CASE 1 DIGEST

GAITE vs FONACIER | G.R. No. L-11827

FACTS
Fonacier, owner of mining claims, constituted Gaite as his attorney-in-fact.

Gaite was authorized to enter into a contract with other persons with respect to the mining claims.

Gaite then entered into a contract with Larap Iron Mines, a company Gaite solely owned, to develop the mining
claims.

Later, Fonacier abruptly decided to revoke Gaite’s authority as attorney-in-fact.

Afterwards, Gaite sold the developments his company made in the mining claims areas and the ore already
mined for a sum of money to Fonacier.

Fonacier secured the sale with a surety company.

Part of the money was paid upon sale while the other part was payable out of the first loan of credit covering
the first shipment of iron ore and the first amount derived from the local sale of the iron ore.

After the surety expired, Gaite demanded payment of the remainder of the purchase price but Fonacier refused
arguing no sale of iron ore had yet taken place.

RTC ruled in favor of Gaite.

ISSUE
WHETHER OR NOT THE SELLING OF THE IRON ORES IS A SUSPENSIVE CONDITION FOR PAYING
GAITE

A suspensive condition is a condition which suspends rights and obligations (or the validity of the entire
contract) until a certain future event occurs. Upon the occurrence of the event, the suspended part of
the contract (or indeed the entire contract) is brought to life. If the suspensive condition is never fulfilled,
the suspended rights and obligations never come into existence and it will be as if the agreement was
never concluded.

“suspensive period” - period upon the arrival of which the obligation becomes demandable 

HELD: NO.

The sale is not a suspensive condition but is only a suspensive period or term. This interpretation is supported
by:

(1) The shipment or local sale of the iron ore is not a condition precedent (or suspensive) to the payment of the
balance of P65,000.00, but was only a suspensive period or term.

What characterizes a conditional obligation is the fact that its efficacy or obligatory force (as distinguished from
its demandability) is subordinated to the happening of a future and uncertain event; so that if the suspensive
condition does not take place, the parties would stand as if the conditional obligation had never existed.

A contract of sale is normally commutative and onerous: not only does each one of the parties assume a
correlative obligation (the seller to deliver and transfer ownership of the thing sold and the buyer to pay the
price),but each party anticipates performance by the other from the very start.

While in a sale the obligation of one party can be lawfully subordinated to an uncertain event, so that the other
understands that he assumes the risk of receiving nothing for what he gives (as in the case of a sale of hopes
or expectations, emptio spei), it is not in the usual course of business to do so; hence, the contingent character
of the obligation must clearly appear.

Nothing is found in the record to evidence that Gaite desired or assumed to run the risk of losing his right over
the ore without getting paid for it, or that Fonacier understood that Gaite assumed any such risk.

This is proved by the fact that Gaite insisted on a bond a to guarantee payment of the P65,000.00, an not only
upon a bond by Fonacier, the Larap Mines & Smelting Co., and the company's stockholders, but also on one
by a surety company; and the fact that appellants did put up such bonds indicates that they admitted the
definite existence of their obligation to pay the balance of P65,000.00.

The appellant have forfeited the right court below that the appellants have forfeited the right to compel Gaite to
wait for the sale of the ore before receiving payment of the balance of P65,000.00, because of their failure to
renew the bond of the Far Eastern Surety Company or else replace it with an equivalent guarantee. The
expiration of the bonding company's undertaking on December 8, 1955 substantially reduced the security of
the vendor's rights as creditor for the unpaid P65,000.00, a security that Gaite considered essential and upon
which he had insisted when he executed the deed of sale of the ore to Fonacier.

Other Issue: Whether there were insufficient tons of ores

(2) The sale between the parties is a sale of a specific mass or iron ore because no provision was made in
their contract for the measuring or weighing of the ore sold in order to complete or perfect the sale, nor was the
price of P75,000,00 agreed upon by the parties based upon any such measurement.(see Art. 1480, second
par., New Civil Code).

