents.

Promulgated:

October 14, 2005

5. That on the date of final payment by the VENDEE to the VENDOR, the latter shall execute at her expense the corresponding document of DEED OF ABSOLUTE SALE for the former as well as the payment of realty clearances, BIR Capital Gain Tax, sales tax or transfer fees and attorney’s fees; that, for the issuance of title in VENDEEs name shall be the exclusive account of said VENDEE.[4]

Petitioner paid the down payment and took possession of the property. She

immediately built a concrete perimeter fence and an artesian well, and planted fruit bearing trees and flowering plants thereon which all amounted to P50,000.00. After paying six monthly installments, petitioner stopped paying due to the Monesets failure to deliver to her the transfer certificate of title of the property as per their agreement; and because of the failure of the Monesets to turn over said title, petitioner failed to have the contract of sale annotated thereon.[5]

Unknown to petitioner, the Monesets executed on November 5, 1985 an absolute deed of sale in favor of Dr. Rafael Canora, Jr. over the said property for P14,000.00.[6] On September 15, 1986, the Monesets executed another sale, this time with pacto de retro with Restituto Bundalo.[7] On the same day, Bundalo, as attorney-in-fact of the Monesets, executed a real estate mortgage over said property with Rural Bank of Larena (hereafter Bank) located in Siquijor for the amount of P100,000.00.[8] The special power of attorney made by the Monesets in favor of Bundalo as well as the real estate mortgage was then annotated on the title on September 16, 1986.[9] For the failure of the Monesets to pay the loan, the Bank served a notice of extrajudicial foreclosure dated January 27, 1988 on Bundalo.[10]

On September 30, 1989, Ursal filed an action for declaration of non-effectivity of mortgage and damages against the Monesets, Bundalo and the Bank. She claimed that the defendants committed fraud and/or bad faith in mortgaging the property she earlier bought from the Monesets with a bank located in another island, Siquijor; and the Bank acted in bad faith since it granted the real estate mortgage in spite of its knowledge that the property was in the possession of petitioner.[11]

The Monesets answered that it was Ursal who stopped paying the agreed monthly installments in breach of their agreement.[12] The Bank, on the other hand, averred that the title of the property was in the name of Cristita Radaza Moneset married to Jesus Moneset and did not show any legal infirmity.[13]

Bundalo, meanwhile, was not served summons because he could no longer be found at his given address.[14]

Trial on the merits proceeded. Thereafter, the Regional Trial Court of Cebu City, Branch 24, rendered its decision finding that Ursal is more credible than the Monesets and that the Monesets are liable for damages for fraud and breach of the contract to sell:

The evidence of [Ursal] show that she was the first to acquire a substantial interest over the lot and house by virtue of the execution of the Contract to Sell (Exh.

A). After the execution of Exh. A plaintiff took possession of the questioned lot and houseafter she made a downpayment of P50,000.00. [S]he paid the installments for six (6) months without fail. [However] plaintiff (stopped) paying the installment because defendant spouses failed to give her the Transfer Certificate of Title over the lot and house despite repeated demands. It is evident then that the first to violate the conditions of Exh. A were the defendants Spouses Moneset. This is the reason why plaintiff was not able to annotate Exh. A on the TCT. The evidence of plaintiff show that there was no intention on her part to discontinue paying the installments. In a reciprocal obligation, one cannot be compelled to do if the other party fails to do his part (Art. 1169, New Civil Code).

The acts of defendant Spouses Moneset in selling again the lot and house in question to Dr. Canora by executing a Deed of Absolute Sale; in selling the same on pacto de retro to defendant Bundalo; and in mortgaging the same to defendant Rural Bank of Larena are plainly and clearly fraudulent because they were done while Exh. A was still existing

and the transaction was done without notice to the plaintiff. As provided in Art. 1170 of the New Civil Code, those who are guilty of fraud in the performance of their obligation --- and those who in any manner contravene the tenor thereof, are liable for damages. Another ground for liability under this article is when there is fraud/deceit. In the instant case, there was fraud/deceit on the part of the defendant spouses Moneset when they executed the Deed of Sale to Dr. Canora; the Deed of Sale with Pacto de Retro to Bundalo and the Special Power of Attorney for Bundalo to execute for and in their behalf the Real Estate Mortgage with the Rural Bank of Larena knowing fully well that the Contract to Sell house and lot, Exh. A was still existing notwithstanding their violation to the provisions thereto. It is therefore crystal clear that defendant spouses Moneset are liable for damages.[15] As to the real estate mortgage, the trial court held that the same was valid and

the Bank was not under any obligation to look beyond the title, although the present controversy could have been avoided had the Bank been more astute in ascertaining the nature of petitioners possession of the property, thus:

The Real Estate Mortgage and the Foreclosure Proceedings cannot

be considered null and void in the sense that per se the formalities required by law were complied with except for the fact that behind their execution there was fraud, deceit and bad faith on the part of defendant spouses Moneset and Bundalo.

The defendant Rural Bank of Larena for its part could have avoided this situation if the bank appraiser who made the ocular inspection of the subject house and lot went deeper and investigated further when he learned that the owner is not the actual occupant. He was however told by Moneset that the actual occupant was only a lessee. Banking on this information that the actual occupant was only a lessee with no other right over and above such, the bank approved a loan of P100,000.00 in favor of Moneset through Bundalo their attorney-in-fact. Likewise the Rural Bank of Larena had the right to rely on what appeared on the certificate of title of the Monesets and it was under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of the certificate.

The approval of the P100,000.00 loan from the Rural Bank of Larena was made possible through the deception and bad faith of defendant spouses Moneset and Bundalo but the pertinent documents were per se in order. The court is of the honest belief that the case against the defendant bank be dismissed for lack of merit. The court however believes that for reasons of equity the bank should give the plaintiff Ursal the preferential right to redeem the subject house and lot.[16]

The trial court then disposed of the case as follows:

Wherefore premises considered, judgment is hereby rendered in favor of the defendant Rural Bank of Larena dismissing the complaint against it for lack of merit and against the defendant spouses Moneset ordering them to:

1. Reimburse to plaintiff Ursal the following:

a.) downpayment of P50,000.00 b.) monthly installments for six months at P3,000.00 per

month --- P18,000.00 c.) expenses improvements P61, 676.52

2. Pay to plaintiff the following:

a.) moral damages ----------------- P30,000.00 b.) exemplary damages ----------- P20,000.00 c.) litigation expenses------------- P 5,000.00

d.) attorneys fees ----------------- P10,000.00 e.) costs

3. Order the defendant Rural Bank of Larena to give the plaintiff the preferential right to redeem the subject house and lot.

SO ORDERED.[17]

Both Ursal and the Monesets appealed the decision to the CA. Ursal alleged

that the Bank was guilty of bad faith for not investigating the presence of Ursal on the property in question, while the Monesets claimed that the trial court erred in giving preferential right to Ursal to redeem the property and in ordering them to pay damages.[18]

The CA affirmed in toto the decision of the trial court. It held that the Bank did not have prior knowledge of the contract to sell the house and lot and the Monesets acted fraudulently thus they cannot be given preferential right to redeem the property and were therefore correctly ordered to pay damages.[19] The Monesets filed a motion for reconsideration which was denied outright for having been filed out of time.[20] Ursals motion for reconsideration was denied by the CA on January 31, 2000 for lack of merit.[21] Hence, the present petition raising the sole error:

That with grave abuse of discretion amounting to excess of jurisdiction, the Honorable Court of Appeals erred in rendering a decision and Resolution NOT in accordance with law and the applicable rulings of the Supreme Court.[22]

Petitioner claims that: the Bank was duly informed through its appraiser that

the house and lot to be mortgaged by Monesets were in the possession of a lessee; the Bank should have taken this as a cue to investigate further the Monesets right over the same; the case of Embrado vs. Court of Appeals (233 SCRA 335) held that where a purchaser neglects to make the necessary inquiry and closes his eyes to facts which should put a reasonable man on his guard to the possibility of the existence of a defect in his vendors title, he cannot claim that he is a purchaser in good faith; Sec. 50 of Act 496 provides that where a party has knowledge of a prior existing interest which is unregistered at the time he acquired the land, his knowledge of that prior unregistered interest has the effect of registration as to him and the Torrens system cannot be used as a shield against fraud; following Art. 2176 of the Civil Code, respondent Bank is obliged to pay for the damage done.[23]

Petitioner then prayed that the Deed of Real Estate Mortgage be declared as non-effective and non-enforceable as far as petitioner is concerned; that she be declared as the absolute owner of the house and lot in question; that the Monesets be ordered to execute a deed of absolute sale covering the subject property; and that the Bank be ordered to direct the collection or payment of the loan of P100,000.00 plus interest from the Monesets for they were the ones who received and enjoyed the said loan.[24]

On the other hand, respondent Bank in its Comment argues that: its interest in

the property was only that of mortgagee and not a purchaser thus its interest is limited only to ascertaining that the mortgagor is the registered owner; the case cited is inapplicable at bar since it involves the purchase of real property; Ursal was purportedly only a lessee of the property, thus as mortgagor who is not entitled to possess the mortgaged property, they no longer considered the lease in the processing and approval of the loan; Sec. 50 of Act No. 496 is also inapplicable since the alleged prior existing interest was only that of a lessee; in any case, it was the Monesets who lied to the Bank anent the real nature of the encumbrance, thus, it is the Monesets who are guilty of fraud and not the Bank.[25]

In her Rejoinder,[26] petitioner argued that: under the law on mortgage, the mortgagor must be the owner of the property he offers as security of his loan; the mortgagee like herein Bank which neglects to verify the ownership of the property offered as security of the loan runs the risk of his folly; the Banks negligence is not

excusable because an adverse claim and notice of lis pendens were already annotated on the certificate of title when the mortgage was constituted or when the deed of real estate mortgage was annotated; it would be unfair to put the blame on petitioner who was innocent of the transaction; the trial court found that the Bank even provided its appraiser the amount of P15,000.00 to redeem the pacto de retro sale allegedly executed in favor of Dr. Canora; this should have aroused the Banks suspicion and prompted it to investigate further the property; the trial court recognized the bad faith committed by the Monesets and ordered them to pay the sum of P126,676.52 in damages but exonerated the Bank who is equally guilty of bad faith; the Monesets cannot pay the damages as they have no money and property thus if the decision of the trial court as affirmed by the CA is to be enforced, they will only be holding an empty bag while the Bank which is equally guilty will go free; what would be fair is to let the two respondents bear jointly and severally the consequences of their transaction and let the innocent petitioner ultimately own the house and lot in question.[27]

The petitioner, in her Memorandum dated July 31, 2005, raised the issues of: (1) Whether or not the document captioned: Contract to Sell Lot and House (Exh. A) is valid and binding so much so that the herein Petitioner who is the Vendee is the lawful and true owner of the lot and house in question; (2) Whether or not the herein respondents spouses Jesus Moneset and Cristita Moneset who were the vendors and/or mortgagors together with respondent Restituto Bundalo were conniving and acting in bad faith; and (3) Whether or not respondent Rural Bank of Larena measured up to the strict requirement of making a thorough investigation of the property offered as collateral before granting a loan and be considered as innocent mortgagee and entitled to the protection of the law.[28] Petitioner reiterated her arguments in support of the first and third issues raised in the Memorandum while she merely adopted the CA findings in support of the second issue, i.e., when the Monesets encumbered the Transfer Certificate of Title (TCT) to Dr. Canora and thereafter to Bundalo, they committed bad faith or fraud since the contract to sell with Ursal was still valid and subsisting.[29]

Respondent Bank, in its Memorandum dated July 20, 2005, reiterated the

arguments it made in its Comment that: the case cited by petitioner requiring extra ordinary diligence is inapplicable in this case since what is involved here is mortgage and not sale; as mortgagee, its interest is limited only to determining whether the mortgagor is the registered owner of the property whose certificate of title showed that there were no existing encumbrances thereon; and even with unregistered encumbrances, the Bank has priority by the registration of the loan documents.[30]

No memorandum is filed by respondent Monesets. The crux of petitioners contention is that the Bank failed to look beyond the

transfer certificate of title of the property for which it must be held liable. We agree. Banks cannot merely rely on certificates of title in ascertaining the status of mortgaged properties; as their business is impressed with public interest, they are expected to exercise more care and prudence in their dealings than private individuals.[31] Indeed, the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.[32] As enunciated in Cruz vs. Bancom:[33]

Respondent is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greater care and prudence in its dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations.[34]

Our agreement with petitioner on this point of law, notwithstanding, we are

constrained to refrain from granting the prayers of her petition, to wit: that the Deed of Real Estate Mortgage be declared as non-effective and non-enforceable as far as petitioner is concerned; that she be declared as the absolute owner of the house and

lot in question; that the Monesets be ordered to execute a deed of absolute sale covering the subject property; and that the Bank be ordered to direct the collection or payment of the loan of P100,000.00 plus interest from the Monesets for they were the ones who received and enjoyed the said loan.[35] The reason is that, the contract between petitioner and the Monesets being one of Contract to Sell Lot and House, petitioner, under the circumstances, never acquired ownership over the property and her rights were limited to demand for specific performance from the Monesets, which at this juncture however is no longer feasible as the property had already been sold to other persons.

A contract to sell is a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price.[36]

In such contract, the prospective seller expressly reserves the transfer of title to

the prospective buyer, until the happening of an event, which in this case is the full payment of the purchase price. What the seller agrees or obligates himself to do is to fulfill his promise to sell the subject property when the entire amount of the purchase price is delivered to him. Stated differently, the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by the prospective seller without further remedies by the prospective buyer.[37]

It is different from contracts of sale, since ownership in contracts to sell is

reserved by the vendor and is not to pass to the vendee until full payment of the purchase price, while in contracts of sale, title to the property passess to the vendee upon the delivery of the thing sold. In contracts of sale the vendor loses ownership over the property and cannot recover it unless and until the contract is resolved or rescinded, while in contracts to sell, title is retained by the vendor until full payment of the price.[38] In contracts to sell, full payment is a positive suspensive condition while in contracts of sale, non-payment is a negative resolutory condition.[39]

A contract to sell may further be distinguished from a conditional contract of

sale, in that, the fulfillment of the suspensive condition, which is the full payment of the purchase price, will not automatically transfer ownership to the buyer although the property may have been previously delivered to him. The prospective vendor still has to convey title to the prospective buyer by entering into a contract of absolute sale. While in a conditional contract of sale, the fulfillment of the suspensive condition renders the sale absolute and affects the sellers title thereto such that if there was previous delivery of the property, the sellers ownership or title to the property is automatically transferred to the buyer. [40]

Indeed, in contracts to sell the obligation of the seller to sell becomes

demandable only upon the happening of the suspensive condition, that is, the full payment of the purchase price by the buyer. It is only upon the existence of the

contract of sale that the seller becomes obligated to transfer the ownership of the thing sold to the buyer. Prior to the existence of the contract of sale, the seller is not obligated to transfer the ownership to the buyer, even if there is a contract to sell between them. [41]

In this case, the parties not only titled their contract as Contract to Sell Lot and

House but specified in their agreement that the vendor shall only execute a deed of absolute sale on the date of the final payment by vendee.[42] Such provision signifies that the parties truly intended their contract to be that of contract to sell.[43]

Since the contract in this case is a contract to sell, the ownership of the property

remained with the Monesets even after petitioner has paid the down payment and took possession of the property. In Flancia vs. Court of Appeals,[44]wherethe vendee in the contract to sell also took possession of the property, this Court held that the subsequent mortgage constituted by the owner over said property in favor of another

person was valid since the vendee retained absolute ownership over the property.[45] At most, the vendee in the contract to sell was entitled only to damages.[46]

Petitioner attributes her decision to stop paying installments to the failure of

the Monesets to comply with their agreement to deliver the transfer certificate of title after the down payment of P50,000.00. On this point, the trial court was correct in holding that for such failure, the Monesets are liable to pay damages pursuant to Art. 1169 of the Civil Code on reciprocal obligations.[47]

The vendors breach of the contract, notwithstanding, ownership still remained

with the Monesets and petitioner cannot justify her failure to complete the payment. In Pangilinan vs. Court of Appeals,[48] the vendees contended that their failure

to pay the balance of the total contract price was because the vendor reneged on its obligation to improve the subdivision and its facilities. In said case, the Court held that the vendees were barred by laches from asking for specific performance eight years from the date of last installment. The Court held that:

(the vendees) instead of being vigilant and diligent in asserting

their rights over the subject property had failed to assert their rights when the law requires them to act. Laches or stale demands is based upon grounds of public policy which requires, for the peace of society, the discouragement of stale claims and unlike the statute of limitations, is not a mere question of time but is principally a question of the inequity or unfairness of permitting a right or claim to be enforced or asserted.

The legal adage finds application in the case at bar. Tempus enim

modus tollendi obligations et actiones, quia tempus currit contra desides et sui juris contemptoresFor time is a means of dissipating obligations and actions, because time runs against the slothful and careless of their own rights.[49]

In this case, petitioner instituted an action for Declaration of Non-Effectivity of

Mortgage with Damages four years from the date of her last installment and only as a reaction to the foreclosure proceedings instituted by respondent Bank. After the Monesets failed to deliver the TCT, petitioner merely stopped paying installments and did not institute an action for specific performance, neither did she consign payment of the remaining balance as proof of her willingness and readiness to comply with her part of the obligation. As we held in San Lorenzo Development Corp. vs. Court of Appeals,[50] the perfected contract to sell imposed on the vendee the obligation to pay the balance of the purchase price. There being an obligation to pay the price, the vendee should have made the proper tender of payment and consignation of the price in court as required by law. Consignation of the amounts due in court is essential in order to extinguish the vendees obligation to pay the balance of the purchase price.[51] Since there is no indication in the records that petitioner even attempted to make the proper consignation of the amounts due, the obligation on the part of the Monesets to transfer ownership never acquired obligatory force.

In other words, petitioner did not acquire ownership over the subject property

as she did not pay in full the equal price of the contract to sell. Further, the Monesets breach did not entitle petitioner to any preferential treatment over the property especially when such property has been sold to other persons.

As explained in Coronel vs. Court of Appeals:[52]

In a contract to sell, there being no previous sale of the property, a third person buying such property despite the fulfillment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title to the property will transfer to the buyer after registration because there is no defect in the owner-sellers title per se, but the latter, of course, may be sued for damages by the intending buyer.[53] (Emphasis supplied)

In this case, the lower courts found that the property was sold to Dr. Canora

and then to Bundalo who in turn acted as attorney-in-fact for the Monesets in mortgaging the property to respondent Bank. The trial court and the CA erred in giving petitioner the preferential right to redeem the property as such would prejudice the rights of the subsequent buyers who were not parties in the proceedings below. While the matter of giving petitioner preferential right to redeem the property was not put in issue before us, in the exercise of our discretionary power to correct manifest and palpable error, we deem it proper to delete said portion of the decision for being erroneous.[54]

Petitioners rights were limited to asking for specific performance and damages

from the Monesets. Specific performance, however, is no longer feasible at this point as explained above. This being the case, it follows that petitioner never had any cause of action against respondent Bank. Having no cause of action against the bank and not being an owner of the subject property, petitioner is not entitled to redeem the subject property.

Petitioner had lost her right to demand specific performance when the Monesets

executed a Deed of Absolute Sale in favor of Dr. Canora. Contrary to what she claims, petitioner had no vested right over the property.

Indeed, it is the Monesets who first breached their obligation towards petitioner

and are guilty of fraud against her. It cannot be denied however that petitioner is also not without fault. She sat on her rights and never consigned the full amount of the property. She therefore cannot ask to be declared the owner of the property, this late, especially since the same has already passed hands several times, neither can she question the mortgage constituted on the property years after title has already passed to another person by virtue of a deed of absolute sale.

At this point, let it be stated that the courts below and even this Court have no

jurisdiction to resolve the issue whether there was bad faith among the Monesets, Canora and Bundalo. Canora was never impleaded. Bundalo has not been served with summons.

WHEREFORE, the petition is DENIED. The decision of the Regional Trial Court

of Cebu City, Branch 24, promulgated on February 5, 1993 and the decision of the Court of Appeals dated June 28, 1999 are hereby AFFIRMED. However, in the higher interest of substantial justice, the Court MODIFIES the same to the effect that the portion ordering the Rural Bank of Larena (Siquijor), Inc. to give petitioner the preferential right to redeem the house and lot covered by Transfer Certificate of Title No. 78374 is DELETED for lack of legal basis.

No costs. SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila THIRD DIVISION

FERNANDO CARRASCOSO, JR.,

Petitioner, -versus- THE HONORABLE COURT OF APPEALS, LAURO LEVISTE, as Director and Minority Stockholder and On Behalf of Other Stockholders of El Dorado Plantation, Inc. and EL DORADO PLANTATION, INC., represented by one of its minority stockholders, Lauro P. Leviste,

Respondents. x---------------------------------------x PHILIPPINE LONG DISTANCE TELEPHONE COMPANY,

Petitioner,

-versus-

LAURO LEVISTE, as Director and Minority Stockholder and On Behalf of Other Stockholders of El Dorado Plantation, Inc., EL DORADO PLANTATION, INC., represented by Minority Stockholder, Lauro P. Leviste, and FERNANDO CARRASCOSO, JR.

Respondents. G.R. No. 123672 Present:

PANGANIBAN, J., Chairman, SANDOVAL-GUTIERREZ, CORONA, CARPIO MORALES, and GARCIA, JJ.

G. R. No. 164489 Promulgated: December 14, 2005 x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x D E C I S I O N CARPIO MORALES, J.:

El Dorado Plantation, Inc. (El Dorado) was the registered owner of a parcel of land (the property) with an area of approximately 1,825 hectares covered by Transfer Certificate of Title (TCT) No. T-93[1] situated in Sablayan, Occidental Mindoro.

On February 15, 1972, at a special meeting of El Dorados Board of Directors, a

Resolution[2] was passed authorizing Feliciano Leviste, then President of El Dorado, to negotiate the sale of the property and sign all documents and contracts bearing thereon.

On March 23, 1972, by a Deed of Sale of Real Property,[3] El Dorado, through

Feliciano Leviste, sold the property to Fernando O. Carrascoso, Jr. (Carrascoso). The pertinent provisions of the Deed of Sale read:

NOW, THEREFORE, for and in consideration of the sum of ONE MILLION EIGHT HUNDRED THOUSAND (1,800,000.00) PESOS, Philippine Currency, the Vendor hereby sells, cedes, and transfer (sic) unto the herein VENDEE, his heirs, successors and assigns, the above-described property subject to the following terms and conditions (sic):

1. Of the said sum of P1,800,000.00 which constitutes the full

consideration of this sale, P290,000.00 shall be paid, as it is hereby paid, to

the Philippines (sic) National Bank, thereby effecting the release and cancellation fo (sic) the present mortgage over the above-described property.

2. That the sum of P210,000.00 shall be paid, as it is hereby paid by

the VENDEE to the VENDOR, receipt of which amount is hereby acknowledged by the VENDOR.

3. The remaining balance of P1,300,000.00 plus interest thereon at

the rate of 10% per annum shall be paid by the VENDEE to the VENDOR within a period of three (3) years, as follows:

(a) One (1) year from the date of the signing of this agreement, the

VENDEE shall pay to the VENDOR the sum of FIVE HUNDRED NINETEEN THOUSAND EIGHT HUNDRED THIRTY THREE & 33/100 (P519,833.33) PESOS.

(b) Two (2) years from the date of signing of this agreement, the

VENDEE shall pay to the VENDOR the sum of FIVE HUNDRED NINETTEN (sic) THOUSAND EIGHT HUNDRED AND THIRTY-THREE & 33/100 (P519,833.33) PESOS.

(c) Three (3) years from the date of signing of this agreement, the

VENDEE shall pay to the VENDOR the sum of FIVE Hundred NINETEEN THOUSAND EIGHT HUNDRED AND THIRTY-THREE & 33/100 (P519,833.33) PESOS.

4. The title of the property, subject of this agreement, shall pass and

be transferred to the VENDEE who shall have full authority to register the same and obtain the corresponding transfer certificate of title in his name.

xxx 6. THE VENDOR certifies and warrants that the property above-

described is not being cultivated by any tenant and is therefore not covered by the provisions of the Land Reform Code. If, therefore, the VENDEE becomes liable under the said law, the VENDOR shall reimburse the VENDEE for all expenses and damages he may incur thereon.[4] (Underscoring supplied)

From the above-quoted provisions of the Deed of Sale, Carrascoso was to pay the

full amount of the purchase price on March 23, 1975. On even date, the Board of Directors of El Dorado passed a Resolution reading:

RESOLVED that by reason of the sale of that parcel of land covered by TCT No. T-93 to Dr. FERNANDO O. CARRASCOSO, JR., the corporation interposes no objection to the property being mortgage (sic) by Dr. FERNANDO O. CARRASCOSO, JR. to any bank of his choice as long as the balance on the Deed of Sale shall be recognized by Dr. FERNANDO O. CARRASCOSO, JR.;

RESOLVED, FURTHER, that the corporation authorizes the prefered

(sic) claim on the property to be subordinated to any mortgage that may be constituted by Dr. FERNANDO O. CARRASCOSO, JR.;

RESOLVED, FINALLY, that in case of any mortgage on the property,

the corporation waives the preference of any vendors lien on the property.[5] (Emphasis and underscoring supplied)

Feliciano Leviste also executed the following affidavit on the same day:

1. That by reason of the sale of that parcel of land covered by Transfer Certificate of Title T-93 as evidenced by the Deed of Sale attached hereto as Annex A and made an integral part hereof, the El Dorado Plantation, Inc. has no objection to the aforementioned property being mortgaged by Dr. Fernando O. Carrascoso, Jr. to any bank of his choice, as long as the payment of the balance due the El Dorado Plantation, Inc. under the Deed of Sale, Annex A hereof, shall be

recognized by the vendee therein, Dr. Fernando O. Carrascoso, Jr. though subordinated to the preferred claim of the mortgagee bank.

2. That in case of any mortgage on the property, the vendor hereby

waives the preference of any vendors lien on the property, subject matter of the deed of sale.

3. That this affidavit is being executed to avoid any question on the

authority of Dr. Fernando O. Carrascoso, Jr. to mortgage the property subject of the Deed of Sale, Annex A hereof, where the purchase price provided therein has not been fully paid.

4. That this affidavit has been executed pursuant to a board

resolution of El Dorado Plantation, Inc.[6] (Emphasis and underscoring supplied) On the following day, March 24, 1972, Carrascoso and his wife Marlene executed a

Real Estate Mortgage[7] over the property in favor of Home Savings Bank (HSB) to secure a loan in the amount of P1,000,000.00. Of this amount, P290,000.00 was paid to Philippine National Bank to release the mortgage priorly constituted on the property and P210,000.00 was paid to El Dorado pursuant to above-quoted paragraph Nos. 1 and 2 of the terms and conditions of the Deed of Sale.[8]

The March 23, 1972 Deed of Sale of Real Property was registered and annotated on

El Dorados TCT No. T-93 as Entry No. 15240[9] on April 5, 1972. On even date, TCT No. T-93 covering the property was cancelled and TCT No. T-6055[10] was in its stead issued by the Registry of Deeds of Occidental Mindoro in the name of Carrascoso on which the real estate mortgage in favor of HSB was annotated as Entry No. 15242.[11]

On May 18, 1972, the real estate mortgage in favor of HSB was amended to include

an additional three year loan of P70,000.00 as requested by the spouses Carrascoso.[12] The Amendment of Real Estate Mortgage was also annotated on TCT No. T-6055 as Entry No. 15486 on May 24, 1972.[13]

The 3-year period for Carrascoso to fully pay for the property on March 23, 1975

passed without him having complied therewith. In the meantime, on July 11, 1975, Carrascoso and the Philippine Long Distance

Telephone Company (PLDT), through its President Ramon Cojuangco, executed an Agreement to Buy and Sell[14] whereby the former agreed to sell 1,000 hectares of the property to the latter at a consideration of P3,000.00 per hectare or a total of P3,000,000.00.

The July 11, 1975 Agreement to Buy and Sell was not registered and annotated on

Carrascosos TCT No. T-6055. Lauro Leviste (Lauro), a stockholder and member of the Board of Directors of El

Dorado, through his counsel, Atty. Benjamin Aquino, by letter[15] dated December 27, 1976, called the attention of the Board to Carrascosos failure to pay the balance of the purchase price of the property amounting to P1,300,000.00. And Lauros lawyer manifested that:

Because of the default for a long time of Mr. Carrascoso to pay the

balance of the consideration of the sale, Don Lauro Leviste, in his behalf and in behalf of the other shareholders similarly situated like him, want a rescission of the sale made by the El Dorado Plantation, Inc. to Mr. Carrascoso. He desires that the Board of Directors take the corresponding action for rescission.[16]

Lauros desire to rescind the sale was reiterated in two other letters[17] addressed

to the Board dated January 20, 1977 and March 3, 1977. Jose P. Leviste, as President of El Dorado, later sent a letter of February 21,

1977[18] to Carrascoso informing him that in view of his failure to pay the balance of the purchase price of the property, El Dorado was seeking the rescission of the March 23, 1972 Deed of Sale of Real Property.

The pertinent portions of the letter read:

x x x

I regret to inform you that the balance of P1,300,000.00 and the interest thereon have long been due and payable, although you have mortgaged said property with the Home Savings Bank for P1,000,000.00 on March 24, 1972, which was subsequently increased to P1,070,000.00 on May 18, 1972. You very well know that the El Dorado Plantation, Inc., is a close family corporation, owned exclusively by the members of the Leviste family and I am one of the co-owners of the land. As nothing appears to have been done on your part after our numerous requests for payment of the said amount of P1,300,000.00 and the interest of 10% per annum due thereon, please be advised that we would like to rescind the contract of sale of the land.[19] (Underscoring supplied) Jose Leviste, by letter[20] dated March 10, 1977, informed Lauros counsel Atty.

Aquino of his (Joses) February 21, 1977 letter to Carrascoso, he lamenting that Carrascoso has not deemed it fit to give [his] letter the courtesy of a reply and advis[ing] that some of the Directors of [El Dorado] could not see their way clear in complying with the demands of your client [Lauro] and have failed to reach a consensus to bring the corresponding action for rescission of the contract against . . . Carrascoso.[21]

Lauro and El Dorado finally filed on March 15, 1977 a complaint[22] for rescission

of the March 23, 1972 Deed of Sale of Real Property between El Dorado and Carrascoso with damages before the Court of First Instance (CFI) of Occidental Mindoro, docketed as Civil Case No. R-226.

