Sales

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Ships ETC

G.R. No. L-41506 March 25, 1935

PHILIPPINE REFINING CO., INC., plaintiff-appellant, vs.FRANCISCO JARQUE, JOSE COROMINAS, and ABOITIZ & CO., defendants. JOSE COROMINAS, in his capacity as assignee of the estate of the insolvent Francisco Jarque,appellee.

Thos. G. Ingalls, Vicente Pelaez and DeWitt, Perkins and Brady for appellant.D.G. McVean and Vicente L. Faelnar for appellee.

MALCOLM, J.:

First of all the reason why the case has been decided by the court in banc needs explanation. A motion was presented by counsel for the appellant in which it was asked that the case be heard and determined by the court sitting in banc because the admiralty jurisdiction of the court was involved, and this motion was granted in regular course. On further investigation it appears that this was error. The mere mortgage of a ship is a contract entered into by the parties to it without reference to navigation or perils of the sea, and does not, therefore, confer admiralty jurisdiction. (Bogart vs. Steamboat John Jay [1854], 17 How., 399.)

Coming now to the merits, it appears that on varying dates the Philippine Refining Co., Inc., and Francisco Jarque executed three mortgages on the motor vessels Pandan and Zaragoza. These documents were recorded in the record of transfers and incumbrances of vessels for the port of Cebu and each was therein denominated a "chattel mortgage". Neither of the first two mortgages had appended an affidavit of good faith. The third mortgage contained such an affidavit, but this mortgage was not registered in the customs house until May 17, 1932, or within the period of thirty days prior to the commencement of insolvency proceedings against Francisco Jarque; also, while the last mentioned mortgage was subscribed by Francisco Jarque and M. N. Brink, there was nothing to disclose in what capacity the said M. N. Brink signed. A fourth mortgage was executed by Francisco Jarque and Ramon Aboitiz on the motorship Zaragoza and was entered in the chattel mortgage registry of the register of deeds on May 12, 1932, or again within the thirty-day period before the institution of insolvency proceedings. These proceedings were begun on June 2, 1932, when a petition was filed with the Court of First Instance of Cebu in which it was prayed that Francisco Jarque be declared an insolvent debtor, which soon thereafter was granted, with the result that an assignment of all the properties of the insolvent was executed in favor of Jose Corominas.

On these facts, Judge Jose M. Hontiveros declined to order the foreclosure of the mortgages, but on the contrary sustained the special defenses of fatal defectiveness of the mortgages. In so doing we believe that the trial judge acted advisedly.

Vessels are considered personal property under the civil law. (Code of Commerce, article 585.) Similarly under the common law, vessels are personal property although occasionally referred to as a peculiar kind of personal property. (Reynolds vs. Nielson [1903], 96 Am. Rep., 1000; Atlantic Maritime Co vs. City of Gloucester [1917], 117 N. E., 924.) Since the term "personal property" includes vessels, they are subject to mortgage agreeably to the provisions of the Chattel Mortgage Law. (Act No. 1508, section 2.) Indeed, it has heretofore been accepted without discussion that a mortgage on a vessel is in nature a chattel mortgage. (McMicking vs. Banco Español-Filipino [1909], 13 Phil., 429; Arroyo vs. Yu de Sane [1930], 54 Phil., 511.) The only difference between a chattel mortgage of a vessel and a chattel mortgage of other personalty is that it is not now necessary for a chattel mortgage of a vessel to be noted n the registry of the register of deeds, but it is essential that a record of documents affecting the title to a vessel be entered in the record of the Collector of Customs at the port of entry. (Rubiso and Gelito vs. Rivera [1917], 37 Phil., 72; Arroyo vs. Yu de Sane, supra.) Otherwise a mortgage on a vessel is generally like other chattel mortgages as to its requisites and validity. (58 C.J., 92.)

The Chattell Mortgage Law in its section 5, in describing what shall be deemed sufficient to constitute a good chattel mortgage, includes the requirement of an affidavit of good faith appended to the mortgage and recorded therewith. The absence of the affidavit vitiates a mortgage as against creditors and subsequent encumbrancers. (Giberson vs. A. N. Jureidini Bros. [1922], 44 Phil., 216; Benedicto de Tarrosa vs. F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros [1923], 46 Phil., 753.) As a consequence a chattel mortgage of a vessel wherein the affidavit of good faith required by the Chattel Mortgage Law is lacking, is unenforceable against third persons.

In effect appellant asks us to find that the documents appearing in the record do not constitute chattel mortgages or at least to gloss over the failure to include the affidavit of good faith made a requisite for a good chattel mortgage by the Chattel Mortgage Law. Counsel would further have us disregard article 585 of the Code of Commerce, but no reason is shown for holding this article not in force. Counsel would further have us revise doctrines heretofore announced in a series of cases, which it is not desirable to do since those principles were confirmed after due liberation and constitute a part of the commercial law of the Philippines. And finally counsel would have us make rulings on points entirely foreign to the issues of the case. As neither the facts nor the law remains in doubt, the seven assigned errors will be overruled.

Judgment affirmed, the costs of this instance to be paid by the appellant.

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SHIPS ETC

G.R. No. L-11407 October 30, 1917

FAUSTO RUBISO and BONIFACIO GELITO, plaintiff-appellee, vs.FLORENTINO E. RIVERA, defendant-appellant.

Francisco Sevilla for appellant. Salvador Q. Araullo for appellee.

TORRES, J.:

This appeal by bill of exceptions was filed by counsel for Florentino E. Rivera against the judgment of September 6, 1915, in which the defendant and appellant was ordered to place at the disposal of the plaintiff Fausto Rubiso the pilot boat in litigation. No special finding was made for costs.

On April 10, 1915, counsel for plaintiff brought suit in the Court of the First Instance of this city and alleged in the complaint that his clients were the owners of the pilot boat named Valentina, which had been in bad condition since the year 1914 and, on the date of the complaint, was stranded in the place called Tingloy, of the municipality of Bauan, Batangas; that the defendant Florentino E. Rivera took charge or possession of said vessel without the knowledge or consent of the plaintiff and refused to deliver it to them, under claim that he was the owner thereof; and that such procedure on the defendant's part caused the plaintiffs to suffer damages, not only because they could not proceed to repair the vessel, but also because they were unable to derive profit from the voyages for which said pilot boat was customarily used; and that the net amount of such uncollected profit was P1,750. The complaint terminated with a petition that judgment be rendered by ordering the defendant to deliver said pilot boat to the plaintiffs and indemnify them in the amount aforementioned or in such amount as should be proven at trial, and to pay the costs.

Counsel for the defendant entered a general and specific denial of all the facts set forth in the complaint, with the exception of those admitted in the special defense and consisting in that said pilot boat belonged to the concern named "Gelito and Co.," Bonifacio Gelito being a copartner thereof to the extent of two-thirds, and the Chinaman Sy Qui, to that of the one-third, of the value of said vessel; the subsequently Bonifacio Gelito sold his share to his copartner Sy Qui, as attested by the instrument Exhibit A, registered in the office of the Collector of Customs and made a part of his answer; that later said Chinaman, the absolute owner of the vessel, sold it in turn to the defendant Rivera, according to the public instrument, also attached to his answer as Exhibit B; and that, for the reason, Rivera took possession of said pilot boat Valentina, as its sole owner. He therefore petitioned that the defendant be absolved from the complaint, with the costs against the plaintiff.

After the hearing of the case and introduction of documentary evidence, the judgment of September 6, 1915, was rendered, from which counsel for the defendant appealed and moved for a new trial. This motion was denied and the appellant excepted.

The record shows it to have been fully proven that Bonifacio Gelito sold his share in the pilot boat Valentina, consisting of a two-thirds interest therein, to the Chinaman Sy Qui, the coowner of the other one-third interest in said vessel; wherefore this vendor is no longer entitled to exercise any action whatever in respect to the boat in question. Gelito was one of the partnership owners of the Valentina, as in fact his name appears in the certificate of protection issued by the Bureau of Customs, and the rights he held are evidenced by the articles of partnership; but, the whole ownership in the vessel having been consolidated in behalf of the Chinaman Sy Qui, this latter, in the use of his right as the sole owner of the Valentina, sold this boat to Florentino E. Rivera for P2,500, on January 4, 1915, which facts, are set forth in a deed ratified on the same date before a notary. This document was registered in the Bureau of Customs on March 17th of the same year.

On the 23d of January of that year, that is, after the sale of the boat to the defendant Rivera, suit having been brought in the justice of the peace court against the Chinaman Sy Qui to enforce payment of a certain sum of money, the latter's creditor Fausto Rubiso, the herein plaintiff, acquired said vessel at a public auction sale and for the sum of P55.45. The certificate of sale and adjudication of the boat in question was issued by the sheriff on behalf of Fausto Rubiso, in the office of the Collector of Customs, on January 27 of the same year and was also entered in the commercial registry on the 14th of March, following.

So that the pilot boat Valentina was twice sold: first privately by its owner Sy Qui to the defendant Florentino E. Rivera, on January 4, 1915, and afterwards by the sheriff at public auction in conformity with the order contained in the judgment rendered by the justice of the peace, court, on January 23 of the same year, against the Chinaman Sy Qui and in behalf of the plaintiff, Fausto Rubiso.

It is undeniable that the defendant Rivera acquired by purchase the pilot boat Valentina on a date prior to that of the purchase and adjudication made at public auction, by and on behalf of the plaintiff Rubiso; but it is no less true that the sale of the vessel by Sy Qui to Florentino E. Rivera, on January 4, 1915, was entered in the customs registry only on March 17, 1915, while its sale at public auction to Fausto Rubiso on the 23d of January of the same year, 1915, was recorded in the office of the Collector of Customs on the 27th of the same month, and in the commercial registry on the 4th of March, following; that is, the sale on behalf of the defendant Rivera was prior to that made at public auction to Rubiso, but the registration of this latter sale was prior by many days to the sale made to the defendant.

Article 573 of the Code of Commerce provides, in its first paragraph:

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Merchant vessels constitute property which may be acquired and transferred by any of the means recognized by law. The acquisition of a vessel must be included in a written instrument, which shall not produce any effect with regard to third persons if not recorded in the commercial registry.

So that, pursuany to the above-quoted article, inscription in the commercial registry was indispensable, in order that said acquisition might affect, and produce consequences with respect to third persons.

However, since the enactment of Act No. 1900, on May 18, 1909, said article of the Code of Commerce was amended, as appears by section 2 of that Act, here below transcribed.

The documenting, registering, enrolling, and licensing of vessels in accordance with the Customs Administrative Act and customs rules and regulations shall be deemed to be a registry of vessels within the meaning of the title two of the Code of Commerce, unless otherwise provided in said Customs Administrative Act or in said customs rules and regulations, and the Insular Collector of Customs shall perform the duties of commercial register concerning the registering of vessels, as defined in title two of the Code of Commerce.

The requisite of registration in the registry, of the purchase of a vessel, is necessary and indispensable in order that the purchaser's rights may be maintained against a claim filed by a third person. Such registration is required both by the Code of Commerce and by Act No. 1900. The amendment solely consisted in charging the Insular Collector of Customs, as at present, with the fulfillment of the duties of the commercial register concerning the registering of vessels; so that the registration of a bill of sale of a vessel shall be made in the office of the insular Collector of Customs, who, since May 18, 1909, has been performing the duties of the commercial register in place of this latter official.

In view of said legal provisions, it is undeniable that the defendant Florentino E. Rivera's rights cannot prevail over those acquired by Fausto Rubiso in the ownership of the pilot boat Valentina, inasmuch as, though the latter's acquisition of the vessel at public auction, on January 23, 1915, was subsequent to its purchase by the defendant Rivera, nevertheless said sale at public auction was antecedently recorded in the office of the Collector of Customs, on January 27, and entered in the commercial registry — an unnecessary proceeding — on March 4th; while the private and voluntary purchase made by Rivera on a prior date was not recorded in the office of the Collector of Customs until many days afterwards, that is, not until March 17, 1915.

The legal rule set down in the Mercantile Code subsists, inasmuch as the amendment solely refers to the official who shall make the entry; but, with respect to the rights of the two purchasers, whichever of them first registered his acquisition of the vessel is the one entitled to enjoy the protection of the law, which considers him the absolute owner of the purchased boat, and this latter to be free of all encumbrance and all claims by strangers for, pursuant to article 582 of the said code, after the bill of the judicial sale at auction has been executed and recorded in the commercial registry, all the other liabilities of the vessel in favor of the creditors shall be considered canceled. 1awphil.net

The purchaser at public auction, Fausto Rubiso, who was careful to record his acquisition, opportunely and on a prior date, has, according to the law, a better right than the defendant Rivera who subsequently recorded his purchase. The latter is a third person, who was directly affected by the registration which the plaintiff made of his acquisition.

Ships or vessels, whether moved by steam or by sail, partake, to a certain extent, of the nature and conditions of real property, on account of their value and importance in the world commerce; and for this reason the provisions of article 573 of the Code of Commerce are nearly identical with those of article 1473 of the Civil Code.

With respect to the indemnity for losses and damages, requested by the plaintiff, aside from the fact, as shown by the evidence, that, subsequent to the date when the judgment appealed from was rendered, the vessel in question emerged unharmed from the place where it was stranded, and was, at the time of the trial, anchored in the port of Maricaban, the record certainly does not furnish any positive evidence of the losses and damages alleged to have been occasioned. On the other hand, it cannot be affirmed that the defendant acted in bad faith specifically because he acquired the vessel on a date prior to that of its acquisition at public auction by the plaintiff Rubiso, who, for the reason aforestated, is the true and sole owner of said pilot boat.

For the foregoing considerations, whereby the errors assigned to the judgment appealed from are deemed to have been refuted, it is our opinion that said judgment should be, as it is hereby, affirmed, with costs against the appellant. So ordered.

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SHIPS ETC

G.R. No. L-31865 February 28, 1930

MARIANO B. ARROYO, provincial Sheriff of Iloilo, plaintiff-appellee, vs.MARIA CORAZON YU DE SANE, JOSE, M. PO PAUCO, and PO SUY LIONG, defendants-appellants. PHILIPPINE NATIONAL BANK, defendant-appellee.

Luis G. Hofileña for appellant Corazon Yu de Sane.Tomas Villa-Real, Teofilo del Rosario and Tiburcio Lutero for appellants Po Pauco and Po Suy Liong.Plaintiff-appellee in his own behalf.Roman J. Lacson for defendant-appellee National Bank.

MALCOLM, J.:

In the Court of First Instance of Iloilo, the sheriff of that province instituted an action to compel the various persons and entities with claims to the lorchas China and Cuylim to interplead with one another to determine their conflicting rights. As a result, Po Suy Liong, Ti, Liong & Co., J. M. Po Pauco, Maria Corazon Yu de Sane, and the Philippine National Bank presented their respective answers and complaints. Thereafter, it is probable that a hearing was had and evidence taken, although no such evidence has been transcribed and elevated to this court, which means that we must perforce accept the findings of fact made by the trial judge. His decision conclude with the following pronouncements:

In view of these proven facts, the court holds that the mortgage of the lorchas China and Cuylim executed in favor of J. M. Po Pauco through notarial deed Exhibit 2, and the transfer of said mortgage by J. M. Po Pouco, the mortgagee, to the Philippine National Bank through notarial deed Exhibit 1, duly recorded in the registry of deeds of the Province of Iloilo on November 29, 1919, are valid and legal.

The fact that this mortgage was not registered in the Bureau of Customs of the port of Iloilo until March 5th of this year does not invalidate it; since it was proved at the trial of this case that such deferred registration was due to certain doubts entertained by the collector of customs of the port of Iloilo touching the applicability of Act No. 3324, amending section 1176 of the Administrative Code; and that said collector only decided to admit and register said mortgage upon lochas China and Cuylim in March of this year after receipt of advice from Manila regarding the applicability of Act No. 3324, which was approved on December 4, 1926, to a mortgage executed on November 6, 1918, in favor of a Chinese subject — a prohibition not found in the original section 1176 of the Administrative Code, but which went into effect when the aforementioned Act No. 3324, approved on December 4, 1926, took effect.

But the lorchas China and Cuylim do not, by the mere fact of being mortgaged, cease to pertain to the Lim Ponzo Navigation Co., as evidence by certificates of ownership Exhibits A and B; and being property appertaining to the Lim Ponzo Navigation Co., they were validly attached, as shown by Exhibits E, F, G and , levied upon by virtue of the writ of execution Exhibit I, issued December 6, 1928, upon petition of plaintiff Maria Corazon Yu de Sane filed in Civil case No. 7688, Exhibit C. It was on December 6, 1928, that by virtue of said writ of execution the sheriff levied upon the lochas China and Cuylim, which, according to Exhibit F, had been attached on December 4, 1928; it being understood that both attachment and execution were subject to all liens existing upon said lorchas on the date of the attachment, which liens were the mortgages in favor of J. M. Po Pauco transferred by the same to the Philippine National Bank, according to Exhibits 1 and 2.

The aforementioned writ of execution Exhibit I was not carried out by the sheriff because the Philippine National Bank filed a third-party claim, Exhibit 12, and according to Exhibit 14, Maria Corazon Yu de Sane, the judgment creditor, failed to give indemnity bond as required by the sheriff.

But the court also holds that the provincial sheriff of Iloilo did not act legally when, after giving notice, Exhibit 15, on December 28, or 29, 1928, he dissolved the attachment levied upon the lorchas China and Cuylim, and delivered them to J. M. Po Pauco, as was proved at the trial of this case, for on December 28, 1928, those lorchas were under the control of this court in the instant case, wherein, on December 17, 1928, the complaint of interpleading filed by the sheriff was entered in the docket, and, without authority of the court in the instant case, said sheriff should not have assumed to dispose of the lorchas China and Cuylim as he did. The complaint of interpleading filed on December 17, 1928, was presented by the provincial sheriff of Iloilo, according to paragraph 11 thereof, for the purpose of protecting himself from any claim that might arise from the sale only the person of the sheriff, but also the lorchas in his possession which were the object of contradictory claims filed by several persons. But the sheriff, by his own authority, and without the knowledge and authority of this court, disposed of said lorchas, as stated in Exhibit 15, and in so acting he assumed full responsibility for all his acts.

The court holds that the now defendants Maria Corazon Yy de Sane may, if she so desires, ask for another order of execution in civil case No. 7688, and may by virtue thereof attached the lorchas China and Cuylim, and order their sale by public

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auction subject to the mortgage executed thereon by the owner, the Lim Ponzo Navigation Co., in favor of the Philippine National Bank, which is hereby declared valid.

The court holds that the damages at the rate of P100 a day claimed by defendants Po Suy Liong, Ti Liong & Co., and J. M. Po Pauco through the counterclaim contained in their answer filed on December 18, 1928, have not been proved.

As to the cross-complaint filed by the Philippine National Bank against J. M. Po Pauco, Maria Corazon Yu de Sane, Po Suy Liong, and Ti Liong & Co., the court finds that the basic facts thereof have been established, as heretofore stated in paragraphs numbered 2, 3, 4, 5, and 6, holding J. M. Po Pauco in debt to the Philippine National Bank for the sum of P131,994.95, including interest up to March 31, 1928, and the interest mentioned in Exhibit 10, from April 1, 1928, until payment, to which is added the stipulated 10 per cent of the sum total by way of attorney's fees, which the court hereby reduced to 5 per cent of the whole.

This debt of J. M. Po Pauco is secured by a mortgage of the property described in Exhibits 1 and 3, already due and demandable when the cross-complaint was filed by the Philippine National Bank.

Let judgment be entered for the Philippine National Bank, ordering J. M. Po Pauco to pay to it the sum of P131,994.95, plus the interest mentioned in Exhibit 10, from April 1, 1928, until payment, plus 5 per cent of the debt as attorney's fees and costs of collection.

If said J. M. Po Pauco fails to pay the amount of this judgment within three months from the date hereof, the court will decree the sale of the mortgaged property, as prayed for by the Philippine National Bank in its cross-complaint; and should be the proceeds of the sale thereof fall short of the amount of this judgment, a writ of execution shall issue against whatsoever unexempted property said J. M. Po Pauco olds, until the whole balance remaining is satisfied.

Maria Corazon de Sane, and Po Suy Liong & Co. are hereby absolved from the cross-complaint interposed by the Philippine National Bank against them.

The Philippine National Bank, J. M. Po Pauco, Po Suy Liong, and Ti Liong & Co., are hereby absolved from the cross-complaint interposed against them by Maria Corazon Yu de Sane.

From the aforementioned decision and judgment, two appeals have been taken, one by Maria Corazon Yu de Sane, and the other by J. M. Po Pauco and Po Suy Liong. These appeals will be disposed of in order.

I. The appeal of Maria Corazon Yu de Sane related to the preference to the two lorchas as between herself and the Philippine National Bank. Among the facts found by the trial judge, it is gleaned that the lorchas China and Cuylim were owned by the Lim Ponzo Navigation Co. On November 6, 1918, the two lorchas were mortgaged to J. M. Po Pauco to guarantee a loan of P20,000. Two days later, the mortgage was duly registered in the office of the register of deeds of Iloilo. On November 28, 1919, J. M. Po Pauco executed a mortgage in favor of the Philippine National Bank to protect a loan of P50,000, and covering, among other things, the titles, rights, and interests which Po Pauco had the lorchas China and Cuylim. One day later, this mortgage was registered in the office of the register of deeds of Iloilo. Subsequently, the credit of Po Pauco with the Philippine National Bank was increased to P90,000 which, with accrued interest, is alleged to now reach the sum of P131,994.95. To return again to the chattel mortgage, it was only recorded in the office of the collector of customs of Iloilo on March 5, 1929.

Maria Corazon Yu de Sane secured a judgment against the Lim Ponzo Navigation Co. for P7,179.65. In due course, a writ of attachment and an execution were secured, the date of the latter being December 6, 1928. The notice of seizure was recorded by the collector of customs of Iloilo on December 4, 1928, on which date the records of that office disclosed the vessels as free from encumbrances.

The registration of vessels is now governed by the Administrative Code. Section 1171 thereof provides:

Record of documents affecting title. — In the record of transfers and incumbrances of vessels, to be kept at each principal port of entry, shall be recorded at length all transfers, bills of sale, mortgages, liens, or other document which evidence ownership or directly or indirectly affect the title of registered vessels, and therein shall be recorded all receipts, certificates, or acknowledgments canceling or satisfying, whole or in part, any such obligation. No other record of any such document or paper shall be required than such as is affected hereunder.

It is clear that section 1171 of the Administrative Code has modified the provisions of the Chattel Mortgage Law, Act No. 1508, particularly section 4 thereof. It is now not necessary for a chattel mortgage of a vessel to be noted in the registry of the register of deeds. On the other hand, it is essential that a record of documents affecting the title of a vessel be entered in the office of the collector of customs, at a port of entry (Rubiso and Gelito vs. Rivera [1917], 37 Phil., 72; 2 Araneta, Administrative Code, note to section 1171). The law as now existing is designed to protect persons who deal with a vessel on the strength of the record title. Mortgages on vessels, although not recorded, are good as between the parties. But as against creditors of the mortgagor, an unrecorded mortgage is invalid (37 Cyc., 54).

Consolidating the facts, we find the mortgage of the Philippine National Bank dated November 28, 1919, but not recorded in the office of the collector of customs until March 5, 1929. The execution sued out by Maria Corazon Yu de Sane was dated December 6, 1928, and noted at the port of entry two days prior thereto. Under these facts, the execution holder would have a prior right over the unrecorded mortgage. However, in the decision of the trial court we find an explanation of the delay which appears to have been

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proved at the trial, and which we must accept since there is nothing in the record to the contrary. His Honor states that the fact that the mortgage was not registered in the office of the collector of customs of Iloilo until March 5, 1929, was because of the doubts entertained by the collector relative to the applicability of Act No. 3324 to a mortgage executed in 1918 in favor of a Chinese subject. This uncontradicted fact must be taken as curing the bank's defective title. That the collector of customs did not perform his duty was no fault of the bank. Constructive registration of the mortgage must, therefore, be accepted.

We rule that as between the appellant, Maria Corazon Yu de Sane, and the appellee, the Philippine National Bank, the latter has a superior claim in the amount of P20,000, the amount of the mortgage of Po Pauco which was transferred to the Philippine National Bank.

II. The remaining appeal concerns the respective rights of Jose M. Po Pauco and Po Suy Liong on the one hand and the Philippine National Bank on the other. There is no particular merit in the arguments offered on behalf of Po Suy Liong, for his mortgage was not on the boats themselves, and moreover his mortgage, so far as the record discloses, has never been recorded in the office of the collector of customs. But the appeal of Po Pauco does present a rather anomalous condition of affairs.

It will be recalled that the action was begun by the several parties interpleading. On these pleadings, the trial judge was led to order the foreclosure of the mortgage of the Philippine National Bank against Po Pauco. But the record does not disclose that any one other than the attorney for Po Pauco was notified, that any summons was issued, or that an opportunity was afforded Po Pauco to interpose his defense, if he had any. Obviously, the procedure provided by law for the foreclosure of a mortgage must be substantially carried out. It is no answer for the appellee to state that no objection was interposed in the lower court. The question is one which goes to the jurisdiction of the court, and a question of this nature may be raised for the first time on appeal.

With the foregoing pronouncements which, except as they related to the judgment of the Philippine National Bank against J. M. Po Pauco, in the main coincide with the pronouncements of the trial judge, the judgment appealed from will in part be affirmed and in part set aside, and the record remanded to the court of origin for further proceedings. It will be so ordered, without special pronouncement as to costs in this instance.

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SHIPS ETC

April 1, 1909

G.R. No. 5029JOSE MCMICKING, sheriff of the city of Manila, plaintiff-appellee,vs.EL BANCO ESPAÑOL-FILIPINO, ET AL., defendants.MANUEL AYALA, appellant.

Rosado, Sanz and Opisso for appellant.Ortigas and Fisher for appellee.JOHNSON, J.:From the record the following facts appear.

First. That prior to the 21st day of February, 1907, one Sanchez and one Cue Suan as a sociedad en comandita were the owners of a certain steamship, known as the Hock-Tay.Second. That on the 21st day of February, 1907, the said sociedad borrowed from El Banco Español-Filipino the sum of P3,000 at 8 per cent per annum from the 21st day of September, 1907, until paid, and gave as security for the payment of said sum a chattel mortgage executed and delivered in accordance with Act No. 1508 of the Philippine Commission.Third. That said mortgage was duly recorded in the office of the collector of customs of the port of Manila on the 27th day of February, 1907, in the record of conveyances of titles, mortgages and hypothecations of vessels documented at said port.

Fourth. That said mortgage was duly recorded in the office of the register of property of the city of Manila on the 13th day of September, 1907, in accordance with the provisions of section 4 of said Act (No. 1508).

Fifth. That, upon the 10th day of October, 1907, El Banco Español-Filipino caused to be delivered to the sheriff of the city of Manila the said chattel mortgage on the said steamer, Hock-Tay, together with notice that the terms of said mortgage had been broken by the mortgagors, and requested that the sheriff sell said mortgaged property in accordance with the provisions of section 14 of said Act (No. 1508).Sixth. The sheriff gave notice to said mortgagors of said request on the part of said mortgagee (El Banco Español-Filipino) and that said ship would be sold in accordance with the law.

Seventh. That due notice was given of the sale of said mortgaged property (the Hock-Tay) in accordance with the provisions of said Act.Eighth. That the date fixed for the sale of said property was the 27th day of October, 1907.

Ninth. That, upon the 27th day of October, 1907, Manuel Ayala served upon the said sheriff the following notice:

MANILA, October 26, 1907.

To the SHERIFF OF THE CITY OF MANILA.

SIR: As captain of the steamer Hock-Tay, the judicial sale of which has been advertised by you for the 28th instant, at 9 o’clock, a. m., I make demand upon you not to deliver to the Banco Español-Filipino the sum of P4,441.92, which is the amount of the wages of the

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crew and expenses of supplies now owing, and which, in accordance with the Code of Commerce, constitute preferred claims; I make this claim in writing and under oath, as shown by the attached affidavit.Very respectfully,

(Signed) MANUEL AYALA.

The attached affidavit is as follows:

CITY OF MANILA, PHILIPPINE ISLANDS, ss.:

Manuel Ayala, being first duly sworn, says that he is the holder of a captain’s license authorizing him to command vessels of any tonnage in Philippine waters; that he is at the present time captain of the steamer Hock-Tay, registered in the port of Manila, P. I. That the said steamer Hock-Tay has been attached by the sheriff of Manila, who has announced the judicial sale thereof for the 28th instant to satisfy a credit in favor of the Banco Español-Filipino; that in accordance with article 580 of the Code of Commerce, the money due to the captain and other members of the crew for salaries is entitled to preference over the claim of the bank; that the amounts owing by the ship for her equipment and provisions are also entitled to preference; that the wages due the captain and crew as shown by the shipping articles and account books of the vessel amount to the sum of P2,840.19; that the sum of P1,601.73 is now owing to the affiant for provisions, equipment and supplies furnished the vessel and expended during her last voyage upon proper authority.(Signed) MANUEL AYALA.

Subscribed and sworn to before me, etc.

Tenth. On the 27th day of October, 1907, the steamer was sold to the highest bidder for cash for the sum of P30,000.

On the 30th day of October, 1907, the sheriff of the city of Manila filed a complaint in the Court of First Instance of the city of Manila in which the foregoing facts were, in substance, alleged, which complaint concluded with the following prayer:

The plaintiff asks the court:

1. That the defendants be requested to interplead their respective rights to said funds.

2. That, upon the delivery of the said funds to such person or persons ordered by the court, the plaintiff be relieved of any responsibility as to all the defendants in connection with said funds; and

3. That the plaintiff be granted any other remedy which the court may deem just and equitable.

To this complaint the defendant Manuel Ayala answered and alleged his claim or lien which he held against the said ship Hock-Tay. On the 9th day of November, 1907, the defendant El Banco Español-Filipino presented its answer in which it attempted to show that neither the said Sanchez et al., nor the said Manuel Ayala had any right whatever to participate in the proceeds of the sale of said ship by said sheriff, and claimed that all of the money except the legal expenses should be paid to said bank. The record does not disclose whether or not the said sociedad en comandita filed an answer in said cause.Upon the 4th day of August, 1908, the attorneys for El Banco Español-Filipino and for the said Manuel Ayala entered into an agreement in the words and figures following:

For the purposes of this suit it is hereby stipulated between the representative of the Banco Español-Filipino and of Captain Don Manuel Ayala, as follows:

First. That the facts alleged in the paragraphs 1, 2, 4, 5, 6, 7, 8, and 9 of the complaint of interpleader filed in these proceedings by J. McMicking, as sheriff of the city of Manila, are true.

Second. That it is true that the mortgage deed of the steamer Hock-Tay, which appears literally copied in paragraph 5 of the said complaint, was duly recorded by the customs of Manila, on the 27th day of February, 1907, and in the registry of chattel mortgages of the city of Manila on the 13th day of September, 1907.Third. That the limited partnership named “Sanchez y Cue Sang,” sociedad en comandita, was the owner of the aforesaid steamer Hock-Tay at the date on which the representative of that partnership executed the mortgage deed of said steamer in favor of the Banco Español-Filipino.Fourth. That there is no credit, arising from the maintenance of the steamer Hock-Tay, recorded in the mercantile registry in favor of Captain Ayala.

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Fifth. That the last voyage of the steamer Hock-Tay prior to her sale by virtue of the mortgage executed by the partnership owner of the same in favor of the Banco Español-Filipino, began on the 12th of September, 1907, and ended on the 29th of September of the same year.Sixth. That the allegations contained in paragraphs 1, 2, 5, 6, and 7 of the answer of Manuel Ayala are true.

Seventh. That Captain Manuel Ayala was the one who collected from the agents “Sanchez y Cue Sang,” sociedad en comandita, the wages of the crew having nothing to do with the ship’s agents whom they did not know and with whom they made no contract except through Captain Ayala.Eighth. That the officers and crew of the steamer Hock-Tay, the same as all those belonging to the coastwise trade of these Islands, were hired upon a monthly salary with food and drink.Ninth. That Inchausti & Co., as charterers of the steamer Hock-Tay, paid to Manuel Ayala, during the month of September, 1907, all expenses for subsistence, with the exception of those corresponding to the maintenance of the officers and crew, and that the balances appearing in Exhibits C and D, attached to the answer of Manuel Ayala, only refer to the food and drink of the officers and crew.Tenth. That the firm of H. J. Andrew & Co. was the authorized agent of the partnership “Sanchez y Cue Sang,” sociedad en comandita, the owner of the steamer Hock-Tay, and that G. Andrews was authorized to represent the firm of H. J. Andrews & Co.Eleventh. That the days of service of the crew and officers referred to in the statement contained in Exhibit B, attached to the answer to Captain Manuel Ayala, are intended to correspond to a number of successive days from the 1st day of October, 1907.

Twelfth. That the port of Manila was, during all the dates referred to in this suit, the port of entry of the steamer Hock-Tay.Thirteenth. That on the date of the sale of the steamer Hock-Tay, under the mortgage executed by the partnership owner of said vessel in favor of the Banco Español-Filipino, the amount of the lien created on said vessel in favor of the mortgage creditor was the sum of thirty thousand (P30,000) pesos, Philippine currency, with the interest thereon at the rate of 8 per cent per year, from the 21st of September, 1907, the date of the last payment of interest.The respective parties signing this stipulation pray the court to render a decision in the case in accordance with the facts contained herein, respectively waiving the submission of other evidence.

Manila, August 4, 1908.

(Signed) ORTIGAS AND FISHER,Attorneys for the Banco Español-Filipino.(Signed) ROSANDO, SANZ AND OPISSO,Attorneys for Don Manuel Ayala.

Upon this agreed statement of the facts the cause was submitted to the lower court and after due consideration of the facts that court rendered a judgment upon the 29th day of September, 1908, the dispositive part of which was in the words following:

The court therefore finds that there is due the defendant Ayala from the proceeds of the sale of the vessel and in preference to the claim of the mortgagee the said sum of P756.66. It is therefore considered and adjudged that the judgment herein of January 20, 1908, be and the same is hereby vacated and that the sheriff of Manila, out of the proceeds of the sale of said vessel as reported by him, pay to the defendant Manuel Ayala the said sum of P756.66, and that the balance of said proceeds less the costs of this proceeding be paid to the mortgagee, the Banco Español-Filipino.

From this decision of the lower court the defendant Manuel Ayala duly appealed and made the following assignment of error:

The Court of First Instance of Manila, in rendering judgment in the above entitled case, committed error:

I. In considering the credit of the Banco Español-Filipino as questionably a mortgage credit, in a suit in which the adverse party in interest is not the debtor, but a third party.

II. In not acknowledging the lien existing in favor of all the credits claimed by the appellant.

III. In making, for the purposes of compliance with a mercantile contract, computations of time which violate the provisions of articles 57 and 60 of the Code of Commerce, giving to article 646 of the same code a restrictive construction which leads to an absurdity.

IV. In giving to the food and drink of the crew, who give their services for salary and maintenance, a distinct character of salary or rent like an industrial contract of lease.

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V. In not granting the appellant Ayala the wages corresponding to the subordinate crew employed by him on the ship, and who are unable to claim, by themselves, their salaries, on account of the small amount of the same and the wandering character of the life imposed upon them by their occupation.

VI. In granting the credit of the Banco Español-Filipino a preference over a great part of those claimed by the appellant Ayala, which were expenses incurred for the maintenance and benefit of the vessel during the existence of the mortgage in favor of the bank.

El Banco Español-Filipino did not appeal from the judgment of the lower court and therefore whatever error may have been committed by the lower court to the prejudice of the said bank can not now be considered.

The claim of the defendant Manuel Ayala is based upon the theory that the wages of the crew and expenses incurred for the ship and furnishing supplies for the same have a preference over the claim of the other defendant, El Banco Español-Filipino. The defendant, the said Ayala, evidently bases his claim upon the provisions of articles 580 and 646 of the Code of Commerce. Article 580 is as follows:

In all judicial sales of vessels for the payment of creditors, the following shall have preference in the order stated:

1. The credits in favor of the public treasury which are accounted for by means of a judicial certificate of the competent authority.

2. The judicial costs of the proceedings, according to an appraisement approved by the judge or court.

3. The pilotage charges, tonnage dues, and the other sea or port charges, proven by means of proper certificates of the officers intrusted with the collection.

4. The salaries of the caretakers and watchmen of the vessel and any other expense connected with the preservation of said vessel, from the time of arrival until her sale, which appear to have been paid or are due by virtue of a true account approved by the judge or court.

5. The rent of the warehouse where the rigging and stores of the vessel have been taken care of, according to contract.

6. The salaries due the captain and crew during their last voyage, which shall be vouched for by virtue of the liquidation made from the shipping articles and account books of the vessel, approved by the chief of the bureau of merchant marine where there is one, and in his absence by the consul, or judge, or court.

7. The reimbursement for the goods of the freight the captain may have sold in order to repair the vessel, provided the sale has been ordered by a judicial instrument executed with the formalities required in such cases, and recorded in the certificate of the registry of the vessel.

8. The part of the price which has not been paid the last vendor, the credits pending for the payment of material and work in the construction of the vessel, when it has not navigated, and those arising from the repair and equipment of the vessel and its provisioning with victuals and fuel during its last voyage.

In order that said credits may enjoy the preference contained in this number, they must appear by contracts recorded in the commercial registry, or if they were contracted for the vessel while on a voyage and said vessel has not returned to the port where she is registered, they must be proven with the authority required for such cases and entered in the certificate of the record of said vessel.

9. The amounts borrowed on bottomry bonds before the departure of the vessel, proven by means of the contracts executed according to law and recorded in the commercial registry, the amounts borrowed during the voyage with the authority mentioned in the foregoing number, filling the same requisites, and the insurance premium, proven by the policy of the contract or certificate taken from the books of the broker.

10. The indemnity due the shippers for the value of the goods shipped, which were not delivered to the consignees, or for averages suffered for which the vessel is liable, provided either appear in a judicial or arbitration decision.

By reference to paragraph 6 of said article 580, as above quoted, it is seen that in all judicial sales of vessels the salaries due the captain and the crew during the last voyage shall be paid in accordance with the preferences mentioned in said article out of the proceeds of said ship. Article 646 of said Code of Commerce provides:

The vessel with her engines, rigging, equipment, and freights shall be liable for the pay earned by the crew engaged per month or for the trip, the liquidation and payment to take place between one voyage and the other.

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After a new voyage has been undertaken, credits such as the former shall lose their right of preference.

This article creates a lien upon a ship in favor of the crew engage in the operation of the same and this lien in favor of the crew takes certain preference in accordance with the provisions of said articles 580. The wages due the crew and expenses incurred in maintaining the ship during the last voyage constitute a lien under the law and take the preference over a lien created by giving the ship as security for money borrowed. The crew, therefore, under article 580 of the Commercial Code, for their wages, etc., for the last voyage, having a prior lien upon a ship, to the lien created in the present case by the chattel mortgage. Liens in favor of the crew under these circumstances are known as legal liens and whoever buys a ship or loans money and takes a chattel mortgage as security, takes the ship subject to such prior liens. In the present case the said mortgage was executed and delivered in accordance with the provisions of Act No. 1508 of the Philippine Commission. The ship was sold by the sheriff of the city of Manila in accordance with the provisions of section 14 of that Act. Section 14 provides the method of disposing of the funds received under such a sale. The method is as follows:

The proceeds of such sale shall be applied to the payment, (1) of the cost and expenses of keeping and sale; (2) to the payment of the demand or obligation secured by such mortgage; (3) the residue shall be paid to persons holding subsequent mortgages in their order; and (4) the balance shall be paid to the mortgagor or person holding under him on demand.

It will be seen that there is no provision in the law for using the funds received in the sale of mortgaged property for the payment of amounts due on prior liens. The reason is plain why no such provision was made. It is that in no case can such a sale or a sale based upon the second mortgage or lien upon property affect in any way prior liens. To illustrate: Suppose that “A” held a mortgage against the ship in question, executed, delivered, and recorded prior to the date of the mortgage executed, delivered, and recorded to and by El Banco Español-Filipino. Certainly the sale of the ship under the mortgage in favor of the second mortgagee could in no way affect the rights which “A” held against the ship and the purchaser under the sale of the mortgage in favor of El Banco Español-Filipino would take ship subject to the claim which “A” held against the same. The lien which Manuel Ayala and the other members of his crew held against the said ship were exactly analogous to the claims of “A” in the above illustration. Therefore the sale of the ship under the mortgage in question in no way divested the lien which the law created in favor of the said Manuel Ayala and his crew against the ship in question. His remedy is, therefore, not against the money which was received under said sale, but against the ship by foreclosing his lien against the same. It is true that under a sale of personal property in accordance with section 14 of said Act, the sheriff has a right to pay the costs and expenses of keeping and sale, but we are not of the opinion that this relates to the cost of keeping and maintaining the ship prior to the time when the sheriff takes possession of it for the purpose of selling the same.

The Code of Commerce refers to two methods of sale: one a judicial and the other a voluntary sale. Article 580 provides how the funds received from a judicial sale shall be distributed and for the cancellation of liens held against the ship. But it can not be contended, even under the provisions of article 582, that by the mere fact that a ship has been sold under a judicial sale, the rights of prior lien holders, who were not parties to the procedure under which such sale took place, were foreclosed. The rights of persons not parties to a proceeding can not be affected thereby. Article 582 gives a certain time within which the creditors shall present and enforce their liens when the sale is a voluntary one. Articles 579 and 584 provide a method of collecting or enforcing not only the liens created under section 580 but also for the collection of any other kind of lien whatsoever.

The appellant alleges that the lower court committed an error in not allowing Manuel Ayala to collect the amount due the other members of the crew. The lower court denied the right of Ayala to collect the amount due the other members of the crew upon the theory that he was not the real person in interest and was not, therefore, permitted to collect the amount under section 114 of the Code of Civil Procedure in Civil Actions. The lower court allowed Ayala to collect the amount that was due him, as well as the amount which was due other members of the crew and which had been assigned to him. With reference to the amounts which had been assigned to him he was the real party in interest and, if he was entitled to recover at all he was entitled to recover not only what was due him but what had been assigned to him. But under no theory could he recover the amount due to the other members of the crew whose claims had not been assigned to him. Said section 114 of the Code of Civil Procedure in Civil Actions expressly provides that every action must be prosecuted in the name of the real party in interest. This section of the code recognizes the assignments of rights of action and also recognizes that when one has a right of action assigned to him he is then the real party in interest and may maintain an action upon such claim or right. The purpose of section 114 is to require the plaintiff to be the real party in interest, or, in other words, he must be the person to whom the proceeds of the action shall belong, and to prevent actions by persons who have no interest in the result of the same. Of course the said section can not be construed to prohibit the maintenance of an action by one who is legally authorized to represent the real parties in interest.

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In view of the fact that the defendant El Banco Español-Filipino did not appeal from the judgment of the lower court in which the defendant Manuel Ayala was allowed the sum of P756.66 out of the proceeds of the sale, we make no change in the result of the decision in the lower court.

For all the foregoing reasons, the judgment of the lower court is hereby affirmed, without any special finding as to costs.

SALES

G.R. No. L-59266 February 29, 1988

SILVESTRE DIGNOS and ISABEL LUMUNGSOD, petitioners, vs.HON. COURT OF APPEALS and ATILANO G. JABIL, respondents.

BIDIN, J.:

This is a petition for review on certiorari seeking the reversal of the: (1) Decision * of the 9th Division, Court of Appeals dated July 31,1981, affirming with modification the Decision, dated August 25, 1972 of the Court of First Instance ** of Cebu in civil Case No. 23-L entitled Atilano G. Jabil vs. Silvestre T. Dignos and Isabela Lumungsod de Dignos and Panfilo Jabalde, as Attorney-in-Fact of Luciano Cabigas and Jovita L. de Cabigas; and (2) its Resolution dated December 16, 1981, denying defendant-appellant's (Petitioner's) motion for reconsideration, for lack of merit.

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

The Dignos spouses were owners of a parcel of land, known as Lot No. 3453, of the cadastral survey of Opon, Lapu-Lapu City. On June 7, 1965, appellants (petitioners) Dignos spouses sold the said parcel of land to plaintiff-appellant (respondent Atilano J. Jabil) for the sum of P28,000.00, payable in two installments, with an assumption of indebtedness with the First Insular Bank of Cebu in the sum of P12,000.00, which was paid and acknowledged by the vendors in the deed of sale (Exh. C) executed in favor of plaintiff-appellant, and the next installment in the sum of P4,000.00 to be paid on or before September 15, 1965.

On November 25, 1965, the Dignos spouses sold the same land in favor of defendants spouses, Luciano Cabigas and Jovita L. De Cabigas, who were then U.S. citizens, for the price of P35,000.00. A deed of absolute sale (Exh. J, also marked Exh. 3) was executed by the Dignos spouses in favor of the Cabigas spouses, and which was registered in the Office of the Register of Deeds pursuant to the provisions of Act No. 3344.

As the Dignos spouses refused to accept from plaintiff-appellant the balance of the purchase price of the land, and as plaintiff- appellant discovered the second sale made by defendants-appellants to the Cabigas spouses, plaintiff-appellant brought the present suit. (Rollo, pp. 27-28)

After due trial, the Court of first Instance of Cebu rendered its Decision on August 25,1972, the decretal portion of which reads:

WHEREFORE, the Court hereby declares the deed of sale executed on November 25, 1965 by defendant Isabela L. de Dignos in favor of defendant Luciano Cabigas, a citizen of the United States of America, null and void ab initio,

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and the deed of sale executed by defendants Silvestre T. Dignos and Isabela Lumungsod de Dignos not rescinded. Consequently, the plaintiff Atilano G. Jabil is hereby ordered to pay the sum, of Sixteen Thousand Pesos (P16,000.00) to the defendants-spouses upon the execution of the Deed of absolute Sale of Lot No. 3453, Opon Cadastre and when the decision of this case becomes final and executory.

The plaintiff Atilano G. Jabil is ordered to reimburse the defendants Luciano Cabigas and Jovita L. de Cabigas, through their attorney-in-fact, Panfilo Jabalde, reasonable amount corresponding to the expenses or costs of the hollow block fence, so far constructed.

It is further ordered that defendants-spouses Silvestre T. Dignos and Isabela Lumungsod de Dignos should return to defendants-spouses Luciano Cabigas and Jovita L. de Cabigas the sum of P35,000.00, as equity demands that nobody shall enrich himself at the expense of another.

The writ of preliminary injunction issued on September 23, 1966, automatically becomes permanent in virtue of this decision.

With costs against the defendants.

From the foregoing, the plaintiff (respondent herein) and defendants-spouss (petitioners herein) appealed to the Court of Appeals, which appeal was docketed therein as CA-G.R. No. 54393-R, "Atilano G. Jabil v. Silvestre T. Dignos, et al."

On July 31, 1981, the Court of Appeals affirmed the decision of the lower court except as to the portion ordering Jabil to pay for the expenses incurred by the Cabigas spouses for the building of a fence upon the land in question. The disposive portion of said decision of the Court of Appeals reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, except as to the modification of the judgment as pertains to plaintiff-appellant above indicated, the judgment appealed from is hereby AFFIRMED in all other respects.

With costs against defendants-appellants.

SO ORDERED.

Judgment MODIFIED.

A motion for reconsideration of said decision was filed by the defendants- appellants (petitioners) Dignos spouses, but on December 16, 1981, a resolution was issued by the Court of Appeals denying the motion for lack of merit.

Hence, this petition.

In the resolution of February 10, 1982, the Second Division of this Court denied the petition for lack of merit. A motion for reconsideration of said resolution was filed on March 16, 1982. In the resolution dated April 26,1982, respondents were required to comment thereon, which comment was filed on May 11, 1982 and a reply thereto was filed on July 26, 1982 in compliance with the resolution of June 16,1 982. On August 9,1982, acting on the motion for reconsideration and on all subsequent pleadings filed, this Court resolved to reconsider its resolution of February 10, 1982 and to give due course to the instant petition. On September 6, 1982, respondents filed a rejoinder to reply of petitioners which was noted on the resolution of September 20, 1982.

Petitioners raised the following assignment of errors:

I

THE COURT OF APPEALS COMMITTED A GRAVE ERROR OF LAW IN GROSSLY, INCORRECTLY INTERPRETING THE TERMS OF THE CONTRACT, EXHIBIT C, HOLDING IT AS AN ABSOLUTE SALE, EFFECTIVE TO TRANSFER OWNERSHIP OVER THE PROPERTY IN QUESTION TO THE RESPONDENT AND NOT MERELY A CONTRACT TO SELL OR PROMISE TO SELL; THE COURT ALSO ERRED IN MISAPPLYING ARTICLE 1371 AS WARRANTING READING OF THE AGREEMENT, EXHIBIT C, AS ONE OF ABSOLUTE SALE, DESPITE THE CLARITY OF THE TERMS THEREOF SHOWING IT IS A CONTRACT OF PROMISE TO SELL.

II

THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN INCORRECTLY APPLYING AND OR IN MISAPPLYING ARTICLE 1592 OF THE NEW CIVIL CODE AS WARRANTING THE ERRONEOUS CONCLUSION THAT THE NOTICE OF RESCISSION, EXHIBIT G, IS INEFFECTIVE SINCE IT HAS NOT BEEN JUDICIALLY DEMANDED NOR IS IT A NOTARIAL ACT.

III

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THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN REJECTING THE APPLICABILITY OF ARTICLES 2208,2217 and 2219 OF THE NEW CIVIL CODE AND ESTABLISHED JURISPRUDENCE AS TO WARRANT THE AWARD OF DAMAGES AND ATTORNEY'S FEES TO PETITIONERS.

IV

PLAINTIFF'S COMPLAINT FOR SPECIFIC PERFORMANCE SHOULD HAVE BEEN DISMISSED, HE HAVING COME TO COURT WITH UNCLEAN HANDS.

V

BY AND LARGE, THE COURT OF APPEALS COMMITTED AN ERROR IN AFFIRMING WITH MODIFICATION THE DECISION OF THE TRIAL COURT DUE TO GRAVE MISINTERPRETATION, MISAPPLICATION AND MISAPPREHENSION OF THE TERMS OF THE QUESTIONED CONTRACT AND THE LAW APPLICABLE THERETO.

The foregoing assignment of errors may be synthesized into two main issues, to wit:

I. Whether or not subject contract is a deed of absolute sale or a contract Lot sell.

II. Whether or not there was a valid rescission thereof.

There is no merit in this petition.

It is significant to note that this petition was denied by the Second Division of this Court in its Resolution dated February 1 0, 1 982 for lack of merit, but on motion for reconsideration and on the basis of all subsequent pleadings filed, the petition was given due course.

I.

The contract in question (Exhibit C) is a Deed of Sale, with the following conditions:

1. That Atilano G..Jabilis to pay the amount of Twelve Thousand Pesos P12,000.00) Phil. Philippine Currency as advance payment;

2. That Atilano G. Jabil is to assume the balance of Twelve Thousand Pesos (P12,000.00) Loan from the First Insular Bank of Cebu;

3. That Atilano G. Jabil is to pay the said spouses the balance of Four. Thousand Pesos (P4,000.00) on or before September 15,1965;

4. That the said spouses agrees to defend the said Atilano G. Jabil from other claims on the said property;

5. That the spouses agrees to sign a final deed of absolute sale in favor of Atilano G. Jabil over the above-mentioned property upon the payment of the balance of Four Thousand Pesos. (Original Record, pp. 10-11)

In their motion for reconsideration, petitioners reiterated their contention that the Deed of Sale (Exhibit "C") is a mere contract to sell and not an absolute sale; that the same is subject to two (2) positive suspensive conditions, namely: the payment of the balance of P4,000.00 on or before September 15,1965 and the immediate assumption of the mortgage of P12,000.00 with the First Insular Bank of Cebu. It is further contended that in said contract, title or ownership over the property was expressly reserved in the vendor, the Dignos spouses until the suspensive condition of full and punctual payment of the balance of the purchase price shall have been met. So that there is no actual sale until full payment is made (Rollo, pp. 51-52).

In bolstering their contention that Exhibit "C" is merely a contract to sell, petitioners aver that there is absolutely nothing in Exhibit "C" that indicates that the vendors thereby sell, convey or transfer their ownership to the alleged vendee. Petitioners insist that Exhibit "C" (or 6) is a private instrument and the absence of a formal deed of conveyance is a very strong indication that the parties did not intend "transfer of ownership and title but only a transfer after full payment" (Rollo, p. 52). Moreover, petitioners anchored their contention on the very terms and conditions of the contract, more particularly paragraph four which reads, "that said spouses has agreed to sell the herein mentioned property to Atilano G. Jabil ..." and condition number five which reads, "that the spouses agrees to sign a final deed of absolute sale over the mentioned property upon the payment of the balance of four thousand pesos."

Such contention is untenable.

By and large, the issues in this case have already been settled by this Court in analogous cases.

Thus, it has been held that a deed of sale is absolute in nature although denominated as a "Deed of Conditional Sale" where nowhere in the contract in question is a proviso or stipulation to the effect that title to the property sold is reserved in the vendor until full payment of the purchase price, nor is there a stipulation giving the vendor the right to unilaterally rescind the contract the moment the

15

vendee fails to pay within a fixed period Taguba v. Vda. de Leon, 132 SCRA 722; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305).

A careful examination of the contract shows that there is no such stipulation reserving the title of the property on the vendors nor does it give them the right to unilaterally rescind the contract upon non-payment of the balance thereof within a fixed period.

On the contrary, all the elements of a valid contract of sale under Article 1458 of the Civil Code, are present, such as: (1) consent or meeting of the minds; (2) determinate subject matter; and (3) price certain in money or its equivalent. In addition, Article 1477 of the same Code provides that "The ownership of the thing sold shall be transferred to the vendee upon actual or constructive delivery thereof." As applied in the case of Froilan v. Pan Oriental Shipping Co., et al. (12 SCRA 276), this Court held that in the absence of stipulation to the contrary, the ownership of the thing sold passes to the vendee upon actual or constructive delivery thereof.

While it may be conceded that there was no constructive delivery of the land sold in the case at bar, as subject Deed of Sale is a private instrument, it is beyond question that there was actual delivery thereof. As found by the trial court, the Dignos spouses delivered the possession of the land in question to Jabil as early as March 27,1965 so that the latter constructed thereon Sally's Beach Resort also known as Jabil's Beach Resort in March, 1965; Mactan White Beach Resort on January 15,1966 and Bevirlyn's Beach Resort on September 1, 1965. Such facts were admitted by petitioner spouses (Decision, Civil Case No. 23-L; Record on Appeal, p. 108).

Moreover, the Court of Appeals in its resolution dated December 16,1981 found that the acts of petitioners, contemporaneous with the contract, clearly show that an absolute deed of sale was intended by the parties and not a contract to sell.

Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they were no longer owners of the same and the sale is null and void.

II.

Petitioners claim that when they sold the land to the Cabigas spouses, the contract of sale was already rescinded.

Applying the rationale of the case of Taguba v. Vda. de Leon (supra) which is on all fours with the case at bar, the contract of sale being absolute in nature is governed by Article 1592 of the Civil Code. It is undisputed that petitioners never notified private respondents Jabil by notarial act that they were rescinding the contract, and neither did they file a suit in court to rescind the sale. The most that they were able to show is a letter of Cipriano Amistad who, claiming to be an emissary of Jabil, informed the Dignos spouses not to go to the house of Jabil because the latter had no money and further advised petitioners to sell the land in litigation to another party (Record on Appeal, p. 23). As correctly found by the Court of Appeals, there is no showing that Amistad was properly authorized by Jabil to make such extra-judicial rescission for the latter who, on the contrary, vigorously denied having sent Amistad to tell petitioners that he was already waiving his rights to the land in question. Under Article 1358 of the Civil Code, it is required that acts and contracts which have for their object the extinguishment of real rights over immovable property must appear in a public document.

Petitioners laid considerable emphasis on the fact that private respondent Jabil had no money on the stipulated date of payment on September 15,1965 and was able to raise the necessary amount only by mid-October 1965.

It has been ruled, however, that "where time is not of the essence of the agreement, a slight delay on the part of one party in the performance of his obligation is not a sufficient ground for the rescission of the agreement" (Taguba v. Vda. de Leon, supra). Considering that private respondent has only a balance of P4,000.00 and was delayed in payment only for one month, equity and justice mandate as in the aforecited case that Jabil be given an additional period within which to complete payment of the purchase price.

WHEREFORE, the petition filed is hereby Dismissed for lack of merit and the assailed decision of the Court of Appeals is Affirmed in toto.

SO ORDERED.

Fernan (Chairman), Gutierrez, Jr., Feliciano and Cortes, JJ., concur.

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G.R. No. L-29421 January 30, 1971

LINO ARTATES and MANUELA POJAS, plaintiffs-appellants, vs.DANIEL URBI, CRISANTO SOLIVEN, assisted by his Guardian 'ad litem,' MARCELA B. SOLIVEN, REMEGIO BUTACAN and NEMESIO OÑATE, in their private capacities and/or as Ex-Oficio Provincial Sheriff and Deputy Sheriff of Cagayan, respectively, and BIENVENIDO CACATIAN, as Deputy Register of Deeds of Cagayan, defendants-appellees.

Bienvenido J. Jimenez for plaintiffs-appellants.

Rogelio Re. Ubarde for defendants-appellees Daniel Urbi and Crisanto Soliven.

Alfredo J. Donato for defendant-appellant Nemesio Oñate.

The Provincial Fiscal (Cagayan) for defendants-appellees Provincial Sheriff and Deputy Register of Deeds.

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

This is an appeal from the decision of the Court of First Instance of Cagayan (Civil Case No. 116-T), involving the public sale of a homestead to satisfy a civil judgment against the grantee.

The records show that in an action filed in the Court of First Instance of Cagayan, the spouses Lino Artates and Manuela Pojas sought annulment of the execution of a homestead1 covered by Patent No. V-12775 issued to them by the proper land authorities on 23 September 1952, and duly registered in their names (OCT No. P-572). The public sale, conducted by the Provincial Sheriff of

17

Cagayan on 2 June 1962, was made to satisfy a judgment against Lino Artates in the amount of P1,476.35, and awarded to Daniel Urbi by the Justice of the Peace Court of Camilaniugan, Cagayan, in its Civil Case No. 40, for physical injuries inflicted by Artates upon Urbi on 21 October 1955. In the execution sale, the property was sold to the judgment creditor, the only bidder, for P1,476.35. In their complaint, the plaintiffs spouses alleged that the sale of the homestead to satisfy an indebtedness of Lino Artates that accrued on 21 October 1955, violated the provision of the Public Land law exempting said property from execution for any debt contracted within five years from the date of the issuance of the patent; that defendant Urbi, with the intention of defrauding the plaintiffs, executed on 26 June 1961 a deed for the sale of the same parcel of land to defendant Crisanto Soliven, a minor, supposedly for the sum of P2,676.35; that as a result of the aforementioned transactions, defendants Urbi and Soliven entered into the possession of the land and deprived plaintiffs of the owners' share in the rice crops harvested during the agricultural year 1961-1962. Plaintiffs, therefore, prayed that the public sale of the land to defendant Urbi, as well as the deed of sale executed by the latter in favor of defendant Soliven, be declared null and void; that defendants be ordered to deliver to plaintiffs possession of the land; and to pay to plaintiffs compensatory damages at the rate of P1,000.00 per agricultural year until possession is finally restored to them, the sum of P2,000.00 as damages for maliciously casting cloud upon plaintiffs' title on the land, plus attorneys' fees and costs.

The defendants2 filed separate answers disputing the averments of the complaint. On 29 March 1953, the court rendered judgment upholding the regularity and validity of the execution conducted by the defendant Provincial Sheriff, but finding that the sale of the lands by defendant Urbi to the minor Soliven was simulated, intended to place the property beyond the reach of the judgment debtor, and that plaintiffs had offered to redeem the land within the 5-year period allowed by Section 119 of the Public Land law for reacquisition thereof by the grantee. Consequently, the court declared the sale of the land by defendant Daniel Urbi to defendant Crisanto Soliven null and void; and Daniel Urbi was ordered to reconvey the property to the plaintiffs upon the latter's payment (to Urbi) of the sum of P1,476.35 plus the sheriff's fee incident to the sale at public auction, with interest thereon at the rate of 12% per annum from 2 June 1961 until said amount shall have been fully paid, and the further sum of P783.45 representing the amount paid by defendant Daniel Urbi to the Philippine National Bank for the release of the real estate mortgage on the land, contracted by Lino Artates, with legal rate of interest thereon from 29 June 1961.

From this decision, the plaintiffs interposed the present appeal assigning several errors allegedly committed by the court below, all hinged on the validity or invalidity of the public sale of the lot involved herein.

Section 118 of the Public Land law (Commonwealth Act 141) provides as follows:

SEC. 118. Except in favor of the Government or any of its branches, units, or institution, or legally constituted banking corporations, lands acquired under free patent or homestead provisions shall not be subject to encumbrance or alienation from the date of the approval of the application and for a term of five years from and after the date of issuance of the patent or grant, nor shall they become liable to the satisfaction of any debt contracted prior to the expiration of said period, but the improvements or crops on the land may be mortgaged or pledged to qualified persons, associations or corporations.

xxx xxx xxx

As thus prescribed by law, for a period of five years from the date of the government grant, lands acquired by free or homestead patent shall not only be incapable of being encumbered or alienated except in favor of the government itself or any of its institutions or of duly constituted banking corporations, but also, they shall not be liable to the satisfaction of any debt contracted within the said period,3 whether or not the indebtedness shall mature during or after the prohibited time.4 This provision against the alienation or encumbrance of public lands granted within five years from the issuance of the patent, it has been held, is mandatory;5 a sale made in violation thereof is null and void 6 and produces no effect whatsoever. Though it may be a limitation on the right of ownership of the grantee, the salutary purpose of the provision cannot be denied: it is to preserve and keep for the homesteader or his family the land given to him gratuitously by the State,7 so that being a property owner, he may become and remain a contented and useful member of our society.8

In the case at bar, the homestead patent covering the land in question (No.V-12775) was issued to appellants on 23 September 1952, and it was sold at public auction to satisfy the civil liability of appellant Lino Artates to Daniel Urbi, adjudged in the 14 March 1956 decision of the Justice of the Peace Court of Camalaniugan, Cagayan.lâwphî1.ñèt There can be no doubt that the award of damages to Urbi created for Artates a civil obligation, an indebtedness, that commenced from the date such obligation was decreed on 14 March 1956. Consequently, it is evident that it can not be enforced against, or satisfied out of, the sale of the homestead lot acquired by appellants less than 5 years before the obligation accrued. And this is true even if the sale involved here is not voluntary. For purposes of complying with the law, it is immaterial that the satisfaction of the debt by the encumbrancing or alienation of the land grant made voluntarily, as in the case of an ordinary sale, or involuntarily, such as that effected through levy on the property and consequent sale at public auction. In both instances, the spirit of the law would have been violated.9

Doubts have been expressed as to whether the words "debt contracted prior to the expiration of said period" (of 5 years from and after the grant) would include the civil liability arising from a crime committed by the homesteader. While there is no direct Philippine precedent on this point, there are various reasons why the non-liability of the homestead grant should be extended to extra-contractual obligations. First and foremost, whether it be viewed as an exemption or as a condition attached to the grant to encourage people to settle and cultivate public land, the immunity in question is in consonance with the definite public policy underlying these grants, which is to "preserve and keep in the family of the homesteader that portion of public land which the State has given to him" so he may have a place to live with his family and become a happy citizen and a useful member of society, 10 and the exemption should not be given restrictive application. 11 A levy and sale of the homestead on account of extra-contractual liability incurred would uproot the homesteader and his family and turn them into homeless waifs as effectively as a levy for non-payment of a contractual debt. Secondly, the word "debt" in exemption statutes,—

18

in its wider sense, (it) includes all that is due to a man under any form or obligation or promise, and covers not only obligations arising under contract, but also those imposed by law without contract. 12

Considering the protective policy of the law, it becomes apparent that "debt contracted" was used in it in the sense of "obligation incurred," since Webster gives the verb to "contract" the meaning of "to bring on; incur; acquire." Finally, our public land laws being copied from American legislation, 13 resort to American precedents reveals that, under the weight of authority, exemption from "debts contracted" by a homesteader has been held to include freedom from money liabilities, from torts or crimes committed by him, such as from bigamy (State vs. O'Neil, 7 Ore. 141, 11 Words and Phrases 318) or slander (Conway vs. Sullivan, 44 Ill. 451, 452), breach of contract (Flanagan vs. Forsythe, 50 Pac. 152, 153) or other torts (In Re Radway, 20 Fed. Cas. 154, 162).

The execution sale in this case being null and void, the possession of the land should be returned to the owners, the herein appellants. There would even be no need to order appellee Urbi to execute a deed of reconveyance thereof to the owners. It appears that what was issued here to the judgment creditor/purchaser was only the sheriff's provisional certificate, under which he derived no definite title or right until the period for redemption has expired, without a redemption having been made, 14 or issuance of a final deed or certificate of sale. In other words, the purchaser herein has not acquired an absolute ownership or title in fee over the land that would necessitate a deed of reconveyance to revert ownership back to the appellant spouses. As things now stand, title to the property covered by OCT No. P-572 remains with the appellants, but Lino Artates shall continue to be under obligation to satisfy the judgment debt to Daniel Urbi in the sum of P1,476.35, with legal interest thereon accruing from the date the writ of execution was first returned unsatisfied. It appearing also that appellee Daniel Urbi paid to the Philippine National Bank the sum of P783.45 to release the mortgage on the land, appellants should reimburse him of said amount or of whatever amount appellants have actually been benefited by the said payment.

FOR THE FOREGOING CONSIDERATIONS, the decision appealed from is hereby reversed, and appellants are declared entitled to the return and possession of the lot covered by Original Certificate of Title No. P-572, without prejudice to their continuing obligation to pay the judgment debt, and expenses connected therewith. No costs.

G.R. No. L-54070 February 28, 1983

HEIRS OF ENRIQUE ZAMBALES and JOAQUINA ZAMBALES, petitioners, vs.COURT OF APPEALS, NIN BAY MINING CORPORATION, ANGELA C. PREYSLER and JOAQUIN B. PREYSLER, respondents.

MELENCIO-HERRERA, J.:

The Decision of respondent Court of Appeals in the case entitled "Enrique Zambales and Joaquina Zambales, Plaintiffs-appellees vs. Atty. Perfecto de los Reyes, Nin Bay Mining Corporation and Joaquin B. Preysler, Defendants-appellants" (CA-G.R. No. 59386-R), setting aside the judgment of the Court of First Instance of Palawan in Civil Case No. 678 for Annulment of a Deed of Sale with Recovery of Possession and Ownership with Damages", is the subject of this Petition for Review on Certiorari.

Joaquin B. Preysler is now deceased and was substituted by Angela C. Preysler, his widow.

Atty. Perfecto de los Reyes was originally a defendant in Civil Case No. 678 but he did not appeal from the Decision of the lower Court.

19

The Zambales spouses (Zambaleses, for brevity) were the homestead patentees of a parcel of land with an area of 17,8474 hectares situated in the Municipality of Del Pilar, Roxas, Palawan, covered by Original Certificate of Title No. G 1193 of the Registry of Deeds for the Province of Palawan, issued pursuant to Homestead Patent No. V-59502 dated September 6, 1955.

Claiming that the Nin Bay Mining Corporation (Corporation, for short) had removed silica sand from their land and destroyed the plants and others improvements thereon, the Zambaleses instituted, on November 10, 1958, Civil Case No. 316 before the Court of First Instance of Palawan claiming damages in the total sum of P48,000.00.

The Corporation denied having caused any damages and claimed that it had excavated and extracted silica sand only from its own mining claims and on which it had mining lease contracts with the Philippine Government.

On October 29, 1959, the Zambaleses, duly assisted by their counsel, Atty. Perfecto de los Reyes, and the Corporation, entered into a Compromise Agreement, the portions of which, pertinent to this case, read:

1. DEFENDANT shall pay the PLAINTIFFS a rental of TWENTY (P20.00) PESOS per hectare per year from September 9, 1955 to September 30, 1960, or a total rental price of ONE THOUSAND SEVEN HUNDRED EIGHTY-FOUR PESOS AND SEVENTY- FOUR CENTAVOS (P1,784.74), Philippine currency, in lieu of all damages...

2. The payment to the PLAINTIFFS of the above-mentioned rental price shall be considered full, absolute and final payment and indemnity for all the alleged damages to PLAINTIFFS' property and its improvements, or any other actual, moral, exemplary or other damages that PLAINTIFFS may have suffered or will suffer in connection with the mining operations of DEFENDANT on the property in question, which property, by virtue of the terms of this Agreement shall be used by DEFENDANT as occupant thereof until September 30, 1960.

3. PLAINTIFFS hereby agree and bind themselves to sell, transfer and convey, and DEFENDANT or its assigns, qualified to acquire or hold lands of the public domain, hereby agrees to purchase and pay for, the aforesaid property of the PLAINTIFFS, containing an area of 17.8474 hectares, situated in the Municipality of Del Pilar, Roxas, Palawan, and covered by Original Certificate of Title No. G1193 of the Registry of Deeds of Palawan, at the fixed selling price of FIVE HUNDRED (P500.00) PESOS per hectare or a total purchase price of EIGHT THOUSAND NINE HUNDRED TWENTY THREE PESOS and SEVENTY CENTAVOS (P8,923.70), Philippine currency. The contract to purchase and sell herein provided for, shall be reciprocally demandable and enforceable by the parties hereto on September 10, 1960. PLAINTIFFS hereby irrevocably constitute and appoint DEFENDANT, its successors and/or assigns their true and lawful attorney-in-fact with full power and authority to sell, transfer and convey on September 10, 1960 or at any time thereafter the whole or any part of PLAINTIFFS' property hereinabove mentioned to the DEFENDANT, its successors and/or assigns, or to any third party, and to execute and deliver all instruments and documents whatsoever necessary for the purpose, and all acts done and to be done by DEFENDANT, its successors and/or assigns in conformity with the powers herein granted are hereby ratified and confirmed by the PLAINTIFFS. ...

4. In consideration of the payment of the amount of P1,784.74 by DEFENDANT, and of other good and valuable consideration, PLAINTIFFS, jointly and severally, hereby forever release, fully and completely, said DEFENDANT, its successors and/or assigns in interest, from any and all liabilities, whether arising from past, present or future excavation or removal of silica sand from the property in question or otherwise, and from all the other claims against the DEFENDANT contained in their Complaint in Civil Case No. 316 of the Court of First Instance of Palawan. 1

The Trial Court rendered judgment on October 29, 1959 based on the Compromise Agreement. The document was duly annotated an OCT No. G - 1193 (Exhibit " A ") the day after, or on October 30, 1959 (Exhibit " 10 A ").

On September 10, 1960, the Corporation, as attorney-in-fact for the Zambaleses, as Vendors, sold the disputed property to Joaquin B. Preysler for the sum of P8,923.70 fixed in the Compromise Agreement (Exhibit " 11 "). Transfer Certificate of Title No. T-970 was issued in the vendee's name on December 19, 1960 (Exhibit " 2 ").

The Deed of Sale to Preysler contained the following proviso:

The VENDORS hereby represent and warrant that the five-year restrictive period on alienation of lands acquired under the homestead provisions of Commonwealth Act No. 141, as amended, otherwise known as the Public Land Act, has already expired, the date of issuance of the herein homestead patent to the VENDORS as aforesaid being September 6, 1955 as shown in Original Certificate of Title No. G-1193.

On October 18, 1960, the Secretary of Agriculture and Natural Resources approved the sale to Preysler of the subject property (Exhibit "13 ").

On. December 6, 1969, or ten (10) years after the Trial Court's Decision based on the Compromise Agreement, and nine (9) years after the sale to Preysler, the Zambaleses filed Civil Case No. 678 before the Court of First Instance of Palawan for "Annulment of a Deed of Sale with Recovery of Possession and Ownership with Damages". They contended that it was their lawyer who prevailed upon them to sign the Compromise Agreement; that they are unschooled and did not understand the contents thereof; that they were made to understand that they would receive the sum of P10,700.00, only as payment for damages sustained by the land from 1955 to 1960; that

20

through fraud, deceit and manipulation by their lawyer and the Corporation, they were made to agree to appoint the Corporation as their attorney-in-fact with full power and authority to sell; that it was never their intention to sell the land; that in September 1969, they were surprised to learn that the land was already titled in the name of Joaquin B. Preysler; that the land was acquired and registered in the latter's name through fraud and deceit. The Zambaleses then prayed that the deed of sale and the title in Preysler's name be annulled on the ground of fraud and that the property be reconveyed to them.

In their Answer, the Corporation denied all allegations that the Zambaleses had signed the Compromise Agreement without understanding the contents thereof, the truth being that it was read to them by their counsel, Atty. Perfecto de los Reyes, who explained thoroughly the full implication and legal consequence of each and every provision, which was then submitted and approved by then Presiding Judge Juan L. Bocar; and that the Corporation had sold the property to Preysler as a duly constituted attorney-in-fact pursuant to the Compromise Agreement.

After trial, the lower Court rendered judgment in favor of the Zambaleses, the dispositive part of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants as follows:

1) That the deed of sale executed by Nin Bay Mining Corporation through its president, to Joaquin B. Preysler is hereby declared null and void;

2) That the defendant Joaquin B. Preysler is hereby ordered to reconvey the land subject matter of this litigation to the plaintiffs;

3) That the defendants Nin Bay Mining Corporation and Joaquin B. Preysler shall pay the plaintiffs the sum of P85,000.00 as actual damages plus the legal rate of interest from September 30, 1960 up to the time the amount is fully paid;

4) That the defendants to pay the sum of FIVE THOUSAND (P5,000.00) PESOS as attorneys fees; and

5) The defendants to pay the costs.

On appeal by the Corporation, the Court of Appeals reversed the Trial Court, after finding that the alleged fraud or misrepresentation in the execution of the Compromise Agreement had not been substantiated by evidence.

The case is now before us on review.

The controversy revolves around the issue of due execution and validity of the Compromise Agreement (Exhibit "8") dated October 29; 1959, and of the subsequent Deed of Sale (Exhibit "11 "), dated 10 September 1960.

I

The general rule is that whoever alleges fraud or mistake must substantiate his allegation, since the presumption is that a person takes ordinary care of his concerns and that private transactions have been fair and regular. The rule admits of an exception in Article 1332 of the Civil Code which provides:

When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former.

For the proper application of said provision, it has first to be established convincingly that the illiterate or the party at a disadvantage could not read or understand the language in which the contract was written. 2 The evidence discloses that the spouses Zambales are unschooled. They cannot read, speak, much less understand English or write, except to sign their names. 3 The Zambaleses alleged in their Complaint that the Compromise Agreement (Exhibit "8") was executed through fraud by the Corporation and by their counsel Atty. Perfecto de los Reyes, whom they included as a defendant. The burden of proof, therefore, shifted to the Corporation to show that the compromise agreement had been fully explained to the plaintiffs.

In refuting the allegation that plaintiffs were misled into signing the compromise agreement, their former counsel, Atty. Perfecto de los Reyes, and the notary, Atty. Salomon Reyes, a lawyer for Nin Bay Mining Corporation, established that the terms and conditions of the Compromise Agreement were thoroughly explained and fully understood by the spouses Zambales in accordance with their proposal to sell the land at P500.00 a hectare; that before the signing of the Compromise Agreement, the notary requested Atty. de los Reyes to read and explain each and every provision to the spouses, and with the help of Ricardo Nunala, Atty. de los Reyes did so in their dialect (Cuyuno). Thereafter, the parties went to Judge Juan Bocar, who was assured that the spouses Zambales understood and signed the Compromise Agreement. 4

We sustain the finding of the Court of Appeals that fraud and misrepresentation did not vitiate petitioners' consent to the Agreement when it observed:

Taking into account the foregoing observations, this Court is not convinced that indeed appellees were victims of a fraudulent scheme employed upon them by their former counsel by reason of their alleged illiteracy and ignorance.

21

The evidence discloses that appellees, although unschooled, are intelligent, well-informed and intelligent people. They are not the kind of persons who could easily be fooled of their rights and interests. Even as commented by the court a quo, which had a chance to observe the demeanor of the witness, it had no observation that the witness, Joaquina Zambales, is ignorant. As correctly observed by appellants, appellees 'are political leaders and chief campaigners; they speak in the platform during political rallies; and they are widely travelled' (p. 28, Appellants' Brief). As a matter of fact they are knowledgeable of the right connections in the government. They had approached former Sen. Rogelio de la Rosa, no less, the congressman and the governor. Even the lawyers they have retained previous to their present counsel are the Padilla Law Office and the Diokno Law Office, It is common knowledge that these law offices are among the established law offices in Manila. It is far convincing that an ignorant couple would have knowledge of these law firms. All these are obvious manifestations of their being well-informed and the way they have conducted their way of living apparently is inconsistent with the plea of being illiterate and/or ignorant. They cannot capitalize on the fact that they are uneducated only because they had no formal schooling inasmuch as one's knowledge of the facts of life is not dependent on whether one had formal schooling or not and it does not necessarily follow always that if one is unschooled he is ignorant.

Furthermore, when plaintiffs-appellees signed the questioned compromise agreement they were duly assisted and represented by their counsel, Atty. de los Reyes. When Atty. de los Reyes testified in court he categorically declared that it was to the best interest of his clients that they compromise Civil Case No. 316. This declaration finds support in Joaquina Zambales' testimony wherein she stated thus:

ATTY. SEMBRANO:

Q. Except for this present case, would you say to the Court that Atty. de los Reyes extended to you legal assistance to your satisfaction?

A. Yes, sir, he is good to us.

xxx xxx xxx

Q. So these people never gave their services to you?

A. Nobody was able to help us except Atty. de los Reyes. (Tsn., pp. 29, 31 & 32, June 19, 1974)

... Thus, it having been established that appellees could not have been misled by their former counsel into signing the compromise agreement and taking into account the acts of the appellees and their children subsequent to the execution of the compromise agreement perforce the court a quo erred in not giving credence to the clear and convincing testimonies of Atty. Perfecto de los Reyes and Atty. Salomon Reyes anent the execution of the compromise agreement. 5

However, although we find that the Zambaleses were not misled into signing the Compromise Agreement, we hold that there has been violation of the Public Land Act. The evidence on record shows that the land in question was awarded t the Zambaleses as a homestead on September 6, 1955 (Exhibit "A"). Before us, the Zambaleses now argue that the Compromise Agreement executed on October 29, 1959 is in violation of the Public Land Act, which prohibits alienation and encumbrance of a homestead lot within five years from the issuance of the patent. 6

We sustain that contention. The fact that the issue was not raised in the Courts below is not a deterrent factor considering that the question affects the validity of the agreement between the parties. The Supreme Court has the authority to review matters even if they are not assigned as errors in the appeal, if it is found that their consideration is necessary in arriving at a just decision of the case. 7 Moreover, a party may change his legal theory on appeal only when the factual bases thereof would not require presentation of any further evidence by the adverse party in order to enable it to properly meet the issue raised in the new theory. 8 In the case at bar it is indisputable that Homestead Patent No. V-59502 was issued on September 6, 1955 as shown in Original Certificate of Title No. 1193 (Exhibit "A ").

The sale of a homestead lot within the five-year prohibitory period is illegal and void. The law does not distinguish between executory and consummated sales.

The law prohibiting any transfer or alienation of homestead land within five years from the issuance of the patent does not distinguish between executory and consummated sales; and it would hardly be in keeping with the primordial aim of this prohibition to preserve and keep in the family of the homesteader the piece of land that the state had gratuitously given to them, to hold valid a homestead sale actually perfected during the period of prohibition but with the execution of the formal deed of conveyance and the delivery of possession of the land sold to the buyer deferred until after the expiration of the prohibitory period, purposely to circumvent the very law that prohibits and declares invalid such transaction to protect the homesteader and his family. 9

In the compromise agreement executed between the parties, (1) the Zambaleses promised to sell and the Corporation agreed to buy the disputed lot at P500.00 per hectare, the contract to be reciprocally demandable and enforceable on September 10, 1960; and as a substitute procedure, (2) an irrevocable agency was constituted in favor of the Corporation as attorney- in-fact to sell the land to any third person on September 10, 1960 or any time thereafter.

22

Clearly, the bilateral promise to buy and sell the homestead lot at a price certain, which was reciprocally demandable 10, was entered into within the five-year prohibitory period and is therefore, illegal and void. Further, the agency to sell the homestead lot to a third party was coupled with an interest inasmuch as a bilateral contract was dependent on it and was not revocable at will by any of the parties. 11 To all intents and purposes, therefore, there was an actual executory sale perfected during the period of prohibition except that it was reciprocally demandable thereafter and the agency to sell to any third party was deferred until after the expiration of the prohibitory period. That "rentals" were ostensibly to be paid during the five-year prohibitory period, and the agency to sell made effective only after the lapse of the said period, was merely a devise to circumvent the prohibition.

To hold valid such an arrangement would be to throw the door wide open to all possible subterfuges that persons interested in homesteads may devise to defeat the legal prohibition against alienation within five years from the issuance of the patent.

We hold, therefore, that the bilateral promise to buy and sell, and the agency to sell, entered into within five years from the date of the homestead patent, was in violation of section 118 of the Public Land Law, although the executed sale was deferred until after the expiration of the five-year- prohibitory period.

As the contract is void from the beginning, for being expressly prohibited by law 12 the action for the declaration of its inexistence does not prescribe. 13 Being absolutely void, it is entitled to no authority or respect, the sale may be impeached in a collateral proceeding by any one with whose rights and interest it conflicts. There is no presumption of its validity. 14 The approval of the sale by the Secretary of Agriculture and Natural Resources after the lapse of five years from the date of the patent would neither legalize the sale. 15

The homestead in question should be returned to the Zambaleses, petitioners herein, who are, in turn, bound to restore to the Corporation the sum of P8,923.70 as the price thereof. The actual damages awarded by the Trial Court of P85,000.00 have not been adequately substantiated. Moreover, under the agreement, the total rental price of P1,784.74 was intended to be "in lieu of all damages, or any other actual, moral, exemplary or other damages.

This is without prejudice to the corresponding action on the part of the State for reversion of the property and its improvements, if any, under Section 124 of the Public Land Act. 16

WHEREFORE, the judgment under review is hereby REVERSED, and another one entered (1) declaring null and void a) the bilateral promise to buy and sell entered into between Enrique Zambales and Joaquina Zambales, on the one hand, and the Nin Bay Mining Corporation on the other, and b) the sale executed by Nin Bay Mining Corporation in favor of Joaquin B. Preysler; (2) ordering Angela C. Preysler to reconvey the land subject matter of this litigation to petitioners upon refund by the latter to the Nin Bay Mining Corporation of the sum of P8,923.70, all expenses for the reconveyance to be borne by private respondents; (3) ordering Nin Bay Mining Corporation to pay rentals to petitioners at the price of P20.00 per hectare per year from December 6, 1969, the date of the institution of the Complaint, till the date that possession is turned over to petitioners; and (4) ordering the Register of Deeds for the Province of Palawan to cancel Transfer Certificate of Title No. T-970 of his Registry, and reissue to the Heirs of Enrique Zambales and Joaquina Zambales the title to the homestead in question.

Let a copy of this Decision be served on the Solicitor General.

No costs.

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

ANDRES QUIROGA, plaintiff-appellant, vs.PARSONS HARDWARE CO., defendant-appellee.

Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant. Crossfield & O'Brien for appellee.

23

AVANCEÑA, J.:

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

CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J. PARSONS, BOTH MERCHANTS ESTABLISHED IN MANILA, FOR THE EXCLUSIVE SALE OF "QUIROGA" BEDS IN THE VISAYAN ISLANDS.

ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the Visayan Islands to J. Parsons under the following conditions:

(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the latter's establishment in Iloilo, and shall invoice them at the same price he has fixed for sales, in Manila, and, in the invoices, shall make and allowance of a discount of 25 per cent of the invoiced prices, as commission on the sale; and Mr. Parsons shall order the beds by the dozen, whether of the same or of different styles.

(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within a period of sixty days from the date of their shipment.

(C) The expenses for transportation and shipment shall be borne by M. Quiroga, and the freight, insurance, and cost of unloading from the vessel at the point where the beds are received, shall be paid by Mr. Parsons.

(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said payment when made shall be considered as a prompt payment, and as such a deduction of 2 per cent shall be made from the amount of the invoice.

The same discount shall be made on the amount of any invoice which Mr. Parsons may deem convenient to pay in cash.

(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of any alteration in price which he may plan to make in respect to his beds, and agrees that if on the date when such alteration takes effect he should have any order pending to be served to Mr. Parsons, such order shall enjoy the advantage of the alteration if the price thereby be lowered, but shall not be affected by said alteration if the price thereby be increased, for, in this latter case, Mr. Quiroga assumed the obligation to invoice the beds at the price at which the order was given.

(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga" beds.

ART. 2. In compensation for the expenses of advertisement which, for the benefit of both contracting parties, Mr. Parsons may find himself obliged to make, Mr. Quiroga assumes the obligation to offer and give the preference to Mr. Parsons in case anyone should apply for the exclusive agency for any island not comprised with the Visayan group.

ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of "Quiroga" beds in all the towns of the Archipelago where there are no exclusive agents, and shall immediately report such action to Mr. Quiroga for his approval.

ART. 4. This contract is made for an unlimited period, and may be terminated by either of the contracting parties on a previous notice of ninety days to the other party.

Of the three causes of action alleged by the plaintiff in his complaint, only two of them constitute the subject matter of this appeal and both substantially amount to the averment that the defendant violated the following obligations: not to sell the beds at higher prices than those of the invoices; to have an open establishment in Iloilo; itself to conduct the agency; to keep the beds on public exhibition, and to pay for the advertisement expenses for the same; and to order the beds by the dozen and in no other manner. As may be seen, with the exception of the obligation on the part of the defendant to order the beds by the dozen and in no other manner, none of the obligations imputed to the defendant in the two causes of action are expressly set forth in the contract. But the plaintiff alleged that the defendant was his agent for the sale of his beds in Iloilo, and that said obligations are implied in a contract of commercial agency. The whole question, therefore, reduced itself to a determination as to whether the defendant, by reason of the contract hereinbefore transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds.

In order to classify a contract, due regard must be given to its essential clauses. In the contract in question, what was essential, as constituting its cause and subject matter, is that the plaintiff was to furnish the defendant with the beds which the latter might order, at the price stipulated, and that the defendant was to pay the price in the manner stipulated. The price agreed upon was the one determined by the plaintiff for the sale of these beds in Manila, with a discount of from 20 to 25 per cent, according to their class. Payment was to be made at the end of sixty days, or before, at the plaintiff's request, or in cash, if the defendant so preferred, and in these last two cases an additional discount was to be allowed for prompt payment. These are precisely the essential features of a contract of purchase and sale. There was the obligation on the part of the plaintiff to supply the beds, and, on the part of the defendant, to pay their price. These features exclude the legal conception of an agency or order to sell whereby the mandatory or agent received the thing to sell it, and does not pay its price, but delivers to the principal the price he obtains from the sale of the thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the contract between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily obliged to pay their price within the term fixed, without any other consideration and regardless as to whether he had or had not sold the beds.

24

It would be enough to hold, as we do, that the contract by and between the defendant and the plaintiff is one of purchase and sale, in order to show that it was not one made on the basis of a commission on sales, as the plaintiff claims it was, for these contracts are incompatible with each other. But, besides, examining the clauses of this contract, none of them is found that substantially supports the plaintiff's contention. Not a single one of these clauses necessarily conveys the idea of an agency. The words commission on sales used in clause (A) of article 1 mean nothing else, as stated in the contract itself, than a mere discount on the invoice price. The word agency, also used in articles 2 and 3, only expresses that the defendant was the only one that could sell the plaintiff's beds in the Visayan Islands. With regard to the remaining clauses, the least that can be said is that they are not incompatible with the contract of purchase and sale.

The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the defendant corporation and who established and managed the latter's business in Iloilo. It appears that this witness, prior to the time of his testimony, had serious trouble with the defendant, had maintained a civil suit against it, and had even accused one of its partners, Guillermo Parsons, of falsification. He testified that it was he who drafted the contract Exhibit A, and, when questioned as to what was his purpose in contracting with the plaintiff, replied that it was to be an agent for his beds and to collect a commission on sales. However, according to the defendant's evidence, it was Mariano Lopez Santos, a director of the corporation, who prepared Exhibit A. But, even supposing that Ernesto Vidal has stated the truth, his statement as to what was his idea in contracting with the plaintiff is of no importance, inasmuch as the agreements contained in Exhibit A which he claims to have drafted, constitute, as we have said, a contract of purchase and sale, and not one of commercial agency. This only means that Ernesto Vidal was mistaken in his classification of the contract. But it must be understood that a contract is what the law defines it to be, and not what it is called by the contracting parties.

The plaintiff also endeavored to prove that the defendant had returned beds that it could not sell; that, without previous notice, it forwarded to the defendant the beds that it wanted; and that the defendant received its commission for the beds sold by the plaintiff directly to persons in Iloilo. But all this, at the most only shows that, on the part of both of them, there was mutual tolerance in the performance of the contract in disregard of its terms; and it gives no right to have the contract considered, not as the parties stipulated it, but as they performed it. Only the acts of the contracting parties, subsequent to, and in connection with, the execution of the contract, must be considered for the purpose of interpreting the contract, when such interpretation is necessary, but not when, as in the instant case, its essential agreements are clearly set forth and plainly show that the contract belongs to a certain kind and not to another. Furthermore, the return made was of certain brass beds, and was not effected in exchange for the price paid for them, but was for other beds of another kind; and for the letter Exhibit L-1, requested the plaintiff's prior consent with respect to said beds, which shows that it was not considered that the defendant had a right, by virtue of the contract, to make this return. As regards the shipment of beds without previous notice, it is insinuated in the record that these brass beds were precisely the ones so shipped, and that, for this very reason, the plaintiff agreed to their return. And with respect to the so-called commissions, we have said that they merely constituted a discount on the invoice price, and the reason for applying this benefit to the beds sold directly by the plaintiff to persons in Iloilo was because, as the defendant obligated itself in the contract to incur the expenses of advertisement of the plaintiff's beds, such sales were to be considered as a result of that advertisement.

In respect to the defendant's obligation to order by the dozen, the only one expressly imposed by the contract, the effect of its breach would only entitle the plaintiff to disregard the orders which the defendant might place under other conditions; but if the plaintiff consents to fill them, he waives his right and cannot complain for having acted thus at his own free will.

For the foregoing reasons, we are of opinion that the contract by and between the plaintiff and the defendant was one of purchase and sale, and that the obligations the breach of which is alleged as a cause of action are not imposed upon the defendant, either by agreement or by law.

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

G.R. No. 55793 May 18, 1990

CONCRETE AGGREGATES, INC., petitioner, vs.COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

25

Santiago, Tinga & Associates for petitioner.

REGALADO, J.:

This petition for review on certiorari seeks the annulment of the decision of respondent Court of Tax Appeals, 1dated September 19, 1980, and its resolution denying reconsideration thereof, dated December 3, 1980, both promulgated in CTA Case No. 2433, entitled "Concrete Aggregates, Inc. vs. Commissioner of Internal Revenue," the decretal portion of which decision reads:

Having reached the conclusion that petitioner is a manufacturer subject to the 7% sales tax under Section 186 of the then National Internal Revenue Code, the decision of respondent dated July 24, 1972 should therefore be sustained. Accordingly, petitioner Concrete Aggregates, Inc. is hereby ordered to pay to respondent Commissioner of Internal Revenue the total amount of P244,022.76 representing sales and ad valorem taxes for the first semester of 1968 inclusive of surcharges, plus interest at the rate of 14% per centum from January 1, 1973 up to the date of full payment thereof pursuant to Section 183 (now 193) of the National Internal Revenue Code.

WHEREFORE, the decision appealed from is hereby affirmed at petitioner's costs.

SO ORDERED. 2

The records disclose that petitioner is a domestic corporation, duly organized and existing under the laws of the Philippines, with business address at Longos, Quezon City. It has an aggregate plant at Montalban, Rizal which processes rock aggregates mined by it from private lands. Petitioner also maintains and operates a plant at Longos, Quezon City for the production of ready-mixed concrete and plant-mixed hot asphalt.

Sometime in 1968, the agents of respondent commissioner conducted an investigation of petitioner's tax liabilities. As a consequence thereof, in a letter dated December 14, 1970 said respondent assessed and demanded payment from petitioner of the amount of P244,002.76 as sales and ad valorem taxes for the first semester of 1968, inclusive of surcharges. Petitioner disputed the said assessment in its letter dated February 2, 1971 without, however, contesting the portion pertaining to the ad valorem tax.

In his letter dated July 24, 1972, respondent reiterated the said assessment of sales and ad valorem taxes which, as explained in his preceding letter, had been arrived at as follows. 3

Taxable sales P 4,164,092.44——————

7% sales tax due thereon P 291,486.47

Less: Tax already paid 116,523.55——————

Deficiency tax due P 174,962.92

Add: 25% surcharge 43,740.73——————

Total deficiency tax and surcharge P 218,703.65

Add: 1 1/2% ad valorem on P20,239.29

25% surcharge thereon 5,059.82 25,299.11———— —————

TOTAL AMOUNT DUE & COLLECTIBLE P244,002.76

Consequently, demand for the payment of the said amount within ten days from receipt of the letter was made by respondent on petitioner, otherwise the same would be collected thru the summary remedies provided for by law. Instead of paying, petitioner appealed to respondent court.

As earlier stated, a judgment adverse to petitioner was handed down by respondent court, whereupon he came to this Court on a petition for review. In its resolution dated September 7, 1981, the Court, through its First Division, denied the petition for review for lack of merit. 4 Petitioner filed a motion for reconsideration which was likewise denied in the resolution of October 19, 1981 for lack of merit, the denial being expressly declared to be final. 5With leave of court, petitioner filed its second motion for reconsideration which was granted by the Court in its resolution dated November 23, 1981. 6

The sole issue in this case is whether petitioner is a contractor subject to the 3% contractor's tax under Section 191 of the 1968 National Internal Revenue Code or a manufacturer subject to the 7% sales tax under Section 186 of the same Code.

26

Petitioner disclaims liability on the ground that it is a contractor within the meaning of Section 191 of the 1968 Tax Code, the pertinent portion of which reads:

Sec. 191. Percentage tax on road, building, irrigation, artesian well, waterworks, and other construction work contractors, proprietors or operators of dockyards, and others. — Road, building, irrigation, artesian well, waterworks, and other construction work contractors; . . . and other independent contractors, . . . shall pay a. tax equivalent to three per centum of their gross receipts.

xxx xxx xxx

Petitioner contends that its business falls under "other construction work contractors" or "other independent contractors" and, as such, it was a holder of a license under Republic Act No. 4566, otherwise known as the "Contractors Licensing Law" and was classified thereunder as a "general engineering contractor" and "specialty asphalt and concrete contractor. 7 It advances the theory that it produced asphalt and concrete mix only upon previous orders, which may be proved by its system of requiring the filling of job orders where the customers specify the construction requirements, and that without such order, it would not do so considering the highly perishable nature of the asphalt and concrete mix. 8

It emphasizes that the mixing of asphalt and cement, if they were to be sold to the public, is not a simple matter of putting things together in a rotating bowl but involves a careful selection of components, proper measuring and weighing of ingredients, calibration of the plant to arrive at the right mixing temperature, and testing of the strength of the material, altogether using its own means and methods without submitting itself to control by the customers. 9

Thus, it adopts the view that if the article subject of the sale is one which is not ready for delivery, as it is yet to be manufactured according to the order, the seller thereof is a contractor. However, if the article subject of the sale is one which is ready for delivery when the order therefor is placed, the seller is a manufacturer. 10 Complementary to this, it postulates that as a contractor dealing exclusively in the construction of roads, buildings and other building or construction works, its business consists of rendering service by way of furnishing its customers with pre-mixed concrete or asphalt, in effect merely doing for the customers what the latter used to do themselves, that is, to buy the ingredients and then mix the concrete or asphalt. 11 It concludes that in doing so, it does not become a manufacturer.

We have had the occasion to construe Section 191, now Section 205, of the Tax Code in Commissioner of Internal Revenue vs. The Court of Tax Appeals, et al. 12 where we reiterated the test as to when one may be considered a contractor within its context, thus;

The word "contractor" has come to be used with special reference to a person who, in the pursuit of the independent business, undertakes to do a specific job or piece of work for other persons, using his own means and methods without submitting himself to control as to the petty details. (Aranas, Annotations and Jurisprudence on the National Internal Revenue Code, p. 318, par. 191(2), 1970 Ed.) The true test of a contractor as was held in the cases of Luzon Stevedoring Co. vs. Trinidad, 43 Phil. 803, 807-808, and La Carlota Sugar Central vs. Trinidad, 43 Phil. 816, 819, would seem to be that he renders service in the course of an independent occupation, representing the will of his employer only as to the result of his work, and not as to the means by which it is accomplished. (Emphasis supplied)

It is quite evident that the percentage tax imposed in Section 191 is generally a tax on the sale of services or labor. In its factual findings, respondent court found that petitioner was formed and organized primarily as a manufacturer; that it has an aggregate plant at Montalban, Rizal, which processes rock aggregates mined by it from private lands; it operates a concrete batching plant at Longos, Quezon City where the specified aggregates from its plant at Montalban are mixed with sand and cement, after which water is added and the concrete mixture is sold and delivered to customers; and at its plant site at Longos, Quezon City, petitioner has also an asphalt mixing machinery where bituminous asphalt mix is manufactured. 13

We see no reason to disturb the findings of respondent court. Petitioner is a manufacturer as defined by Section 194(x), now Section 187(x), of the Tax Code.

Sec. 1 94. Words and phrases defined. — In applying the provisions of this Title words and phrases shall be taken in the sense and extension indicated below:

xxx xxx xxx

(x) "Manufacturer" includes every person who by physical or chemical process alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to which it could not have been put in its original condition, or who by any such process alters the quality of any such raw material or manufactured or partially manufactured product so as to reduce it to marketable shape or prepare it for any of the uses of industry, or who by any such process combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or different kinds and in such manner that the finished product of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured products, in their original condition could not have been put, and who in addition alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption.

27

As aptly pointed out by the Solicitor General, petitioner's raw materials are processed under a prescribed formula and thereby changed by means of machinery into a finished product, altering their quality, transforming them into marketable state or preparing them for any of the specific uses of industry. Thus, the raw materials become a distinct class of merchandise or "finished products for the purpose of their sales or distribution to others and not for his own use or consumption." Evidently, without the above process, the raw materials or aggregates could not, in their original form, perform the uses of the finished product. 14

In a case involving the making of ready-mixed concrete, it was held that concrete is a product resulting from a combination of sand or gravel or broken bits of limestones with water and cement; a combination which requires the use of skill and most generally of machinery. Concrete in forms designed for use and supplied to others for buildings, bridges and other structures is a distinct article of commerce and the making of them would be manufacturing by the corporation doing so. 15

Selling or distribution is an essential ingredient of manufacturing. The sale of a manufactured product is properly incident to manufacture. The power to sell is an indispensable adjunct to a manufacturing business. 16 Petitioner, as a manufacturer, not only manufactures the finished articles but also sells or distributes them to others. This is inferable from the testimonial evidence of petitioner's witness that, in the marketing of its products, the company has marketing personnel who visit the client, whether he is a regular or a prospective customer, and that it is the customer who specifies the requirement according to his needs by filling up a purchase order, after which a job order is issued. This is followed by the delivery of the finished product to the job site. 17

Petitioner relies heavily on the case of The Commissioner of Internal Revenue vs. Engineering Equipment and Supply Co., et al. 18 and on the basis thereof posits that it has passed the test of a contractor under Article 1467 of the Civil Code which provides:

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

It is readily apparent that, in declaring private respondent in the aforesaid Engineering Equipment case as a contractor, the Court relied on findings of fact distinguishable from those in the case at bar.

. . . We find that Engineering did not manufacture air conditioning units for sale to the general public, but imported some items (as refrigeration coils, . . .) which were used in executing contracts entered into by it. Engineering, therefore, undertook negotiations and execution of individual contracts for the design, supply and installation of air conditioning units of the central type . . ., taking into consideration in the process such factors as the area of the space to be air conditioned; the number of persons occupying or would be occupying the premises; the purpose for which the various air conditioning areas are to be used; and the sources of heat gain or cooling load on the plant such as the sun load, lighting, and other electrical appliances which are or may be in the plan. . . . Engineering also testified during the hearing in the Court of Tax Appeals that relative to the installation of air conditioning system, Engineering designed and engineered complete each particular plant and that no two plants were identical but each had to be engineered separately.

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

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

The facts and circumstances aforequoted support the theory that Engineering is a contractor rather than a manufacturer.

It is still good law that a contract to make is a contract of sale if the article is already substantially in existence at the time of the order and merely requires some alteration, modification or adaptation to the buyer's wishes or purposes. A contract for the sale of an article which the vendor in the ordinary course of his business manufactures or procures for the general market, whether the same is on hand at the time or not is a contract for the sale of goods. 19

Petitioner insists that it would produce asphalt or concrete mix only upon previous job orders otherwise it would not do so. It does not and will not carry in stock cement and asphalt mix. 20 But the reason is obvious. What practically prevents the petitioner from mass production and storage is the nature of its products, that is, they easily harden due to temperature change and water and cement reaction. 21 Stated differently by respondent court, "it is self-evident that it is due to the highly perishable nature of asphalt and concrete mix, as petitioner itself argues, that makes impossible for them to be carried in stock because they cool and harden with time, and once hardened, they become useless. 22

Had it not been for this fact, petitioner could easily mass produce the ready-mixed concrete or asphalt desired and needed by its various customers and for which it is mechanically equipped to do. It is clear, however, that petitioner does nothing more than sell the articles that it habitually manufactures. It stocks raw materials, ready at any time, for the manufacture of asphalt and/or concrete mix. 23 Its marketing system would readily disclose that its products are available for sale to anyone needing them. Whosoever would need its products, whether builder, contractor, homeowner or payer with sufficient money, may order aggregates, concrete mix or

28

bituminous asphalt mix of the kind manufactured by petitioner. 24 The habituality of the production of goods for the general public characterizes the business of petitioner.

We are likewise persuaded by the submissions of the Solicitor General that the ruling in Celestino Co & Company vs. Collector of Internal Revenue 25 is applicable to this case in that unless an activity is covered by Section 191 of the Tax Code, one who manufactures articles, although upon a previous order and subject to the specifications of the buyer, is nonetheless a manufacturer.

We also reject petitioner's theory that, with the amendment of Section 191 of the Tax Code, it can be considered as a "specialty contractor." As observed by respondent, a specialty contractor is one whose operations pertain to construction work requiring special skill and involves the use of specialized building trades or crafts. The manufacture of concrete and cement mix do not involve the foregoing requirements as to put it within such special category.

ON THE FOREGOING CONSIDERATIONS, certiorari is DENIED and the appealed decision of respondent Court of Tax Appeals is AFFIRMED.

SO ORDERED.

29

G.R. No. L-61623 December 26, 1984

PEOPLE'S HOMESITE & HOUSING CORPORATION, petitioner-appellant, vs.COURT OF APPEALS, RIZALINO L. MENDOZA and ADELAIDA R. MENDOZA, respondents-appellees.

Manuel M. Lazaro, Pilipinas Arenas Laborte and Antonio M. Brillantes for petitioner PHHC.

Tolentino, Cruz, Reyes, Lava and Manuel for private respondents.

AQUINO, J.:

The question in this case is whether the People's Homesite & Housing Corporation bound itself to sell to the Mendoza spouses Lot 4 (Road) Pcs- 4564 of the revised consolidation subdivision plan with an area of 2,6,08.7 (2,503.7) square meters located at Diliman, Quezon City.

The PHHC board of directors on February 18, 1960 passed Resolution No. 513 wherein it stated "that subject to the approval of the Quezon City Council of the above-mentioned Consolidation Subdivision Plan, Lot 4. containing4,182.2 square meters be, as it is hereby awarded to Spouses Rizalino Mendoza and Adelaida Mendoza, at a price of twenty-one pesos (P21.00) per square meter" and "that this award shall be subject to the approval of the OEC (PHHC) Valuation Committee and higher authorities".

The city council disapproved the proposed consolidation subdivision plan on August 20, 1961 (Exh. 2). The said spouses were advised by registered mail of the disapproval of the plan (Exh. 2-PHHC). Another subdivision plan was prepared and submitted to the city council for approval. The revised plan, which included Lot 4, with a reduced area of 2,608.7, was approved by the city council on February 25, 1964 (Exh. H).

On April 26, 1965 the PHHC board of directors passed a resolution recalling all awards of lots to persons who failed to pay the deposit or down payment for the lots awarded to them (Exh. 5). The Mendozas never paid the price of the lot nor made the 20% initial deposit.

On October 18, 1965 the PHHC board of directors passed Resolution No. 218, withdrawing the tentative award of Lot 4 to the Mendoza -spouses under Resolution No. 513 and re-awarding said lot jointly and in equal shares to Miguela Sto. Domingo, Enrique Esteban, Virgilio Pinzon, Leonardo Redublo and Jose Fernandez, subject to existing PHHC rules and regulations. The prices would be the same as those of the adjoining lots. The awardees were required to deposit an amount equivalent to 20% of the total selling price (Exh. F).

The five awardees made the initial deposit. The corresponding deeds of sale were executed in their favor. The subdivision of Lot 4 into five lots was approved by the city council and the Bureau of Lands.

On March 16, 1966 the Mendoza spouses asked for reconsideration of the withdrawal of the previous award to them of Lot 4 and for the cancellation of the re-award of said lot to Sto. Domingo and four others. Before the request could be acted upon, the spouses filed the instant action for specific performance and damages.

The trial court sustained the withdrawal of the award. The Mendozas appealed. The Appellate Court reversed that decision and declared void the re-award of Lot 4 and the deeds of sale and directed the PHHC to sell to the Mendozas Lot 4 with an area of 2,603.7 square meters at P21 a square meter and pay to them P4,000 as attorney's fees and litigation expenses. The PHHC appealed to this Court.

The issue is whether there was a perfected sale of Lot 4, with the reduced area, to the Mendozas which they can enforce against the PHHC by an action for specific performance.

We hold that there was no perfected sale of Lot 4. It was conditionally or contingently awarded to the Mendozas subject to the approval by the city council of the proposed consolidation subdivision plan and the approval of the award by the valuation committee and higher authorities.

The city council did not approve the subdivision plan. The Mendozas were advised in 1961 of the disapproval. In 1964, when the plan with the area of Lot 4 reduced to 2,608.7 square meters was approved, the Mendozas should have manifested in writing their acceptance of the award for the purchase of Lot 4 just to show that they were still interested in its purchase although the area was reduced and to obviate ally doubt on the matter. They did not do so. The PHHC board of directors acted within its rights in withdrawing the tentative award.

"The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the law governing the form of contracts." (Art. 1475, Civil Code).

30

"Son, sin embargo, excepcion a esta regla los casos en que por virtud de la voluntad de las partes o de la ley, se celebra la venta bajo una condicion suspensiva, y en los cuales no se perfecciona la venta hasta el cumplimiento de la condicion" (4 Castan Tobenas, Derecho Civil Español 8th ed. p. 81).

"In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. (Art. 1181, Civil Code). "Se llama suspensive la condicion de la que depende la perfeccion, o sea el principio del contrato". (9 Giorgi, Teoria de las Obligaciones, p. 57).

Under the facts of this case, we cannot say there was a meeting of minds on the purchase of Lot 4 with an area of 2,608.7 square meters at P21 a square meter.

The case of Lapinig vs. Court of Appeals, 115 SCRA 213 is not in point because the awardee in that case applied for the purchase of the lot, paid the 10% deposit and a conditional contract to sell was executed in his favor. The PHHC could not re-award that lot to another person.

WHEREFORE, the decision of the Appellate Court is reversed and set aside and the judgment of the trial court is affirmed. No costs.

SO ORDERED.

31

G.R. No. L-116650 May 23, 1995

TOYOTA SHAW, INC., petitioner, vs.COURT OF APPEALS and LUNA L. SOSA, respondents.

DAVIDE, JR., J.:

At the heart of the present controversy is the document marked Exhibit "A" 1 for the private respondent, which was signed by a sales representative of Toyota Shaw, Inc. named Popong Bernardo. The document reads as follows:

9

AGREEMENTS BETWEEN MR. SOSA& POPONG BERNARDO OF TOYOTA

SHAW, INC.

1. all necessary documents will be submitted to TOYOTA SHAW, INC. (POPONG BERNARDO) a week after, upon arrival of Mr. Sosa from the Province (Marinduque) where the unit will be used on the 19th of June.

2. the downpayment of P100,000.00 will be paid by Mr. Sosa on June 15, 1989.

3. the TOYOTA SHAW, INC. LITE ACE yellow, will be pick-up [sic] and released by TOYOTA SHAW, INC. on the 17th of June at 10 a.m.ly yours,

Was this document, executed and signed by the petitioner's sales representative, a perfected contract of sale, binding upon the petitioner, breach of which would entitle the private respondent to damages and attorney's fees? The trial court and the Court of Appeals took the affirmative view. The petitioner disagrees. Hence, this petition for review oncertiorari.

The antecedents as disclosed in the decisions of both the trial court and the Court of Appeals, as well as in the pleadings of petitioner Toyota Shaw, Inc. (hereinafter Toyota) and respondent Luna L. Sosa (hereinafter Sosa) are as follows. Sometime in June of 1989, Luna L. Sosa wanted to purchase a Toyota Lite Ace. It was then a seller's market and Sosa had difficulty finding a dealer with an available unit for sale. But upon contacting Toyota Shaw, Inc., he was told that there was an available unit. So on 14 June 1989, Sosa and his son, Gilbert, went to the Toyota office at Shaw Boulevard, Pasig, Metro Manila. There they met Popong Bernardo, a sales representative of Toyota.

Sosa emphasized to Bernardo that he needed the Lite Ace not later than 17 June 1989 because he, his family, and abalikbayan guest would use it on 18 June 1989 to go to Marinduque, his home province, where he would celebrate his birthday on the 19th of June. He added that if he does not arrive in his hometown with the new car, he would become a "laughing stock." Bernardo assured Sosa that a unit would be ready for pick up at 10:00 a.m. on 17 June 1989. Bernardo then signed the aforequoted "Agreements Between Mr. Sosa & Popong Bernardo of Toyota Shaw, Inc." It was also agreed upon by the parties that the balance of the purchase price would be paid by credit financing through B.A. Finance, and for this Gilbert, on behalf of his father, signed the documents of Toyota and B.A. Finance pertaining to the application for financing.

The next day, 15 June 1989, Sosa and Gilbert went to Toyota to deliver the downpayment of P100,000.00. They met Bernardo who then accomplished a printed Vehicle Sales Proposal (VSP) No. 928, 2 on which Gilbert signed under the subheading CONFORME. This document shows that the customer's name is "MR. LUNA SOSA" with home address at No. 2316 Guijo Street, United Parañaque II; that the model series of the vehicle is a "Lite Ace 1500" described as "4 Dr minibus"; that payment is by "installment," to be financed by "B.A.," 3 with the initial cash outlay of P100,000.00 broken down as follows:

a) downpayment — P 53,148.00b) insurance — P 13,970.00c) BLT registration fee — P 1,067.00

CHMO fee — P 2,715.00service fee — P 500.00accessories — P 29,000.00

32

and that the "BALANCE TO BE FINANCED" is "P274,137.00." The spaces provided for "Delivery Terms" were not filled-up. It also contains the following pertinent provisions:

CONDITIONS OF SALES

1. This sale is subject to availability of unit.

2. Stated Price is subject to change without prior notice, Price prevailing and in effect at time of selling will apply. . . .

Rodrigo Quirante, the Sales Supervisor of Bernardo, checked and approved the VSP.

On 17 June 1989, at around 9:30 a.m., Bernardo called Gilbert to inform him that the vehicle would not be ready for pick up at 10:00 a.m. as previously agreed upon but at 2:00 p.m. that same day. At 2:00 p.m., Sosa and Gilbert met Bernardo at the latter's office. According to Sosa, Bernardo informed them that the Lite Ace was being readied for delivery. After waiting for about an hour, Bernardo told them that the car could not be delivered because "nasulot ang unit ng ibang malakas."

Toyota contends, however, that the Lite Ace was not delivered to Sosa because of the disapproval by B.A. Finance of the credit financing application of Sosa. It further alleged that a particular unit had already been reserved and earmarked for Sosa but could not be released due to the uncertainty of payment of the balance of the purchase price. Toyota then gave Sosa the option to purchase the unit by paying the full purchase price in cash but Sosa refused.

After it became clear that the Lite Ace would not be delivered to him, Sosa asked that his downpayment be refunded. Toyota did so on the very same day by issuing a Far East Bank check for the full amount of P100,000.00, 4 the receipt of which was shown by a check voucher of Toyota, 5 which Sosa signed with the reservation, "without prejudice to our future claims for damages."

Thereafter, Sosa sent two letters to Toyota. In the first letter, dated 27 June 1989 and signed by him, he demanded the refund, within five days from receipt, of the downpayment of P100,000.00 plus interest from the time he paid it and the payment of damages with a warning that in case of Toyota's failure to do so he would be constrained to take legal action. 6 The second, dated 4 November 1989 and signed by M. O. Caballes, Sosa's counsel, demanded one million pesos representing interest and damages, again, with a warning that legal action would be taken if payment was not made within three days. 7 Toyota's counsel answered through a letter dated 27 November 1989 8 refusing to accede to the demands of Sosa. But even before this answer was made and received by Sosa, the latter filed on 20 November 1989 with Branch 38 of the Regional Trial Court (RTC) of Marinduque a complaint against Toyota for damages under Articles 19 and 21 of the Civil Code in the total amount of P1,230,000.00. 9 He alleges, inter alia, that:

9. As a result of defendant's failure and/or refusal to deliver the vehicle to plaintiff, plaintiff suffered embarrassment, humiliation, ridicule, mental anguish and sleepless nights because: (i) he and his family were constrained to take the public transportation from Manila to Lucena City on their way to Marinduque; (ii) his balikbayan-guest canceled his scheduled first visit to Marinduque in order to avoid the inconvenience of taking public transportation; and (iii) his relatives, friends, neighbors and other provincemates, continuously irked him about "his Brand-New Toyota Lite Ace — that never was." Under the circumstances, defendant should be made liable to the plaintiff for moral damages in the amount of One Million Pesos (P1,000,000.00). 10

In its answer to the complaint, Toyota alleged that no sale was entered into between it and Sosa, that Bernardo had no authority to sign Exhibit "A" for and in its behalf, and that Bernardo signed Exhibit "A" in his personal capacity. As special and affirmative defenses, it alleged that: the VSP did not state date of delivery; Sosa had not completed the documents required by the financing company, and as a matter of policy, the vehicle could not and would not be released prior to full compliance with financing requirements, submission of all documents, and execution of the sales agreement/invoice; the P100,000.00 was returned to and received by Sosa; the venue was improperly laid; and Sosa did not have a sufficient cause of action against it. It also interposed compulsory counterclaims.

After trial on the issues agreed upon during the pre-trial session, 11 the trial court rendered on 18 February 1992 a decision in favor of Sosa. 12 It ruled that Exhibit "A," the "AGREEMENTS BETWEEN MR. SOSA AND POPONG BERNARDO," was a valid perfected contract of sale between Sosa and Toyota which bound Toyota to deliver the vehicle to Sosa, and further agreed with Sosa that Toyota acted in bad faith in selling to another the unit already reserved for him.

As to Toyota's contention that Bernardo had no authority to bind it through Exhibit "A," the trial court held that the extent of Bernardo's authority "was not made known to plaintiff," for as testified to by Quirante, "they do not volunteer any information as to the company's sales policy and guidelines because they are internal matters." 13 Moreover, "[f]rom the beginning of the transaction up to its consummation when the downpayment was made by the plaintiff, the defendants had made known to the plaintiff the impression that Popong Bernardo is an authorized sales executive as it permitted the latter to do acts within the scope of an apparent authority holding him out to the public as possessing power to do these acts." 14 Bernardo then "was an agent of the defendant Toyota Shaw, Inc. and hence bound the defendants." 15

The court further declared that "Luna Sosa proved his social standing in the community and suffered besmirched reputation, wounded feelings and sleepless nights for which he ought to be compensated." 16 Accordingly, it disposed as follows:

WHEREFORE, viewed from the above findings, judgment is hereby rendered in favor of the plaintiff and against the defendant:

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1. ordering the defendant to pay to the plaintiff the sum of P75,000.00 for moral damages;

2. ordering the defendant to pay the plaintiff the sum of P10,000.00 for exemplary damages;

3. ordering the defendant to pay the sum of P30,000.00 attorney's fees plus P2,000.00 lawyer's transportation fare per trip in attending to the hearing of this case;

4. ordering the defendant to pay the plaintiff the sum of P2,000.00 transportation fare per trip of the plaintiff in attending the hearing of this case; and

5. ordering the defendant to pay the cost of suit.

SO ORDERED.

Dissatisfied with the trial court's judgment, Toyota appealed to the Court of Appeals. The case was docketed as CA-G.R. CV No. 40043. In its decision promulgated on 29 July 1994, 17 the Court of Appeals affirmed in toto the appealed decision.

Toyota now comes before this Court via this petition and raises the core issue stated at the beginning of the ponenciaand also the following related issues: (a) whether or not the standard VSP was the true and documented understanding of the parties which would have led to the ultimate contract of sale, (b) whether or not Sosa has any legal and demandable right to the delivery of the vehicle despite the non-payment of the consideration and the non-approval of his credit application by B.A. Finance, (c) whether or not Toyota acted in good faith when it did not release the vehicle to Sosa, and (d) whether or not Toyota may be held liable for damages.

We find merit in the petition.

Neither logic nor recourse to one's imagination can lead to the conclusion that Exhibit "A" is a perfected contract of sale.

Article 1458 of the Civil Code defines a contract of sale as follows:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

A contract of sale may be absolute or conditional.

and Article 1475 specifically provides when it is deemed perfected:

Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts.

What is clear from Exhibit "A" is not what the trial court and the Court of Appeals appear to see. It is not a contract of sale. No obligation on the part of Toyota to transfer ownership of a determinate thing to Sosa and no correlative obligation on the part of the latter to pay therefor a price certain appears therein. The provision on the downpayment of P100,000.00 made no specific reference to a sale of a vehicle. If it was intended for a contract of sale, it could only refer to a sale on installment basis, as the VSP executed the following day confirmed. But nothing was mentioned about the full purchase price and the manner the installments were to be paid.

This Court had already ruled that a definite agreement on the manner of payment of the price is an essential element in the formation of a binding and enforceable contract of sale. 18 This is so because the agreement as to the manner of payment goes into the price such that a disagreement on the manner of payment is tantamount to a failure to agree on the price. Definiteness as to the price is an essential element of a binding agreement to sell personal property. 19

Moreover, Exhibit "A" shows the absence of a meeting of minds between Toyota and Sosa. For one thing, Sosa did not even sign it. For another, Sosa was well aware from its title, written in bold letters, viz.,

AGREEMENTS BETWEEN MR. SOSA & POPONG BERNARDO OF TOYOTA SHAW, INC.

that he was not dealing with Toyota but with Popong Bernardo and that the latter did not misrepresent that he had the authority to sell any Toyota vehicle. He knew that Bernardo was only a sales representative of Toyota and hence a mere agent of the latter. It was incumbent upon Sosa to act with ordinary prudence and reasonable diligence to know the extent of Bernardo's authority as anagent 20 in respect of contracts to sell Toyota's vehicles. A person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. 21

At the most, Exhibit "A" may be considered as part of the initial phase of the generation or negotiation stage of a contract of sale. There are three stages in the contract of sale, namely:

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(a) preparation, conception, or generation, which is the period of negotiation and bargaining, ending at the moment of agreement of the parties;

(b) perfection or birth of the contract, which is the moment when the parties come to agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract. 22

The second phase of the generation or negotiation stage in this case was the execution of the VSP. It must be emphasized that thereunder, the downpayment of the purchase price was P53,148.00 while the balance to be paid on installment should be financed by B.A. Finance Corporation. It is, of course, to be assumed that B.A. Finance Corp. was acceptable to Toyota, otherwise it should not have mentioned B.A. Finance in the VSP.

Financing companies are defined in Section 3(a) of R.A. No. 5980, as amended by P.D. No. 1454 and P.D. No. 1793, as "corporations or partnerships, except those regulated by the Central Bank of the Philippines, the Insurance Commission and the Cooperatives Administration Office, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, either by discounting or factoring commercial papers or accounts receivables, or by buying and selling contracts, leases, chattel mortgages, or other evidence of indebtedness, or by leasing of motor vehicles, heavy equipment and industrial machinery, business and office machines and equipment, appliances and other movable property." 23

Accordingly, in a sale on installment basis which is financed by a financing company, three parties are thus involved: the buyer who executes a note or notes for the unpaid balance of the price of the thing purchased on installment, the seller who assigns the notes or discounts them with a financing company, and the financing company which is subrogated in the place of the seller, as the creditor of the installment buyer. 24 Since B.A. Finance did not approve Sosa's application, there was then no meeting of minds on the sale on installment basis.

We are inclined to believe Toyota's version that B.A. Finance disapproved Sosa's application for which reason it suggested to Sosa that he pay the full purchase price. When the latter refused, Toyota cancelled the VSP and returned to him his P100,000.00. Sosa's version that the VSP was cancelled because, according to Bernardo, the vehicle was delivered to another who was "mas malakas" does not inspire belief and was obviously a delayed afterthought. It is claimed that Bernardo said, "Pasensiya kayo, nasulot ang unit ng ibang malakas," while the Sosas had already been waiting for an hour for the delivery of the vehicle in the afternoon of 17 June 1989. However, in paragraph 7 of his complaint, Sosa solemnly states:

On June 17, 1989 at around 9:30 o'clock in the morning, defendant's sales representative, Mr. Popong Bernardo, called plaintiff's house and informed the plaintiff's son that the vehicle will not be ready for pick-up at 10:00 a.m. of June 17, 1989 but at 2:00 p.m. of that day instead. Plaintiff and his son went to defendant's office on June 17 1989 at 2:00 p.m. in order to pick-up the vehicle but the defendant for reasons known only to its representatives, refused and/or failed to release the vehicle to the plaintiff. Plaintiff demanded for an explanation, but nothing was given; . . . (Emphasis supplied). 25

The VSP was a mere proposal which was aborted in lieu of subsequent events. It follows that the VSP created no demandable right in favor of Sosa for the delivery of the vehicle to him, and its non-delivery did not cause any legally indemnifiable injury.

The award then of moral and exemplary damages and attorney's fees and costs of suit is without legal basis. Besides, the only ground upon which Sosa claimed moral damages is that since it was known to his friends, townmates, and relatives that he was buying a Toyota Lite Ace which they expected to see on his birthday, he suffered humiliation, shame, and sleepless nights when the van was not delivered. The van became the subject matter of talks during his celebration that he may not have paid for it, and this created an impression against his business standing and reputation. At the bottom of this claim is nothing but misplaced pride and ego. He should not have announced his plan to buy a Toyota Lite Ace knowing that he might not be able to pay the full purchase price. It was he who brought embarrassment upon himself by bragging about a thing which he did not own yet.

Since Sosa is not entitled to moral damages and there being no award for temperate, liquidated, or compensatory damages, he is likewise not entitled to exemplary damages. Under Article 2229 of the Civil Code, exemplary or corrective damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages.

Also, it is settled that for attorney's fees to be granted, the court must explicitly state in the body of the decision, and not only in the dispositive portion thereof, the legal reason for the award of attorney's fees. 26 No such explicit determination thereon was made in the body of the decision of the trial court. No reason thus exists for such an award.

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in CA-G.R. CV NO. 40043 as well as that of Branch 38 of the Regional Trial Court of Marinduque in Civil Case No. 89-14 are REVERSED and SET ASIDE and the complaint in Civil Case No. 89-14 is DISMISSED. The counterclaim therein is likewise DISMISSED.

No pronouncement as to costs.

SO ORDERED.

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August 3, 1918

G.R. No. L-12342A. A. ADDISON, plaintiff-appellant,vs.MARCIANA FELIX and BALBINO TIOCO, defendants-appellees.

Thos. D. Aitken for appellant.Modesto Reyes and Eliseo Ymzon for appellees.Fisher, J.:By a public instrument dated June 11, 1914, the plaintiff sold to the defendant Marciana Felix, with the consent of her husband, the defendant Balbino Tioco, four parcels of land, described in the instrument. The defendant Felix paid, at the time of the execution of the deed, the sum of P3,000 on account of the purchase price, and bound herself to pay the remainder in installments, the first of P2,000 on July 15, 1914, and the second of P5,000 thirty days after the issuance to her of a certificate of title under the Land Registration Act, and further, within ten years from the date of such title P10, for each coconut tree in bearing and P5 for each such tree not in bearing, that might be growing on said four parcels of land on the date of the issuance of title to her, with the condition that the total price should not exceed P85,000. It was further stipulated that the purchaser was to deliver to the vendor 25 per centum of the value of the products that she might obtain from the four parcels “from the moment she takes possession of them until the Torrens certificate of title be issued in her favor.”

It was also covenanted that “within one year from the date of the certificate of title in favor of Marciana Felix, this latter may rescind the present contract of purchase and sale, in which case Marciana Felix shall be obliged to return to me, A. A. Addison, the net value of all the products of the four parcels sold, and I shall obliged to return to her, Marciana Felix, all the sums that she may have paid me, together with interest at the rate of 10 per cent per annum.”

In January, 1915, the vendor, A. A. Addison, filed suit in Court of First Instance of Manila to compel Marciana Felix to make payment of the first installment of P2,000, demandable in accordance with the terms of the contract of sale aforementioned, on July 15, 1914, and of the interest in arrears, at the stipulated rate of 8 per cent per annum. The defendant, jointly with her husband, answered the complaint and alleged by way of special defense that the plaintiff had absolutely failed to deliver to the defendant the lands that were the subject matter of the sale, notwithstanding the demands made upon him for this purpose. She therefore asked that she be absolved from the complaint, and that, after a declaration of the rescission of the contract of the purchase and sale of said lands, the plaintiff be ordered to refund the P3,000 that had been paid to him on account, together with the interest agreed upon, and to pay an indemnity for the losses and damages which the defendant alleged she had suffered through the plaintiff’s non-fulfillment of the contract.

The evidence adduced shows that after the execution of the deed of the sale the plaintiff, at the request of the purchaser, went to Lucena, accompanied by a representative of the latter, for the purpose of designating and delivering the lands sold. He was able to designate only two of the four parcels, and more than two-thirds of these two were found to be in the possession of one Juan Villafuerte, who claimed to be the owner of the parts so occupied by him. The plaintiff admitted that the purchaser would have to bring suit to obtain possession of the land (sten. notes, record, p. 5). In August, 1914, the surveyor Santamaria went to Lucena, at the request of the plaintiff and accompanied by him, in order to survey the land sold to the defendant; but he surveyed only two parcels, which are those occupied mainly by the brothers Leon and Julio Villafuerte. He did not survey the other parcels, as they were not designated to him by the plaintiff. In order to make this survey it was necessary to obtain from the Land Court a writ of injunction against the occupants, and for the purpose of the issuance of this writ the defendant, in June, 1914, filed an application with the Land Court for the registration in her name of four parcels of land described in the deed of sale executed in her favor by the plaintiff. The

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proceedings in the matter of this application were subsequently dismissed, for failure to present the required plans within the period of the time allowed for the purpose.

The trial court rendered judgment in behalf of the defendant, holding the contract of sale to be rescinded and ordering the return to the plaintiff the P3,000 paid on account of the price, together with interest thereon at the rate of 10 per cent per annum. From this judgment the plaintiff appealed.

In decreeing the rescission of the contract, the trial judge rested his conclusion solely on the indisputable fact that up to that time the lands sold had not been registered in accordance with the Torrens system, and on the terms of the second paragraph of clause (h) of the contract, whereby it is stipulated that “. . . within one year from the date of the certificate of title in favor of Marciana Felix, this latter may rescind the present contract of purchase and sale . . . .”

The appellant objects, and rightly, that the cross-complaint is not founded on the hypothesis of the conventional rescission relied upon by the court, but on the failure to deliver the land sold. He argues that the right to rescind the contract by virtue of the special agreement not only did not exist from the moment of the execution of the contract up to one year after the registration of the land, but does not accrue until the land is registered. The wording of the clause, in fact, substantiates the contention. The one year’s deliberation granted to the purchaser was to be counted “from the date of the certificate of title … .” Therefore the right to elect to rescind the contract was subject to a condition, namely, the issuance of the title. The record show that up to the present time that condition has not been fulfilled; consequently the defendant cannot be heard to invoke a right which depends on the existence of that condition. If in the cross-complaint it had been alleged that the fulfillment of the condition was impossible for reasons imputable to the plaintiff, and if this allegation had been proven, perhaps the condition would have been considered as fulfilled (arts. 1117, 1118, and 1119, Civ. Code); but this issue was not presented in the defendant’s answer.

However, although we are not in agreement with the reasoning found in the decision appealed from, we consider it to be correct in its result. The record shows that the plaintiff did not deliver the thing sold. With respect to two of the parcels of land, he was not even able to show them to the purchaser; and as regards the other two, more than two-thirds of their area was in the hostile and adverse possession of a third person.

The Code imposes upon the vendor the obligation to deliver the thing sold. The thing is considered to be delivered when it is placed “in the hands and possession of the vendee.” (Civ. Code, art. 1462.) It is true that the same article declares that the execution of a public instruments is equivalent to the delivery of the thing which is the object of the contract, but, in order that this symbolic delivery may produce the effect of tradition, it is necessary that the vendor shall have had such control over the thing sold that, at the moment of the sale, its material delivery could have been made. It is not enough to confer upon the purchaser the ownership and the right of possession. The thing sold must be placed in his control. When there is no impediment whatever to prevent the thing sold passing into the tenancy of the purchaser by the sole will of the vendor, symbolic delivery through the execution of a public instrument is sufficient. But if, notwithstanding the execution of the instrument, the purchaser cannot have the enjoyment and material tenancy of the thing and make use of it himself or through another in his name, because such tenancy and enjoyment are opposed by the interposition of another will, then fiction yields to reality – the delivery has not been effected.

As Dalloz rightly says (Gen. Rep., vol. 43, p. 174) in his commentaries on article 1604 of the French Civil code, “the word “delivery” expresses a complex idea . . . the abandonment of the thing by the person who makes the delivery and the taking control of it by the person to whom the delivery is made.”

The execution of a public instrument is sufficient for the purposes of the abandonment made by the vendor; but it is not always sufficient to permit of the apprehension of the thing by the purchaser.

The supreme court of Spain, interpreting article 1462 of the Civil Code, held in its decision of November 10, 1903, (Civ. Rep., vol. 96, p. 560) that this article “merely declares that when the sale is made through the means of a public instrument, the execution of this latter is equivalent to the delivery of the thing sold: which does not and cannot mean that this fictitious tradition necessarily implies the real tradition of the thing sold, for it is incontrovertible that, while its ownership still pertains to the vendor (and with greater reason if it does not), a third person may be in possession of the same thing; wherefore, though, as a general rule, he who purchases by means of a public instrument should be deemed . . . to be the possessor in fact, yet this presumption gives way before proof to the contrary.”

It is evident, then, in the case at bar, that the mere execution of the instrument was not a fulfillment of the vendors’ obligation to deliver the thing sold, and that from such non-fulfillment arises the purchaser’s right to demand, as she has demanded, the rescission of the sale and the return of the price. (Civ. Code, arts. 1506 and 1124.)

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Of course if the sale had been made under the express agreement of imposing upon the purchaser the obligation to take the necessary steps to obtain the material possession of the thing sold, and it were proven that she knew that the thing was in the possession of a third person claiming to have property rights therein, such agreement would be perfectly valid. But there is nothing in the instrument which would indicate, even implicitly, that such was the agreement. It is true, as the appellant argues, that the obligation was incumbent upon the defendant Marciana Felix to apply for and obtain the registration of the land in the new registry of property; but from this it cannot be concluded that she had to await the final decision of the Court of Land Registration, in order to be able to enjoy the property sold. On the contrary, it was expressly stipulated in the contract that the purchaser should deliver to the vendor one-fourth “of the products … of the aforesaid four parcels from the moment when she takes possession of them until the Torrens certificate of title be issued in her favor.” This obviously shows that it was not forseen that the purchaser might be deprived of her possession during the course of the registration proceedings, but that the transaction rested on the assumption that she was to have, during said period, the material possession and enjoyment of the four parcels of land.

Inasmuch as the rescission is made by virtue of the provisions of law and not by contractual agreement, it is not the conventional but the legal interest that is demandable.

It is therefore held that the contract of purchase and sale entered into by and between the plaintiff and the defendant on June 11, 1914, is rescinded, and the plaintiff is ordered to make restitution of the sum of P3,000 received by him on account of the price of the sale, together with interest thereon at the legal rate of 6 per annum from the date of the filing of the complaint until payment, with the costs of both instances against the appellant. So ordered.

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G.R. No. L-43059 October 11, 1979

SAMPAGUITA PICTURES, INC., plaintiff-appellant, vs.JALWINDOR MANUFACTURERS, INC., defendant-appellee.

DE CASTRO, J:

This case was certified to this Court by the Court of Appeals pursuant to the provisions of Section 17, paragraph (6) in relation to Section 31 of the Judiciary Act of 1948.

Plaintiff-appellant Sampaguita Pictures, Inc. (hereinafter referred to as Sampaguita) is the owner of the Sampaguita Pictures Building located at the corner of General Araneta and General Roxas Streets, Cubao, Quezon City. The roofdeck of the building and all existing improvements thereon were leased by Sampaguita to Capitol "300" Inc. (Capitol for short), and it was agreed, among other things, that the premises shall be used by said club for social purposes exclusively for its members and guests; that all permanent improvements made by the lessee on the leased premises shall belong to the lessor without any obligation on the part of the lessor to reimburse the lessee for the sum spent for said improvements; that the improvements made by lessee have been considered as part of the consideration of the monthly rental and said improvements belong to the lessor; that any remodelling, alterations and/or addition to the premises shall be at the expense of the lessee and such improvements belong to the lessor, without any obligation to reimburse the lessee of any sum spent for said improvements. (pp. 29-32, Record on Appeal).

Capitol "300" purchased on credit from defendant-appellee Jalwindor Manufacturers, Inc. (hereinafter referred to as Jalwindor) glass and wooden jalousies which were delivered and installed in the leased premises by Jalwindor replacing the existing windows. On June 1, 1964, Jalwindor filed with the Court of First Instance of Rizal, Quezon City, an action for collection of a sum of money with a petition for preliminary attachment against Capitol for its failure to pay its purchases. The parties submitted to the trial court a Compromise Agreement wherein Capitol acknowledged its indebtedness to Jalwindor in the amount of P9,531.09, exclusive of attorney's fees and interest, payable in monthly installments of at least P300.00 a month beginning December 15, 1964; and pending liquidation of the said obligation, all the materials purchased by Capitol will be considered as security for such undertaking. (p. 13, Record on Appeal).

In the meantime, Capitol "300" was not able to pay rentals to Sampaguita from March 1, 1964 to April 30, 1965, water, electric and telephone services. Sampaguita filed a complaint for ejectment and for collection of a sum of money against Capitol and on June 8, 1965, the City Court of Quezon City rendered judgment ordering Capitol to vacate the premises and to pay Sampaguita.

On the other hand, Capitol likewise failed to comply with the terms of the Compromise Agreement, and on July 31, 1965, the Sheriff of Quezon City made levy on the glass and wooden jalousies in question. Sampaguita filed a third party claim alleging that it is the owner of said materials and not Capitol, Jalwindor however, filed an indemnity bond in favor of the Sheriff and the items were sold et public auction on August 30, 1965 with Jalwindor as the highest bidder for P6,000.00.

Sampaguita filed with the Court of First Instance of Rizal, Branch IV of Quezon City, an action to nullify the Sheriff's Sale and for the issuance of a writ of preliminary injunction against Jalwindor from detaching the glass and wooden jalousies. Jalwindor was ordered to maintain the status quo pending final determination of the case. No actual hearing was held and the parties submitted the following stipulation of facts for the consideration of the court.

1. That plaintiff and defendant are both domestic corporations duly organized and existing by and under the laws of the Philippines:

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2. That plaintiff leased to the CAPITOL "300", Inc. the roofdeck of the Sampaguita building and all the existing improvements thereon for a monthly, rental of P650.00; that the parties to the lease contract agreed that all permanent improvements made by the lessee on the leased premises shall belong to the lessor without any obligation on the part of the lessor to reimburse the lessee for the sum spent for said improvements; that it was agreed upon by the parties that the improvements made by the lessee have been considered as part of the consideration of the monthly rental;

3. That CAPITOL "300", Inc. made alterations on the leased premises; that it removed the then existing windows and replaced 'them with the following items bought on credit from the JALWINDOR MANUFACTURERS INC.. valued at P9,531.09, to wit:

J-21(lever-type) Solex Bluepane

Glass Jaluosies

11 Sets 15'-1 3/4" x 47-7/8" (5 units)

4 Sets 13'-5 3/4" x 47-7/8" (5 units)

3 Sets 10'-9 3/4" x 47-7/7" (4 units)

2 Sets 18'-1 3/3" x 56-3/8" (6 units)

1 Set 9'-1 3/4" x 65-3/8" (3 units)

115 Pcs. Roto Operators for J-21

MODEL J-21 (Roto-type) Glass

and Wood Jalousies

8 Sets 32-1/2" x 60" Solex Bluepane

19 Sets 31-1/4" x 48" Solex Bluepane

18 Sets 34" x 48" Wood

4. That after the CAPITOL "300", Inc. failed to pay the price of the items mentioned in the preceding paragraph, JALWINDOR MANUFACTURERS, Inc, filed a case for collection of a sum of money against CAPITOL "300", Inc. with the Court of First Instance of Rizal (Branch IV Quezon City), Civil Case No. Q-8040; that by virtue of a Compromise Agreement, CAPITOL "300", Inc. acknowledged indebtedness in favor of JALWINDOR in the amount of P9,531,09, with a stipulation in the said Compromise Agreement, that the items forming part of the improvements will form as security for such an undertaking;

5. That due to non-compliance by CAPITOL "300", Inc., JALWINDOR executed judgment that the Sheriff of Quezon City made levy on the items above-stated in paragraph 3 hereof and sold them at a public auction to JALWINDOR MANUFACTURERS, INC. as the highest bidder, on August 30, 1965, for the total amount of P 6,000.00:

6. That after CAPITOL "300", Inc. failed to pay the rentals in arrears from March 1, 1964 to April 30, 1965, water, electric and telephone services amounting to P 10,772.90, the plaintiff SAMPAGUITA PICTURES, INC. filed with the City Court of Quezon City, Civil Case No. 11-13161 for ejectment and collection of a sum of money against the CAPITOL "300", Inc,; that the City Court rendered judgment in favor of the Sampaguita Pictures, Inc., on June 8, 1965, ordering the CAPITOL "300", Inc. to vacate the premises located at the Sampaguita Building and to pay the Sampaguita Pictures, Inc.;

7. That after the Sheriff of Quezon City made levy on the items above-stated in paragraph 3 hereof situated on the roofdeck of the Sampaguita Building, plaintiff filed a Third Party Claim stated in its affidavit on the ground of its right and title to the possession of the items and that CAPITOL "300", Inc. has no right or title whatsoever to the possession over said items; that defendant filed a bond to indemnify the Sheriff against the claim, and the Sheriff sold the items to the defendant; that the JALWINDOR MANUFACTURERS, Inc., being the highest bidder and the execution creditor, considered itself paid to the amount of P6,000.00;

8. That the parties herein agree that the matter of attorney's fees be left to the sound discretion of the Court, which shall not be less than P500.00. (Record on Appeal, pp. 11-14).

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On October 20, 1967, based on said Stipulation of Facts, the lower court dismissed the complaint and ordered Sampaguita to pay Jalwindor the amount of P500.00 as attorney's fees. Sampaguita filed a motion for reconsideration which was likewise denied, hence, the instant appeal.

Petitioner-appellant raised the following assignment of errors:

I

The lower court erred in holding that Capitol "300" Inc. could not legally transfer or assign the glass and wooden jalousies in question to the plaintiff-appellant.

II

The lower court erred in not holding that plaintiff-appellant was the rightful owner of the glass and wooden jalousies when they were sold by the Sheriff at the public auction,

III

The lower court erred in not declaring as null and void the levy on execution and the Sheriff's sale at public auction of the glass and wooden jalousies.

IV

The lower court erred in holding that defendant-appellee became the rightful owner of the glass and wooden jalousies.

When the glass and wooden jalousies in question were delivered and installed in the leased premises, Capitol became the owner thereof. Ownership is not transferred by perfection of the contract but by delivery, either actual or constructive. This is true even if the purchase has been made on credit, as in the case at bar. Payment of the purchase price is not essential to the transfer of ownership as long as the property sold has been delivered. Ownership is acquired from the moment the thing sold was delivered to vendee, as when it is placed in his control and possession. (Arts. 1477, 1496 and 1497, Civil Code of the Phil.)

Capitol entered into a lease Contract with Sampaguita in 1964, and the latter became the owner of the items in question by virtue of the agreement in said contract "that all permanent improvements made by lessee shall belong to the lessor and that said improvements have been considered as part of the monthly rentals." When levy or said items was made on July 31, 1965, Capitol, the judgment debtor, was no longer the owner thereof.

The action taken by Sampaguita to protect its interest is sanctioned by Section 17, Rule 39 of the Rules of Court, which reads:

Section 17, Proceedings where property claimed by third person.

... The officer is not liable for damages for the taking or keeping of the property to any third-party claimant unless a claim is made by the latter and unless an action for damages is brought by him against the officer within one hundred twenty (120) days from the date of the filing of the bond. But nothing herein contained shall prevent claimant from vindicating his claim to the property by any action.

It is, likewise, recignized in the case of Bayer Phil., Inc. vs. Agana, et al., 63 SCRA 358, wherein the Court declared, "that the rights of third party claimants over certain properties levied upon by the sheriff to satisfy the judgment, may not be taken up in the case where such claims are presented but in a separate and independent action instituted by claimants. ... and should a third-party appear to claim is denied, the remedy contemplated by the rules in the filing by said party of a reinvicatiry action against the execution creditor or the purchaser of the property after the sale is completed or that a complaint for damages to be charged against the bond filed by the creditor in favor of the sheriff. ... Thus, when a property levied upon by the sheriff pursuant to a writ of execution is claimed by a third person in a sworn statement of ownership thereof, as prescribed by the rules, an entirely different matter calling for a new adjudication arises."

