[G.R. No. 44471. September 26, 1938.

]
H. E. HEACOCK COMPANY, plaintiff-appellee, vs. BUNTAL MANUFACTURING
COMPANY, GREGORIO NIEVA, and MARIA A. DE NIEVA, defendants-appellants.
Crispin Oben, for appellants.
Eulalio Chavez, for appellee.
SYLLABUS
1.
CONTRACTS; LEASE OR PURCHASE AND SALE OF PERSONALTY ON
INSTALLMENTS; TRUE INTENTION OF THE PARTIES. The fact that the price of
the machine was fixed in the contract makes the latter not a lease but a purchase and sale
because in contracts of lease, as distinguished from those of purchase and sale, it is plain
redundancy to fix or make any mention of the price of the thing given in lease (articles
1445, 1543, Civil Code). When the terms of a contract are not clear or conflict with each
other, as those appearing in Exhibit A, effect must be given to the intention of the parties
(article 1281, Civil Code); and the intention of plaintiff and defendants in this case as we
gather it from Exhibit A is that the contract entered into between them is one of purchase
and sale on installments and not a lease.
2.
ID.; ID.; RESCISSION OF CONTRACT. The act of plaintiff in requiring, as it
did, the return of the machine in question, receiving and accepting the same thereafter
from defendants when the latter voluntarily returned it, shows that plaintiff not only
consented to, but desired the rescission of the contract it had entered into with defendants,
specially when it is taken into consideration that it thus expressed itself in its original
complaint wherein it prayed not for the return of the machine and payment of supposed
rents due at the same time, but only for one of these things.
3.
ID.; ID.; ID.; OPTION OF VENDOR. Upon taking the machine under such
circumstances plaintiff performed a positive act indicating its intention to rescind the
contract, and having done so and retained what defendants had up to then paid to it,
amounting to P305 without any objection on their part, it can not and must not have any
right to anything more. Its right was reduced to demanding compliance with the terms of
Exhibit A as contract of purchase and sale or to rescind of Exhibit A as contract of
purchase and sale or to rescind the same, and it chose the latter alternative and to retain
the aforesaid sum of P305 (articles 1506 and 1124, Civil Code).
4.
COMPLAINT; AMENDMENT OF PRAYER. There was no error in the act of
the lower court granting leave to plaintiff to amend its complaint, which may be
considered prejudicial to defendants. No attempt was made to amend an essential part of
the complaint, but only a part of its prayer for relief; and it is known that the prayer is not
the complaint itself nor is it a part of the allegations which state the cause or causes of
action submitted to the consideration of the court for its resolution. (Aguilar vs. Rubiato
and Gonzalez Villa, 40 Phil., 570; Campomanes vs. Bartolome and Germann & Co., 38
Phil., 808; Rosales vs. Reyes and Ordoveza, 25 Phil., 495.) Moreover, the amendment
was made substantially in accordance with the provisions of sections 109 and 110 of Act
No. 190.
DECISION
DIAZ, J p:
The main, if not the sole, question raised by the appeal taken by the defendants from the
judgment of the lower court is the following:

Is the document Exhibit A which plaintiff and the first two defendants executed on May
12, 1931 a contract for the lease of an adding and calculating machine therein described,
with option to purchase by defendants; or is it, on the contrary, a contract of purchase and
sale on installments in which said defendants were vendees and plaintiff, vendor?
The lower court held that it was one of lease and thereafter decided that since defendants
failed to pay plaintiff the rents which they had bound themselves to pay it, at the rate of
P35 a month from August, 1931, and which then amounted to P555, they should deliver
to plaintiff the aforesaid sum with costs. This it resolved notwithstanding that it had been
shown at the trial that upon plaintiff's demand in its complaint for preliminary
attachment, defendants had to return to it the said machine which it accepted to its
satisfaction, without the necessity of making use of the writ of attachment. Said acts of
defendants constituted compliance with the prayer in plaintiff's complaint that one of
these things, and not both at the same time, be done: "The delivery of said personal
property, and if delivery cannot be affected then judgment for the rents in arrears."
Defendants chose to make delivery so as to dispose of the question in this manner.
Defendants maintain that in deciding the case in the way it had done, the lower court
erred in the following respects:
I.
In granting plaintiff's petition that it be allowed to file an amended complaint after
defendants had been declared in default with respect to the original complaint.
II.
In granting plaintiff the two alternative remedies for which it had prayed in its
original complaint upon its asking for both in the amended complaint.
III.
In not holding that the contract entered into between the parties was one of
purchase and sale on installments and that once the same was rescinded by plaintiff upon
its taking the machine which is the subject matter thereof, if lost all right to recover from
the balance of its price.
1.
Two hearings were held in the case: The first took place in the absence and
default of defendants, and the second after the original complaint had been amended and
the answer of defendants filed. Upon the objection of the latter's attorney, who appeared
in the first trial, upon the ground that the plaintiff could have no other relief than the
confirmation of its possession of the machine in question after it had taken and received
the same from defendants for the reason that the prayer for relief in the complaint did not
ask for more than "the delivery of said personal property" (referring to the machine in
question), or for "judgment for the rents in arrears," "If delivery cannot be effected then,"
plaintiff decided to ask for, which it did and obtained, leave from the lower court to
amend its complaint in the sense of eliminating from the prayer thereof the phrase "if
delivery cannot be effected then." This it did, no doubt, so as to be able to secure two
things at the same time: The return of its machine and the amount it claimed as rents.
After amendment of the complaint a second hearing was held in which the lower court
rendered the judgment appealed from. We find no error in the act of the lower court
granting leave to plaintiff to amend its complaint, which error may be considered
prejudicial to defendants. There was no attempt to amend an essential part of the
complaint, but only a part of its prayer for relief; and it is known that the prayer for relief
is not the complaint itself nor is it a part of the allegations which state the cause or causes
of action submitted to the consideration of the court for its resolution. (Aguilar vs.
Rubiato and Gonzalez Villa, 40 Phil., 570; Campomanes vs. Bartolome and Germann &
Co., 38 Phil., 808; Rosales vs. Reyes and Ordoveza, 25 Phil., 495.) Moreover, the

amendment was made substantially in accordance with the provisions of sections 109 and
110 of Act No. 190. The first error attributed to the lower court, is therefore, without
merit.
2.
The determination of the other errors alleged to have been committed by the
lower court depends upon our consideration of the nature of the contract Exhibit A and
upon the conclusion which we may reach with respect thereto. If it is a lease, then said
errors can not exist.
Among the clauses appearing that it is not really a contract there are several showing that
it is not really a contract of lease but of purchase and sale on installments. Said clauses
are the following:
"That the owner hereby leases unto the hirer
and the hirer hereby hires from the owner one
Dalton adding, calculating and posting machine,
Multiplex Model 490-180 Serial No. 4-103493
P860.00.
"To credit one Dalton adding machine S. H. Serial No.
116182 for P110 and by cash P50, Initial payment 160.00

"Balance due 700.00

which the hirer acknowledges having received in good state and condition, for the term of
20 calendar months from the date hereof at the rental of P35 per calendar month, and . . .
calendar months at the rental . . . subject to the following terms and conditions:
"1.
The hirer agrees with the owner as follows:
"(a) To pay the owner at its office at 122 Escolta, the said hire monthly on the 12th
day of every month within the three days thereafter.
"6.
In consideration of the sum of P160 to it in hand paid by the hirer, the owner
hereby grants to the hirer the option to purchase, while the present lease is in force and
effect, the property made the subject of this agreement, at the purchase price of P860. In
the event of the exercise of said option, the hirer shall be entitled to a credit on the
purchase price for an amount equal to the rentals actually paid hereunder and the payment
made under this paragraph; it being expressly understood and agreed, however, that the
said chattel shall remain the property of the owner until after the complete exercise of
such option, and the payment in full of the purchase price agreed upon, and, until such
time the hirer shall not have any property right in said chattel or be deemed to have
purchased or obligated to purchase the same. Should the hirer not exercise the option
herein granted, the amount paid by him for said option under this paragraph shall become
forfeited to the owner."
In the first clause above-quoted it appears that defendants paid the amount of P160 on
account of the price of the machine which was fixed at P860. It is therein stated that said
amount was delivered to plaintiff as "initial payment." It was for this reason that upon the
signing of the contract care was taken to express therein that the balance which
defendants were bound to pay to plaintiff for the machine was only P700. So as to
facilitate the payment of this amount by defendants, it was agreed between them and
plaintiff that the former would complete the same in twenty monthly installments of P35.
Dividing P700 by 20, the resulting amount is exactly P35.

It is true that in the contract it is often stated that plaintiff leased the machine to
defendants, giving them the option to buy it upon their paying it the sum of P860 and
crediting them with so much as they might be able to pay as rents at the above rate of P35
a month. It should be noted, however, that in the clause aforementioned, it is clearly
stated that defendant paid the sum of P160 on account of the price of the machine. This
payment shows that the real contract between the parties was that of purchase and sale on
installments and not a lease. In spite of any effort to prove the contrary, the aforesaid
amount of P160 can not be understood to constitute payment in advance of the rents
agreed upon for there is nothing in the contract to indicate that it was and because,
according to the contract itself, the rents could not be more nor less than P35 a month,
payable monthly. Following the theory of plaintiff and in accordance with the sound
principles of accounting, the amount of P160 can not be considered as payment of rents
in advance; otherwise we would reach the conclusion that defendants, without being
bound to do so and in violation of the terms of the contract, paid plaintiff rents not
monthly but from day to day inasmuch as said sum corresponds to four months and
twenty days. Furthermore, it must be borne in mind that the mention in the aforesaid
contract of the fact that the sum of P160 constituted an "initial payment" on account of
the price of the machine in question can have no other effect than to contradict and
nullify that stated in clause 6, which is one of those above-quoted, to the effect that the
same is the consideration by virtue of which plaintiff granted defendants the option to
buy the machine. Defendants did not have to pay anything for the option for the reason
that they made the payment of P160 to buy the machine on installments, binding
themselves to pay the balance by delivering to plaintiff the sum of P35 a month. It should
be stated, moreover, that the fact that the price of the machine was fixed in the contract
makes the latter not a lease but a purchase and sale because in contracts of lease, as
distinguished from those of purchase and sale, it is plain redundancy to fix or make any
mention of the price of the thing given in lease (articles 1445, 1543, Civil Code). When
the terms of a contract are not clear or conflict with each other, as those appearing in
Exhibit A, effect must be given to the intention of the parties (article 1281, Civil Code);
and the intention of plaintiff and defendants in this case as we gather it from Exhibit A,
considered in connection with all its terms and clauses, is that the contract entered into
between them is one of purchase and sale on installments and not a lease.
Accordingly, the act of plaintiff in requiring, as it did, the return of the machine in
question, receiving and accepting the same thereafter from defendants when the latter
voluntarily returned it, shows that plaintiff not only consented to, but desired the
rescission of the contract it had entered with defendants, specially when it is taken into
consideration that it thus expressed itself in its original complaint wherein it prayed not
for the return of the machine and payment of supposed rents due at the same time, but
only for one of these things. Upon taking the machine under such circumstances plaintiff
performed a positive act indicating its intention to rescind the contract, and having done
so and retained what defendants had up to then paid to it, amounting to P305 without any
objection on their part, it can not and must not have any right to anything more. Its right
was reduced to demanding compliance with the terms of Exhibit A as contract of
purchase and sale or to rescind the same, and it chose the latter alternative and to retain
the aforesaid sum of P305 (articles 1506 and 1124, Civil Code).

In conclusion we hold that the contract Exhibit A is that of purchase and sale on
installments; that said contracts was rescinded without objection on the part of
defendants; and that the appeal of the latter is well taken.
Wherefore, declaring Exhibit A rescinded, the judgment appealed from is reversed,
absolving defendants from the complaint and sentencing plaintiff to pay the costs in both
instances. So ordered.
Avancea, C.J., Villa-Real, Abad Santos, Imperial, Laurel and Concepcion, JJ., concur.
[G.R. No. 11491. August 23, 1918.]
ANDRES QUIROGA, plaintiff-appellant, vs. PARSONS HARDWARE CO., defendantappellee.
Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza, for appellant.
Crossfield & O'Brien, for appellee.
SYLLABUS
1.
SALES; INTERPRETATION OF CONTRACT. For the classification of
contracts, due regard must be paid to their essential clauses. In the contract in the instant
case, what was essential, constituting its cause and subject matter, was that the plaintiff
was to furnish the defendant with the beds which the latter might order, at the stipulated
price, and that the defendant was to pay this price in the manner agreed upon. These are
precisely the essential features of a contract of purchase and sale. There was the
obligation on the part of the plaintiff to supply the beds, and, on that of the defendant, to
pay their price. These features exclude the legal conception of an agency or older to sell
whereby the mandatary or agent receives 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, Held: That this contract is
one of purchase and sale, and not of commercial agency.
2.
ID., ID. The testimony of the person who drafted this contract, to the effect
that his purpose was to be an agent for the beds and to collect a commission on the sales,
is of no importance to prove that the contract was one of agency, inasmuch as the
agreements contained in the contract constitute, according to law, covenants of purchase
and sale, and not of commercial agency. 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.
3.
ID.; ID. The fact that the contracting parties did not perform the contract in
accordance with its terms, only shows mutual tolerance and gives no right to have the
contract considered, not as the parties stipulated it, but as they performed it.
4.
ID.; ID. Only the acts of the contracting parties, subsequent to and in
connection with, the performance of the contract must be considered in the interpretation
of 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
5.
ID.; ID. The defendant obligated itself to order the beds from the plaintiff by
the dozen. Held: That the effect of a breach of this clause by the defendant would only
entitle the plaintiff to disregard the orders which the defendant might place under other
conditions, but if the plaintiff consents to fill them, he waives his right and cannot
complain for having acted thus at his own free will.

DECISION
AVANCEA, J p:
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 an allowance of a discount of 25 per cent of the
invoiced prices, as commission on the sales; 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 within the Visayan
group.
"ART. 3.
Mr. Parsons may sell, or establish branches of his agency for the sale of
'Quiroga' beds in all the towns of the Archipelago where there are no exclusive agents,
and shall immediately report such action to Mr. Quiroga for his approval.
"ART. 4.
This contract is made for an unlimited period, and may be terminated by
either of the contracting parties on a previous notice of ninety days to the other party "
Of the three causes of action alleged by the plaintiff in his complaint, only two of them
constitute the subject matter of this appeal and both substantially amount to the averment
that the defendant violated the following obligations: not to sell the beds at higher prices

than those of the invoices; to have an open establishment in Iloilo; itself to conduct the
agency; to keep the beds on public exhibition, and to pay for the advertisement expenses
for the same; and to order the beds by the dozen and in no other manner. As may be seen,
with the exception of the obligation on the part of the defendant to order the beds by the
dozen and in no other manner, none of the obligations imputed to the defendant in the
two causes of action are expressly set forth in the contract. But the plaintiff alleged that
the defendant was his agent for the sale of his beds in Iloilo, and that said obligations are
implied in a contract of commercial agency. The whole question, therefore, reduces itself
to a determination as to whether the defendant, by reason of the contract hereinbefore
transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds.
In order to classify a contract, due regard must be given to its essential clauses. In the
contract in question, what was essential, as constituting its cause and subject matter, is
that the plaintiff was to furnish the defendant with the beds which the latter might order,
at the price stipulated) and that the defendant was to pay the price in the manner
stipulated. The price agreed upon was the one determined by the plaintiff for the sale of
these beds in Manila, with a discount of from 20 to 25 per cent, according to their class.
Payment was to be made at the end of sixty days, or before, at the plaintiff's request, or in
cash, if the defendant so preferred, and in these last two cases an additional discount was
to be allowed for prompt payment. These are precisely the essential features of a contract
of purchase and sale. There was the obligation on the part of the plaintiff to supply the
beds, and, on the part of the defendant, to pay their price. These features exclude the legal
conception of an agency or order to sell whereby the mandatory or agent received the
thing to sell it, and does not pay its price, but delivers to the principal the price he obtains
from the sale of the thing to a third person, and if he does not succeed in selling it, he
returns it. By virtue of the contract between the plaintiff and the defendant, the latter, on
receiving the beds, was necessarily obliged to pay their price within the term fixed,
without any other consideration and regardless as to whether he had or had not sold the
beds.
It would be enough to hold, as we do, that the contract by and between the defendant and
the plaintiff is one of purchase and sale, in order to show that it was not one made on the
basis of a commission on sales, as the plaintiff claims it was, for these contracts are
incompatible with each other. But, besides, examining the clauses of this contract, none
of them is found that substantially supports the plaintiff's contention. Not a single one of
these clauses necessarily conveys the idea of an agency. The words commission on sales
used in clause (A) of article 1 mean nothing else, as stated in the contract itself, than a
mere discount on the invoice price. The word agency, also used in articles 2 and 3, only
expresses that the defendant was the only one that could sell the plaintiff's beds in the
Visayan Islands. With regard to the remaining clauses, the least that can be said is that
they are not incompatible with the contract of purchase and sale.
The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of
the defendant corporation and who established and managed the latter's business in Iloilo.
It appears that this witness, prior to the time of his testimony, had serious trouble with the
defendant, had maintained a civil suit against it, and had even accused one of its partners,
Guillermo Parsons, of falsification. He testified that it was he who drafted the contract
Exhibit A, and when questioned as to what was his purpose in contracting with the
plaintiff, replied that it was to be an agent for his beds and to collect a commission on

sales. However, according to the defendant's evidence, it was Mariano Lopez Santos, a
director of the corporation, who prepared Exhibit A. But, even supposing that Ernesto
Vidal has stated the truth, his statement as to what was his idea in contracting with the
plaintiff is of no importance, inasmuch as the agreements contained in Exhibit A which
he claims to have drafted, constitute, as we have said, a contract of purchase and sale, and
not one of commercial agency. This only means that Ernesto Vidal was mistaken in his
classification of the contract. But it must be understood that a contract is what the law
defines it to be, and not what it is called by the contracting parties.
The plaintiff also endeavored to prove that the defendant had returned beds that it could
not sell; that, without previous notice, it forwarded to the defendant the beds that it
wanted; and that the defendant received its commission for the beds sold by the plaintiff
directly to persons in Iloilo. But all this, at the most only shows that, on the part of both
of them, there was mutual tolerance in the performance of the contract in disregard of its
terms; and it gives no right to have the contract considered, not as the parties stipulated it,
but as they performed it. Only the acts of the contracting parties, subsequent to, and in
connection with, the execution of the contract, must be considered for the purpose
interpreting the contract, when such interpretation is necessary, but not when, as in the
instant case, its essential agreements are clearly set forth and plainly show that the
contract belongs to a certain kind and not to another. Furthermore, the return made was of
certain brass beds, and was not effected in exchange for the price paid for them, but was
for other beds of another kind; and for the purpose of making this return, the defendant,
in its letter Exhibit L-1, requested the plaintiff's prior consent with respect to said beds,
which shows that it was not considered that the defendant had a right, by virtue of the
contract, to make this return. As regards the shipment of beds without previous notice, it
is insinuated in the record that these brass beds were precisely the ones so shipped, and
that, for this very reason, the plaintiff agreed to their return. And with respect to the socalled commissions, we have said that they merely constituted a discount on the invoice
price, and the reason for applying this benefit to the beds sold directly by the plaintiff to
persons in Iloilo was because, as the defendant obligated itself in the contract to incur the
expenses of advertisement of the plaintiff's beds, such sales were to be considered as a
result of that advertisement.
In respect to the defendant's obligation to order by the dozen, the only one expressly
imposed by the contract, the effect of its breach would only entitle the plaintiff to
disregard the orders which the defendant might place under other conditions; but if the
plaintiff consents to fill them, he waives his right and cannot complain for having acted
thus at his own free will.
For the foregoing reasons, we are of opinion that the contract by and between the plaintiff
and the defendant was one of purchase and sale, and that the obligations the breach of
which is alleged as a cause of action are not imposed upon the defendant, either by
agreement or by law. The judgment appealed from is affirmed, with costs against the
appellant. So ordered.
Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.
KER & CO., LTD., petitioner, vs. JOSE B. LINGAD, as Acting Commissioner of
Internal Revenue, respondent.