Lauro and El Dorado also sought the cancellation of TCT No. T-6055 in the name of

Carrascoso and the revival of TCT No.T-93 in the name of El Dorado, free from any liens and encumbrances. Furthermore, the two prayed for the issuance of an order for Carrascoso to: (1) reconvey the property to El Dorado upon return to him of P500,000.00, (2) secure a discharge of the real estate mortgage constituted on the property from HSB, (3) submit an accounting of the fruits of the property from March 23, 1972 up to the return of possession of the land to El Dorado, (4) turn over said fruits or the equivalent value thereof to El Dorado and (5) pay the amount of P100,000.00 for attorneys fees and other damages.[23]

Also on March 15, 1977, Lauro and El Dorado caused to be annotated on TCT No.

T-6055 a Notice of Lis Pendens, inscribed as Entry No. 39737.[24] In the meantime, Carrascoso, as vendor and PLDT, as vendee forged on April 6,

1977 a Deed of Absolute Sale[25] over the 1,000 hectare portion of the property subject of their July 11, 1975 Agreement to Buy and Sell. The pertinent portions of the Deed are as follows:

WHEREAS, the VENDOR and the VENDEE entered into an agreement

To Buy and Sell on July 11, 1975, which is made a part hereof by reference; WHEREAS, the VENDOR and the VENDEE are now decided to execute

the Deed of Absolute Sale referred to in the aforementioned agreement to Buy and Sell;

WHEREFORE, for and in consideration of the foregoing premises and

the terms hereunder stated, the VENDOR and the VENDEE have agreed as follows:

1. For and in consideration of the sum of THREE MILLION PESOS

(P3,000,000.00), Philippine currency, of which ONE HUNDRED TWENTY THOUSAND PESOS P120,000.00 have (sic) already been received by the VENDOR, the VENDOR hereby sells, transfers and conveys unto the VENDEE one thousand hectares (1,000 has.) of his parcel of land covered by T.C.T. No. T-6055 of the Registry of Deeds of Mindoro, delineated as Lot No. 3-B-1 in the subdivision survey plan xxx

2. The VENDEE shall pay to the VENDOR upon the signing of this agreement, the sum of TWO MILLION FIVE HUNDRED THOUSAND PESOS (P2,500,000.00) in the following manner:

a) The sum of TWO MILLION THREE HUNDRED THOUSAND PESOS

(P2,300,000.00) to Home Savings Bank in full payment of the VENDORs mortgaged obligation therewith;

b) The sum of TWO HUNDRED THOUSAND PESOS (P200,000.00) to

VENDOR; The remaining balance of the purchase price in the sum of THREE

HUNDRED EIGHTY THOUSAND PESOS (P380,000.00), less such expenses which may be advanced by the VENDEE but which are for the account of the VENDOR under Paragraph 6 of the Agreement to Buy and Sell, shall be paid by the VENDEE to the VENDOR upon issuance of title to the VENDEE.[26] (Underscoring supplied)

In turn, PLDT, by Deed of Absolute Sale[27] dated May 30, 1977, conveyed the

aforesaid 1,000 hectare portion of the property to its subsidiary, PLDT Agricultural Corporation (PLDTAC), for a consideration of P3,000,000.00, the amount of P2,620,000.00 of which was payable to PLDT upon signing of said Deed, and P380,000.00 to Carrascoso upon issuance of title to PLDTAC.

In the meantime, on October 19, 1977, the El Dorado Board of Directors, by a

special meeting,[28] adopted and approved a Resolution ratifying and conferring the prosecution of Civil Case No. R-226 of the Court of First Instance of Occidental Mindoro, entitled Lauro P. Leviste vs. Fernando Carascoso (sic), etc. initiated by stockholder Mr. Lauro P. Leviste.[29]

In his Answer with Compulsory Counterclaim,[30] Carrascoso alleged that: (1) he

had not paid his remaining P1,300,000.00 obligation under the March 23, 1972 Deed of Sale of Real Property in view of the extensions of time to comply therewith granted him by El Dorado; (2) the complaint suffered from fatal defects, there being no showing of compliance with the condition precedent of exhaustion of intra-corporate remedies and the requirement that a derivative suit instituted by a complaining stockholder be verified under oath; (3) El Dorado committed a gross misrepresentation when it warranted that the property was not being cultivated by any tenant to take it out of the coverage of the Land Reform Code; and (4) he suffered damages due to the premature filing of the complaint for which Lauro and El Dorado must be held liable.

On February 21, 1978, the April 6, 1977 and May 30, 1977 Deeds of Absolute Sale and the respective Articles of Incorporation of PLDT and PLDTAC were annotated on TCT No. T-6055 as Entry Nos. 24770,[31] 42774,[32] 42769[33] and 24772,[34] respectively. On even date, Carrascosos TCT No. T-6055 was cancelled and TCT No. T-12480[35] covering the 1,000 hectare portion of the property was issued in the name of PLDTAC. The March 15, 1977 Notice of Lis Pendens was carried over to TCT No. T-12480.

On July 31, 1978, PLDT and PLDTAC filed an Urgent Motion for Intervention[36]

which was granted by the trial court by Order[37] of September 7, 1978. PLDT and PLDTAC thereupon filed their Answer In Intervention with Compulsory

Counterclaim and Crossclaim[38] against Carrascoso on November 13, 1978, alleging that: (1) when Carrascoso executed the April 6, 1977 Deed of Absolute Sale in favor of PLDT, PLDT was not aware of any litigation involving the 1,000 hectare portion of the property or of any flaw in his title, (2) PLDT is a purchaser in good faith and for value; (3) when PLDT executed the May 30, 1977 Deed of Absolute Sale in favor of PLDTAC, they had no knowledge of any pending litigation over the property and neither were they aware that a notice of lis pendens had been annotated on Carrascosos title; and (4) Lauro and El Dorado knew of the sale by Carrascoso to PLDT and PLDTs actual possession of the 1,000 hectare portion of the property since June 30, 1975 and of its exercise of exclusive rights of ownership thereon through agricultural development.[39]

By Decision[40] of January 28, 1991, Branch 45 of the San Jose Occidental

Mindoro Regional Trial Court to which the CFI has been renamed, dismissed the complaint on the ground of prematurity, disposing as follows, quoted verbatim:

WHEREFORE, in view of all the foregoing considerations, judgment is hereby rendered:

1. Dismissing the plaintiffs complaint against the defendant on the

ground of prematurity; 2. Ordering the plaintiffs to pay to the defendant the sum of

P2,980,000.00 as actual and compensatory damages, as well as the sum of P100,000.00 as and for attorneys fees; provided, however, that the aforesaid amounts must first be set off from the latters unpaid balance to the former;

3. Dismissing the defendants-intervenors counterclaim and cross-

claim; and 4. Ordering the plaintiffs to pay to (sic) the costs of suit. SO ORDERED.[41] (Underscoring supplied)

Carrascoso, PLDT and PLDTAC filed their respective appeals to the Court of Appeals.

By Decision[42] of January 31, 1996, the appellate court reversed the decision of

the trial court, disposing as follows, quoted verbatim:

WHEREFORE, not being meritorious, PLDTs/PLDTACs appeal is hereby DISMISSED and finding El Dorados appeal to be impressed with merit, We REVERSE the appealed Decision and render the following judgment:

1. The Deed of Sale of Real Property (Exhibit C) is hereby rescinded

and TCT No. T-12480 (Exhibit Q) is cancelled while TCT No. T-93 (Exhibit A), is reactivated.

2. Fernando Carrascoso, Jr. is commanded to:

2.1. return the possession of the 825 [hectare-] remaining portion of the land to El Dorado Plantation, Inc. without prejudice to the landholdings of legitimate tenants thereon; 2.2. return the net fruits of the land to El Dorado Plantation, Inc. from March 23, 1972 to July 11, 1975, and of the 825-hectare-remaining portion minus the tenants landholdings, from July 11, 1975 up to its delivery to El Dorado Plantation, Inc. including whatever he may have received from the tenants if any by way of compensation under the Operation Land Transfer or under any other pertinent agrarian law; 2.3 Pay El Dorado Plantation, Inc. an attorneys fee of P20,000.00 and litigation expenses of P30,000.00; 2.4 Return to Philippine Long Distance Telephone Company/PLDT Agricultural Corporation P3,000,000.00 plus legal interest from April 6, 1977 until fully paid;

3. PLDT Agricultural Corporation is ordered to surrender the possession of the 1000-hectare Farm to El Dorado Plantation, Inc.;

4. El Dorado Plantation, Inc. is directed to return the P500,000.00 to

Fernando Carrascoso, Jr. plus legal interest from March 23, 1972 until fully paid. The performance of this obligation will however await the full compliance by Fernando Carrascoso, Jr. of his obligation to account for and deliver the net fruits of the land mentioned above to El Dorado Plantation, Inc.

5. To comply with paragraph 2.2 herein, Carrascoso is directed to submit in (sic) the court a quo a full accounting of the fruits of the land during the period mentioned above for the latters approval, after which the net fruits shall be delivered to El Dorado, Plantation, Inc.

6. El Dorado Plantation, Inc. should inform Philippine Long Distance Telephone Co. and PLDT Agricultural Corporation in writing within ten (10)

days after finality of this decision regarding the exercise of its option under Art. 448 of the Civil Code.

SO ORDERED.[43](Underscoring supplied)

PLDT and PLDTAC filed on February 22, 1996, a Motion for Reconsideration[44] of the January 31, 1996 CA Decision, while Carrascoso went up this Court by filing on March 25, 1996 a petition for review,[45] docketed as G.R. No. 123672, assailing the January 31, 1996 CA Decision and seeking the reinstatement of the January 28, 1991 Decision of the trial court except with respect to its finding that the acquisition of PLDT and PLDTAC of the 1,000 hectare portion of the property was subject to the notice of lispendens.

Lauro, in the meantime, died, hence, on April 16, 1996, a Motion for Substitution of

Party[46] was filed praying that his heirs, represented by Conrad C. Leviste, be substituted as respondents. The Motion was granted by Resolution[47] of July 10, 1996.

PLDT and PLDTAC filed their Comment[48] to Carrascosos petition and prayed that

judgment be rendered finding them to be purchasers in good faith to thus entitle them to possession and ownership of the 1,000 hectare portion of the property, together with all the improvements they built thereon. Reiterating that they were not purchaserspendente lite, they averred that El Dorado and Lauro had actual knowledge of their interests in the said portion of the property prior to the annotation of the notice of lis pendens to thereby render said notice ineffective.

El Dorado and the heirs of Lauro, both represented by Conrad C. Leviste, also filed

their Comment[49] to Carrascosos petition, praying that it be dismissed for lack of merit and that paragraph 6 of the dispositive portion of the January 31, 1996 CA Decision be modified to read as follows:

6. El Dorado Plantation, Inc. should inform Philippine Long Distance

Telephone Co. and PLDT Agricultural Corporation in writing within ten (10) days after finality of this decision regarding the exercise of its option under Arts. 449 and 450 of the Civil Code, without right to indemnity on the part of the latter should the former decide to keep the improvements under Article 449.[50] (Underscoring supplied)

Carrascoso filed on November 13, 1996 his Reply[51] to the Comment of El Dorado

and the heirs of Lauro. In the meantime, as the February 22, 1996 Motion for Reconsideration filed by PLDT

and PLDTAC of the CA decision had remained unresolved, this Court, by Resolution[52] of June 30, 2003, directed the appellate court to resolve the same.

By Resolution[53] of July 8, 2004, the CA denied PLDT and PLDTACs Motion for

Reconsideration for lack of merit. PLDT[54] thereupon filed on September 2, 2004 a petition for review[55] before this

Court, docketed as G.R. No. 164489, seeking to reverse and set aside the January 31, 1996 Decision and the July 8, 2004 Resolution of the appellate court. It prayed that judgment be rendered upholding its right, interest and title to the 1,000 hectare portion of the property and that it and its successors-in-interest be declared owners and legal possessors thereof, together with all improvements built, sown and planted thereon.

By Resolution[56] of August 25, 2004, G.R. No. 164489 was consolidated with G.R.

No. 123672. In his petition, Carrascoso faults the CA as follows:

I THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION AND COMMITTED A MISTAKE OF LAW IN NOT DECLARING THAT THE ACTION FOR RESCISSION WAS PREMATURELY FILED.

II THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION AND COMMITTED A MISTAKE OF LAW IN DISREGARDING THE CRUCIAL

SIGNIFICANCE OF THE WARRANTY OF NON-TENANCY EXPRESSLY STIPULATED IN THE CONTRACT OF SALE.

III THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION IN REVERSING THE DECISION OF THE TRIAL COURT.[57] (Underscoring supplied) PLDT, on the other hand, faults the CA as follows:

I THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT PETITIONER AND PLTAC (sic) TOOK THEIR RIGHT, INTEREST AND TITLE TO THE FARM SUBJECT TO THE NOTICE OF LIS PENDENS, THE SAME IN DISREGARD OF THE PROTECTION ACCORDED THEM UNDER ARTICLES 1181 AND 1187 OF THE NEW CIVIL CODE.

II THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT PETITIONER AND PLDTAC TOOK THEIR RIGHT, INTEREST AND TITLE TO THE FARM SUBJECT TO THE NOTICE OF LIS PENDENS, THE SAME IN DISREGARD OF THE LEGAL PRINCIPLE THAT RESPONDENTS EL DORADO ET AL.s PRIOR, ACTUAL KNOWLEDGE OF PETITIONER PLDTS AGREEMENT TO BUY AND SELL WITH RESPONDENT CARRASCOSO RESULTING IN THE DELIVERY TO, AND POSSESSION, OCCUPATION AND DEVELOPMENT BY, SAID PETITIONER OF THE FARM, IS EQUIVALENT TO REGISTRATION OF SUCH RIGHT, INTEREST AND TITLE AND, THEREFORE, A PRIOR REGISTRATION NOT AFFECTED BY THE LATER NOTICE OF LIS PENDENS.[58] (Underscoring supplied) Carrascoso posits that in the El Dorado Board Resolution and the Affidavit of

Feliciano Leviste, both dated March 23, 1972, no objection was interposed to his mortgaging of the property to any bank provided that the balance of the purchase price of the property under the March 23, 1972 Deed of Sale of Real Property is recognized, hence, El Dorado could collect the unpaid balance of P1,300,000.00 only after the mortgage in favor of HSB is paid in full; and the filing of the complaint for rescission with damages on March 15, 1977 was premature as he fully paid his obligation to HSB only on April 5, 1977 as evidenced by the Cancellation of Mortgage[59] signed by HSB President Gregorio B. Licaros.

Carrascoso further posits that extensions of the period to pay El Dorado were

verbally accorded him by El Dorados directors and officers, particularly Jose and Angel Leviste.

Article 1191 of the Civil Code provides:

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

The injured party may choose between the fulfillment and the

rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just

cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third

persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.

Reciprocal obligations are those which arise from the same cause, and in which

each party is a debtor and a creditor of the other, such that the obligation of one is

dependent upon the obligation of the other.[60] They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other.[61]

The right of rescission of a party to an obligation under Article 1191 is predicated

on a breach of faith by the other party who violates the reciprocity between them.[62] A contract of sale is a reciprocal obligation. The seller obligates itself to transfer the

ownership of and deliver a determinate thing, and the buyer obligates itself to pay therefor a price certain in money or its equivalent.[63] The non-payment of the price by the buyer is a resolutory condition which extinguishes the transaction that for a time existed, and discharges the obligations created thereunder.[64] Such failure to pay the price in the manner prescribed by the contract of sale entitles the unpaid seller to sue for collection or to rescind the contract.[65]

In the case at bar, El Dorado already performed its obligation through the

execution of the March 23, 1972 Deed of Sale of Real Property which effectively transferred ownership of the property to Carrascoso. The latter, on the other hand, failed to perform his correlative obligation of paying in full the contract price in the manner and within the period agreed upon.

The terms of the Deed are clear and unequivocal: Carrascoso was to pay the

balance of the purchase price of the property amounting to P1,300,000.00 plus interest thereon at the rate of 10% per annum within a period of three (3) years from the signing of the contract on March 23, 1972. When Jose Leviste informed him that El Dorado was seeking rescission of the contract by letter of February 21, 1977, the period given to him within which to fully satisfy his obligation had long lapsed.

The El Dorado Board Resolution and the Affidavit of Jose Leviste interposing no

objection to Carrascosos mortgaging of the property to any bank did not have the effect of suspending the period to fully pay the purchase price, as expressly stipulated in the Deed, pending full payment of any mortgage obligation of Carrascoso.

As the CA correctly found:

The adverted resolution (Exhibit 2) does not say that the obligation of Carrascoso to pay the balance was extended. Neither can We see in it anything that can logically infer said accommodation.

A partially unpaid seller can agree to the buyers mortgaging the

subject of the sale without changing the time fixed for the payment of the balance of the price. The two agreements are not incompatible with each other such that when one is to be implemented, the other has to be suspended. In the case at bench, there was no impediment for Carrascoso to pay the balance of the price after mortgaging the land.

Also, El Dorados subordinating its preferred claim or waiving its

superior vendors lien over the land in favor of the mortgagee of said property only means that in a situation where the unpaid price of the Land and loan secured by the mortgage over the Land both become due and demandable, the mortgagee shall have precedence in going after the Land for the satisfaction of the loan. Such accommodations do not necessarily imply the modification of the period fixed in the contract of sale for the payment by Carrascoso of the balance.

The palpable purpose of El Dorado in not raising any objection to

Carrascosos mortgaging the land was to eliminate any legal impediment to such a contract. That was so succinctly expressed in the Affidavit (Exhibit 2-A) of President Feleciano (sic) Leviste. El Dorados yielding its superior lien over the land in favor of the mortgagee was plainly intended to overcome the natural reluctance of lending institutions to accept a land whose price has not yet been fully paid as collateral of a loan.[66] (Underscoring supplied)

Respecting Carrascosos insistence that he was granted verbal extensions within

which to pay the balance of the purchase price of the property by El Dorados directors and officers Jose and Angel Leviste, this Court finds the same unsubstantiated by the evidence on record.

It bears recalling that Jose Leviste wrote Carrascoso, by letter of February 21, 1977, calling his attention to his failure to comply, despite numerous requests, with his obligation to pay the amount of P1,300,000.00 and 10% annual interest thereon, and advising him that we would like to rescind the contract of sale. This letter reiterated the term of payment agreed upon in the March 23, 1972 Deed of Sale of Real Property and Carrascososs non-compliance therewith.

Carrascoso, harping on Jose Levistes March 10, 1977 letter to Lauros counsel

wherein he (Jose Leviste) stated that some of the Directors of the corporation could not see their way clear in complying with the demands of [Lauro] and have failed to reach a consensus to bring the corresponding action for rescission of the contract against Dr. Fernando Carrascoso, argues that the extensions priorly given to him no doubt lead to the logical conclusion on some of the directors inability to file suit against him.[67]

The argument is specious. As the CA found, even if some officers of El Dorado were

initially reluctant to file suit against him, the same should not be interpreted to mean that this was brought about by a prior extension of the period to pay the balance of the purchase price of the property as such reluctance could have been due to a myriad of reasons totally unrelated to the period of payment of the balance.

The bottomline however is, if El Dorado really intended to extend the

period of payment of the balance there was absolutely no reason why it did not do it in writing in clear and unmistakable terms. That there is no such writing negates all the speculations of the court a quo and pretensions of Carrascoso.

x x x

The unalterable fact here remains that on March 23, 1973, with or without demand, the obligation of Carrascoso to pay P519,933.33 became due. The same was true on March 23, 1974 and on March 23, 1975 for equal amounts. Since he did not perform his obligation under the contract of sale, he, therefore, breached it. Having breached the contract, El Dorados cause of action for rescission of that contract arose.[68] (Underscoring supplied)

Carrascoso goes on to argue that the appellate court erred in ignoring the import of

the warranty of non-tenancy expressly stipulated in the March 23, 1972 Deed of Sale of Real Property. He alleges that on March 8, 1972 or two weeks prior to the execution of the Deed of Sale, he discovered, while inspecting the property on board a helicopter, that there were people and cattle in the area; when he confronted El Dorado about it, he was told that the occupants were caretakers of cattle who would soon leave;[69] four months after the execution of the Deed of Sale, upon inquiry with the Bureau of Lands and the Bureau of Soils, he was informed that there were people claiming to be tenants in certain portions of the property;[70] and he thus brought the matter again to El Dorado which informed him that the occupants were not tenants but squatters.[71]

Carrascoso now alleges that as a result of what he concludes to be a breach of the

warranty of non-tenancy committed by El Dorado, he incurred expenses in the amount of P2,890,000.00 for which he should be reimbursed, his unpaid obligation to El Dorado amounting to P1,300,000.00 to be deducted therefrom.[72]

The breach of an express warranty makes the seller liable for damages.[73] The

following requisites must be established in order that there be an express warranty in a contract of sale: (1) the express warranty must be an affirmation of fact or any promise by the seller relating to the subject matter of the sale; (2) the natural tendency of such affirmation or promise is to induce the buyer to purchase the thing; and (3) the buyer purchases the thing relying on such affirmation or promise thereon.[74]

Under the March 23, 1972 Deed of Sale of Real Property, El Dorado warranted that

the property was not being cultivated by any tenant and was, and therefore, not covered by the provisions of the Land Reform Code. If Carrascoso would become liable under the said law, he would be reimbursed for all expenses and damages incurred thereon.

Carrascoso claims to have incurred expenses in relocating persons found on the

property four months after the execution of the Deed of Sale. Apart from such bare claim, the records are bereft of any proof that those persons were indeed tenants.[75] The fact of

tenancy[76] not having been priorly established,[77] El Dorado may not be held liable for actual damages.

Carrascoso further argues that both the trial and appellate courts erred in holding

that the sale of the 1,000 hectare portion of the property to PLDT, as well as its subsequent sale to PLDTAC, is subject to the March 15, 1977 Notice of Lis Pendens.

PLDT additionally argues that the CA incorrectly ignored the Agreement to Buy and

Sell which it entered into with Carrascoso on July 11, 1975, positing that the efficacy of its purchase from Carrascoso, upon his fulfillment of the condition it imposed resulting in its decision to formalize their transaction and execute the April 6, 1977 Deed of Sale, retroacted to July 11, 1975 or before the annotation of the Notice of Lis Pendens.[78]

The pertinent portions of the July 11, 1975 Agreement to Buy and Sell between PLDT and Carrascoso read:

2. That the VENDOR hereby agrees to sell to the VENDEE and the

latter hereby agrees to purchase from the former, 1,000 hectares of the above-described parcel of land as shown in the map hereto attached as Annex A and made an integral part hereof and as hereafter to be more particularly determined by the survey to be conducted by Certeza & Co., at the purchase price of P3,000.00 per hectare or for a total consideration of Three Million Pesos (P3,000,000.00) payable in cash.

3. That this contract shall be considered rescinded and cancelled and

of no further force and effect, upon failure of the VENDOR to clear the aforementioned 1,000 hectares of land of all the occupants therein located, within a period of one (1) year from the date of execution of this Agreement. However, the VENDEE shall have the option to extend the life of this Agreement by another six months, during which period the VENDEE shall definitely inform the VENDOR of its decision on whether or not to finalize the deed of absolute sale for the aforementioned 1,000 hectares of land.

The VENDOR agrees that the amount of P500.00 per family within

the aforementioned 1,000 hectares of land shall be spent by him for relocation purposes, which amount however shall be advanced by the VENDEE and which shall not exceed the total amount of P120,000.00, the same to be thereafter deducted by the VENDEE from the aforementioned purchase price of P3,000,000.00.

The aforementioned advance of P120,000.00 shall be remitted by the

VENDEE to the VENDOR upon the signing of this Agreement.

x x x

It is likewise further agreed that the VENDEE shall have the right to enter into any part of the aforementioned 1,000 hectares at any time within the period of this Agreement for purposes of commencing the development of the same.

x x x

5. Title to the aforementioned land shall also be cleared of all liens or

encumbrances and if there are any unpaid taxes, existing mortgages, liens and encumbrances on the land, the payments to be made by the VENDEE to the VENDOR of the purchase price shall first be applied to liquidate said mortgages, liens and/or encumbrances, such that said payments shall be made directly to the corresponding creditors. Thus, the balance of the purchase price will be paid to the VENDOR after the title to the land is cleared of all such liens and encumbrances.

x x x

7. The VENDOR agrees that, during the existence of this Agreement and without the previous written permission from the VENDEE, he shall not sell, cede, assign and/or transfer the parcel of land subject of this Agreement.[79]

A notice of lis pendens is an announcement to the whole world that a particular real property is in litigation, and serves as a warning that one who acquires an interest over said property does so at his own risk, or that he gambles on the result of the litigation over said property.[80]

Once a notice of lis pendens has been duly registered, any cancellation or issuance

of title over the land involved as well as any subsequent transaction affecting the same would have to be subject to the outcome of the suit. In other words, a purchaser who buys registered land with full notice of the fact that it is in litigation between the vendor and a third party stands in the shoes of his vendor and his title is subject to the incidents and result of the pending litigation.[81]

x x x Notice of lis pendens has been conceived and, more often than

not, availed of, to protect the real rights of the registrant while the case involving such rights is pending resolution or decision. With the notice of lis pendens duly recorded, and while it remains uncancelled, the registrant could rest secure that he would not lose the property or any part of it during the litigation.

The filing of a notice of lis pendens in effect (1) keeps the subject

matter of litigation within the power of the court until the entry of the final judgment so as to prevent the defeat of the latter by successive alienations; and (2) binds a purchaser of the land subject of the litigation to the judgment or decree that will be promulgated thereon whether such a purchaser is a bona fide purchaser or not; but (3) does not create a non-existent right or lien.

The doctrine of lis pendens is founded upon reason of public policy

and necessity, the purpose of which is to keep the subject matter of the litigation within the power of the court until the judgment or decree shall have been entered; otherwise by successive alienations pending the litigation, its judgment or decree shall be rendered abortive and impossible of execution. The doctrine of lis pendens is based on considerations of public policy and convenience, which forbid a litigant to give rights to others, pending the litigation, so as to affect the proceedings of the court then progressing to enforce those rights, the rule being necessary to the administration of justice in order that decisions in pending suits may be binding and may be given full effect, by keeping the subject matter in controversy within the power of the court until final adjudication, that there may be an end to litigation, and to preserve the property that the purpose of the pending suit may not be defeated by successive alienations and transfers of title.[82] (Italics in the original)

In ruling against PLDT and PLDTAC, the appellate court held:

PLDT and PLDTAC argue that in reality the Farm was bought by the former on July 11, 1975 when Carrascoso and it entered into the Agreement to Buy and Sell (Exhibit 15). How can an agreement to buy and sell which is a preparatory contract be the same as a contract of sale which is a principal contract? If PLDTs contention is correct that it bought the Farm on July 11, 1975, why did it buy the same property again on April 6, 1977? There is simply no way PLDT and PLDTAC can extricate themselves from the effects of said Notice of Lis Pendens. It is admitted that PLDT took possession of the Farm on July 11, 1975 after the execution of the Agreement to Buy and Sell but it did so not as owner but as prospective buyer of the property. As prospective buyer which had actual on (sic) constructive notice of the lis pendens, why did it pursue and go through with the sale if it had not been willing to gamble with the result of this case?[83] (Underscoring supplied)

Further, in its July 8, 2004 Resolution, the CA held:

PLDT cannot shield itself from the notice of lis pendens because all that it had at the time of its inscription was an Agreement to Buy and Sell with CARRASCOSO, which in effect is a mere contract to sell that did not pass to it the ownership of the property. x x x

Ownership was retained by CARRASCOSO which EL DORADO may very well recover through its action for rescission. x x x PLDTs possession at the time the notice of lis pendens was registered not being a legal possession based on ownership but a mere possession in fact and the Agreement to Buy and Sell under which it supposedly took possession not being registered, it is not protected from an adverse judgment that may be rendered in the case subject of the notice of lis pendens.[84] (Underscoring supplied) In a contract of sale, the title passes to the vendee upon the delivery of the thing

sold; whereas in a contract to sell, ownership is not transferred upon delivery of the property but upon full payment of the purchase price.[85] In the former, the vendor has lost and cannot recover ownership until and unless the contract is resolved or rescinded; whereas in the latter, title is retained by the vendor until the full payment of the price, such payment being a positive suspensive condition and failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective.[86]

PLDT argues that the July 11, 1975 Agreement to Buy and Sell is a conditional

contract of sale, thus calling for the application of Articles 1181[87] and 1187[88] of the Civil Code as held in Coronel v. Court of Appeals.[89]

The Court is not persuaded. For in a conditional contract of sale, if the suspensive condition is fulfilled, the

contract of sale is thereby perfected, such that if there had already been previous delivery of the property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by operation of law without any further act having to be performed by the seller.[90] Whereas in a contract to sell, upon fulfillment of the suspensive condition, ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale.[91]

A perusal of the contract[92] adverted to in Coronel reveals marked differences

from the Agreement to Buy and Sell in the case at bar. In the Coronel contract, there was a clear intent on the part of the therein petitioners-sellers to transfer title to the therein respondent-buyer. In the July 11, 1975 Agreement to Buy and Sell, PLDT still had to definitely inform Carrascoso of its decision on whether or not to finalize the deed of absolute sale for the 1,000 hectare portion of the property, such that in the April 6, 1977 Deed of Absolute Sale subsequently executed, the parties declared that they are now decided to execute such deed, indicating that the Agreement to Buy and Sell was, as the appellate court held, merely a preparatory contract in the nature of a contract to sell. In fact, the parties even had to stipulate in the said Agreement to Buy and Sell that Carrascoso, during the existence of the Agreement, shall not sell, cede, assign and/or transfer the parcel of land, which provision this Court has held to be a typical characteristic of a contract to sell.[93]

Being a contract to sell, what was vested by the July 11, 1975 Agreement to Buy

and Sell to PLDT was merely the beneficial title to the 1,000 hectare portion of the property.

The right of Daniel Jovellanos to the property under the contract [to

sell] with Philamlife was merely an inchoate and expectant right which would ripen into a vested right only upon his acquisition of ownership which, as aforestated, was contingent upon his full payment of the rentals and compliance with all his contractual obligations thereunder. A vested right is an immediate fixed right of present and future enjoyment. It is to be distinguished from a right that is expectant or contingent. It is a right which is fixed, unalterable, absolute, complete and unconditional to the exercise of which no obstacle exists, and which is perfect in itself and not dependent upon a contingency. Thus, for a property right to be vested, there must be a transition from the potential or contingent to the actual, and the proprietary interest must have attached to a thing; it must have become fixed or established and is no longer open to doubt or controversy.[94] (Underscoring supplied)

In the case at bar, the July 11, 1975 Agreement to Buy and Sell was not registered,

which act of registration is the operative act to convey and affect the land.

