Cases SalesFT

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Republic of the Philippines SUPREME COURT Manila

EN BANC

G.R. No. L-9935 February 1, 1915

YU TEK and CO.,plaintiff-appellant, vs. BASILIO GONZALES,defendant-appellant.

Beaumont, Tenney and Ferrier for plaintiff. Buencamino and Lontokfor defendant.

TRENT, J .:

The basis of this action is a written contract, Exhibit A, the pertinent

paragraphs of which follow:

1. That Mr. Basilio Gonzalez hereby acknowledges receipt of the sumof P3,000 Philippine currency from Messrs. Yu Tek and Co., and thatin consideration of said sum be obligates himself to deliver to the saidYu Tek and Co., 600 piculs of sugar of the first and second grade,according to the result of the polarization, within the period of threemonths, beginning on the 1st day of January, 1912, and ending onthe 31st day of March of the same year, 1912.

2. That the said Mr. Basilio Gonzales obligates himself to deliver tothe said Messrs. Yu Tek and Co., of this city the said 600 piculs ofsugar at any place within the said municipality of Santa Rosa whichthe said Messrs. Yu Tek and Co., or a representative of the samemay designate.

3. That in case the said Mr. Basilio Gonzales does not deliver toMessrs. Yu Tek and Co. the 600 piculs of sugar within the period ofthree months, referred to in the second paragraph of this document,

this contract will be rescinded and the said Mr. Basilio Gonzales willthen be obligated to return to Messrs. Yu Tek and Co. the P3,000received and also the sum of P1,200 by way of indemnity for loss anddamages.

Plaintiff proved that no sugar had been delivered to it under thiscontract nor had it been able to recover the P3,000. Plaintiff prayed


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for judgment for the P3,000 and, in addition, for P1,200 underparagraph 4, supra. Judgment was rendered for P3,000 only, andfrom this judgment both parties appealed.

The points raised by the defendant will be considered first. He allegesthat the court erred in refusing to permit parol evidence showing thatthe parties intended that the sugar was to be secured from the cropwhich the defendant raised on his plantation, and that he was unableto fulfill the contract by reason of the almost total failure of his crop.This case appears to be one to which the rule which excludes parolevidence to add to or vary the terms of a written contract is decidedlyapplicable. There is not the slightest intimation in the contract that thesugar was to be raised by the defendant. Parties are presumed tohave reduced to writing all the essential conditions of their contract.

While parol evidence is admissible in a variety of ways to explain themeaning of written contracts, it cannot serve the purpose ofincorporating into the contract additional contemporaneous conditionswhich are not mentioned at all in the writing, unless there has beenfraud or mistake. In an early case this court declined to allow parolevidence showing that a party to a written contract was to become apartner in a firm instead of a creditor of the firm. (Pastor vs.Gaspar, 2Phil. Rep., 592.) Again, in Eveland vs.Eastern Mining Co. (14 Phil.Rep., 509) a contract of employment provided that the plaintiff shouldreceive from the defendant a stipulated salary and expenses. Thedefendant sought to interpose as a defense to recovery that thepayment of the salary was contingent upon the plaintiff's employmentredounding to the benefit of the defendant company. The contractcontained no such condition and the court declined to receive parolevidence thereof.

In the case at bar, it is sought to show that the sugar was to beobtained exclusively from the crop raised by the defendant. There isno clause in the written contract which even remotely suggests such

a condition. The defendant undertook to deliver a specified quantity ofsugar within a specified time. The contract placed no restriction uponthe defendant in the matter of obtaining the sugar. He was equally atliberty to purchase it on the market or raise it himself. It may be truethat defendant owned a plantation and expected to raise the sugarhimself, but he did not limit his obligation to his own crop of sugar.Our conclusion is that the condition which the defendant seeks to add


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to the contract by parol evidence cannot be considered. The rights ofthe parties must be determined by the writing itself.

The second contention of the defendant arises from the first. Heassumes that the contract was limited to the sugar he might raiseupon his own plantation; that the contract represented a perfectedsale; and that by failure of his crop he was relieved from complyingwith his undertaking by loss of the thing due. (Arts. 1452, 1096, and1182, Civil Code.) This argument is faulty in assuming that there wasa perfected sale. Article 1450 defines a perfected sale as follows:

The sale shall be perfected between vendor and vendee and shall bebinding on both of them, if they have agreed upon the thing which isthe object of the contract and upon the price, even when neither has

been delivered.

Article 1452 reads: "The injury to or the profit of the thing sold shall,after the contract has been perfected, be governed by the provisionsof articles 1096 and 1182."

This court has consistently held that there is a perfected sale withregard to the "thing" whenever the article of sale has been physicallysegregated from all other articles Thus, a particular tobacco factorywith its contents was held sold under a contract which did not provide

for either delivery of the price or of the thing until a future time.McCullough vs.Aenlle and Co. (3 Phil. Rep., 295). Quite similar wasthe recent case of Barretto vs. Santa Marina (26 Phil. Rep., 200)where specified shares of stock in a tobacco factory were held soldby a contract which deferred delivery of both the price and the stockuntil the latter had been appraised by an inventory of the entireassets of the company. In Borromeo vs. Franco (5 Phil. Rep., 49) asale of a specific house was held perfected between the vendor andvendee, although the delivery of the price was withheld until thenecessary documents of ownership were prepared by the vendee. InTan Leonco vs. Go Inqui(8 Phil. Rep., 531) the plaintiff had delivereda quantity of hemp into the warehouse of the defendant. Thedefendant drew a bill of exchange in the sum of P800, representingthe price which had been agreed upon for the hemp thus delivered.Prior to the presentation of the bill for payment, the hemp wasdestroyed. Whereupon, the defendant suspended payment of the bill.


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It was held that the hemp having been already delivered, the title hadpassed and the loss was the vendee's. It is our purpose to distinguishthe case at bar from all these cases.

In the case at bar the undertaking of the defendant was to sell to theplaintiff 600 piculs of sugar of the first and second classes. Was thisan agreement upon the "thing" which was the object of the contractwithin the meaning of article 1450, supra? Sugar is one of the staplecommodities of this country. For the purpose of sale its bulk isweighed, the customary unit of weight being denominated a "picul."There was no delivery under the contract. Now, if called upon todesignate the article sold, it is clear that the defendant could only saythat it was "sugar." He could only use this generic name for the thingsold. There was no "appropriation" of any particular lot of sugar.

Neither party could point to any specific quantity of sugar and say:"This is the article which was the subject of our contract." Howdifferent is this from the contracts discussed in the cases referred toabove! In the McCullough case, for instance, the tobacco factorywhich the parties dealt with was specifically pointed out anddistinguished from all other tobacco factories. So, in the Barrettocase, the particular shares of stock which the parties desired totransfer were capable of designation. In the Tan Leonco case, wherea quantity of hemp was the subject of the contract, it was shown thatthat quantity had been deposited in a specific warehouse, and thusset apart and distinguished from all other hemp.

A number of cases have been decided in the State of Louisiana,where the civil law prevails, which confirm our position. Perhaps thelatest is Witt Shoe Co. vs.Seegars and Co. (122 La., 145; 47 Sou.,444). In this case a contract was entered into by a traveling salesmanfor a quantity of shoes, the sales having been made by sample. Thecourt said of this contract:

But it is wholly immaterial, for the purpose of the main question,whether Mitchell was authorized to make a definite contract of sale ornot, since the only contract that he was in a position to make was anagreement to sell or an executory contract of sale. He says thatplaintiff sends out 375 samples of shoes, and as he was offering tosell by sample shoes, part of which had not been manufactured andthe rest of which were incorporated in plaintiff's stock in Lynchburg,


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Va., it was impossible that he and Seegars and Co. should at thattime have agreed upon the specific objects, the title to which was topass, and hence there could have been no sale. He and Seegars andCo. might have agreed, and did (in effect ) agree, that theidentification of the objects and their appropriation to the contractnecessary to make a sale should thereafter be made by the plaintiff,acting for itself and for Seegars and Co., and the legend printed inred ink on plaintiff's billheads ("Our responsibility ceases when wetake transportation Co's. receipt `In good order'" indicates plaintiff'sidea of the moment at which such identification and appropriationwould become effective. The question presented was carefullyconsidered in the case of State vs.Shields, et al. (110 La., 547, 34Sou., 673) (in which it was absolutely necessary that it should bedecided), and it was there held that in receiving an order for a

quantity of goods, of a kind and at a price agreed on, to be suppliedfrom a general stock, warehoused at another place, the agentreceiving the order merely enters into an executory contract for thesale of the goods, which does not divest or transfer the title of anydeterminate object, and which becomes effective for that purposeonly when specific goods are thereafter appropriated to the contract;and, in the absence of a more specific agreement on the subject, thatsuch appropriated takes place only when the goods as ordered aredelivered to the public carriers at the place from which they are to beshipped, consigned to the person by whom the order is given, atwhich time and place, therefore, the sale is perfected and the titlepasses.

