sales midterms reviewer

SALES MIDTERMS REVIEWER ATTY. RAY PAOLO SANTIAGO CROMBONDS 2012-‐2013

Sharing is a good thing! Ad Majorem Dei Gloriam 1

Law on Sales Chapter 1: The Nature of Sale

Art. 1458.

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

A contract of sale may be absolute or conditional. (1445a)

Definition of Sale Nature of Obligations Created in a Sale

• Contract whereby one of the contracting parties (seller) obligates himself to… o Transfer the ownership o Deliver the possession o Of a determinate thing

• To the other party, the Buyer, who obligates himself o To pay a price certain o In money or its equivalent

• These are real obligations – obligations to give o This means that they can be subject for actions of specific

performance. o Art. 1480 : When what is to be delivered is a determinate thing, the

buyer may compel the seller to make the delivery, plus damages o Thus, one who defaults can’t insist on just paying damages

Subject Matter of Sale

• “Determinable” is included in “determinate” when describing the subject matter of a sale

• Article 1460 – the “determinate” requirement is satisfied when, at the time the contract is entered into…

o The thing is capable of being made determinate o Without necessity of new or further agreement

• CLV: “Determinate” is also accurate because it refers to the obligation of the seller

o Necessarily would require a segregation/designation at some point, making the subject matter determinate at that point

o “Determinate” emphasizes that the delivery and transfer can only be made when the subject matter becomes specific/determinate.

Elements of Contract of Sale

• Coronel vs CA o Consent : meeting of the minds o Subject matter o Price certain

• When all three are present, a perfected contract of sale arises o Such validity not affected by previous fictitious deed of sale o Neither is it affected by non-‐performance thereafter

• SC has declared sales “void” when these requisites not present o CLV : The more proper term is to declare a “no contract” situation o Dizon v. CA: Absence of requirements negates the existence of a

contract of sale • When there is a defect in any of the elements…

o Voidable, when defect is a vitiation of consent o Void : Art 14091

1 The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;

(2) Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the transaction;

(4) Those whose object is outside the commerce of men;

(5) Those which contemplate an impossible service;

(6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;

(7) Those expressly prohibited or declared void by law.



Stages in the Life of Sale

• Strictly speaking, only two • But SC has considered three

o Policitation • This is a period of time from when the parties indicate

interest in entering into an agreement • To the time when the contract is perfected

o Perfection • The concurrence of the essential elements of the sale

o Consummation • From when the parties perform their respective obligations • Culminates in extinguishment of the contract

Essential Characteristics of Sale Nominate and Principal

• Nominate : it has been given a name by law • Principal

o It can stand on its own o Independent of other contracts for validity and existence o Parties enter into a sale to achieve a sale

• Not in preparation for another contract • This characteristic leads to the SC Doctrine : Real character of contract is

indicated by the substance, not by the name given to it by the parties • Lao v. CA

o Courts must look at the intent of the parties in order to determine the nature of a contract

o Not at the nomenclature used to describe it o True aim and purpose can be shown by conduct, words, actions

• Cavite Dev Bank vs Lim o Contracts not defined by parties o But by the principles of law

• Thus, all other contracts which have for their objective… o Transfer of ownership and possession of a determinate subject o For a valuable consideration o Will be governed by the law on Sales

Consensual

• Sale is perfected by mere consent o At the moment there is a meeting of the minds upon the object and

consideration, the contract is perfected • Buenaventura v. CA

o Sale over subject matter is not real, but consensual o It becomes valid and binding upon meeting of the minds as to the

price. • Art 1475, Civil Code2

o Parties may reciprocally demand performance from the moment of perfection.

o Actual delivery/payment are not necessary components for a valid sale to exist

• Thus, nondelivery or nonpayment does not invalidate or void a perfected sale.

• These merely become legal basis for remedies. o Fule v. CA

• Contract of Sale perfected at the moment there is a meeting of the minds upon the thing, and upon the price

• It has the force of law between the contracting parties • Noncompliance with formal requirements does not affect

validity of contract o He who alleges existence of a sale must show it by competent proof o Exception : Article 1322 of the Civil Code3

Modalities that Affect Characteristic of Consensuality

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

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

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



• Consensual characteristic may be affected by certain modalities added by stipulation

o Ex. Suspensive term or condition • Thus, not all contracts of sale become automatically and immediately effective • NHA vs. Grace Baptist Church

o Even delivery and taking possession of subject matter, with consent of the seller, does not perfect sale when meeting of minds is incomplete

o In this case, there was no agreement yet on final price.

Bilateral and Reciprocal

• Bilateral : it imposes obligations on both parties

o Obligation/promise of each party is the cause for the obligation of the other.

• Reciprocal Obligations

o Those which arise from the same cause

o Each party is simultaneously a debtor and creditor of the other

o The performance of one is conditioned upon the simultaneous fulfillment of the other

• Legal Effects of Sale being bilateral/reciprocal

o Power to rescind is implied – it need not be stipulated in the contract for innocent party to invoke the remedy.4

o Neither party incurs in delay if the other party does not comply/is not ready to comply.5

o From the moment one of the parties fulfills, default by the other begins, without need of prior demand.6

4 Art 1191, NCC. 5 Art 1168.

6 Arts. 1168 and 1191.

• PUP vs. CA

o It is a requisite for a valid and enforceable sale that it is mutually obligatory

Onerous

• Onerous : It imposes a valuable consideration. o Ideally, a price certain in money or its equivalent.

• Gaite v. Fonacier o Stipulation regarding balance of the purchase price was deemed a

suspensive period rather than a condition. o Why? Greater reciprocity obtains if we consider it to be a period. o Rules of interpretation : we interpret in favor of the greater reciprocity

of interests.

Commutative

• Commutative : a thing of value is exchanged for equal value o Ideally, the value of the subject matter is equivalent to the price paid

• No strict requirement though o What is required is the belief of the seller that he received something

of commutative value to what he gave. • Gaite : obligations in a sale can be subordinated to a suspensive condition

o Thus, commutativeness is not objective, but subjective. • Ex. Seller selling old car for P200,000

o More objective review would say that the car is worth P500,000 o The contract would still be a sale, as seller really believes that he’s

receing appropriate value • However, subjective nature cannot be pushed to absurdity

o Seller, knowing full well that his car is worth P200,000 o Sells it for P100 o Such could be considered more of a donation

• Subjective nature supported by principle that inadequacy of price does not affect ordinary sale

o Not a sufficient ground for cancelling a voluntary contract of sale

Sale is Title and Not Mode

• Perfection of sale gives rise to obligations and rights



o Obligation of seller to deliver possession and ownership, right of buyer to receive such

• However, delivery or tradition is the mode that transfers ownership and possession.

• Sale is merely a title that creates obligation – on its own, sale does not transfer the ownership as a mode.

• Sale perfected by consent – but ownership passes only upon delivery • Acap v. CA

o Real right over a thing arising from a juridical act is not sufficient to give rise to ownership

o Such right must be completed – in the case of sale, by actually acquiring the thing

• Mode – legal means by which ownership is created, transferred, or destroyed o Succession o Donation o Discovery

• Title – constitutes the legal basis by which to affect ownership. • To reiterate : Sale does not by itself transfer or affect ownership – it merely

creates the obligation to transfer ownership

Sale Distinguinshed from Other Similar Contracts • Underlying principle : intent of parties and elements of relationship are more

important than the nomenclature used to describe a certain contract • We look at the true aim and purpose of the contracting parties.

From Donation

• Donation : act of liberality whereby a person disposes gratuitously of a thing or right in favor of another person, who accepts it.7

• Sale is essentially onerous, while donation is gratuitous. • Sale is perfected by consent, donation is a solemn contract

o Requires consent

7 Art. 725, NCC

o Also requires formalities mandated by law in order to be valid • When is it important to know the distinction? – when the consideration for the

transfer is not clear • Manongsong v. Estimo

o Valid sale cannot have legal effect of depriving compulsory heirs of their legitimes

o Valid sale dos not diminish the estate of the seller • Because there is substitution of value • Commutative aspect

• When price of sale is simulated, the sale is void, but the act may be shown to be a donation or some other act.8

o Contract may be in the form of a “sale” but will end up being governed by some other provisions of law.

• On the other hand, a supposed donation may actually have different considerations rather than liberality

o Burdens placed upon the donee o In that case, it becomes important to determine what the applicable

rule is (Law on Sales vs. Law on Donation) • Art 726 of the Civil Code

o Even if a burden is imposed on donee, it is still a donation when such burden is less than the value of the thing given.

• Legal implication – when the burden is more valuable than the thing given, it is an “onerous donation”

o Maybe a barter or a sale.

From Barter

• Barter : One of the parties binds himself to give one thing in consideration for the other’s promise to give another thing

• Sale : One of the parties binds himself to deliver a thing in consideration of the other’s undertaking to pay the price in money or its equivalent.

• Rules to Differentiate Sale from Barter9

8 Art 1471, NCC 9 Art. 1468, NCC



o Manifest Intention of the Parties • Even if acquisition of a thing is paid for by another object

that’s worth more than the money component • It may still be a sale if such was the intention of the parties.

o When Intention Does Not Appear and Consideration Consists Partly in Money and Partly in Another Thing

• It is barter when value of the thing given as part of the consideration exceeds the amount of money given

• It is sale when the value of the thing given as part of consideration equals or is less than the amount of money given.

• Actually, these distinctions are merely academic o Aside from two separate rules applicable to barter, Art 1641 say that

barter is governed by the Law on Sales o What are the two separate rules?

• Article 1639 • If one of the contracting parties, having received the

thing promised him in barter, should prove that it did not belong to the person who gave it, he cannot be compelled to deliver that which he offered in exchange, but he shall be entitled to damages

• Article 1640 • One who loses by eviction the thing received in

barter may recover that which he gave in exchange with a right to damages, or he may only demand an indemnity for damages. However, he can only make use of the right to recover the thing which he has delivered while the same remains in the possession of the other party, and without prejudice to the rights acquired in good faith in the meantime by a third person.

• Two instances where difference is critical o Statute of Frauds does not apply to barter. o Right of legal redemption granted by law to an adjoining owner of an

urban land does not cover exchanges of properties.

From Contract for a Piece-‐of-‐Work

• Piece of Work Contract

o Contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation

o Contractor may either employ only his labor or skill, or also furnish the material

• Statutory Rules to Distinguish Sale from a Piece of Work contract o Inchausti v. Cromwell (1911)

• Issue : w/n seller could be held liable for sales tax on the price it received from bailing hemp sold to customers

• They contended that the charge for bailing should not be considered as part of the sale, but as a charge for the service rendered (i.e., for that piece of work)

o Inchausti: • Distinction between sale and contract for piece of work is

tested by the inquiry of whether the thing transferred is one not in existence and which never would have existed but for the order of the party

• Or, a thing which would have existed and been the object of a sale to some other person, even if the order was not made

o Later, the Civil Code gave statutory rules in Article 1467 – two tests • Manufacturing in the ordinary course of business – sales

contracts • Manufacturing upon special order for customers – piece of

work • “Upon special order” – based on the ability of producer to

manufacture the goods without waiting for specific orders o Celestino Co v. Collector of Internal Revenue

• Company used to pay sales tax on its products as a manufatcturer-‐seller

• They began claiming that they should only be assessed a contractor’s tax

• Because they manufactured their products only upon special customers’ special orders, in accordance with specifications

• Thus making their services a piece-‐of-‐work contract • Court held that company can’t claim the contractor’s tax –

they were sellers • They habitually made the products



• That they made products only upon order did not alter than ture of the establishment – they would manufacture the products as they always had

• Nature of the products – any builder could order such products. Thus they did not serve special customers only.

• Essence of contract of piece of work – “sale of service” • Company must accept a job which requires use of services

not generally performed by it • The test, in this case, is not one of timing

• Rather, it is done by determining the nature of the work to be performed and the products to be made.

• The products must not be ordinary products of the manufacturer

• They would require special skills or equipment o CIR v. Eng’ng Equipment and Supply Company

• EEI was engaged in design and installation of aircon systems • SC held that it was a contractor • “If the article ordered by purchaser is exactly such as [vendor]

makes and keeps on hand for sale to anyone, and no change is made at defendant’s request, it is a contract of sale.”

• EEI undertook negotiations and execution of individual contracts – each contract job was different, no two were identical.

• Test : whether the manufacturer could produce the product ahead of any special order

• What is the test to follow? CLV mentions the “main theme” in SC decisions o Main distinguishing factor – essence of why parties enter into the

contract o If essence is the object, the contract is sale o If the essence is the…

• Service • Knowledge • Reputation

o Of the manufacturer, it is for a piece of work • Essentially sale of services/labor

• Practical needs for being able to distinguish o Tax Provisions o Sale – real obligation

• Could be subject of action for specific performance o Piece of work – subject matter is service rendered

• Thus it is an obligation to do • Cannot be subject to specific performance

o PoW not governed by Statute of Frauds

From Agency to Sell or Agency to Buy

• Agency : a person binds himself to render some service or to do something in representation or on behalf of the principal, with the consent or authority of the latter.