The items in question were illegally levied upon since they do not belong to the judgemnt debtor. The power of the Court in execution of judgment extends only to properties unquestionably belonging to the judgment debtor. The fact that Capitol failed to pay Jalwindor the purchase price of the items levied upon did not prevent the transfer of ownership to Capitol. The complaint of Sampaguita to nullify the Sheriff's sale well-founded, and should prosper. Execution sales affect the rights of judgment debtor only, and the purchaser in the auction sale acquires only the right as the debtor has at the time of sale. Since the items already belong to Sampaguita and not to Capitol, the judgment debtor, the levy and auction sale are, accordingly, null and void. It is well-settled in this jurisdiction that the sheriff is not authorized to attach property not belonging to the judgment debtor. (Arabay, Inc. vs. Salvador, et al., 3 PHILAJUR, 413 [1978], Herald Publishing vs. Ramos, 88 Phil. 94, 100).

WHEREFORE, the decision appealed from is hereby reversed, and plaintiff-appellant Sampaguita is declared the lawful owner of the disputed glass and wooden jalousies. Defendant-appellee Jalwindor is permanently enjoined from detaching said items from the roofdeck of the Sampaguita Pictures Building, and is also ordered to pay plaintiff-appellant the sum of P1,000.00 for and as attorney's fees, and costs.

41

SO ORDERED.

[G.R. No. 151212. September 10, 2003]

TEN FORTY REALTY AND DEVELOPMENT CORP., Represented by its President, VERONICA G. LORENZANA, petitioner, vs. MARINA CRUZ,respondent.

D E C I S I O N

PANGANIBAN, J.:

In an ejectment suit, the question of ownership may be provisionally ruled upon for the sole purpose of determining who is entitled to possession de facto. In the present case, both parties base their alleged right to possess on their right to own. Hence, the Court of Appeals did not err in passing upon the question of ownership to be able to decide who was entitled to physical possession of the disputed land.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the August 31, 2001 Decision[2] and December 19, 2001 Resolution[3] of the Court of Appeals (CA) in CA- GR SP No. 64861. The dispositive portion of the assailed Decision is as follows:

“WHEREFORE, premises considered, the petition is hereby DISMISSED and the Decision dated May 4, 2001 is hereby AFFIRMED.”[4]

The assailed Resolution denied petitioner's Motion for Reconsideration.

The Facts

The facts of the case are narrated by the CA as follows:

“A complaint for ejectment was filed by [Petitioner Ten Forty Realty and Development Corporation] against x x x [Respondent Marina Cruz] before the Municipal Trial Court in Cities (MTCC) of Olongapo City, docketed as Civil Case 4269, which alleged that: petitioner is the true and absolute owner of a parcel of lot and residential house situated in #71 18th Street, E.B.B. Olongapo City, particularly described as:

http://sc.judiciary.gov.ph/jurisprudence/2003/sep2003/151212.htm#_ftn4




42

‘A parcel of residential house and lot situated in the above-mentioned address containing an area of 324 square meters more or less bounded on the Northeast by 041 (Lot 255, Ts-308); on the Southeast by 044 (Lot 255, Ts-308); on the Southwest by 043 (Lot 226-A & 18th street) and on the Northwest by 045 (Lot 227, Ts-308) and declared for taxation purposes in the name of [petitioner] under T.D. No. 002-4595-R and 002-4596.’

having acquired the same on December 5, 1996 from Barbara Galino by virtue of a Deed of Absolute Sale; the sale was acknowledged by said Barbara Galino through a 'Katunayan'; payment of the capital gains tax for the transfer of the property was evidenced by a Certification Authorizing Registration issued by the Bureau of Internal Revenue; petitioner came to know that Barbara Galino sold the same property on April 24, 1998 to Cruz, who immediately occupied the property and which occupation was merely tolerated by petitioner; on October 16, 1998, a complaint for ejectment was filed with the Barangay East Bajac-Bajac, Olongapo City but for failure to arrive at an amicable settlement, a Certificate to File Action was issued; on April 12, 1999 a demand letter was sent to [respondent] to vacate and pay reasonable amount for the use and occupation of the same, but was ignored by the latter; and due to the refusal of [respondent] to vacate the premises, petitioner was constrained to secure the services of a counsel for an agreed fee of P5,000.00 as attorney’s fee andP500.00 as appearance fee and incurred an expense of P5,000.00 for litigation.

“In respondent’s Answer with Counterclaim, it was alleged that: petitioner is not qualified to own the residential lot in dispute, being a public land; according to Barbara Galino, she did not sell her house and lot to petitioner but merely obtained a loan from Veronica Lorenzana; the payment of the capital gains tax does not necessarily show that the Deed of Absolute Sale was at that time already in existence; the court has no jurisdiction over the subject matter because the complaint was filed beyond the one (1) year period after the alleged unlawful deprivation of possession; there is no allegation that petitioner had been in prior possession of the premises and the same was lost thru force, stealth or violence; evidence will show that it was Barbara Galino who was in possession at the time of the sale and vacated the property in favor of respondent; never was there an occasion when petitioner occupied a portion of the premises, before respondent occupied the lot in April 1998, she caused the cancellation of the tax declaration in the name of Barbara Galino and a new one issued in respondent’s name; petitioner obtained its tax declaration over the same property on November 3, 1998, seven (7) months [after] the respondent [obtained hers]; at the time the house and lot [were] bought by respondent, the house was not habitable, the power and water connections were disconnected; being a public land, respondent filed a miscellaneous sales application with the Community Environment and Natural Resources Office in Olongapo City; and the action for ejectment cannot succeed where it appears that respondent had been in possession of the property prior to the petitioner.”[5]

In a Decision[6] dated October 30, 2000, the Municipal Trial Court in Cities (MTCC) ordered respondent to vacate the property and surrender to petitioner possession thereof. It also directed her to pay, as damages for its continued unlawful use, P500 a month from April 24, 1999 until the property was vacated, P5,000 as attorney’s fees, and the costs of the suit.

On appeal, the Regional Trial Court[7] (RTC) of Olongapo City (Branch 72) reversed the MTCC. The RTC ruled as follows: 1) respondent’s entry into the property was not by mere tolerance of petitioner, but by virtue of a Waiver and Transfer of Possessory Rights and Deed of Sale in her favor; 2) the execution of the Deed of Sale without actual transfer of the physical possession did not have the effect of making petitioner the owner of the property, because there was no delivery of the object of the sale as provided for in Article 1428 of the Civil Code; and 3) being a corporation, petitioner was disqualified from acquiring the property, which was public land.

Ruling of the Court of Appeals

Sustaining the RTC, the CA held that petitioner had failed to make a case for unlawful detainer, because no contract -- express or implied -- had been entered into by the parties with regard to possession of the property. It ruled that the action should have been for forcible entry, in which prior physical possession was indispensable -- a circumstance petitioner had not shown either.

The appellate court also held that petitioner had challenged the RTC’s ruling on the question of ownership for the purpose of compensating for the latter’s failure to counter such ruling. The RTC had held that, as a corporation, petitioner had no right to acquire the property which was alienable public land.

Hence, this Petition.[8]

Issues

Petitioner submits the following issues for our consideration:

“1. The Honorable Court of Appeals had clearly erred in not holding that [r]espondent’s occupation or possession of the property in question was merely through the tolerance or permission of the herein [p]etitioner;

“[2.] The Honorable Court of Appeals had likewise erred in holding that the ejectment case should have been a forcible entry case where prior physical possession is indispensable; and

“[3.] The Honorable Court of Appeals had also erred when it ruled that the herein [r]espondent’s possession or occupation of the said property is in the nature of an exercise of ownership which should put the herein [p]etitioner on guard.”[9]

The Court’s Ruling






43

The Petition has no merit.

First Issue:Alleged Occupation by Tolerance

Petitioner faults the CA for not holding that the former merely tolerated respondent’s occupation of the subject property. By raising this issue, petitioner is in effect asking this Court to reassess factual findings. As a general rule, this kind of reassessment cannot be done through a petition for review on certiorari under Rule 45 of the Rules of Court, because this Court is not a trier of facts; it reviews only questions of law.[10] Petitioner has not given us ample reasons to depart from the general rule.

On the basis of the facts found by the CA and the RTC, we find that petitioner failed to substantiate its case for unlawful detainer. Admittedly, no express contract existed between the parties. Not shown either was the corporation’s alleged tolerance of respondent’s possession.

While possession by tolerance may initially be lawful, it ceases to be so upon the owner’s demand that the possessor by tolerance vacate the property.[11] To justify an action for unlawful detainer, the permission or tolerance must have been present at the beginning of the possession.[12] Otherwise, if the possession was unlawful from the start, an action for unlawful detainer would be an improper remedy. Sarona v. Villegas[13] elucidates thus:

“A close assessment of the law and the concept of the word ‘tolerance’ confirms our view heretofore expressed that such tolerance must be present right from the start of possession sought to be recovered, to categorize a cause of action as one of unlawful detainer not of forcible entry. Indeed, to hold otherwise would espouse a dangerous doctrine. And for two reasons. First. Forcible entry into the land is an open challenge to the right of the possessor. Violation of that right authorizes the speedy redress – in the inferior court – provided for in the rules. If one year from the forcible entry is allowed to lapse before suit is filed, then the remedy ceases to be speedy; and the possessor is deemed to have waived his right to seek relief in the inferior court. Second, if a forcible entry action in the inferior court is allowed after the lapse of a number of years, then the result may well be that no action for forcible entry can really prescribe. No matter how long such defendant is in physical possession, plaintiff will merely make a demand, bring suit in the inferior court – upon a plea of tolerance to prevent prescription to set in – and summarily throw him out of the land. Such a conclusion is unreasonable. Especially if we bear in mind the postulates that proceedings of forcible entry and unlawful detainer are summary in nature, and that the one year time bar to suit is but in pursuance of the summary nature of the action.”[14]

In this case, the Complaint and the other pleadings do not recite any averment of fact that would substantiate the claim of petitioner that it permitted or tolerated the occupation of the property by Respondent Cruz. The Complaint contains only bare allegations that 1) respondent immediately occupied the subject property after its sale to her, an action merely tolerated by petitioner;[15]and 2) her allegedly illegal occupation of the premises was by mere tolerance.[16]

These allegations contradict, rather than support, petitioner’s theory that its cause of action is for unlawful detainer. First, these arguments advance the view that respondent’s occupation of the property was unlawful at its inception. Second, they counter the essential requirement in unlawful detainer cases that petitioner’s supposed act of sufferance or tolerance must be present right from the start of a possession that is later sought to be recovered.[17]

As the bare allegation of petitioner’s tolerance of respondent’s occupation of the premises has not been proven, the possession should be deemed illegal from the beginning. Thus, the CA correctly ruled that the ejectment case should have been for forcible entry -- an action that had already prescribed, however, when the Complaint was filed on May 12, 1999. The prescriptive period of one year for forcible entry cases is reckoned from the date of respondent’s actual entry into the land, which in this case was on April 24, 1998.

Second Issue:Nature of the Case

Much of the difficulty in the present controversy stems from the legal characterization of the ejectment Complaint filed by petitioner. Specifically, was it for unlawful detainer or for forcible entry?

The answer is given in Section 1 of Rule 70 of the Rules of Court, which we reproduce as follows:

“SECTION 1. Who may institute proceedings, and when. - Subject to the provisions of the next succeeding section, a person deprived of the possession of any land or building by force, intimidation, threat, strategy, or stealth, or a lessor, vendor, vendee, or other person against whom the possession of any land or building is unlawfully withheld after the expiration or termination of the right to hold possession, by virtue of any contract, express or implied, or the legal representatives or assigns of any such lessor, vendor, vendee, or other person, may, at any time within one (1) year after such unlawful deprivation or withholding of possession, bring an action in the proper Municipal Trial Court against the person or persons unlawfully withholding or depriving of possession, or any person or persons claiming under them, for the restitution of such possession, together with damages and costs.”

While both causes of action deal only with the sole issue of physical or de facto possession,[18] the two cases are really separate and distinct, as explained below:

“x x x. In forcible entry, one is deprived of physical possession of land or building by means of force, intimidation, threat, strategy, or stealth. In unlawful detainer, one unlawfully withholds possession thereof after the expiration or termination of his right to hold possession under any contract, express or implied. In forcible entry, the possession is illegal from the beginning and the basic inquiry










44

centers on who has the prior possession de facto. In unlawful detainer, the possession was originally lawful but became unlawful by the expiration or termination of the right to possess, hence the issue of rightful possession is decisive for, in such action, the defendant is in actual possession and the plaintiff’s cause of action is the termination of the defendant’s right to continue in possession.

“What determines the cause of action is the nature of defendant’s entry into the land. If the entry is illegal, then the action which may be filed against the intruder within one year therefrom is forcible entry. If, on the other hand, the entry is legal but the possession thereafter became illegal, the case is one of unlawful detainer which must be filed within one year from the date of the last demand.”[19]

It is axiomatic that what determines the nature of an action as well as which court has jurisdiction over it are the allegations in the complaint[20] and the character of the relief sought.[21]

In its Complaint, petitioner alleged that, having acquired the subject property from Barbara Galino on December 5, 1996, [22] it was the true and absolute owner[23] thereof; that Galino had sold the property to Respondent Cruz on April 24, 1998; [24] that after the sale, the latter immediately occupied the property, an action that was merely tolerated by petitioner; [25] and that, in a letter given to respondent on April 12, 1999,[26] petitioner had demanded that the former vacate the property, but that she refused to do so.[27] Petitioner thereupon prayed for judgment ordering her to vacate the property and to pay reasonable rentals for the use of the premises, attorney’s fees and the costs of the suit.[28]

The above allegations appeared to show the elements of unlawful detainer. They also conferred initiatory jurisdiction on the MTCC, because the case was filed a month after the last demand to vacate -- hence, within the one-year prescriptive period.

However, what was actually proven by petitioner was that possession by respondent had been illegal from the beginning. While the Complaint was crafted to be an unlawful detainer suit, petitioner’s real cause of action was for forcible entry, which had already prescribed. Consequently, the MTCC had no more jurisdiction over the action.

The appellate court, therefore, did not err when it ruled that petitioner’s Complaint for unlawful detainer was a mere subterfuge or a disguised substitute action for forcible entry, which had already prescribed. To repeat, to maintain a viable action for forcible entry, plaintiff must have been in prior physical possession of the property; this is an essential element of the suit.[29]

Third Issue:Alleged Acts of Ownership

Petitioner next questions the CA’s pronouncement that respondent’s occupation of the property was an exercise of a right flowing from a claim of ownership. It submits that the appellate court should not have passed upon the issue of ownership, because the only question for resolution in an ejectment suit is that of possession de facto.

Clearly, each of the parties claimed the right to possess the disputed property because of alleged ownership of it. Hence, no error could have been imputed to the appellate court when it passed upon the issue of ownership only for the purpose of resolving the issue of possession de facto.[30] The CA’s holding is moreover in accord with jurisprudence and the law.

Execution of a Deed of SaleNot Sufficient as Delivery

In a contract of sale, the buyer acquires the thing sold only upon its delivery “in any of the ways specified in Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee.” [31] With respect to incorporeal property, Article 1498 lays down the general rule: the execution of a public instrument shall be equivalent to the delivery of the thing that is the object of the contract if, from the deed, the contrary does not appear or cannot be clearly inferred.

However, ownership is transferred not by contract but by tradition or delivery. [32] Nowhere in the Civil Code is it provided that the execution of a Deed of Sale is a conclusive presumption of delivery of possession of a piece of real estate.[33]

This Court has held that the execution of a public instrument gives rise only to a prima facie presumption of delivery. Such presumption is destroyed when the delivery is not effected because of a legal impediment. [34] Pasagui v. Villablanca[35] had earlier ruled that such constructive or symbolic delivery, being merely presumptive, was deemed negated by the failure of the vendee to take actual possession of the land sold.

It is undisputed that petitioner did not occupy the property from the time it was allegedly sold to it on December 5, 1996 or at any time thereafter. Nonetheless, it maintains that Galino’s continued stay in the premises from the time of the sale up to the time respondent’s occupation of the same on April 24, 1998, was possession held on its behalf and had the effect of delivery under the law.[36]

Both the RTC and the CA disagreed. According to the RTC, petitioner did not gain control and possession of the property, because Galino had continued to exercise ownership rights over the realty. That is, she had remained in possession, continued to declare it as her property for tax purposes and sold it to respondent in 1998.

For its part, the CA found it highly unbelievable that petitioner -- which claims to be the owner of the disputed property -- would tolerate possession of the property by respondent from April 24, 1998 up to October 16, 1998. How could it have been so tolerant despite its knowledge that the property had been sold to her, and that it was by virtue of that sale that she had undertaken major repairs and improvements on it?



















45

Petitioner should have likewise been put on guard by respondent’s declaration of the property for tax purposes on April 23, 1998,[37] as annotated in the tax certificate filed seven months later.[38] Verily, the tax declaration represented an adverse claim over the unregistered property and was inimical to the right of petitioner.

Indeed, the above circumstances derogated its claim of control and possession of the property.

Order of Preference in DoubleSale of Immovable Property

The ownership of immovable property sold to two different buyers at different times is governed by Article 1544 of the Civil Code, which reads as follows:

“Article 1544. x x x

“Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property.

“Should there be no inscription, the ownership shall pertain to the person who in good faith was first in possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith.”

Galino allegedly sold the property in question to petitioner on December 5, 1996 and, subsequently, to respondent on April 24, 1998. Petitioner thus argues that being the first buyer, it has a better right to own the realty. However, it has not been able to establish that its Deed of Sale was recorded in the Registry of Deeds of Olongapo City.[39] Its claim of an unattested and unverified notation on its Deed of Absolute Sale[40] is not equivalent to registration. It admits that, indeed, the sale has not been recorded in the Registry of Deeds.[41]

In the absence of the required inscription, the law gives preferential right to the buyer who in good faith is first in possession. In determining the question of who is first in possession, certain basic parameters have been established by jurisprudence.

First, the possession mentioned in Article 1544 includes not only material but also symbolic possession. [42] Second, possessors in good faith are those who are not aware of any flaw in their title or mode of acquisition. [43] Third, buyers of real property that is in the possession of persons other than the seller must be wary -- they must investigate the rights of the possessors. [44] Fourth, good faith is always presumed; upon those who allege bad faith on the part of the possessors rests the burden of proof.[45]

Earlier, we ruled that the subject property had not been delivered to petitioner; hence, it did not acquire possession either materially or symbolically. As between the two buyers, therefore, respondent was first in actual possession of the property.

Petitioner has not proven that respondent was aware that her mode of acquiring the property was defective at the time she acquired it from Galino. At the time, the property -- which was public land -- had not been registered in the name of Galino; thus, respondent relied on the tax declarations thereon. As shown, the former’s name appeared on the tax declarations for the property until its sale to the latter in 1998. Galino was in fact occupying the realty when respondent took over possession. Thus, there was no circumstance that could have placed the latter upon inquiry or required her to further investigate petitioner’s right of ownership.

Disqualification from Ownershipof Alienable Public Land

Private corporations are disqualified from acquiring lands of the public domain, as provided under Section 3 of Article XII of the Constitution, which we quote:

“Sec. 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and national parks. Agricultural lands of the public domain may be further classified by law according to the uses to which they may be devoted. Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or associations may not hold such alienable lands of the public domain except by lease, for a period not exceeding twenty-five years, and not to exceed one thousand hectares in area. Citizens of the Philippines may not lease not more than five hundred hectares, or acquire not more than twelve hectares thereof by purchase, homestead, or grant. x x x.” (Italics supplied)

While corporations cannot acquire land of the public domain, they can however acquire private land. [46] Hence, the next issue that needs to be resolved is the determination of whether the disputed property is private land or of the public domain.

According to the certification by the City Planning and Development Office of Olongapo City, the contested property in this case is alienable and disposable public land.[47] It was for this reason that respondent filed a miscellaneous sales application to acquire it.[48]

On the other hand, petitioner has not presented proof that, at the time it purchased the property from Galino, the property had ceased to be of the public domain and was already private land. The established rule is that alienable and disposable land of the public domain held and occupied by a possessor -- personally or through predecessors-in-interest, openly, continuously, and exclusively for 30 years -- is ipso jure converted to private property by the mere lapse of time.[49]














46

In view of the foregoing, we affirm the appellate court’s ruling that respondent is entitled to possession de facto. This determination, however, is only provisional in nature.[50] Well-settled is the rule that an award of possession de facto over a piece of property does not constitute res judicata as to the issue of its ownership.[51]

WHEREFORE, this Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.



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