An agreement to sell is a voluntary instrument as it is a willful act of the registered owner. As such voluntary instrument, Section 50 of Act No. 496 [now Section 51 of PD 1529] expressly provides that the act of registration shall be the operative act to convey and affect the land. And Section 55 of the same Act [now Section 53 of PD 1529] requires the presentation of the owners duplicate certificate of title for the registration of any deed or voluntary instrument. As the agreement to sell involves an interest less than an estate in fee simple, the same should have been registered by filing it with the Register of Deeds who, in turn, makes a brief memorandum thereof upon the original and owners duplicate certificate of title. The reason for requiring the production of the owners duplicate certificate in the registration of a voluntary instrument is that, being a willful act of the registered owner, it is to be presumed that he is interested in registering the instrument and would willingly surrender, present or produce his duplicate certificate of title to the Register of Deeds in order to accomplish such registration. However, where the owner refuses to surrender the duplicate certificate for the annotation of the voluntary instrument, the grantee may file with the Register of Deeds a statement setting forth his adverse claim, as provided for in Section 110 of Act No. 496. xxx[95] (Underscoring supplied)

In Valley Golf Club, Inc. v. Salas,[96] where a Deed of Absolute Sale covering a

parcel of land was executed prior to the annotation of a notice of lis pendens by the original owner thereof but which Deed was registered after such annotation, this Court held:

The advance payment of P15,000.00 by the CLUB on October 18, 1960 to ROMERO, and the additional payment by the CLUB of P54,887.50 as full payment of the purchase price on October 26, 1960, also to ROMERO, cannot be held to be the dates of sale such as to precede the annotation of the adverse claim by the SISTERS on October 25, 1960 and the lis pendens on October 27, 1960. It is basic that it is the act of registration of the sale that is the operative act to convey and affect the land. That registration was not effected by the CLUB until December 4, 1963, or three (3) years after it had made full payment to ROMERO. xxx

x x x

As matters stand, therefore, in view of the prior annotations of the adverse claim and lis pendens, the CLUB must be legally held to have been aware of the flaws in the title. By virtue of the lis pendens, its acquisition of the property was subject to whatever judgment was to be rendered in Civil Case No. 6365. xxx The CLUBs cause of action lies, not against the SISTERS, to whom the property had been adjudged by final judgment in Civil Case No. 6365, but against ROMERO who was found to have had no right to dispose of the land.[97] (Underscoring supplied) PLDT further argues that El Dorados prior, actual knowledge of the July 11, 1975

Agreement to Buy and Sell is equivalent to prior registration not affected by the Notice of Lis Pendens. As such, it concludes that it was not a purchaser pendente lite nor a purchaser in bad faith.

PLDT anchors its argument on the testimony of Lauro and El Dorados counsel

Atty. Aquino from which it infers that Atty. Aquino filed the complaint for rescission and caused the notice of lis pendens to be annotated on Carrascosos title only after reading newspaper reports on the sale to PLDT of the 1,000 hectare portion of the property.

The pertinent portions of Atty. Aquinos testimony are reproduced hereunder: Q: Do you know, Atty. Aquino, what you did after the filing of the complaint in

the instant case of Dr. Carrascoso?

A: Yes, I asked my associates to go to Mamburao and had the notice of Lis Pendens covering the property as a result of the filing of the instant complaint.

Q: Do you know the notice of Lis Pendens? A: Yes, it is evidenced by a [Transfer] Certificate Copy of Title of Dr.

Carrascoso entitled Notice of Lis Pendens. Q: As a consequence of the filing of the complaint which was annotated, you

have known that? A: Yes. x x x Q: After the annotation of the notice of Lis Pendens, do you know, if any

further transaction was held on the property? A: As we have read in the newspaper, that Dr. Carrascoso had sold the

property in favor of the PLDT, Co. Q: And what did you do? A: We verified the portion of the property having recorded under entry No.

24770 xxx and we also discovered that the articles incorporated (sic) and other corporate matters had been organized and established of the PLDT, Co., and had been annotated.

x x x Q: Do you know what happened to the property? A: It was sold by the PLDT to its sub-PLDT Agitating (sic) Co. when at that

time there was already notice of Lis Pendens. x x x Q: In your testimony, you mentioned that you had come cross- (sic) reading

the sale of the subject litigation (sic) between Dr. Fernando Carrascoso, the defendant herein and the PLDT, one of defendants-intervenor, may I say when?

A: I cannot remember now, but it was in the newspaper where it was

informed or mentioned of the sold property to PLDT. x x x Q: Will you tell to the Honorable Court what newspaper was that? A: Well, I cannot remember what is that newspaper. That is only a means of

[confirming] the transaction. What was [confirmed] to us is whether there was really transaction (sic) and we found out that there was in the Register of Deeds and that was the reason why we obtained the case.

Q: Well, may I say, is there any reason, the answer is immaterial. The

question is as regard the matter of time when counsel is being able (sic) to read the newspaper allegedly (interrupted)

x x x Q: The idea of the question, your Honor, is to establish and ask further the

notice of [lis pendens] with regards (sic) to the transfer of property to PLDT, would have been accorded prior to the pendency of the case.

x x x

A: I cannot remember.[98] PLDT also relies on the following testimony of Carrascoso: Q: You mentioned Doctor a while ago that you mentioned to the late

Governor Feliciano Leviste regarding your transaction with the PLDT in relation to the subject property you allegedly mention (sic) your intention to sell with the PLDT?

A: It was Dr. Jose Leviste and Dr. Angel Leviste that was constantly in

touched (sic) with me with respect to my transaction with the PLDT, sir.

Q: Any other officer of the corporation who knows with instruction aside

from Dr. Angel Leviste and Dr. Jose Leviste? A: Yes, sir. It was Trinidad Andaya Leviste and Assemblyman Expedito

Leviste. x x x Q: What is the position of Mrs. Trinidad Andaya Leviste with the plaintiff-

corporation? A: One of the stockholders and director of the plaintiff-corporation, sir. Q: Will you please tell us the other officers? A: Expedito Leviste, sir. A: Will you tell the position of Expedito Leviste? A: He was the corporate secretary, sir. Q: If you know, was Dr. Jose Leviste also a director at that time? A: Yes, sir.[99] On the other hand, El Dorado asserts that it had no knowledge of the July 11,

1975 Agreement to Buy and Sell prior to the filing of the complaint for rescission against Carrascoso and the annotation of the notice of lis pendens on his title. It further asserts that it always acted in good faith:

xxx The contract to sell between the Petitioner [Carrascoso] and PLDT

was executed in July 11, 1975. There is no evidence that El Dorado was notified of this contract. The property is located in Mindoro, El Dorado is based in Manila. The land was planted to rice. This was not an unusual activity on the land, thus it could have been the Petitioner who was using the land. Not having been notified of this sale, El Dorado could not have stopped PLDT from developing the land.

The absolute sale of the land to PLDT took place on April 6, 1977, or

AFTER the filing of this case on March 15, 1977 and the annotation of a notice of lis pendens on March 16, 1977. Inspite of the notice of lis pendens, PLDT then PLDTAC persisted not only in buying the land but also in putting up improvements on the property such as buildings, roads, irrigation systems and drainage. This was done during the pendency of this case, where PLDT and PLDTAC actively participated as intervenors. They were not innocent bystanders. xxx[100]

This Court finds the above-quoted testimony of Atty. Aquino to be susceptible of

conflicting interpretations. As such, it cannot be the basis for inferring that El Dorado knew of the July 11, 1975 Agreement to Buy and Sell prior to the annotation of the notice of lis pendens on Carrascosos title.

Respecting Carrascosos allegation that some of the directors and officers of El

Dorado had knowledge of his dealings with PLDT, it is true that knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his employment, and in relation to matters within the scope of his authority, is notice to the

corporation, whether he communicates such knowledge or not.[101] In the case at bar, however, apart from Carrascosos claim that he in fact notified several of the directors about his intention to sell the 1,000 hectare portion of the property to PLDT, no evidence was presented to substantiate his claim. Such self-serving, uncorroborated assertion is indubitably inadequate to prove that El Dorado had notice of the July 11, 1975 Agreement to Buy and Sell before the annotation of the notice of lis pendens on his title.

PLDT is, of course, not without recourse. As held by the CA:

Between Carrascoso and PLDT/PLDTAC, the former acted in bad faith while the latter acted in good faith. This is so because it was Carrascosos refusal to pay his just debt to El Dorado that caused PLDT/PLDTAC to suffer pecuniary losses. Therefore, Carrascoso should return to PLDT/PLDTAC the P3,000,000.00 price of the farm plus legal interest from receipt thereof until paid.[102] (Underscoring supplied)

The appellate courts decision ordering the rescission of the March 23, 1972 Deed of

Sale of Real Property between El Dorado and Carrascoso being in order, mutual restitution follows to put back the parties to their original situation prior to the consummation of the contract.

The exercise of the power to rescind extinguishes the obligatory

relation as if it had never been created, the extinction having a retroactive effect. The rescission is equivalent to invalidating and unmaking the juridical tie, leaving things in their status before the celebration of the contract.

Where a contract is rescinded, it is the duty of the court to require

both parties to surrender that which they have respectively received and to place each other as far as practicable in his original situation, the rescission has the effect of abrogating the contract in all parts.[103] (Underscoring supplied) The April 6, 1977 and May 30, 1977 Deeds of Absolute Sale being subject to the

notice of lis pendens, and as the Court affirms the declaration by the appellate court of the rescission of the Deed of Sale executed by El Dorado in favor of Carrascoso, possession of the 1,000 hectare portion of the property should be turned over by PLDT to El Dorado.

As regards the improvements introduced by PLDT on the 1,000 hectare portion of

the property, a distinction should be made between those which it built prior to the annotation of the notice of lis pendens and those which it introduced subsequent thereto.

When a person builds in good faith on the land of another, Article 448 of the Civil

Code governs: Art. 448. The owner of the land on which anything has been built,

sown or planted in good faith, shall have the right to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in Articles 546 and 548, or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent. However, the builder or planter cannot be obliged to buy the land if its value is considerably more than that of the building or trees. In such a case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the building or trees after the proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof.

The above provision covers cases in which the builders, sowers or planters believe

themselves to be owners of the land or, at least, to have a claim of title thereto.[104] Good faith is thus identified by the belief that the land is owned; or that by some title one has the right to build, plant, or sow thereon.[105]

The owner of the land on which anything has been built, sown or planted in good

faith shall have the right to appropriate as his own the building, planting or sowing, after payment to the builder, planter or sower of the necessary and useful expenses,[106] and in the proper case, expenses for pure luxury or mere pleasure.[107]

The owner of the land may also oblige the builder, planter or sower to purchase

and pay the price of the land.

If the owner chooses to sell his land, the builder, planter or sower must purchase the land, otherwise the owner may remove the improvements thereon. The builder, planter or sower, however, is not obliged to purchase the land if its value is considerably more than the building, planting or sowing. In such case, the builder, planter or sower must pay rent to the owner of the land.

If the parties cannot come to terms over the conditions of the lease, the court must

fix the terms thereof. The right to choose between appropriating the improvement or selling the land on

which the improvement of the builder, planter or sower stands, is given to the owner of the land.[108]

On the other hand, when a person builds in bad faith on the land of another,

Articles 449 and 450 govern:

Art. 449. He who builds, plants or sows in bad faith on the land of another, loses what is built, planted or sown without right to indemnity.

Art. 450. The owner of the land on which anything has been built,

planted or sown in bad faith may demand the demolition of the work, or that the planting or sowing be removed, in order to replace things in their former condition at the expense of the person who built, planted or sowed; or he may compel the builder or planter to pay the price of the land, and the sower the proper rent.

In the case at bar, it is undisputed that PLDT commenced construction of

improvements on the 1,000 hectare portion of the property immediately after the execution of the July 11, 1975 Agreement to Buy and Sell with the full consent of Carrascoso.[109] Thus, until March 15, 1977 when the Notice of Lis Pendens was annotated on Carrascosos TCT No. T-6055, PLDT is deemed to have been in good faith in introducing improvements on the 1,000 hectare portion of the property.

After March 15, 1977, however, PLDT could no longer invoke the rights of a builder

in good faith. Should El Dorado then opt to appropriate the improvements made by PLDT on the

1,000 hectare portion of the property, it should only be made to pay for those improvements at the time good faith existed on the part of PLDT or until March 15, 1977,[110] to be pegged at its current fair market value.[111]

The commencement of PLDTs payment of reasonable rent should start on March

15, 1977 as well, to be paid until such time that the possession of the 1,000 hectare portion is delivered to El Dorado, subject to the reimbursement of expenses as aforestated, that is, if El Dorado opts to appropriate the improvements.[112]

If El Dorado opts for compulsory sale, however, the payment of rent should

continue up to the actual transfer of ownership.[113] WHEREFORE, the petitions are DENIED. The Decision dated January 13, 1996

and Resolution dated July 8, 2004 of the Court of Appeals are AFFIRMED with MODIFICATION in that

1) the Regional Trial Court of San Jose, Occidental Mindoro, Branch 45 is further

directed to: a. determine the present fair price of the 1,000 hectare portion of the property and

the amount of the expenses actually spent by PLDT for the improvements thereon as of March 15, 1977;

b. include for determination the increase in value (plus value) which the 1,000

hectare portion may have acquired by reason of the existence of the improvements built by PLDT before March 15, 1977 and the current fair market value of said improvements;

2. El Dorado is ordered to exercise its option under the law, whether to appropriate

the improvements, or to oblige PLDT to pay the price of the land, and 3) PLDT shall pay El Dorado the amount of Two Thousand Pesos (P2,000.00) per

month as reasonable compensation for its occupancy of the 1,000 hectare portion of the

property from the time that its good faith ceased to exist until such time that possession of the same is delivered to El Dorado, subject to the reimbursement of the aforesaid expenses in favor of PLDT or until such time that the payment of the purchase price of the 1,000 hectare portion is made by PLDT in favor of El Dorado in case the latter opts for its compulsory sale.

Costs against petitioners. SO ORDERED.

CONCHITA CARPIO MORALES Associate Justice

Republic of the Philippines SUPREME COURT

Manila

FIRST DIVISION

SACOBIA HILLS DEVELOPMENT G.R. No. 165889 CORPORATION and JAIME C. KOA,

Petitioners,

Present: Davide, Jr., C.J. (Chairman),

- versus - Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ.

ALLAN U. TY, Respondent.

Promulgated: September 20, 2005 x ------------------------------------------ x

DECISION YNARES-SANTIAGO, J.:

This petition for review on certiorari[1] assails the August 19, 2004 decision of the Court of Appeals in CA-G.R. CV No. 76987,[2] which reversed and set aside the November 29, 2002 decision[3] of the Regional Trial Court of Manila, Branch 46, and its October 28, 2004 resolution[4] denying reconsideration thereof.

The antecedent facts show that petitioner Sacobia Hills Development

Corporation (Sacobia) is the developer of True North Golf and Country Club (True North) located inside the Clark Special Economic Zone in Pampanga which boasts of amenities that include a golf course, clubhouse, sports complex and several vacation villas.

On February 12, 1997, respondent Allan U. Ty wrote to Sacobia a letter

expressing his intention to acquire one (1) Class A share of True North and accordingly paid the reservation fee of P180,000.00 as evidenced by PCI Bank Check No. 0038053.[5]

Through letters dated May 28, 1997 and July 4, 1997, Sacobia assured its

shareholders that the development of True North was proceeding on schedule; that the golf course would be playable by October 1999; that the Environmental Clearance Certificate (ECC) by the Department of Environment and Natural Resources (DENR) as well as the Permit to Sell from the Securities and Exchange Commission (SEC) should have been released by October 1997; and that their registration deposits remained intact in an escrow account.[6]

On September 1, 1997, Sacobia approved the purchase application and

membership of respondent for P600,000.00, subject to certain terms and conditions. The notice of approval provided, inter alia:[7]

Terms and Conditions

1. Approval of an application to purchase golf/country club shares is

subjected to the full payment of the total purchase price. Should the buyer opt for the deferred payment scheme, approval is subject to our receipt of a down payment of at least 30% and the balance payable in installments over a maximum of eleven (11)

months from the date of application, and covered by postdated cheques.

2. Your reserved share shall be considered withdrawn and may be

deemed cancelled should you fail to settle your obligation within fifteen (15) days from due date, or failure to cover the value of the postdated cheques upon their maturity, or your failure to issue the required postdated cheques. In which case, we shall reserve the right to offer the said shares to other interested parties. This also means forfeiture of 50% of the total amount you have already paid.

3. We will undertake to execute the corresponding sales documents/

Deed of Absolute Sale covering the reserved shares upon full payment of the total purchase price. The Certificate of Membership shall be issued thereafter.

...

However, on January 12, 1998, respondent notified Sacobia that he is

rescinding the contract and sought refund of the payments already made due to the latters failure to complete the project on time as represented.

In an effort to assure the respondent that the project would soon be

operational, Sacobia wrote him a letter dated March 10, 1998, stating that the DENR had issued the required ECC only on March 5, 1998, and that the golf course would be ready for use by end of 1998.[8]

On April 3, 1998, Sacobia again wrote the respondent advising him that the 18-

hole golf course would be fully operational by summer of 1999. Sacobia also sought to collect from respondent the latters outstanding balance of P190,909.08 which was covered by five (5) postdated checks.

Notwithstanding, respondent notified Sacobia on April 17, 1998 that he had

stopped payment on the five (5) postdated checks and reiterated his demand for the refund of his payments which amounted to P409,090.92.

On June 16, 1999, respondent sent Sacobia a letter formally rescinding the

contract and demanding for the refund of the P409,090.92 thus far paid by him. By way of reply, Sacobia informed respondent that it had a no-refund policy,

and that it had endorsed respondent to Century Properties, Inc. for assistance on the resale of his share to third persons.

Thus, on July 21, 1999, respondent filed a complaint for rescission and damages before the SEC but the case was eventually transferred to the Regional Trial Court of Manila, Branch 46, pursuant to Administrative Circular AM No. 00-11-03.[9]

On April 13, 2002, the trial court personnel conducted an on-site ocular

inspection and in their report, they made the following observations:

... We went up and down the hills on board the golf cart, and have

seen the entire golf course. The 9 holes area are already operational and playable, we have seen the tee bank (mount soil) color coded flags, blue for regular golfers, white for senior golfers and red for ladies golfers. We have seen all their playing areas which all appeared in order except the main clubhouse which is undergoing finishing touches. Likewise the road leading to the clubhouse area is undergoing pavement works and concreting.

We learned from our tour guide Mr. Gerry Zoleta, Site Supervisor,

that the timetable in finishing all remaining things (eg. Clubhouse and the road leading to it) to be done, are influenced or rather, hampered by the prevailing weather condition. Such that when it rain, (which often happens in the area during afternoon or early morning) they cannot really push thru with the construction due to the soil condition (easily

eroded) and sloping terrain of the place. Except, the clubhouse, all seem prim and proper for golf playing. In fact, according to Mr. Zoleta, the site has been operational since January 2002. The first tournament was conducted on October 2000 and there were three tournaments already took place in the area.

... In summary, we found nothing amiss for one not to be able to play

and enjoy golf to the fullest, except as earlier said the clubhouse.[10]

On November 29, 2002, the trial court rendered judgment in favor of petitioners, the decretal portion of which reads:

WHEREFORE, the complaint is hereby dismissed without pronouncement as to costs. If the plaintiff desires to continue with the acquisition of the share, he may do so by paying the balance of the acquisition price of One Hundred Ninety Thousand Ninety Pesos and Ten Centavos (P190,090.10) without interest within thirty (30) days from the finality of this decision, otherwise, he forfeits his payments. IT IS SO ORDERED.[11]

The trial court found that the contract between the parties did not warrant that the golf course and clubhouse would be completed within a certain period of time to entitle respondent to rescind. It also noted that the completion of the project was subject to the issuance of an ECC and the approval by the SEC of the registration of non-proprietary golf club shares, which is beyond Sacobias control. The appellate court, in its decision dated August 19, 2004, disposed of the appeal as follows:

WHEREFORE, the appealed November 29, 2002 decision of the Regional Trial Court of Manila, Branch 46, is hereby REVERSED and SET ASIDE, and a new one is hereby entered with this Court hereby CONFIRMING the RESCISSION of the contract of purchase of one (1) Class A proprietary share of True North Golf and Country Club as elected choice by plaintiff-appellant Ty, the aggrieved party, and hereby DIRECTING defendant-appellee SACOBIA to: 1) Refund to the plaintiff-appellant Allan U. Ty the amount of

P409,090.20 and all payments made by him thus far on the TRUE NORTH share, with legal interest of 12% per annum from July 21, 1999, the date of the filing of the complaint with the SEC, until fully paid;

2) Return the five post-dated checks of the plaintiff-appellant amounting to P190,908.08;

3) Pay costs of the suit.

SO ORDERED.[12] The Court of Appeals agreed with the trial court that Sacobia was in delay in

the performance of its obligation to respondent. As such, Ty could properly rescind the contract, or demand specific performance with damages, or demand for damages alone. It held though that the failure of the DENR to issue the ECC on time is a valid ground to reduce the damages claimed by Ty. It also ruled that Sacobia is estopped from asserting that there was no completion date for the project as no less than its chairman announced the projected completion dates.

Petitioners motion for reconsideration was denied, hence the instant petition for review on certiorari which raises the issue of whether the contract entered into by the parties may be validly rescinded under Article 1191 of the Civil Code. Sacobia contends that it was not in breach of the contract as the Intent to Purchase, the Contract of Purchase, and the Notice of Approval to Purchase Shares of True North, do not contain any specific date as to when the golf course and country club

would be completed. It argues that respondent should have known the risks involved in this kind of project; the construction being contingent on the issuance of the ECC by the DENR and the payment of the buyers of their share.

On the other hand, respondent claims that Sacobias arguments raise new matters which would warrant the reversal of the decision rendered by the Court of Appeals. He insists that Sacobia failed to complete the project on time which entitles him to rescind the contract in accordance with Article 1191 of the Civil Code. He further argues that the delay in the completion of the project is clearly established by the fact that there have been no substantial work done on the site, particularly on the clubhouse, despite the lapse of nearly 4-years from the issuance of the ECC on March 5, 1998. The petition is meritorious.

In resolving the present controversy, the lower courts merely assumed that the delay in the completion of the golf course was the decisive factor in determining the propriety or impropriety of rescinding the contract. Yet, confusion could have been avoided had there been a more thorough scrutiny of the nature of the contract entered into by the contending parties.

In the notice of approval, which embodies the terms and conditions of the agreement, Sacobia signified its intent to retain the ownership of the property until such time that the respondent has fully paid the purchase price. This condition precedent is characteristic of a contract to sell. The intention of the contracting parties is inferable from the following provisions, to wit:

TERMS AND CONDITIONS

1. Approval of an application to purchase golf/country club shares is

subjected to the full payment of the total purchase price. Should the buyer opt for the deferred payment scheme, approval is subject to our receipt of a down payment of at least 30% and the balance payable in installments over a maximum of eleven (11) months from the date of application, and covered by postdated cheques.

2. Your reserved share shall be considered withdrawn and may be

deemed cancelled should you fail to settle your obligation within fifteen (15) days from due date, or failure to cover the value of the postdated cheques upon their maturity, or your failure to issue the required postdated cheques. In which case, we shall reserve the right to offer the said shares to other interested parties. This also means forfeiture of 50% of the total amount you have already paid.

3. We shall undertake to execute the corresponding sales

documents/Deed of Absolute Sale covering the reserved shares upon full payment of the total purchase price. The

Certificate of Membership shall be issued thereafter.

Clearly, the approval of the application hinged on the full payment of the total purchase price. In fact, Sacobia explicitly reserved the right to retain title over the share pending full satisfaction of the purchase price.

The notice of approval likewise stipulated that the reservation shall be deemed

withdrawn or cancelled in case respondent fails to settle his obligation within 15 days from the due date or cover the value of the checks upon their maturity. Thus, Sacobia reserved the right to unilaterally rescind the contract in the event the respondent fails to comply with his obligation of remitting the full purchase price within the deadline. In fact, Sacobia, after having cancelled the agreement, can offer the share to other interested parties.

In addition, the execution of the deed of absolute sale and other pertinent

documents shall be made only upon full payment of the purchase price. The terms of

the agreement between Sacobia and Ty can be deduced, not on a formal document like a deed of sale, but from a series of correspondence and acts signifying the parties intention to enter into a contract. The absence of a formal deed of conveyance is a strong indication that Sacobia did not intend to transfer title until respondent shall have completely complied with his correlative obligation of paying the contact price.

Since the agreement between Sacobia and Ty is a contract to sell, the full

payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and ownership is retained by the seller without further remedies by the buyer. In Cheng v. Genato,[13] we explained the nature of a contract to sell and its legal implications in this wise:

In a Contract to Sell, the payment of the purchase price is a

positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. It is one where the happening of the event gives rise to an obligation. Thus, for its non-fulfillment there will be no contract to speak of, the obligor having failed to perform the suspensive condition which enforces a juridical relation. In fact with this circumstance, there can be no rescission of an obligation that is still non-existent, the suspensive condition not having occurred as yet. Emphasis should be made that the breach contemplated in Article 1191 of the New Civil Code is the obligors failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation.

In a contract to sell, the prospective seller does not consent to transfer

ownership of the property to the buyer until the happening of an event, which for present purposes, is the full payment of the purchase price. What the seller agrees or obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of the purchase price is delivered to him. Upon the fulfillment of the suspensive condition, ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale.[14]

According to True North Payment Schedule,[15]respondents checks dated from

October 12, 1997 until January 12, 1998 were marked as stale. His failure to cover the value of the checks and by issuing a stop payment order effectively abated the perfection of the contract. For it is understood that when a sale is made subject to a suspensive condition, perfection is had only from the moment the condition is fulfilled.[16]

As shown, Ty did not pay the full purchase price which is his obligation under

the contract to sell, therefore, it cannot be said that Sacobia breached its obligation. No obligations arose on its part because respondents non-fulfillment of the suspensive condition rendered the contract to sell ineffective and unperfected. Indeed, there can be no rescission under Article 1191[17] of the Civil Code because until the happening of the condition, i.e. full payment of the contract price, Sacobias obligation to deliver the title and object of the sale is not yet extant. A non-existent obligation cannot be

subject of rescission. Article 1191 speaks of obligations already existing, which may be rescinded in case one of the obligors fails to comply with what is incumbent upon him.

As earlier discussed, the payment by Ty of the reservation fee as well as the

issuance of the postdated checks is subject to the condition that Sacobia was reserving title until full payment, which is the essence of a contract to sell. The perfection of this kind of contract would give rise to two distinct obligations, namely, 1) the buyers obligation to fulfill the suspensive condition, i.e. the full payment of the contract price as in the instant case, and, 2) the correlative obligation of the seller to convey ownership upon compliance of the suspensive condition.

In the present case, respondents failure to fulfill this suspensive condition

prevented the perfection of the contract to sell. With an ineffective contract, Ty had not acquired the status of a shareholder but remained, at most, a prospective investor. In the absence of a juridical tie between the parties, Ty cannot claim the rights and privileges accorded to Sacobias full-fledged members and shareowners, including the

full enjoyment of the amenities being offered. Unfortunately for Ty, he cannot avail of rescission as envisioned by Article 1191 of the Civil Code. However, he can withdraw his investment subject to the restrictions under the terms and conditions pertinent to a reneging investor.

Even assuming arguendo that the delay in the completion of the golf course and

clubhouse was attributable to Sacobia, respondent had not refuted to this Courts satisfaction the trial courts denial of such claim upon its finding that, among other things, the parties did not warrant the completion of the project within a certain period of time.

As early as January 12, 1998, respondent had notified Sacobia of his intention to rescind the contract on the ground that there was unreasonable delay in the completion of the golf course and clubhouse. Yet, evidence shows that even prior thereto, or on May 28, 1997, Sacobia already informed its investors, including the respondent, that the full completion of the project was expected by mid-1999. Patently, respondents claim is premature by one year and a half, if reckoned from the expected time of completion as foreseen by Sacobia. Moreover, respondent was well aware of the risk of delay in the completion of the project considering that he was apprised beforehand of such delay due to the belated issuance of the proper documents.

It appears, however, that Sacobia is not really intent on cancelling Tys

reservation. Even after it was notified by Ty that he was intending to rescind the contract, and had in fact issued a stop-payment order, Sacobia merely deferred the deposit of Tys checks in an effort to resolve the issue, instead of cancelling the reservation in accordance with the terms of the notice of approval. Subsequently, it sought to collect from Ty his remaining obligations. It also referred Ty to its marketing arm if Ty is so minded to sell his rights to third parties. To this extent, the trial court correctly ordered Ty to pay the remaining balance if he so desires, otherwise, he forfeits half of his payments, pursuant to the terms of the notice of approval.

WHEREFORE, the petition is GRANTED. The decision dated August 19, 2004

of the Court of Appeals in CA-G.R. CV No. 76987 and its resolution dated October 28, 2004, are REVERSED and SET ASIDE. Respondents complaint for rescission of contract and damages in Civil Case No. 01-99696 is DISMISSED. He is ORDERED to PAY to Sacobia Hills Development Corporation the amount of Pesos: One Hundred Ninety Thousand Nine Hundred Nine and Eight Centavos (P190,909.08) without interest within thirty (30) days from finality of this decision; otherwise, fifty percent (50%) of his total payments shall be forfeited.

SO ORDERED.

CONSUELO YNARES-SANTIAGO Associate Justice

Republic of the Philippines SUPREME COURT

Manila

FIRST DIVISION

SACOBIA HILLS DEVELOPMENT G.R. No. 165889 CORPORATION and JAIME C. KOA,

Petitioners,

Present: Davide, Jr., C.J. (Chairman),

- versus - Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ.

ALLAN U. TY, Respondent.

Promulgated: September 20, 2005 x ------------------------------------------ x

DECISION YNARES-SANTIAGO, J.:

This petition for review on certiorari[1] assails the August 19, 2004 decision of the Court of Appeals in CA-G.R. CV No. 76987,[2] which reversed and set aside the November 29, 2002 decision[3] of the Regional Trial Court of Manila, Branch 46, and its October 28, 2004 resolution[4] denying reconsideration thereof.

The antecedent facts show that petitioner Sacobia Hills Development

Corporation (Sacobia) is the developer of True North Golf and Country Club (True North) located inside the Clark Special Economic Zone in Pampanga which boasts of amenities that include a golf course, clubhouse, sports complex and several vacation villas.

On February 12, 1997, respondent Allan U. Ty wrote to Sacobia a letter

expressing his intention to acquire one (1) Class A share of True North and accordingly paid the reservation fee of P180,000.00 as evidenced by PCI Bank Check No. 0038053.[5]

Through letters dated May 28, 1997 and July 4, 1997, Sacobia assured its

shareholders that the development of True North was proceeding on schedule; that the golf course would be playable by October 1999; that the Environmental Clearance Certificate (ECC) by the Department of Environment and Natural Resources (DENR) as well as the Permit to Sell from the Securities and Exchange Commission (SEC) should have been released by October 1997; and that their registration deposits remained intact in an escrow account.[6]

On September 1, 1997, Sacobia approved the purchase application and

membership of respondent for P600,000.00, subject to certain terms and conditions. The notice of approval provided, inter alia:[7]

Terms and Conditions

1. Approval of an application to purchase golf/country club shares is

subjected to the full payment of the total purchase price. Should the buyer opt for the deferred payment scheme, approval is subject to our receipt of a down payment of at least 30% and the balance payable in installments over a maximum of eleven (11)

months from the date of application, and covered by postdated cheques.