The subject matter of the sale is, therefore, a determinate object, the mass, and not the actual number of units
or tons contained therein, so that all that was required of the seller Gaite was to deliver in good faith to his
buyer all of the ore found in the mass, notwithstanding that the quantity delivered is less than the amount
estimated by them.
CASE 2

BUENAVENTURA VS CA
416 SCRA 263

FACTS:

Defendant: spouses Leonardo Joaquin and Feliciana Landrito and their children Fidel, Tomas, Artemio, Clarita,
Felicitas, Fe, and Gavino,

Plaintiffs: Children Consolacion, Nora, Emma and Natividad

Sought to be declared null and void ab initio are certain deeds of sale of real property executed by spouses in
favor of their co-defendant children and the corresponding certificates of title issued in their names.

The plaintiffs in this case sought for the declaration of nullity of the six deeds of sale and certificates of title in
favor of the defendants. 

They alleged that certain deed of sale were null and void ab initio because they are simulated.

Plaintiffs said that:

a. Firstly, there was no actual valid consideration for the deeds of sale xxx over the properties in litis;
b.Secondly, assuming that there was consideration in the sums reflected in the questioned deeds, the
properties are more than three-fold times more valuable than the measly sums appearing therein;
c.Thirdly, the deeds of sale do not reflect and express the true intent of the parties (vendors and
vendees); and
d.Fourthly, the purported sale of the properties in litis was the result of a deliberate conspiracy designed
to unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of their legitime.

Defendants, on the other hand aver

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

RTC ruled in favor of the defendants (respondents in this case) and dismissed the complaint. Upon appeal, the
CA upheld RTC’s ruling.

ISSUES: 
1.Whether the Deeds of Sale are void for lack of consideration. NO

2.Whether the Deeds of Sale are void for gross inadequacy of price. NO

HELD:

1ST ISSUE: THERE WAS A CONSIDERATION.

If there is a meeting of the minds of the parties as to the price, the contract of sale is valid, despite the manner
of payment, or even the breach of that manner of payment.  

If the real price is not stated in the contract, then the contract of sale is valid but subject to reformation.

If there is no meeting of the minds of the parties as to the price, because the price stipulated in the contract is
simulated, then the contract is void. Article 1471 of the Civil Code states that if the price in a contract of sale is
simulated, the sale is void.

It is not the act of payment of price that determines the validity of a contract of sale.  
Payment of the price has nothing to do with the perfection of the contract.  Payment of the price goes into the
performance of the contract.  Failure to pay the consideration is different from lack of consideration.  The
failure to pay the consideration results in a right to demand the fulfillment or cancellation of the obligation under
an existing valid contract while the latter prevents the existence of a valid contract.

Petitioners failed to show that the prices in the Deeds of Sale were absolutely simulated.

To prove simulation, petitioners presented Emma Joaquin Valdoz’s testimony stating that their father,
respondent Leonardo Joaquin, told her that he would transfer a lot to her through a deed of sale without need
for her payment of the purchase price. The trial court did not find the allegation of absolute simulation of price
credible.  

Petitioners’ failure to prove absolute simulation of price is magnified by their lack of knowledge of their
respondent siblings’ financial capacity to buy the questioned lots.

On the other hand, the Deeds of Sale which petitioners presented as evidence plainly showed the cost of each
lot sold.  

Not only did respondents’ minds meet as to the purchase price, but the real price was also stated in the Deeds
of Sale.  

As of the filing of the complaint, respondent siblings have also fully paid the price to their respondent father.

2ND ISSUE: THE GENERAL RULE IS THAT INADEQUACY OF CONSIDERATION SHALL NOT INVALIDATE
A CONTRACT.

Art. 1355.  Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue influence.

Article 1470 of the Civil Code further provides:

Art. 1470.  Gross inadequacy of price does not affect a contract of sale, except as may indicate a defect in the
consent, or that the parties really intended a donation or some other act or contract.  (Emphasis supplied)

Petitioners failed to prove any of the instances mentioned in Articles 1355 and 1470 of the Civil Code
which would invalidate, or even affect, the Deeds of Sale.  Indeed, there is no requirement that the price be
equal to the exact value of the subject matter of sale.  All the respondents believed that they received the
commutative value of what they gave.

Ruling: In the instant case, the trial court found that the lots were sold for a valid consideration, and that the
defendant children actually paid the purchase price stipulated in their respective Deeds of Sale.

Actual payment of the purchase price by the buyer to the seller is a factual finding that is now conclusive upon
us. WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.
CASE 3

Celestino Co vs CIR (G.R. No. L-8506)

Subject: Sales

Doctrine: Contract for Piece-of-work – None, mere manufacturing of general products

Buyer:
Seller:

Facts: Celestino Co & Company is a duly registered general co-partnership doing business under the trade
name of “Oriental Sash Factory”.

From 1946 to 1951 it paid percentage taxes of 7% on the gross receipts of its sash, door and window factory,
in accordance with sec. 186 of the National Internal Revenue Code which is a tax on the original sales of
articles by manufacturer, producer or importer.

However, in 1952 it began to claim only 3% tax under Sec. 191, which is a tax on sales of services.

Petitioner claims that it does not manufacture ready-made doors, sash and windows for the public, but only
upon special orders from the customers, hence, it is not engaged in manufacturing under sec 186, but only in
sales of services covered by sec 191 (only 3% tax).

Having failed to convince BIR, petitioner went to the Court of Tax Appeal where it also failed.

CTA, in its decision, holds that the “petitioner has chosen for its tradename and has offered itself to the public
as a “Factory”, which means it is out to do business, in its chosen lines on a big scale.

As a general rule, sash factories receive orders for doors and windows of special design only in particular
cases but the bulk of their sales is derived from a ready-made doors and windows of standard sizes for the
average home..

Even if we were to believe petitioner’s claim that it does not manufacture ready-made sash, doors and
windows for the public and that it makes these articles only special order of its customers, that does not make
it a contractor within the purview of section 191 of the national Internal Revenue Code… there are no less than
fifty occupations enumerated in the aforesaid section…and after reading carefully each and every one of them,
we cannot find under which the business of manufacturing sash, doors and windows upon special order of
customers fall under the category” mentioned under Sec 191.

Issue: Whether the petitioner company provides special services or is engaged in manufacturing.

Held: Manufacturing.
The important thing to remember is that Celestino Co & Company habitually makes sash, windows and doors,
as it has represented in its stationery and advertisements to the public. That it “manufactures” the same is
practically admitted by appellant itself.

The fact that windows and doors are made by it only when customers place their orders, does not alter the
nature of the establishment, for it is obvious that it only accepted such orders as called for the employment of
such material-moulding, frames, panels-as it ordinarily manufactured or was in a position habitually to
manufacture.

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.

Appellant invokes Article 1467 of the New Civil Code to bolster its contention that in filing orders for windows
and doors according to specifications, it did not sell, but merely contracted for particular pieces of work or
“merely sold its services”.

In our opinion when this Factory accepts a job that requires the use of extraordinary or additional equipment, or
involves services not generally performed by it-it thereby contracts for a piece of work — filing special orders
within the meaning of Article 1467.

The orders herein exhibited were not shown to be special. They were merely orders for work — nothing is
shown to call them special requiring extraordinary service of the factory. The thought occurs to us that if, as
alleged-all the work of appellant is only to fill orders previously made, such orders should not be called special
work, but regular work. The Supreme Court affirms the assailed decision by the CTA.

CASE 4

Commissioner on Internal Revenue vs Engineering Equipment G.R. No. L-27044 June 30, 1975

Facts: Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation, is an
engineering and machinery firm. As operator of an integrated engineering shop, it is engaged, among others,
in the design and installation of central type air conditioning system, pumping plants and steel fabrications.

On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now Commissioner, of Internal Revenue
denouncing Engineering for tax evasion by misdeclaring its imported articles and failing to pay the correct
percentage taxes due thereon in connivance with its foreign suppliers.

Engineering was likewise denounced to the Central Bank (CB) for alleged fraud in obtaining its dollar
allocations.

Acting on these denunciations, a raid and search was conducted by a joint team of Central Bank, (CB),
National Bureau of Investigation (NBI) and Bureau of Internal Revenue (BIR) agents on September 27, 1956,
on which occasion voluminous records of the firm were seized and confiscated

On September 30, 1957, revenue examiners Quesada and Catudan reported and recommended to the then
Collector, now Commissioner, of Internal Revenue that Engineering be assessed for P480,912.01 as
deficiency advance sales tax on the theory that it misdeclared its importation of air conditioning units and parts
and accessories thereof which are subject to tax under Section 185(m)  of the Tax Code,

On March 3, 1959. the Commissioner assessed against, and demanded upon, Engineering payment of the
increased amount and suggested that P10,000 be paid as compromise in extrajudicial settlement of
Engineering's penal liability for violation of the Tax Code.

The firm, however, contested the tax assessment and requested that it be furnished with the details and
particulars of the Commissioner's assessment

Engineering appealed to the Court of Tax Appeals. CTA rendered  a decision in favor of Engineering, declared

exempt from the deficiency manufacturers sales tax covering the period from June 1, 1948. to September 2,
1956.

However, petitioner is ordered to pay respondent, or his duly authorized collection agent, the sum of
P174,141.62 as compensating tax and 25% surcharge for the period from 1953 to September 1956. With costs
against petitioner.

Not satisfied, both appealed before the SC. Since the two cases are similar, both will be tried together.

Issue:  W/ON Engineering is a manufacturer of air conditioning units under Section 185(m), supra, in relation
to Sections 183(b) and 194 of the Code, or a contractor under Section 191 of the same Code.

Held:  Contractor.  

The distinction between a contract of sale and one for work, labor and materials is tested by the inquiry
whether the thing transferred is one not in existence and which never would have existed but for the order of
the party desiring to acquire it, or a thing which would have existed and has been the subject of sale to some
other persons even if the order had not been given.

The word "contractor" has come to be used with special reference to a person who, in the pursuit of the
independent business, undertakes to do a specific job or piece of work for other persons, using his own means
and methods without submitting himself to control as to the petty details.

The true test of a contractor, would seem to be that he renders service in the course of an independent
occupation, representing the will of his employer only as to the result of his work, and not as to the means by
which it is accomplished.
Engineering, in a nutshell,

fabricates, assembles, supplies and installs in the buildings of its various customers the central type air
conditioning system;

prepares the plans and specifications therefor which are distinct and different from each other;

the air conditioning units and spare parts or accessories thereof used by petitioner are not the window
type of air conditioner which are manufactured, assembled and produced locally for sale to the general market;

and the imported air conditioning units and spare parts or accessories thereof are supplied and
installed by petitioner upon previous orders of its customers conformably with their needs and requirements.
CASE 5

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

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

Buyer – Parsons
Seller – Quiroga

FACTS: On Jan 24, 1911, Quiroga and J. Parsons entered into a contract making J. Parsons an “agent” of the
former.

The contract stipulates that Don Andres Quiroga, here in petitioner, grants exclusive rights to sell his beds in
the Visayan region to J. Parsons.

Parsons was obliged under the contract to pay for the beds within 6 months after delivery even when not yet
sold, at a discount of 25% as commission for the sales..

Quiroga subsequently sought the rescission of the agreement claiming that Parsons, as agent, had violated its
obligation:

-not to sell the beds at higher prices than those of the invoices;
-to open an establishment in Iloilo;
-to keep the beds on public exhibition,
-and to pay for the advertisement expenses incurred;
-and to order the beds in dozen and in no other manner.

Except for the ordering the beds in dozens, none of the other obligations were expressly set forth in the
contract to serve as a basis for rescission based on substantial breach.

However, Quiroga insisted that Parsons was his agent, and that said obligations were implied from the
commercial agency or at least were instructed and disobeyed; in other words, he invoked the essential
revocability of agency as his legal basis to rescind the agreement.

Whether Quiroga could rescind (i.e., revoke) the contract therefore depended on whether it was one of sale or
agency to sell.

Issue: Whether the contract is a contract of agency or of sale.

Held: Purchaser / Contract of Sale

In order to classify a contract, due attention 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.

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.
Not a single one of the 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. 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.

Only the acts of the contracting parties, subsequent to, and in connection with, the execution of the contract,
must be considered for the purpose of interpreting the contract, when such interpretation is necessary, but not
when, as in the instant case, its essential agreements are clearly set forth and plainly show that the contract
belongs to a certain kind and not to another.

By virtue of the contract between the plaintiff and the defendant, the defendant 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.

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.

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.