Ross, Selph & Carrascoso for petitioner.

Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Atty.
Balbino Gatdula, Jr. for respondent.
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; COMMERCIAL
BROKER, DEFINED; TEST FOLLOWED IN DETERMINING WHO FALLS WITHIN
THE DEFINITION. According to the National Internal Revenue Code a commercial
broker "includes all persons, other than importers, manufacturers, producers, or bona fide
employees, who, for compensation or profit, sell or bring about sales or purchases of
merchandise for other persons or bring proposed buyers and sellers together, or negotiate
freights or other business for owners of vessels or other means of transportation, or for
the shippers, or consignors or consignees of freight carried by vessels or other means of
transportation. The term includes commission merchants [Section 194(t)]." The
controlling decision as to the test to be followed as to who falls within the above
definition of a commercial broker is that of Commissioner of Internal Revenue v.
Constantino L-25926, February 27, 1970, 31 SCRA 779. In the language of Justice J.B.L.
Reyes, who penned the opinion: "Since the company retained ownership of the goods,
even as it delivered possession unto the dealer for resale to customers, the price and terms
of which were subject to the company's control, the relationship between the company
and the dealer is one of agency, . . ." An excerpt from Salisbury v. Brooks [94 SE 117
(1917)] cited in support of such a view follows: "'The difficulty in distinguishing between
contracts of sale and the creation of an agency to sell has led to the establishment of rules
by the application of which this difficulty may be solved. The decisions say the transfer
of title or agreement to transfer it for a price paid or promised is the essence of sale. If
such transfer puts the transferee in the attitude or position of an owner and makes him
liable to the transferor as a debtor for the agreed price, and not merely as an agent who
must account for the proceeds of a resale, the transaction is a sale; while the essence of an
agency to sell is the delivery to an agent, not as his property, but as the property of the
principal, who remains the owner and has the right to control sales, fix the price, and
terms, demand and receive the proceeds less the agent's commission upon sales made."'
2.
ID.; ID.; ID.; ID.; APPLICATION IN CASE AT BAR. The mere disclaimer in
a contract that an entity like petitioner is not "the agent or legal representative . . . for any
purpose whatsoever" does not suffice to yield the conclusion that it is an independent
merchant if the control over the goods for resale of the goods consigned is pervasive in
character. The terms of the contract, as noted, speak quite clearly. There is lacking that
degree of ambiguity sufficient to give rise to serious doubt as to what was contemplated
by the parties. A reading thereof discloses that the relationship arising therefrom was not
one of seller and purchaser. If it were thus intended, then it would not have included
covenants which in their totality would negate the concept of a firm acquiring as vendee
goods from another. Instead, the stipulations were so worded as to lead to no other
conclusion than that the control by the United States Rubber International over the goods
in question is, in the language of the Constantino opinion, "pervasive". The insistence on
a relationship opposed to that apparent from the language employed might even yield the
impression that such a mode of construction was resorted to in order that the applicability
of a taxing statute might be rendered nugatory. Certainly, such a result is to be avoided.
DECISION

FERNANDO, J p:
Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals,
holding it liable as a commercial broker under Section 194(t) of the National Internal
Revenue Code. Its plea, notwithstanding the vigorous effort of its counsel, is not
sufficiently persuasive. An obstacle, well-nigh insuperable, stands in the way. The
decision under review conforms to and is in accordance with the controlling doctrine
announced in the recent case of Commissioner of Internal Revenue v. Constantino. 1 The
decisive test, as therein set forth, is the retention of the ownership of the goods delivered
to the possession of the dealer, like herein petitioner, for resale to customers, the price
and terms remaining subject to the control of the firm consigning such goods. The facts,
as found by respondent Court, to which we defer, unmistakably indicate that such a
situation does exist. The juridical consequences must inevitably follow. We affirm.
It was shown that petitioner was assessed by the then Commissioner of Internal Revenue
Melecio R. Domingo the sum of P20,272.33 as the commercial broker's percentage tax,
surcharge, and compromise penalty for the period from July 1, 1949 to December 31,
1953. There was a request on the part of petitioner for the cancellation of such
assessment, which request was turned down. As a result, it filed a petition for review with
the Court of Tax Appeals. In its answer, the then Commissioner Domingo maintained his
stand that petitioner should be taxed in such amount as a commercial broker. In the
decision now under review, promulgated on October 19, 1962, the Court of Tax Appeals
held petitioner taxable except as to the compromise penalty of P500.00, the amount due
from it being fixed at P19,772.33.
Such liability arose from a contract of petitioner with the United States Rubber
International, the former being referred to as the Distributor and the latter specifically
designated as the Company. The contract was to apply to transactions between the former
and petitioner, as Distributor, from July 1, 1948 to continue in force until terminated by
their party giving to the other sixty days' notice. 2 The shipments would cover products
"for consumption in Cebu, Bohol, Leyte, Samar, Jolo, Negros Oriental, and Mindanao
except [the] province of Davao", petitioner, as Distributor, being precluded from
disposing such products elsewhere than in the above places unless written consent would
first be obtained from the Company. 3 Petitioner, as Distributor, is required to exert every
effort to have the shipment of the products in the maximum quantity and to promote in
every way the sale thereof. 4 The prices, discounts, terms of payment, terms of delivery
and other conditions of sale were subject to change in the discretion of the Company. 5
Then came this crucial stipulation: "The Company shall from time to time consign to the
Distributor and the Distributor will receive, accept and/or hold upon consignment the
products specified under the terms of this agreement in such quantities as in the judgment
of the Company may be necessary for the successful solicitation and maintenance of
business in the territory, and the Distributor agrees that responsibility for the final sale of
all goods delivered shall rest with him. All goods on consignment shall remain the
property of the Company until sold by the Distributor to the purchaser or purchasers, but
all sales made by the Distributor shall be in his name, in which case the sale price of all
goods sold less the discount given to the Distributor by the Company in accordance with
the provision of paragraph 13 of this agreement, whether or not such sale price shall have
been collected by the Distributor from the purchaser or purchasers, shall immediately be
paid and remitted by the Distributor to the Company. It is further agreed that this

agreement does not constitute Distributor the agent or legal representative of the
Company for any purpose whatsoever. Distributor is not granted any right or authority to
assume or to create any obligation or responsibility, express or implied, in behalf of or in
the name of the Company, or to bind the Company in any manner or thing whatsoever." 6
All specifications for the goods ordered were subject to acceptance by the Company with
petitioner, as Distributor, required to accept such goods shipped as well as to clear the
same through customs and to arrange for delivery in its warehouse in Cebu City.
Moreover, orders are to be filled in whole or in part from the stocks carried by the
Company's neighboring branches, subsidiaries or other sources of Company's brands. 7
Shipments were to be invoiced at prices to be agreed upon, with the customs duties being
paid by petitioner, as Distributor, for account of the Company. 8 Moreover, all resale
prices, lists, discounts and general terms and conditions of local resale were to be subject
to the approval of the Company and to change from time to time in its discretion. 9 The
dealer, as Distributor, is allowed a discount of ten percent on the net amount of sales of
merchandise made under such agreement. 10 On a date to be determined by the
Company, the petitioner, as Distributor, was required to report to it data showing in detail
all sales during the month immediately preceding, specifying therein the quantities, sizes
and types together with such information as may be required for accounting purposes,
with the Company rendering an invoice on sales as described to be dated as of the date of
inventory and sales report. As Distributor, petitioner had to make payment on such
invoice or invoices on due date with the Company being privileged at its option to
terminate and cancel the agreement forthwith upon the failure to comply with this
obligation. 11 The Company, at its own expense, was to keep the consigned stock fully
insured against loss or damage by fire or as a result of fire, the policy of such insurance to
be payable to it in the event of loss. Petitioner, as Distributor, assumed full responsibility
with reference to the stock and its safety at all times; and upon request of the Company at
any time, it was to render inventory of the existing stock which could be subject to
change. 12 There was furthermore this equally tell-tale covenant: "Upon the termination
or any cancellation of this agreement all goods held on consignment shall be held by the
Distributor for the account of the Company, without expense to the Company, until such
time as provision can be made by the Company for disposition." 13
The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus
created is one of vendor and vendee or of broker and principal. Not that there would have
been the slightest doubt were it not for the categorical denial in the contract that
petitioner was not constituted as "the agent or legal representative of the Company for
any purpose whatsoever." It would be, however, to impart to such an express disclaimer a
meaning it should not possess to ignore what is manifestly the role assigned to petitioner
considering the instrument as a whole. That would be to lose sight altogether of what has
been agreed upon. The Court of Tax Appeals was not misled. In the language of the
decision now on appeal: "That the petitioner Ker & Co., Ltd. is, by contractual
stipulation, an agent of U.S. Rubber International is borne out by the facts that petitioner
can dispose of the products of the Company only to certain persons or entities and within
stipulated limits, unless excepted by the contract or by the Rubber Company (Par. 2); that
it merely receives, accepts and/or holds upon consignment the products, which remain
properties of the latter company (Par. 8); that every effort shall be made by petitioner to
promote in every way the sale of the products (Par. 3); that sales made by petitioner are

subject to approval by the company (Par. 12); that on dates determined by the rubber
company, petitioner shall render a detailed report showing sales during the month (Par.
14); that the rubber company shall invoice the sales as of the dates of inventory and sales
report (Par. 14); that the rubber company agrees to keep the consigned goods fully
insured under insurance policies payable to it in case of loss (Par. 15); that upon request
of the rubber company at any time, petitioner shall render an inventory of the existing
stock which may be checked by an authorized representative of the former (Par. 15); and
that upon termination or cancellation of the Agreement, all goods held on consignment
shall be held by petitioner for the account of the rubber company until their disposition is
provided for by the latter (Par. 19). All these circumstances are irreconcilably
antagonistic to the idea of an independent merchant." 14 Hence its conclusion: "However,
upon analysis of the contract, as a whole, together with the actual conduct of the parties
in respect thereto, we have arrived at the conclusion that the relationship between them is
one of brokerage or agency." 15 We find ourselves in agreement, notwithstanding the
able brief filed on behalf of petitioner by its counsel. As noted at the outset, we cannot
heed petitioner's plea for reversal.
1.
According to the National Internal Revenue Code, a commercial broker "includes
all persons, other than importers, manufacturers, producers, or bona fide employees, who,
for compensation or profit, sell or bring about sales or purchases of merchandise for other
persons or bring proposed buyers and sellers together, or negotiate freights or other
business for owners of vessels or other means of transportation, or for the shippers, or
consignors or consignees of freight carried by vessels or other means of transportation.
The term includes commission merchants." 16 The controlling decision as to the test to
be followed as to who falls within the above definition of a commercial broker is that of
Commissioner of Internal Revenue v. Constantino. 17 In the language of Justice J.B.L.
Reyes, who penned the opinion: "Since the company retained ownership of the goods,
even as it delivered possession unto the dealer for resale to customers, the price and terms
of which were subject to the company's control, the relationship between the company
and the dealer is one of agency, . . .." 18 An excerpt from Salisbury v. Brooks 19 cited in
support of such a view follows:" 'The difficulty in distinguishing between contracts of
sale and the creation of an agency to sell has led to the establishment of rules by the
application of which this difficulty may be solved. The decisions say the transfer of title
or agreement to transfer it for a price paid or promised is the essence of sale. If such
transfer puts the transferee in the attitude or position of an owner and makes him liable to
the transferor as a debtor for the agreed price and not merely as an agent who must
account for the proceeds of a resale, the transaction is a sale; while the essence of an
agency to sell is the delivery to an agent, not as his property, but as the property of the
principal, who remains the owner and has the right to control sales, fix the price, and
terms, demand and receive the proceeds less the agent's commission upon sales made.'"
20 The opinion relied on the work of Mechem on Sales as well as Mechem on Agency.
Williston and Tiedman, both of whom wrote treatises on Sales, were likewise referred to.
Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or
appreciate the necessity or presence of these mutual requirements and obligations on any
theory other than that of a contract of agency. Salisbury was to furnish the mill and put
the timber owned by him into a marketable condition in the form of lumber; Brooks was
to furnish the funds necessary for that purpose, sell the manufactured product, and

account therefor to Salisbury upon the specific terms of the agreement, less the
compensation fixed by the parties in lieu of interest on the money advanced and for
services as agent. These requirements and stipulations are inconsistent with any other
conception of the contract. If it constitutes an agreement to sell, they are meaningless.
But they cannot be ignored. They were placed there for some purpose, doubtless as the
result of definite antecedent negotiations therefore, consummated by the final written
expression of the agreement." 21 Hence the Constantino opinion could categorically
affirm that the mere disclaimer in a contract that an entity like petitioner is not "the agent
or legal representative . . . for any purpose whatsoever" does not suffice to yield the
conclusion that it is an independent merchant if the control over the goods for resale of
the goods consigned is pervasive in character. The Court of Tax Appeals decision now
under review pays fealty to such an applicable doctrine.
2.
No merit therefore attaches to the first error imputed by petitioner to the Court of
Tax Appeals. Neither did such Court fail to appreciate in its true significance the act and
conduct pursued in the implementation of the contract by both the United States Rubber
International and petitioner, as was contended in the second assignment of error.
Petitioner ought to have been aware that there was no need for such an inquiry. The terms
of the contract, as noted, speak quite clearly. There is lacking that degree of ambiguity
sufficient to give rise to serious doubt as to what was contemplated by the parties. A
reading thereof discloses that the relationship arising therefrom was not one of seller and
purchaser. If it were thus intended, then it would not have included covenants which in
their totality would negate the concept of a firm acquiring as vendee goods from another.
Instead, the stipulations were so worded as to lead to no other conclusion than that the
control by the United States Rubber International over the goods in question is, in the
language of the Constantino opinion, "pervasive". The insistence on a relationship
opposed to that apparent from the language employed might even yield the impression
that such: mode of construction was resorted to in order that the applicability of a taxing
statute might be rendered nugatory. Certainly, such a result is to be avoided.
Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax
Appeals which has developed an expertise in view of its function being limited solely to
the interpretation of revenue laws, this Court is prepared to substitute its own judgment
unless a grave abuse of discretion is manifest. It would be to frustrate the objective for
which administrative tribunals are created if the judiciary, absent such a showing, is to
ignore their appraisal on a matter that forms the staple of their specialized competence.
While it is to be admitted that counsel for petitioner did scrutinize with care the decision
under review with a view to exposing what was considered its flaws, it cannot be said
that there was such a failure to apply what the law commands as to call for its reversal.
Instead, what cannot be denied is that the Court of Tax Appeals reached a result to which
the Court in the recent Constantino decision gave the imprimatur of its approval.
WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With
costs against petitioner.
Concepcion, C . J ., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Teehankee,
Barredo, Villamor and Makasiar, JJ ., concur.

[G.R. No. 153033. June 23, 2005.]

DEL MONTE PHILIPPINES, INC., petitioner, vs. NAPOLEON N. ARAGONES,
respondent.
Tan Acut & Lopez for petitioner.
Estelito R. Alvia for respondent.
SYLLABUS
1.
CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACT FOR A
PIECE OF WORK; ESTABLISHED IN CASE AT BAR. As reflected in the
highlighted and underscored above-quoted provisions of the "Supply Agreement," as well
as other evidence on record, the machines Aragones was obliged to fabricate were those
for casting the concrete blocks specified by Garcia. Aragones did not have those kind of
machines in his usual business, hence, the special order. While initially Garcia specified
that the machines to be fabricated should be for hexagon shaped blocks, he later asked
Aragones to instead fabricate machines for casting S shaped blocks. In accordance with
the "Supply Agreement," Garcia furnished the cement and aggregates for the fabrication
of the blocks and Aragones fabricated three (3) machines for S shaped blocks which were
delivered at the casting site on different dates. And the "entire plant/casting machines and
. . . accessories" were, as dictated under the "Supply Agreement," devoted by Aragones
"for [MEGA-WAFF]'s exclusive use. ITAaCc
2.
ID.; ID.; ID.; CONTRACTUAL PRIVITY IS CREATED BETWEEN THE
OWNER AND THOSE WHO FURNISH LABOR AND/OR MATERIALS. Aragones
having specially fabricated three casting machines and furnished some materials for the
production of the concrete blocks specially ordered and specified by MEGA-WAFF
which were to be and indeed they were for the exclusive use of MEGA-WAFF, he has a
cause of action upon petitioner up to the amount it owed MEGA-WAFF at the time
Aragones made his claim to petitioner. As Velasco v. CA explains, the intention of Art.
1729 is to protect the laborers and material men from being taken advantage of by
unscrupulous contractors and from possible connivance between owners and contractors.
Thus, a constructive vinculum or contractual privity is created by this provision, by way
of exception to the principle underlying Article 1311 between the owner, on the one
hand, and those who furnish labor and/or materials, on the other. In fine, a constructive
vinculum or contractual privity was created between petitioner and Aragones.
DECISION
CARPIO MORALES, J p:
The decision in the present Petition for Review on Certiorari hinges on the nature of the
contract denominated "Supply Agreement" 1 which was forged between Dynablock
Enterprises, represented by its Manager herein respondent Napoleon N. Aragones
(Aragones) and Mega-Engineering Services in joint venture with WAFF Construction
System Corporation (MEGA-WAFF) whether it was one of sale or for a piece of
work. SDHAEC
On September 18, 1988, herein petitioner Del Monte Philippines Inc. (DMPI) entered
into an "Agreement" 2 with MEGA-WAFF, represented by "Managing Principal"
Edilberto Garcia (Garcia), whereby the latter undertook "the supply and installation of
modular pavement" at DMPI's condiments warehouse at Cagayan de Oro City within 60
calendar days from signing of the agreement.