2. Your reserved share shall be considered withdrawn and may be

deemed cancelled should you fail to settle your obligation within fifteen (15) days from due date, or failure to cover the value of the postdated cheques upon their maturity, or your failure to issue the required postdated cheques. In which case, we shall reserve the right to offer the said shares to other interested parties. This also means forfeiture of 50% of the total amount you have already paid.

3. We will undertake to execute the corresponding sales documents/

Deed of Absolute Sale covering the reserved shares upon full payment of the total purchase price. The Certificate of Membership shall be issued thereafter.

...

However, on January 12, 1998, respondent notified Sacobia that he is

rescinding the contract and sought refund of the payments already made due to the latters failure to complete the project on time as represented.

In an effort to assure the respondent that the project would soon be

operational, Sacobia wrote him a letter dated March 10, 1998, stating that the DENR had issued the required ECC only on March 5, 1998, and that the golf course would be ready for use by end of 1998.[8]

On April 3, 1998, Sacobia again wrote the respondent advising him that the 18-

hole golf course would be fully operational by summer of 1999. Sacobia also sought to collect from respondent the latters outstanding balance of P190,909.08 which was covered by five (5) postdated checks.

Notwithstanding, respondent notified Sacobia on April 17, 1998 that he had

stopped payment on the five (5) postdated checks and reiterated his demand for the refund of his payments which amounted to P409,090.92.

On June 16, 1999, respondent sent Sacobia a letter formally rescinding the

contract and demanding for the refund of the P409,090.92 thus far paid by him. By way of reply, Sacobia informed respondent that it had a no-refund policy,

and that it had endorsed respondent to Century Properties, Inc. for assistance on the resale of his share to third persons.

Thus, on July 21, 1999, respondent filed a complaint for rescission and damages before the SEC but the case was eventually transferred to the Regional Trial Court of Manila, Branch 46, pursuant to Administrative Circular AM No. 00-11-03.[9]

On April 13, 2002, the trial court personnel conducted an on-site ocular

inspection and in their report, they made the following observations:

... We went up and down the hills on board the golf cart, and have

seen the entire golf course. The 9 holes area are already operational and playable, we have seen the tee bank (mount soil) color coded flags, blue for regular golfers, white for senior golfers and red for ladies golfers. We have seen all their playing areas which all appeared in order except the main clubhouse which is undergoing finishing touches. Likewise the road leading to the clubhouse area is undergoing pavement works and concreting.

We learned from our tour guide Mr. Gerry Zoleta, Site Supervisor,

that the timetable in finishing all remaining things (eg. Clubhouse and the road leading to it) to be done, are influenced or rather, hampered by the prevailing weather condition. Such that when it rain, (which often happens in the area during afternoon or early morning) they cannot really push thru with the construction due to the soil condition (easily

eroded) and sloping terrain of the place. Except, the clubhouse, all seem prim and proper for golf playing. In fact, according to Mr. Zoleta, the site has been operational since January 2002. The first tournament was conducted on October 2000 and there were three tournaments already took place in the area.

... In summary, we found nothing amiss for one not to be able to play

and enjoy golf to the fullest, except as earlier said the clubhouse.[10]

On November 29, 2002, the trial court rendered judgment in favor of petitioners, the decretal portion of which reads:

WHEREFORE, the complaint is hereby dismissed without pronouncement as to costs. If the plaintiff desires to continue with the acquisition of the share, he may do so by paying the balance of the acquisition price of One Hundred Ninety Thousand Ninety Pesos and Ten Centavos (P190,090.10) without interest within thirty (30) days from the finality of this decision, otherwise, he forfeits his payments. IT IS SO ORDERED.[11]

The trial court found that the contract between the parties did not warrant that the golf course and clubhouse would be completed within a certain period of time to entitle respondent to rescind. It also noted that the completion of the project was subject to the issuance of an ECC and the approval by the SEC of the registration of non-proprietary golf club shares, which is beyond Sacobias control. The appellate court, in its decision dated August 19, 2004, disposed of the appeal as follows:

WHEREFORE, the appealed November 29, 2002 decision of the Regional Trial Court of Manila, Branch 46, is hereby REVERSED and SET ASIDE, and a new one is hereby entered with this Court hereby CONFIRMING the RESCISSION of the contract of purchase of one (1) Class A proprietary share of True North Golf and Country Club as elected choice by plaintiff-appellant Ty, the aggrieved party, and hereby DIRECTING defendant-appellee SACOBIA to: 1) Refund to the plaintiff-appellant Allan U. Ty the amount of

P409,090.20 and all payments made by him thus far on the TRUE NORTH share, with legal interest of 12% per annum from July 21, 1999, the date of the filing of the complaint with the SEC, until fully paid;

2) Return the five post-dated checks of the plaintiff-appellant amounting to P190,908.08;

3) Pay costs of the suit.

SO ORDERED.[12] The Court of Appeals agreed with the trial court that Sacobia was in delay in

the performance of its obligation to respondent. As such, Ty could properly rescind the contract, or demand specific performance with damages, or demand for damages alone. It held though that the failure of the DENR to issue the ECC on time is a valid ground to reduce the damages claimed by Ty. It also ruled that Sacobia is estopped from asserting that there was no completion date for the project as no less than its chairman announced the projected completion dates.

Petitioners motion for reconsideration was denied, hence the instant petition for review on certiorari which raises the issue of whether the contract entered into by the parties may be validly rescinded under Article 1191 of the Civil Code. Sacobia contends that it was not in breach of the contract as the Intent to Purchase, the Contract of Purchase, and the Notice of Approval to Purchase Shares of True North, do not contain any specific date as to when the golf course and country club

would be completed. It argues that respondent should have known the risks involved in this kind of project; the construction being contingent on the issuance of the ECC by the DENR and the payment of the buyers of their share.

On the other hand, respondent claims that Sacobias arguments raise new matters which would warrant the reversal of the decision rendered by the Court of Appeals. He insists that Sacobia failed to complete the project on time which entitles him to rescind the contract in accordance with Article 1191 of the Civil Code. He further argues that the delay in the completion of the project is clearly established by the fact that there have been no substantial work done on the site, particularly on the clubhouse, despite the lapse of nearly 4-years from the issuance of the ECC on March 5, 1998. The petition is meritorious.

In resolving the present controversy, the lower courts merely assumed that the delay in the completion of the golf course was the decisive factor in determining the propriety or impropriety of rescinding the contract. Yet, confusion could have been avoided had there been a more thorough scrutiny of the nature of the contract entered into by the contending parties.

In the notice of approval, which embodies the terms and conditions of the agreement, Sacobia signified its intent to retain the ownership of the property until such time that the respondent has fully paid the purchase price. This condition precedent is characteristic of a contract to sell. The intention of the contracting parties is inferable from the following provisions, to wit:

TERMS AND CONDITIONS

1. Approval of an application to purchase golf/country club shares is

subjected to the full payment of the total purchase price. Should the buyer opt for the deferred payment scheme, approval is subject to our receipt of a down payment of at least 30% and the balance payable in installments over a maximum of eleven (11) months from the date of application, and covered by postdated cheques.

2. Your reserved share shall be considered withdrawn and may be

deemed cancelled should you fail to settle your obligation within fifteen (15) days from due date, or failure to cover the value of the postdated cheques upon their maturity, or your failure to issue the required postdated cheques. In which case, we shall reserve the right to offer the said shares to other interested parties. This also means forfeiture of 50% of the total amount you have already paid.

3. We shall undertake to execute the corresponding sales

documents/Deed of Absolute Sale covering the reserved shares upon full payment of the total purchase price. The

Certificate of Membership shall be issued thereafter.

Clearly, the approval of the application hinged on the full payment of the total purchase price. In fact, Sacobia explicitly reserved the right to retain title over the share pending full satisfaction of the purchase price.

The notice of approval likewise stipulated that the reservation shall be deemed

withdrawn or cancelled in case respondent fails to settle his obligation within 15 days from the due date or cover the value of the checks upon their maturity. Thus, Sacobia reserved the right to unilaterally rescind the contract in the event the respondent fails to comply with his obligation of remitting the full purchase price within the deadline. In fact, Sacobia, after having cancelled the agreement, can offer the share to other interested parties.

In addition, the execution of the deed of absolute sale and other pertinent

documents shall be made only upon full payment of the purchase price. The terms of

the agreement between Sacobia and Ty can be deduced, not on a formal document like a deed of sale, but from a series of correspondence and acts signifying the parties intention to enter into a contract. The absence of a formal deed of conveyance is a strong indication that Sacobia did not intend to transfer title until respondent shall have completely complied with his correlative obligation of paying the contact price.

Since the agreement between Sacobia and Ty is a contract to sell, the full

payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and ownership is retained by the seller without further remedies by the buyer. In Cheng v. Genato,[13] we explained the nature of a contract to sell and its legal implications in this wise:

In a Contract to Sell, the payment of the purchase price is a

positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. It is one where the happening of the event gives rise to an obligation. Thus, for its non-fulfillment there will be no contract to speak of, the obligor having failed to perform the suspensive condition which enforces a juridical relation. In fact with this circumstance, there can be no rescission of an obligation that is still non-existent, the suspensive condition not having occurred as yet. Emphasis should be made that the breach contemplated in Article 1191 of the New Civil Code is the obligors failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation.

In a contract to sell, the prospective seller does not consent to transfer

ownership of the property to the buyer until the happening of an event, which for present purposes, is the full payment of the purchase price. What the seller agrees or obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of the purchase price is delivered to him. Upon the fulfillment of the suspensive condition, ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale.[14]

According to True North Payment Schedule,[15]respondents checks dated from

October 12, 1997 until January 12, 1998 were marked as stale. His failure to cover the value of the checks and by issuing a stop payment order effectively abated the perfection of the contract. For it is understood that when a sale is made subject to a suspensive condition, perfection is had only from the moment the condition is fulfilled.[16]

As shown, Ty did not pay the full purchase price which is his obligation under

the contract to sell, therefore, it cannot be said that Sacobia breached its obligation. No obligations arose on its part because respondents non-fulfillment of the suspensive condition rendered the contract to sell ineffective and unperfected. Indeed, there can be no rescission under Article 1191[17] of the Civil Code because until the happening of the condition, i.e. full payment of the contract price, Sacobias obligation to deliver the title and object of the sale is not yet extant. A non-existent obligation cannot be

subject of rescission. Article 1191 speaks of obligations already existing, which may be rescinded in case one of the obligors fails to comply with what is incumbent upon him.

As earlier discussed, the payment by Ty of the reservation fee as well as the

issuance of the postdated checks is subject to the condition that Sacobia was reserving title until full payment, which is the essence of a contract to sell. The perfection of this kind of contract would give rise to two distinct obligations, namely, 1) the buyers obligation to fulfill the suspensive condition, i.e. the full payment of the contract price as in the instant case, and, 2) the correlative obligation of the seller to convey ownership upon compliance of the suspensive condition.

In the present case, respondents failure to fulfill this suspensive condition

prevented the perfection of the contract to sell. With an ineffective contract, Ty had not acquired the status of a shareholder but remained, at most, a prospective investor. In the absence of a juridical tie between the parties, Ty cannot claim the rights and privileges accorded to Sacobias full-fledged members and shareowners, including the

full enjoyment of the amenities being offered. Unfortunately for Ty, he cannot avail of rescission as envisioned by Article 1191 of the Civil Code. However, he can withdraw his investment subject to the restrictions under the terms and conditions pertinent to a reneging investor.

Even assuming arguendo that the delay in the completion of the golf course and

clubhouse was attributable to Sacobia, respondent had not refuted to this Courts satisfaction the trial courts denial of such claim upon its finding that, among other things, the parties did not warrant the completion of the project within a certain period of time.

As early as January 12, 1998, respondent had notified Sacobia of his intention to rescind the contract on the ground that there was unreasonable delay in the completion of the golf course and clubhouse. Yet, evidence shows that even prior thereto, or on May 28, 1997, Sacobia already informed its investors, including the respondent, that the full completion of the project was expected by mid-1999. Patently, respondents claim is premature by one year and a half, if reckoned from the expected time of completion as foreseen by Sacobia. Moreover, respondent was well aware of the risk of delay in the completion of the project considering that he was apprised beforehand of such delay due to the belated issuance of the proper documents.

It appears, however, that Sacobia is not really intent on cancelling Tys

reservation. Even after it was notified by Ty that he was intending to rescind the contract, and had in fact issued a stop-payment order, Sacobia merely deferred the deposit of Tys checks in an effort to resolve the issue, instead of cancelling the reservation in accordance with the terms of the notice of approval. Subsequently, it sought to collect from Ty his remaining obligations. It also referred Ty to its marketing arm if Ty is so minded to sell his rights to third parties. To this extent, the trial court correctly ordered Ty to pay the remaining balance if he so desires, otherwise, he forfeits half of his payments, pursuant to the terms of the notice of approval.

WHEREFORE, the petition is GRANTED. The decision dated August 19, 2004

of the Court of Appeals in CA-G.R. CV No. 76987 and its resolution dated October 28, 2004, are REVERSED and SET ASIDE. Respondents complaint for rescission of contract and damages in Civil Case No. 01-99696 is DISMISSED. He is ORDERED to PAY to Sacobia Hills Development Corporation the amount of Pesos: One Hundred Ninety Thousand Nine Hundred Nine and Eight Centavos (P190,909.08) without interest within thirty (30) days from finality of this decision; otherwise, fifty percent (50%) of his total payments shall be forfeited.

SO ORDERED.

CONSUELO YNARES-SANTIAGO Associate Justice

Republic of the Philippines SUPREME COURT

Manila

SECOND DIVISION

SPS. ALFREDO R. EDRADA G.R. No. 154413 and ROSELLA L. EDRADA,

Petitioners,

Present: PUNO, J.,

- versus - Chairman, AUSTRIA-MARTINEZ , CALLEJO, SR., TINGA, and

SPS.EDUARDO RAMOS CHICO-NAZARIO, JJ.

and CARMENCITA RAMOS, Respondents.

Promulgated: August 31, 2005 x ---------------------------------------------------------------x

D E C I S I O N

TINGA, J.:

In this Petition[1] under Rule 45, petitioner Spouses Alfredo and Rosella Edrada

(petitioners) seek the reversal of the Former Second Division of the Court of Appeals Decision[2] and Resolution[3] in CA-G.R. CV No. 66375, which affirmed the Decision of Regional Trial Court (RTC) of Antipolo City, Branch 71,[4] in Civil Case No. 96-4057, and denied the Motion for Reconsideration[5] therein.

Respondent spouses Eduardo and Carmencita Ramos (respondents) are the owners of two (2) fishing vessels, the Lady Lalaine and the Lady Theresa. On 1 April 1996, respondents and petitioners executed an untitled handwritten document which lies at the center of the present controversy. Its full text is reproduced below:

1st April 1996

This is to acknowledge that Fishing Vessels Lady Lalaine and Lady Theresa owned by Eduardo O. Ramos are now in my possession and received in good running and serviceable order. As such, the vessels are now my responsibility.

Documents pertaining to the sale and agreement of payments

between me and the owner of the vessel to follow. The agreed price for the vessel is Nine Hundred Thousand Only (P900,000.00).

(SGD.) (SGD.)

EDUARDO O. RAMOS ALFREDO R. EDRADA (Seller) (Purchaser) CONFORME: CONFORME:

(SGD.) (SGD.) CARMENCITA RAMOS ROSIE ENDRADA[6]

Upon the signing of the document, petitioners delivered to respondents four (4)

postdated Far East Bank and Trust Company (FEBTC) checks payable to cash drawn by petitioner Rosella Edrada, in various amounts totaling One Hundred Forty Thousand Pesos (P140,000.00). The first three (3) checks were honored upon

presentment to the drawee bank while the fourth check for One Hundred Thousand Pesos (P100,000.00) was dishonored because of a stop payment order.

On 3 June 1996, respondents filed an action against petitioners for specific performance with damages before the RTC, praying that petitioners be obliged to execute the necessary deed of sale of the two fishing vessels and to pay the balance of the purchase price. In their Complaint,[7] respondents alleged that petitioners contracted to buy the two fishing vessels for the agreed purchase price of Nine Hundred Thousand Pesos (P900,000.00), as evidenced by the above-quoted document, which according to them evinced a contract to buy. However, despite delivery of said vessels and repeated oral demands, petitioners failed to pay the balance, so respondents further averred.

Belying the allegations of respondents, in their Answer with

Counterclaim,[8]petitioners averred that the document sued upon merely embodies an agreement brought about by the loans they extended to respondents. According to petitioners, respondents allowed them to manage or administer the fishing vessels as a business on the understanding that should they find the business profitable, the

vessels would be sold to them for Nine Hundred Thousand Pesos (P900,000.00). But petitioners decided to call it quits after spending a hefty sum for the repair and maintenance of the vessels which were already in dilapidated condition.

After trial, the RTC rendered a Decision[9]dated 22 February 1999, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the

plaintiffs and against the defendants and the latter are ordered to pay to the former the amount of Eight Hundred Sixty Thousand Pesos (P860,000.00) with legal interests thereon from June 30, 1996 until fully paid; the amount of P20,000.00 as attorneys fees and the cost of suit.

The counterclaim of the defendants for moral and exemplary damages and for attorneys fees is dismissed for lack of merit.

SO ORDERED.[10]

The RTC treated the action as one for collection of a sum of money and for damages and considered the document as a perfected contract of sale. On 19 April 1999, petitioners filed a Motion for Reconsideration which the RTC denied in an Order[11] dated 2 July 1999.

Both parties appealed the RTC Decision. However, finding no reversible error in

the appealed decision, the Court of Appeals, in its Decision,[12] affirmed the same and dismissed both appeals. Only petitioners elevated the controversy to this Court.

Petitioners raised the nature of the subject document as the primary legal

issue. They contend that there was no perfected contract of sale as distinguished from a contract to sell. They likewise posed as sub-issues the purpose for which the checks were issued, whether replacement of the crew was an act of ownership or

administration, whether petitioners failed to protest the dilapidated condition of the vessels, and whether the instances when the vessels went out to sea proved that the vessels were not seaworthy.[13] It is also alleged in the petition that the true agreement as between the parties was that of a loan.

Evidently, the petition hinges on the true nature of the document dated 1 April

1996. Normally, the Court is bound by the factual findings of the lower courts, and accordingly, should affirm the conclusion that the document in question was a perfected contract of sale. However, we find that both the RTC and the Court of Appeals gravely misapprehended the nature of the said document, and a reevaluation of the document is in order.[14] Even if such reevaluation would lead the court to examine issues not raised by the parties, it should be remembered that the Court has authority to review matters even if not assigned as errors in the appeal, if it is found that their consideration is necessary in arriving at a just decision of the case.[15]

In doing so, we acknowledge that the contending parties offer vastly differing accounts as to the true nature of the agreement. Still, we need not look beyond the document dated 1 April 1996 and the stipulations therein in order to ascertain what obligations, if any, have been contracted by the party. The parol evidence rule forbids any addition to or contradiction of the terms of a written agreement by testimony or other evidence purporting to show that different terms were agreed upon by the parties, varying the purport of the written contract. Whatever is not found in the writing is understood to have been waived and abandoned.[16]

We disagree with the RTC and the Court of Appeals that the document is a

perfected contract of sale. A contract of sale is defined as an agreement whereby one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefore a price certain in money or its equivalent.[17] It must evince the consent on the part of the seller to transfer and deliver and on the part of the buyer to pay.[18]

An examination of the document reveals that there is no perfected contract of

sale. The agreement may confirm the receipt by respondents of the two vessels and their purchase price. However, there is no equivocal agreement to transfer ownership of the vessel, but a mere commitment that documents pertaining to the sale and agreement of payments[are] to follow. Evidently, the document or documents which would formalize the transfer of ownership and contain the terms of payment of the purchase price, or the period when such would become due and demandable, have yet to be executed. But no such document was executed and no such terms were stipulated upon.

The fact that there is a stated total purchase price should not lead to the

conclusion that a contract of sale had been perfected. In numerous cases,[19] the most recent of which is Swedish Match, AB v. Court of Appeals,[20] we held that before a valid and binding contract of sale can exist, the manner of payment of the purchase price must first be established, as such stands as essential to the validity of the sale. After all, such agreement on the terms of payment is integral to the element of a price certain, such that a disagreement on the manner of payment is tantamount to a failure to agree on the price.

Assuming arguendo that the document evinces a perfected contract of sale, the absence of definite terms of payment therein would preclude its enforcement by the respondents through the instant Complaint. A requisite for the judicial enforcement of an obligation is that the same is due and demandable. The absence of a stipulated period by which the purchase price should be paid indicates that at the time of the filing of the complaint, the obligation to pay was not yet due and demandable.

Respondents, during trial, did claim the existence of a period. Respondent Carmencita Ramos, during cross-examination, claimed that the supposed balance shall be paid on 30 June 1996.[21] But how do respondents explain why the Complaint was filed on 3 June 1996? Assuming that the 30 June 1996 period was duly agreed upon by the parties, the filing of the Complaint was evidently premature, as no cause of action had accrued yet. There could not have been any breach of obligation because on the date the action was filed, the alleged maturity date for the payment of the balance had not yet arrived.

In order that respondents could have a valid cause of action, it is essential that there must have been a stipulated period within which the payment would have become due and demandable. If the parties themselves could not come into agreement, the courts may be asked to fix the period of the obligation, under Article 1197 of the Civil Code.[22] The respondents did not avail of such relief prior to the filing of the instant Complaint; thus, the action should fail owing to its obvious prematurity.

Returning to the true nature of the document, we neither could conclude that a contract to sell had been established. A contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price.[23]

A contract is perfected when there is concurrence of the wills of the contracting parties with respect to the object and the cause of the contract. In this case, the agreement merely acknowledges that a purchase price had been agreed on by the parties. There was no mutual promise to buy on the part of petitioners and to sell on the part of respondents. Again, the aforestated proviso in the agreement that documents pertaining to the sale and agreement of payments between the parties will follow clearly manifests lack of agreement between the parties as to the terms of the contract to sell, particularly the object and cause of the contract.

The agreement in question does not create any obligatory force either for the

transfer of title of the vessels, or the rendition of payments as part of the purchase price. At most, this agreement bares only their intention to enter into either a contract to sell or a contract of sale.

Consequently, the courts below erred in ordering the enforcement of a contract

of sale that had yet to come into existence. Instead, the instant Complaint should be dismissed. It prays for three reliefs arising from the enforcement of the document: execution by the petitioners of the necessary deed of sale over the vessels, the payment of the balance of the purchase price, and damages. The lower courts have already ruled that damages are unavailing. Our finding that there is no perfected contract of sale precludes the finding of any cause of action that would warrant the granting of the first two reliefs. No cause of action arises until there is a breach or violation thereof by either party.[24] Considering that the documents create no obligation to execute or even pursue a contract of sale, but only manifest an intention to eventually contract one, we find no rights breached or violated that would warrant any of the reliefs sought in the Complaint.

WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution

of the Court of Appeals are REVERSED and SET ASIDE. The case before the Regional Trial Court is ordered DISMISSED. No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines 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. 126376. November 20, 2003]

SPOUSES BERNARDO BUENAVENTURA and CONSOLACION JOAQUIN, SPOUSES JUANITO EDRA and NORA JOAQUIN, SPOUSES RUFINO VALDOZ and EMMA JOAQUIN, and NATIVIDAD JOAQUIN, petitioners,

vs.

COURT OF APPEALS, SPOUSES LEONARDO JOAQUIN and FELICIANA LANDRITO, SPOUSES FIDEL JOAQUIN and CONCHITA BERNARDO, SPOUSES TOMAS JOAQUIN and SOLEDAD ALCORAN, SPOUSES ARTEMIO JOAQUIN and SOCORRO ANGELES, SPOUSES ALEXANDER MENDOZA and CLARITA JOAQUIN, SPOUSES

TELESFORO CARREON and FELICITAS JOAQUIN, SPOUSES DANILO VALDOZ and FE JOAQUIN, and SPOUSES GAVINO JOAQUIN and LEA ASIS, respondents.

D E C I S I O N

CARPIO, J.:

The Case

This is a petition for review on certiorari1[1] to annul the Decision2[2] dated 26 June 1996 of the Court of Appeals in CA-G.R. CV No. 41996. The Court of Appeals affirmed the Decision3[3] dated 18 February 1993 rendered by Branch 65 of the Regional Trial Court of Makati (trial court) in Civil Case No. 89-5174. The trial court dismissed the case after it found that the parties executed the Deeds of Sale for valid consideration and that the plaintiffs did not have a cause of action against the defendants.

The Facts

The Court of Appeals summarized the facts of the case as follows:

Defendant spouses Leonardo Joaquin and Feliciana Landrito are the parents of plaintiffs Consolacion, Nora, Emma and Natividad as well as of defendants Fidel, Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all surnamed JOAQUIN. The married Joaquin children are joined in this action by their respective spouses.

Sought to be declared null and void ab initio are certain deeds of sale of real property executed by defendant parents Leonardo Joaquin and Feliciana Landrito in favor of their co-defendant children and the corresponding certificates of title issued in their names, to wit:

1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan (LRC) Psd-256395 executed on 11 July 1978, in favor of defendant Felicitas Joaquin, for a consideration of P6,000.00 (Exh. C), pursuant to which TCT No. [36113/T-172] was issued in her name (Exh. C-1);

1[1]Under Rule 45 of the Rules of Court.

2[2] Penned by Associate Justice Artemio G. Tuquero, with Associate Justices Cancio C. Garcia

and Romeo J. Callejo, Sr., concurring.

3[3]Penned by Judge Salvador S. Abad Santos.

2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC) Psd-256394 executed on 7 June 1979, in favor of defendant Clarita Joaquin, for a consideration of P1[2],000.00(Exh. D), pursuant to which TCT No. S-109772 was issued in her name (Exh. D-1);

3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC) Psd-256394 executed on 12 May 1988, in favor of defendant spouses Fidel Joaquin and Conchita Bernardo, for a consideration of P54,[3]00.00 (Exh. E), pursuant to which TCT No. 155329 was issued to them (Exh. E-1);

4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC) Psd-256394 executed on 12 May 1988, in favor of defendant spouses Artemio Joaquin and Socorro Angeles, for a consideration of P[54,3]00.00 (Exh. F), pursuant to which TCT No. 155330 was issued to them (Exh. F-1); and

5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision plan (LRC) Psd-256395 executed on 9 September 1988, in favor of Tomas Joaquin, for a consideration of P20,000.00 (Exh. G), pursuant to which TCT No. 157203 was issued

in her name (Exh. G-1).

6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC) Psd-256395 executed on 7 October 1988, in favor of Gavino Joaquin, for a consideration of P25,000.00 (Exh. K), pursuant to which TCT No. 157779 was issued in his name (Exh. K-1).]

In seeking the declaration of nullity of the aforesaid deeds of sale and certificates of title, plaintiffs, in their complaint, aver:

- XX-

The deeds of sale, Annexes C, D, E, F, and G, [and K] are simulated as they are, are NULL AND VOID AB INITIO because

a) Firstly, there was no actual valid consideration for the deeds of sale xxx over the properties in litis;

b) Secondly, assuming that there was consideration in the sums reflected in the questioned deeds, the properties are more than three-fold times more valuable than the measly sums appearing therein;

c) Thirdly, the deeds of sale do not reflect and express the true intent of the parties (vendors and vendees); and

d) Fourthly, the purported sale of the properties in litis was the result of a deliberate conspiracy designed to unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of their legitime.

- XXI -

Necessarily, and as an inevitable consequence, Transfer Certificates of Title Nos. 36113/T-172, S-109772, 155329, 155330, 157203 [and 157779] issued by the Registrar of Deeds over the properties in litis xxx are NULL AND VOID AB INITIO.

Defendants, on the other hand aver (1) that plaintiffs do not have a cause of action against them as well as the requisite standing and interest to assail their titles over the properties in litis; (2) that the sales were with sufficient considerations and made by defendants parents voluntarily, in good faith, and with full knowledge of the consequences of their deeds of sale; and (3) that the certificates of title were issued with sufficient factual and legal basis.4[4] (Emphasis in the original)

4[4]Rollo, pp. 29-31.

The Ruling of the Trial Court

Before the trial, the trial court ordered the dismissal of the case against defendant spouses Gavino Joaquin and Lea Asis.5[5] Instead of filing an Answer with their co-defendants, Gavino Joaquin and Lea Asis filed a Motion to Dismiss.6[6] In granting the dismissal to Gavino Joaquin and Lea Asis, the trial court noted that compulsory heirs have the right to a legitime but such right is contingent since said right commences only from the moment of death of the decedent pursuant to Article 777 of the Civil Code of the Philippines.7[7]

After trial, the trial court ruled in favor of the defendants and dismissed the complaint. The trial court stated:

In the first place, the testimony of the defendants, particularly that of the xxx father will show that the Deeds of Sale were all executed for valuable consideration. This assertion must prevail over the negative allegation of plaintiffs.

And then there is the argument that plaintiffs do not have a valid cause of

action against defendants since there can be no legitime to speak of prior to the death of their parents. The court finds this contention tenable. In determining the legitime, the value of the property left at the death of the testator shall be considered (Art. 908 of the New Civil Code). Hence, the legitime of a compulsory heir is computed as of the time of the death of the decedent. Plaintiffs therefore cannot claim an impairment of their legitime while their parents live.

All the foregoing considered, this case is DISMISSED.

In order to preserve whatever is left of the ties that should bind families together, the counterclaim is likewise DISMISSED.

No costs.

SO ORDERED.8[8]

The Ruling of the Court of Appeals

The Court of Appeals affirmed the decision of the trial court. The appellate court ruled:

To the mind of the Court, appellants are skirting the real and decisive issue in this case, which is, whether xxx they have a cause of action against appellees.

Upon this point, there is no question that plaintiffs-appellants, like their defendant brothers and sisters, are compulsory heirs of defendant spouses, Leonardo Joaquin and Feliciana Landrito, who are their parents. However, their right to the properties of their defendant parents, as compulsory heirs, is merely inchoate and vests only upon the latters death. While still alive, defendant parents are free to dispose of their properties, provided that such dispositions are not made in fraud of creditors.

Plaintiffs-appellants are definitely not parties to the deeds of sale in question. Neither do they claim to be creditors of their defendant parents. Consequently, they cannot be considered as real parties in interest to assail the validity of said deeds either for gross inadequacy or lack of consideration or for failure to express the true

5[5]Records, pp. 189, 204.

6[6]Ibid., pp. 170-175.

7[7]Ibid., p. 189.