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.
CASE 6

G.R. No. L-47538 June 20, 1941

GONZALO PUYAT & SONS, INC., petitioner,
vs.
ARCO AMUSEMENT COMPANY (formerly known as Teatro Arco), respondent.

Arco – Seller
Puyat – Buyer

Facts:

Arco Amusement Company is a business engaged in operating cinematographs.

Gonzalo Puyat& Sons, Inc, was acting as exclusive agents in the Philippines for Starr Piano Company of
Indiana, USA, and dealt with cinematographer equipment and company.

Arco Amusement approached Gonzalo Puyat& Sons entered into an agreement wherein Gonzalo Puyat will,
on behalf of Arco Amusement, order sound reproducing equipment from Starr Piano Company and that Arco
Amusement will pay Gonzalo Puyat, in addition to the price of equipment, a 10% commission plus all
expenses.

Starr Piano quoted the list price of equipment as $1700 without discount to Gonzalo Puyat, which then told
Arco Amusement about it. Being agreeable, the two formalized the transaction and Arco Amusement duly paid
$1700 to Gonzalo Puyat.

Subsequently, Arco Amusement made another order again to Gonzalo Puyat for the equipment on the same
terms as the first order.

The order stated that Gonzalo Puyat would pay for the equipment the amount of $1600 which was supposed to
be the exact price quoted by Starr Piano plus 10% commission and expenses.

Arco Amusement duly paid $1600 plus 10% commission plus $160 for the expenses; the $160 does not
represent actual out-of-pocket expenses but a mere flat charge and rough estimate made by Arco Amusement
equivalent to 10% of the $1,600 price.

Arco Amusement subsequently discovered that the price quoted to them with regard to their previous orders
were not the net price but rather the list price, and that the Gonzalo Puyat had obtained a discount from the
Starr Piano Company.

Moreover, by reading reviews and literature on prices of machinery and cinematograph equipment, Arco
Amusement was convinced that the prices charged them were much too high.

For these reasons, they sought to obtain a reduction from Gonzalo Puyat rather than a reimbursement, and
failing in this they filed the complaint.

RTC: Contract between Arco Amusement and Gonzalo Puyat was one of outright purchase and sale.

CA: Reversed RTC’s ruling; the relation between the two was that of agent and principal, Gonzalo Puyat acting
as agent of Arco Amusement, and sentenced Gonzalo Puyat to pay the alleged overpayments.

Issue: FRAMEWORK SYSTEM PHIL INC G.R. NO 149420

Whether or not the contract between Arco Amusement and Gonzalo Puyat was one of purchase and sale, and
not agency.

Held:

Yes. There was a contract of sale between the two.

In the first place, the contract is the law between the parties and should include all the things they are
supposed to have been agreed upon. What does not appear on the face of the contract should be regarded
merely as “dealer’s” or “trader’s talk”, which can not bind either party.
The letters showing that Arco Amusement accepted the prices of $1700 and $1600 for the sound reproducing
equipment subject of its contract with the petitioner, are clear in their terms and admit no other interpretation
that the respondent in question at the prices indicated which are fixed and determinate.

**Whatever unforseen events might have taken place unfavorable to Arco Amusement, such as change in
prices, mistake in their quotation, loss of the goods not covered by insurance or failure of the Starr Piano
Company to properly fill the orders as per specifications, Gonzalo Puyat might still legally hold Arco
Amusement to the prices fixed.

This is incompatible with the pretended relation of agency between the petitioner and the respondent,
because in agency, the agent is exempted from all liability in the discharge of his commission provided he acts
in accordance with the instructions received from his principal (section 254, Code of Commerce), and the
principal must indemnify the agent for all damages which the latter may incur in carrying out the agency without
fault or imprudence on his part (article 1729, Civil Code).

The orders which state that the petitioner was to receive ten per cent (10%) commission does not necessarily
make Gonzalo Puyat an agent of Arco Amusement as this provision is only an additional price which Arco
Amusement bound itself to pay, and which stipulation is compatible with the contract of purchase and sale.

To hold the petitioner an agent of the respondent in the purchase of equipment and machinery from the Starr
Piano Company of Richmond, Indiana, is incompatible with the admitted fact that the petitioner is the exclusive
agent of the same company in the Philippines.