• Agency establishes a representative capacity in the agent o Highly fiduciary o Involves obligations to do

• Distinguishing Sale from Agency o Sale is not unilaterally revocable

§ Contract of agency – essentially revocable by principal o Sale : buyer himself pays for the subject, which is his main obligation

§ Agency – agent not obliged to pay the price, merely obliged to deliver price which he may receive from buyer

o Sale – Buyer becomes owner of subject matter after delivery § Agency – agent never becomes owner

o Sale – Seller warrants § Agency – agent assumes no personal liability as long as he

acts within authority and in name of principal. o Agency is a fiduciary relationship

§ Agent disqualified from receiving personal profit • Statutory Rule – Art. 146610 -‐-‐ importance of “essential clauses”

o Quiroga v. Parsons, Puyat v. Arco Amusement : SC determined that the contract was one of sale and not agency

10 In construing a contract containing provisions characteristic of both the contract of sale and of the contract of agency to sell, the essential clauses of the whole instrument shall be considered.



§ The essential clause provided for a transfer of ownership upon payment – precisely the essential features of a sale.

o Ker & Co. v. Lingad – ownership of goods was never transferred to possession of the dealer

§ Thus, not a sale o Victorias Milling Co v. CA – distinguishing factor of agency ifs that of

control § One person acts under the control of another.

• Value for being able to distinguish o Contract of Agency is valid and enforceable in any form – not under

the SoF. o Exception : authority to sell land must be in writing.

From Dacion en Pago

• Dacion : property is alienated to creditor in full satisfaction of a debt in money o Governed by law on sales (express provision of law) o Objective novation takes place

§ Thing offered as accepted equivalent of performance § Considered as object of sale – debt is the purchase price

• Dacion : exists in the stage of consummation o A special mode of payment

• Requisites for Dacion o Performance of the prestation in lieu of payment o Difference between prestation due and that given in substitution o Agreement that the obligation is extinguished.

• Similar to sale – creditor “buys” the thing, payment of which is charged to the debtor’s debt.

From Lease

• Lease : lessor binds himself to give to another the enjoyment or use of a thing for a price certain, for a period which may be definite or indefinite.

• “Lease with option to buy” is a conditional sale. (lease only in name) • When rentals in a lease are meant to be installment payments – it is a sale by

installments.

Chapter 2: Parties of Sale

General Rule on Capacity of Parties

Art. 1489.

All persons who are authorized in this Code to obligate themselves, may enter into a contract of sale, saving the modifications contained in the following articles.

Where necessaries are those sold and delivered to a minor or other person without capacity to act, he must pay a reasonable price therefor. Necessaries are those referred to in Article 290. (1457a)

• General Rule : any person who has capacity to act, or the power to do acts with legal effects, or with the power to obligate himself may enter into a contract of sale.

• Natural Persons : age of majority begins at 18 years – they have capacity to act from this point

• Juridical Persons – a juridical personality distinct from the members or partners

o Expressly recognized by law o They have full juridical capacity

Minors, Insane or Demented Persons, Deaf-‐Mutes • GR: Minors, insane or demented persons, deaf-‐mutes who cannot write

have no legal capacity to contract and thus cannot be parties to a sale. • However, contracts entered into by these people are not void, but

voidable o Subject to annulment o Subject to ratification

• Person who is capacitated cannot institute the action for annulment based on incapacity.

• When entered into during a lucid interval – valid • When in a state of drunkenness, under hypnotic spell – voidable. • Incapacitated person is not obliged to make restitution



o Except insofar as he has been benefitted by the thing/price

Necessaries

• This is an exception to a general rule regarding minors o Since they cannot give consent, there can be no valid sale o Thus, the sale is voidable

• However, where necessaries are sold and delivered to a minor or incapacitated person, he must pay a reasonable price therefore.11

o The sale here is valid. • Necessaries are defined in Art. 194 of the Family Code

o Everything indispensable for sustenance o Dwelling o Clothing o Medical Attendance o Education and transportation o In keeping with the financial capacity of the family

• Since sales can only be obligations to deliver a thing o Necessaries under this article may only cover sales pertaining to

sustenance, dwelling, clothing o Perhaps medicine and educational materials.

• Requisites for sale of necessaries to minors to be valid o Perfection of sale o Delivery of subject necessaries

Emancipation • RA 6809 has lowered age of majority to 18 years old • Thus, issue on validity of sales entered into by emancipated minors no

longer exists.

11 Art 1489, NCC – “Where necessaries are those sold and delivered to a minor or other person without capacity to act, he must pay a reasonable price therefor. Necessaries are those referred to in Article 290.”

Senility and Serious Illness • Domingo vs. CA

o Main issue : did proponents establish existence and due execution of a deed of sale

o Only evidence – signature of the seller was a thumb mark made while sick

o SC ruled that the sale was void ab initio • Consideration was inadequate • Alleged seller was incapacitated both physically and

mentally o When age or infirmities have impaired mental faculties,

preventing person from properly understanding the rights, she is incapacitated

o Thus there was reason to doubt the seller’s consent to the sale of the land.

• CLV : the essence of the ruling declaring the sale void was that there was never any meeting of the minds, and no real consideration

o This was caused by the incapacity • Paragas Doctrine

o Sale executed by senile person declared void, and not voidable o SC used Art 24 of NCC

• Protection of one with mental weakness o CLV : this seems illogical o CLV prefers the annulment of contract by reason of vitiated

consent • In other words, CLV seems to prefer having such sales declared voidable

(Paragas) or declaring sale void because of no meeting of the minds (Domingo)

Sales By and Between Spouses

Art. 1490.

The husband and the wife cannot sell property to each other, except:



(1) When a separation of property was agreed upon in the marriage settlements; or

(2) When there has been a judicial separation or property under Article 191. (1458a)

Sale with Third Parties • Before Family Code – there were limitations on when husband or wife

could deal with conjugal property • Present Family Code

o Common provisions apply equally to both spouses o Spouses have joint administration of the conjugal properties in

CPG o In ACP, everything is co-‐owned

• Art 73 of the FC o Either spouse may exercise … business without the consent of the

other, and latter may only object on valid, serious and moral grounds.

o Courts shall decide whether the objection is proper o If benefits accrued before objection, obligation enforced against

separate property o Otherwise, chargeable against the community property

• Under Law on Sales o Spouse may enter into sales in regular or normal pursuit of his or

her profession, without consent o However – Arts. 96 and 124 of FC

• Administration of conjugal property will belong to both jointly

• In case of disagreement – husband’s decision will prevail, subject to wife seeking remedy within 5 years

• Disposition/encumbrance of property shall be void without authority of court or written consent of other spouse

• In such case : transaction considered as a continuing offer on the part of the consenting spouse and the third person

• May be perfected as a binding contract (before withdrawal by either party)

o Upon acceptance of other spouse o Or upon authorization by court

o Guiang v. CA • Sale by husband of conjugal property without consent of

wife – void (there was no full consent) o Abalos v. Macatangay Jr

• Sale of husband of conjugal property without consent of capacatitated wife was void ab initio

• Exception : husband may dispose of conjugal property without consent of wife when sale is necessary to answer for conjugal liabilities in Arts 161-‐162 of NCC.

Sale Between Spouses • Art 1490, NCC – Spouses cannot sell property to each other, except :

o Separation of property was agreed upon in marriage settlement o Judicial Decree for separation of property

• Art 1492 – Prohibition relating to spouses selling to one another applicable to sales in

o Redemption o Compromise o Renunciation

a. Status of Prohibited Sales between Spouses

• Contracts entered into in violation of the above two provisions are void • Not everyone may assail validity, though

o Spouses themselves cannot – they are in pari delicto. o Creditors who became such after transaction cannot – they have

not been prejudiced • Who can assail?

o Heirs of either spouse, who have been prejudiced



o Prior creditors o State – payment of taxes due on transactions.

b. Rationale for Prohibition • Medina v. CIR

o Prevent a spouse defrauding his creditors by transferring his properties to the other spouse

o Avoid situation where dominant spouse unduly takes advantage of the weaker spouse, defrauding the latter

o Avoid indirect violation of prohibitions against donation between spouses (Art 133)

• Art 133 now replaced by Art 87 of the FC – prohibition also applies to persons living together as husband and wife without a valid marriage.

• Art 86 does not make the same exceptions for donations that Art 1490 does for sales

o Thus, even if there is judicial separation of property, they still can’t donate to each other.

o Explanation : donation necessarily reduces estate of donor – sale would result in both estates being of the same value

c. Rationale for Exceptions to Prohibition under Art. 1490 • It would seem that the situations in the exceptions are also susceptible to

the evils sought to be avoided. o Greater danger of undue influence in separation of property o One spouse can still exercise undue influence or pressure on the

other one. o Also, exceptions allow the circumvention of the prohibition

against donations between spouses. • CLV : key element to exceptions lies in the psychology of the situation

o Hardness of heart on the part of the spouses o Businesslike approach to the relationship o Thus, it would be unlikely for one spouse to influence the other. o This still doesn’t cover situations where dominant spouses could

influence the other, weaker spouses

• CLV’s final word – absolute prohibition under Art 87 of the FC should apply to sales between spouses.

Applicability of Incapacity to Common Law Spouses • Matabuena v. Cervantes

o Whether ban on donations applies to common-‐law spouses • (This is moot now, Art 87 of FC also bans donations

between people living as husband and wife without marriage)

o SC held that the donation was void – reasons of policy. • Every reason to apply same prohibitive policy to

common-‐law spouses • Evils sought to be avoided are still present

• Calimlim-‐Canullas v. Fortun o Court applied the same ruling in Matabuena to sales o Sales between common law spouses are void

• Art 1409 – such are contrary to morals and public policy • Art 1352 – void for having unlawful cause • Art 1490 – prohibits sales between spouses

o SC : otherwise, those who “incurred guilt” (thus living w/o benefit of marriage) would be in a better position that those who were legally married.

Specific Incapacity Mandated by Law

Art. 1491.

The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another:

(1) The guardian, the property of the person or persons who may be under his guardianship;

(2) Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given;

(3) Executors and administrators, the property of the estate under administration;



(4) Public officers and employees, the property of the State or of any subdivision thereof, or of any government-‐owned or controlled corporation, or institution, the administration of which has been intrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale;

(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession.

(6) Any others specially disqualified by law. (1459a)

Art. 1492.

The prohibitions in the two preceding articles are applicable to sales in legal redemption, compromises and renunciations. (n)

• Art 1491 of the CC prohibits the following persons from entering into contracts of sale: (AGEP-‐JL)

o Agents, with respect to property whose administration or sale may have been entrusted to him, unless consent of principal has been given.

o Guardians, with respect to property of person under his guardianship

o Executor or administrator, with respect to property of estate under his administration

o Public officers and employees, with respect to property of the State or any subdivision thereof

• Or of any GOCC or institution • Administration of which has been entrusted to them • Provision includes judges and government experts who

take part in the sale.

o Justices, judges, prosecuting attorneys, clerks of courts, and other officers and employees connected with the administration of justice, with respect to property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions

o Lawyers, with respect to property and rights which may be the object of any litigation in which they may take part by virtue of their profession.

• These incapacities are applied also to sales in redemption, compromise and renunciation

Legal Status of Contracts Entered Into in Violation of Articles 1491 and 1942

• Apart from case of agents, all cases in the enumeration cannot be validated by the consent of the persons sought to be protected

o Only in the “agents” part is “consent of principals” given as an exception.

• It is not expressly stated that such contracts are void. o Wolfson v. Estate of Martinez classified them as merely voidable.

• Rubias v. Batiller – Court said that they must be void, not merely voidable o Civil Code recognizes the nullity of contracts which are expressly

prohibited or declared void by law and declares such inexistent and void from the beginning.

o Violation of such provision cannot be cured by ratification a. Different form of “ratification”

• Rubias tries to declare a difference in the “voidness” of guardians, agents, administrators, as opposed to judges, judicial officers and lawyers.

o Permanent disqualification of public and judicial officers and lawyers is grounded on public policy.

o First three may be “ratified” by means of and in “the form of a new contract”

• In which case the validity will be determined as of the time of the execution of the new contract

• Thus, the contract may be lawful when at the time of the second contract, the legal impediments no longer exist



• In the first group (agents, guardians, administrators) o After the inhibition has ceased, only real wrong is a private one o A wrong that such private parties may choose to condone

• Second group o There also exists a public wrong o Damage to the public service o Damage to esteem with which we regard our justice system

Agents

• Brokers do not come within this prohibition o Their authority is merely looking for a buyer/seller o To bring them together for them to consummate transaction

• Schmid & Oberly v. RJL Martinez Fishing Corp o Broker : one who is engaged, for others, on a commission,

negotiating contracts relative to property with the custody of which he has no concern.

o Strictly a middleman. o His occupation is to bring parties together to bargain.

Guardians, Administrators and Executors • These are necessarily officers of the courts – they are appointed to such

positions in judicial proceedings • Phil Trust Co. v. Roldan

o Guardian filed a motion for authority to sell parcels of land belonging to the ward (to invest in a house for the ward)

o Guardian sold parcels of land in favor of her brother in law, who immediately resold the parcels to the guardian

o SC here overturned an earlier doctrine which required proof that the third party was a mere intermediary

• Even without such proof, the sale may be rescinded. o Guardianship is a trust of the highest order – the sales were

declared void • CLV : Any matter relating to advantage or benefit is irrelevant under Article

1491. o The article imposes absolute disqualification.

o To allow exceptions based on “benefit” is to court abuse of such doctrine.

• Are hereditary rights included in the coverage? o Earlier ruling : Naval v . Enriquez held that hereditary rights aren’t

included in the prohibition insofar as the administrator or executor of the estate of the deceased.

o CLV : This is hard to accept – hereditary rights gain their value only from the estate

• The estate is what is within fiduciary control of the administrator

• If they were not included, administrator could validly acquire hereditary rights – putting him in a conflict of interest situation.

• Thus, the prohibition must apply based on the spirit of the law.

Judges, Justices and Those Involved in Administration of Justice

• Gan Tingo v. Pabinguit o As to judges, it is not required that some contest or litigation over

the property itself should have been tried by the judge. o The property is in litigation from the moment it becomes subject

to the judicial action of the judge • Macariola v. Asuncion

o Doctrine of “prohibition applicable only during period of litigation” also applies to judges.

o In that case, judge acquired pieces of land which had been part of a partition case decided by him

o SC held that prohibition was only applicable to property actually under litigation – and such acquisition must take place “during the pendency” of the litigation

Attorneys

• Valencia v. Cabanting – reason for the prohibition is the fiduciary relationship



o Intended to curtail any undue influence of the lawyer upon his client.

• Rubias v. Batiller – nullity of such contracts is definite and permanent o Cannot be cured by ratification or compromise.

• Araneta Inc v. Tuason de Paterno – prohibition applies only when property they are buying is actually the subject of litigation

o It does not apply to a sale who were not the owners’ attorneys in the case.

• Del Rosario v. Millado – prohibition does not apply when lawyer acquired property prior to his involvement in a case concerning such.

• Municipal Council of Iloilo v. Evangelista – prohibition applies only to lawyer who actually represented a client in a suit involving that property.

• Prohibition only apples when litigation is pending o Even if case is on appeal, after final judgment.

Contingent Fee Agreements

• Recto v. Harden – prohibition does not apply to a contingent fee agreement

o Fee based on value of property involved o Lawyer can acquire a certain percentage of the value of the

properties, if his client wins. • Vda. De Laig v. CA – such agreement not prohibited because payment is

not made during pendency of litigation • Director of Lands v. Ababa – contingent fee always subject to supervision

of courts o Court may protect the client from any undue influence or fraud.

• Fabillo v. IAC – lawyer still must not exert undue influence. • CLV : Ababa and Fabilio sort of miss the point

o They exclude contingent fee agreements from prohibition because of the timing

• Fees are paid after pendency of litigation o However, the agreement is negotiated during the pendency of

litigation – at a point where the lawyer may still exert undue influence

• Also – contingency fee agreement is essentially a contract for service – why is it in the Law on Sales?

o Law on Sales : “catch-‐all” provision for all onerous contracts for transfer of ownership.



Chapter 3: Subject Matter

Requisites of Valid Subject Matter

Art. 1459

The thing must be licit and the vendor must have a right to transfer the ownership thereof at the time it is delivered. (n)

Art. 1460

A thing is determinate when it is particularly designated or physically segregated from all others of the same class.

The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing is capable of being made determinate without the necessity of a new or further agreement between the parties. (n)

Art. 1461

Things having a potential existence may be the object of the contract of sale.

The efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing will come into existence

The sale of a vain hope or expectancy is void. (n)

Art. 1462

The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or goods to be manufactured, raised, or acquired by the seller after the perfection of the contract of sale, in this Title called “future goods.”

There may be a contract of sale of goods, whoose acquisition by the seller depends upon a contingency which may or may not happen. (n)

Requisites of a valid subject matter: (PLD)

• It must be a possible thing • It must be licit • It must be determinate or at least determinable

Effect of absence of any requisite

• Absence of any requisite results in either a “no contract” situation, or a void contract under Art. 1409.

• Effect of “no contract” situation – buyer can recover what he has paid, based on the principle of unjust enrichment

• Effects of void contracts: 1. If void because the illegality constitutes a criminal offense – pari

delicto will apply; courts leave the parties where they are, without prejudice to criminal prosecution

2. If no crime, but both are at fault – neither may recover 3. If no crime, and only one party is at fault – innocent party may

recover • The requisites of the subject matter are meant to safeguard the

realizability and enforceability of the obligations of the seller to transfer ownership and deliver possession.

Subject Matter Must be a “Possible Thing” A thing is possible when it is: (PEFR)

• Exisiting (Art. 1462) • Has a potential to exist, considering the state of science and technology at

the time of perfection of the contract (Art. 1461) • A future thing (Art. 1462) • Contingent or subject to a resolutory condition (Art. 1462 & Art. 1465)

Implications of the definition of “possible thing”

• A literal application of Art. 1409(3) which holds that contracts “whose cause or object did not exist at the time of the transaction” are deemed inexistent and void ab initio does not apply in contracts of sale involving possible things.

• But if the subject matter cannot come to existence (i.e. an impossible thing), the contract is void because of Art. 1409(3).

• The sale of goods yet to be manufactured, raised, or acquired by the seller is valid, provided that they can come into existence.

• For things whose existence depends on a condition, capacity to exist is sufficient. Certainty to exist is not necessary.

Emptio Rei Speratae

• A contract of sale covering future things, and subject to a suspensive condition that the subject matter will come into existence.

• Literally means “the purchase of what we hope”



• If the thing does not come into existence, contract is deemed extinguished. • Covers only determinate or specific things. Generic or determinable things

are not covered since they do not come out of existence. • Crops which are yet to be harvested and have a potential existence may be

the valid subject matter of sale. They are considered distinct from the land on which they grow. Sibal v. Valdez (50 Phil. 512); Pichel v. Alonzo (111 SCRA 34)

Emptio Spei

• Literally means “the purchase of hope” • Still a valid sale. What is prohibited by the Civil Code is the sale of a vain

hope or expectancy (Art. 1461) • Example: sale of sweepstakes ticket. The object of the sale is the chance to

win. • A sale emptio spei is a possible situation where the commutative nature of

sale is not complied with. The buyer can actually get more than what he paid for.

Sale of Things Subject to a Resolutory Condition

• If the thing is extinguished by the resolutory condition, the contract of sale is itself extinguished.

o The parties should return to each other what they have received, thus preserving the commutative nature of sale.

o The fruits and interests of the things received need not be returned since they are deemed to have been mutually compensated (Art. 1187).

• The suspensive or resolutory condition does not affect the commutative nature of sale. It is presumed that the parties considered these in the determination of the price or consideration for the sale.

Subject Matter is Nexus of Sale

• The essence of a contract of sale is the meeting of the minds with respect to the subject matter.

• The provisions on sale are “catch-‐all” provisions which covers transfers whereby ownership of a thing is ceded for a consideration. Polytechnic University v. CA (368 SCRA 691)

Polytechnic University v. CA

Facts: NDC owned a 10-‐hectare property which was leased by Firestone Ceramics with a right of first refusal. Near the end of the lease term, NDC looked to sell the

property to Polytechnic University of the Philippines (PUP). Memorandum Order No. 214, issued by Pres. Cory Aquino, ordered the conveyance of the property to PUP. It also cancelled the debt of NDC to the National Government.

Issue: Was there a contract of sale between NDC and PUP?

Held: Yes, there was a contract of sale in violation of Firestone’s right of first refusal. The provisions on sale are “catch-‐all” provisions which covers transfers whereby ownership of a thing is ceded for a consideration. The cancellation of NDC’s debt was the consideration for the sale. Since the NDC, PUP, and the national government are distinct from each other, the transfer was not a transfer within the same entity, and was thus a conveyance of title.

Subject Matter Must Be Licit Sales Declared Illegal by Law

• Things outside the commerce of man • Animals suffering from contagious disease, rendering them unfit for use or

service they are intended for • Sale of future inheritance • Those declared void by special laws:

o Narcotics, gunpowder, explosives, firearms and ammunictions. o Wild animals and rare, wild or poisonous plants or fruits o Sale of friar land without consent of Secretary of Agriculture

• Sale of land to a foreigner is void because it is contrary to the Constitution. Frenzel v. Catito (406 SCRA 55)

Subject Matter Must Be Determinate or at Least Determinable Determinate Subject Matter

• A thing is determinate or specific when it is o Particularly designated, or o Physically segregated from others of the same class.

• Defense of force majeure is applicable to release the seller from the consequences of failure to deliver

Determinable Subject Matter

• 2 requisites/tests:



o “capacity to segregate” test – at perfection, subject matter is capable of being made determinate

o “no further agreement” test – without necessity of a new or further agreement between the parties

• A determinable subject matter is a generic object because it has not been physically segregated nor particularly designated at the point of perfection from the rest of its kind.

• If the court still has to go back to the parties to determine their intended subject matter, the sale is void because of Art. 1409(6).

Melliza v. City of Iloilo

Facts: Juliana Melliza sold parts of Lot No. 1214 to Iloilo City. The lots mentioned were 1214-‐C, 1214-‐D, and the area “needed for the construction of the sity hall site, avenues and parks according to the Arellano Plan.” The rights to the property were eventually transferred to Pio Sian Melliza. The TCT issued to him contained the annotation that lots 1214-‐B-‐2 and 1214-‐B-‐3 also belonged to City of Iloilo.

Issue: Whether or not lot 1214-‐B did belong to the City of Iloilo.

Held: Yes, it did. It was part of the subject matter of the deed of sale between Juliana Melliza and the city. The requirement that a sale must have a determinate object is fulfilled as long as, at the time of perfection of the contract, the object is capable of being determined without further agreement. In this case, the Arellano Plan already specified the lands which were neede for the city hall site.

Test of Determinability Is the Meeting of Minds of Parties and Not the Covering Deed

• The true contract of sale is intangible and is a legal concept. It is perfected by the meeting of the minds.

• The Deed of Sale is merely an evidence of the contract. If it does not reflect the true meeting of the minds, it may be subject to reformation. It does not invalidate the contract.

Atilano v. Atilano

Facts: Eulogio Atilano executed a deed of sale in favor of his brother which supposedly covered lot 535-‐E. It was later on discovered that what was actually occupied was lot 535-‐A, while Eulogio was occupying lot 535-‐E. Eulogio’s heirs filed

an action seeking possession of lot 535-‐A.

Issue: What was the real subject matter of the deed of sale?

Held: The SC held that the brothers intended to convey lot 535-‐A. The error in the deed of sale did not invalidate the transfer. It was just a mistake which did not vitiate consent. Thus, the contract of sale, as evidenced by the deed of sale, is valid.

Quantity is Essential in the Validity of the Contract of Sale

• General Rule: Quantity is essential o It goes into the determinability of the subject matter. o It also goes into the price or consideration in the contract. (i.e. the

total amount to be paid is determined by the quantity to be bought)

o With a specific quantity, the obligation to deliver an object becomes realizable, enforceable and demandable.

• Exception: When a maximum quota/quantity is agreed upon. It is still possible to determine the quantity without the need of a new contract. National Grains Authority v. IAC (171 SCRA 131)

Generic Non-‐Determinable Objects

• Refers to fungible things (e.g. sugar, rice, oil, etc.) • Sale of fungible things is valid if it can be made determinate at the time of

delivery. • Fungible/generic things are never lost. Therefore, the obligation to deliver

is not extinguished by loss.

Yu Tek & Co. v. Gonzales

Facts: The two parties entered into a contract where Gonzales bound himself to deliver 600 piculs of first class sugar to YTC, without designating a particular source. Gonzales failed to deliver. YTC brought suit.

Issue: Whether or not force majeure is a valid defense for Gonzales.

Held: No. Sugar is a fungible and generic object which is never lost. As long as the object is not made determinate, the thing is not lost, and the seller is still bound to deliver.



If the subject matter is neither determinate or determinable, the contract is VOID

• Void by virtue of Art. 1409(6) of the Civil Code which declares inexistent “those [contracts] where the intention of the parties relative to the principal object of the contract cannot be ascertained.”

Art. 1463

The sole owner of a thing may sell an undivided interest therein.

Art. 1464

In the case of fungible goods, there may be a sale of an undivided share of a specific mass, though the seller purports to sell and the buyer to buy a definite number, weight or measure of the goods in the mass, and though the number, weight or measure of the goods in the mass is undetermined. By such a sale the buyer becomes owner in commmon of such a share of the mass as the number, weight or measure bought bears to the number, weight or measure of the mass. If the mass contains less than the number, weight or measure bought, the buyer becomes the owner of the whole mass and the seller is bound to make good the deficiency from the goods of the same kind and quality, unless a contrary intent appears.

Instances where a sale will give rise to a co-‐ownership:

1. Sale of an undivided interest (Art. 1463) • Co-‐ownership will be proportional to the percentage of the undivided

interest with respect to the whole. 2. Sale of an undivided share in a mass of fungible things (Art. 1464)

• The buyer will be a co-‐owner to the extent of the definite number, weight, or measure actually bought.

• If what was actually bought is greater than the amount available, the buyer will become owner of the whole and the seller is bound to supply the deficiency.

• If the sale covers a specific mass as a subject matter, without any provisions as to the measuring or weighing of the subject sold, and the price was not based on such measurement, the subject matter of the sale

is the whole mass itself, as a determinate object. The sale is valid. Gaite v. Fonacier (2 SCRA 831)

Seller’s Obligation to Transfer Ownership Required at Time of Delivery Ownership is only required at time of delivery (consummation stage)

• General Rule: Ownership is required only upon delivery. It is not required at the perfection of the contract, provided, that the seller will be able to transmit ownership at the time of consummation of the contract.

o Exception: In judicial sale, the forced seller who is actually the mortgagor in default, is the owner because only the absolute owner of the thing can mortgage it.

• If a buyer sells something and delivers it to the buyer without owning it, the contract of sale remains valid but the buyer has no better title to the goods than the seller.

o However, if the seller thereafter acquires title to the thing sold and delivered, such title passes to the buyer by operation of law. (Art. 1434)

• If the owner does not reveal that he is not the owner of the thing at the time of perfection, the contract of sale cannot be declared null and void. Hilltop v. Villacorta (13 CAR 113)

• The sale of copra for future delivery does not make the seller liable for estafa for failing to deliver because the contract is still valid and there is only a civil obligation. Esguerra v. People (108 Phil. 1078)

• Sale of a lot by a seller who is yet to acquire full ownership from a government agency was still valid since it involved the sale of a future thing. Mananzala v. CA (286 SCRA 722)



Chapter 4: Price and Other Consideration

Meaning of “Price”

• Price – sum stipulated as the equivalent of the thing sold and also every incident taken into consideration for the fixing of the price

• The ideal consideration for a contract of sale would be “price” as a “sum certain in money or its equivalent.”

o But a sale can have other valuable considerations, not necessarily money. The essence of sale is the transfer of ownership for some valuable consideration. Polytechnic University of the Philippines v. CA (368 SCRA 691)

• Once agreed upon, the seller cannot unilaterally increase the price. Neither can the buyer unilaterally withdraw from the sale because of the price.

Requsites of a Valid Price The price must be:

1. Real 2. In Money or its Equivalent 3. It must be Certain or Ascertainable

Price Must be Real When Price is Real

• At the time of perfection, there is legal intention to pay on the part of the buyer, and legal expectation on the part of the seller to receive the price.

When Price is Simulated

• It is simulated when neither party had any intention that the amount will be paid.

• The sale if void • However, such a contract can in reality be a donation or some other

contract. In this way, the contract’s validity can be saved. • The issue thus boils down to contractual intent at the time of perfection of

the contract. If there was no intent to pay and receive the stipulated price, then it is wholy simulated and thus void.

• Intent can be determined by the overt acts of the parties. • The pari delicto rule will apply in the following instances of simulated sales:

o Both parties are in bad faith o There is illegal consideration o The purpose of the simulation is illegal

Mapalo v. Mapalo

Facts: Miguel Mapalo and his wife decided to donate the eastern part of their property to Maximo Mapalo. Maximo Mapalo then made them sign a Deed of Sale for the entire property, for the consideration of P500. He told them that it was a Deed of Donation. Maximo then sold the entire property to Narciso.

Held: With respect to the eastern portion, the consideration was the pure liberality of the Mapalo spouses. The western portion, on the other hand, had no consideration pertaining to it. The P500 was a simulated price. Thus, the western portion was reconveyed to plaintiff spouses Mapalo.

Rongavilla v. CA

Facts: Dolores Rongavilla lent P2,000 to her aunts for the repair of their house. Rongavilla then tricked her aunts into signing a deed of sale. She told them that it was just a document showing their indebtedness.

Held: The deed of sale is void ab initio for having no consideration. The P2000 given which was exchanged was not for the sale of the property, but for the purposes of repairs to the house.

When Price is False

• “False price” – there is a real price agreed upon but not declared, and what is stated in the deed of sale is not the one intended to be paid

• The sale itself is valid, but the instrument embodying it is subject to reformation.

• A false price is a form of relative simulation of contract. • However, the parties may be bound by estoppel to follow the price in the

instrument when interests of third parties will be adversely affected by the reformation of the instrument.

Effect of Non-‐payment of Price



• Failure to pay is not automatically equal to the lack of consideration. There is still consideration, thus, the sale remains valid.

• Failure to pay goes into the consummation of the contract, not its perfection.

• Such failure to pay gives the right to the seller to demand specific performance or recission of the contract.

• BUT if the deed of sale says that the price has been paid when in fact it hasn’t been, this is a “badge of simulation” which would render the contract void. Montecillo v. Reynes (385 SCRA 233)

Price Must Be in Money or Its Equivalent

• Art. 1458 : Obligation of Buyer – he must pay the price certain in “money or its equivalent.”

• Bagnas v. CA o “Something equivalent” is something representative of money o For this case, services are not included/

• Art. 1468 – the sale is valid when the consideration is part money and partly in another thing.

o The consideration for a valid sale can be the price and other additional considerations.

• Republic v. Phil Resources Development o Apostol purchased logs, but only paid a small part of the price. o He delivered, to fulfil the balance, goods of the PRDC to the

Bureau of Prisons. Was this a valid payment? o SC: “money or its equivalent” – payment need not be in money o However – this case covers the consummation stage

• Not perfection – they didn’t agree that such goods could be used as payment

• Essentially what happened here was a dacion en pago. (substitution of the goods for the price)

• Torres v. CA o Contract stated that the consideration for the sale was

expectation of profits o This was valid cause or consideration to validate the sale.

• Polytechnic University v. CA – cancellation of liabilities of seller was a valid consideration.

• CLV : requisite of “money or its equivalent” has not been held steadfast by the SC.

o This shows that the essence of a sale is the obligations – for the seller to deliver, and for the buyer to pay

o Price may be subject to variations – it’s essentially a generic obligation

o The significance of the requirement – demonstrate the ideal example of the onerous nature of sale – that it is supported by “valuable consideration.”

Adequacy of Price to Make it “Real” – Concept of “Valuable Consideration.”

• Ong v. Ong – a sale was held valid when consideration for real property was one peso “and other valuable considerations.

o Since there was no evidence that the consideration was not paid, it is presumed to exist.12

o SC: Inadequacy is unimportant – usual practice is to place a nominal amount, but there are more valuable considerations to be given

o Essence of this ruling – it is possible to agree on an adequate consideration, even stating a false/nominal consideration.

• This assumes that the valuable consideration in addition to the nominal amount was actually agreed upon.

o There must be a valuable consideration. • Bagnas v. CA – a sale where consideration in the contract was “one peso

and services rendered.” o SC : disproportion between consideration stipulated and the value

of the property o They concluded – price stated was false and fictitious, thus the

sale was void ab initio.

12 Art 1354, CC : -‐-‐ cause is presumed to exist in the contract, even when not stated



o SC : even though there was a consideration agreed upon, and the parties intended to pay it, the sale is void if price was merely nominal

o CLV : this does not mean that the sale was void because the services were not actually performed

• Non-‐performance has nothing to do with validity o Sale here was void because it was found that there was no

intention to pay any valuable consideration – thus, void for lack of consideration.

• Arimas v. Arimas – two documents evidencing terms of sale of a hacienda o Deed of sale o Supplement which contained part of the consideration

• Other further considerations o Seller : supplement was executed because he didn’t agree with

the terms in the first deed of sale o SC: consideration in supplement must be part of the consideration

for sale of the hacienda – they were both signed by the parties • Consideration generally agreed upon as a whole –

otherwise, there is no price certain • Otherwise, there would be no meeting of the minds

Price Must Be Certain or Ascertainable at Perfection

• Certainty – when it has been expressed and agreed upon in specific terms o Specific pesos and centavos o Reiterate : Money is the best model of valuable consideration

• Art. 1469 – when is price considered ascertainable? o When it is with reference to another thing certain o Determination is left to judgment of specified person/persons.

Price Fixed by 3rd Party

• Designation of 3rd party to fix price is valid. o This designation already makes the price ascertainable

o However – fixing of price cannot be left to discretion of one of the parties – the contract of sale is not yet existing when the price has yet to be fixed

• No mutuality or obligatory force • Before price is fixed by third person – the sale is perfected and existing,

although conditional o Thus, a party cannot unilaterally withdraw from the contract o It is conditional – suspensive condition of the third party fixing the

price. • Article 1469 – If third party fixes the price in bad faith or by mistake

o Parties can seek court remedy to fix the price o These are the only two instances where this is possible.

• When party is unable or unwilling to fix the price o Parties cannot seek aid from the court to fix the price o The condition imposed has not yet happened o Non-‐happening extinguished the contract o The sale here is “inefficacious.”

• When third party is prevented from fixing the price by one of the parties o Innocent party has remedies against the guilty party.

• Party may demand from the courts the fixing of the price. • Based on Art. 1186 – when a party prevents a condition

from happening, it’s considered as fulfilled.

Fixing of Subject Matter by Third Party

• The subject matter may not be left up to the will of a third party. o Situation contemplated : price agreed upon, but there are similar

subjects and the parties can’t choose • Such designation would in fact authorize withdrawal of the parties • Subject matter must be determinate/determinable

o Test is one of fact – physical segregation and particular designation

o It must be so without further agreement • Why are the rules different?

o Obligation to pay the price is essentially a fungible obligation



• Any money may be used • Cannot be extinguished by fortuitous event

o Obligation to deliver subject matter can only be complied when it is already determinate/determinable

• It is not a generic obligation • Designation cannot be left to a 3rd person who may

choose a subject that party might be unwilling to give.

Price Ascertainable in Reference to Other Things Certain

• Price of securities, grains, etc. Will be considered certain when price is... o That which the thing would have on a definite day o Or in a particular exchange or market

• Price of thing is certain at the point of perfection when it refers to another thing certain

o Certain invoices existing and identified o Known factors, or stipulated formula.

Effect of Unascertainability

• When price can’t be determined – inefficacious • Law does not use the term “void”

o There is actually a contract, but a conditional one o It can’t be voided by what happens after perfection

Manner of Payment of Price Must be Agreed Upon

• A meeting of the minds must include the terms and manner of payment of the price

o Such is an essential ingredient before a valid sale can exist o It is part of the prestation of the contract. o Specific performance can’t be availed of

• Manner of payment : essence of what makes price certain o Time value of money o Seller may be willing to accept lower price if it is to be paid within

a short period of time • Navarro v. Sugar Producer’s Corp

o When manner of payment is discussed after acceptance, such acceptance did not produce a binding contract of sale

o There was no complete meeting of the minds • Velasco v. CA

o Even if downpayment had been made and received, no valid sale where manner of payment was not agreed upon

o Definite agreement on manner of payment – essential element in formation of binding sale.

• Leabres v. CA o Main cause of action as a receipt issued for an alleged sale o Receipt was only an acknowledgement for P1000

• No indication of the total purchase price, or of what the installments were

• SC held that receipt cannot be basis of valid sale. • San Miguel Properties Philippines v. Huang

o No valid sale since they were unable to arrive at acceptable terms of payment scheme

• Cruz v. Dernando o Absence of stipulation on manner of payment – it was a contract

to sell, not a contract of sale • CLV : “terms of payment” has same requisites of “price” in order to

support a valid contract of sale – it must be certain or ascertainable. • If terms of payment are provided in a formula/process that doesn’t require

agreement of parties – valid, but with a condition. o Similar to when price is left up to 3rd person.

Proper Understanding of Manner of Payment

• While it is imperative that meeting of the minds be made when it comes to terms of payment, they do not always have to be expressly agreed upon – when the law supplies these by default.

• In the earlier cases, parties were to have a mode of payment other that immediate payment

o There could not have been a meeting of the minds because both parties expected more negotiations as to manner of payment



• In all other cases, price is deemed to be demandable at once o Art 1179, CC – all obligations without conditions or periods are

demandable at once. • In absence of stipulation indicating a different form of payment, price is

deemed by operation of law to be immediately demandable • DBP v. CA

o Where there is no other basis of payment o Reasonable conclusion is that subsequent payments shall be

made in same amounts as first payment.

When There is Sale Even When No Price Has Been Agreed Upon

Art. 1474

Where the price cannot be determined in accordance with the preceding articles, or in any other manner, the contract is inefficacious. However, if the thing or any part thereof has been delivered to and appropriated by the buyer he must pay a reasonable price therefor. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.

• In such a case, courts have authority to fix the reasonable price for the subject matter.

• This article is the only exception where there would still be a valid sale even when there is no meeting of the minds as to price.

• What does “preceding articles” mean? o CLV : 1469-‐1473

• What does “inefficacious” mean? o “inability to produce the effect wanted” o Does not exclude void sales o Rather, it includes valid sales which have become inefficacious in

the same group as void sales (when it comes to price) • Concept of Appropriation

o Basis of Art 1474 – Robles v. Lizarraga Hermanos • An unjust enrichment would occur in allowing someone

to appropriate the movables without compensating the other person.

o 2 Important Points

• Doctrine is based on unjust enrichment against the buyer -‐-‐ he can’t be allowed to retain the subject matter without being liable to pay the price

• Applies even in a “no contract” situation where there is no meeting of the minds as to price

• May also apply to void sale contract, where defect is in the price.

o Art 1474 is meant to cover all sale contract situations • Agreement as to the subject matter, along with tradition • Art 1474 is a remedy in favour of the seller

o What if he does not want to take advantage of the remedy, and instead recover the subject matter?

• Seems not possible if appropriation had taken place • Art 1474 seems to contemplate a situation where there

is delivery but not appropriation • Thus we must look at what appropriation means

o Appropriation – covers situation of acceptance, and buyer treats subject matter as his own,

Rulings on Receipts and Other Documents Embodying Price

• El Oro Engravers v. CA – sales invoices are not evidence of payment, but only of receipt.

o Best evidence to prove payment : official receipt issued by seller • Leabres v. CA – buyer sought to enforce purchase on land based on receipt

o SC : Receipt cannot be regarded as contract of sale o Only recognition of the sum of P1000 o Requisites for valid contract were lacking o Sale is not valid not enforceable

• CLV : Leabres seems to deal with the Statute of Frauds (sale was not enforceable)

o However, reading of facts was that there was partial payment and delivery of possession

o These things would remove contract from SoF.



• Toyota Shaw v. CA – written agreement was entered between a prospective buyer and the sales representative

o Acknowledged a downpayment of P100,000 o SC: never a perfected contract between the parties

§ Agreement only provided for the downpayment § No purchase price or manner of payment of balance

• Limson v. CA – nothing in the receipt indicated that the earnest money was part of the purchase price, much less any showing of a perfected sale – only conclusion is no sale.

• Coronel v. CA – seller executed a receipt of downpayment, indicating balance of purchase price, with obligation to transfer title upon payment

o SC: there was a perfected contract of sale o No reservation of title until payment o Consistent with requirement that memoranda of sale must

include all essential requisites in order to remove it from the SoF. • Cheng v. Genato – seller acknowledged receipt of sum as partial payment

o Did not provide further stipulations as to balance or manner of payment

o SC: no sale, since requisites were not expressed in the receipt. o CLV : isn’t sale a consensual contract? Defect in memorandum

would affect enforceability, but should it affect validity? • Xentrex v. CA – contract of sale perfected upon meeting of the minds

o Seller obliged itself when it accepted deposit and pulled out a unit • David v. Tiongson – sale of real property on installments

o Even when receipts do not provide for the installments, when there is partial payment, SoF no longer applies.

• Tigno v. Aquino – absence of receipts or any proof of consideration is not conclusive as to the inexistence of a sale.

o Consideration always presumed • CLV : no constant doctrine when it comes to legal consequences of

receipts.

Inadequacy of Price

• Art. 1355 – Lesion or inadequacy of cause does not invalidate a contract, unless there is fraud, mistake or undue influence.

• Art 1470 – Gross inadequacy of price does not affect a contract of sale o Except as it may indicate a defect in consent o Or that parties really intended a donation or some other act.

• “Gross inadequacy” – a reasonable man would not agree to dispose of his property at that amount.

• In a sale, there is no requirement that the price is exactly the value of the subject matter.

o Recall: Test for commutativeness is the belief of the parties that they received good value.

Distinguished from Simulated Price

• Bravo-‐Guerrero v. Bravo – simulation of contract and gross inadequacy of price are distinct legal concepts

o When parties to an alleged contract do not really intend to be bound – simulated

§ Void § No legal effect § No real agreement

o Gross inadequacy – not a void contract § Validity of sale not affected § Unless there is a defect in consent or parties intended

donation or other contract



Rescissible Contracts of Sale

• Inadequacy of Price – ground for rescission in cases covered under Article 1381 of the Civil Code.13

Judicial Sale

• Inadequacy of price may render void judicial sale of real property o Why the difference? – sale is not a result of negotiations o In fact, property of the “Seller” to be sold at public auction o State must protect seller from a bad deal that’s not his fault

• Such inadequacy however must be “shocking to the conscience of man” o It must be shown that a resale would fetch a better price.

• However, even if these are shown, judicial sale will not be set aside when there is a right to redemption

o Lower sale price à easier time for the owner to redeem. o Proper remedy is simply for the “Seller” to exercise such right.

Sales with Right to Repurchase

• In sales like this, inadequacy gives rise to a presumption of equitable mortgage.

• Remedy of the seller – have the sale reformed or declared a mortgage contract, then pay off the debt which is secured.

• Remedy of the buyer – foreclose on the mortgage. o Cannot appropriate the subject matter – pactum commissorium

which is not allowed.

13 (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-‐fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;

When Motive Nullifies Sale

• Consideration is not equal to motive • When motive is illegal, sale is void

o Sale executed in order to frustrate another person’s right to inheritance and to avoid tax

• Uy v. CA – Distinguished cause from motive o Cause

§ Essential reason which moves parties to enter into the contract

§ “immediate, direct and proximate reason” to create the obligation

o Motive § Particular reason of a contracting party § Does not affect the other party

o In this case – cause of vendor to sell the land is to obtain the price, and for the vendee, the acquisition of the land.

o Motive of the vendor – is to use the lands for housing. • SC : When motive predetermines cause, it may be regarded as the cause.

o When there was a mistake in the quality of land, the motive/cause was negated

o And thus the contract was inexistent. • Heirs of Spouses Balite v. Lim – amount reflected in Deed of Sale was lower

than what they agreed on o Motive was to pay lower taxes o SC : Contract of sale was valid – motive here (lower taxes) was not

the consideration. o Although illegal, motives do not take the place of the

consideration.



Chapter 5: Formation of Sale

Stages in the Life of Sale a) Policitacion – negotiation and bargaining b) Perfection – moment when there is meeting of the minds on the subject

matter and price c) Consummation – parties perform their respective obligations

Policitation Stage

• Negotiation is initiated by an offer which must be certain. • In order to give rise to a contract of sale, the offer must be accepted.

Acceptance must be absolute, clear, unequivocal, plain and unequivocal. Manila Metal Containers Corp. v. PNB (511 SCRA 444)

• Before the acceptance, there is “freedom to contract.” An owner of property is free to offer the subject property for sale to any interested person. There is still no obligation between the potential buyer and potential seller. (Exception: option contract, infra)

• A Letter of Intent to Buy and Sell is just that, a declaration of intent. It is not a conditional contract of sale or a contract to sell. It is also not an offer. Muslim and Christian Urban Poor Association, Inc. v. BRY-‐C Dev’t. Corp. (594 SCRA 724)

Manila Metal Container Corp. v. PNB

Facts: PNB foreclosed the mortgage MMCC constituted in its favor. PNB won the public auction. MMCC requested for an extension of the 1-‐year redemption period, which PNB rejected. A special assets department of PNB issued to petitioner a statement of account indicating bid price and interest (about Php 1.5 million); MMCC then remitted Php 725,000 as “deposit for repurchase”. PNB offered to MMCC to buy back the property for Php 2.66 million. MMCC insists that it had already accepted the offer of the PNB department of Php 1.5 million, and it had deposited the money as earnest money (down payment). The amount of Php 2.6 million is a unilateral increase by PNB of the purchase price.

Issue: WON there was already a perfected contract of sale when MMCC gave deposit after the department issued statement of account—NO

Held: The exchanges were counter offers and so the contract never moved beyond the negotiation stage. It was stipulated by the parties that PNB will accept the deposit “on the condition that the purchase price is still subject to the approval of the PNB board.” Thus, there was no definite price.

Muslim and Christian Urban Poor Association, Inc. v. BRYC-‐V Development Corp.

Facts: MCUPAI entered into negotiation with Seafood Corporation (SFC) for the purchase of latter’s land. MCUPAI executed a Letter of Intent to Buy and SFC a Letter of Intent to Sell to facilitate the former’s loan application. The sale didn’t happen because herein buyer wasn’t able to obtain a loan, even when it was given an extension of 3 months to procure it. Eventually, SFC sold the lot to BRYC-‐V. MCUPAI alleged that the sale violated its subsisting agreement with SFC which gave it a preferred right to purchase the lot.

Issue: WON the letters of intent created a bilateral contract within the meaning of Art. 1479—NO

Held: A mere intention or plan to do something does not give rise to an obligation, nor bind a party to do or give. It was not an offer, but merely an expression of the intention to enter in to the contract. It does not contain a commitment to enter into the contract. In fact, SFC’s entering into a contract was conditioned upon MCUPAI’s ability to raise the funds.

Advertisements and Invitations

Art. 1325



Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (n)

• General rule: they are less than offers and are merely invitations to make an offer

o Exception: It appears otherwise. That is, there is a determinate subject matter and a determinate price and terms of payment.

• Better rule according to CLV and RP: Even if the advertisement contains definite terms, it remains an invitation so long as it is addressed to the general public.. The exception comes in when the invitation is addressed to a particular offeree.

Offers

• The offeror can attach any term or condition he desires, and may fix the time, place and manner of acceptance. He has full control of the offer before it is accepted.

• Offeror can withdraw the offer any time, even without notifying the offeree. (Exception: option contract)

• Acceptance by the offeree must be absolute. Any conditional acceptance will be a counter-‐offer which rejects and terminates the original offer.

• An offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of either offeror or offeree, before acceptance is conveyed and received by the offeror. (Art 1323)

Option Contracts

Art. 1479

A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a)

Art. 1324

When the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. (n)

Definition and Essence of Option Contract

• An option is a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions, the power to decide whether or not to enter into a principal contract [of sale]. Carceller v. CA (302 SCRA 718)

• An option is a continuing offer or an unaccepted offer which must be certain. It is distinct from the contract of sale, by as soon as the offer is accepted, the contract of sale is perfected. Adelfa Properties, Inc. v. CA (240 SCRA 565)

Carcellar v. CA

Facts: SIHI (landowner) entered into lease contract with Carcellar with option to purchase within a certain period, exercised by a written notice to SIHI. Nearing termination, Carceller wrote and requested for an extension to raise funds, which SIHI rejected. Carceller still laterexpressed intention to exercise option to purchase after the period expired, which SIHI denied because period had lapsed. Carceller files action for specific performance.

Issue: WON Carceller should be allowed to exercise option given the delay in giving the required notice—YES

Ratio: Carceller’s letter to SIHI showed intent to exercise option to purchase despite the request for the extension. Granting the option is consistent with the intention of the parties. The delay was not substantial or fundamental as to amount to a breach that would defeat the intention of the parties when they entered into the contract. His first letter and his formal exercise were within reasonable time frame.

Tayag v. CA

Facts: Lacsons are owners of a land, tenanted by farmer tillers who had



landholdings thereon. The farmers executed a deed of assignment in favor of Tayag stating that they would assign their landholdings for Php50/sq. meter payable when legal impediments to the sale of the property no longer existed and if the Lacsons decide to sell the property. When Tayag called for a meeting to discuss their agreement, the farmers expressed they would not attend and that they were going to sell their landholdings to the Lacsons. Tayag claims that they had no right to deal directly with the Lacsons, while their contracts with him were valid and existing.

Issue: WON the deeds of assignment were option contracts—NO

Ratio: The payment of the purchase price was conditioned on the disappearance of any legal impediments in sale of the property and on the Lacsons actually selling it—there was no showing that they ever agreed to sell their property. There was no option contract here because in an option contract, the one giving is only bound to hold the land in case the optionee decides the receive the lands at his election. Here, the farmers did not just give Tayag and option; they gave him an exclusive right to buy the property. They cannot legally do this because they are not the registered owners of the land. They had no right to enter into those contracts with Tayag without the knowledge of the Lacsons.

Characteristics and Obligations in an Option Contract; Compared with Sale

• Both option contract and sale are onerous contracts because both require a separate consideration. An option without separate consideration is void as a contract.

o Consideration in an option contract may be anything of value, not necessarily money or its equivalent, as in sale.

o Exception: An option may be included within another valid contract, such as a lease or mortgage. It will be binding even if it does not have a separate consideration. It is a stipulation within the contract which acts like an option contract.

• An option contract is a consensual contract. • It is a unilateral promise to sell a determinate thing. It only binds the

optioner with the following obligations: o Not to offer to any third party the sale of the object

o Not to withdraw the offer during the agreed period o To enter into a contract of sale when the option holder, if he uses

the option (i.e. accepts the offer) within the specified period. • The three obligations are obligations to do. Therefore, a breach of the

option contract will only be actionable for damages, not specific performance.

o When the offer is accepted, the obligations become obligations to give, since the contract of sale is already perfected.

• The subject matter of an option contract is the option to purchase a determinate thing. In other words, it is the subject matter is the right to choose to buy or not.

• An option contract is not covered by the Statute of Frauds. Therefore, it can be proved by parol evidence and is enforceable even if not written.

Elements of a Valid Option Contract

a) Consent b) Subject Matter-‐ the right to choose whether or not to buy a

determinate/determinable object for a price certain (including manner of payment)

c) Consideration which is anything of value and is separate and distinct from the purchase price

• Just like in a sale, the option contract will only be perfected if the parties agree on the specific object (i.e. the right itself, and the conditions) and the price and manner of payment of the consideration.

Meaning of “Separate Consideration”

• An option contract is an offer and a preparatory contract to that of sale. This presupposes that there is already a purchase price on the subject matter of the sale which was agreed upon by the parties. As long as the consideration for the option contract is distinct and not included in the purchase price, it is considered “separate consideration”.

• Some examples where the Court held that there was separate consideration:



o In Villamor v. CA (202 SCRA 607), the buyers bought ½ of the land for P70 which was much higher than the prevailing market rate at that time. The Court ruled that the separate consideration for the option to buy the other half was the difference between the market value and the P70 price paid.

o In reciprocal contracts like lease, the obligation or promise of each party is the consideration for that of the other.14 Vda. De Quirino v. Palarca (29 SCRA 1)

o The monthly interest paid by the spouses on the foreclosed property during the one year period granted to them by the bank was considered as the separate consideration to hold the option contract valid. Dijamco v. CA (440 SCRA 190)

o The option to buy included in a mortgage was deemed a vald stipulation since it is supported by the same consideration of the mortgage, which is itself distinct from that of the sale. Soriano v. Bautista (6 SCRA 946)

• The Court had ruled in 1947 that the consideration is presumed to exist. Once proven, it is binding. Montinola v. Cojunagco (78 Phil. 481) This is in contrast with the 1972 case of Sanchez v. Rigos which refused to apply that presumption.

Villamor v. CA

Facts: Villamor purchased from Reyes one half of a piece of land for more than the market value. They then executed a Deed of Option stating that the reason only why Villamor bought the half in the first place is because Reyes granted him exclusive right to buy the other half whenever the need would arise for either party. Reyes sought to repurchase the half already bought by Villamore but the latter refused.

14 Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274)

Issue: WON the Deed of Option was valid—YES

Ratio:

The consideration for the Option was the difference in the higher purchase price of the land compared to its actual market value. Consideration maybe anything of value. The option here was the consideration for the Villamors buying the first half of the land. Since they expressed their intention to exercise the option (which is an offer), a valid contract was perfected.

When Option Is Without Separate Consideration

• Without separate consideration, an option contract is void as a contract but would still be a valid offer. If the option is exercised before it is withdrawn, it is equivalent to an offer being accepted. Thus, a valid and binding sale would be perfected. Sanchez v. Rigos (45 SCRA 368)

• The burden of proof to show that the option contract has a separate consideration is with the party seeking to show it. Art. 1354, which presumes that consideration exists, cannot apply since Art. 1479, the more specific provision, requires such separate consideration for an option to be valid.

• Lately, there have been rulings by the SC which tend to diverge from the Sanchez doctrine. However, Sanchez is still the controlling doctrine since it has yet to be expressly abandoned by the Court. Montilla v. CA (161 SRA 167); Natino v. IAC (197 SCRA 323); Yai Ka Sin Trading v. CA (209 SCRA 763); Diamante v. CA (206 SCRA 52)

• It was held in Vazquez v. CA (199 SCRA 102) that for the Sanchez doctrine to apply, the option must be accepted and the acceptance must be communicated to the offeror. This emphasizes the point that an option contract is a distinct contract.

• Classroom example: o S is selling B a condominium unit. He tells B that he can pay

P50,000 as reservation fee which will entitle him to a period of 1 month to think about the purchase. If he accepts, the P50,000 will be deducted from the purchase price. This is not an option



contract because the 50,000 is not a separate consideration but is actually part of the purchase price. What we have is an innominate contract (do ut facias). Breach of the contract will entitle B to damages only. The innominate contract involves a prestation to do, thus, specific performance is not available.

Sanchez v. Rigos

Facts: An Option to Purchase was executed where Rigos would sell a piece of land to Sanchez upon the exercise of the option within 2 years. Sanchez made several tenders of payment to Rigos, which latter rejected. Sanchez then deposited the amount with the CFI and commenced suit for specific performance against Rigos. Latter asserts that it was not a valid contract for absence of consideration.

Issue: WON Rigos is bound to sell by virtue of the Option to Purchase—YES

Ratio: Seller cannot revoke an offer if the option to buy had a separate consideration. If the option is given without a consideration, it is a mere offer of a contract of sale, which is not binding until accepted. If, however, acceptance is made before a withdrawal, it constitutes a binding contract of sale, even thought the option was not supported by a sufficient consideration. Sanchez’s tenders were valid exercise of the option granted him and thus a contract of sale was perfected.

Vasquez v. CA

Facts: Vallejera sold land to Vasquez who then secured TCT. A separate instrument together with the deed of sale, a Right to Repurchase was executed by them in favor of Vallejera. Later, Vasquez resisted this action for redemption on the premise that Right to Repurchase is just an option to buy since it is not embodied in the same document of sale but in a separate document, and such option is not supported by a consideration distinct from the price, the deed for right to repurchase is not binding upon them.

Issue: WON the right of repurchase gave rise to a valid contract of sale—NO

Ratio: The right to repurchase was not supported by a separate consideration. Thus,

for it to be binding on Vasquez, it must hav been shown that Vallejera accepted the offer therein before it was withdrawn by Vasquez. None was made; the vendor a retro must make actual and simultaneous tender of payment and consignation. Mere expressions of readiness or willingness to repurchase are insufficient. The right of repurchase is not a right granted the vendor by the vendee in a subsequent instrument, but is a right reserved by the vendor in the same instrument of sale as one of the stipulations of the contract.

Option Not Deemed Part of Renewal of Lease

• Under the principle of tacita reconduccion, a lease is impliedly renewed if the term of the original contract of lease has expired, the lessor has not ordered the lessee to vacate, and 15 days has passed without the acquisecnce of the lessor15.

• Only the essential stipulations in the lease are deemed renewed. • An option to purchase which is stipulated in a lease is not essential to the

lease. Thus, they it is not renewed.

Period of Exercise of Option

• If the option contract does not specify the period in which the option can be exercised, it cannot be presumed that it can be exercised indefinitely.

• Actions upon written contracts must be brought within 10 years. Afterwards, it prescribes.

Proper Exercise of Option

• The optionee may exercise his right by merely advising the offeror of the decision to buy and expressing his readiness to pay, provided that he is actually able to pay. Actual payment is not necessary to exercise the option. Nietes v. CA (46 SCRA 654)

• Notice within the option period of clear intention to purchase the property, even with a request for leeway or extension of the period in

15 Samelo v. Manotok Services, Inc., G.R. No. 170509 (not in the book)



order to raise money to buy the property, is a valid and substantial exercise of the option. Carceller v. CA (302 SCRA 718)

• In Sanchez v. Rigos, the Court held that repeated tenders of payment, which were refused by the optioner for no reason, was a valid exercise of the option.

• The refusal by the offeror to comply with the demand by the offeree with the exercise of his option may be enforced by specific performance. Exercise of the option is acceptance of the offer which perfects the contract of sale. Thus, the obligations to do become obligations to give.

Nietes v. CA

Facts: Garcia (owner and lessor) entered into a Contract of Lease with Option to Buy a school with Nietes (lessee). Lessee is granted an option to buy the land within the period of the contract of lease. Later, Garcia expressed his intention to rescind the contract due to poor maintenance of the building. In his reply, Nietes expressed inention to exercise the option to buy. In the specific performance case filed against Garcia, he asserts that the full purchase price must first be paid before the option could be exercised.

Issue: WON Garcia’s assertion is correct—NO

Ratio: In the case of an option to buy, THE CREDITOR MAY VALIDLY AND EFFECTIVELY EXERCISE HIS RIGHT BY MERELY ADVISING THE DEBTOR OF THE FORMER’S (1) DECISION TO BUY AND (2) HIS READINESS TO PAY THE STIPULATED PRICE, provided that the same is available and actually delivered to the debtor upon execution and delivery by him of the corresponding deed of sale. In other words, notice of the creditor’s decision to exercise his option to buy need not be coupled with actual payment of the price, so long as this is delivered to the owner of the property upon performance of his part of the agreement.

Summary Rules When Period is Granted to Promisee

• Ang Yu Asuncion v. CA (238 SCRA 602) sumarized the applicable rules:

a. If the period is not supported by a separate consideration, the offeror can still withdraw the offer before it is accepted, or before he learns of an acceptance made by the offeree.

b. The right to withdraw must not be done whimsically or arbitrarily, otherwise, the other party may sue for damages under Article 19.

c. If there is a separate consideration, an option contract is perfected, and withdrawal of the option within the period is a breach of the contract.

d. The option contract is an independent contract by itself. If it is withdrawn, there is a breach which can be the basis of an action for damages. Specific performance is not available.

e. The nature of the consideration must be taken into account. If the consideration was in fact part of the purchase price, then there is no option contract, but a perfected contract of sale.

• Ang Yu Asuncion ruled that the the separate consideration merely guarantees that within the option period, before the optioner withdraws the offer, an acceptance by the optionee would give rise to a valid sale. This, in effect, is similar to the doctrine in Sanchez v. Rigos which considered an option which did not have separate consideration.

o The effect is that as far as the optionee is concerned, whether or not he gives a separate consideration, his right can be defeated simply by the optioner’s withdrawal. He is therefore not assured that a sale will be perfected.

o According to RP, the more logical action in case of a breach of an option contract is specific performance. But, the reasoning in Ang Yu (I.e you can’t compel specific performance for prestations to do) is also logical.

o CLV says this does not provide for a commercially sound doctrine because it emasculates the effectiveness of an option supported by a separate consideration. There is no incentive or motivation for the optionee to give, and the optioner to demand a separate consideration.

Ang Yu Asuncion v. CA

Facts: Ang Yu and others were tenants and lessees of commercial spaces owned by



Ongpin. On several occasions, Ongpin informed Ang Yu that he is offering to sell the premises and is giving them priority to acquire the same. Negotiations were had and counter offers were given by both parties. Ang Yu filed for specific performance to compel Ongpin to sell the property when he found out that the latter was about to sell the property. Pending resolution of the case, Ongpin sold the property to another.

Issue: Whether or not there was a perfected sale. – NO

Ratio: In a right of first refusal, while the object might be made determinate, the exercise of the right, would depend not only on the vendor’s intention to sell but also on terms, including the price, that are yet to be firmed up. Its breach cannot justify an issuance of a writ of execution under a judgment or sanction an action for specific performance without negating consensuality in the perfection of contracts. The proper remedy is an action for damages.

Rights of First Refusal

• A promise on the part of the owner that if he decides to sell the property in the future, he would first negotiate its sale to the promisee.

• If the promise is breached, an action for specific performance is not allowed, but action for damages is allowed. Guerrero v. Yñigo (96 Phil. 37)

• In Guerrero, the Court ruled that recission is also not allowed for breach of right of first refusal. This was reversed in 1992 in the case of Guzman, Bocaling & Co. v. Bonnevie (206 SCRA 668). It held that when a right of first refusal included in a contract of lease is breached by selling the property to another, the contract of sale is rescisible because of injury to third persons (the lessees).

• The buyer of a real property who knew that such property was subject to the right of first refusal cannot claim good faith.

• A right of first refusal is not a contract. It is not a sale nor an option contract.

o While it has a definite subject matter, there is no agreement as to the price or the manner of payment.

o Furthermore, the exercise of the right would be dependent upon the grantor’s eventual intention to sell the land.

• If the right of first refusal is included in a lease, there need not be a separate consideration for the right since it is already part and parcel of the entire contract of lease. The consideration for the lease is the consideration for the right of first refusal. Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc. (264 SCRA 483)

o The enforceability of the right of first refusal is based on the obligatory force of the lease contract.

o If the right is violated by the grantor who sold the property to another, the resulting contract is rescissible by the grantee of the right.

• The Equatorial Realty ruling would only apply to rights of first refusal attached to a valid principal contract. If they are constituted as separate contracts, the ruling in Ang Yu Asuncion would apply.

o Verbal grants of the right of first refusal are unenforceable since such right must be embodied in a written contract. Sen Po Ek Marketing Corp. v. Martinez (325 SCRA 210)

• How to comply with the right of first refusal when the seller decides to sell: o The seller must first offer to sell the property to the grantee of the

option. o The negotiations about the sale between the seller and the

grantee would be deemed compliance with the right, even if there is no final price agreed upon. Riviera Filipina, Inc. v. CA (380 SCRA 245)

o If no price is agreed upon, the seller can then offer to sell to other parties with the same terms as those offered to the grantee.

o If the seller and the third party negotiate and agree upon different terms, the seller must first offer these new terms again to the grantee.

o If the grantee again rejects the new terms, the seller can proceed with the sale of the property to the third party.

• The right of first refusal granted to the lessee may not be availed of by the sublessee because he is a stranger to the lessor. Sadhwani v. CA (281 SCRA 75)



• Similar to an option contract, the right of first refusal included in a lease is not renewed even in tacita reconduccion. Dizon v. CA (396 SCRA 152)

Equatorial Realty Dev. Inc. v. Mayfair Theater Inc.

Facts: Mayfair leased a portion of Carmelo’s building. Their lease contract stipulated that if Carmelo wants to sell the premises, the Mayfair shall be given exclusive option to purchase within 30 days. Carmelo informed Mayfair that it wanted to sell the property, but they never agreed upon the price. Carmelo sold the property to Equatorial. Mayfair filed an action for specific performance to have the property sold to it and to annul the sale to Equatorial.

Issues: Whether or not there was a right of first refusal. – YES

Whether or not the sale to Equatorial was valid. – YES, but rescissible.

Held: Carmelo violated the right of first refusal when without affording its negotiations with Mayfair the full process to ripen to a definite offer and a possible acceptance within the "30-‐day exclusive option" time. Equatorial is a buyer in bad faith because it had notice and full knowledge of Mayfair’s rights. Hence, the sale to Equatorial is rescissible.

Paranaque Kings v. CA

Facts: Catalina Santos, owner of the property which was leased to Paranaque Kings, sold the property to a third party (David Raymundo) for 5M. The lease contract between Santos and PK provides that the lessee shall have the first option or priority to buy the properties subject of the lease. Santos rectified her error of violating the contractual right, by having the property reconveyed to her. She sold the property to PK for 15M. However PK contests that it should be sold to them at 5M only.

Issues: W/N there is a violation of a contractual right of “first option or priority” to buy the properties subject of the lease – NO

W/N the grantee of such right is entitled to be offered the same terms and conditions as those given to a third party who eventually bought such properties – YES

Held: Only if the petitioner failed to exercise their right of first priority could Santos thereafter lawfully sell the subject property to others, and only under the same terms and conditions previously offered to the petitioner. The basis of the right of the first refusal must be the current offer to sell of the seller or offer to purchase of any prospective buyer.

Vasquez v. Ayala Corp.

Facts: Vasquez spouses own shares of stocks with Conduit Corporation. Conduit's main asset was a 49.9 hectare land in Ayala Alabang, Muntinlupa. Spouses enter into a MOA with Ayala where the latter committed to develop said lands including the 4 parcels of land to be sold to petitioner spouses. Par. 5.15 of MOA states that Ayala agrees to grant the spouses "a first option to purchase four developed lots next to the “Retained Area” at the prevailing market price at the time of the purchase.”