8[8]Ibid., pp. 355-356.

intent of the parties. In point is the ruling of the Supreme Court in Velarde, et al. vs. Paez, et al., 101 SCRA 376, thus:

The plaintiffs are not parties to the alleged deed of sale and are not principally or subsidiarily bound thereby; hence, they have no legal capacity to challenge their validity.

Plaintiffs-appellants anchor their action on the supposed impairment of their legitime by the dispositions made by their defendant parents in favor of their defendant brothers and sisters. But, as correctly held by the court a quo, the legitime of a compulsory heir is computed as of the time of the death of the decedent. Plaintiffs therefore cannot claim an impairment of their legitime while their parents live.

With this posture taken by the Court, consideration of the errors assigned by plaintiffs-appellants is inconsequential.

WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs against plaintiffs-appellants.

SO ORDERED.9[9]

Hence, the instant petition.

Issues

Petitioners assign the following as errors of the Court of Appeals:

1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE IN QUESTION HAD NO VALID CONSIDERATION.

2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN ASSUMING THAT THERE WAS A CONSIDERATION, THE SAME IS GROSSLY INADEQUATE.

3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE DEEDS OF SALE DO NOT EXPRESS THE TRUE INTENT OF THE PARTIES.

4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE WAS PART AND PARCEL OF A CONSPIRACY AIMED AT UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF THE SPOUSES LEONARDO JOAQUIN AND FELICIANA LANDRITO OF THEIR INTEREST OVER THE SUBJECT PROPERTIES.

5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS HAVE A GOOD, SUFFICIENT AND VALID CAUSE OF ACTION AGAINST THE PRIVATE RESPONDENTS.10[10]

The Ruling of the Court

We find the petition without merit.

We will discuss petitioner’s legal interest over the properties subject of the Deeds of Sale before discussing the issues on the purported lack of consideration and gross inadequacy of the prices of the Deeds of Sale.

Whether Petitioners have a legal interest over the properties subject of the Deeds of Sale

9[9]Rollo, pp. 32-33.

10[10]Ibid., pp. 16-17.

Petitioners Complaint betrays their motive for filing this case. In their Complaint, petitioners asserted that the purported sale of the properties in litis was the result of a deliberate conspiracy designed to unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of their legitime. Petitioners strategy was to have the Deeds of Sale declared void so that ownership of the lots would eventually revert to their respondent parents. If their parents die still owning the lots, petitioners and their respondent siblings will then co-own their parents estate by hereditary succession.11[11]

It is evident from the records that petitioners are interested in the properties subject of the Deeds of Sale, but they have failed to show any legal right to the properties. The trial and appellate courts should have dismissed the action for this reason alone. An action must be prosecuted in the name of the real party-in-interest.12[12]

The question as to real party-in-interest is whether he is the party who would be benefitted or injured by the judgment, or the party entitled to the avails of the suit.

x x x

In actions for the annulment of contracts, such as this action, the real parties are those who are parties to the agreement or are bound either principally or subsidiarily or are prejudiced in their rights with respect to one of the contracting parties and can show the detriment which would positively result to them from the contract even though they did not intervene in it (Ibaez v. Hongkong & Shanghai Bank, 22 Phil. 572 [1912]) xxx.

These are parties with a present substantial interest, as distinguished from a mere expectancy or future, contingent, subordinate, or consequential interest. The phrase present substantial interest more concretely is meant such interest of a party in the subject matter of the action as will entitle him, under the substantive law, to recover if the evidence is sufficient, or that he has the legal title to demand and the defendant will be protected in a payment to or recovery by him.13[13]

Petitioners do not have any legal interest over the properties subject of the Deeds of Sale. As the appellate court stated, petitioners right to their parents properties is merely inchoate and vests only upon their parents death. While still living, the parents of petitioners are free to dispose of their properties. In their overzealousness to safeguard their future legitime, petitioners forget that theoretically, the sale of the lots to their siblings does not affect the value of their parents estate. While the sale of the lots reduced the estate, cash of equivalent value replaced the lots taken from the estate.

Whether the Deeds of Sale are void for lack of consideration

Petitioners assert that their respondent siblings did not actually pay the prices stated in the Deeds of Sale to their respondent father. Thus, petitioners ask the court

to declare the Deeds of Sale void.

A contract of sale is not a real contract, but a consensual contract. As a consensual contract, a contract of sale becomes a binding and valid contract upon the meeting of the minds as to price. If there is a meeting of the minds of the parties as to the price, the contract of sale is valid, despite the manner of payment, or even the

11[11] Article 1078 of the Civil Code of the Philippines states: Where there are two or more heirs,

the whole estate of the decedent is, before its partition, owned in common by such heirs, subject

to the payment of debts of the deceased.

12[12] Section 2, Rule 3, 1997 Rules of Civil Procedure.

13[13]Kilosbayanv. Morato, 316 Phil. 652 (1995).

breach of that manner of payment. If the real price is not stated in the contract, then the contract of sale is valid but subject to reformation. If there is no meeting of the minds of the parties as to the price, because the price stipulated in the contract is simulated, then the contract is void.14[14] Article 1471 of the Civil Code states that if the price in a contract of sale is simulated, the sale is void.

It is not the act of payment of price that determines the validity of a contract of sale. Payment of the price has nothing to do with the perfection of the contract. Payment of the price goes into the performance of the contract. Failure to pay the consideration is different from lack of consideration. The former results in a right to demand the fulfillment or cancellation of the obligation under an existing valid contract while the latter prevents the existence of a valid contract.15[15]

Petitioners failed to show that the prices in the Deeds of Sale were absolutely simulated. To prove simulation, petitioners presented Emma Joaquin Valdozs testimony stating that their father, respondent Leonardo Joaquin, told her that he would transfer a lot to her through a deed of sale without need for her payment of the purchase price.16[16] The trial court did not find the allegation of absolute simulation of price credible. Petitioners failure to prove absolute simulation of price is magnified by their lack of knowledge of their respondent siblings financial capacity to buy the questioned lots.17[17] On the other hand, the Deeds of Sale which petitioners presented as evidence plainly showed the cost of each lot sold. Not only did respondents minds meet as to the purchase price, but the real price was also stated in the Deeds of Sale. As of the filing of the complaint, respondent siblings have also fully paid the price to their respondent father.18[18]

Whether the Deeds of Sale are void for gross inadequacy of price

Petitioners ask that assuming that there is consideration, the same is grossly inadequate as to invalidate the Deeds of Sale.

Articles 1355 of the Civil Code states:

Art. 1355. Except in cases specified by law, lesion or inadequacy of cause

shall not invalidate a contract, unless there has been fraud, mistake or undue influence. (Emphasis supplied)

Article 1470 of the Civil Code further provides:

Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract. (Emphasis supplied)

14[14]SeeLadanga, et al. v. CA, et al., 216 Phil. 332 (1984). CESAR L. VILLANUEVA,

PHILIPPINE LAW ON SALES 54 (1998).

15[15]RidoMontecillov.IgnaciaReynes and Spouses Redemptor and Elisa Abucay, G.R. No.

138018, 26 July 2002.

16[16] TSN, 17 May 1991, pp. 497-498.

17[17]SeeEmbradov. Court of Appeals, G.R. No. 51457, 27 June 1994, 233 SCRA 335; TSN, 17

May 1991, 497-498 (Emma Joaquin Valdoz); TSN, 22 May 1991, pp. 11-12, 20-21 (Nora

Joaquin Edra).

18[18] TSN, 14 June 1991, p. 19 (Leonardo Joaquin); TSN, 30 October 1991, p. 6 (Fidel Joaquin);

TSN, 27 November 1991, p. 10 (Felicitas Joaquin Carreon); TSN, 7 January 1992, pp. 5-6

(Artemio Joaquin); TSN, 31 January 1992, p. 12 (Clarita Joaquin Mendoza); TSN, 11 March

1992, pp. 16-17 (Tomas Joaquin).

Petitioners failed to prove any of the instances mentioned in Articles 1355 and 1470 of the Civil Code which would invalidate, or even affect, the Deeds of Sale. Indeed, there is no requirement that the price be equal to the exact value of the subject matter of sale. All the respondents believed that they received the commutative value of what they gave. As we stated in Vales v. Villa:

Courts cannot follow one every step of his life and extricate him from bad bargains, protect him from unwise investments, relieve him from one-sided contracts, or annul the effects of foolish acts. Courts cannot constitute themselves guardians of persons who are not legally incompetent. Courts operate not because one person has been defeated or overcome by another, but because he has been defeated or overcome illegally. Men may do foolish things, make ridiculous contracts, use miserable judgment, and lose money by them indeed, all they have in the world; but not for that alone can the law intervene and restore. There must be, in addition, a violation of the law, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of the situation and remedy it. (Emphasis in the original)

Moreover, the factual findings of the appellate court are conclusive on the

parties and carry greater weight when they coincide with the factual findings of the trial court. This Court will not weigh the evidence all over again unless there has been a showing that the findings of the lower court are totally devoid of support or are clearly erroneous so as to constitute serious abuse of discretion.19[20] In the instant case, the trial court found that the lots were sold for a valid consideration, and that the defendant children actually paid the purchase price stipulated in their respective Deeds of Sale. Actual payment of the purchase price by the buyer to the seller is a factual finding that is now conclusive upon us.

WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.

SO ORDERED.

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.

Republic of the Philippines SUPREME COURT

Manila

FIRST DIVISION

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.

I

After going over the three volumes of stenographic notes and the voluminous

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

As found by the lower court, which finding 4We 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 190 5 of the Code. This compensating tax is not a tax on the importation of goods but a tax on the use of imported goods not subject to sales tax. Engineering, therefore, should be held liable to the payment of 30% compensating tax in accordance with Section 190 of the Tax Code in relation to Section 185(m) of the same, but without the 50% mark up provided in Section 183(b).

II

We take up next the issue of fraud. The Commissioner charged Engineering

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

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

Despite the above findings, however, the Court of Tax Appeals absolved

Engineering from paying the 50% surcharge prescribe by Section 183(a) of the Tax Code by reasoning out as follows:

The imposition of the 50% surcharge prescribed by Section 183(a)

of the Tax Code is based on willful neglect to file the monthly return within 20 days after the end of each month or in case a false or fraudulent return is willfully 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. Makalintal, C.J., Castro, Makasiar and Martin, JJ., concur.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-11491 August 23, 1918

ANDRES QUIROGA, plaintiff-appellant, vs. PARSONS HARDWARE CO., defendant-appellee.

Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant. Crossfield & O'Brien for appellee.

AVANCEÑA, J.:

On January 24, 1911, in this city of manila, a contract in the following tenor

was entered into by and between the plaintiff, as party of the first part, and J. Parsons (to whose rights and obligations the present defendant later subrogated itself), as party of the second part:

CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J. PARSONS, BOTH MERCHANTS ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE OF "QUIROGA" BEDS IN THE VISAYAN ISLANDS.

ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the Visayan Islands to J. Parsons under the following conditions:

(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the latter's establishment in Iloilo, and shall invoice them at the same price he has fixed for sales, in Manila, and, in the invoices, shall make and allowance of a discount of 25 per cent of the invoiced prices, as commission on the sale; and Mr. Parsons shall order the beds by the dozen, whether of the same or of different styles.

(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within a period of sixty days from the date of their shipment.

(C) The expenses for transportation and shipment shall be borne by M. Quiroga, and the freight, insurance, and cost of unloading from the vessel at the point where the beds are received, shall be paid by Mr. Parsons.

(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said payment when made shall be considered as a prompt payment, and as such a deduction of 2 per cent shall be made from the amount of the invoice.

The same discount shall be made on the amount of any invoice which Mr. Parsons may deem convenient to pay in cash.

(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of any alteration in price which he may plan to make in respect to his beds, and agrees that if on the date when such alteration takes effect he should have any order pending to be served to Mr. Parsons, such order shall enjoy the advantage of the alteration if the price thereby be lowered, but shall not be affected by said alteration if the price thereby be increased, for, in this latter case, Mr. Quiroga assumed the obligation to invoice the beds at the price at which the order was given.

(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga" beds.

ART. 2. In compensation for the expenses of advertisement which, for the benefit of both contracting parties, Mr. Parsons may find himself obliged to make, Mr. Quiroga assumes the obligation to offer and give the preference to Mr. Parsons in case anyone should apply for the exclusive agency for any island not comprised with the Visayan group.

ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of "Quiroga" beds in all the towns of the Archipelago where there are no exclusive agents, and shall immediately report such action to Mr. Quiroga for his approval.

ART. 4. This contract is made for an unlimited period, and may be terminated by either of the contracting parties on a previous notice of ninety days to the other party.

Of the three causes of action alleged by the plaintiff in his complaint, only two of them constitute the subject matter of this appeal and both substantially amount to the averment that the defendant violated the following obligations: not to sell the beds

at higher prices than those of the invoices; to have an open establishment in Iloilo; itself to conduct the agency; to keep the beds on public exhibition, and to pay for the advertisement expenses for the same; and to order the beds by the dozen and in no other manner. As may be seen, with the exception of the obligation on the part of the defendant to order the beds by the dozen and in no other manner, none of the obligations imputed to the defendant in the two causes of action are expressly set forth in the contract. But the plaintiff alleged that the defendant was his agent for the sale of his beds in Iloilo, and that said obligations are implied in a contract of commercial agency. The whole question, therefore, reduced itself to a determination as to whether the defendant, by reason of the contract hereinbefore transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds.

In order to classify a contract, due regard must be given to its essential clauses. In the contract in question, what was essential, as constituting its cause and subject matter, is that the plaintiff was to furnish the defendant with the beds which the latter might order, at the price stipulated, and that the defendant was to pay the price in the manner stipulated. The price agreed upon was the one determined by the plaintiff for the sale of these beds in Manila, with a discount of from 20 to 25 per cent, according to their class. Payment was to be made at the end of sixty days, or before, at the plaintiff's request, or in cash, if the defendant so preferred, and in these last two cases an additional discount was to be allowed for prompt payment. These are precisely the essential features of a contract of purchase and sale. There was the obligation on the part of the plaintiff to supply the beds, and, on the part of the defendant, to pay their price. These features exclude the legal conception of an agency or order to sell whereby the mandatory or agent received the thing to sell it, and does not pay its price, but delivers to the principal the price he obtains from the sale of the thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the contract between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily obliged to pay their price within the term fixed, without any other consideration and regardless as to whether he had or had not sold the beds.

It would be enough to hold, as we do, that the contract by and between the defendant and the plaintiff is one of purchase and sale, in order to show that it was not one made on the basis of a commission on sales, as the plaintiff claims it was, for these contracts are incompatible with each other. But, besides, examining the clauses of this contract, none of them is found that substantially supports the plaintiff's contention. Not a single one of these clauses necessarily conveys the idea of an agency. The words commission on sales used in clause (A) of article 1 mean nothing else, as stated in the contract itself, than a mere discount on the invoice price. The word agency, also used in articles 2 and 3, only expresses that the defendant was the only one that could sell the plaintiff's beds in the Visayan Islands. With regard to the remaining clauses, the least that can be said is that they are not incompatible with the contract of purchase and sale.

The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the defendant corporation and who established and managed the latter's

business in Iloilo. It appears that this witness, prior to the time of his testimony, had serious trouble with the defendant, had maintained a civil suit against it, and had even accused one of its partners, Guillermo Parsons, of falsification. He testified that it was he who drafted the contract Exhibit A, and, when questioned as to what was his purpose in contracting with the plaintiff, replied that it was to be an agent for his beds and to collect a commission on sales. However, according to the defendant's evidence, it was Mariano Lopez Santos, a director of the corporation, who prepared Exhibit A. But, even supposing that Ernesto Vidal has stated the truth, his statement as to what was his idea in contracting with the plaintiff is of no importance, inasmuch as the agreements contained in Exhibit A which he claims to have drafted, constitute, as we have said, a contract of purchase and sale, and not one of commercial agency. This only means that Ernesto Vidal was mistaken in his classification of the contract. But it must be understood that a contract is what the law defines it to be, and not what it is called by the contracting parties.

The plaintiff also endeavored to prove that the defendant had returned beds that it could not sell; that, without previous notice, it forwarded to the defendant the beds that it wanted; and that the defendant received its commission for the beds sold

by the plaintiff directly to persons in Iloilo. But all this, at the most only shows that, on the part of both of them, there was mutual tolerance in the performance of the contract in disregard of its terms; and it gives no right to have the contract considered, not as the parties stipulated it, but as they performed it. Only the acts of the contracting parties, subsequent to, and in connection with, the execution of the contract, must be considered for the purpose of interpreting the contract, when such interpretation is necessary, but not when, as in the instant case, its essential agreements are clearly set forth and plainly show that the contract belongs to a certain kind and not to another. Furthermore, the return made was of certain brass beds, and was not effected in exchange for the price paid for them, but was for other beds of another kind; and for the letter Exhibit L-1, requested the plaintiff's prior consent with respect to said beds, which shows that it was not considered that the defendant had a right, by virtue of the contract, to make this return. As regards the shipment of beds without previous notice, it is insinuated in the record that these brass beds were precisely the ones so shipped, and that, for this very reason, the plaintiff agreed to their return. And with respect to the so-called commissions, we have said that they merely constituted a discount on the invoice price, and the reason for applying this benefit to the beds sold directly by the plaintiff to persons in Iloilo was because, as the defendant obligated itself in the contract to incur the expenses of advertisement of the plaintiff's beds, such sales were to be considered as a result of that advertisement.

In respect to the defendant's obligation to order by the dozen, the only one expressly imposed by the contract, the effect of its breach would only entitle the plaintiff to disregard the orders which the defendant might place under other conditions; but if the plaintiff consents to fill them, he waives his right and cannot complain for having acted thus at his own free will.

For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and the defendant was one of purchase and sale, and that the obligations the breach of which is alleged as a cause of action are not imposed upon the defendant, either by agreement or by law.

The judgment appealed from is affirmed, with costs against the appellant. So ordered.

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

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-47538 June 20, 1941

GONZALO PUYAT & SONS, INC., petitioner, vs. ARCO AMUSEMENT COMPANY (formerly known as Teatro Arco), respondent.

Feria & Lao for petitioner. J. W. Ferrier and Daniel Me. Gomez for respondent.

LAUREL, J.:

This is a petition for the issuance of a writ of certiorari to the Court of Appeals for the

purpose of reviewing its Amusement Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat and Sons. Inc., defendant-appellee."

It appears that the respondent herein brought an action against the herein petitioner in the Court of First Instance of Manila to secure a reimbursement of certain amounts allegedly overpaid by it on account of the purchase price of sound reproducing equipment and machinery ordered by the petitioner from the Starr Piano Company of Richmond, Indiana, U.S.A. The facts of the case as found by the trial court and confirmed by the appellate court, which are admitted by the respondent, are as follows:

In the year 1929, the "Teatro Arco", a corporation duly organized under the laws of the Philippine Islands, with its office in Manila, was engaged in the business of operating cinematographs. In 1930, its name was changed to Arco Amusement Company. C. S. Salmon was the president, while A. B. Coulette was the business manager. About the same time, Gonzalo Puyat & Sons, Inc., another corporation doing business in the Philippine Islands, with office in Manila, in addition to its other business, was acting as exclusive agents in the Philippines for the Starr Piano Company of Richmond, Indiana, U.S. A. It would seem that this last company dealt in cinematographer equipment and machinery, and the Arco Amusement Company desiring to equipt its cinematograph with sound reproducing devices, approached Gonzalo Puyat & Sons, Inc., thru its then president and acting manager, Gil Puyat, and an employee named Santos. After some negotiations, it was agreed between the parties, that is to say, Salmon and Coulette on one side, representing the plaintiff, and Gil Puyat on the other, representing the defendant, that the latter would, on behalf of the plaintiff, order sound reproducing equipment from the Starr Piano Company and that the plaintiff would pay the defendant, in addition to the price of the equipment, a 10 per cent commission, plus all expenses, such as, freight, insurance, banking charges, cables, etc. At the

expense of the plaintiff, the defendant sent a cable, Exhibit "3", to the Starr Piano Company, inquiring about the equipment desired and making the said company to quote its price without discount. A reply was received by Gonzalo Puyat & Sons, Inc., with the price, evidently the list price of $1,700 f.o.b. factory Richmond, Indiana. The defendant did not show the plaintiff the cable of inquiry nor the reply but merely informed the plaintiff of the price of $1,700. Being agreeable to this price, the plaintiff, by means of Exhibit "1", which is a letter signed by C. S. Salmon dated November 19, 1929, formally authorized the order. The equipment arrived about the end of the year 1929, and upon delivery of the same to the plaintiff and the presentation of necessary papers, the price of $1.700, plus the 10 per cent commission agreed upon and plus all the expenses and charges, was duly paid by the plaintiff to the defendant.

Sometime the following year, and after some negotiations between the same parties, plaintiff and defendants, another order for sound reproducing equipment was placed by the plaintiff with the defendant, on the same terms as

the first order. This agreement or order was confirmed by the plaintiff by its letter Exhibit "2", without date, that is to say, that the plaintiff would pay for the equipment the amount of $1,600, which was supposed to be the price quoted by the Starr Piano Company, plus 10 per cent commission, plus all expenses incurred. The equipment under the second order arrived in due time, and the defendant was duly paid the price of $1,600 with its 10 per cent commission, and $160, for all expenses and charges. This amount of $160 does not represent actual out-of-pocket expenses paid by the defendant, but a mere flat charge and rough estimate made by the defendant equivalent to 10 per cent of the price of $1,600 of the equipment.

About three years later, in connection with a civil case in Vigan, filed by one Fidel Reyes against the defendant herein Gonzalo Puyat & Sons, Inc., the officials of the Arco Amusement Company discovered that the price quoted to them by the defendant with regard to their two orders mentioned was not the net price but rather the list price, and that the defendants had obtained a discount from the Starr Piano Company. Moreover, by reading reviews and literature on prices of machinery and cinematograph equipment, said officials of the plaintiff were convinced that the prices charged them by the defendant were much too high including the charges for out-of-pocket expense. For these reasons, they sought to obtain a reduction from the defendant or rather a reimbursement, and failing in this they brought the present action.

The trial court held that the contract between the petitioner and the respondent was one of outright purchase and sale, and absolved that petitioner from the complaint. The appellate court, however, — by a division of four, with one justice dissenting — held that the relation between petitioner and respondent was that of agent and principal, the petitioner acting as agent of the respondent in the purchase of the equipment in question, and sentenced the petitioner to pay the respondent alleged overpayments in the total sum of $1,335.52 or P2,671.04, together with legal interest thereon from the date of the filing of the complaint until said amount is fully paid, as well as to pay the costs of the suit in both instances. The appellate court further argued that even if the contract between the petitioner and the respondent was one of purchase and sale, the petitioner was guilty of fraud in concealing the true price and hence would still be liable to reimburse the respondent for the overpayments made by the latter.

The petitioner now claims that the following errors have been incurred by the appellate court:

I. El Tribunal de Apelaciones incurrio en error de derecho al declarar que, segun hechos, entre la recurrente y la recurrida existia una relacion implicita de mandataria a mandante en la transaccion de que se trata, en vez de la de vendedora a compradora como ha declarado el Juzgado de Primera Instncia de Manila, presidido entonces por el hoy Magistrado Honorable Marcelino Montemayor.

II. El Tribunal de Apelaciones incurrio en error de derecho al declarar que,

suponiendo que dicha relacion fuerra de vendedora a compradora, la recurrente obtuvo, mediante dolo, el consentimiento de la recurrida en cuanto al precio de $1,700 y $1,600 de las maquinarias y equipos en cuestion, y condenar a la recurrente ha obtenido de la Starr Piano Company of Richmond, Indiana.

We sustain the theory of the trial court that the contract between the petitioner and the respondent was one of purchase and sale, and not one of agency, for the reasons now to be stated.

In the first place, the contract is the law between the parties and should include all the things they are supposed to have been agreed upon. What does not appear on the face of the contract should be regarded merely as "dealer's" or "trader's talk", which can not bind either party. (Nolbrook v. Conner, 56 So., 576, 11 Am. Rep., 212; Bank v. Brosscell, 120 III., 161; Bank v. Palmer, 47 III., 92; Hosser v. Copper, 8 Allen, 334; Doles v. Merrill, 173 Mass., 411.) The letters, Exhibits 1 and 2, by which the respondent accepted the prices of $1,700 and $1,600, respectively, for the sound

reproducing equipment subject of its contract with the petitioner, are clear in their terms and admit no other interpretation that the respondent in question at the prices indicated which are fixed and determinate. The respondent admitted in its complaint filed with the Court of First Instance of Manila that the petitioner agreed to sell to it the first sound reproducing equipment and machinery. The third paragraph of the respondent's cause of action states:

3. That on or about November 19, 1929, the herein plaintiff (respondent) and defendant (petitioner) entered into an agreement, under and by virtue of which the herein defendant was to secure from the United States, and sell and deliver to the herein plaintiff, certain sound reproducing equipment and machinery, for which the said defendant, under and by virtue of said agreement, was to receive the actual cost price plus ten per cent (10%), and was also to be reimbursed for all out of pocket expenses in connection with the purchase and delivery of such equipment, such as costs of telegrams, freight, and similar expenses. (Emphasis ours.)

We agree with the trial judge that "whatever unforseen events might have taken

place unfavorable to the defendant (petitioner), such as change in prices, mistake in their quotation, loss of the goods not covered by insurance or failure of the Starr Piano Company to properly fill the orders as per specifications, the plaintiff (respondent) might still legally hold the defendant (petitioner) to the prices fixed of $1,700 and $1,600." This is incompatible with the pretended relation of agency between the petitioner and the respondent, because in agency, the agent is exempted from all liability in the discharge of his commission provided he acts in accordance with the instructions received from his principal (section 254, Code of Commerce), and the principal must indemnify the agent for all damages which the latter may incur in carrying out the agency without fault or imprudence on his part (article 1729, Civil Code).

While the latters, Exhibits 1 and 2, state that the petitioner was to receive ten per cent (10%) commission, this does not necessarily make the petitioner an agent of the respondent, as this provision is only an additional price which the respondent bound itself to pay, and which stipulation is not incompatible with the contract of purchase and sale. (See Quiroga vs. Parsons Hardware Co., 38 Phil., 501.)

In the second place, to hold the petitioner an agent of the respondent in the purchase of equipment and machinery from the Starr Piano Company of Richmond, Indiana, is incompatible with the admitted fact that the petitioner is the exclusive agent of the same company in the Philippines. It is out of the ordinary for one to be the agent of both the vendor and the purchaser. The facts and circumstances indicated do not point to anything but plain ordinary transaction where the respondent enters into a contract of purchase and sale with the petitioner, the latter as exclusive agent of the Starr Piano Company in the United States.

It follows that the petitioner as vendor is not bound to reimburse the respondent as vendee for any difference between the cost price and the sales price which represents the profit realized by the vendor out of the transaction. This is the

very essence of commerce without which merchants or middleman would not exist.

The respondents contends that it merely agreed to pay the cost price as distinguished from the list price, plus ten per cent (10%) commission and all out-of-pocket expenses incurred by the petitioner. The distinction which the respondents seeks to draw between the cost price and the list price we consider to be spacious. It is to be observed that the twenty-five per cent (25%) discount granted by the Starr piano Company to the petitioner is available only to the latter as the former's exclusive agent in the Philippines. The respondent could not have secured this discount from the Starr Piano Company and neither was the petitioner willing to waive that discount in favor of the respondent. As a matter of fact, no reason is advanced by the respondent why the petitioner should waive the 25 per cent discount granted it by the Starr Piano Company in exchange for the 10 percent commission offered by the respondent. Moreover, the petitioner was not duty bound to reveal the private arrangement it had with the Starr Piano Company relative to such discount to its prospective customers, and the respondent was not even aware of such an arrangement. The respondent,

therefore, could not have offered to pay a 10 per cent commission to the petitioner provided it was given the benefit of the 25 per cent discount enjoyed by the petitioner. It is well known that local dealers acting as agents of foreign manufacturers, aside from obtaining a discount from the home office, sometimes add to the list price when they resell to local purchasers. It was apparently to guard against an exhorbitant additional price that the respondent sought to limit it to 10 per cent, and the respondent is estopped from questioning that additional price. If the respondent later on discovers itself at the short end of a bad bargain, it alone must bear the blame, and it cannot rescind the contract, much less compel a reimbursement of the excess price, on that ground alone. The respondent could not secure equipment and machinery manufactured by the Starr Piano Company except from the petitioner alone; it willingly paid the price quoted; it received the equipment and machinery as represented; and that was the end of the matter as far as the respondent was concerned. The fact that the petitioner obtained more or less profit than the respondent calculated before entering into the contract or reducing the price agreed upon between the petitioner and the respondent. Not every concealment is fraud; and short of fraud, it were better that, within certain limits, business acumen permit of the loosening of the sleeves and of the sharpening of the intellect of men and women in the business world.

The writ of certiorari should be, as it is hereby, granted. The decision of the appellate court is accordingly reversed and the petitioner is absolved from the respondent's complaint in G. R. No. 1023, entitled "Arco Amusement Company (formerly known as Teatro Arco), plaintiff-appellant, vs. Gonzalo Puyat & Sons, Inc., defendants-appellee," without pronouncement regarding costs. So ordered.

Avanceña, C.J., Diaz, Moran and Horrilleno, JJ., concur.

FIRST DIVISION

[G.R. No. 149420. October 8, 2003] SONNY LO, petitioner,

vs. KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.

D E C I S I O N

YNARES-SANTIAGO, J.:

Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged

in the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing business under the name and style Sans Enterprises, is a building contractor. On February 22, 1990, petitioner ordered scaffolding equipments from respondent

worth P540,425.80.20[1] He paid a downpayment in the amount of P150,000.00. The balance was made payable in ten monthly installments.

Respondent delivered the scaffoldings to petitioner.21[2] Petitioner was able to pay

the first two monthly installments. His business, however, encountered financial difficulties and he was unable to settle his obligation to respondent despite oral and written demands made against him.22[3]

On October 11, 1990, petitioner and respondent executed a Deed of

Assignment,23[4] whereby petitioner assigned to respondent his receivables in the amount of P335,462.14 from Jomero Realty Corporation. Pertinent portions of

the Deed provide:

WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house located at Greenmeadow Avenue, Quezon City owned by Jomero Realty Corporation;

WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR purchased on account scaffolding equipments from the ASSIGNEE payable to the latter;

WHEREAS, up to the present the ASSIGNOR has an obligation to the

ASSIGNEE for the purchase of the aforementioned scaffoldings now in the amount of Three Hundred Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14);

NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14), Philippine Currency which represents part of the ASSIGNORs

collectible from Jomero Realty Corp., said ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles amounting to the said amount of P335, 462.14;

And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and

assigns, the full power and authority to demand, collect, receive, compound, compromise and give acquittance for the same or any part thereof, and in the

name and stead of the said ASSIGNOR;

20[1] Exhibit A, Records, p. 128.