This case and State vs. Shields, referred to in the above quotationare amply illustrative of the position taken by the Louisiana court onthe question before us. But we cannot refrain from referring to thecase of Larue and Prevost vs. Rugely, Blair and Co. (10 La. Ann.,242) which is summarized by the court itself in the Shields case asfollows:

. . . It appears that the defendants had made a contract for the sale,by weight, of a lot of cotton, had received $3,000 on account of theprice, and had given an order for its delivery, which had beenpresented to the purchaser, and recognized by the press in which thecotton was stored, but that the cotton had been destroyed by firebefore it was weighed. It was held that it was still at the risk of the


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seller, and that the buyer was entitled to recover the $3,000 paid onaccount of the price.

We conclude that the contract in the case at bar was merely anexecutory agreement; a promise of sale and not a sale. At there wasno perfected sale, it is clear that articles 1452, 1096, and 1182 arenot applicable. The defendant having defaulted in his engagement,the plaintiff is entitled to recover the P3,000 which it advanced to thedefendant, and this portion of the judgment appealed from musttherefore be affirmed.

The plaintiff has appealed from the judgment of the trial court on theground that it is entitled to recover the additional sum of P1,200 underparagraph 4 of the contract. The court below held that this paragraph

was simply a limitation upon the amount of damages which could berecovered and not liquidated damages as contemplated by the law."It also appears," said the lower court, "that in any event thedefendant was prevented from fulfilling the contract by the delivery ofthe sugar by condition over which he had no control, but theseconditions were not sufficient to absolve him from the obligation ofreturning the money which he received."

The above quoted portion of the trial court's opinion appears to bebased upon the proposition that the sugar which was to be delivered

by the defendant was that which he expected to obtain from his ownhacienda and, as the dry weather destroyed his growing cane, hecould not comply with his part of the contract. As we have indicated,this view is erroneous, as, under the contract, the defendant was notlimited to his growth crop in order to make the delivery. He agreed todeliver the sugar and nothing is said in the contract about where hewas to get it.

We think is a clear case of liquidated damages. The contract plainlystates that if the defendant fails to deliver the 600 piculs of sugarwithin the time agreed on, the contract will be rescinded and he willbe obliged to return the P3,000 and pay the sum of P1,200 by way ofindemnity for loss and damages. There cannot be the slightest doubtabout the meaning of this language or the intention of the parties.There is no room for either interpretation or construction. Under theprovisions of article 1255 of the Civil Code contracting parties are free


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to execute the contracts that they may consider suitable, providedthey are not in contravention of law, morals, or public order. In ouropinion there is nothing in the contract under consideration which isopposed to any of these principles.

For the foregoing reasons the judgment appealed from is modified byallowing the recovery of P1,200 under paragraph 4 of the contract. Asthus modified, the judgment appealed from is affirmed, without costsin this instance.

Arellano, C.J., Torres, Carson and Araullo, JJ.,concur. Johnson, J.,dissents.

COMPANIA GENERAL DE TABACOS DEFILIPINAS, pet i t ioner, vs. HON. COURT OFAPPEALS and THE COMMISSIONER OFINTERNAL REVENUE, respondents.

D E C I S I O N

QUISUMBING, J.:

This petition for review on certiorariseeks to reverse theDecision,[1]dated October 16, 2000, of the Court of Appealsin CA-G.R. SP No. 48797, which set aside the Decision [2]ofthe Court of Tax Appeals (CTA), in CTA Case No.5204. The tax court ordered the refund of specific taxes inthe amount of P1,051,050 paid under protest by petitioner onthe removal, transfer and sale of its stemmed leaf tobaccoproducts to various cigar and cigarette manufacturers.

Petitioner likewise assails the appellate courts Resolution[3]dated March 6, 2001 which denied the Motion forReconsideration.

The facts, as culled from records, are as follows:

Petitioner Compania General de Tabacos de Filipinasis


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engaged in the business of re-drying of tobacco leaves, forboth the export and domestic markets. It purchases itstobacco leaves directly from local growers. Thereafter,petitioner cuts, re-dries, packs and sells in bulk the leaves

for delivery to cigar and cigarette manufacturers. Said re-dried leaves then form the raw material for the manufactureof cigar and cigarettes.

Prior to June 1993, petitioner sold its tobacco to cigarand cigarette manufacturers without prepayment of anyexcise tax, there being no notice of assessment from norcollection made by respondent Commissioner. Instead, whatpetitioner paid were inspection fees.

Beginning June 1993, however, respondentCommissioner imposed upon petitioner a specific tax at therate of 75 centavos per kilogram prior to any removal, sale ortransfer of its tobacco products.

Petitioner paid said taxes under protest up to August 22,1994.

On December 8, 1994, petitioner filed a written claim forrefund of P1,051,050 as specific taxes paid on its tobaccoleaves. It alleged that it was exempt from paying said taxes.Petitioner based its claim on Sections 137[4] and 141[5] ofthe National Internal Revenue Code and Section 20 ofRevenue Regulations No. V-39,[6] which exempted thetransfer of stripped tobacco for use in the manufacture ofother tobacco products from prepayment of excise tax.

Receiving no response from respondent Commissioner,petitioner on February 22, 1995, filed a Petition for Review,docketed as CTA Case No. 5204 with the tax court, prayingfor refund of specific taxes it had paid since June 1993.

The CTA granted the petition in its decision dated June15, 1998, which decreed:


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WHEREFORE, in view of the foregoing, the instant Petition for

Review is hereby GRANTED. Accordingly, respondent is hereby

ORDERED to REFUND the amount of P1,051,050.00 to the

petitioner immediately.

SO ORDERED.[7]

In finding for petitioner, the CTA cited Commissioner ofInternal Revenue v. Fortune Tobacco Corporation, CA-G.R.SP Nos. 38219/40313, dated January 30, 1998. It held thatthe exemption from specific tax granted by Sections 137 and141 of the Tax Code applies to stemmed leaf tobacco. The

appellate court held that stemmed leaf tobacco is solelymeant to be the raw material of cigarettes and other tobaccoproducts which are subject to excise tax. The Court of

Appeals also found that the Bureau of Internal Revenue(BIR) went beyond its rule-making power and arrogatedlegislative power unto itself when it issued both RevenueRegulations Nos. 17-67 and V-39 since by using the powerto classify, the BIR actually amended and amplified the taxlaw. Inasmuch as petitioner herein was similarly situated as

Fortune Tobacco, said the tax court, there was no reasonwhy the appellate courts ruling in CA-G.R. SP Nos.38219/40313 should not apply to petitioners case. Hence,no prepayment of excise tax was required and a refund wasin order.

Respondent Commissioner appealed the tax courtsdecision to the Court of Appeals in CA-G.R. SP No.48797. On October 16, 2000, the appellate court ruled asfollows:

WHEREFORE, in view of the foregoing, the petition is

GRANTED. The decision and resolution of the Court of Tax

Appeals is hereby ANNULLED and SET ASIDE.


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SECTIONS 137 AND 141 OF THE NATIONALINTERNAL REVENUE CODE;

2. .WHEN IT DENIED PETITIONERS CLAIM FORREFUND CONTRARY TO THE WELLESTABLISHED DOCTRINES ON STARE DECISIS.[9]

The only issue for our resolution is whether petitioner isentitled to the refund of the amount of P1,051,050 onspecific taxes on stemmed tobacco which it paid underprotest.

Petitioner contends that it is exempt from paying thespecific tax on its stemmed tobacco since its tobacco leaves

are unfit for consumption and the cigar and cigarettemanufacturers, who are the end users of its product, payexcise taxes thereon.

Respondent Commissioner counters that under RevenueRegulations No. 17-67, stemmed leaf tobacco is classifiedas partially manufactured tobacco, hence subject tospecific tax under Section 141 of the NIRC. Stemmed leaftobacco is exempt from specific tax only when sold as raw

material by one L-7[10]directly to another L-7, as prescribedby Revenue Regulations No. V-39. RespondentCommissioner further points out that since petitioner isengaged in re-drying, Revenue Regulations No. 17-67classifies it as either an L-3R[11]or L-6,[12]and not L-7. Thus,it cannot claim any exemption from specific tax.

The issue raised in the instant case is not novel.