It is out of the ordinary for one to be the agent of both the vendor and the purchaser. The facts and
circumstances indicated do not point to anything but plain ordinary transaction where the respondent enters
into a contract of purchase and sale with the petitioner, the latter as exclusive agent of the Starr Piano
Company in the United States.

SC reversed the ruling of the CA

CASE 7

LO V. KJS ECO-FRAMEWORK SYSTEM PHIL INC G.R. NO 149420 (2003)

Buyer –
Seller-

FACTS: Respondent KJS Eco-Framework System is a corporation engaged in the sale of steel scaffoldings,
while petitioner Sonny Lo, doing business under the name of San’s Enterprises, is a building contractor.

In February 1990, petitioner Lo ordered scaffolding equipments from the respondent KJS amounting to P540,
425.80. Lo paid a down payment of P150,000 and the balance was to be paid in 10 monthly installments  

However, petitioner Lo was only able to pay the first 2 monthly installments due to financial difficulties despite
demands from the respondent.

In October 1990, petitioner and respondent executed a deed of assignment whereby petitioner Lo assigned to
respondent KJS his receivables of P335,462.14 from Jomero Realty Corp.

But when respondent KJS tried to collect the said credit from Jomero Realty Corp, the latter refused to honor
the deed of assignment because it claimed that petitioner Lo was also indebted to it.

As such, KJS (respondent) sent petitioner Lo a demand letter but the latter refused to pay, claiming that his
obligation had been extinguished when they executed the deed of assignment.

Subsequently, respondent filed an action for recovery of sum of money against petitioner.

Petitioner argued that his obligation was extinguished with the execution of the deed of assignment of credit.

Respondent alleged that Jomero Realty Corp refused to honor the deed of assignment because it claimed that
the petitioner had outstanding indebtedness to it.

The trial court dismissed the complaint on the ground that the assignment of credit extinguished the obligation,

Upon appeal, CA reversed the trial court decision and held in favor of KJS.  

CA held that:  Petitioner failed to comply with his warranty under the deed;

The object of the deed did not exist at the time of the transaction, rendering it void under Art 1409 NCC;

Petitioner violated the terms of the deed of assignment when he failed to execute and do all acts
necessary to effectually enable the respondent to recover the collectibles.

ISSUE: WON the deed of assignment extinguished the petitioner’s obligation  

HELD: No, the petitioner Lo’s obligation was not extinguished with the execution of the deed of assignment
since he failed to comply with his warranty

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

In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it
as equivalent of payment of an outstanding debt.  

In order that there be a valid dation in payment, the following are the requisites:

(1) There must be the performance of the prestation in lieu of payment (animosolvendi) which may consist in
the delivery of a corporeal thing or a real right or a credit against the third person;

(2) There must be some difference between the prestation due and that which is given in substitution (aliud pro
alio);

(3) There must be an agreement between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that due.
 Thing offered – object of contract of sale
Debt – purchase price

The assignment of credit, which is in the nature of a sale of personal property, produced the effects of a dation
in payment, which may extinguish the obligation. 

However, as in any other contract of sale, the vendor or assignor is bound by certain warranties. Paragraph 1
of Article 1628 of the Civil Code provides: The vendor in good faith shall be responsible for the existence and
legality of the credit at the time of the sale, unless it should have been sold as doubtful; but not for the solvency
of the debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of
common knowledge.

Lo, as assignor, is bound to warrant the existence and legality of the credit at the time of the sale or
assignment.

When Jomero claimed that it was no longer indebted to Petitioner Lo since the Lo also had an unpaid
obligation to it, it essentially meant that its obligation to Lo has been extinguished by compensation.

As a result, KJS alleged the non-existence of the credit and asserted its claim to Lo’s warranty under the
assignment. Lo was therefore required to make good its warranty and pay the obligation.

Furthermore, Lo breached his obligation under the Deed of Assignment as he did not “execute and do all such
further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover
whatever collectibles said ASSIGNOR has in accordance with the true intent and meaning of these presents.”

By warranting the existence of the credit, Lo should have ensured its performance in case it is found to be
inexistent. He should be held liable to pay to KJS the amount of his indebtedness

Judgment Affirmed.