21[2] Exhibits B-B-8, Records, pp. 130-138.

22[3] Exhibit C, Records, p. 139.

23[4] Records, pp. 142-143.

And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its successors and assigns that said debt is justly owing and due to the ASSIGNOR for Jomero Realty Corporation and that said ASSIGNOR has not

done and will not cause anything to be done to diminish or discharge said debt, or delay or to prevent the ASSIGNEE, its successors or assigns, from collecting the same;

And the ASSIGNOR further agrees and stipulates as aforesaid that the said

ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or assigns, at

his cost and expense, execute and do all such further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in accordance with the true intent and meaning of these presents. xxx24[5] (Italics supplied)

However, when respondent tried to collect the said credit from Jomero Realty Corporation, the latter refused to honor the Deed of Assignment because it

claimed that petitioner was also indebted to it.25[6] On November 26, 1990, respondent sent a letter26[7] to petitioner demanding payment of his obligation,

but petitioner refused to pay claiming that his obligation had been extinguished when they executed the Deed of Assignment.

Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money against the petitioner before the Regional Trial Court of

Makati, Branch 147, which was docketed as Civil Case No. 91-074.27[8]

During the trial, petitioner argued that his obligation was extinguished with the execution of the Deed of Assignment of credit. Respondent, for its part,

presented the testimony of its employee, Almeda Baaga, who testified that Jomero Realty refused to honor the assignment of credit because it claimed that petitioner had an outstanding indebtedness to it.

On August 25, 1994, the trial court rendered a decision28[9] dismissing the

complaint on the ground that the assignment of credit extinguished the obligation. The decretal portion thereof provides:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in

favor of the defendant and against the plaintiff, dismissing the complaint and ordering the plaintiff to pay the defendant attorneys fees in the amount of P25,000.00.

Respondent appealed the decision to the Court of Appeals. On April 19, 2001,

the appellate court rendered a decision,29[10] the dispositive portion of which reads:

WHEREFORE, finding merit in this appeal, the court REVERSES the appealed

Decision and enters judgment ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100

(P335,462.14) with legal interest of 6% per annum from January 10, 1991

24[5] Records, p. 142.

25[6] TSN, April 28, 1993, p. 25.

26[7] Exhibit C, Records, p. 139.

27[8] Records, pp. 1-6.

28[9]Penned by Judge Teofilo L. Guadiz, Jr.

29[10]Penned by Justice Hilarion L. Aquino with Justices Ma.Alicia Austria-Martinez (now a

member of this Court) and Jose L. Sabio, Jr., concurring.

(filing of the Complaint) until fully paid and attorneys fees equivalent to 10% of the amount due and costs of the suit.

SO ORDERED.30[11]

In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to the respondent, the Court of Appeals held that (1) petitioner failed

to comply with his warranty under the Deed; (2) the object of the Deed did not exist at the time of the transaction, rendering it void pursuant to Article 1409

of the Civil Code; and (3) petitioner violated the terms of the Deed of Assignment when he failed to execute and do all acts and deeds as shall be necessary to effectually enable the respondent to recover the collectibles.31[12]

Petitioner filed a motion for reconsideration of the said decision, which was

denied by the Court of Appeals.32[13]

In this petition for review, petitioner assigns the following errors:

I

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN DECLARING THE DEED OF ASSIGNMENT (EXH. 4) AS NULL AND VOID

FOR LACK OF OBJECT ON THE BASIS OF A MERE HEARSAY CLAIM.

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ASSIGNMENT (EXH. 4) DID NOT EXTINGUISH PETITIONERS OBLIGATION ON THE WRONG NOTION THAT PETITIONER FAILED TO

COMPLY WITH HIS WARRANTY THEREUNDER.

III

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE TRIAL COURT AND IN ORDERING PAYMENT OF

INTERESTS AND ATTORNEYS FEES.33[14]

The petition is without merit.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dacion en pago,

exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it

against the debtor.34[15]

Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of

an outstanding debt.35[16] In order that there be a valid dation in payment, the following are the requisites: (1) There must be the performance of the

prestation in lieu of payment (animo solvendi) which may consist in the delivery

30[11] Decision, CA-G.R. CV No. 47713, p. 6; Rollo, p. 14.

31[12] Rollo, pp. 9-14.

32[13] Rollo, p. 50.

33[14] Petition, pp. 6-7, Rollo, pp. 24-25.

34[15]South City Homes, Inc., et al. v. BA Finance Corporation, G.R. No. 135462, 7 December

2001.

35[16]Filinvest Credit Corporation v. Philippine Acetylene, Co., Inc., G.R. No. L-50449, January

30, 1982.

of a corporeal thing or a real right or a credit against the third person; (2) There must be some difference between the prestation due and that which is given in substitution (aliud pro alio); (3) There must be an agreement between the

creditor and debtor that the obligation is immediately extinguished by reason of the performance of a prestation different from that due.36[17] The undertaking

really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtors debt. As such, the vendor in good faith shall be

responsible, for the existence and legality of the credit at the time of the sale but not for the solvency of the debtor, in specified circumstances.37[18]

Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property,38[19] produced the effects of a dation in payment which

may extinguish the obligation.39[20] However, as in any other contract of sale, the vendor or assignor is bound by certain warranties. More specifically, the first

paragraph of Article 1628 of the Civil Code provides:

The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly

stipulated or unless the insolvency was prior to the sale and of common knowledge.

From the above provision, petitioner, as vendor or assignor, is bound to

warrant the existence and legality of the credit at the time of the sale or assignment. When Jomero claimed that it was no longer indebted to petitioner since the latter also had an unpaid obligation to it, it essentially meant that its

obligation to petitioner has been extinguished by compensation.40[21] In other words, respondent alleged the non-existence of the credit and asserted its claim

to petitioners warranty under the assignment. Therefore, it behooved on petitioner to make good its warranty and paid the obligation.

Furthermore, we find that petitioner breached his obligation under the Deed of Assignment, to wit:

And the ASSIGNOR further agrees and stipulates as aforesaid that the said

ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or assigns, at

his cost and expense, execute and do all such further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in accordance with the true intent

and meaning of these presents.41[22] (underscoring ours)

Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the performance thereof in case the same is later found to be

36[17] 3 Castan, Vol. I, 8th Ed., page 283 cited in IV Caguioa 'Comments and Cases in Civil Law,

page 325.

37[18] Civil Code, Article 1628. 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 solvency

was prior to the sale and of common knowledge. xxx

38[19]Civil Code, Art. 417. The following are also considered as personal property:

(1) Obligations and actions which have for their object movables or demandable sums, and xxx.

39[20]Civil Code, Art. 1231. Obligations are extinguished:

(1) By payment or performance; xxx.

40[21]Civil Code, Art. 1278. Compensation shall take place when two persons, in their own rights,

are creditors and debtors of each other.

41[22] Records, p. 143.

inexistent. He should be held liable to pay to respondent the amount of his indebtedness.

Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the sum of P335,462.14 with legal interest thereon. However, we

find that the award by the Court of Appeals of attorney’s fees is without factual basis. No evidence or testimony was presented to substantiate this claim. Attorney’s fees, being in the nature of actual damages, must be duly

substantiated by competent proof.

WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19, 2001 in CA-G.R. CV No. 47713, ordering petitioner to pay

respondent the sum of P335,462.14 with legal interest of 6% per annum from January 10, 1991 until fully paid is AFFIRMED with MODIFICATION. Upon finality of this Decision, the rate of legal interest shall be 12% per annum,

inasmuch as the obligation shall thereafter become equivalent to a forbearance of credit.42[23] The award of attorney’s fees is DELETED for lack of evidentiary

basis.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Vitug, Carpio and Azcuna, JJ., concur.

42[23] Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, 12 July 1994, 234 SCRA

78.

SECOND DIVISION [G.R. No. 168220. August 31, 2005] SPS. RUDY PARAGAS and CORAZON B. PARAGAS, petitioners, vs. HRS. OF DOMINADOR BALACANO, namely: DOMINIC, RODOLFO, NANETTE and CYRIC, all surnamed BALACANO, represented by NANETTE BALACANO and ALFREDO BALACANO, respondents.

R E S O L U T I O N CHICO-NAZARIO, J.:

Thispetition for review seeks to annul the Decision[1] dated 15 February 2005 of the Court of Appeals in CA-G.R. CV No. 64048, affirming with modification the 8 March 1999 Decision[2] of the Regional Trial Court (RTC), Branch 21, of Santiago City, Isabela, in Civil Case No. 21-2313. The petition likewise seeks to annul the Resolution[3] dated 17 May 2005 denying petitioners motion for reconsideration.

The factual antecedents were synthesized by the Court of Appeals in its decision.

Gregorio Balacano, married to Lorenza Sumigcay, was the registered owner of

Lot 1175-E and Lot 1175-F of the Subd. Plan Psd-38042 [located at Baluarte, Santiago City, Isabela] covered by TCT No. T-103297 and TCT No.T-103298 of the Registry of Deeds of the Province of Isabela.

Gregorio and Lorenza had three children, namely: Domingo, Catalino and

Alfredo, all surnamed Balacano. Lorenza died on December 11, 1991. Gregorio, on the other hand, died on July 28, 1996.

Prior to his death, Gregorio was admitted at the Veterans General Hospital in Bayombong, Nueva Vizcaya on June 28, 1996 and stayed there until July 19, 1996. He was transferred in the afternoon of July 19, 1996 to the Veterans Memorial Hospital in Quezon City where he was confined until his death.

Gregorio purportedly sold on July 22, 1996, or barely a week prior to his death,

a portion of Lot 1175-E (specifically consisting of 15,925 square meters from its total area of 22,341 square meters) and the whole Lot 1175-F to the Spouses Rudy (Rudy) and Corazon Paragas (collectively, the Spouses Paragas) for the total consideration of P500,000.00. This sale appeared in a deed of absolute sale notarized by Atty. Alexander V. de Guzman, Notary Public for Santiago City, on the same date July 22, 1996 and witnessed by Antonio Agcaoili (Antonio) and Julia Garabiles (Julia). Gregorios certificates of title over Lots 1175-E and 1175-F were consequently cancelled and new certificates of title were issued in favor of the Spouses Paragas.

The Spouses Paragas then sold on October 17, 1996 a portion of Lot 1175-E

consisting of 6,416 square meters to Catalino for the total consideration of P60,000.00.

Domingos children (Dominic, Rodolfo, Nanette and Cyric, all surnamed

Balacano;) filed on October 22, 1996 a complaint for annulment of sale and partition against Catalino and the Spouses Paragas. They essentially alleged in asking for the nullification of the deed of sale that: (1) their grandfather Gregorio could not have appeared before the notary public on July 22, 1996 at Santiago City because he was then confined at the Veterans Memorial Hospital in Quezon City; (2) at the time of the alleged execution of the deed of sale, Gregorio was seriously ill, in fact dying at that time, which vitiated his consent to the disposal of the property; and (3) Catalino manipulated the execution of the deed and prevailed upon the dying Gregorio to sign his name on a paper the contents of which he never understood because of his serious condition. Alternatively, they alleged that assuming Gregorio was of sound and disposing mind, he could only transfer a half portion of Lots 1175-E and 1175-F as the other half belongs to their grandmother Lorenza who predeceased Gregorio they

claimed that Lots 1175-E and 1175-F form part of the conjugal partnership properties of Gregorio and Lorenza. Finally, they alleged that the sale to the Spouses Paragas covers only a 5-hectare portion of Lots 1175-E and 1175-F leaving a portion of 6,416 square meters that Catalino is threatening to dispose. They asked for the nullification of the deed of sale executed by Gregorio and the partition of Lots 1175-E and 1175-F. They likewise asked for damages.

Instead of filing their Answer, the defendants Catalino and the Spouses Paragas

moved to dismiss the complaint on the following grounds: (1) the plaintiffs have no legal capacity - the Domingos children cannot file the case because Domingo is still alive, although he has been absent for a long time; (2) an indispensable party is not impleaded that Gregorios other son, Alfredo was not made a party to the suit; and (3) the complaint states no cause of action that Domingos children failed to allege a ground for the annulment of the deed of sale; they did not cite any mistake, violence, intimidation, undue influence or fraud, but merely alleged that Gregorio was seriously ill. Domingos children opposed this motion.

The lower court denied the motion to dismiss, but directed the plaintiffs-

appellees to amend the complaint to include Alfredo as a party. Alfredo was subsequently declared as in default for his failure to file his Answer to the Complaint.

The defendants-appellees filed their Answer with Counterclaim on May 7, 1997,

denying the material allegations of the complaint. Additionally, they claimed that: (1) the deed of sale was actually executed by Gregorio on July 19 (or 18), 1996 and not July 22, 1996; (2) the Notary Public personally went to the Hospital in Bayombong, Nueva Vizcaya on July 18, 1996 to notarize the deed of sale already subject of a previously concluded covenant between Gregorio and the Spouses Paragas; (3) at the time Gregorio signed the deed, he was strong and of sound and disposing mind; (4) Lots 1175-E and 1175-F were Gregorios separate capital and the inscription of Lorenzas name in the titles was just a description of Gregorios marital status; (5) the entire area of Lots 1175-E and 1175-F were sold to the Spouses Paragas. They interposed a counterclaim for damages.

At the trial, the parties proceeded to prove their respective contentions.

Plaintiff-appellant Nanette Balacano testified to prove the material allegations of their complaint. On Gregorios medical condition, she declared that: (1) Gregorio, who was then 81 years old, weak and sick, was brought to the hospital in Bayombong, Nueva Vizcaya on June 28, 1996 and stayed there until the afternoon on July 19, 1996; (2) thereafter, Gregorio, who by then was weak and could no longer talk and whose condition had worsened, was transferred in the afternoon of July 19, 1996 to the Veterans Memorial Hospital in Quezon City where Gregorio died. She claimed that Gregorio could not have signed a deed of sale on July 19, 1996 because she stayed at the hospital the whole of that day and saw no visitors. She likewise testified on their agreement for attorneys fees with their counsel and the litigation expenses they incurred.

Additionally, the plaintiffs-appellees presented in evidence Gregorios medical

records and his death certificate.

Defendants-appellees, on the other hand, presented as witnesses Notary Public

de Guzman and instrumental witness Antonio to prove Gregorios execution of the sale and the circumstances under the deed was executed. They uniformly declared that: (1) on July 18, 1996, they went to the hospital in Bayombong, Nueva Vizcaya where Gregorio was confined with Rudy; (2) Atty. De Guzman read and explained the contents of the deed to Gregorio; (3) Gregorio signed the deed after receiving the money from Rudy; (4) Julia and Antonio signed the deed as witnesses. Additionally, Atty. De Guzman explained that the execution of the deed was merely a confirmation of a previous agreement between the Spouses Paragas and Gregorio that was concluded at least a month prior to Gregorios death; that, in fact, Gregorio had previously asked him to prepare a deed that Gregorio eventually signed on July 18, 1996. He also explained that the deed, which appeared to have been executed on July 22, 1996, was actually executed on July 18, 1996; he notarized the deed and entered it in his register only on July 22, 1996. He claimed that he did not find it necessary to state the precise date and place of execution (Bayombong, Nueva Vizcaya, instead of

Santiago City) of the deed of sale because the deed is merely a confirmation of a previously agreed contract between Gregorio and the Spouses Paragas. He likewise stated that of the stated P500,000.00 consideration in the deed, Rudy paid Gregorio P450,000.00 in the hospital because Rudy had previously paid Gregorio P50,000.00. For his part, Antonio added that he was asked by Rudy to take pictures of Gregorio signing the deed. He also claimed that there was no entry on the date when he signed; nor did he remember reading Santiago City as the place of execution of the deed. He described Gregorio as still strong but sickly, who got up from the bed with Julias help. Witness for defendants-appellants Luisa Agsalda testified to prove that Lot 1175-E was Gregorios separate property. She claimed that Gregorios father (Leon) purchased a two-hectare lot from them in 1972 while the other lot was purchased from her neighbor. She also declared that Gregorio inherited these lands from his father Leon; she does not know, however, Gregorios brothers share in the inheritance. Defendant-appellant Catalino also testified to corroborate the testimony of witness Luisa Agsalda; he said that Gregorio told him that he (Gregorio) inherited Lots 1175-E and 1175-F from his father Leon. He also stated that a portion of Lot 1175-E consisting of 6,416 square meters was sold to him by the Spouses Paragas and that he will pay the Spouses Paragas P50,000.00, not as consideration for the return of the land but for the transfer of the title to his name.

Additionally, the defendants-appellants presented in evidence the pictures taken by Antonio when Gregorio allegedly signed the deed.[4]

The lower court, after trial, rendered the decision declaring null and void the

deed of sale purportedly executed by Gregorio Balacano in favor of the spouses Rudy Paragas and Corazon Paragas. In nullifying the deed of sale executed by Gregorio, the lower court initially noted that at the time Gregorio executed the deed, Gregorio was ill. The lower courts reasoning in declaring the deed of sale null and void and this reasonings premises may be summarized as follows: (1) the deed of sale was improperly notarized; thus it cannot be considered a public document that is usually accorded the presumption of regularity; (2) as a private document, the deed of sales due execution must be proved in accordance with Section 20, Rule 132 of the Revised Rules on Evidence either: (a) by anyone who saw the document executed or written; or (b) by evidence of the genuineness of the signature or handwriting of the maker; and (3) it was incumbent upon the Spouses Paragas to prove the deed of sales due execution but failed to do so the lower court said that witness Antonio Agcaoili is not credible while Atty. Alexander De Guzman is not reliable.[5]

The lower court found the explanations of Atty. De Guzman regarding the

erroneous entries on the actual place and date of execution of the deed of sale as justifications for a lie. The lower court said

―The Court cannot imagine an attorney to undertake to travel to another

province to notarize a document when he must certainly know, being a lawyer and by all means, not stupid, that he has no authority to notarize a document in that province. The only logical thing that happened was that Rudy Paragas brought the deed of sale to him on July 22, 1996 already signed and requested him to notarize the same which he did, not knowing that at that time the vendor was already in a hospital and [sic] Quezon City. Of course had he known, Atty. De Guzman would not have

notarized the document. But he trusted Rudy Paragas and moreover, Gregorio Balacano already informed him previously in June that he will sell his lands to Paragas. In addition [sic, (,) was omitted] Rudy Paragas also told him that Balacano received an advance of P50,000.00.‖

The intention to sell is not actual selling. From the first week of June when,

according to Atty. De Guzman, Gregorio Balacano informed him that he will sell his land to Rudy Paragas, enough time elapsed to the time he was brought to the hospital on June 28, 1996. Had there been a meeting of the minds between Gregorio Balacano and Rudy Paragas regarding the sale, surely Gregorio Balacano would have immediately returned to the office of Atty. De Guzman to execute the deed of sale. He did not until he was brought to the hospital and diagnosed to have liver cirrhosis. Because of the seriousness of his illness, it is not expected that Gregorio Balacano would be negotiating a contract of sale. Thus, Rudy Paragas negotiated with Catalino Balacano, the son of Gregorio Balacano with whom the latter was staying.[6]

The lower court also did not consider Antonio Agcaoili, petitioner Rudy Paragass driver, a convincing witness, concluding that he was telling a rehearsed story. The lower court said

The only portion of his testimony that is true is that he signed the document. How could the Court believe that he brought a camera with him just to take pictures of the signing? If the purpose was to record the proceeding for posterity, why did he not take the picture of Atty. De Guzman when the latter was reading and explaining the document to Gregorio Balacano? Why did he not take the picture of both Gregorio Balacano and Atty. de Guzman while the old man was signing the document instead of taking a picture of Gregorio Balacano alone holding a ball pen without even showing the document being signed? Verily there is a picture of a document but only a hand with a ball pen is shown with it. Why? Clearly the driver Antonio Agcaoili must have only been asked by Rudy Paragas to tell a concocted story which he himself would not dare tell in Court under oath.[7]

The lower court likewise noted that petitioner Rudy Paragas did not testify

about the signing of the deed of sale. To the lower court, Rudys refusal or failure to testify raises a lot of questions, such as: (1) was he (Rudy) afraid to divulge the circumstances of how he obtained the signature of Gregorio Balacano, and (2) was he (Rudy) afraid to admit that he did not actually pay the P500,000.00 indicated in the deed of sale as the price of the land?[8]

The lower court also ruled that Lots 1175-E and 1175-F were Gregorios and

Lorenzas conjugal partnership properties. The lower court found that these lots were acquired during the marriage because the certificates of title of these lots clearly stated that the lots are registered in the name Gregorio, married to Lorenza Sumigcay. Thus, the lower court concluded that the presumption of law (under Article 160 of the Civil Code of the Philippines) that property acquired during the marriage is presumed to belong to the conjugal partnership fully applies to Lots 1175-E and 1175-F.[9]

Thus, on 8 March 1999, the RTC, Branch 21, of Santiago City, Isabela,

rendered a Decision[10] in Civil Case No. 21-2313, the dispositive portion of which reads as follows:

WHEREFORE in the light of the foregoing considerations judgment is hereby rendered:

1. DECLARING as NULL and VOID the deed of sale purportedly executed

by Gregorio Balacano in favor of the spouses Rudy Paragas and Corazon Paragas over lots 1175-E and 1175-F covered by TCT Nos. T-103297 and T-103298, respectively;

2. ORDERING the cancellation of TCT Nos. T-258042 and T-258041 issued

in the name of the spouses Rudy and Corazon Paragas by virtue of the deed of sale; and

3. DECLARING the parcel of lands, lots 1175-E and 1175-F as part of the

estate of the deceased spouses Gregorio Balacano and Lorenza

Balacano.[11]

In the assailed Decision dated 15 February 2005, the Court of Appeals affirmed the Decision of the trial court, with the modification that Lots 1175-E and 1175-F were adjudged as belonging to the estate of Gregorio Balacano. The appellate court disposed as follows:

WHEREFORE, premises considered, the appeal is hereby DISMISSED. We AFFIRM the appealed Decision for the reasons discussed above, with the MODIFICATION that Lots 1175-E and 1175-F belong to the estate of Gregorio Balacano.

Let a copy of this Decision be furnished the Office of the Bar Confidant for whatever action her Office may take against Atty. De Guzman.[12] (Emphasis in the original.)

Herein petitioners motion for reconsideration was met with similar lack of success when it was denied for lack of merit by the Court of Appeals in its Resolution[13] dated 17 May 2005.

Hence, this appeal via a petition for review where petitioners assign the

following errors to the Court of Appeals, viz: A. THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF

DISCRETION, SERIOUSLY ERRED IN FINDING THAT THERE WAS NO PERFECTED AND PARTIALLY EXECUTED CONTRACT OF SALE OVER LOTS 1175-E AND 1175-F PRIOR TO THE SIGNING OF THE DEED OF SALE.

B. THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF DISCRETION, SERIOUSLY FAILED TO APPRECIATE THE SIGNIFICANCE OF THE JUDICIAL ADMISSION ON THE AUTHENTICITY AND DUE EXECUTION OF THE DEED OF SALE MADE BY THE RESPONDENTS DURING THE PRE-TRIAL CONFERENCE.

C. THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF DISCRETION, BASED ITS CONCLUSION THAT GREGORIOS CONSENT TO THE SALE OF THE LOTS WAS ABSENT MERELY ON SPECULATIONS AND SURMISES.

D. THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF DISCRETION, SERIOUSLY ERRED IN NOT RULING ON THE ISSUE OF RESPONDENTS LACK OF LEGAL CAPACITY TO SUE FOR NOT BEING THE PROPER PARTIES IN INTEREST.

E. THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF

DISCRETION, SERIOUSLY ERRED IN DISMISSING ATTY. ALEXANDER DE GUZMAN AND ANTONIO AGCAOILI AS NOT CREDIBLE WITNESSES.[14]

At bottom is the issue of whether or not the Court of Appeals committed

reversible error in upholding the findings and conclusions of the trial court on the nullity of the Deed of Sale purportedly executed between petitioners and the late Gregorio Balacano.

To start, we held in Blanco v. Quasha[15] that this Court is not a trier of facts.

As such, it is not its function to examine and determine the weight of the evidence supporting the assailed decision. Factual findings of the Court of Appeals, which are supported by substantial evidence, are binding, final and conclusive upon the Supreme Court,[16] and carry even more weight when the said court affirms the factual findings of the trial court. Moreover, well- entrenched is the prevailing jurisprudence that only errors of law and not of facts are reviewable by this Court in a petition for review on certiorari under Rule 45 of the Revised Rules of Court.

The foregoing tenets in the case at bar apply with greater force to the petition

under consideration because the factual findings by the Court of Appeals are in full agreement with that of the trial court.

Specifically, the Court of Appeals, in affirming the trial court, found that there was no prior and perfected contract of sale that remained to be fully consummated. The appellate court explained –

In support of their position, the defendants-appellants argue that at least a

month prior to Gregorios signing of the deed, Gregorio and the Spouses Paragas already agreed on the sale of Lots 1175-E and 1175-F; and that, in fact, this agreement was partially executed by Rudys payment to Gregorio of P50,000.00 before Gregorio signed the deed at the hospital. In line with this position, defendants-appellants posit that Gregorios consent to the sale should be determined, not at the time Gregorio signed the deed of sale on July 18, 1996, but at the time when he agreed to sell the property in June 1996 or a month prior to the deeds signing; and in June 1996, Gregorio was of sound and disposing mind and his consent to the sale was in no wise vitiated at that time. The defendants-appellants further argue that the execution or signing of the deed of sale, however, irregular it might have been, does

not affect the validity of the previously agreed sale of the lots, as the execution or signing of the deed is merely a formalization of a previously agreed oral contract. . . .

In the absence of any note, memorandum or any other written instrument evidencing the alleged perfected contract of sale, we have to rely on oral testimonies, which in this case is that of Atty. de Guzman whose testimony on the alleged oral agreement may be summarized as follows: (1) that sometime in the first week of June 1996, Gregorio requested him (Atty. de Guzman) to prepare a deed of sale of two lots; (2) Gregorio came to his firms office in the morning with a certain Doming Balacano, then returned in the afternoon with Rudy; (3) he (Atty. de Guzman) asked Gregorio whether he really intends to sell the lots; Gregorio confirmed his intention; (4) Gregorio and Rudy left the law office at 5:00 p.m., leaving the certificates of title; (5) he prepared the deed a day after Rudy and Gregorio came. With regard to the alleged partial execution of this agreement, Atty. de Guzman said that he was told by Rudy that there was already a partial payment of P50,000.00.

We do not consider Atty. de Guzmans testimony sufficient evidence to establish

the fact that there was a prior agreement between Gregorio and the Spouses Paragas on the sale of Lots 1175-E and 1175-F. This testimony does not conclusively establish the meeting of the minds between Gregorio and the Spouses Paragas on the price or consideration for the sale of Lots 1175-E and 1175-F Atty. de Guzman merely declared that he was asked by Gregorio to prepare a deed; he did not clearly narrate the details of this agreement. We cannot assume that Gregorio and the Spouses Paragas agreed to a P500,000.00 consideration based on Atty. de Guzmans bare assertion that Gregorio asked him to prepare a deed, as Atty. de Guzman was not personally aware of the agreed consideration in the sale of the lots, not being privy to the parties agreement. To us, Rudy could have been a competent witness to testify on the perfection of this prior contract; unfortunately, the defendants-appellants did not present Rudy as their witness.

We seriously doubt too the credibility of Atty. de Guzman as a witness. We

cannot rely on his testimony because of his tendency to commit falsity. He admitted in open court that while Gregorio signed the deed on July 18, 1996 at Bayombong, Nueva Vizcaya, he nevertheless did not reflect these matters when he notarized the deed; instead he entered Santiago City and July 22, 1996, as place and date of execution, respectively. To us, Atty. de Guzmans propensity to distort facts in the performance of his public functions as a notary public, in utter disregard of the significance of the act of notarization, seriously affects his credibility as a witness in the present case. In fact, Atty. de Guzmans act in falsifying the entries in his acknowledgment of the deed of sale could be the subject of administrative and disciplinary action, a matter that we however do not here decide.

Similarly, there is no conclusive proof of the partial execution of the contract

because the only evidence the plaintiffs-appellants presented to prove this claim was Atty. de Guzmans testimony, which is hearsay and thus, has no probative value. Atty. de Guzman merely stated that Rudy told him that Rudy already gave P50,000.00 to Gregorio as partial payment of the purchase price; Atty. de Guzman did not personally see the payment being made.[17]

But, did Gregorio give an intelligent consent to the sale of Lots 1175-E and

1175-F when he signed the deed of sale? The trial court as well as the appellate court found in the negative. In the Court of Appeals rationale-

It is not disputed that when Gregorio signed the deed of sale, Gregorio was

seriously ill, as he in fact died a week after the deeds signing. Gregorio died of complications caused by cirrhosis of the liver. Gregorios death was neither sudden nor immediate; he fought at least a month-long battle against the disease until he succumbed to death on July 22, 1996. Given that Gregorio purportedly executed a deed during the last stages of his battle against his disease, we seriously doubt whether Gregorio could have read, or fully understood, the contents of the documents he signed or of the consequences of his act. We note in this regard that Gregorio was brought to the Veterans Hospital at Quezon City because his condition had worsened on or about the time the deed was allegedly signed. This transfer and fact of death not long after speak volumes about Gregorios condition at that time. We likewise see no

conclusive evidence that the contents of the deed were sufficiently explained to Gregorio before he affixed his signature. The evidence the defendants-appellants offered to prove Gregorios consent to the sale consists of the testimonies of Atty. de Guzman and Antonio. As discussed above, we do not find Atty. de Guzman a credible witness. Thus, we fully concur with the heretofore-quoted lower courts evaluation of the testimonies given by Atty. de Guzman and Antonio because this is an evaluation that the lower court was in a better position to make.

Additionally, the irregular and invalid notarization of the deed is a falsity that

raises doubts on the regularity of the transaction itself. While the deed was indeed signed on July 18, 1996 at Bayombong, Nueva Vizcaya, the deed states otherwise, as it shows that the deed was executed on July 22, 1996 at Santiago City. Why such falsity was committed, and the circumstances under which this falsity was committed, speaks volume about the regularity and the validity of the sale. We cannot but consider the commission of this falsity, with the indispensable aid of Atty. de Guzman, an orchestrated attempt to legitimize a transaction that Gregorio did not intend to be binding upon him nor on his bounty.

Article 24 of the Civil Code tells us that in all contractual, property or other

relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age or other handicap, the courts must be vigilant for his protection.[18]

Based on the foregoing, the Court of Appeals concluded that Gregorios consent

to the sale of the lots was absent, making the contract null and void. Consequently, the spouses Paragas could not have made a subsequent transfer of the property to Catalino Balacano. Indeed, nemo dat quod non habet. Nobody can dispose of that which does not belong to him.[19]

We likewise find to be in accord with the evidence on record the ruling of the

Court of Appeals declaring the properties in controversy as paraphernal properties of Gregorio in the absence of competent evidence on the exact date of Gregorios acquisition of ownership of these lots.