We agree with petitioner that both Sections 137 and 141of the former Tax Code allowed the sale of stemmed leaftobacco without any pre-payment of tax. We must stress,however, that a careful reading of the aforementionedprovisions show that such sale is qualified by and is subjectto such conditions as may be prescribed in the regulations


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of the Department of Finance. Said conditions wereprovided for in Revenue Regulations Nos. V-39 and 17-67,which were issued to clarify and implement the foregoingprovisions of the Tax Code. Hence, said provisions of the Tax

Code must be read and interpreted in accordance with saidregulations.

Section 20 of Revenue Regulations No. V-39, whichspecifically lays the rules for tax exemption on tobaccoproducts states:

Section 20.Exemption from tax of tobacco products intended for

agricultural or industrial purposes. (a) Sale of stemmed leaf

tobacco, etc., by one factory to another. Subject to the limitationsherein established, products of tobacco entirely unfit for chewing

or smoking may be removed free of tax for agricultural or

industrial use; and stemmed leaf tobacco, fine-cut shorts, the refuse

of fine-cut chewing tobacco, refuse, scraps, cuttings, clippings, and

sweeping of tobacco may be sold in bulk as raw materials by one

manufacturer directly to another without the prepayment of the

specific tax.

Stemmed leaf tobacco,fine-cut shorts, the refuse of fine-cut

chewing tobacco, scraps, cutting, clippings, and sweeping of leaf

tobacco or partially manufactured tobacco or other refuse of

tobacco may be transferred from one factory to another under an

official L-7 invoice on which shall be entered the exact weight of

the tobacco at the time of its removal, and entry shall be made in

the L-7 register in the place provided on the page for

removals. Corresponding debit entry will be made in the L-7

register book of the factory receivingthe tobacco under headingRefuse, etc., received from other factory, showing date of

receipt, assessment and invoice numbers, name and address of the

consignor, form in which received, and the net weight of the

tobacco. x x x (Emphasis and underscoring supplied.)


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Section 20 must be construed in relation to Section2(m)(1) of Revenue Regulations No. 17-67, which classifiesstemmed leaf tobacco as partially manufactured tobacco,and Section 3 thereof which provides for the different

designations for persons dealing with tobacco, to wit: L-3, L-4, L-6, L-7, etc. Section 3(h) of Revenue Regulations No. 17-67 describes an L-7 as a manufacturer of tobaccoproducts.

The 2001 case of Commissioner of Internal Revenue v.La Campana Fabrica de Tabacos, Inc.[13] held that thefollowing conditions must be met for stemmed leaf tobaccoto be transferred without prepayment of specific tax, to wit:

(a) The transfer shall be made pursuant to an official L-7invoice on which shall be entered the exact weight ofthe tobacco at the time of its removal;

(b) Entry shall be made in the L-7 register in the placeprovided on the page removals; and

(c) Corresponding debit entry shall be made in the L-7register book of the factory receiving the tobacco

under the heading Refuse, etc., received from theother factory, showing the date of receipt,assessment and invoice numbers, name and addressof the consignor, form in which received, and theweight of the tobacco.[14]

From the foregoing, it is clear that an entity claimingexemption from specific tax under Section 137, must provethat both the entity and the transferee are categorized as L-7

manufacturers since only an L-7 tobacco manufacturer hasan L-7 invoice and an L-7 registry book.[15]Here, petitioner isengaged in the export, domestic sale and re-drying oftobacco leaves, activities which are designated as fallingeither under L-3R or L-6 under Revenue Regulations No. 17-67. Thus, not being designated as an L-7 tobacco
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manufacturer, petitioner cannot claim any exemption frompayment of the specific tax on its stemmed leaf tobacco. Inother words, petitioner, as a non-L-7 tobacco dealer ofstemmed leaf tobacco, is liable to pay the specific tax

thereon. Hence, petitioner is not entitled to any refund of thespecific taxes paid.

Petitioners arguments impugning the validity ofRevenue Regulations Nos. V-39 and 17-67 deserve scantconsideration. First, both regulations were issued pursuantto Section 245[16] (now Section 244) of the Tax Code. Theauthority of the Secretary of Finance, in conjunction with theCommissioner of Internal Revenue, to promulgate needful

rules and regulations for the effective enforcement of internalrevenue laws cannot be controverted. Such rules andregulations, as well as administrative opinions and rulings,ordinarily deserve to be given weight and respect by thecourts.[17]Second, our scrutiny of Revenue Regulations Nos.V-39 and 17-67 clearly shows that said regulations did notmodify or deviate from the text of Sections 137 and 141 butmerely implemented and clarified said two provisions by

providing certain conditions under which stemmed leaftobacco may be exempted from prepayment of specific tax.

WHEREFORE, the petition is DENIED for lack ofmerit. The assailed Decision and the Resolution of the Courtof Appeals in CA-G.R. SP No. 48797 are AFFIRMED.

SO ORDERED.

Austria-Martinez, Callejo, Sr., andTinga, JJ., concur.

Puno, (Chairman), J., on leave.


FIRST DIVISION

G.R. No. L-36902 January 30, 1982


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LUIS PICHEL, petitioner, vs. PRUDENCIO ALONZO, respondent.

GUERRERO, J.:

This is a petition to review on certiorari the decision of the Court ofFirst Instance of Basilan City dated January 5, 1973 in Civil Case No.820 entitled "Prudencio Alonzo, plaintiff, vs. Luis Pichel, defendant."

This case originated in the lower Court as an action for the annulmentof a "Deed of Sale" dated August 14, 1968 and executed byPrudencio Alonzo, as vendor, in favor of Luis Pichel, as vendee,involving property awarded to the former by the PhilippineGovernment under Republic Act No. 477. Pertinent portions of thedocument sued upon read as follows:

That the VENDOR for and in consideration of the sum of FOURTHOUSAND TWO HUNDRED PESOS (P4,200.00), PhilippineCurrency, in hand paid by the VENDEE to the entire satisfaction ofthe VENDOR, the VENDOR hereby sells transfers, and conveys, byway of absolute sale, all the coconut fruits of his coconut land,designated as Lot No. 21 - Subdivision Plan No. Psd- 32465, situatedat Balactasan Plantation, Lamitan, Basilan City, Philippines;

That for the herein sale of the coconut fruits are for all the fruits onthe aforementioned parcel of land presently found therein as well asfor future fruits to be produced on the said parcel of land during theyears period; which shag commence to run as of SEPTEMBER15,1968; up to JANUARY 1, 1976 (sic);

That the delivery of the subject matter of the Deed of Sale shall befrom time to time and at the expense of the VENDEE who shall dothe harvesting and gathering of the fruits;

That the Vendor's right, title, interest and participation hereinconveyed is of his own exclusive and absolute property, free from anyliens and encumbrances and he warrants to the Vendee good titlethereto and to defend the same against any and all claims of allpersons whomsoever. 1


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After the pre-trial conference, the Court a quo issued an Order datedNovember 9, 1972 which in part read thus:

The following facts are admitted by the parties:

Plaintiff Prudencio Alonzo was awarded by the Government thatparcel of land designated as Lot No. 21 of Subdivision Plan Psd32465 of Balactasan, Lamitan, Basilan City in accordance withRepublic Act No. 477. The award was cancelled by the Board ofLiquidators on January 27, 1965 on the ground that, previous thereto,plaintiff was proved to have alienated the land to another, in violationof law. In 197 2, plaintiff's rights to the land were reinstated.

On August 14, 1968, plaintiff and his wife sold to defendant an the

fruits of the coconut trees which may be harvested in the land inquestion for the period, September 15, 1968 to January 1, 1976, inconsideration of P4,200.00. Even as of the date of sale, however, theland was still under lease to one, Ramon Sua, and it was theagreement that part of the consideration of the sale, in the sum ofP3,650.00, was to be paid by defendant directly to Ramon Sua so asto release the land from the clutches of the latter. Pending saidpayment plaintiff refused to snow the defendant to make any harvest.

In July 1972, defendant for the first time since the execution of the

deed of sale in his favor, caused the harvest of the fruit of the coconuttrees in the land.

xxx xxx xxx

Considering the foregoing, two issues appear posed by the complaintand the answer which must needs be tested in the crucible of a trialon the merits, and they are:

First.Whether or nor defendant actually paid to plaintiff the full sum

of P4,200.00 upon execution of the deed of sale.

Second. Is the deed of sale, Exhibit 'A', the prohibitedencumbrance contemplated in Section 8 of Republic Act No. 477? 2

Anent the first issue, counsel for plaintiff Alonzo subsequently'stipulated and agreed that his client ... admits fun payment thereof by


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defendant. 3 The remaining issue being one of law, the Court belowconsidered the case submitted for summary judgment on the basis of thepleadings of the parties, and the admission of facts and documentaryevidence presented at the pre-trial conference.