To source its supply of concrete blocks to be installed on the pavement of the DMPI
warehouse, MEGA-WAFF, as CONTRACTOR represented by Garcia, entered into a
"Supply Agreement" with Dynablock Enterprises, represented by herein respondent
Aragones, as SUPPLIER, under the following terms:
1.
ITEMS TO BE SUPPLIED
The SUPPLIER at its own expense shall provide the CONTRACTOR with labor and all
materials, equipment, tools and supplies necessary and incident thereto, the required
concrete blocks at the contractor's specified casting site, all in accordance with the terms
and conditions of this agreement, as well as the requirements of the project specifications
and provisions with respect to the fabrication of concrete blocks.
2.
PRICE
The CONTRACTOR will pay the supplier in consideration for the full and total
performance of the above undertaking, inclusive of all applicable taxes, the unit price of
P7.00 per supplied and accepted piece. This price is based on the assumption that the cost
per bag of premium cement is P54.00 and aggregate at P95.00 per cu. m. Any increase of
the above raw materials shall be to the account of the contractor. All taxes shall be for the
account of the contractor. TacESD
3.
PLANT/EQUIPMENT
3.1
The machines for the fabrication/casting of the concrete blocks, including all
necessary equipment and accessories, shall be provided by the SUPPLIER. The machines
and equipment shall be mobilized and made operational at the specified casting
location/stockpiling yard designated and provided by the CONTRACTOR.
3.2
The SUPPLIER shall ensure that all plant facilities/equipment must, at all times,
be accessible for inspection by the representatives of the CONTRACTOR.
3.3
The SUPPLIER shall ensure that the plant/casting machines actual operating
capacities shall not be lower than 75,000 pieces every month. If at any time within the
life of this agreement the plant/casting machines are proven to be operating below the
required minimum capacity as aforesaid, the SUPPLIER shall be obliged to take the
necessary actions to upgrade the plant/casting machines and/or make the necessary
rehabilitation to increase the capacity to the required level.
4.
QUALITY OF MATERIALS
4.1
The SUPPLIER guarantees that all materials supplied to the CONTRACTOR
shall meet the approved specifications (Attached Annex "A") at 5,000 pci.
In this connection, the CONTRACTOR shall assign an inspector at the casting
site to ensure that all items supplied shall conform with the approved standards.
4.2
The CONTRACTOR may reject any finished product or materials which do not
pass the approved standards. TDcEaH
4.3
There shall be a system of sampling the output of the plant and/or each casting
machine for testing in accordance with the quality standards specified. Result of such
sampling tests shall be the basis for acceptance or rejection of the finished materials.
4.4
Where the CONTRACTOR has provided materials to the SUPPLIER to be
incorporated into the SUPPLIER's production, as in the case of cement and aggregates,
the cost of such materials which becomes part of the rejected products due to faulty
batching/mixing/curing shall be for the account of the SUPPLIER.
5.
MATERIALS AND OTHER PROVISIONS SUPPLIED BY THE
CONTRACTOR

5.1
All the materials are for the account of the SUPPLIER. The CONTRACTOR
shall, however, provide all the cement and aggregates requirement for the fabrication of
the concrete blocks, in which the corresponding cost shall be deducted from the
periodical proceeds due to the SUPPLIER.
5.2
The CONTRACTOR shall provide and make available to the SUPPLIER the
following provisions/facilities free of charge:
a)
Casting/Fabrication Area
b)
Stockpile Area
c)
Warehouse for Cement
d)
An all-weather working shed for workers
e)
Night Watchers IaHSCc
5.3
The CONTRACTOR shall arrange for the installation of electrical and water
facilities for the work in which the cost of electricity and water actually consumed shall
be borne by the SUPPLIER.
5.4
The SUPPLIER shall be responsible for all materials already turned over by the
CONTRACTOR at the casting area. The responsibility, however, of the SUPPLIER on
the finished products ceases upon loading of the same to the CONTRACTOR's truck on
way to the project site.
6.
OBLIGATIONS OF SUPPLIER
6.1
To fabricate and provide the required block machines in such number adequate to
cope up with time schedule.
6.2
To provide concrete mixers: one (1) unit of two-bagger, and two (2) units of onebagger.
6.3
To provide drying racks, measuring boxes, wheel borrows and other necessary
hand tools.
6.4
To supervise and provide the required manpower for the operation and production
of concrete blocks.
6.5
To undertake the following:
a)
mixing and formulation of proper mix.
b)
to consolidate, form and compress the blocks.
c)
to unload the formed blocks into the drying racks.
d)
after initial setting of blocks, to unload and arrange them to wooden pallets.
EHASaD
e)
curing of blocks as per approved standards.
7.
OTHER OBLIGATIONS OF CONTRACTOR
7.1
To provide tarpaulin or canvas or plastic sheets to cover blocks during the
seasoning stage.
7.2
To provide forklift and wooden pallets.
8.
EXCLUSIVITY OF PRODUCTION
8.1
Effective upon the execution of this agreement, the SUPPLIER binds itself to
devote the entire plant/casting machines and its accessories for the CONTRACTOR's
exclusive use and full operation and production of the required concrete blocks for the
intended project.
8.2
The SUPPLIER or his agents or representatives shall not, directly or indirectly,
enter into any contract, agreement, concessions or transactions of whatever nature or kind
with the project owner or of its representative which will affect the rights, interest or

participation of the CONTRACTOR in regard to the execution and accomplishment of

the project.
8.3
In case of violation of this exclusivity clause, utmost fidelity and good faith being
of the essence, the CONTRACTOR shall have the right to demand reasonable amount of
damages or terminate this agreement upon due notice.
9.
CONDITIONS OF PAYMENT
9.1
Upon mobilization of the casting machines, equipments accessories and making
some operational at the casting area by the SUPPLIER, the CONTRACTOR shall
advance to the supplier a downpayment or mobilization fund of TEN THOUSAND
(P10,000.00) PESOS per machine. Said mobilization fee shall be deducted from the
proceeds of the SUPPLIER at two (2) equal installments beginning at the first billing.
THEDCA
9.2
The SUPPLIER shall present its billing every fifteen days based on the below
indicated payment schedule:
a)
Billing from 1st/day/month to 15th day payable after fifteen days from the date
the billing is submitted.
b)
Billing from the 16th day of the month to the 31st day of the month, payable after
fifteen days from the date the billing is submitted.
10.
EFFECTIVITY OF CONTRACT
This agreement shall be co-terminus with the terms of the contract for the project and/or
upon completion of all requirements therefor; PROVIDED, However, that if for some
reason or another the production of the concrete blocks is temporarily suspended, this
agreement shall remain in force and effective for a period of fifteen (15) days from the
date of the cessation of production. In case the said grace period expires without the
production having resumed, the CONTRACTOR shall be obliged to pay reasonable
compensation for the period of suspension counted from the expiration of the said grace
period.
11.
PERFORMANCE BOND
The SUPPLIER shall post a SURETY/PERFORMANCE BOND in such sums which
may be deemed adequate to secure its faithful compliance of the terms and conditions of
this agreement.
12.
PENALTY CLAUSE
In the event the SUPPLIER fails to meet the requirements demanded in this agreement or
when the SUPPLIER is in delay in the performance of its obligation to the prejudice of
the CONTRACTOR, the SUPPLIER shall answer for the corresponding damages
equivalent to one-tenth (1/10) of the rated monthly production capacity. (Emphasis and
underscoring supplied). 3
Aragones thereupon started assembling the machines for the fabrication/casting of the
concrete blocks which MEGA-WAFF specified to be hexagonal shaped. MEGA-WAFF,
through Garcia, later directed Aragones to instead fabricate machines for S shaped
blocks. DaCEIc
As stated in the "Agreement" between DMPI and MEGA-WAFF, the deadline for the
installation of the pavement of the warehouse was November 18, 1988, but it was not
met. As extended, the installation was finished on or about February 28, 1989, but
MEGA-WAFF was, in accordance with its agreement with DMPI, penalized for the
delay, albeit at a reduced amount.

Aragones, having in the meantime gotten wind of MEGA-WAFF & DMPI's

"Agreement," more particularly the imposition of a penalty by DMPI for the delay in the
completion of the installation of the warehouse pavement, appealed to DMPI, by letter of
March 4, 1989, 4 for leniency in the imposition of the penalty which "would affect [him]
also although [he] was not a direct party to the contract," he inviting attention to the
"intricacy and enormity of the job involved."
Aragones later failed to collect from MEGA-WAFF the full payment of the concrete
blocks. He thus sent DMPI a letter dated March 10, 1989, 5 received by the latter on
March 13, 1989, 6 advising it of MEGA-WAFF's unpaid obligation and requesting it to
earmark and withhold the amount of P188,652.65 "from [MEGA-WAFF's] billing" to be
paid directly to him "[l]est Garcia collects and fails to pay [him]."
DMPI, in the meantime, verbally advised Aragones to secure a court order directing it to
withhold payment of the amount due MEGA-WAFF for, in the absence of such court
order, DMPI was under its agreement with MEGA-WAFF obliged to release full
payment within 30 days from acceptance of the completed work.
It appears that Aragones reiterated his request to DMPI for direct payment to him, by
letter of March 28, 1989. 7 This was followed by another letter dated April 6, 1989 8
which was received on April 8, 1989 9 by DMPI, copy of which it referred to Garcia, by
letter of April 27, 1989, 10 for his comment. ATcaID
By letter of May 3, 1989 11 addressed to DMPI, Garcia, commenting on Aragones' April
6, 1989 letter, stated:
xxx
xxx
xxx
If there is somebody who have (sic) justifiable ground to complain, it is MEGA-WAFF
against Atty. Aragones for all the miseries and embarrassment we had suffered due to the
factors attributable to Atty. Aragones Dynablock Enterprises.
For proper evaluation of things and to give both parties a fair chance, we enclosed (sic)
pertinent papers for your perusal.
As contractor and businessman, it is our firm policy not to take advantage of other people
and definitely not to renegade (sic) from commitments/obligations.
We are willing to pay Atty. Aragones but based on the actual accomplishment and
amount only due to him as per reconciliation furnished to him. (attached)
We sincerely hope that the facts we had presented will suffice, and please accept our
apology for whatever inconvenience it has caused you and we pray that this matter of
payments be settled soon for the general benefit of all concerned.
xxx
xxx
xxx (Underscoring supplied).
It turned out that DMPI had, on or about April 6, 1989, released to MEGA-WAFF a
check dated April 4, 1989 in the amount of P157,863.77 representing DMPI's balance of
its obligation to MEGA-WAFF.
Aragones was thus prompted to file on May 25, 1989 a complaint 12 for sum of money
(P188,652.65) with damages against Garcia and/or MEGA-WAFF and DMPI before the
Regional Trial Court (RTC) of Lanao del Norte which was raffled to Branch 5 thereof.
SEAHID
Aragones impleaded DMPI on the strength of Articles 1729 and 1467 of the Civil Code,
he contending that it was liable to him who put labor upon or furnished materials for a
piece of work.

By his July 14, 1989 Answer, 13 Garcia, without disputing the amount being collected by
Aragones, justified his "refusal to satisfy [Aragones'] demand" by claiming that Aragones
defaulted in his obligation under the "Supply Agreement".
DMPI, by its Answer 14 of June 25, 1989, pleaded that Aragones had no cause of action
against it as it had no privity of contract with him; that it had already paid MEGA-WAFF
the full amount due it; and that it had not committed any actionable wrong against
Aragones.
Aragones later filed an Amended Complaint, 15 with leave of court, "to cure certain
formal defects in the original complaint as to the designation of parties . . ."
DMPI also later filed a Motion for Leave to File an Amended Answer with Cross-Claim
against Garcia and WAFF President Francisco Castro 16 which the trial court granted. In
the Amended Answer with Cross Claim, 17 DMPI alleged, inter alia, that "[i]n the event
[Aragones] succeeds in obtaining a judgment [against] DMPI, that said judgment should
be charged to and paid by the cross-defendants who have collected the full contract price
of the Agreement wherein [Aragones] claims the rights of a subcontractor, plus
consequential damages" (underscoring in the original).
The trial court, upon the following issues:
a.
Whether or not [Aragones] has still a collectible amount of P188,652.65 from
defendants Garcia and Castro; cTIESD
b.
Whether or not defendant DMPI may also be held accountable for this unpaid
obligation of defendant Garcia/MEGA-WAFF;
c.
Whether or not the remaining balance of defendant DMPI account payable is
P188,652.65 insisted by defendant Garcia/MEGA-WAFF or only P157,863.77 insisted
by defendant DMPI;
d.
Whether or not the parties are entitled to damages pleaded;
e.
Whether or not there was delay in the performance of the respective obligations of
either party or both;
f.
Assuming that defendant DMPI is liable to plaintiff, whether or not cross
defendant Garcia/MEGA-WAFF shall be liable to DMPI for reimbursement. 18
found for the plaintiff Aragones in light of the following considerations:
Those who put their labor upon or furnish materials for a piece of work undertaken by the
contractor have an action against the owner up to the amount owing from the latter to the
contractor at the time the claim is made. However, the following shall not prejudice the
laborers, employees and furnishers of materials:
(1)
Payments made by the owner of the contractor before they are due;
(2)
Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws (1597a)
(Article 1729, New Civil Code, [emphasis supplied]).
In interpreting the foregoing provision, the Supreme Court made the following pertinent
pronouncement:
"Article 1729 is promulgated to protect the laborers and the materialmen from being
taken advantage of by unscrupulous contractors and from possible connivance between
owners and contractors." (Velasco vs. C.A. 95 Phils. (sic) (616-641). DIEcHa
"The legal issue that arises is whether or not GSIS is liable to the petitioners for the cost
of the materials and labor furnished by them in construction of the 63 houses now owned
by the GSIS and for the construction of which no payment has been made on the balance

due to petitioners. Our considered view is and we so hold that even in equity alone, GSIS
should pay the petitioners, without prejudice to its securing indemnity from Laigo Realty
Corp." (Velaso vs. C.A., 95 Phils. (sic) 616-641 [emphasis and underscoring supplied]).
Moreover, anent this matter another decisional rule, says:
"Although there was no privity of contract between plaintiff and defendant Joven, Inc.,
there is sufficient evidence showing that he had really supplied stones and sands to said
defendant and also removed dirt and soil from its construction site. And it is this main
point which calls for resolution in the light of the provisions of Art. 1729 of the New
Civil Code, to determine whether or not defendant corporation is liable for materials
supplied and services rendered by the plaintiff. It is quite clear that the owner of the
building, Joven Inc. is liable for materials and labor furnished to the contractor "up to the
amount owing from the latter to the contractor" and to enforce such liability, the law
allows the person furnishing labor or materials to bring his right of action directly against
the owner." (Flores vs. Ruelo, CA 52 OG 850, [emphasis and underscoring supplied]).
Of course, while defendant DMPI is indeed directly liable to pay plaintiff the cost of the
construction material (modular paving blocks) sought to be collected, this defendant has
also a right of recourse against cross defendant Garcia/MEGA-WAFF for reimbursement
of whatever amount it will be required here to pay plaintiff, otherwise it would result in
making defendant Garcia/MEGA-WAFF enrich itself at the expense of defendant DMPI.
Additionally since the evidence on record shows that plaintiff was compelled to litigate
this matter if only to collect a just and demandable obligation, the refusal of these
defendants to pay their obligation upon demand could not be justified in law, thus both
defendants should be condemned to pay exemplary damages in the amount of P20,000.00
each and attorney's fees in the amount of P10,000.00 each, including the cost of this suit.
(Underscoring supplied) 19
The trial court accordingly rendered judgment in favor of Aragones by decision 20 of
September 11, 1992, the dispositive portion of which reads:
WHEREFORE, the foregoing premises considered, the Court finds that there is ample
reason in law and preponderant evidence on record to sustain the cause of action of
plaintiff asserted against both defendants, thus judgment is now rendered granting the
following relief:
a.
That the defendants Garcia/MEGA-WAFF and DMPI shall be liable to jointly and
severally pay plaintiff the unpaid cost of the modular paving blocks construction material
which he delivered to defendant DMPI priced at P188,652.65 and in the event that
defendant DMPI will be made to pay the full amount of this particular obligation, the
defendant Garcia MEGA-WAFF must reimburse said defendant such amount; TDcCIS
b.
That this unpaid obligation sought to be collected must bear legal interest of 12%
per annum from the time there was an extrajudicial demand made by plaintiff last March
01, 1989; and
c.
Lastly, these defendants are condemned that each pay plaintiff P20,000.00 for
exemplary damages and P10,000.00 for attorney's fees, including the cost of this suit.
SO ORDERED. (Emphasis and underscoring supplied). 21
On appeal to the Court of Appeals (CA) by only DMPI, upon the following assigned
errors:
I

THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF DID NOT INCUR
DELAY AND VIOLATE ITS SUPPLY AGREEMENT WITH DEFENDANT MEGAWAFF;
II
THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT MEGA-WAFF'S
LIABILITY TO PLAINTIFF IS P188,652.65 BECAUSE AS STIPULATED IN THE
SUPPLY AGREEMENT, THE CEMENT AND AGGREGATES USED IN THE
MANUFACTURE OF THE BLOCKS WERE ADVANCED BY MEGA-WAFF, THE
COST OF WHICH WILL BE DEDUCED FROM PLAINTIFF'S BILLINGS;
III.
THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT DMPI IS ALSO
LIABLE TO PLAINTIFF FOR ANY LIABILITY OF MEGA-WAFF UNDER THE
SUPPLY AGREEMENT; cDAEIH
IV.
ASSUMING EX GRATIA ARGUMENTI THAT DMPI IS LIABLE TO PLAINTIFF'S
AID LIABILITY CANNOT EXCEED THE SUM OF P157,863.77 BALANCE OF THE
CONTRACT PRICE BETWEEN DMPI AND MEGA-WAFF, LESS AGREED
PENALTY FOR LATE DELIVERY AS LIQUIDATED DAMAGES;
V.
THE TRIAL COURT ERRED IN HOLDING DEFENDANT DMPI LIABLE TO
PLAINTIFF FOR ATTORNEY'S FEES AND COSTS OF COLLECTION
CONSIDERING THAT IT HAD THE RIGHT TO RESIST PAYMENT BECAUSE IT
HAS NO PRIVITY OF CONTRACT BETWEEN PLAINTIFF AND DEFENDANT
MEGA-WAFF, (Underscoring supplied), 22
the CA, by decision of September 19, 2001 23 subject of the petition at bar, affirmed the
trial court's decision in this wise:
At this juncture it is well to note that the Supply Agreement was in the nature of a
contract for a piece of work. The distinction between a contract of sale and one for work,
labor and materials is tested by inquiry whether the thing transferred is one not in
existence and which never would have existed but for the order of the party desiring to
acquire it, or a thing which would have existed but has been the subject of sale to some
other persons even if the order had not been given. If the article ordered by the purchaser
is exactly such as the seller makes and keeps on hand for sale to anyone, and no change
or modification of it is made at purchaser's request, it is a contract of sale even though it
may be entirely made after, and in consequence of the purchaser's order for it.
[Commissioner of Internal Revenue vs. Engineering Equipment and Supply Company,
G.R. No. L-27044, June 30, 1975] CITcSH
In the case at bench, the modular paving blocks are not exactly what the plaintiff-appellee
makes and keeps on hand for sale to anyone, but with a modification that the same be "S"
in shape. Hence, the agreement falls within the ambit of Article 1467 making Article
1729 likewise applicable in the instant case.
As regard the issue of privity of contracts, We need to add only that Article 1311 of the
New Civil Code which DMPI invokes is not applicable where the situation contemplated
in Article 1729 obtains. The intention of the latter provision is to protect the laborers and
the materialmen from being taken advantage of by unscrupulous contractors and from
possible connivance between owners and contractors. Thus, a constructive vinculum or

contractual privity is created by this provision, by way of exception to the principle

underlying Article 1311 between the owner, on the one hand, and those who furnish labor
and/or materials, on the other. [Velasco vs. Court of Appeals, G.R. No. L-47544, January
28, 1980]
As a matter of fact, insofar as the laborers are concerned, by a special law, Act no. 3959,
otherwise known as "An Act making it obligatory for any person, company, firm or
corporation owning any work of any kind executed by contract to require the contractor
to furnish a bond guaranteeing the payment of the laborers." they are given added
protection by requiring contractors to file bonds guaranteeing payment to them.
It is true that defendant-appellant had already fully paid its obligation to defendant Garcia
however, the former's payment to the latter does not extinguish its legal obligation to
plaintiff-appellee because such payment was irregular. The former should have taken care
not to pay to such contractor the full amount which he is entitled to receive by virtue of
the contract, until he shall have shown that he first paid the wages of the laborer
employed in said work, by means of an affidavit made and subscribed by said contractor
before a notary public or other officer authorized by law to administer oaths. There is no
showing that defendant appellant DMPI, as owner of the building, complied with this
requirement laid down in Act No. 3959. Hence, under Section 2 of said law, said
defendant-appellant is responsible, jointly and severally with the general contractor, for
the payment to plaintiff-appellee as sub-contractor. CcAITa
In this connection, while, indeed, Article 1729 refers to the laborers and materialmen
themselves, under the peculiar circumstances of this case, it is but fair and just that
plaintiff-appellee be deemed as suing for the reimbursement of what they have already
paid the laborers and materialmen, as otherwise he would be unduly prejudiced while
either defendant-appellant DMPI or defendant Garcia would enrich themselves at
plaintiff-appellee's expense.
Be that as it may, We so hold that plaintiff-appellee has a lawful claim against defendantappellant DMPI, owner of the constructed warehouse since it disregarded the notice of
claim of plaintiff-appellee, at a time when the amounts owing from defendant-appellant
DMPI to defendant GARCIA were more than sufficient to pay for plaintiff-appellee's
claim. The least that defendant-appellant should have done was to withhold payment of
the balance still owing to defendant Garcia as until the claim of plaintiff-appellee was
clarified. (Italics in the original; emphasis and underscoring supplied). 24
Its Motion for Reconsideration having been denied by the CA, DMPI (hereinafter
referred to as petitioner) lodged the present Petition for Review on Certiorari, faulting the
CA:
I.
. . . IN FINDING THAT DMPI WAS LIABLE TO RESPONDENT ARAGONES FOR
THE UNPAID PRICE OF THE CONCRETE PAVING BLOCKS OWED BY MEGAWAFF TO THE LATTER.
A.
. . . IN FINDING THAT THE CONTRACT FOR THE SUPPLY OF THE
CONCRETE PAVING BLOCKS WAS NOT A SALE BUT ONE FOR A PIECE OF
WORK.
B.
. . . IN HOLDING DMPI LIABLE BASED UPON THE PROVISIONS OF
ARTICLE 1729 OF THE CIVIL CODE AND ACT 3959, WHICH ARE
INAPPLICABLE. TIEHDC

II.
. . . IN FAILING TO AWARD MORAL DAMAGES, ATTORNEY'S FEES, AND
LITIGATION EXPENSES TO DMPI ON ITS COUNTERCLAIM. 25
As reflected above, only petitioner appealed the trial court's decision. MEGA-WAFF did
not appeal. The decision as to it then is final and executory.
Petitioner, in the main, contends that while the CA correctly stated the test in determining
whether a transfer is a sale or one for a piece of work, it failed to properly apply the
same.
Applying the "nature of the object" test, petitioner insists that the concrete block to be
produced by Aragones under the "Supply Agreement" represented by Garcia clearly
shows that the contract was one of sale, advancing the following reasons:
1.4.1 First, the concrete paving blocks were . . . capable of being mass-produced
1.4.2 Second, save for the shape, there was here no consideration of any special needs or
requirements of DMPI taken into account in the design or manufacture of the concrete
paving blocks. 26
Petitioner cites the following ruling in Commissioner of Internal Revenue v. Arnoldus
Carpentry Shop, Inc.: 27
. . . As can be clearly seen from the wordings of Art. 1467, what determines whether the
contract is one of work or of sale is whether the thing has been "manufactured specially
for the customer and upon his special order." Thus, if the thing is specially done on the
order of another, this is a contract for a piece of work. If, on the other hand, the thing is
manufactured or procured for the general market in the ordinary course of one's business,
it is a contract of sale." (Italics and emphasis in the original; underscoring supplied), 28
and argues that "given habituality of business and the ability to mass-produce the article
ordered, that customers requires (sic) certain specifications is of no moment, the
transaction remains one of sale."
Petitioner further cites, among other authorities, the following ruling in Celestino Co. v.
Collector of Internal Revenue: 29
. . . The important thing to remember is that Celestino & Co. habitually makes sash,
windows and doors, as it has represented in its stationery and advertisements to the
public. That it "manufactures" the same is practically admitted by appellant itself. The
fact that windows and doors are made by it only when customers place their orders, does
not alter the nature of the establishment of such materials-moulding, frames, panels as
it ordinarily manufactured or was in a position habitually to manufacture. cCTAIE
xxx
xxx
xxx
That the doors and windows must meet desired specifications is neither here nor there. If
these specifications do not happen to be of the kind habitually manufactured by appellant
special forms of sash, mouldings, panels it would not accept the order and no
sale is made. If they do, the transaction would be no different from purchaser of
manufactured goods held in stock for sale; they are bought because they meet
specifications desired by the purchaser.
Nobody will say that when a sawmill cuts lumber in accordance with the peculiar
specifications of a customer sizes not previously held in stock for sale to the public
it thereby becomes an employee or servant of the customer, not the seller of lumber. The
same consideration applies to this sash manufacturer.

The Oriental Sash Factory does nothing more than sell the goods that it mass-produces or
habitually makes sash, panels, mouldings, frames cutting them to such sizes and
combining them in such forms as its customers may desire.
xxx
xxx
xxx
. . . Such new form does not divest the Oriental Sash Factory of its character as
manufacturer. Neither does it take the transaction out of the category of sales under
Article 1467 above quoted, because although the Factory does not, in the ordinary course
of its business, manufacture and keep on stock doors of the kind sold to Teodoro, it could
and/or probably had in stock the sash, mouldings and panels it used therefor (some of
them at least). (Emphasis in the original; underscoring supplied).
Petitioner concludes that as the "Supply Agreement" between Aragones and MEGAWAFF was one of sale to which it (petitioner) was not privy, it cannot be held liable for
any obligation arising therefrom. HCITDc
Dodging liability for the damages ("exemplary and . . . attorney's fees including the cost
of this suit") awarded to Aragones, petitioner claims that it was in fact the one which was
injured by Aragones' filing in bad faith of a complaint bereft of cause of action and "at
best, [one] barred by full payment of the amount due to MEGA-WAFF," on account of
which it is entitled to moral damages in the amount of P50,000.00 pursuant to Article
2217 of the Civil Code, and to attorney's fees and expenses of litigation in the amount of
at least P30,000.00 plus P2,500.00 per hearing pursuant to Article 2208 of the Civil
Code.
The petition fails.
The authorities petitioner cited in fact show that the nature of the "Supply Agreement"
between Aragones and MEGA-WAFF was one for a piece of work.
Contrary to petitioner's claim that "save for the shape, there was no consideration of any
special needs or requirements of DMPI taken into account in the design or manufacture
of the concrete paving blocks," the "Supply Agreement" is replete with specifications,
terms or conditions showing that it was one for a piece of work.
As reflected in the highlighted and underscored above-quoted provisions of the "Supply
Agreement," as well as other evidence on record, the machines Aragones was obliged to
fabricate were those for casting the concrete blocks specified by Garcia. Aragones did not
have those kind of machines in his usual business, hence, the special order.
While initially Garcia specified that the machines to be fabricated should be for hexagon
shaped blocks, he later asked Aragones to instead fabricate machines for casting S shaped
blocks.
In accordance with the "Supply Agreement," Garcia furnished the cement and aggregates
for the fabrication of the blocks and Aragones fabricated three (3) machines for S shaped
blocks which were delivered at the casting site on different dates. And the "entire
plant/casting machines and . . . accessories" were, as dictated under the "Supply
Agreement," devoted by Aragones "for [MEGA-WAFF]'s exclusive use. HCTEDa
There can be no gainsaying that the specifications/conditions in the "Supply Agreement"
and the admitted subsequent directive of Garcia for Aragones to fabricate machines for
casting S shaped, instead of hexagon shaped blocks, show that the concrete blocks were
"manufactured specifically for, and upon the special order" of Garcia.
That Garcia supplied the cement and aggregates and that the entire made-to-order casting
machines and accessories used in the manufacture of those unusual shaped blocks were

agreed upon to be devoted only "for the exclusive use" of MEGA-WAFF should belie
petitioner's contention that the concrete blocks were mass-produced and catered to the
general market in the ordinary course of Aragones' business.
Under Art. 1467 then 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. (Emphasis and underscoring
supplied),
the "Supply Agreement" was decidedly a contract for a piece of work.
Following Art. 1729 of the Civil Code which provides:
ART. 1729. Those who put their labor upon or furnish materials for a piece of work
undertaken by the contractor have an action against the owner up to the amount owing
from the latter to the contractor at the time the claim is made. . . .
xxx
xxx
xxx (Underscoring supplied),
Aragones having specially fabricated three casting machines and furnished some
materials for the production of the concrete blocks specially ordered and specified by
MEGA-WAFF which were to be and indeed they were for the exclusive use of MEGAWAFF, he has a cause of action upon petitioner up to the amount it owed MEGA-WAFF
at the time Aragones made his claim to petitioner. IDAaCc
As Velasco v. CA 30 explains, the intention of Art. 1729 is
to protect the laborers and materialmen from being taken advantage of by unscrupulous
contractors and from possible connivance between owners and contractors. Thus, a
constructive vinculum or contractual privity is created by this provision, by way of
exception to the principle underlying Article 1311 between the owner, on the one hand,
and those who furnish labor and/or materials, on the other.
In fine, a constructive vinculum or contractual privity was created between petitioner and
Aragones.
Respecting petitioner's disclaimer of liability for damages and its claim for moral
damages, attorney's fees and expenses of litigation, the trial court's disposition thereof, to
wit:
. . . since the evidence on record shows that [Aragones] was compelled to litigate this
matter if only to collect a just and demandable obligation, the refusal of [DMPI and
MEGA-WAFF] to pay their obligation upon demand could not be justified by law, thus
both . . . should be condemned to pay exemplary damages in the amount of P20,000.00
each and attorney's fees in the amount of P10,000.00 each including . . . costs of this suit"
(underscoring supplied),
merits this Court's approval.
Why should not petitioner be liable for damages? Aragones' request, based on a provision
of law, to petitioner for it to pay directly to him his account receivable from MEGAWAFF/Garcia out of petitioner's account payable to MEGA-WAFF was made before
petitioner's obligation to it was due. Yet petitioner settled such obligation to MEGAWAFF on or about April 6, 1989 when it released to it its check-payment. For petitioner
to harp on its undertaking under its "Agreement" with MEGA-WAFF to pay its full
obligation thereunder within 30 days from complete installation of the pavement by