On the credibility of witnesses, it is in rhyme with reason to believe the

testimonies of the witnesses for the complainants vis--vis those of the defendants. In the assessment of the credibility of witnesses, we are guided by the following well-entrenched rules: (1) that evidence to be believed must not only spring from the mouth of a credible witness but must itself be credible, and (2) findings of facts and assessment of credibility of witness are matters best left to the trial court who had the front-line opportunity to personally evaluate the witnesses demeanor, conduct, and behavior while testifying.[20]

In the case at bar, we agree in the trial courts conclusion that petitioners star

witness, Atty. De Guzman is far from being a credible witness. Unlike this Court, the trial court had the unique opportunity of observing the demeanor of said witness. Thus, we affirm the trial court and the Court of Appeals uniform decision based on the whole evidence in record holding the Deed of Sale in question to be null and void.

In Domingo v. Court of Appeals,[21] the Court declared as null and void the deed

of sale therein inasmuch as the seller, at the time of the execution of the alleged contract, was already of advanced age and senile. We held

. . . She died an octogenarian on March 20, 1966, barely over a year when the deed was allegedly executed on January 28, 1965, but before copies of the deed were entered in the registry allegedly on May 16 and June 10, 1966. The general rule is that a person is not incompetent to contract merely because of advanced years or by reason of physical infirmities. However, when such age or infirmities have impaired the mental faculties so as to prevent the person from properly, intelligently, and firmly protecting her property rights then she is undeniably incapacitated. The unrebutted testimony of Zosima Domingo shows that at the time of the alleged execution of the deed, Paulina was already incapacitated physically and mentally. She narrated that Paulina played with her waste and urinated in bed. Given these circumstances, there is in our view sufficient reason to seriously doubt that she consented to the sale of and the price for her parcels of land. Moreover, there is no receipt to show that said price

was paid to and received by her. Thus, we are in agreement with the trial courts finding and conclusion on the matter: . . .

In the case at bar, the Deed of Sale was allegedly signed by Gregorio on his death bed in the hospital. Gregorio was an octogenarian at the time of the alleged execution of the contract and suffering from liver cirrhosis at that circumstances which raise grave doubts on his physical and mental capacity to freely consent to the contract. Adding to the dubiety of the purported sale and further bolstering respondents claim that their uncle Catalino, one of the children of the decedent, had a hand in the execution of the deed is the fact that on 17 October 1996, petitioners sold a portion of Lot 1175-E consisting of 6,416 square meters to Catalino for P60,000.00.[22] One need not stretch his imagination to surmise that Catalino was in cahoots with petitioners in maneuvering the alleged sale.

On the whole, we find no reversible error on the part of the appellate court in

CA-G.R. CV No. 64048 that would warrant the reversal thereof.

WHEREFORE, the present petition is hereby DENIED. Accordingly, the Decision[23] and the Resolution,[24] dated 15 February 2005 and 17 May 2005, respectively, of the Court of Appeals in CA-G.R. CV No. 64048 are hereby AFFIRMED. No costs.

SO ORDERED. Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

Republic of the Philippines SUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-57499 June 22, 1984 MERCEDES CALIMLIM- CANULLAS, petitioner, vs. HON. WILLELMO FORTUN, Judge, Court of First instance of Pangasinan, Branch I, and CORAZON DAGUINES, respondents. Fernandez Law Offices for petitioner. Francisco Pulido for respondents. MELENCIO-HERRERA, J.:

Petition for Review on certiorari assailing the Decision, dated October 6, 1980,

and the Resolution on the Motion for Reconsideration, dated November 27, 1980, of the then Court of First Instance of Pangasinan, Branch I, in Civil Case No. 15620 entitled "Corazon DAGUINES vs. MERCEDES Calimlim-Canullas," upholding the sale of a parcel of land in favor of DAGUINES but not of the conjugal house thereon'

The background facts may be summarized as follows: Petitioner MERCEDES Calimlim-Canullas and FERNANDO Canullas were married on December 19, 1962. They begot five children. They lived in a small house on the residential land in question with an area of approximately 891 square meters, located at Bacabac, Bugallon, Pangasinan. After FERNANDO's father died in 1965, FERNANDO inherited the land.

In 1978, FERNANDO abandoned his family and was living with private

respondent Corazon DAGUINES. During the pendency of this appeal, they were convicted of concubinage in a judgment rendered on October 27, 1981 by the then Court of First Instance of Pangasinan, Branch II, which judgment has become final.

On April 15, 1980, FERNANDO sold the subject property with the house

thereon to DAGUINES for the sum of P2,000.00. In the document of sale, FERNANDO described the house as "also inherited by me from my deceased parents."

Unable to take possession of the lot and house, DAGUINES initiated a

complaint on June 19, 1980 for quieting of title and damages against MERCEDES. The latter resisted and claimed that the house in dispute where she and her children were residing, including the coconut trees on the land, were built and planted with conjugal funds and through her industry; that the sale of the land together with the house and improvements to DAGUINES was null and void because they are conjugal properties and she had not given her consent to the sale,

In its original judgment, respondent Court principally declared DAGUINES "as

the lawful owner of the land in question as well as the one-half () of the house erected on said land." Upon reconsideration prayed for by MERCEDES, however, respondent Court resolved:

WHEREFORE, the dispositive portion of the Decision of this Court, promulgated on October 6, 1980, is hereby amended to read as follows: (1) Declaring plaintiff as the true and lawful owner of the land in question and the 10 coconut trees; (2) Declaring as null and void the sale of the conjugal house to plaintiff on April 15, 1980 (Exhibit A) including the 3 coconut trees and other crops planted during the conjugal relation between Fernando Canullas (vendor) and his legitimate wife, herein defendant Mercedes Calimlim- Canullas;

xxx xxx xxx

The issues posed for resolution are (1) whether or not the construction of a conjugal house on the exclusive property of the husband ipso facto gave the land the character of conjugal property; and (2) whether or not the sale of the lot together with the house and improvements thereon was valid under the circumstances surrounding the transaction.

The determination of the first issue revolves around the interpretation to be

given to the second paragraph of Article 158 of the Civil Code, which reads:

xxx xxx xxx

Buildings constructed at the expense of the partnership during the marriage on land belonging to one of the spouses also pertain to the partnership, but the value of the land shall be reimbursed to the spouse who owns the same.

We hold that pursuant to the foregoing provision both the land and the building belong to the conjugal partnership but the conjugal partnership is indebted to the husband for the value of the land. The spouse owning the lot becomes a creditor of the conjugal partnership for the value of the lot, 1 which value would be reimbursed at the liquidation of the conjugal partnership. 2

In his commentary on the corresponding provision in the Spanish Civil Code

(Art. 1404), Manresa stated:

El articulo cambia la doctrine; los edificios construidos durante el matrimonio en suelo propio de uno de los conjuges son gananciales, abonandose el valor del suelo al conj uge a quien pertenezca.

It is true that in the case of Maramba vs. Lozano, 3 relied upon by respondent Judge, it was held that the land belonging to one of the spouses, upon which the spouses have built a house, becomes conjugal property only when the conjugal partnership is liquidated and indemnity paid to the owner of the land. We believe that the better rule is that enunciated by Mr. Justice J.B.L. Reyes in Padilla vs. Paterno, 3 SCRA 678, 691 (1961), where the following was explained:

As to the above properties, their conversion from paraphernal to

conjugal assets should be deemed to retroact to the time the conjugal buildings were first constructed thereon or at the very latest, to the time immediately before the death of Narciso A. Padilla that ended the conjugal partnership. They can not be considered to have become conjugal property only as of the time their values were paid to the estate of the widow Concepcion Paterno because by that time the conjugal partnership no longer existed and it could not acquire the ownership of said properties. The acquisition by the partnership of these properties was, under the 1943 decision, subject to the suspensive condition that their values would be reimbursed to the widow at the liquidation of the conjugal partnership; once paid, the effects of the fulfillment of the condition should be deemed to retroact to the date the obligation was constituted (Art. 1187, New Civil Code) ...

The foregoing premises considered, it follows that FERNANDO could not have

alienated the house and lot to DAGUINES since MERCEDES had not given her consent to said sale. 4

Anent the second issue, we find that the contract of sale was null and void for

being contrary to morals and public policy. The sale was made by a husband in favor of a concubine after he had abandoned his family and left the conjugal home where his wife and children lived and from whence they derived their support. That sale was subversive of the stability of the family, a basic social institution which public policy cherishes and protects. 5

Article 1409 of the Civil Code states inter alia that: contracts whose cause, object, or purpose is contrary to law, morals, good customs, public order, or public policy are void and inexistent from the very beginning.

Article 1352 also provides that: "Contracts without cause, or with unlawful

cause, produce no effect whatsoever. The cause is unlawful if it is contrary to law, morals, good customs, public order, or public policy."

Additionally, the law emphatically prohibits the spouses from selling property to

each other subject to certain exceptions. 6 Similarly, donations between spouses during marriage are prohibited. 7 And this is so because if transfers or con conveyances between spouses were allowed during marriage, that would destroy the system of conjugal partnership, a basic policy in civil law. It was also designed to prevent the exercise of undue influence by one spouse over the other, 8as well as to protect the institution of marriage, which is the cornerstone of family law. The prohibitions apply to a couple living as husband and wife without benefit of marriage, otherwise, "the condition of those who incurred guilt would turn out to be better than those in legal union." Those provisions are dictated by public interest and their

criterion must be imposed upon the wig of the parties. That was the ruling in Buenaventura vs. Bautista, also penned by Justice JBL Reyes (CA) 50 O.G. 3679, and cited in Matabuena vs. Cervantes. 9 We quote hereunder the pertinent dissertation on this point:

We reach a different conclusion. While Art. 133 of the Civil Code considers as void a donation between the spouses during the marriage, policy considerations of the most exigent character as wen as the dictates of morality require that the same prohibition should apply to a common-law relationship.

As announced in the outset of this opinion, a 1954 Court of Appeals decision, Buenaventura vs. Bautista, 50 OG 3679, interpreting a similar provision of the old Civil Code speaks unequivocally. If the policy of the law is, in the language of the opinion of the then Justice J.B.L. Reyes of that Court, 'to prohibit donations in favor of the other consort and his descendants because of fear of undue influence and improper pressure upon the donor, a prejudice deeply rooted in our ancient law, ..., then there is every reason to apply the same prohibitive policy to persons living together as husband and wife without benefit of nuptials. For it is not to be doubted that assent to such irregular connection for thirty years bespeaks greater influence of one party over the other, so that the danger that the law seeks to avoid is correspondingly increased'. Moreover, as pointed out by Ulpian (in his lib 32 ad Sabinum, fr. 1), "It would not be just that such donations — should subsist, lest the conditions of those who incurred guilt should turn out to be better." So long as marriage remains the cornerstone of our family law, reason and morality alike demand that the disabilities attached to marriage should likewise attach to concubinage (Emphasis supplied),

WHEREFORE, the Decision of respondent Judge, dated October 6, 1980, and

his Resolution of November 27, 1980 on petitioner's Motion for Reconsideration, are

hereby set aside and the sale of the lot, house and improvements in question, is hereby declared null and void. No costs.

SO ORDERED.

Teehankee (Chairman), Plana, Relova, Gutierrez, Jr., and De la Fuente, JJ., concur.

EN BANC

[G.R. No.L-8477. May 31, 1956.]

THE PHILIPPINE TRUST COMPANY, as Guardian of the Property of the minor, MARIANO L. BERNARDO, Petitioner,

vs.

SOCORRO ROLDAN, FRANCISCO HERMOSO, FIDEL C. RAMOS and EMILIO CRUZ, Respondents.

D E C I S I O N

BENGZON, J.:

As guardian of the property of the minor Mariano L. Bernardo, the Philippine Trust Company filed in the Manila court of first instance a complaint to annul two

contracts regarding 17 parcels of land:c

(a) sale thereof by Socorro Roldan, as guardian of said minor, to Fidel C. Ramos;and (b) sale thereof by Fidel C. Ramos to Socorro Roldan personally. The complaint likewise sought to annul a conveyance of four out of the said seventeen parcels by Socorro Roldan to Emilio Cruz.

The action rests on the proposition that the first two sales were in reality a sale by the guardian to herself — therefore, null and void under Article 1459 of the Civil Code. As to the third conveyance, it is also ineffective, because Socorro Roldan had acquired no valid title to convey to Cruz.

The material facts of the case are not complicated. These 17 parcels located in Guiguinto, Bulacan, were part of the properties inherited by Mariano L. Bernardo from his father, Marcelo Bernardo, deceased. In view of his minority, guardianship proceedings were instituted, wherein Socorro Roldan was appointed his guardian. She was the surviving spouse of Marcelo Bernardo, and the stepmother of said Mariano L. Bernardo.

On July 27, 1947, Socorro Roldan filed in said guardianship proceedings (Special Proceeding 2485, Manila), a motion asking for authority to sell as guardian the 17 parcels for the sum of P14,700 to Dr. Fidel C. Ramos, the purpose of the sale being allegedly to invest the money in a residential house, which the minor desired to have on Tindalo Street, Manila. The motion was granted.

On August 5, 1947 Socorro Roldan, as guardian, executed the proper deed of sale in favor of her brother-in-law Dr. Fidel C. Ramos (Exhibit A-1), and on August 12, 1947 she asked for, and obtained, judicial confirmation of the sale. On August 13, 1947, Dr. Fidel C. Ramos executed in favor of Socorro Roldan, personally, a deed of conveyance covering the same seventeen parcels, for the sum of P15,000 (Exhibit A-2). And on October 21, 1947 Socorro Roldan sold four parcels out of the seventeen to Emilio Cruz for P3,000, reserving to herself the right to repurchase (Exhibit A-3).

The Philippine Trust Company replaced Socorro Roldan as guardian, on August 10, 1948. And this litigation, started two months later, seeks to undo what the previous guardian had done. The step-mother in effect, sold to herself, the properties of her ward, contends the Plaintiff, and the sale should be annulled because it violates Article 1459 of the Civil Code prohibiting the guardian from purchasing ―either in person or through the mediation of another‖ the property of her ward.

The court of first instance, following our decision in Rodriguez vs. Mactal, 60 Phil. 13 held the article was not controlling, because there was no proof that Fidel C. Ramos was a mere intermediary or that the latter had previously agreed with Socorro Roldan to buy the parcels for her benefit.

However, taking the former guardian at her word - she swore she had repurchased the lands from Dr. Fidel C. Ramos to preserve it and to give her protege opportunity to redeem — the court rendered judgment upholding the contracts but allowing the minor to repurchase all the parcels by paying P15,000, within one year.

The Court of Appeals affirmed the judgment, adding that the minor knew the particulars of, and approved the transaction, and that ―only clear and positive evidence of fraud or bad faith, and not mere insinuations and inferences will overcome the presumptions that a sale was concluded in all good faith for value‖.

At first glance the resolutions of both courts accomplished substantial justice:the minor recovers his properties.

But if the conveyances are annulled as prayed for, the minor will obtain a better deal:he receives all the fruits of the lands from the year 1947 (Article 1303 Civil Code) and will return P14,700, not P15,000.

To our minds the first two transactions herein described couldn’t be in a better juridical situation than if this guardian had purchased the seventeen parcels on the day following the sale to Dr. Ramos. Now, if she was willing to pay P15,000 why did she sell the parcels for less? In one day (or actually one week) the price could not have risen so suddenly. Obviously when, seeking approval of the sale she represented the price to be the best obtainable in the market, she was not entirely truthful. This is one phase to consider.

Again, supposing she knew the parcels were actually worth P17,000; chan roblesvirtualawlibrarythen she agreed to sell them to Dr. Ramos at P14,700; chan roblesvirtualawlibraryand knowing the realty’s value she offered him the next day P15,000 or P15,500, and got it. Will there be any doubt that she was recreant to her guardianship, and that her acquisition should be nullified? Even without proof that she had connived with Dr. Ramos. Remembering the general doctrine that guardianship is a trust of the highest order, and the trustee cannot be allowed to have any inducement to neglect his ward’s interest and in line with the court’s suspicion whenever the guardian acquires the ward’s property 1 we have no hesitation to declare that in this case, in the eyes of the law, Socorro Roldan took by purchase her ward’s parcels thru Dr. Ramos, and that Article 1459 of the Civil Code applies.

She acted it may be true without malice; chan roblesvirtualawlibrarythere may have been no previous agreement between her and Dr. Ramos to the effect that the latter would buy the lands for her. But the stubborn fact remains that she acquired her protege’s properties, through her brother-in-law. That she planned to get them for herself at the time of selling them to Dr. Ramos, may be deduced from the very short time between the two sales (one week). The temptation which naturally besets a guardian so circumstanced, necessitates the annulment of the transaction, even if no actual collusion is proved (so hard to prove) between such guardian and the intermediate purchaser. This would uphold a sound principle of equity and justice. 2

We are aware of course that in Rodriguez vs. Mactal, 60 Phil. p. 13 wherein the guardian Mactal sold in January 1926 the property of her ward to Silverio Chioco, and in March 1928 she bought it from Chioco, this Court said:chanroblesvirtuallawlibrary

―In order to bring the sale in this case within the part of Article 1459, quoted above, it is essential that the proof submitted establish some agreement between Silverio Chioco and Trinidad Mactal to the effect that Chioco should buy the property for the benefit of Mactal. If there was no such agreement, either express or implied, then the sale cannot be set asidecralaw . (Page 16; chan roblesvirtualawlibraryItalics

supplied.)‖

However, the underlined portion was not intended to establish a general principle of law applicable to all subsequent litigations. It merely meant that the subsequent purchase by Mactal could not be annulled in that particular case because there was no proof of a previous agreement between Chioco and her. The court then considered such proof necessary to establish that the two sales were actually part of one scheme — guardian getting the ward’s property through another person — because two years had elapsed between the sales. Such period of time was sufficient to dispel the natural suspicion of the guardian’s motives or actions. In the case at bar, however, only one week had elapsed. And if we were technical, we could say, only one day had elapsed from the judicial approval of the sale (August 12), to the purchase by the guardian (Aug. 13).

Attempting to prove that the transaction was beneficial to the minor, Appellee’s attorney alleges that the money (P14,700) invested in the house on Tindalo Street produced for him rentals of P2,400 yearly; chan roblesvirtualawlibrarywhereas the

parcels of land yielded to his step-mother only an average of P1,522 per year. 3 The argument would carry some weight if that house had been built out of the purchase price of P14,700 only. 4 One thing is certain:chanroblesvirtuallawlibrary the calculation does not include the price of the lot on which the house was erected. Estimating such lot at P14,700 only, (ordinarily the city lot is more valuable than the building) the result is that the price paid for the seventeen parcels gave the minor an income of only P1,200 a year, whereas the harvest from the seventeen parcels netted his step-mother a yearly profit of P1,522.00. The minor was thus on the losing end.

Hence, from both the legal and equitable standpoints these three sales should not be sustained: the first two for violation of article 1459 of the Civil Code; and the third because Socorro Roldan could pass no title to Emilio Cruz. The annulment carries with is (Article 1303 Civil Code) the obligation of Socorro Roldan to return the 17 parcels together with their fruits and the duty of the minor, through his guardian to repay P14,700 with legal interest.

Judgment is therefore rendered:c

a. Annulling the three contracts of sale in question; b. declaring the minor as the owner of the seventeen parcels of land, with the

obligation to return to Socorro Roldan the price of P14,700 with legal interest from August 12, 1947;

c. Ordering Socorro Roldan and Emilio Cruz to deliver said parcels of land to the minor;

d. Requiring Socorro Roldan to pay him beginning with 1947 the fruits, which her attorney admits, amounted to P1,522 a year;

e. Authorizing the minor to deliver directly to Emilio Cruz, out of the price of P14,700 above mentioned, the sum of P3,000; and

f. charging Appellees with the costs.

SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-35702 May 29, 1973

DOMINGO D. RUBIAS, plaintiff-appellant, vs. ISAIAS BATILLER, defendant-appellee.

Gregorio M. Rubias for plaintiff-appellant. Vicente R. Acsay for defendant-appellee.

TEEHANKEE, J.:

In this appeal certified by the Court of Appeals to this Court as involving purely

legal questions, we affirm the dismissal order rendered by the Iloilo court of first instance after pre-trial and submittal of the pertinent documentary exhibits.

Such dismissal was proper, plaintiff having no cause of action, since it was duly established in the record that the application for registration of the land in question filed by Francisco Militante, plaintiff's vendor and predecessor interest, had been dismissed by decision of 1952 of the land registration court as affirmed by final judgment in 1958 of the Court of Appeals and hence, there was no title or right to the land that could be transmitted by the purported sale to plaintiff.

As late as 1964, the Iloilo court of first instance had in another case of ejectment likewise upheld by final judgment defendant's "better right to possess the land in question .having been in the actual possession thereof under a claim of title many years before Francisco Militante sold the land to the plaintiff."

Furthermore, even assuming that Militante had anything to sell, the deed of sale executed in 1956 by him in favor of plaintiff at a time when plaintiff was concededly his counsel of record in the land registration case involving the very land in dispute (ultimately decided adversely against Militante by the Court of Appeals' 1958 judgment affirming the lower court's dismissal of Militante's application for registration) was properly declared inexistent and void by the lower court, as decreed by Article 1409 in relation to Article 1491 of the Civil Code.

The appellate court, in its resolution of certification of 25 July 1972, gave the following backgrounder of the appeal at bar:

On August 31, 1964, plaintiff Domingo D. Rubias, a lawyer, filed a suit to recover the ownership and possession of certain portions of lot under Psu-99791 located in Barrio General Luna, Barotac Viejo, Iloilo which he bought from his father-in-law, Francisco Militante in 1956

against its present occupant defendant, Isaias Batiller, who illegally entered said portions of the lot on two occasions — in 1945 and in 1959. Plaintiff prayed also for damages and attorneys fees. (pp. 1-7, Record on Appeal). In his answer with counter-claim defendant claims the complaint of the plaintiff does not state a cause of action, the truth of the matter being that he and his predecessors-in-interest have always been in actual, open and continuous possession since time immemorial under claim of ownership of the portions of the lot in question and for the alleged malicious institution of the complaint he claims he has suffered moral damages in the amount of P 2,000.00, as well as the sum of P500.00 for attorney's fees. ...

On December 9, 1964, the trial court issued a pre-trial order, after a pre-trial conference between the parties and their counsel which order reads as follows..

'When this case was called for a pre-trial conference today, the plaintiff appeared assisted by himself and Atty. Gregorio M. Rubias. The defendant also appeared, assisted by his counsel Atty. Vicente R. Acsay.

A. During the pre-trial conference, the parties have agreed that the following facts are attendant in this case and that they will no longer introduced any evidence, testimonial or documentary to prove them:

1. That Francisco Militante claimed ownership of a parcel of land located in the Barrio of General Luna, municipality of Barotac Viejo province of Iloilo, which he caused to be surveyed on July 18-31, 1934, whereby he was issued a plan Psu-99791 (Exhibit "B"). (The land claimed contained an area of 171:3561 hectares.)

2. Before the war with Japan, Francisco Militante filed with the Court of First Instance of Iloilo an application for the registration of the title of the

land technically described in psu-99791 (Exh. "B") opposed by the Director of Lands, the Director of Forestry and other oppositors. However, during the war with Japan, the record of the case was lost before it was heard, so after the war Francisco Militante petitioned this court to reconstitute the record of the case. The record was reconstituted on the Court of the First Instance of Iloilo and docketed as Land Case No. R-695, GLRO Rec. No. 54852. The Court of First Instance heard the land registration case on November 14, 1952, and after the trial this court dismissed the application for registration. The appellant, Francisco Militante, appealed from the decision of this Court to the Court of Appeals where the case was docketed as CA-GR No. 13497-R..

3. Pending the disposal of the appeal in CA-GR No. 13497-R and more particularly on June 18, 1956, Francisco Militante sold to the plaintiff, Domingo Rubias the land technically described in psu-99791 (Exh. "A"). The sale was duly recorded in the Office of the Register of Deeds for the province of Iloilo as Entry No. 13609 on July 11, 1960 (Exh. "A-1").

(NOTE: As per deed of sale, Exh. A, what Militante purportedly sold to plaintiff-appellant, his son-in-law, for the sum of P2,000.00 was "a parcel of untitled land having an area Of 144.9072 hectares ... surveyed under Psu 99791 ... (and) subject to the exclusions made by me, under (case) CA-i3497, Land Registration Case No. R-695, G.L.R.O. No. 54852, Court of First Instance of the province of Iloilo. These exclusions referred to portions of the original area of over 171 hectares originally claimed by Militante as applicant, but which he expressly recognized during the trial to pertain to some oppositors, such as the Bureau of Public Works and Bureau of Forestry and several other individual occupants and accordingly withdrew his application over the same. This is expressly made of record in Exh. A, which is the Court of Appeals' decision of 22 September 1958 confirming the land registration court's dismissal of Militante's application for registration.)

4. On September 22,1958 the Court of appeals in CA-G.R. No. 13497-R promulgated its judgment confirming the decision of this Court in Land Case No. R-695, GLRO Rec. No. 54852 which dismissed the application for Registration filed by Francisco Militante (Exh. "I").

5. Domingo Rubias declared the land described in Exh. 'B' for taxation purposes under Tax Dec. No. 8585 (Exh. "C") for 1957; Tax Dec. Nos. 9533 (Exh. "C-1") and 10019 (Exh. "C-3")for the year 1961; Tax Dec. No. 9868 (Exh. "C-2") for the year 1964, paying the land taxes under Tax Dec. No. 8585 and 9533 (Exh. "D", "D-1", "G-6").

6. Francisco Militante immediate predecessor-in-interest of the plaintiff, has also declared the land for taxation purposes under Tax Dec. No.

5172 in 1940 (Exh. "E") for 1945; under Tax Dec. No. T-86 (Exh. "E-1") for 1948; under Tax Dec. No. 7122 (Exh. "2"), and paid the land taxes for 1940 (Exhs. "G" and "G-7"), for 1945 46 (Exh."G-1") for 1947 (Exh. "G-2"), for 1947 & 1948 (Exh. "G-3"), for 1948 (Exh."G-4"), and for 1948 and 1949 (Exh."G-5").

7. Tax Declaration No. 2434 in the name of Liberato Demontaño for the land described therein (Exh. "F") was cancelled by Tax. Dec. No. 5172 of Francisco Militante (Exh. "E"). Liberato Demontaño paid the land tax under Tax Dec. No. 2434 on Dec. 20, 1939 for the years 1938 (50%) and 1959 (Exh. "H").

8. The defendant had declared for taxation purposes Lot No. 2 of the Psu-155241 under Tax Dec. Not. 8583 for 1957 and a portion of Lot No. 2, Psu-155241, for 1945 under Tax Dec. No. 8584 (Exh."2-A" Tax No. 8583 (Exh. "2") was revised by Tax Dec. No. 9498 in the name of the defendant (Exh. "2-B") and Tax Dec. No. 8584 (Exh. "2-A") was cancelled by Tax Dec. No. 9584 also in the name of the defendant (Exh. "2-C"). The defendant paid the land taxes for Lot 2, Psu-155241, on Nov. 9, 1960 for the years 1945 and 1946, for the year 1950, and for the year 1960 as shown by the certificate of the treasurer (Exh. "3"). The defendant may present to the Court other land taxes receipts for the payment of taxes for this lot.

9. The land claimed by the defendant as his own was surveyed on June 6 and 7,1956, and a plan approved by Director of Land on November 15, 1956 was issued, identified as Psu 155241 (Exh. "5").

10. On April 22, 1960, the plaintiff filed forcible Entry and Detainer case against Isaias Batiller in the Justice of the Peace Court of Barotac Viejo Province of Iloilo (Exh. "4") to which the defendant Isaias Batiller riled his answer on August 29, 1960 (Exh."4-A"). The Municipal Court of Barotac Viejo after trial,decided the case on May 10, 1961 in favor of the defendant and against the plaintiff (Exh. "4-B"). The plaintiff appealed from the decision of the Municipal Court of Barotac Viejo which was docketed in this Court as Civil Case No. 5750 on June 3, 1961, to which the defendant, Isaias Batiller, on June 13, 1961 filed his answer (Exh. "4-C").And this Court after the trial.decided the case on November 26, 1964, in favor of the defendant, Isaias Batiller and against the plaintiff (Exh. "4-D").

(NOTE: As per Exh. 4-B, which is the Iloilo court of first instance decision of 26 November 1964 dismissing plaintiff's therein complaint for ejectment against defendant, the iloilo court expressly found "that plaintiff's complaint is unjustified, intended to harass the defendant" and "that the defendant, Isaias Batiller, has a better right to possess the land in question described in Psu 155241 (Exh. "3"), Isaias Batiller having been in the actual physical possession thereof under a claim of title many years before Francisco Militante sold the land to the plaintiff-hereby dismissing plaintiff's complaint and ordering the plaintiff to pay the defendant attorney's fees ....")

B. During the trial of this case on the merit, the plaintiff will prove by competent evidence the following:

1. That the land he purchased from Francisco Militante under Exh. "A" was formerly owned and possessed by Liberato Demontaño but that on September 6, 1919 the land was sold at public auction by virtue of a judgment in a Civil Case entitled "Edw J. Pflieder plaintiff vs. Liberato Demontaño Francisco Balladeros and Gregorio Yulo, defendants", of which Yap Pongco was the purchaser (Exh. "1-3"). The sale was registered in the Office of the Register of Deeds of Iloilo on August 4, 1920, under Primary Entry No. 69 (Exh. "1"), and a definite Deed of Sale was executed by Constantino A. Canto, provincial Sheriff of Iloilo, on Jan. 19, 1934 in

favor of Yap Pongco (Exh. "I"), the sale having been registered in the Office of the Register of Deeds of Iloilo on February 10, 1934 (Exh."1-1").

2. On September 22, 1934, Yap Pongco sold this land to Francisco Militante as evidenced by a notarial deed (Exh. "J") which was registered in the Registry of Deeds on May 13, 1940 (Exh."J-1").

3. That plaintiff suffered damages alleged in his complaint.

C. Defendants, on the other hand will prove by competent evidence during the trial of this case the following facts:

1. That lot No. 2 of the Psu-1552 it (Exh. '5') was originally owned and possessed by Felipe Batiller, grandfather of the defendant Basilio Batiller, on the death of the former in 1920, as his sole heir. Isaias Batiller succeeded his father , Basilio Batiller, in the ownership and possession of the land in the year 1930, and since then up to the present, the land remains in the possession of the defendant, his possession being actual,

open, public, peaceful and continuous in the concept of an owner, exclusive of any other rights and adverse to all other claimants.

2. That the alleged predecessors in interest of the plaintiff have never been in the actual possession of the land and that they never had any title thereto.