The lower court rendered its decision now under review, holding thatalthough the agreement in question is denominated by the parties asa deed of sale of fruits of the coconut trees found in the vendor'sland, it actually is, for all legal intents and purposes, a contract oflease of the land itself. According to the Court:

... the sale aforestated has given defendant complete control andenjoyment of the improvements of the land. That the contract isconsensual; that its purpose is to allow the enjoyment or use of athing; that it is onerous because rent or price certain is stipulated; andthat the enjoyment or use of the thing certain is stipulated to be for acertain and definite period of time, are characteristics which admit ofno other conclusion. ... The provisions of the contract itself and itscharacteristics govern its nature. 4

The Court, therefore, concluded that the deed of sale in question isan encumbrance prohibited by Republic Act No. 477 which providesthus:

Sec. 8. Except in favor of the Government or any of its branches,units, or institutions, land acquired under the provisions of this Act orany permanent improvements thereon shall not be thereon and for aterm of ten years from and after the date of issuance of the certificateof title, nor shall they become liable to the satisfaction of any debtcontracted prior to the expiration of such period.

Any occupant or applicant of lands under this Act who transferswhatever rights he has acquired on said lands and/or on theimprovements thereon before the date of the award or signature of

the contract of sale, shall not be entitled to apply for another piece ofagricultural land or urban, homesite or residential lot, as the case maybe, from the National Abaca and Other Fibers Corporation; and suchtransfer shall be considered null and void. 5

The dispositive portion of the lower Court's decision states:


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WHEREFORE, it is the judgment of this Court that the deed of sale,Exhibit 'A', should be, as it is, hereby declared nun and void; thatplaintiff be, as he is, ordered to pay back to defendant theconsideration of the sale in the sum of P4,200.00 the same to bearlegal interest from the date of the filing of the complaint until paid; thatdefendant shall pay to the plaintiff the sum of P500.00 as attorney'sfees.

Costs against the defendant. 6

Before going into the issues raised by the instant Petition, the matterof whether, under the admitted facts of this case, the respondent hadthe right or authority to execute the "Deed of Sale" in 1968, his awardover Lot No. 21 having been cancelled previously by the Board of

Liquidators on January 27, 1965, must be clarified. The case in pointis Ras vs. Sua 7wherein it was categorically stated by this Court that acancellation of an award granted pursuant to the provisions of Republic ActNo. 477 does not automatically divest the awardee of his rights to the land.Such cancellation does not result in the immediate reversion of theproperty subject of the award, to the State. Speaking through Mr. JusticeJ.B.L. Reyes, this Court ruled that "until and unless an appropriateproceeding for reversion is instituted by the State, and its reacquisition ofthe ownership and possession of the land decreed by a competent court,the grantee cannot be said to have been divested of whatever right that he

may have over the same property."

8

There is nothing in the record to show that at any time after thesupposed cancellation of herein respondent's award on January 27,1965, reversion proceedings against Lot No. 21 were instituted by theState. Instead, the admitted fact is that the award was reinstated in1972. Applying the doctrine announced in the above-cited Ras case,therefore, herein respondent is not deemed to have lost any of hisrights as grantee of Lot No. 21 under Republic Act No. 477 during theperiod material to the case at bar, i.e., from the cancellation of the

award in 1965 to its reinstatement in 1972. Within said period,respondent could exercise all the rights pertaining to a grantee withrespect to Lot No. 21.

This brings Us to the issues raised by the instant Petition. In his Brief,petitioner contends that the lower Court erred:


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1. In resorting to construction and interpretation of the deed of sale inquestion where the terms thereof are clear and unambiguous andleave no doubt as to the intention of the parties;

2. In declaring granting without admitting that an interpretation isnecessary the deed of sale in question to be a contract of leaseover the land itself where the respondent himself waived andabandoned his claim that said deed did not express the trueagreement of the parties, and on the contrary, respondent admitted atthe pre-trial that his agreement with petitioner was one of sale of thefruits of the coconut trees on the land;

3. In deciding a question which was not in issue when it declared thedeed of sale in question to be a contract of lease over Lot 21;

4. In declaring furthermore the deed of sale in question to be acontract of lease over the land itself on the basis of facts which werenot proved in evidence;

5. In not holding that the deed of sale, Exhibit "A" and "2", expressesa valid contract of sale;

6. In not deciding squarely and to the point the issue as to whether ornot the deed of sale in question is an encumbrance on the land and

its improvements prohibited by Section 8 of Republic Act 477; and

7. In awarding respondent attorney's fees even granting, withoutadmitting, that the deed of sale in question is violative of Section 8 ofRepublic Act 477.

The first five assigned errors are interrelated, hence, We shallconsider them together. To begin with, We agree with petitioner thatconstruction or interpretation of the document in question is not calledfor. A perusal of the deed fails to disclose any ambiguity or obscurity

in its provisions, nor is there doubt as to the real intention of thecontracting parties. The terms of the agreement are clear andunequivocal, hence the literal and plain meaning thereof should beobserved. Such is the mandate of the Civil Code of the Philippineswhich provides that:

Art. 1370. If the terms of a contract are clear and leave no doubt upon


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the intention of the contracting parties, the literal meaning of itsstipulation shall control ... .

Pursuant to the afore-quoted legal provision, the first andfundamental duty of the courts is the application of the contractaccording to its express terms, interpretation being resorted to onlywhen such literal application is impossible. 9

Simply and directly stated, the "Deed of Sale dated August 14, 1968is precisely what it purports to be. It is a document evidencing theagreement of herein parties for the sale of coconut fruits of Lot No.21, and notfor the leaseof the land itself as found by the lower Court.In clear and express terms, the document defines the object of thecontract thus: "the herein sale of the coconut fruits are for an the

fruits on the aforementioned parcel of land during the years ...(from)SEPTEMBER 15, 1968; up to JANUARY 1, 1976." Moreover, aspetitioner correctly asserts, the document in question expresses avalid contract of sale. It has the essential elements of a contract ofsale as defined under Article 1485 of the New Civil Code whichprovides thus:

Art. 1458. By the contract of sale one of the contracting partiesobligates himself to transfer the ownership of and to deliver adeterminate thing, and the other to pay therefor a price certain in

money or its equivalent.

A contract of sale may be absolute or conditional.

The subject matter of the contract of sale in question are the fruits ofthe coconut trees on the land during the years from September 15,1968 up to January 1, 1976, which subject matter is a determinatething. Under Article 1461 of the New Civil Code, things having apotential existence may be the object of the contract of sale. And inSibal vs. Valdez, 50 Phil. 512, pending crops which have potentialexistence may be the subject matter of the sale. Here, the SupremeCourt, citing Mechem on Sales and American cases said which havepotential existence may be the subject matter of sale. Here, theSupreme Court, citing Mechem on Sales and American cases said:

Mr. Mechem says that a valid sale may be made of a thing, whichthough not yet actually in existence, is reasonably certain to come


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into existence as the natural increment or usual incident of somethingalready in existence, and then belonging to the vendor, and the titlewill vest in the buyer the moment the thing comes into existence.(Emerson vs. European Railway Co., 67 Me., 387; Cutting vs.Packers Exchange, 21 Am. St. Rep. 63) Things of this nature are saidto have a potential existence. A man may sell property of which he ispotentially and not actually possess. He may make a valid sale of thewine that a vineyard is expected to produce; or the grain a field maygrow in a given time; or the milk a cow may yield during the comingyear; or the wool that shall thereafter grow upon sheep; or what maybe taken at the next case of a fisherman's net; or fruits to grow; oryoung animals not yet in existence; or the goodwill of a trade and thelike. The thing sold, however, must be specific and Identified. Theymust be also owned at the time by the vendor. (Hull vs. Hull 48 Conn.

250 (40 Am. Rep., 165) (pp. 522-523).

We do not agree with the trial court that the contract executed by andbetween the parties is "actually a contract of lease of the land and thecoconut trees there." (CFI Decision, p. 62, Records). The Court'sholding that the contract in question fits the definition of a lease ofthings wherein one of the parties binds himself to give to another theenjoyment or use of a thing for a price certain and for a period whichmay be definite or indefinite (Art. 1643, Civil Code of the Philippines)is erroneous. The essential difference between a contract of sale anda lease of things is that the delivery of the thing sold transfersownership, while in lease no such transfer of ownership results as therights of the lessee are limited to the use and enjoyment of the thingleased.