Issue: W/N the stipulation is a right of first refusal or an option contract. – It was a right of first refusal.

Ratio: While the object may be determinate, the exercise of the right would depend not only on the grantor's eventual intention to sell but also on terms, including price, that are yet to be firmed up. It was not an option contract because there was no separate consideration. This right given by Ayala can be revoked at any time by communicating it to the spouses. When Ayala rejected the price at which spouses wanted to by the lands, the option was lost.

Riviera Filipina v. CA

Facts: Reyes executed a contract of lease with a right of first refusal in favor of Riviera. The parcel of land was mortgaged to Prudential Bank and will be foreclosed upon Reyes’ failure to pay. Reyes offered to sell the lot to Riviera, and the parties underwent negotiations on the price. Riviera finally confirmed to purchase the property for P5,000. Reyes negotiated and sold the lot to Cypress (owned by a family friend) for P5,300.



Issue: W/N Riviera’s right of first refusal was violated by Reyes’ sale of the property to Cypress. – NO

Ratio: Riviera strongly exhibited a "take-‐it or leave-‐it" attitude in its negotiations with Reyes. It quoted its "fixed and final" price as P5,000 and not any peso more. Riviera cannot now be heard that had it been informed of the offer of P5,300 of Cypress, it would have matched said price. Its stubborn approach in its negotiations with Reyes showed crystal-‐clear that there was never any need to disclose such information and doing so would be just a futile effort on the part of Reyes. Reyes was under no obligation to disclose the same.

Proposed Doctrine on Option Contracts vis-‐à-‐vis Right of First Refusal Alternative Doctrine of Enforceability of Rights of First Refusal

• Justice Vitug, in his decision in Ang Yu Asuncion and in his dissent in Equatorial Realty said that a right of first refusal is not a contract.

o In his view, breach would result in damages pursuant to Art. 19. • CLV posits that a right of first refusal over a determinate subject matter

and supported by a separate consideration would give rise to an innominate contract (do ut facias).

o This would allow the remedy of recission which would then give rise to damages if it is breached. (Note: Art. 19 would not be the basis for damages.)

Enforceability of Option Rights Should be at Par with, if not at a Higher Level Than, Rights of First Refusal

• In light of the rulings in Equatorial Realty and Parañaque Kings, it seems that rights of first refusal attached to principal contracts have greater legal enforceability than option contracts which are supported by separate consideration.

• CLV’s proposed better rule:

o If the option is supported by a separate consideration, the optionee shall have the right to exercise the option anytime during the period, and that would give rise to a valid sale.

o The optioner, on the other hand, cannot withdraw the offer during the option period, and any attempt to withdraw will be void.

o If a third party bought the property in bad faith (i.e. he knew the existence of the option in favor of the optionee), the optionee can go after the optioner and the third-‐party buyer in an action for specific performance.

o If a third party bought the property in good faith and for value, the optionee may sue the optioner for recovery of damages for breach of contract of sale.

Mutual Promises to Buy and Sell

• This gives rise to a mutual obligation which allows each party to demand fulfillment of the obligation. It is an executory agreement. Borromeo v. Franco (5 Phil. 49)

• An unconditional mutual promise to buy and sell is enforceable by an action for specific performance.

• Contract of sale v. Mutual Promise to Buy and Sell: o A contract of sale is consummated by delivery and payment o A bilateral promise to buy and sell gives rights in personam which

grants the parties a right to demand fulfillment. Macion v. Guiani (225 SCRA 102)

Macion v. Judge Guiani

Facts: Macion and Dela Vida Institute entered into a contract to sell a property for the construction of an educational institution. The contract stipulated that Dela Vida Institute had until July 31, 1991 to buy the property for P1,750. Dela Vida Institute started construction of the building, but the sale did not materialize. Macion filed for unlawful detainer but eventually agreed to a compromise agreement to give Dela Vida Institute 5 months to pay, otherwise the latter would have to vacate the property. Respondent judge opined that the proximate cause of private respondent's failure to comply with the compromise agreement was the



refusal of petitioners to execute a contract to sell as required under the agreement.

Issue: W/N respondent Judge may compel Macion to execute a contract to sell in favor of Dela Vida Institute. -‐ YES

Ratio: The court looked into the contemporaneous and subsequent acts of the parties and determined their real intentions. A review of the facts reveal that even prior to the signing of the compromise agreement and the filing of Civil Case No. 592 before the trial court, the parties had already entered into a contract to sell. In contracts to sell, payment is a positive suspensive condition, failure of which does not constitute a breach but an event that prevents the obligation of the vendor to convey title from materializing, in accordance with Article 1184 of the Civil Code.

Perfection Stage: Offer and Acceptance

Art. 1475

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

From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. (1450a)

Consent that Perfects a Sale

• Sale, being a consensual contract is perfected by the meeting of the minds upon the object of the contract and the price.

• Meeting of the minds happens when a certain offer and an absolute acceptance meet.

Offer Must Be “Certain”

• An offer is certain when it contains: o A description of the subject matter which is a “possible thing,” licit

and determinate or at least determinable. o And a price which is real, in money or its equivalent, certain or at

least ascertainable. The terms of payment must also be included.

Acceptance Must Be “Absolute” • The acceptance must be plain and unconditional, and it will not be so if it

involves any new proposition. Zayco v. Serra (44 Phil 326) • Acceptance must be in the exact terms in which they are made. Any

modification annuls the offer. Beumont v. Prieto (41 Phil. 670) • If the term “to negotiate” is included in the acceptance letter, there is still

no absolute acceptance. Yuvienco v. Dacuycuy (104 SCRA 668) • In the same way, if the word “Noted” is signed at the bottom of the

acceptance, it was deemed not to be an acceptance of the offer. DBP v. Ong (460 SCRA 170)

• If a party accepts but with a request that payment terms be modified, there is no absolute acceptance. Limketkai Sons Milling, Inc. v. CA (255 SCRA 626)

• The moment a party accepts the offer unconditionally, the contract of sale is perfected. If the seller subsequently requests for a higher price, but no agreement is reached, the first sale is stil valid and is not novated. Uraca v. CA (278 SCRA 702)

• A document cannot constitute a sale even when it provides for a downpayment since the provision on the downpayment made no specific reference to a sale of a vehicle. Definiteness as to the price is an essential element of a binding agreement to sell personal property. Toyota Shaw, Inc. v. CA (244 SCRA 320)

When “Deviation” Is Allowed

• The change in the phrases which do not essentially change the terms of the offer does not amount to a rejection and a counter-‐offer. Clarificatory changes are allowed. Villonco v. Bormaheco (65 SCRA 352)

Villonco v. Bormaheco

Facts: Cervantes (Bormaheco) owns a lot in Buendia. It offered to sell the lot to Villaconco who owns a lot adjacent to the lot of the latter with the following conditions; (a) 100k as earnest money which will become part of the payment if lot in Sta. Ana is purchased (b) If the said property is not purchased, the money will be returned and the sale will not be consummated, which will be known 45 days after negotiation. Villonco sent a counter offer that the 100k will have an interest of 10%



per annum. Cervantes returned the earnest money and reasoned that he acquired the property beyond the 45 days period.

Issue: Whether or not there was a perfected sale?

Held: Yes. "Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract" (Art. 1482, Civil Code). The contract was already consummated at the time respondent accepted the check. In fact, he accepted the earnest money, and furthermore returned the 100k with 10% interest which serves as proof of the acceptance.

Acceptance may be Express or Implied

• Acceptance on the part of the buyer was manifested through acts such as payment of the purchase price, declaration of the property for tax purposes, and payment of real estate taxes. Gomez v. CA (340 SCRA 720)

• By affixing their signatures as witnesses, the co-‐owners accepted the terms of the contract. Oesmer v. PDC (514 SCRA 228)

Oesmer v. Paraiso Development Co.

Facts: Petitioners are siblings and co-‐owners of two parcels of land in Cavite. Ernesto, met with Respondent PDC and signed a Contract to Sell. A P100,000 check, payable to Ernesto, was given as option money. Sometime thereafter, 4 other also signed the Contract to Sell. Petitioners then wrote a letter to PDC to rescind the contract.

Issue: Whether or not the sale is valid on the petitioners who signed the contract

Held: Yes. The other five petitioners (excluding Ernesto) personally affixed their signatures thereon. Therefore, a written authority is no longer necessary in order to sell their shares because, by affixing their signatures on the Contract to Sell, they were not selling their shares through an agent but, rather, they were selling directly and in their own right. 6/8 of the property is sold.

The court also had the occasion of distinguishing earnest money and option money; (a) earnest money is part of the purchase price, while option money is the money given as a distinct consideration for an option contract; (b) earnest money is given only where there is already a sale, while option money applies to a sale not yet perfected; and (c) when earnest money is given, the buyer is bound to pay the balance, while when the would-‐be buyer gives option money, he is not required to buy, but may even forfeit it depending on the terms of the option.

Acceptance by Letter or Telegram

• Does not bind the offeror except from the time it came to his knowledge. Therefore, mere mailing or sending the acceptance is not enough. The offeror may still withdraw before he learns of the acceptance.

Acceptance Subject to a Suspensive Condition

• Even if there is a meeting of the minds, there will be no perfected contract of sale if it is subject to a suspensive condition. Gan, Sr. v. Reforma (11 CAR 57)

• CLV disagrees. He proposes that the better rule should be that there is already a perfected contract but it is not yet demandable because of the suspensive condition.

Acceptance in Auction Sales

• The owner of the property sold at auction may provide the terms under which the auction will proceed and the same are binding upon all bidders, whether they knew of such conditions or not. Leoquinco v. Postal Savings Bank (47 Phil. 772)

• An auction sale is perfected by the fall of the hammer and it does not matter if another bidder matched the price of the highest bidder. Province of Cebu v. Heirs of Rufina Morales (546 SCRA 315)

• Generally, the seller and the auctioneer cannot bid either by themselves or by an agent. Exception is when the seller reserves such right.



Earnest Money

Art. 1482

Whenever earnest money is given in a contract of sale it shall be considered as part of the prices and as proof of the perfection of the contract. (1454a)

Function of Earnest Money

• Art. 1482 gives a presumption. This prevails only in the absense of contrary or rebuttal evidence. PNB v. CA (262 SCRA 464,484)

• The presumption is based on the fact that there is a valid sale. The giving of earnest money does not establish the existence of a perfected sale. It is still the concurrence of the esential elements of sale which perfects the contract. Manila Metal Containers Corp. v. PNB (511 SCRA 444)

• The presumption does not apply when earnest money is given in a contract to sell. Serrano v. Caguiat (517 SCRA 57). The money given in a contract to sell is not earnest money but as part of the consideration to the seller’s promise to reserve the subject property for the buyer. PNB v. CA (262 SCRA 464)

• In a conditional contract of sale, the acceptance of earnest money would prove that the sale is conditionally consummated or party executed. Villonco v. Bormaheco (65 SCRA 352)

Varying Treatments of Earnest Money

• The treatment of earnest money in Art. 1482 is the preferred concept under the law.

• However, there is nothing which prevents the parties from treating the earnest money differently.

• For example, in Spouses Doromal v. CA (66 SCRA 575), the parties treated the earnest money as a guarantee that the buyer would not back out from the sale. This was the concept of earnest money in the old Civil Code.

Distinguising Earnest Money and Option Money

• Adelfa Properties, Inc. v. CA (240 SCRA 565, 580) provides the distinctions:

Earnest Money Option Money

Part of the purchase price Distinct consideration for an option contract

Given only where there is already a sale Applies to a sale not yet perfected

The buyer is bound to pay the balance The buyer is not required to buy.

Effect of Recission on Earnest Money Received

• Except if expressly stipulated, the seller cannot keep the earnest money to answer for damages sustained in the event that the sale fails due to the fault of the buyer. Goldenrod, Inc v. CA (299 SCRA 141)

• If the sale is rescinded, the seller must return the earnest money. Recission creates the obligation to return the things which were the object of the contract, together with their fruits and interest.

Place of Perfection • The sale’s place of perfection is where the meeting of the minds as to the

determinate subject matter and price occurs. • In case of acceptance by telegram or letter, the presumption is that the

contract was perfected in the place where the offer was made.

Expenses of Execution and Registration The seller has to answer for the following expenses:

1. Execution and registration of the sale 2. Putting the goods into a deliverable state 3. Withholding taxes due on the sale

Performance Should Not Affect Perfection • The ability of the parties to perform the contract (after perfection) does

not affect the perfection of the contract. • Example:

o In Schuback v. CA (227 SCRA 719), the Court ruled that there was already a perfected sale even when the required letter of credit (which was the means of payment agreed upon) had not been opened by the buyer.



• Non-‐payment of the price does not render void nor reverse the effects of the perfection of the contract of sale. It only creates a right to demand fulfillment of the obligation or to rescind the contract. Balatbat v. CA (261 SCRA 128)

• When the seller is not the owner both at the time of perfection and delivery, it is similar to an “impossible service” under Art. 1409(5). Thus, the contract is void. Nool v. CA (276 SCRA 149)

o BUT, CLV says that the comparison to an impossible service is erroneous because the obligations are “to give,” not “to do.”