3. That Lot No. 2, Psu 155241, the subject of Free Patent application of the defendant has been approved.

4. The damages suffered by the defendant, as alleged in his counterclaim."' 1

The appellate court further related the developments of the case, as follows:

On August 17, 1965, defendant's counsel manifested in open court that before any trial on the merit of the case could proceed he would file a motion to dismiss plaintiff's complaint which he did, alleging that plaintiff does not have cause of action against him because the property in dispute which he (plaintiff) allegedly bought from his father-in-law, Francisco Militante was the subject matter of LRC No. 695 filed in the CFI of Iloilo, which case was brought on appeal to this Court and docketed as CA-G.R. No. 13497-R in which aforesaid case plaintiff was the counsel on record of his father-in-law, Francisco Militante. Invoking Arts. 1409 and 1491 of the Civil Code which reads:

'Art. 1409. The following contracts are inexistent and void from the beginning:

xxx xxx xxx

(7) Those expressly prohibited by law.

'ART. 1491. The following persons cannot acquire any purchase, even at a public auction, either in person of through the mediation of another: .

xxx xxx xxx

(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights of in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring an assignment and shall apply to lawyers, with respect to

the property and rights which may be the object of any litigation in which they may take part by virtue of their profession.'

defendant claims that plaintiff could not have acquired any interest in the property in dispute as the contract he (plaintiff) had with Francisco Militante was inexistent and void. (See pp. 22-31, Record on Appeal). Plaintiff strongly opposed defendant's motion to dismiss claiming that defendant can not invoke Articles 1409 and 1491 of the Civil Code as Article 1422 of the same Code provides that 'The defense of illegality of contracts is not available to third persons whose interests are not directly affected' (See pp. 32-35 Record on Appeal).

On October 18, 1965, the lower court issued an order disclaiming plaintiffs complaint (pp. 42-49, Record on Appeal.) In the aforesaid order of dismissal the lower court practically agreed with defendant's contention that the contract (Exh. A) between plaintiff and Francism Militante was null and void. In due season plaintiff filed a motion for reconsideration (pp. 50-56 Record on Appeal) which was denied by the

lower court on January 14, 1966 (p. 57, Record on Appeal).

Hence, this appeal by plaintiff from the orders of October 18, 1965 and January 14, 1966.

Plaintiff-appellant imputes to the lower court the following errors:

'1. The lower court erred in holding that the contract of sale between the plaintiff-appellant and his father-in-law, Francisco Militante, Sr., now deceased, of the property covered by Plan Psu-99791, (Exh. "A") was void, not voidable because it was made when plaintiff-appellant was the counsel of the latter in the Land Registration case.

'2. The lower court erred in holding that the defendant-appellee is an interested person to question the validity of the contract of sale between plaintiff-appellant and the deceased, Francisco Militante, Sr.

'3. The lower court erred in entertaining the motion to dismiss of the defendant-appellee after he had already filed his answer, and after the termination of the pre-trial, when the said motion to dismiss raised a collateral question.

'4. The lower court erred in dismissing the complaint of the plaintiff-appellant.'

The appellate court concluded that plaintiffs "assignment of errors gives rise to two (2) legal posers — (1) whether or not the contract of sale between appellant and his father-in-law, the late Francisco Militante over the property subject of Plan Psu-99791 was void because it was made when plaintiff was counsel of his father-in-law in a land registration case involving the property in dispute; and (2) whether or not the lower court was correct in entertaining defendant-appellee's motion to dismiss after the latter had already filed his answer and after he (defendant) and plaintiff-appellant had agreed on some matters in a pre-trial conference. Hence, its elevation of the appeal to this Court as involving pure questions of law.

It is at once evident from the foregoing narration that the pre-trial conference held by the trial court at which the parties with their counsel agreed and stipulated on the material and relevant facts and submitted their respective documentary exhibits as referred to in the pre-trial order, supra, 2practically amounted to a fulldress trial which placed on record all the facts and exhibits necessary for adjudication of the case.

The three points on which plaintiff reserved the presentation of evidence at the-trial dealing with the source of the alleged right and title of Francisco Militante's

predecessors, supra, 3actually are already made of record in the stipulated facts and admitted exhibits. The chain of Militante's alleged title and right to the land as supposedly traced back to Liberato Demontaño was actually asserted by Militante (and his vendee, lawyer and son-in-law, herein plaintiff) in the land registration case and rejected by the Iloilo land registration court which dismissed Militante's application for registration of the land. Such dismissal, as already stated, was affirmed by the final judgment in 1958 of the Court of Appeals. 4

The four points on which defendant on his part reserved the presentation of evidence at the trial dealing with his and his ancestors' continuous, open, public and peaceful possession in the concept of owner of the land and the Director of Lands' approval of his survey plan thereof, supra, 5are likewise already duly established facts of record, in the land registration case as well as in the ejectment case wherein the Iloilo court of first instance recognized the superiority of defendant's right to the land as against plaintiff.

No error was therefore committed by the lower court in dismissing plaintiff's complaint upon defendant's motion after the pre-trial.

1. The stipulated facts and exhibits of record indisputably established plaintiff's lack of cause of action and justified the outright dismissal of the complaint. Plaintiff's claim of ownership to the land in question was predicated on the sale thereof for P2,000.00 made in 1956 by his father-in- law, Francisco Militante, in his favor, at a time when Militante's application for registration thereof had already been dismissed by the Iloilo land registration court and was pending appeal in the Court of Appeals.

With the Court of Appeals' 1958 final judgment affirming the dismissal of Militante's application for registration, the lack of any rightful claim or title of Militante to the land was conclusively and decisively judicially determined. Hence, there was no right or title to the land that could be transferred or sold by Militante's purported sale in 1956 in favor of plaintiff.

Manifestly, then plaintiff's complaint against defendant, to be declared absolute owner of the land and to be restored to possession thereof with damages was bereft of any factual or legal basis.

2. No error could be attributed either to the lower court's holding that the purchase by a lawyer of the property in litigation from his client is categorically prohibited by Article 1491, paragraph (5) of the Philippine Civil Code, reproduced supra; 6and that consequently, plaintiff's purchase of the property in litigation from his client (assuming that his client could sell the same since as already shown above, his client's claim to the property was defeated and rejected) was void and could produce no legal effect, by virtue of Article 1409, paragraph (7) of our Civil Code which provides that contracts "expressly prohibited or declared void by law' are "inexistent and that "(T)hese contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived."

The 1911 case of Wolfson vs. Estate of Martinez 7relied upon by plaintiff as

holding that a sale of property in litigation to the party litigant's lawyer "is not void but voidable at the election of the vendor" was correctly held by the lower court to have been superseded by the later 1929 case of Director of Lands vs. Abagat. 8In this later case of Abagat, the Court expressly cited two antecedent cases involving the same transaction of purchase of property in litigation by the lawyer which was expressly declared invalid under Article 1459 of the Civil Code of Spain (of which Article 1491 of our Civil Code of the Philippines is the counterpart) upon challenge thereof not by the vendor-client but by the adverse parties against whom the lawyer was to enforce his rights as vendee thus acquired.

These two antecedent cases thus cited in Abagat clearly superseded (without so expressly stating the previous ruling in Wolfson:

The spouses, Juan Soriano and Vicente Macaraeg, were the owners of twelve parcels of land. Vicenta Macaraeg died in November, 1909, leaving a large number of collateral heirs but no descendants. Litigation between

the surviving husband, Juan Soriano, and the heirs of Vicenta immediately arose, and the herein appellant Sisenando Palarca acted as Soriano's lawyer. On May 2, 1918, Soriano executed a deed for the aforesaid twelve parcels of land in favor of Sisenando Palarca and on the following day, May 3, 1918, Palarca filed an application for the registration of the land in the deed. After hearing, the Court of First Instance declared that the deed was invalid by virtue of the provisions of article 1459 of the Civil Code, which prohibits lawyers and solicitors from purchasing property rights involved in any litigation in which they take part by virtue of their profession. The application for registration was consequently denied, and upon appeal by Palarca to the Supreme Court, the judgement of the lower court was affirmed by a decision promulgated November 16,1925. (G.R. No. 24329, Palarca vs. Director of Lands, not reported.)

In the meantime cadastral case No. 30 of the Province of Tarlac was instituted, and on August 21, 1923, Eleuteria Macaraeg, as administratrix of the estate of Vicente Macaraeg, filed claims for the

parcels in question. Buenaventura Lavitoria administrator of the estate of Juan Soriano, did likewise and so did Sisenando Palarca. In a decision dated June 21, 1927, the Court of First Instance, Judge Carballo presiding, rendered judgment in favor of Palarea and ordered the registration of the land in his name. Upon appeal to this court by the administration of the estates of Juan Soriano and Vicente Macaraeg, the judgment of the court below was reversed and the land adjudicated to the two estates as conjugal property of the deceased spouses. (G.R. No. 28226, Director of Lands vs. Abagat, promulgated May 21, 1928, not reported.) 9

In the very case of Abagat itself, the Court, again affirming the invalidity and nullity of the lawyer's purchase of the land in litigation from his client, ordered the issuance of a writ of possession for the return of the land by the lawyer to the adverse parties without reimbursement of the price paid by him and other expenses, and ruled that "the appellant Palarca is a lawyer and is presumed to know the law. He must, therefore, from the beginning, have been well aware of the defect in his title and is, consequently, a possessor in bad faith."

As already stated, Wolfson and Abagat were decided with relation to Article 1459 of the Civil Code of Spain then adopted here, until it was superseded on August 30, 1950 by the Civil Code of the Philippines whose counterpart provision is Article 1491.

Article 1491 of our Civil Code (like Article 1459 of the Spanish Civil Code) prohibits in its six paragraphs certain persons, by reason of the relation of trust or their peculiar control over the property, from acquiring such property in their trust or control either directly or indirectly and "even at a public or judicial auction," as follows: (1) guardians; (2) agents; (3) administrators; (4) public officers and employees; judicial officers and employees, prosecuting attorneys, and lawyers; and (6) others especially disqualified by law.

In Wolfson which involved the sale and assignment of a money judgment by the client to the lawyer, Wolfson, whose right to so purchase the judgment was being challenged by the judgment debtor, the Court, through Justice Moreland, then expressly reserved decision on "whether or not the judgment in question actually falls within the prohibition of the article" and held only that the sale's "voidability cannot be asserted by one not a party to the transaction or his representative," citing from Manresa 10that "(C)onsidering the question from the point of view of the civil law, the view taken by the code, we must limit ourselves to classifying as void all acts done contrary to the express prohibition of the statute. Now then: As the code does not recognize such nullity by the mere operation of law, the nullity of the acts hereinbefore referred to must be asserted by the person having the necessary legal capacity to do so and decreed by a competent court." 11

The reason thus given by Manresa in considering such prohibited acquisitions under Article 1459 of the Spanish Civil Code as merely voidable at the instance and option of the vendor and not void — "that the Code does not recognize such nullity de pleno derecho" — is no longer true and applicable to our own Philippine Civil Code which does recognize the absolute nullity of contracts "whose cause, object, or purpose is contrary to law, morals, good customs, public order or public policy" or which are "expressly prohibited or declared void by law" and declares such contracts "inexistent and void from the beginning." 12

The Supreme Court of Spain and modern authors have likewise veered from Manresa's view of the Spanish codal provision itself. In its sentencia of 11 June 1966, the Supreme Court of Spain ruled that the prohibition of Article 1459 of the Spanish Civil Code is based on public policy, that violation of the prohibition contract cannot be validated by confirmation or ratification, holding that:

... la prohibicion que el articulo 1459 del C.C. establece respecto a los administradores y apoderados, la cual tiene conforme a la doctrina de esta Sala, contendia entre otras, en S. de 27-5-1959, un fundamento de

orden moral lugar la violacion de esta a la nulidad de pleno derecho del acto o negocio celebrado, ... y prohibicion legal, afectante orden publico, no cabe con efecto alguno la aludida retification ... 13

The criterion of nullity of such prohibited contracts under Article 1459 of the Spanish Civil Code (Article 1491 of our Civil Code) as a matter of public order and policy as applied by the Supreme Court of Spain to administrators and agents in its above cited decision should certainly apply with greater reason to judges, judicial officers, fiscals and lawyers under paragraph 5 of the codal article.

Citing the same decisions of the Supreme Court of Spain, Gullon Ballesteros, his "Curso de Derecho Civil, (Contratos Especiales)" (Madrid, 1968) p. 18, affirms that, with respect to Article 1459, Spanish Civil Code:.

Que caracter tendra la compra que se realice por estas personas?Porsupuesto no cabe duda de que el caso (art.) 1459, 40 y 50, la nulidad esabsoluta porque el motivo de la prohibicion es de orden publico.14

Perez Gonzales in such view, stating that "Dado el caracter prohibitivo delprecepto, la consequencia de la infraccion es la nulidad radical y ex lege." 15

Castan, quoting Manresa's own observation that.

"El fundamento do esta prohibicion es clarisimo. No sa trata con este precepto tan solo de guitar la ocasion al fraude; persiguese, ademasel proposito de rodear a las personas que intervienen en la administrcionde justicia de todos los retigios que necesitan pora ejercer su ministerio librandolos de toda suspecha, que aunque fuere in fundada, redundura endescredito de la institucion." 16arrives at the contrary and now accepted view that "Puede considerace en nuestro derecho inexistente 'o radicalmente nulo el contrato en los siguentes cases: a) ...; b) cuando el contrato se ha celebrado en violacion de una prescripcion 'o prohibicion legal, fundada sobre motivos de orden publico (hipotesis del art. 4 del codigo) ..." 17

It is noteworthy that Caltan's rationale for his conclusion that fundamental consideration of public policy render void and inexistent such expressly prohibited purchase (e.g. by public officers and employees of government property intrusted to them and by justices, judges, fiscals and lawyers of property and rights in litigation and submitted to or handled by them, under Article 1491, paragraphs (4) and (5) of our Civil Code) has been adopted in a new article of our Civil Code, viz, Article 1409 declaring such prohibited contracts as "inexistent and void from the beginning." 18

Indeed, the nullity of such prohibited contracts is definite and permanent and cannot be cured by ratification. The public interest and public policy remain paramount and do not permit of compromise or ratification. In his aspect, the permanent disqualification of public and judicial officers and lawyers grounded on public policy

differs from the first three cases of guardians, agents and administrators (Article 1491, Civil Code), as to whose transactions it had been opined that they may be "ratified" by means of and in "the form of a new contact, in which cases its validity shall be determined only by the circumstances at the time the execution of such new contract. The causes of nullity which have ceased to exist cannot impair the validity of the new contract. Thus, the object which was illegal at the time of the first contract, may have already become lawful at the time of the ratification or second contract; or the service which was impossible may have become possible; or the intention which could not be ascertained may have been clarified by the parties. The ratification or second contract would then be valid from its execution; however, it does not retroact to the date of the first contract." 19

As applied to the case at bar, the lower court therefore properly acted upon defendant-appellant's motion to dismiss on the ground of nullity of plaintiff's alleged purchase of the land, since its juridical effects and plaintiff's alleged cause of action founded thereon were being asserted against defendant-appellant. The principles governing the nullity of such prohibited contracts and judicial declaration of their nullity have been well restated by Tolentino in his treatise on our Civil Code, as

follows:

Parties Affected. — Any person may invoke the in existence of the contract whenever juridical effects founded thereon are asserted against him. Thus, if there has been a void transfer of property, the transferor can recover it by the accion reinvindicatoria; and any prossessor may refuse to deliver it to the transferee, who cannot enforce the contract. Creditors may attach property of the debtor which has been alienated by the latter under a void contract; a mortgagee can allege the inexistence of a prior encumbrance; a debtor can assert the nullity of an assignment of credit as a defense to an action by the assignee.

Action On Contract. — Even when the contract is void or inexistent, an action is necessary to declare its inexistence, when it has already been fulfilled. Nobody can take the law into his own hands; hence, the intervention of the competent court is necessary to declare the absolute nullity of the contract and to decree the restitution of what has been given under it. The judgment, however, will retroact to the very day when the contract was entered into.

If the void contract is still fully executory, no party need bring an action to declare its nullity; but if any party should bring an action to enforce it, the other party can simply set up the nullity as a defense. 20

ACCORDINGLY, the order of dismissal appealed from is hereby affirmed, with costs in all instances against plaintiff-appellant. So ordered.

Republic of the Philippines SUPREME COURT

Manila

THIRD DIVISION

G.R. No. L-68838 March 11, 1991

FLORENCIO FABILLO and JOSEFA TANA (substituted by their heirs Gregorio Fabillo, Roman Fabillo, Cristeta F. Maglinte and Antonio Fabillo), petitioners, vs. THE HONORABLE INTERMEDIATE APPELLATE COURT (Third Civil Case Division) and ALFREDO MURILLO (substituted by his heirs Fiamita M. Murillo, Flor M. Agcaoili and Charito M. Babol), respondents.

Francisco A. Tan for petitioners. Von Kaiser P. Soro for private respondent.

FERNAN, C.J.:

In the instant petition for review on certiorari, petitioners seek the reversal of the appellate court's decision interpreting in favor of lawyer Alfredo M. Murillo the contract of services entered into between him and his clients, spouses Florencio Fabillo and Josefa Taña.

In her last will and testament dated August 16, 1957, Justina Fabillo bequeathed to her brother, Florencio, a house and lot in San Salvador Street, Palo, Leyte which was covered by tax declaration No. 19335, and to her husband, Gregorio D. Brioso, a piece of land in Pugahanay, Palo, Leyte. 1 After Justina's death, Florencio filed a petition for the probate of said will. On June 2, 1962, the probate court approved the project of partition "with the reservation that the ownership of the land declared under Tax Declaration No. 19335 and the house erected thereon be litigated and determined in a separate proceedings." 2

Two years later, Florencio sought the assistance of lawyer Alfredo M. Murillo in recovering the San Salvador property. Acquiescing to render his services, Murillo wrote Florencio the following handwritten letter:

Dear Mr. Fabillo:

I have instructed my stenographer to prepare the complaint and file the same on Wednesday if you are ready with the filing fee and sheriffs fee of not less than P86.00 including transportation expenses.

Considering that Atty. Montilla lost this case and the present action is a revival of a lost case, I trust that you will gladly give me 40% of the money value of the house and lot as a contigent (sic) fee in case of a success. When I come back I shall prepare the contract of services for your signature.

Thank you.

Cordially yours, (Sgd.) Alfredo M. Murillo Aug. 9, 1964 3

Thirteen days later, Florencio and Murillo entered into the following contract:

CONTRACT OF SERVICES

KNOW ALL MEN BY THESE PRESENTS:

That I, FLORENCIO FABILLO, married to JOSEFA TANA, of legal age, Filipino citizen and with residence and postal address at Palo, Leyte, was the Petitioner in Special Proceedings No. 843, entitled "In the Matter of the Testate Estate of the late Justina Fabillo, Florencio Fabillo, Petitioner" of the Court of First Instance of Leyte;

That by reason of the Order of the Court of First Instance of Leyte dated June 2, 1962, my claim for the house and lot mentioned in paragraph one (1) of the last will and testament of the late Justina Fabillo, was denied altho the will was probated and allowed by the Court;

That acting upon the counsel of Atty. Alfredo M. Murillo, I have cause(d) the preparation and filing of another case, entitled "Florencio Fabillo vs. Gregorio D. Brioso," which was docketed as Civil Case No. 3532 of the Court of First Instance of Leyte;

That I have retained and engaged the services of Atty. ALFREDO M. MURILLO, married and of legal age, with residence and postal address

at Santa Fe, Leyte to be my lawyer not only in Social Proceedings No. 843 but also in Civil Case No. 3532 under the following terms and conditions;

That he will represent me and my heirs, in case of my demise in the two cases until their successful conclusion or until the case is settled to my entire satisfaction;

That for and in consideration for his legal services, in the two cases, I hereby promise and bind myself to pay Atty. ALFREDO M. MURILLO, in case of success in any or both cases the sum equivalent to FORTY PER CENTUM (40%) of whatever benefit I may derive from such cases to be implemented as follows:

If the house and lot in question is finally awarded to me or a part of the same by virtue of an amicable settlement, and the same is sold, Atty. Murillo, is hereby constituted as Atty. in-fact to sell and convey the said house and lot and he shall be given as his compensation for his services as counsel and as attorney-in-fact the sum equivalent to forty per centum of the purchase price of the house and lot;

If the same house and lot is just mortgage(d) to any person, Atty. Murillo shall be given the sum equivalent to forty per centum (40%) of the proceeds of the mortgage;

If the house and lot is leased to any person, Atty. Murillo shall be entitled to receive an amount equivalent to 40% (FORTY PER CENTUM) of the rentals of the house and lot, or a part thereof;

If the house and lot or a portion thereof is just occupied by the undersigned or his heirs, Atty. Murillo shall have the option of either occupying or leasing to any interested party FORTY PER CENT of the house and lot.

Atty. Alfredo M. Murillo shall also be given as part of his compensation for legal services in the two cases FORTY PER CENTUM of whatever damages, which the undersigned can collect in either or both cases, provided, that in case I am awarded attorney's fees, the full amount of attorney's fees shall be given to the said Atty. ALFREDO M. MURILLO;

That in the event the house and lot is (sic) not sold and the same is maintained by the undersigned or his heirs, the costs of repairs, maintenance, taxes and insurance premiums shall be for the account of myself or my heirs and Attorney Murillo, in proportion to our rights and interest thereunder that is forty per cent shall be for the account of Atty. Murillo and sixty per cent shall be for my account or my heirs.

IN WITNESS HEREOF, I hereby set unto my signature below this 22nd day of August 1964 at Tacloban City.

(Sgd.) FLORENCIO FABILLO

(Sgd.) JOSEFA T. FABILLO WITH MY CONFORMITY:

(Sgd.) ALFREDO M. MURILLO

(Sgd.) ROMAN T. FABILLO (Witness)

(Sgd.) CRISTETA F. MAGLINTE (Witness) 4

Pursuant to said contract, Murillo filed for Florencio Fabillo Civil Case No. 3532 against Gregorio D. Brioso to recover the San Salvador property. The case was terminated on October 29, 1964 when the court, upon the parties' joint motion in the nature of a compromise agreement, declared Florencio Fabillo as the lawful owner not

only of the San Salvador property but also the Pugahanay parcel of land.

Consequently, Murillo proceeded to implement the contract of services between him and Florencio Fabillo by taking possession and exercising rights of ownership over 40% of said properties. He installed a tenant in the Pugahanay property.

Sometime in 1966, Florencio Fabillo claimed exclusive right over the two properties and refused to give Murillo his share of their produce. 5 Inasmuch as his demands for his share of the produce of the Pugahanay property were unheeded, Murillo filed on March 23, 1970 in the then Court of First Instance of Leyte a complaint captioned "ownership of a parcel of land, damages and appointment of a receiver" against Florencio Fabillo, his wife Josefa Taña, and their children Ramon (sic) Fabillo and Cristeta F. Maglinte. 6

Murillo prayed that he be declared the lawful owner of forty per cent of the two properties; that defendants be directed to pay him jointly and severally P900.00 per annum from 1966 until he would be given his share of the produce of the land plus P5,000 as consequential damages and P1,000 as attorney's fees, and that defendants be ordered to pay moral and exemplary damages in such amounts as the court might deem just and reasonable.

In their answer, the defendants stated that the consent to the contract of services of the Fabillo spouses was vitiated by old age and ailment; that Murillo misled them into believing that Special Proceedings No. 843 on the probate of Justina's will was already terminated when actually it was still pending resolution; and that the contingent fee of 40% of the value of the San Salvador property was excessive, unfair and unconscionable considering the nature of the case, the length of time spent for it, the efforts exerted by Murillo, and his professional standing.

They prayed that the contract of services be declared null and void; that Murillo's fee be fixed at 10% of the assessed value of P7,780 of the San Salvador

property; that Murillo be ordered to account for the P1,000 rental of the San Salvador property which he withdrew from the court and for the produce of the Pugahanay property from 1965 to 1966; that Murillo be ordered to vacate the portion of the San Salvador property which he had occupied; that the Pugahanay property which was not the subject of either Special Proceedings No. 843 or Civil Case No. 3532 be declared as the exclusive property of Florencio Fabillo, and that Murillo be ordered to pay moral damages and the total amount of P1,000 representing expenses of litigation and attorney's fees.

In its decision of December 2, 1975, 7 the lower court ruled that there was insufficient evidence to prove that the Fabillo spouses' consent to the contract was vitiated. It noted that the contract was witnessed by two of their children who appeared to be highly educated. The spouses themselves were old but literate and physically fit.

In claiming jurisdiction over the case, the lower court ruled that the complaint being one "to recover real property from the defendant spouses and their heirs or to enforce a lien thereon," the case could be decided independent of the probate proceedings. Ruling that the contract of services did not violate Article 1491 of the Civil Code as said contract stipulated a contingent fee, the court upheld Murillo's claim for "contingent attorney's fees of 40% of the value of recoverable properties." However, the court declared Murillo to be the lawful owner of 40% of both the San Salvador and Pugahanay properties and the improvements thereon. It directed the defendants to pay jointly and severally to Murillo the amount of P1,200 representing 40% of the net produce of the Pugahanay property from 1967 to 1973; entitled Murillo to 40% of the 1974 and 1975 income of the Pugahanay property which was on deposit with a bank, and ordered defendants to pay the costs of the suit.

Both parties filed motions for the reconsideration of said decision: Fabillo, insofar as the lower court awarded 40% of the properties to Murillo and the latter insofar as it granted only P1,200 for the produce of the properties from 1967 to 1973. On January 29, 1976, the lower court resolved the motions and modified its decision thus:

ACCORDINGLY, the judgment heretofore rendered is modified to read as follows:

(a) Declaring the plaintiff as entitled to and the true and lawful owner of forty percent (40%) of the parcels of land and improvements thereon covered by Tax Declaration Nos. 19335 and 6229 described in Paragraph 5 of the complaint;

(b) Directing all the defendants to pay jointly and severally to the plaintiff the sum of Two Thousand Four Hundred Fifty Pesos (P2,450.00) representing 40% of the net produce of the Pugahanay property from 1967 to 1973;

(c) Declaring the plaintiff entitled to 40% of the 1974 and 1975 income of said riceland now on deposit with the Prudential Bank, Tacloban City, deposited by Mr. Pedro Elona, designated receiver of the property;

(d) Ordering the defendants to pay the plaintiff the sum of Three Hundred Pesos (P 300.00) as attorney's fees; and

(e) Ordering the defendants to pay the costs of this suit.

SO ORDERED.

In view of the death of both Florencio and Justina Fabillo during the pendency of the case in the lower court, their children, who substituted them as parties to the case, appealed the decision of the lower court to the then Intermediate Appellate Court. On March 27, 1984, said appellate court affirmed in toto the decision of the lower court. 8

The instant petition for review on certiorari which was interposed by the Fabillo

children, was filed shortly after Murillo himself died. His heirs likewise substituted him in this case. The Fabillos herein question the appellate court's interpretation of the contract of services and contend that it is in violation of Article 1491 of the Civil Code.

The contract of services did not violate said provision of law. Article 1491 of the Civil Code, specifically paragraph 5 thereof, prohibits lawyers from acquiring by purchase even at a public or judicial auction, properties and rights which are the objects of litigation in which they may take part by virtue of their profession. The said prohibition, however, applies only if the sale or assignment of the property takes place during the pendency of the litigation involving the client's property. 9

Hence, a contract between a lawyer and his client stipulating a contingent fee is not covered by said prohibition under Article 1491 (5) of the Civil Code because the payment of said fee is not made during the pendency of the litigation but only after judgment has been rendered in the case handled by the lawyer. In fact, under the

1988 Code of Professional Responsibility, a lawyer may have a lien over funds and property of his client and may apply so much thereof as may be necessary to satisfy his lawful fees and disbursements. 10

As long as the lawyer does not exert undue influence on his client, that no fraud is committed or imposition applied, or that the compensation is clearly not excessive as to amount to extortion, a contract for contingent fee is valid and enforceable. 11 Moreover, contingent fees were impliedly sanctioned by No. 13 of the Canons of Professional Ethics which governed lawyer-client relationships when the contract of services was entered into between the Fabillo spouses and Murillo. 12

However, we disagree with the courts below that the contingent fee stipulated between the Fabillo spouses and Murillo is forty percent of the properties subject of the litigation for which Murillo appeared for the Fabillos. A careful scrutiny of the contract shows that the parties intended forty percent of the value of the properties as Murillo's contingent fee. This is borne out by the stipulation that "in case of success of any or both cases," Murillo shall be paid "the sum equivalent to forty per centum of whatever benefit" Fabillo would derive from favorable judgments. The same stipulation

was earlier embodied by Murillo in his letter of August 9, 1964 aforequoted.

Worth noting are the provisions of the contract which clearly states that in case the properties are sold, mortgaged, or leased, Murillo shall be entitled respectively to 40% of the "purchase price," "proceeds of the mortgage," or "rentals." The contract is vague, however, with respect to a situation wherein the properties are neither sold, mortgaged or leased because Murillo is allowed "to have the option of occupying or leasing to any interested party forty per cent of the house and lot." Had the parties intended that Murillo should become the lawful owner of 40% of the properties, it would have been clearly and unequivocally stipulated in the contract considering that the Fabillos would part with actual portions of their properties and cede the same to Murillo.

The ambiguity of said provision, however, should be resolved against Murillo as it was he himself who drafted the contract. 13 This is in consonance with the rule of interpretation that, in construing a contract of professional services between a lawyer and his client, such construction as would be more favorable to the client should be adopted even if it would work prejudice to the lawyer. 14 Rightly so because of the inequality in situation between an attorney who knows the technicalities of the law on the one hand and a client who usually is ignorant of the vagaries of the law on the other hand. 15

Considering the nature of the case, the value of the properties subject matter thereof, the length of time and effort exerted on it by Murillo, we hold that Murillo is entitled to the amount of Three Thousand Pesos (P3,000.00) as reasonable attorney's fees for services rendered in the case which ended on a compromise agreement. In so ruling, we uphold "the time-honored legal maxim that a lawyer shall at all times uphold the integrity and dignity of the legal profession so that his basic ideal becomes one of rendering service and securing justice, not money-making. For the worst scenario that can ever happen to a client is to lose the litigated property to his lawyer

in whom all trust and confidence were bestowed at the very inception of the legal controversy." 16

WHEREFORE, the decision of the then Intermediate Appellate Court is hereby reversed and set aside and a new one entered (a) ordering the petitioners to pay Atty. Alfredo M. Murillo or his heirs the amount of P3,000.00 as his contingent fee with legal interest from October 29, 1964 when Civil Case No. 3532 was terminated until the amount is fully paid less any and all amounts which Murillo might have received out of the produce or rentals of the Pugahanay and San Salvador properties, and (b) ordering the receiver of said properties to render a complete report and accounting of his receivership to the court below within fifteen (15) days from the finality of this decision. Costs against the private respondent.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur