Sales 13 June_full

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SALES | 13 June 2013

1. Gaite v. Fonacier, 2 SCRA 830 (1961).

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.

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 lodemineral 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 anddevelopment of the mining claims aforementioned on a royalty basis of not less than P0.50 per ton of ore that might be extractedtherefrom. On March 19, 1954, Gaite in turn executed a general assignment (Record on Appeal, pp. 17-19) conveying the developmentand exploitation of said mining claims into the Larap Iron Mines, a single proprietorship owned solely by and belonging to him, on thesame royalty basis provided for in Exhibit "3". Thereafter, Gaite embarked upon the development and exploitation of the mining claims inquestion, 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 metrictons 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 miningclaims 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 therecords 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 coveringthe 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 tothe promise, Fonacier delivered to Gaite a surety bond dated December 8, 1954 with himself (Fonacier) as principal and the Larap Minesand Smelting Co. and its stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty assureties (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 inthe stockpiles in the mining claims. Hence, a second bond, also dated December 8, 1954 (Exhibit "B"),was executed by the same partiesto the first bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional surety, but it provided that the liability of thesurety 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 conveyingunto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and explore the mining claims in question, together with theimprovements 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 byFonacier 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 tomake use of the period given them when their bond, Exhibit "B" automatically expired (Exhibits "C" to "C-24"). And when Fonacier andhis 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'sfees.

All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon by Gaite was subject to a conditionthat 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 firstamount 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 thecomplaint, 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 soldto 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 thedefendants failed to renew the surety bond underwritten by the Far Eastern Surety and Insurance Co., Inc. (Exhibit "B"), which expiredon 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 miningclaims 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 theapproximately 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'sgiving 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 inquestion 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 withinterest at 6% per annum from December 9, 1955 until payment, plus costs. From this judgment, defendants jointly appealed to thisCourt.

During the pendency of this appeal, several incidental motions were presented for resolution: a motion to declare the appellants LarapMines & Smelting Co., Inc. and George Krakower in contempt, filed by appellant Fonacier, and two motions to dismiss the appeal ashaving become academic and a motion for new trial and/or to take judicial notice of certain documents, filed by appellee Gaite. Themotion for contempt is unmeritorious because the main allegation therein that the appellants Larap Mines & Smelting Co., Inc. andKrakower 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 paymentof 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 unnecessaryto 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 onDecember 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 toappellant 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 24,000tons 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 coveringthe first shipment of iron ore made by the Larap Mines & Smelting Co., Inc., its assigns, administrators, or successors ininterest.

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 conditionalobligation is the fact that its efficacy or obligatory force (as distinguished from its demandability) is subordinated to the happening of afuture and uncertain event; so that if the suspensive condition does not take place, the parties would stand as if the conditional obligationhad never existed. That the parties to the contract Exhibit "A" did not intend any such state of things to prevail is supported by severalcircumstances:

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 thepayment 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 termsof 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 (theseller to deliver and transfer ownership of the thing sold and the buyer to pay the price),but each party anticipates performance by theother 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 isfound 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 guaranteepayment of the P65,000.00, an not only upon a bond by Fonacier, the Larap Mines & Smelting Co., and the company's stockholders, butalso on one by a surety company; and the fact that appellants did put up such bonds indicates that they admitted the definite existenceof 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 betantamount to leaving the payment at the discretion of the debtor, for the sale or shipment could not be made unless the appellants tooksteps 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 asuspensive period (dies ad quem) for the payment of the P65,000.00, the rules of interpretation would incline the scales in favor of "thegreater 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 itsmaturity (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 wherethe 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 shouldwait for the sale or shipment of the ore before receiving payment; or, in other words, whether or not they are entitled to take fulladvantage 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 compelGaite 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 undertakingon December 8, 1955 substantially reduced the security of the vendor's rights as creditor for the unpaid P65,000.00, a security that Gaiteconsidered essential and upon which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit "A"). The casesquarely 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 fortuitousevent 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 beenintended, for Gaite stood to lose and had nothing to gain barely; and if there was any, it could be rationally explained only if theappellants 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 thedeed Exhibit "A.".

All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding payment and instituting this actionone year from and after the contract (Exhibit "A") was executed, either because the appellant debtors had impaired the securitiesoriginally given and thereby forfeited any further time within which to pay; or because the term of payment was originally of no more thanone 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 byappellee Gaite to appellant Fonacier, and whether, if there had been a short-delivery as claimed by appellants, they are entitled to thepayment 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 mereestimate by the parties of the total tonnage weight of the mass; and second , that the evidence shows that neither of the parties hadactually 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 measuringor 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 determinateobject, the mass, and not the actual number of units or tons contained therein, so that all that was required of the seller Gaite was todeliver in good faith to his buyer all of the ore found in the mass, notwithstanding that the quantity delivered is less than the amountestimated by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872, applying art. 2459 of theLouisiana Civil Code). There is no charge in this case that Gaite did not deliver to appellants all the ore found in the stockpiles in themining claims in questions; Gaite had, therefore, complied with his promise to deliver, and appellants in turn are bound to pay the lumpprice.

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, wasthere 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 cubicmeter, or ton by ton. Both parties predicate their respective claims only upon an estimated number of cubic meters of ore multiplied bythe 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, whileappellants contend that by actual measurement, their witness Cirpriano Manlañgit found the total volume of ore in the stockpiles to beonly 6.609 cubic meters. As to the average weight in tons per cubic meter, the parties are again in disagreement, with appellantsclaiming the correct tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite claims that the correct tonnage factor is about3.7.

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 madeby Leopoldo F. Abad, chief of the Mines and Metallurgical Division of the Bureau of Mines, a government pensionado to the States and amining 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 asmaximum. 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 iscorrect, 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 practicallyimpossible, so that a reasonable percentage of error should be allowed anyone making an estimate of the exact quantity in tons found inthe mass. It must not be forgotten that the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (ch. PineRiver 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 claimsin 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.

2. Buenaventura v. Court of Appeals, 416 SCRA 263 (2003).

[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 FELICITASJOAQUIN, SPOUSES DANILO VALDOZ and FE JOAQUIN, and SPOUSES GAVINO JOAQUIN and LEAASIS, respondents.

D E C I S I O N

CARPIO, J .:

The Case

This is a petition for review on certiorar i [1] to annul the Decision[2] dated 26 June 1996 of the Court of Appeals in CA-G.R. CV No.41996. The Court of Appeals affirmed the Decision[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

http://sc.judiciary.gov.ph/jurisprudence/2003/nov2003/126376.htm#_ftn1











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 aswell as of defendants Fidel, Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all surnamed JOAQUIN. The married Joaquin childrenare 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 Joaquinand Feliciana Landrito in favor of their co-defendant children and the corresponding certificates of title issued in their names, to wit:

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

issued in her name (Exh. “C-1”);

2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC) Psd-256394 executed on 7 June 1979, in favor of defendant Clarita Joaquin, for a consideration of P1[2],000.00 (Exh. “D”), pursuant to which TCT No. S-109772 wasissued 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 whichTCT 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 towhich 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 wasissued 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 hisname (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 morethan 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 unjustlydeprive 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 andinterest to assail their titles over the properties in litis; (2) that the sales were with sufficient considerations and made by defendantsparents voluntarily, in good faith, and with full knowledge of the consequences of their deeds of sale; and (3) that the certificates of titlewere issued with sufficient factual and legal basis.[4] (Emphasis in the original)

The Ruling of the Trial Court

Before the trial, the trial court ordered the dismissal of the case against defendant spouses Gavino Joaquin and Lea Asis. [5] Insteadof filing an Answer with their co-defendants, Gavino Joaquin and Lea Asis filed a Motion to Dismiss. [6] In granting the dismissal to Gavino

Joaquin and Lea Asis, the trial court noted that “compulsory heirs have the right to a legitime but such right is contingent since said rightcommences only from the moment of death of the decedent pursuant to Article 777 of the Civil Code of the Philippines.” [7]

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

In the first place, the testimony of the defendants, particularly that of the 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 tospeak of prior to the death of their parents. The court finds this contention tenable. In determining the legitime, the value of the propertyleft at the death of the testator shall be considered (Art. 908 of the New Civil Code). Hence, the legitime of a compulsory heir iscomputed as of the time of the death of the decedent. Plaintiffs therefore cannot claim an impairment of their legitime while their parentslive.

All the foregoing considered, this case is DISMISSED.

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

No costs.

SO ORDERED.[8]

The Ruling of the Court of Appeals

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

To the mind of the Court, appellants are skirting the real and decisive issue in this case, which is, whether 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 defendantspouses, Leonardo Joaquin and Feliciana Landrito, who are their parents. However, their right to the properties of their defendantparents, as compulsory heirs, is merely inchoate and vests only upon the latter’s death. While still alive, defendant parents are free todispose 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 defendantparents. Consequently, they cannot be considered as real parties in interest to assail the validity of said deeds either for grossinadequacy or lack of consideration or for failure to express the true intent of the parties. In point is the ruling of the Supreme Court inVelarde, 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 legalcapacity to challenge their validity.

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

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

WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs against plaintiffs-appellants.

SO ORDERED.[9]

Hence, the instant petition.

Issues

Petitioners assign the following as errors of the Court of Appeals:

1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE IN QUESTION HAD NO VALIDCONSIDERATION.

2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN ASSUMING THAT THERE WAS ACONSIDERATION, THE SAME IS GROSSLY INADEQUATE.

3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE DEEDS OF SALE DO NOT EXPRESS THE TRUEINTENT 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 LEONARDOJOAQUIN 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 VALIDCAUSE OF ACTION AGAINST THE PRIVATE RESPONDENTS. [10]









The Ruling of the Court

We find the petition without merit.

We will discuss petitioners’ legal interest over the properties subject of the Deeds of Sale before discussing the issues on thepurported lack of consideration and gross inadequacy of the prices of the Deeds of Sale.

Whether Petitioners have a legal interest over the properties subject of the Deeds of Sale

Petitioners’ Complaint betrays their motive for filing this case. In their Complaint, petitioners asserted that the “purported sale of theproperties 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 revertto their respondent parents. If their parents die still owning the lots, petitioners and their respondent siblings will then co-own their parents’ estate by hereditary succession. [11]

It is evident from the records that petitioners are interested in the properties subject of the Deeds of Sale, but they have failed toshow any legal right to the properties. The trial and appellate courts should have dismissed the action for this reason alone. An actionmust be prosecuted in the name of the real party-in-interest.[12]

[T]he question as to “real party-in-interest” is whether he is “the party who would be benefitted or injured by the judgment, or the ‘partyentitled 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 boundeither principally or subsidiarily or are prejudiced in their rights with respect to one of the contracting parties and can show the detrimentwhich would positively result to them from the contract even though they did not intervene in it (Ibañez v. Hongkong & Shanghai Bank,22 Phil. 572 [1912]) 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 demandand the defendant will be protected in a payment to or recovery by him.” [13]

Petitioners do not have any legal interest over the properties subject of the Deeds of Sale. As the appellate court stated,petitioners’ right to their parents’ properties is merely inchoate and vests only upon their parents’ death. While still living, the parents of petitioners are free to dispose of their properties. In their overzealousness to safeguard their future legitime, petitioners forget thattheoretically, the sale of the lots to their siblings does not affect the value of their parents’ estate. While the sale of the lots reduced theestate, 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 respondentfather. 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 bindingand 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 contractof sale is valid, despite the manner of payment, or even the breach of that manner of payment. If the real price is not stated in thecontract, then the contract of sale is valid but subject to reformation. If there is no meeting of the minds of the parties as to the price,because the price stipulated in the contract is simulated, then the contract is void .[14] Article 1471 of the Civil Code states that if the pricein 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 withthe perfection of the contract. Payment of the price goes into the performance of the contract. Failure to pay the consideration isdifferent from lack of consideration. The former results in a right to demand the fulfillment or cancellation of the obligation under anexisting valid contract while the latter prevents the existence of a valid contract .[15]

Petitioners failed to show that the prices in the Deeds of Sale were absolutely simulated. To prove simulation, petitionerspresented Emma Joaquin Valdoz’s testimony stating that their father, respondent Leonardo Joaquin, told her that he would transfer a lotto her through a deed of sale without need for her payment of the purchase price. [16] The trial court did not find the allegation of absolute

simulation of price credible. Petitioners’ failure to prove absolute simulation of price is magnified by their lack of knowledge of their respondent siblings’ financial capacity to buy the questioned lots.[17] On the other hand, the Deeds of Sale which petitioners presented asevidence plainly showed the cost of each lot sold. Not only did respondents’ minds meet as to the purchase price, but the real price wasalso stated in the Deeds of Sale. As of the filing of the complaint, respondent siblings have also fully paid the price to their respondentfather .[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 beenfraud, 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 theparties really intended a donation or some other act or contract. (Emphasis supplied)

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:[19]

Courts cannot follow one every step of his life and extricate him from bad bargains, protect him from unwise investments, relieve himfrom one-sided contracts, or annul the effects of foolish acts. Courts cannot constitute themselves guardians of persons who are notlegally incompetent. Courts operate not because one person has been defeated or overcome by another, but because he has beendefeated 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 thelaw, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of the situation andremedy 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 withthe factual findings of the trial court. This Court will not weigh the evidence all over again unless there has been a showing that thefindings of the lower court are totally devoid of support or are clearly erroneous so as to constitute serious abuse of discretion. [20] In theinstant case, the trial court found that the lots were sold for a valid consideration, and that the defendant children actually paid thepurchase price stipulated in their respective Deeds of Sale. Actual payment of the purchase price by the buyer to the seller is a factualfinding that is now conclusive upon us.

WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.

SO ORDERED.