In Rodriguez vs. Borromeo, 43 Phil. 479, 490, the Supreme Courtheld:

Since according to article 1543 of the same Code the contract of

lease is defined as the giving or the concession of the enjoyment oruse of a thing for a specified time and fixed price, and since suchcontract is a form of enjoyment of the property, it is evident that itmust be regarded as one of the means of enjoyment referred to insaid article 398, inasmuch as the terms enjoyment, use, and benefitinvolve the same and analogous meaning relative to the generalutility of which a given thing is capable. (104 Jurisprudencia Civil,


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443)

In concluding that the possession and enjoyment of the coconut treescan therefore be said to be the possession and enjoyment of the landitself because the defendant-lessee in order to enjoy his right underthe contract, he actually takes possession of the land, at least duringharvest time, gather all of the fruits of the coconut trees in the land,and gain exclusive use thereof without the interference or interventionof the plaintiff-lessor such that said plaintiff-lessor is excluded in factfrom the land during the period aforesaid, the trial court erred. Thecontract was clearly a "sale of the coconut fruits." The vendor sold,transferred and conveyed "by way of absolute sale, all the coconutfruits of his land," thereby divesting himself of all ownership ordominion over the fruits during the seven-year period. The

possession and enjoyment of the coconut trees cannot be said to bethe possession and enjoyment of the land itself because these rightsare distinct and separate from each other, the first pertaining to theaccessory or improvements (coconut trees) while the second, to theprincipal (the land). A transfer of the accessory or improvement is nota transfer of the principal. It is the other way around, the accessoryfollows the principal. Hence, the sale of the nuts cannot beinterpreted nor construed to be a lease of the trees, much lessextended further to include the lease of the land itself.

The real and pivotal issue of this case which is taken up in petitioner'ssixth assignment of error and as already stated above, refers to thevalidity of the "Deed of Sale", as such contract of sale, vis-a-vis theprovisions of Sec. 8, R.A. No. 477. The lower Court did not rule onthis question, having reached the conclusion that the contract at barwas one of lease. It was from the context of a lease contract that theCourt below determined the applicability of Sec. 8, R.A. No. 477, tothe instant case.

Resolving now this principal issue, We find after a close and carefulexamination of the terms of the first paragraph of Section 8hereinabove quoted, that the grantee of a parcel of land under R.A.No. 477 is not prohibited from alienating or disposing of the naturaland/or industrial fruits of the land awarded to him. What the lawexpressly disallows is the encumbrance or alienation of the land itselfor any of the permanent improvements thereon. Permanent


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improvements on a parcel of land are things incorporated or attachedto the property in a fixed manner, naturally or artificially. They includewhatever is built, planted or sown on the land which is characterizedby fixity, immutability or immovability. Houses, buildings, machinery,animal houses, trees and plants would fall under the category ofpermanent improvements, the alienation or encumbrance of which isprohibited by R.A. No. 477. While coconut trees are permanentimprovements of a land, their nuts are natural or industrial fruits whichare meant to be gathered or severed from the trees, to be used,enjoyed, sold or otherwise disposed of by the owner of the land.Herein respondents, as the grantee of Lot No. 21 from theGovernment, had the right and prerogative to sell the coconut fruits ofthe trees growing on the property.

By virtue of R.A. No. 477,bona fideoccupants, veterans, members ofguerilla organizations and other qualified persons were given theopportunity to acquire government lands by purchase, taking intoaccount their limited means. It was intended for these persons tomake good and productive use of the lands awarded to them, notonly to enable them to improve their standard of living, but likewise tohelp provide for the annual payments to the Government of thepurchase price of the lots awarded to them. Section 8 was included,as stated by the Court a quo, to protect the grantees from themselvesand the incursions of opportunists who prey on their misery andpoverty." It is there to insure that the grantees themselves benefitfrom their respective lots, to the exclusion of other persons.

The purpose of the law is not violated when a grantee sells theproduce or fruits of his land. On the contrary, the aim of the law isthereby achieved, for the grantee is encouraged and induced to bemore industrious and productive, thus making it possible for him andhis family to be economically self-sufficient and to lead a respectablelife. At the same time, the Government is assured of payment on the

annual installments on the land. We agree with herein petitioner thatit could not have been the intention of the legislature to prohibit thegrantee from selling the natural and industrial fruits of his land, forotherwise, it would lead to an absurd situation wherein the granteewould not be able to receive and enjoy the fruits of the property in thereal and complete sense.


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Respondent through counsel, in his Answer to the Petition contendsthat even granting arguendo that he executed a deed of sale of thecoconut fruits, he has the "privilege to change his mind and claim itas (an) implied lease," and he has the "legitimate right" to file anaction for annulment "which no law can stop." He claims it is his "soleconstruction of the meaning of the transaction that should prevail andnot petitioner. (sic). 10Respondent's counsel either misapplies the law oris trying too hard and going too far to defend his client's hopeless cause.Suffice it to say that respondent-grantee, after having received theconsideration for the sale of his coconut fruits, cannot be allowed toimpugn the validity of the contracts he entered into, to the prejudice ofpetitioner who contracted in good faith and for a consideration.

The issue raised by the seventh assignment of error as to thepropriety of the award of attorney's fees made by the lower Courtneed not be passed upon, such award having been apparently basedon the erroneous finding and conclusion that the contract at bar isone of lease. We shall limit Ourselves to the question of whether ornot in accordance with Our ruling in this case, respondent is entitledto an award of attorney's fees. The Civil Code provides that:

Art. 2208. In the absence of stipulation, attorney's fees and expensesof litigation, other than judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendant's act or omission has compelled the plaintiffto litigate with third persons or to incur expenses to protect hisinterest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding againstthe plaintiff;

(5) Where the defendant acted in gross and evident bad faith inrefusing to satisfy the plaintiff's plainly valid, just and demandableclaim;

(6) In actions for legal support;


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review of the decision rendered in the case by the Court of Appealsreversing that of the Court of First Instance of Leyte, for the reversalthereof, and for the affirmance of the decision of said Court of FirstInstance.

As grounds for the allowance of the appeal, petitioner assigns thefollowing alleged errors of law committed by said Court of Appeals inits decision, to wit:

1. The Court of Appeals erred in finding in its decision, subject of thepresent petition for certiorari, that the 5th paragraph of the contract oflease Exhibit A establishes rights for the petitioner and for therespondent, which are antagonistic and, therefore, unenforceable byaction.

2. The Court of Appeals likewise erred in finding in its decision thatthe promise, if any, made by respondent to sell to petitioner the landin question is not enforceable by action for lack of a price.

3. The Court of Appeals also erred in finding in its decision that the5th paragraph of the contract of lease entered into by petitioner andrespondent does not state two promises to buy and to sell which aremutually demandable.

4. Lastly, the Court of Appeals erred in holding that the hereinpetitioner has nocauseof action against defendant-respondent.

5. On May 14, 1923 petitioner and respondent entered into a contractof lease in the fifth clause of which, pertinent to the question at issue,provides:

5th. That upon termination of the period of this contract, namely, tenyears, the lessor shall have the option to buy the building orimprovement which the lessee may have built upon the lots,

reimbursing the latter ninety per cent (90%) of the original net cost ofthe construction; but should the lessor be unable or unwilling to buysaid building or improvement, the income or rent derived therefromshall be equally divided between said lessor and lessee, and thelatter shall no longer have the obligation to pay the rent agreed uponfor the lots in the second paragraph of this contract; provided,however, that the present contract, with the modification just


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mentioned, with respect to the income from the building and the rentfrom the lot, shall continue in force until the lessor buys the buildingor improvement or the lessee buys the land.

The judgment rendered by the Court of First Instance of Leyte andreversed by the Court of Appeals, which absolved the defendant is asfollows:

Wherefore, judgment is rendered sentencing defendant to buy thehouse of plaintiff or to sell to plaintiff the land on which the latter'shouse is built. Each of the parties must submit the name of a personto be appointed commissioner for the assessment and appraisal ofthe land on which plaintiff's house is built.

Defendant is sentenced to pay the costs of the suit.

The main question to be decided in this appeal is whether plaintiff, aslessee, has a right, by virtue of the aforecited fifth clause of thecontract of lease, to compel defendant as lessor, to sell to him theland on which he built his house in accordance with said contract.

It will be seen that the lessor is given the preference of buying thebuilding erected on the leased land at a price equivalent to 90 percent of the original net cost of the construction upon the termination

of the ten years fixed in the contract as the duration of the lease. Asten years have elapsed and the lessor has not exercised his right tobuy the building, and has no intention to do so, may the lesseecompel the lessor to sell to him the leased land? The lessee is notgiven the option to buy the land. The grant of said right may not beinferred from the conditional clause of paragraph 5 and fromparagraph 4 of the contract since neither in the conditional clauseaforecited nor in the fourth paragraph of the contract is the lessorbound to sell the questioned land to the lessee. Furthermore, in thesaid conditional clause the price which the lessee would have to payshould he decide to buy the land is not fixed. Article 1445 of the CivilCode provides that "By the contract of purchase and sale one of thecontracting parties binds himself to deliver a determinate thing andthe other to pay a certain price therefor in money or in somethingrepresenting the same." According to article 1451, "a promise to sellor buy, when there is an agreement as to the thing and the price,


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entitles the contracting parties reciprocally to demand the fulfillmentof the contract." And article 1447 of the same Code provides that inorder that the price may be considered certain, it shall be sufficientthat it be so in relation to some certain thing, or that its determinationbe left to the judgment of some particular person, and should thelatter be unable or unwilling to fix the price, the contract shall beinoperative. And according to article 1449 of the same Code, thedesignation of the price can never be left to the determination of oneof the contracting parties.