MEGA-WAFF unless a court injunction could be produced by Aragones is too shallow,

under the facts and circumstances surrounding the case, to merit consideration. SHTEaA
Petitioner's referral for comment of Garcia, by letter of April 27, 1989, on Aragones'
April 6, 1989 reiterative letter for the withholding of the release of so much amount to
MEGA-WAFF even after it (petitioner) had already released on or about April 6, 1989 its
check-full payment to MEGA-WAFF reflects a futile attempt to cover-up the apparent
"connivance" between it and contractor MEGA-WAFF to the prejudice of Aragones,
leaving him no option but to litigate.
As for the assailed citation by the appellate court of Act No. 3959 (which requires a
person or firm owning any work of any kind executed by contract to put up a bond
guaranteeing the payment of the laborers) as additional justification to hold petitioner
liable to Aragones, indeed, said Act had been repealed in 1974 by P.D. No. 442 (The
Labor Code of the Philippines).
WHEREFORE, in light of the foregoing discussions, the petition is hereby DENIED.
Costs against petitioner. TSHcIa
SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona and Garcia, JJ., concur.
1.
EXECUTORS AND ADMINISTRATORS; SALE OF PROPERTY TO PAY
DEBTS. The appellants insist the administratrix bought indirectly, through the
mediation of S. Ch., the land sold by her to the latter, and that both sales should be
annulled under the provisions of article 1459 of the Civil Code. The proofs do not
substantiate such claim. In order to bring the sale within the provisions of the above cited
article it is essential that the proof submitted establish some agreement between the
purchaser and the administratrix to the effect that said purchaser should buy the property
for the benefit of the administratrix. Without said agreement the sale could not be set
aside, and the evidence does not establish such agreement.
2.
ID.; ID. After the amendment of section 714 of the Code of Civil Procedure by
Act No. 3882, the court, under the circumstances therein mentioned, on application of the
executor or administrator, and on written notice to the heirs, devisees, and other persons
interested, may grant him a license to sell, mortgage or otherwise encumber real estate for
the payment of debts. The consent and approbation, in writing, of the heirs, devisees, and
legatees, are no longer necessary.
DECISION
GODDARD, J p:
This is an appeal from an order of the Court of First Instance of Nueva Ecija, issued in
the intestate proceeding of Mauricia de Guzman, deceased, denying the motion of the
appellants in which they sought to annul a sale, executed January 23, 1926, by the
administratrix Trinidad Mactal, of a parcel of land to Silverio Choco and a resale of the
same land on March 10, 1928, to the administratrix Trinidad Mactal.
The appellants Pedro, Catalina and Benigno Rodriguez, and the appellee Trinidad Mactal,
are all heirs of Mauricia de Guzman whose estate is under administration in civil case No.
3152 of the Court of First Instance of Nueva Ecija. At the time the motion in question
was filed in that case the appellants were 24, 19 and 15 years of age. Mauricia de
Guzman died on March 22, 1922.

On March 17, 1923, the appellee Trinidad Mactal was appointed and duly qualified as
administratrix of the intestate estate of Mauricia de Guzman. The committee of claims,
on April 16, 1924, submitted a report in which the following claims against the estate
were allowed: Irene de Gonzales and Isidro Gonzales for the sum of P3,050; Esperanza
Fernandez and Fruto Aquino for P200; and the Philippine National Bank for P200.88, a
total of P3,450.88 aside from the fees of the members of the committee of claims which
amounted to P104. The report of this committee was approved by the court on April 29,
1924, and in this order of approval the court ordered the administratrix "que se provea de
fondos para pagar las deudas admitidas por la Comision de Avaluo y Reclamaciones y
sancionadas por el Juzgado." By reason of this order the administratrix in a motion dated
May 13, 1924, prayed that she be allowed to sell the only parcel of land belonging to the
estate with an area of 19 hectares, 79 ares and 74 centares for the purpose of paying
debts. This land was a part of a parcel of land of 23 hectares, 79 ares and 74 centares, 4
hectares of which belonged to Teofilo Rodriguez. A copy of this motion was served upon
Juliana del Rosario, the mother and guardian of the appellants, all of whom were minors
and under her case at that time. That Juliana del Rosario was the guardian of her children
is evidenced by the fact that she and Trinidad Mactal executed on July 6, 1922, a contract
of lease of this same land to Timoteo de Guzman, at an annual rental of P150, in which it
appears that Juliana del Rosario executed the same "en concepto de tutora de sus hijos"
The court authorized the administratrix to sell the land for the sum of P9,000. Later it was
found that no one would buy at that price and the authorized selling price was reduced to
P7,000 and then, as the highest offer was for P3,800, the court, upon motion of the
administratrix, fixed the selling price at no less than P3,800. Later the land was sold to
Silverio Choco for the sum of P4,000 on January 23, 1926. Juliana del Rosario received a
copy of all motions. On February 16, 1926, the administratrix paid the approved claim of
Irene de Gonzales and Isidoro Gonzales of P3,050, and the claim of Esperanza Fernandez
and Fruto Aquino of P200. The claim of the Philippine National Bank with interest
thereon was also paid as were the fees of the members of the committee of claims
amounting to P104, the surveyor's fee of P120 for the segregation of the four hectares
belonging to Teofilo Rodriguez and the overdue tax on the land amounting to more than
P300.
These payments, all of which were made after the sale in favor of Silverio Choco,
conclusively prove that sale was not fictitious as alleged by the appellants.
On March 10, 1928, more than two years later, Silverio Choco sold the same land to the
spouses Pio Villar and Trinidad Mactal for the sum of P4,500, who in turn mortgaged it
to the Philippine National Bank for the same amount. The appellants also allege that this
sale was fictitious, that there was collusion between Silverio Choco and Trinidad Mactal
and that the former never paid the latter the sum of P4,000. As we have seen,
immediately after the sale to Choco, Trinidad Mactal paid out considerable sums of
money, which undoubtedly came out of the P4,000 Choco paid her for the land.
The appellants rely on article 1459 of the Civil Code which reads in part as follows:
"The following persons cannot take by purchase, even at a public or judicial auction,
either in person or through the mediation of another:
xxx
xxx
xxx
"2.
An agent, any property of which the management or sale may have been intrusted
to him;

"3.
Executors, the property intrusted to their care;"
xxx
xxx
xxx
They insist the administratrix bought the land indirectly through the mediation of Silverio
Choco and that both sales should be annulled under the provisions of the article cited
above. The proofs in this case do not substantiate this claim of the appellants. The lower
court refused to annul these sales and we find nothing in the record that would justify this
court in reversing that finding. In order to bring the sale in this case within the part of
article 1459, quoted above, it is essential that the proof submitted establish some
agreement between Silverio Choco and Trinidad Mactal to the effect that Choco should
buy the property for the benefit of Mactal. If there was no such agreement, either express
or implied, then the sale can not be set aside. The evidence before this court does not
establish such agreement.
The appellants also allege that the order of the court authorizing the administrator to sell
the land in question in null and void due to the fact that the motion of Trinidad Mactal,
praying that she be authorized to sell, was not accompanied by the written consent of the
heirs or their duly authorized guardian. They rely upon section 714 of the Code of Civil
Procedure which, before it was amended by Act No. 3882, provided that ". . . where a
testator has not otherwise made sufficient provision for the payment of such debts and
charges, the court, on application of the executor or administrator with the consent and
approbation, in writing, of the heirs, devisees, and legatees, residing in the Philippine
Islands, may grant a license to the executor or administrator to sell, mortgage or
otherwise encumber for that purpose real, in lieu of personal estate, if it clearly appears
that such sale, mortgaging or encumbrance of real estate would be beneficial to the
persons interested and will not defeat any devise of land; in which case the assent of the
devisee shall be required."
As amended by Act No. 3882, approved November 14, 1931 section 714 reads:
"Realty may be sold or encumbered. When there is no personal estate of the deceased
or when, though there be such, its sale would redound to the detriment of the interests of
the participants in the estate and the deceased has left no testamentary disposition for the
payment of his debts and charges of administration, the court, on application of the
executor or administrator, and on written notice to the heirs, devisees, and other persons
interested, may grant him a license to sell, mortgage, or otherwise encumber for that
purpose real estate, if it clearly appears that such sale, mortgaging or encumbrance would
be beneficial to the persons interested and will not defeat any devise of land; in which
case the assent of the devisee shall be required."
The last paragraph of this Act provides that it "shall take effect on its approval and shall
be applicable to all testamentary or intestate proceedings pending at the time of its
approval."
The record in this case shows that the intestate proceeding of Mauricia de Guzman,
deceased, is still pending in the Court of First Instance of Nueva Ecija.
The appealed order of the lower court is affirmed with costs against the appellants.
Malcolm, Villa-Real, Hull and Imperial, JJ., concur.