3. Celestino & Co. v. Collector , 99 Phil. 841 (1956).

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 withsection one hundred eighty-six of the National Revenue Code imposing taxes on sale of manufactured articles. However in 1952 itbegan 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 havingfailed 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, sketchesof 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 todeduce from these few exhibits is that the Oriental Sash Factory does not manufacture ready-made doors, sash and windowsfor the public but only upon special order of its select customers. . . . I cannot believe that petitioner company would take, as infact it has taken, all the trouble and expense of registering a special trade name for its sash business and then orders companystationery 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 thebest 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", whichmeans it is out to do business, in its chosen lines on a big scale. As a general rule, sash factories receive orders for doors andwindows of special design only in particular cases but the bulk of their sales is derived from a ready-made doors and windowsof standard sizes for the average home. Moreover, as shown from the investigation of petitioner's book of accounts, during theperiod from January 1, 1952 to September 30, 1952, it sold sash, doors and windows worth P188,754.69. I find it difficult tobelieve that this amount which runs to six figures was derived by petitioner entirely from its few customers who made specialorders 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 publicand 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, wecannot find under which the business of manufacturing sash, doors and windows upon special order of customers fall under thecategory 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, thisleaves 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 factbeen 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 thetax 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 thatthe articles sold are manufactured by the seller does not exchange the contract from the purview of section 186 of the NationalInternal 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 factsand the law. The important thing to remember is that Celestino Co & Company habitually makes sash, windows and doors, as it hasrepresented 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 ordinarilymanufactured 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 thesame and not for the general market: since the doors ordered by Don Toribio Teodoro & Sons, Inc., for instance, are not inexistence and which never would have existed but for the order of the party desiring it; and since petitioner's contractual relationwith his customers is that of a contract for a piece of work or since petitioner is engaged in the sale of services, it follows thatthe petitioner should be taxed under section 191 of the Tax Code and NOT under section 185 of the same Code." (Appellant'sbrief, 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 kindmanufactured by this appellant. Therefore it is not true that it serves special customers only or confines its services to them alone. Andanyone who sees, and likes, the doors ordered by Don Toribio Teodoro & Sons Inc. may purchase from appellant doors of the samekind, provided he pays the price. Surely, the appellant will not refuse, for it can easily duplicate or even mass-produce the same doors-itis 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 thekind habitually manufactured by appellant — special forms for sash, mouldings of panels — it would not accept the order — and no saleis made. If they do, the transaction would be no different from a purchasers of manufactured goods held is stock for sale; they arebought 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 instock for sale to the public-it thereby becomes an employee or servant of the customer, 1 not the seller of lumber. The same considerationapplies 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 tospecifications, 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 manufacturesor 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 tobe manufactured specially for the customer and upon his special order, and not for the general market, it is contract for a pieceof 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 notdivest 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 onstockdoors 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 notgenerally performed by it-it thereby contracts for a piece of work — filing special orders within the meaning of Article 1467. The ordersherein exhibited were not shown to be special. They were merely orders for work — nothing is shown to call them special requiringextraordinary 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 becalled 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 acontractor. 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.

4. Commissioner of Internal Revenue v. Engineering Equipment & Supply Co., 64 SCRA 590 (1975).

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 acompensating 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. Asoperator of an integrated engineering shop, it is engaged, among others, in the design and installation of central type air conditioningsystem, 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 itsforeign 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 occasionvoluminous 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, nowCommissioner, of Internal Revenue (hereinafter referred to as Commissioner) that Engineering be assessed for P480,912.01 asdeficiency 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 toP916,362.56 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 andsuggested 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 theCommissioner's assessment. (Exh. "B" and "15", pp. 86-88 BIR rec. Vol. I) The Commissioner replied that the assessment was inaccordance 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 investigatingrevenue 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, andpetitioner, as a contractor, is declared exempt from the deficiency manufacturers sales tax covering the period fromJune 1, 1948. to September 2, 1956. However, petitioner is ordered to pay respondent, or his duly authorizedcollection agent, the sum of P174,141.62 as compensating tax and 25% surcharge for the period from 1953 toSeptember 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 thedecision abovementioned. This was denied on April 6, 1967, prompting Engineering to file also with this Court its appeal, docketed asG.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 conditioningsystems it designed, fabricated, constructed and installed in the buildings and premises of its customers, rather than tothe compensating tax of only 7%;

2. That the Court of Tax Appeals erred in holding Engineering Equipment & Supply Company guilty of fraud ineffecting 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 inevidence;

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 deficiencyassessment 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 TaxCode and not to the 30% advance sales tax imposed by section 183 (b), in relation to section 185(m) both of the sameCode, 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 importationsof parts and accessories of air conditioning units, notwithstanding the finding of said court that the respondentcompany 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 theperiod 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 Section185(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 thesame, which defines a manufacturer as follows:

Section 194. — Words and Phrases Defined. — In applying the provisions of this Title, words and phrases shall betaken 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 prepareit for a special use or uses to which it could not have been put in its original condition, or who by any such processalters the quality of any such material or manufactured or partially manufactured product so as to reduce it tomarketable shape, or prepare it for any of the uses of industry, or who by any such process combines any such rawmaterial or manufactured or partially manufactured products with other materials or products of the same or of differentkinds and in such manner that the finished product of such process of manufacture can be put to special use or usesto which such raw material or manufactured or partially manufactured products in their original condition could nothave 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 installationof the central type of air-conditioning system subject to the 3% tax imposed by Section 191 of the same Code, which is essentially a taxon 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 and186 of the Code.

The arguments of both the Engineering and the Commissioner call for a clarification of the term contractor as well as the distinctionbetween a contract of sale and contract for furnishing services, labor and materials. The distinction between a contract of sale and onefor work, labor and materials is tested by the inquiry whether the thing transferred is one not in existence and which never would haveexisted 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 someother persons even if the order had not been given. 2 If the article ordered by the purchaser is exactly such as the plaintiff makes andkeeps 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, eventhough 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 hisbusiness manufactures or procures for the general market, whether the same is on hand at the time or not, is acontract of sale, but if the goods are to be manufactured specially for the customer and upon his special order and notfor 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 tocontrol 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, andLaCarlota Sugar Central vs. Trinidad, 43, Phil. 816, 819, would seem to be that he renders service in the course of an independentoccupation, 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 theCommissioner to hold it liable to the advance sales tax under Section 185(m), or it only had its services "contracted" for installationpurposes 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 exhibitssubmitted by both parties, We find that Engineering did not manufacture air conditioning units for sale to the general public, but importedsome items (as refrigeration compressors in complete set, heat exchangers or coils, t.s.n. p. 39) which were used in executing contractsentered into by it. Engineering, therefore, undertook negotiations and execution of individual contracts for the design, supply andinstallation 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 intoconsideration in the process such factors as the area of the space to be air conditioned; the number of persons occupying or would beoccupying 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 beengineered separately.

As found by the lower court, which finding 4 We adopt —



Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of its various customers thecentral type air conditioning system; prepares the plans and specifications therefor which are distinct and different fromeach other; the air conditioning units and spare parts or accessories thereof used by petitioner are not the window typeof air conditioner which are manufactured, assembled and produced locally for sale to the general market; and theimported air conditioning units and spare parts or accessories thereof are supplied and installed by petitioner uponprevious 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 whodesires 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 tothe 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. ToOur mind, the distinction as explained by Engineering, in its Brief, quoting from books, is not an idle play of words as claimed by theCommissioner, but a significant fact which We just cannot ignore. As quoted by Engineering Equipment & Supply Co., from anEngineering 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 aspecific type of space; others to perform a specific function; and still others as components to be assembled into atailor-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 functionalcomponents are included in one or two packages, and installation involves only making service connection such aselectricity, water and drains. Central-station systems, often referred to as applied or built-up systems, require theinstallation 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 uniqueamong air conditioning equipment in two respects: It is in the electrical appliance classification, and it is made by agreat number of manufacturers.

There is also the testimony of one Carlos Navarro, a licensed Mechanical and Electrical Engineer, who was once the Chairman of theBoard 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 requiresplanning and meticulous layout due to the fact that usually architects assign definite space and usually the spaces they assign are verysmall 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 buildingshere 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 theavailable 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 maybe 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 ableto satisfy themselves that the desired comfort within a room could be made by a definite setting of the machine as itcomes 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 itsservices 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 entirelydifferent. 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 thebold 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 1729of 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" werereflected 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 asEngineering 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 thedesign 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 JudgeLuciano of the CTA —

Q — Aside from the general components, which go into air conditioning plant or system of thecentral 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 thecovering contracts for these different projects listed ... referred to in the list, Exh. "F" are identical inevery respect? I mean every plan or system covered by these different contracts are identical instandard 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 mustbe designed and constructed to meet the particular requirements, whether the application is to beoperated. (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 InternalRevenue 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 tothe furnishing of a cooling unit, the connection of such unit with electrical and plumbing facilities and the installation of ducts within andthrough 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 thana 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 acontractor 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 toregisters. The contract called for completed air conditioning systems which became permanent part of the buildings and improvements tothe realty." The Court held the appellant a contractor which used the materials and the equipment upon the value of which the tax hereinimposed was levied in the performance of its contracts with its customers, and that the customers did not purchase the equipment andhave 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 uponhis 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 werenot intended for sale to the general public. Therefore, We have but to affirm the conclusion of the Court of Tax Appeals that Engineeringis a contractor rather than a manufacturer, subject to the contractors tax prescribed by Section 191 of the Code and not to the advancesales tax imposed by Section 185(m) in relation to Section 194 of the same Code. Since it has been proved to Our satisfaction thatEngineering 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. Thiscompensating 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 toSection 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 unitsand 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 Engineeringbut 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 purposelymisdeclared its importations. This evidence consists of letters written by petitioner to its foreign suppliers, instructingthem 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 bySection 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, itcan 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 dealingon 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 lawnotwithstanding 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, wehold that petitioner is not subject to the 50% surcharge despite the existence of fraud in the absence of legal basis tosupport 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 onlyand not to the customer.



When invoicing, your invoices should be exactly as detailed in the customer's Letter Order dated March 14th, 1953attached. This is in accordance with the Philippine import licenses granted to Madrigal & Co., Inc. and such detailsmust 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 carefulattention, otherwise great difficulties will be encountered with the Philippine Bureau of Customs when clearing theshipment on its arrival in Manila. All invoices and cases should be marked "THIS EQUIPMENT FOR RIZAL CEMENTCO."

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.) alsoenjoining the latter from mentioning or referring to the term 'air conditioning' and to describe the goods on order as Fiberglass pipe andpipe fitting insulation instead. Likewise on April 30, 1953, Engineering threatened to discontinue the forwarding service of UniversalTranscontinental 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 havebeen 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 inample time to have avoided this error in terminology, and we will ask that on receipt of this letter that you again write toUniversal Transcontinental Corp. and inform them that, if in the future, they are unable to cooperate with us on thisrequirement, we will thereafter be unable to utilize their forwarding service. Please inform them that we will not tolerateanother 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 thePhilippines, 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 soas 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 wemight make up two sets of invoices: one set describing equipment ordered simply according to the way that they arelisted on the import license and another according to our ordinary regular methods of order write-up. We would theninclude 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 separatecorrespondence. (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 packinglist. Upon presenting the packing list, it was discovered that the same was prepared on a copy of your letterhead whichindicated that the Trane Co. manufactured air conditioning, heating and heat transfer equipment. Accordingly, theinspectors insisted that this equipment was being imported for air conditioning purposes. To date, we have not beenable 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 isaltogether too glaring, We cannot agree with the Court of Tax Appeals in absolving Engineering from the 50% fraud surcharge, otherwiseWe 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 theimportations maybe released from customs custody. The said entries are the very documents where the nature, quantity and value of theimported goods declared and where the customs duties, internal revenue taxes, and other fees or charges incident to the importation arecomputed. 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 thesame. 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 knownas 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 paymentthereof. Under the original text of Section 190 of the Tax Code as amended by Commonwealth Act No. 503, thecontention of the petitioner that it is not subject to the 25% surcharge appears to be legally tenable. However, Section190 of the Tax Code was subsequently amended by the Republic Acts Nos. 253, 361, 1511 and 1612 effectiveOctober 1, 1946, July 1, 1948, June 9, 1949, June 16, 1956 and August 24, 1956 respectively, which invariablyprovides among others, the following:

... If any article withdrawn from the customhouse or the post office without payment of thecompensating 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 theCollector of Internal Revenue and payment of the corresponding compensating tax made within 30days from the date of such entry or notice and if tax is not paid within such period the amount of thetax 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 samewere 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 wereused for other purposes within 30 days. ... Consequently; as the 30% compensating tax was not paid by petitioner within the timeprescribed 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 ineffecting the importations and, therefore, Section 332(a) prescribing ten years is inapplicable, claiming that the pertinent prescriptiveperiod is five years from the date the questioned importations were made. A review of the record however reveals that Engineering didfile a tax return or declaration with the Bureau of Customs before it paid the advance sales tax of 7%. And the declaration filed revealsthat 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 beassessed, or a proceeding in court for the collection of such tax may be begun without assessment at any time withinten 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.

5. Quiroga v. Parsons, 38 Phil. 501 (1918).

G.R. No. L-11491 August 23, 1918

ANDRES QUIROGA vs. PARSONS HARDWARE CO. | AVANCEÑA, J.:

1. On January 24, 1911, in this city of manila, a contract was entered into by the plaintiff and J. Parsons (to whose rights andobligations the present defendant later subrogated itself), as party of the second part:

CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J. PARSONS, BOTH MERCHANTSESTABLISHED 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 thefollowing conditions:

(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the latter's establishment in Iloilo, and shall invoicethem 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 aprompt 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 15 days before hand of any alteration in price which he may plan to make inrespect to his beds, and agrees that if on the date when such alteration takes effect he should have any order pending to beserved to Mr. Parsons, such order shall enjoy the advantage of the alteration if the price thereby be lowered, but shall not beaffected by said alteration if the price thereby be increased, for, in this latter case, Mr. Quiroga assumed the obligation toinvoice 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 mayfind himself obliged to make, Mr. Quiroga assumes the obligation to offer and give the preference to Mr. Parsons in caseanyone 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 previousnotice 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 andboth substantially amount to the averment that the defendant violated the following obligations: not to sell the beds at higher prices thanthose of the invoices; to have an open establishment in Iloilo; itself to conduct the agency; to keep the beds on public exhibition, and topay 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 theexception of the obligation on the part of the defendant to order the beds by the dozen and in no other manner, none of the obligationsimputed to the defendant in the two causes of action are expressly set forth in the contract. But the plaintiff alleged that the defendantwas his agent for the sale of his beds in Iloilo, and that said obligations are implied in a contract of commercial agency. The wholequestion, therefore, reduced itself to a determination as to

whether the defendant (Parsons), by reason of the contract hereinbefore transcribed, was a purchaser or an agent of the plaintiff for thesale 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, asconstituting 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 onedetermined 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 inthese last two cases an additional discount was to be allowed for prompt payment. These are precisely the essential features of acontract 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 receivedthe 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, onreceiving the beds, was necessarily obliged to pay their price within the term fixed, without any other consideration and regardless as towhether he had or had not sold the beds.

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 onthe 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 mean nothing else, as stated in thecontract itself, than a mere discount on the invoice price. The word agency , also used, only expresses that the defendant was the onlyone 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 theyare 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 establishedand managed the latter's business in Iloilo. It appears that this witness, prior to the time of his testimony, had serious trouble with thedefendant, had maintained a civil suit against it, and had even accused one of its partners, Guillermo Parsons, of falsification. Hetestified that it was he who drafted the contract Exhibit A, and, when questioned as to what was his purpose in contracting with theplaintiff, replied that it was to be an agent for his beds and to collect a commission on sales. However, according to the defendant'sevidence, it was Mariano Lopez Santos, a director of the corporation, who prepared Exhibit A. But, even supposing that Ernesto Vidalhas stated the truth, his statement as to what was his idea in contracting with the plaintiff is of no importance, inasmuch as theagreements contained in Exhibit A which he claims to have drafted, constitute, as we have said, a contract of purchase and sale, and notone 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, itforwarded 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 theperformance 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 instantcase, 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 itwas not considered that the defendant had a right, by virtue of the contract, to make this return. As regards the shipment of beds withoutprevious notice, it is insinuated in the record that these brass beds were precisely the ones so shipped, and that, for this very reason, theplaintiff agreed to their return. And with respect to the so-called commissions, we have said that they merely constituted a discount onthe invoice price, and the reason for applying this benefit to the beds sold directly by the plaintiff to persons in Iloilo was because, as thedefendant obligated itself in the contract to incur the expenses of advertisement of the plaintiff's beds, such sales were to be consideredas 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 breachwould only entitle the plaintiff to disregard the orders which the defendant might place under other conditions; but if the plaintiff consentsto 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 andsale, and that the obligations the breach of which is alleged as a cause of action are not imposed upon the defendant, either byagreement or by law.

The judgment appealed from is affirmed, with costs against the appellant. So ordered.

6. Puyat v. Arco Amusement Co., 72 Phil. 402 (1941).

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 areimbursement of certain amounts allegedly overpaid by it on account of the purchase price of sound reproducing equipment andmachinery ordered by the petitioner from the Starr Piano Company of Richmond, Indiana, U.S.A. The facts of the case as found by thetrial 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 inManila, was engaged in the business of operating cinematographs. In 1930, its name was changed to Arco AmusementCompany. C. S. Salmon was the president, while A. B. Coulette was the business manager. About the same time, GonzaloPuyat & 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 desiringto equipt its cinematograph with sound reproducing devices, approached Gonzalo Puyat & Sons, Inc., thru its then presidentand 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 thedefendant, that the latter would, on behalf of the plaintiff, order sound reproducing equipment from the Starr Piano Companyand that the plaintiff would pay the defendant, in addition to the price of the equipment, a 10 per cent commission, plus allexpenses, 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 pricewithout 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 theplaintiff 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, andupon delivery of the same to the plaintiff and the presentation of necessary papers, the price of $1.700, plus the 10 per centcommission 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. Thisagreement or order was confirmed by the plaintiff by its letter Exhibit "2", without date, that is to say, that the plaintiff would payfor 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 defendantwas duly paid the price of $1,600 with its 10 per cent commission, and $160, for all expenses and charges. This amount of





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 thecost 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 theStarr piano Company to the petitioner is available only to the latter as the former's exclusive agent in the Philippines. The respondentcould 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 discountgranted 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 prospectivecustomers, and the respondent was not even aware of such an arrangement. The respondent, therefore, could not have offered to pay a10 per cent commission to the petitioner provided it was given the benefit of the 25 per cent discount enjoyed by the petitioner. It is wellknown that local dealers acting as agents of foreign manufacturers, aside from obtaining a discount from the home office, sometimesadd 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 compela reimbursement of the excess price, on that ground alone. The respondent could not secure equipment and machinery manufacturedby the Starr Piano Company except from the petitioner alone; it willingly paid the price quoted; it received the equipment and machineryas 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 andthe 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 isabsolved 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.

7. Lo v. KJS Eco-Formwork System Phil., Inc., 413 SCRA 182 (2003).

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 SonnyL. Lo, doing business under the name and style San’s Enterprises, is a building contractor. On February 22, 1990, petitioner orderedscaffolding equipments from respondent worth P540,425.80.1 He paid a downpayment in the amount of P150,000.00. The balance wasmade payable in ten monthly installments.

Respondent delivered the scaffoldings to petitioner .2 Petitioner was able to pay the first two monthly installments.1a\^/phi1.net Hisbusiness, however, encountered financial difficulties and he was unable to settle his obligation to respondent despite oral and writtendemands made against him.3

On October 11, 1990, petitioner and respondent executed a Deed of Assignment, 4 whereby petitioner assigned to respondent hisreceivables 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 Cityowned by Jomero Realty Corporation;

WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR purchased on account scaffolding equipmentsfrom 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 scaffoldingsnow 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 14/100Pesos (P335,462.14), Philippine Currency which represents part of the ASSIGNOR’s collectible from Jomero Realty Corp., said

ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles amounting to the said amount of P335, 462.14;

And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the full power and authority to demand, collect,receive, compound, compromise and give acquittance for the same or any part thereof, and in the name and stead of the said

ASSIGNOR;

http://www.lawphil.net/judjuris/juri2003/oct2003/gr_149420_2003.html#fnt1















And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its successors and assigns that said debt is justlyowing and due to the ASSIGNOR for Jomero Realty Corporation and that said ASSIGNOR has not done and will not cause anything tobe 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. xxx5 (Italics supplied)

However, when respondent tried to collect the said credit from Jomero Realty Corporation, the latter refused to honor the Deed of Assignment because it claimed that petitioner was also indebted to it.6 On November 26, 1990, respondent sent a letter 7 to petitioner

demanding payment of his obligation, but petitioner refused to pay claiming that his obligation had been extinguished when theyexecuted 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 RegionalTrial Court of Makati, Branch 147, which was docketed as Civil Case No. 91-074. 8

During the trial, petitioner argued that his obligation was extinguished with the execution of the Deed of Assignment of credit.Respondent, for its part, presented the testimony of its employee, Almeda Bañaga, who testified that Jomero Realty refused to honor theassignment of credit because it claimed that petitioner had an outstanding indebtedness to it.

On August 25, 1994, the trial court rendered a decision9 dismissing the complaint on the ground that the assignment of creditextinguished 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, dismissingthe complaint and ordering the plaintiff to pay the defendant attorney’s fees in the amount of P25,000.00. 1a\^/phi1.net

Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court rendered a decision ,10 the dispositiveportion 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 FiveThousand Four Hundred Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum from January 10, 1991 (filing of theComplaint) until fully paid and attorney’s fees equivalent to 10% of the amount due and costs of the suit.

SO ORDERED.11

In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to the respondent, the Court of Appeals held that(1) petitioner failed to comply with his warranty under the Deed; (2) the object of the Deed did not exist at the time of the transaction,rendering it void pursuant to Article 1409 of the Civil Code; and (3) petitioner violated the terms of the Deed of Assignment when hefailed to execute and do all acts and deeds as shall be necessary to effectually enable the respondent to recover the collectibles .12

Petitioner filed a motion for reconsideration of the said decision, which was denied by the Court of Appeals. 13

In this petition for review, petitioner assigns the following errors:

I

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN DECLARING THE DEED OF ASSIGNMENT (EXH. "4") AS NULL AND VOID FOR LACK OF OBJECT ON THE BASIS OF A MERE HEARSAY CLAIM.

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ASSIGNMENT (EXH. "4") DID NOTEXTINGUISH PETITIONER’S OBLIGATION ON THE WRONG NOTION THAT PETITIONER FAILED TO COMPLY WITH HISWARRANTY THEREUNDER.

III

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE TRIAL COURT AND IN ORDERINGPAYMENT OF INTERESTS AND ATTORNEY’S FEES.14

The petition is without merit.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such assale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another,known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. 15






























Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it asequivalent of payment of an outstanding debt.16 In order that there be a valid dation in payment, the following are the requisites: (1)There must be the performance of the prestation in lieu of payment (animo solvendi ) which may consist in the delivery of a corporealthing or a real right or a credit against the third person; (2) There must be some difference between the prestation due and that which isgiven in substitution (aliud pro alio); (3) There must be an agreement between the creditor and debtor that the obligation is immediatelyextinguished by reason of the performance of a prestation different from that due. 17 The undertaking really partakes in one sense of thenature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against thedebtor’s debt. As such, the vendor in good faith shall be responsible, for the existence and legality of the credit at the time of the sale butnot for the solvency of the debtor, in specified circumstances.18

Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property, 19produced the effects of a dation

in payment which may extinguish the obligation.

20

However, as in any other contract of sale, the vendor or assignor is bound by certainwarranties. 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 havebeen sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency wasprior 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 thesale or assignment. When Jomero claimed that it was no longer indebted to petitioner since the latter also had an unpaid obligation to it,it essentially meant that its obligation to petitioner has been extinguished by compensation. 21 In other words, respondent alleged the non-existence of the credit and asserted its claim to petitioner’s warranty under the assignment. Therefore, it behooved on petitioner to makegood 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 allsuch further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever collectibles said

ASSIGNOR has in accordance with the true intent and meaning of these presents.22 (underscoring ours)

Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the performance thereof in case thesame is later found to be inexistent. He should be held liable to pay to respondent the amount of his indebtedness.

Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the sum of P335,462.14 with legal interestthereon. However, we find that the award by the Court of Appeals of attorney’s fees is without factual basis. No evidence or testimonywas presented to substantiate this claim. Attorney’s fees, being in the nature of actual damages, must be duly substantiated bycompetent 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, orderingpetitioner 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 theobligation shall thereafter become equivalent to a forbearance of credit.23 The award of attorney’s fees is DELETED for lack of evidentiary basis.

SO ORDERED.

























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