As we have said, a price certain which the lessee should pay thelessor for the land in case he should desire to buy it has not beenfixed; neither has anything which may have definite value or whichmay serve as a basis for the fixing of the price been designated. Also,

no determinate person has been named to fix the price.

The price of the leased land not having been fixed and the lessor nothaving bound himself to sell it, the essential elements which give lifeto the contract are lacking. It follows that the lessee cannot compelthe lessor to sell the leased land to him.

Having arrived at this conclusion, we do not find sufficient grounds forreversing the decision appealed from, which is hereby affirmed, withcosts against the appellant.

Imperial, Diaz, Laurel, and Concepcion, JJ., concur.


FIRST DIVISION

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

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

DAVIDE, JR., J.:


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At the heart of the present controversy is the document markedExhibit "A" 1 for the private respondent, which was signed by a salesrepresentative of Toyota Shaw, Inc. named Popong Bernardo. Thedocument reads as follows:

4 June 1989

AGREEMENTS BETWEEN MR. SOSA

& POPONG BERNARDOOF TOYOTA

SHAW, INC.

1. all necessary documents will be submitted to TOYOTA SHAW,INC. (POPONG BERNARDO) a week after, upon arrival of Mr. Sosafrom the Province (Marinduque) where the unit will be used on the19th of June.

2. the downpayment of P100,000.00 will be paid by Mr. Sosa on June15, 1989.

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

Very truly yours,

(Sgd.) POPONG BERNARDO.

Was this document, executed and signed by the petitioner's salesrepresentative, a perfected contract of sale, binding upon thepetitioner, breach of which would entitle the private respondent todamages and attorney's fees? The trial court and the Court of

Appeals took the affirmative view. The petitioner disagrees. Hence,this petition for review on certiorari.

The antecedents as disclosed in the decisions of both the trial court

and the Court of Appeals, as well as in the pleadings of petitionerToyota Shaw, Inc. (hereinafter Toyota) and respondent Luna L. Sosa(hereinafter Sosa) are as follows. Sometime in June of 1989, Luna L.Sosa wanted to purchase a Toyota Lite Ace. It was then a seller'smarket and Sosa had difficulty finding a dealer with an available unitfor sale. But upon contacting Toyota Shaw, Inc., he was told thatthere was an available unit. So on 14 June 1989, Sosa and his son,


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Gilbert, went to the Toyota office at Shaw Boulevard, Pasig, MetroManila. There they met Popong Bernardo, a sales representative ofToyota.

Sosa emphasized to Bernardo that he needed the Lite Ace not laterthan 17 June 1989 because he, his family, and a balikbayan guestwould use it on 18 June 1989 to go to Marinduque, his homeprovince, where he would celebrate his birthday on the 19th of June.He added that if he does not arrive in his hometown with the new car,he would become a "laughing stock." Bernardo assured Sosa that aunit would be ready for pick up at 10:00 a.m. on 17 June 1989.Bernardo then signed the aforequoted "Agreements Between Mr.Sosa & Popong Bernardo of Toyota Shaw, Inc." It was also agreedupon by the parties that the balance of the purchase price would be

paid by credit financing through B.A. Finance, and for this Gilbert, onbehalf of his father, signed the documents of Toyota and B.A.Finance pertaining to the application for financing.

The next day, 15 June 1989, Sosa and Gilbert went to Toyota todeliver the downpayment of P100,000.00. They met Bernardo whothen accomplished a printed Vehicle Sales Proposal (VSP) No. 928, 2on which Gilbert signed under the subheading CONFORME. Thisdocument shows that the customer's name is "MR. LUNA SOSA" withhome address at No. 2316 Guijo Street, United Paraaque II; that the

model series of the vehicle is a "Lite Ace 1500" described as "4 Drminibus"; that payment is by "installment," to be financed by "B.A.," 3withthe initial cash outlay of P100,000.00 broken down as follows:

a) downpayment P 53,148.00

b) insurance P 13,970.00

c) BLT registration fee P 1,067.00

CHMO fee P 2,715.00

service fee P 500.00


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accessories P 29,000.00

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

CONDITIONS OF SALES

1. This sale is subject to availability of unit.

2. Stated Price is subject to change without prior notice, Price

prevailing and in effect at time of selling will apply. . . .

Rodrigo Quirante, the Sales Supervisor of Bernardo, checked andapproved the VSP.

On 17 June 1989, at around 9:30 a.m., Bernardo called Gilbert toinform him that the vehicle would not be ready for pick up at 10:00a.m. as previously agreed upon but at 2:00 p.m. that same day. At2:00 p.m., Sosa and Gilbert met Bernardo at the latter's office.

According to Sosa, Bernardo informed them that the Lite Ace wasbeing readied for delivery. After waiting for about an hour, Bernardotold them that the car could not be delivered because "nasulot angunit ng ibang malakas."

Toyota contends, however, that the Lite Ace was not delivered toSosa because of the disapproval by B.A. Finance of the creditfinancing application of Sosa. It further alleged that a particular unithad already been reserved and earmarked for Sosa but could not bereleased due to the uncertainty of payment of the balance of the

purchase price. Toyota then gave Sosa the option to purchase theunit by paying the full purchase price in cash but Sosa refused.

After it became clear that the Lite Ace would not be delivered to him,Sosa asked that his downpayment be refunded. Toyota did so on thevery same day by issuing a Far East Bank check for the full amountof P100,000.00, 4the receipt of which was shown by a check voucher of


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Toyota,5which Sosa signed with the reservation, "without prejudice to ourfuture claims for damages."

Thereafter, Sosa sent two letters to Toyota. In the first letter, dated 27June 1989 and signed by him, he demanded the refund, within five

days from receipt, of the downpayment of P100,000.00 plus interestfrom the time he paid it and the payment of damages with a warningthat in case of Toyota's failure to do so he would be constrained totake legal action. 6The second, dated 4 November 1989 and signed byM. O. Caballes, Sosa's counsel, demanded one million pesos representinginterest and damages, again, with a warning that legal action would betaken if payment was not made within three days. 7 Toyota's counselanswered through a letter dated 27 November 1989 8refusing to accede tothe demands of Sosa. But even before this answer was made andreceived by Sosa, the latter filed on 20 November 1989 with Branch 38 of

the Regional Trial Court (RTC) of Marinduque a complaint against Toyotafor damages under Articles 19 and 21 of the Civil Code in the total amountof P1,230,000.00.9He alleges, inter alia, that:

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

In its answer to the complaint, Toyota alleged that no sale wasentered into between it and Sosa, that Bernardo had no authority to

sign Exhibit "A" for and in its behalf, and that Bernardo signed Exhibit"A" in his personal capacity. As special and affirmative defenses, italleged that: the VSP did not state date of delivery; Sosa had notcompleted the documents required by the financing company, and asa matter of policy, the vehicle could not and would not be releasedprior to full compliance with financing requirements, submission of alldocuments, and execution of the sales agreement/invoice; the


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P100,000.00 was returned to and received by Sosa; the venue wasimproperly laid; and Sosa did not have a sufficient cause of actionagainst it. It also interposed compulsory counterclaims.

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

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

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

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

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

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

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


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

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

SO ORDERED.

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

Toyota now comes before this Court via this petition and raises thecore issue stated at the beginning of the ponencia and also thefollowing related issues: (a) whether or not the standard VSP was thetrue and documented understanding of the parties which would haveled to the ultimate contract of sale, (b) whether or not Sosa has anylegal and demandable right to the delivery of the vehicle despite thenon-payment of the consideration and the non-approval of his creditapplication by B.A. Finance, (c) whether or not Toyota acted in goodfaith when it did not release the vehicle to Sosa, and (d) whether ornot Toyota may be held liable for damages.

We find merit in the petition.

Neither logic nor recourse to one's imagination can lead to theconclusion that Exhibit "A" is aperfected contract of sale.

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

Art. 1458. By the contract of sale one of the contracting partiesobligates himself to transfer the ownership of and to deliver adeterminate thing, and the other to pay therefor a price certain in

money or its equivalent.

A contract of sale may be absolute or conditional.

and Article 1475 specifically provides when it is deemed perfected:

Art. 1475. The contract of sale is perfected at the moment there is a


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meeting of minds upon the thing which is the object of the contractand upon the price.

From that moment, the parties may reciprocally demandperformance, subject to the provisions of the law governing the formof contracts.

What is clear from Exhibit "A" is not what the trial court and the Courtof Appeals appear to see. It is not a contract of sale. No obligation onthe part of Toyota to transfer ownership of a determinate thing toSosa and no correlative obligation on the part of the latter to paytherefor a price certain appears therein. The provision on thedownpayment of P100,000.00 made no specific reference to a sale ofa vehicle. If it was intended for a contract of sale, it could only refer to

a sale on installment basis, as the VSP executed the following dayconfirmed. But nothing was mentioned about the full purchase priceand the manner the installments were to be paid.

This Court had already ruled that a definite agreement on the mannerof payment of the price is an essential element in the formation of abinding and enforceable contract of sale. 18 This is so because theagreement as to the manner of payment goes into the price such that adisagreement on the manner of payment is tantamount to a failure to agreeon the price. Definiteness as to the price is an essential element of a

binding agreement to sell personal property.19

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

AGREEMENTS BETWEEN MR. SOSA & POPONG BERNARDO OFTOYOTA SHAW, INC.

that he was not dealing with Toyota but with Popong Bernardo andthat the latter did not misrepresent that he had the authority to sellany Toyota vehicle. He knew that Bernardo was only a salesrepresentative of Toyota and hence a mere agent of the latter. It wasincumbent upon Sosa to act with ordinary prudence and reasonablediligence to know the extent of Bernardo's authority as an agent20inrespect of contracts to sell Toyota's vehicles. A person dealing with an


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agent is put upon inquiry and must discover upon his peril the authority ofthe agent.21

At the most, Exhibit "A" may be considered as part of the initial phaseof the generation or negotiation stage of a contract of sale. There are

three stages in the contract of sale, namely:

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

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

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

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

Financing companies are defined in Section 3(a) of R.A. No. 5980, asamended by P.D. No. 1454 and P.D. No. 1793, as "corporations orpartnerships, except those regulated by the Central Bank of thePhilippines, the Insurance Commission and the Cooperatives

Administration Office, which are primarily organized for the purposeof extending credit facilities to consumers and to industrial,commercial, or agricultural enterprises, either by discounting orfactoring commercial papers or accounts receivables, or by buyingand selling contracts, leases, chattel mortgages, or other evidence of

indebtedness, or by leasing of motor vehicles, heavy equipment andindustrial machinery, business and office machines and equipment,appliances and other movable property." 23

Accordingly, in a sale on installment basis which is financed by afinancing company, three parties are thus involved: the buyer whoexecutes a note or notes for the unpaid balance of the price of the


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thing purchased on installment, the seller who assigns the notes ordiscounts them with a financing company, and the financing companywhich is subrogated in the place of the seller, as the creditor of theinstallment buyer. 24 Since B.A. Finance did not approve Sosa'sapplication, there was then no meeting of minds on the sale on installmentbasis.

We are inclined to believe Toyota's version that B.A. Financedisapproved Sosa's application for which reason it suggested to Sosathat he pay the full purchase price. When the latter refused, Toyotacancelled the VSP and returned to him his P100,000.00. Sosa'sversion that the VSP was cancelled because, according to Bernardo,the vehicle was delivered to another who was "mas malakas" doesnot inspire belief and was obviously a delayed afterthought. It is

claimed that Bernardo said, "Pasensiya kayo, nasulot ang unit ngibang malakas," while the Sosas had already been waiting for anhour for the delivery of the vehicle in the afternoon of 17 June 1989.However, in paragraph 7 of his complaint, Sosa solemnly states:

On June 17, 1989 at around 9:30 o'clock in the morning, defendant'ssales representative, Mr. Popong Bernardo, called plaintiff's houseand informed the plaintiff's son that the vehicle will not be ready forpick-up at 10:00 a.m. of June 17, 1989 but at 2:00 p.m. of that dayinstead. Plaintiff and his son went to defendant's office on June 17

1989 at 2:00 p.m. in order to pick-up the vehicle but the defendant forreasons known only to its representatives, refused and/or failed torelease the vehicle to the plaintiff. Plaintiff demanded for anexplanation, but nothing was given; . . . (Emphasis supplied). 25

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

The award then of moral and exemplary damages and attorney's feesand costs of suit is without legal basis. Besides, the only ground uponwhich Sosa claimed moral damages is that since it was known to hisfriends, townmates, and relatives that he was buying a Toyota Lite

Ace which they expected to see on his birthday, he sufferedhumiliation, shame, and sleepless nights when the van was not


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delivered. The van became the subject matter of talks during hiscelebration that he may not have paid for it, and this created animpression against his business standing and reputation. At thebottom of this claim is nothing but misplaced pride and ego. Heshould not have announced his plan to buy a Toyota Lite Aceknowing that he might not be able to pay the full purchase price. Itwas he who brought embarrassment upon himself by bragging abouta thing which he did not own yet.

Since Sosa is not entitled to moral damages and there being noaward for temperate, liquidated, or compensatory damages, he islikewise not entitled to exemplary damages. Under Article 2229 of theCivil Code, exemplary or corrective damages are imposed by way ofexample or correction for the public good, in addition to moral,

temperate, liquidated, or compensatory damages.

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

WHEREFORE, the instant petition is GRANTED. The challenged

decision of the Court of Appeals in CA-G.R. CV NO. 40043 as well asthat of Branch 38 of the Regional Trial Court of Marinduque in CivilCase No. 89-14 are REVERSED and SET ASIDE and the complaintin Civil Case No. 89-14 is DISMISSED. The counterclaim therein islikewise DISMISSED.

No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-14823 December 9, 1919

HILARIA AGUILAR,plaintiff-appellant, vs. JUAN RUBIATO,


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defendant-appellant, and MANUEL GONZALEZ VILA,defendant-appellee.

Francisco A. Delgado for plaintiff and appellant. Abaya andPamatmat for defendant and appellant.

MALCOLM, J.:

As certainly as may be ascertained, the facts of record in this caseare believed to be the following:

Juan Rubiato is a resident of the municipality of Nagcarlan, Provinceof Laguna, of somewhat ordinary intelligence and astuteness. Early inthe year 1915, he was the owner of various parcels of land having apotential value of approximately P26,000. Rubiato was desirous ofobtaining a loan of not to exceed P1,000. Being in this state of mind,two men, Manuel Gonzalez Vila a procurador judicial and oneGregorio Azucena, and possibly another, one Marto Encarnacion,came to the house of Rubiato and there induced him to sign thesecond page of a power of attorney in favor of Manuel Gonzalez Vila.This power of attorney, introduced in evidence as Exhibit A, reads asfollows:

To all whom it may concern:

I, Juan Rubiato e Isles, of age, married, a resident of the barrio ofRizal, municipality of Nagcarlan, Province of Laguna, PhilippineIslands, do hereby freely and voluntarily set forth the following:

First. That I own and possess the full and absolute dominion overeight parcels of land (planted with about two thousand five hundredcoconut trees) situated in the aforesaid barrio, municipality ofNagcarlan, Province of Laguna, P. I.; that the description andboundaries of same are duly described in the possessory title (dated

the 15th day of January, 1896) (titulo posesorio) issued to me by theformer Spanish sovereignty; that same is inscribed in the register ofproperty of said province under numbers 141, 144, 146, 148, 150,152, 154 and 156; that these facts are proven by the certificatewritten on the legal official papers numbered 0.153.826, 0.460.498,0.455.683 and 0.460.459 and duly authorized by registrar, Sr.

Antonio Roura, . . .lawphi1.net


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Second. That being unable, on account of illness, to go in person toManila, I hereby declare that I grant to Sr. Manuel Gonzalez Vila, aresident of the municipality of San Pablo, Province of Laguna, P. I.,any power whatever required by law to secure in said city a loan notexceeding one thousand pesos (P1,000), Philippine currency; that heshall secure same in my name and representation; that he maysecure same either under the rate of interest and conditionsconsidered most convenient and beneficial for my interests, or under

pacto de retro; that furthermore he has ample power to execute, signand ratify, as though he were myself, any writing necessary for themortgage of my land described in the aforementioned document; andthe he holds this special power of attorney over said lands to the endthat same may be used as a guaranty of the loan to be secured. . . .

By reason of the power thus given, Manuel Gonzalez Vila on April 29,1915, formulated the document introduced in evidence as Exhibit C,by which the lands of Rubiato were sold to Hilaria Aguilar of Manila,for the sum of P800, with right of repurchase within one year, Rubiatoto remain in possession of the land as lessee and to pay P120 everythree months as lease rent. Hilaria Aguilar never saw the lands inquestion and did not know, until after she had consulted her attorney,exactly what her rights were. Manuel Gonzalez Vila received fromHilaria Aguilar the P800 mentioned in Exhibit C as the selling price ofthe land. Whether this money was then passed on to Juan Rubiato isuncertain, although it is undeniable that Hilaria Aguilar has neverbeen paid the money she advanced.

The one year mentioned in thepacto de retrohaving expired withoutHilaria Aguilar having received the principal nor any part of the leaserent, she began action against Juan Rubiato and Manuel GonzalezVila to consolidate the eight parcels of land in her name. After duetrial, the trial judge, the Hon. Manuel Camus, rendered a decision inwhich he recited the facts somewhat, although not exactly, as

hereinbefore set forth. The court found that the power of attorney onlyauthorized Manuel Gonzalez Vila to obtain a loan subject to amortgage, and not to sell the property. The judgment handed downwas to the effect that the plaintiff Hilaria Aguilar recover from thedefendant Juan Rubiato the sum of P800 with interest at the rate of60 per cent per annum from April 29, 1915 until May 1, 1916, andwith interest at the rate of 12 per cent per annum from May 1, 1916,


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until the payment of the principal, with the costs against thedefendant. Both parties appealed.

The points raised by the plaintiff-appellant going as they do to thefacts and these being as hereinbefore stated, no lengthy discussionof plaintiff's five assignments of error need be indulged in. The issueis not precisely relative to an interpretation of the power of attorney.The court is under no necessity of seizing on inexact language inorder to hold that the document authorized a mortgage and not asale. The so-called power of attorney might indeed be construed asauthorizing Vila to sell the property of Rubiato. And it might indeed beconstrued under a conception similar to that of the trial court's as aloan guaranteed by a mortgage. But the controlling fact is, that thepower of attorney was in reality no power of attorney but a sham

document.

In addition to the evidence, there is one very cogent reason whichimpels us to the conclusion that Rubiato is only responsible to theplaintiff for a loan. It is that the inadequacy of the price which Vilaobtained for the eight parcels of land belonging to Rubiato is so greatthat the minds revolts at it. It is an agreement which a reasonableman would neither directly nor indirectly be likely to enter into or toconsent to. To hold that the power of attorney signed by Rubiatoauthorized Vila to enter into the instant contract of sale would be

equivalent to holding, if we may be permitted to use the language ofLord Hardwicke, that "a man in his senses and not under delusion"would dispose of lands worth P26,000 for P1,000, and would payinterest thereon at the rate of 60 per cent per annum. (See 6 R. C. L.,679, 841.)

The members of this court after most particular and cautiousconsideration, having in view all the facts and all the naturalstendencies of mankind, consider that Rubiato is only responsible to

the plaintiff for the loan of P800.

The points advanced by defendant-appellant likewise necessitateonly brief consideration. While entertaining some doubt as to the

justice of requiring Rubiato to pay back the amount of P800, we donot feel authorized in disturbing this finding of the trial court. It maywell be that Vila and his partners, acting as middlemen, fabricated the


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document which Rubiato signed, secured the money from HilariaAguilar, and then pocketed the same. Yet as minor details somewhatcorroborative of the result reached by the trial court, are theundeniable facts that Rubiato admitted his desire to obtain a loan,that Hilaria Aguilar made such a loan, and that while the testimony ofVila is not overly truthful, in this one respect we do have his forcefulstatement that the money was paid over to Rubiato. That payment ofthe sum of P800 was not explicity prayed for in the complaint, doesnot deprive the court of power to render judgment for this amount,because it is a rule of good pleading that "the demand in thecomplaint is no part of the statement of the cause of action, and doesnot give it character. The facts alleged do this, and the plaintiff isentitled to so much relief as they warrant." (Sutherland on CodePleading, Vol. I, sec. 186; Code of Civil Procedure, sec. 126.)

The only remaining question which merits resolution, on which theplaintiff and defendants flatly disagree, relates to the interest whichshould be allowed. The trial court, it will be remembered, permittedthe plaintiff to recover interest at the rate of 60 per cent per annumfrom April 29, 1915, when the pacto de retro was formulated, untilMay 1, 1916, the date when the Usury Law, Act No. 2655, went intoeffect, and interest at the rate of 12 per cent per annum after thatdate. It is, of course, true, as previously decided by this court inUnited States vs. Constantino Tan Quingco Chua ([1919], 39 Phil.,552), that usury laws, such as that in force in the Philippines, are tobe construed prospectively and not retrospectively. As stated in thedecision just cited, "The reason is, that if the contract is legal at itsinception, it cannot be rendered illegal by any subsequent legislation,for this would be tantamount to the impairment of the obligation forthe contract." As we have held that the defendant is under obligationto the plaintiff for a mere loan, as this loan fails to name a lawful rateof interest, and as interest at the rate of 60 per cent per annum isunquestionably exorbitant and usurious under the Usury Law, on and

after the date when this law became effective, the defendant wouldbe liable for the legal rate of interest, which is 6 per cent per annum.We would even go further and hold that he would be liable only forsuch interest prior to the enactment of the Usury Law. This we can dounder the sanction of article 1255 of the Civil Code which condemnsagreements contrary to morals and public policy.


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Judgment is affirmed, with the sole modification that the plaintiff shallonly recover interest at the rate of 6 per cent per annum on the sumof P800 from April 29, 1915 until paid, without special finding as tocosts in this instance. So ordered.

Arellano, C.J., Torres, Araullo, Street and Avancea, JJ., concur.

Republic of the Philippines SUPREME

COURT Manila

EN BANC

February 13, 1924

G.R. No. 21026 PHILIPPINE NATIONAL BANK,

plaintiff-appellee, vs. MANUEL ERNESTO

GONZALEZ,defendant-appellee. SATURNINO

LOPEZ,buyer and appellant.

Camus and Delgado, Turner and Rheberg, Serviliano de la

Cruz for appellant.

Palma, Leuterio and Yamzon for

defendant-appellee.

No appearance for the plaintiff-

appellee.

STATEMENT

November 23, 1921, Philippine National Bank commenced

a suit against Manuel Ernesto Gonzales to foreclose a realmortgage made to secure a promissory note for P15,000.

March 17, 1922, the plaintiff bank filed an amended

complaint against the same defendant, in which the original

was reproduced, to foreclose a second mortgage for


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P15,000 upon the same land described in the original

complaint. The defendant was duly served in both

proceedings with both the original and amended

complaints, and made defaults in both cases. On April 21,1922, the bank filed a motion for default. August 8, 1922,

the court declared the defendant in default, and set the case

for hearing on August 23, 1922, at which time the bank

appeared and presented proofs of all the facts alleged in its

original and amended complaints. August 28, 1922, the

court rendered judgment in favor of the bank and against

the defendant, requiring him within three months from the

date to pay the plaintiff the amount of the two mortgages inquestion, together with the interest and costs, and that in

default thereof, execution should be issued for the sale of

the property to satisfy the judgment. December 7, 1922,

and for want of any payment, the plaintiff moved the court

for an execution, and on January 11, 1923, an execution

was issued for the sale of the real property described in the

mortgages to satisfy the amount of the judgment. OnAugust 28, 1922, the total of the judgment in the first cause

of action, including the interest, was P17,313.59, and in the

second mortgage, on the same date, it was P17,755.

The property advertised for sale was evidenced by Torrens

Certificate of Title and described in Exhibits A, B and C, of

which Exhibit A contains 3,657,703 square meters, Exhibit

B 1,335,505, square meters and Exhibit C 263,765 square

meters. Pursuant to the execution the property was duly

advertised for sale, and that described in Exhibits B and C

was sold to Saturnino Lopez, the appellant here, for

P15,000, that being the highest bid, and he being the


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highest bidder.

February 16, 1923, the sheriff filed a motion to confirm the

sale to Lopez, which was set down for hearing on March 9,1923, and due notice was given to all the parties in interest.

At a hearing on that date, the court made an order duly

conforming the sale.

April 5, 1923, the defendant Gonzales, through his then

attorney, filed the following motion:

Comes now the defendant and to the Honorable Court

respectfully shows that he applies for a reconsideration of

the order entered in this case under the date of March 9,

1923, confirming the sale at public auction made by the

deputy provincial sheriff Mr. Jose V. Lopez in favor of Mr.

Saturnino Lopez of the two parcels of land included in

certificate of title No. 5136 of the property of the defendant

and judgment debtor Mr. Manuel Ernesto Gonzales. Thismotion is based on the following ground:

That said order is not in accordance with law.

It was set down for hearing on April 7, 1923, and notice

was duly given. April 16, 1923, the court rendered a

decision in which he found as a fact that all of thenecessary requisit

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