Form of Sales Form Not Generally Important for Validity of Sale

Art. 1483

Subject to the provisions of the Statute of Frauds and of any other applicable statue, a contract of sale may be made in writing, or by word of mouth, or partly in writing and partly by word of mouth, or may be inferred from the conduct of the parties. (n)

• Sale, being a consensual contract, no particular form is required for its validity.

• The sale of land under a private instrument is valid. Gallar v. Hussain (20 SCRA 186) The requirement in the Statute of Frauds that sale of real estate should be embodied in a public document is only for the purpose of binding third parties.

• The fact that the sale over land was not registered does not affect the validity of the sale. Again, registration is only for the purpose of greater efficacy and binding third persons. Universal Sugar Milling Corp. v. Heirs of Angel Teves (389 SCRA 216)

• Remember: Unenforceable contracts are still valid.

Requirement for Public Instrument for Immovables under Art. 1358

• Art. 135816 enumerates the contracts which require a public document. However, it expressly provides that sales of real property or an interest therein, are governed by Art. 1403(2) (i.e. Statute of Frauds) and Art. 1405.

• Provisions of Art. 1358 are only for purposes of convenience. Non-‐compliance would not render the contract void or unenforceable. It merely provides a cause of action for the parties to compel the other to have the document notarized. Dalion v. CA (182 SCRA 872)

• Even if the deed of sale has not yet been signed and notarized, the contract is still perfected. Limketkai Sons Milling, Inc. v. CA (250 SCRA 523)

• However, if a deed of sale over a condominium unit or a piece of land is not registered in the Registry of Deeds, it cannot bind third persons. Talusan v. Tayag (356 SCRA 263), Santos v. Manalili (476 SCRA 679)

Dalion v. CA

Facts: Segundo Dalion is denying that he sold his parcel of land in Southern Leyte to Ruperto Sabesaje, contending that the document is fictitious and should have been executed in a public instrument. Sabesaje filed a suit for recovery of ownership of the parcel of land based on the deed of absolute sale executed by Dalion.

Issue: Whether or not the sale was valid despite the failure to embody it in a public document

Held: Yes. Art. 1358 states that “acts and contracts which have for their object the

16 Art. 1358 – The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or

extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by Articles 1403, No. 2, and 1405;

(2) xxx (3) xxx (4) xxx

All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles 1403, No. 2 and 1405. (1280a)



creation, transmission, modification or extinction of real rights over immovable property must appear in a public instrument” is only for convenience, not for validity or enforceability. It is not a requirement for the validity of a contract of sale of a parcel of land that this be embodied in a public instrument.

A contract of sale is a consensual contract, which means that the sale is perfected by mere consent. No particular form is required for its validity. The authenticity of the signature of Dallion was proven by the testimony of several witness including the person who made the deed of sale.

Function of a Deed of Sale

• A formal and symbolic delivery of the property sold. It can be used by the buyer as proof of ownership.

• The execution of a public document is one of the highest forms of constructive delivery in the Law on Sales

• Public document: o Subscribed and acknowledged before a notary public o Enjoys presumption of regularity and due execution o High probative value o Clear and convincing evidence is required to contradict such

• However, notarization does not guarantee validity. Neither is it conclusive of the nature of the transaction conferred by the said document. Salonga v. Concepcion (470 SCRA 291)

• Execution and notarization of a deed of sale is not conclusive presumption of delivery of possession. Santos v. Santos (366 SCRA 395)

o The buyer’s immediate taking of possession and occupation of the property corroborates the authenticity of the deed of sale

o But the seller’s continued possession of the property casts doubt on the validity of the sale. It can show that the sale was simulated.

• Jurat – clause at the foot of an affidavit showing when, where and before whom the actual oath was sworn

o If this alone is present, the deed of sale is not notarized and remains a private document.

• Even if deeds of sale were notarized by someone who was not a notary public, the sale still remained valid. But the Deed of Sale becomes a mere private document. R.F. Navarro & Co. v. Vailoces (361 SCRA 139)

• In Dalumpines v. CA (336 SCRA 538), the signatures of the sellers were found on the acknowledgemnt of the notarized Deed of Absolute Sale, not the Deed of Absolute Sale itself. The Court ruled that the deed cannot be considered notarized because the notary public did not observe utmost care in the performance of his duty.

• Even if unsigned, Contracts to Sell constitute the law between the contracting parties. They are consensual and thus, binding as long as there is a meeting of the minds. Gomez v. CA (340 SCRA 720)

• Substantial variance in the terms of the Contract to Sell and the subseqeunt Deed of Absolute Sale did not void the transaction. The Deed of Absolute Sale novated the Contract to Sell. Lumbres v. Tejada, Jr. (516 SCRA 575)

When Form of Sale Affects its Validity

• General Rule: Form does not affect validity of sale. • Exceptions: (ACM)

a. Power to sell a piece of land by an agent must be in writing, otherwise, the sale will be void.

b. Sale of large cattle must be in writing, otherwise the sale would be void. It must also be registered with the municipal treasurer in order to be valid.

c. Sale of land by “non-‐muslim hill tribe cultural minorities all throughout the Philippines” is void if not approved by the National Commission on Indigenous Peoples (NCIP).

• The authority of an agent to sell real estate must be embodied in a written special power of attorney. Therefore, the authority must be expressly given and specific. Cosmic Lumber Corp. v. CA (265 SCRA 168); Raet v. CA (295 SCRA 677)

• An oral sale entered into by the son for the real property of his father is void. Delos Reyes v. CA (313 SCRA 632)

• Likewise, the agent of a corporation must have a written authority to sell a piece of land, otherwise, it will be void. Receipt of part of the purchase



price by the agent will not validate the sale. City-‐Lite Realty Corp. v. CA (325 SCRA 385)

• However, the agent’s written authority alone will not exempt the sale from the Statute of Frauds. The Deed of Sale itself must be in writing and registered in order to be enforceable and binding to 3rd persons. Torcuator v. Bernabe (459 SCRA 439)

• When the Contract to Sell is signed by the co-‐owners themselves, written authority by the agent is no longer required. The co-‐owners are acting directly. Oesmer v. Paraiso Dev. Corp. (514 SCRA 228)

Statute of Frauds: When Form Is Important for Enforceability Nature and Purpose of Statue of Frauds

• To prevent fraud and perjury in the enforcement of obligations. The written note must emobody the essentials of the contract. Torcuator v. Bernabe (459 SCRA 439)

• The application of the Statute of Frauds presupposed the existence of a perfected contract. Firme v. Bukal Enterprises and Dev. Corp. (414 SCRA 190)

Sales Coverage in Statute of Frauds

• The following kinds of sale are unenforceable if not embodied in a written document: (1-‐500-‐R)

o A sale which is not to be performed within one year o Agreement for the sale of goods, chattel or things in action not

less than P500 o Sale of real property

• Evidence of the agreement must be in writing.

Exceptions to Coverage of Statue of Frauds in Sales Contracts

• The following are exempted from the Statute of Frauds and are thus enforceable: (M-‐POE)

1. There is a note or memorandum in writing and subscribed by the party charged or his agent

2. When there has been partial consummation/partial performance

3. Failure to object to the presentation of evidence aliunde (meaning: from another place) as to the existence of a contract

4. Sales effected through electronic commerce

Nature of Memorandum

• The memorandum need not be in just one document. Several correspondences taken together would constitute sufficient memorandum. Berg v. Magdalena Estate, Inc. (92 Phil 110); First Phil. International Bank v. CA (252 SCRA 259)

• The memorandum must contain all the essential terms of the contract of sale. All the requisites of a valid sale must be indicated. Paredes v. Espino (22 SCRA 1000)

o The manner of payment must also be included in the memorandum. Yuvienco v. Dacuycuy (104 SCRA 668)

o But the Court has held that in sales of real property, the statute of frauds will not apply if there has already been partial payment even if the memorandum evidencing the sale did not mention payment by installment. David v. Tiongson (313 SCRA 63)

• The courts will not go beyond the four corners of the memorandum to ascertain the presence of a sale. Doing so would be violative of the Statute of Frauds. If the memoranda do not embody the essential elements of a sale, the court will declare that there wasn’t any perfected sale. Oral evidence will not suffice to prove the sale. Limketkai Sons Milling, Inc. v. CA (255 SCRA 626)

Yuviengco v. Dacuycuy

Facts: Petitioners are owners of a bakery in Tacloban, they intend to sell it at 6.5M and the offer pending until July 31, 1978 to buy the property. Atty.Gamboa went to Cebu bringing a contact with an altered mode of payment which says that the balance payment should be paid withing 30 days instead of the former 90 days. Due to the said variance in the said document, the bank draft was returned unsigned.

Issue: Whether or not there was a cause of action

Whether or not the statute of fraud will apply



Held: SC considered the correct juridical significance of the telegram of respondents instructing Atty. Gamboa to "proceed to Tacloban tonegotiate details." It emphasizes the word "negotiate" advisedly because to SC’s mind it is the key word that negates and makes it legally impossible to hold that respondents' acceptance of petitioners' offer, assuming that it was a "certain" offer indeed, was the "absolute" one that Article 1319. Payment on installments is entirely different from cash payment. The manner of payment is an essential requisite in a contract of sale. The alteration in the terms of payment clearly showed there was no meeting of the minds yet to perfect a contract of sale.

In any sale of real property on installments, the Statute of Frauds read together with the perfection requirements of Article 1475 of the Civil Code must be understood and applied in the sense that the idea of payment on installments must be in the requisite of a note or memorandum therein contemplated. Under the Statute of Frauds, the contents of the note or memorandum, whether in one writing or in separate ones merely indicative for an adequate understanding of all the essential elements of the entire agreement, may be said to be the contract itself, except as to the form

Limketkai v. CA

Facts: BPI as trustee of PRC , authorized Pedro Revilla to sell a lot in Barrio Bagong Hog, Pasig. BPI VP Albano, Asst. VP Aromin and Limketkai had negotiations and eventually settled on Php 1000/sq meter. Lim asked if they could pay on terms and so VP Albano dictated the terms of payment. About 3 days later, Limketkai learned that its offer to pay on terms has been frozen. Lim went to BPI to tender full payment of Php 33, 056, 000.00 to VP Albano but the latter refused payment and said his authority to sell the land had been withdrawn. Limketkai filed a case to against BPI for specific performance.

Issues

1) WON there was a perfected contract of sale between Limketkai and BPI—YES 2) WON the evidence admitted by the trial court in ruling for the perfection of the

sale is admissible, given that in a sale of real property, the Statute of Frauds is applicable?—YES

3) WON the sale to NBS during the pendency of the trial in the RTC was effected in good faith—NO

Ratio

1. Contract of sale perfected-‐VP and Asst. VP have authority to sell since their primary responsibilities were to manage and administer real estate property.Asst. VP Aromin testified that there was already a perfected contract of sale.When they met, talked and agreed that the lot would be sold to Limketkai at Php 1000/sq. meter and on terms dictated by Albano, the sale was perfected.

2. Statute of Frauds -‐ transaction was outside the ambit of the SoF, there is the existence of a written note or memorandum, the Authorization Letters and letter from Limketkai confirming the sale. Respondents cross-‐examined the witnesses at length regarding the contract, price, tender of payment, etc.

3. NBS not a purchaser in good faith. They ignored the lis pendens annotated on the title.

Limketkai v. CA (MR)

1. No contract of sale perfected-‐ . Petitioners fail to establish any definite agreement or meeting of the mind as regards the price or term of payment. Petitioner’s acceptance of the offer was qualified, which amounts to a rejection of the original offer.

2.Statute of Frauds-‐ Petitioner claims as proof of perfected contract of sale between it and respondent BPI were not subscribed by the party charged, i.e. BPI, thus did not constitute the memoranda or notes that the law speaks of.

Partial Performance

• Partial performance is not limited to the giving of money. Contracts covered by the Statute of Frauds are ratified by acceptance of benefits under them. (Art. 1405)



• However, delivery of the deed to the buyer without intention on the part of the seller to part with the title until purchase price is paid does not constitute partial performance. Baretto v. Manila Railroad Co. (46 Phil. 964)

• Partial performance of a sale of real property will take it out of the Statute of Frauds even if the formal requirements (i.e. it must be in writing) are not complied with, as long as the essential requisites of sale are present. Vda. De Jomoc v. CA (200 SCRA 74)

• The Statute of Frauds only applies to executory contracts. Where one party has performed his obligation, oral evidence will be admitted to prove the agreement. Alfredo v. Borras (404 SCRA 145) (Note the difference with the admissibility of parol evidence in the Limketkai case, supra.)

Spouses Alfredo v. Spouses Borres

Facts: Spouses Alfredo sold a land to Spouses Borres, the latter will pay the DBP loan of the former and the balance will be paid in cash. Carmen Alfredo issued a receipt for the payment. Alfredos then delivered the OCT 284, along with document of cancellation of mortgage, official receipts of realty tax payments to Adelia. However, Borreses discovered that the Alfredos had re-‐sold portions of the subject land to several persons.

Issue: WON sale of land in favor of Borreses is valid even if orally entered. (YES)

WON Statute of Frauds is applicable (NO)

Ratio: Contract of Sale was a perfected contract. The contract was also consummated because both parties have performed their respective obligations. SOF does not apply because there is a memorandum of sale, Receipt is considered a memorandum of sale. SoF only applies to executory contracts, not ones that have been partially/totally performed.

Effect of Partial Execution on Third Parties

• Sale of real property which are not in writing but are partially executed still do not bind third parties.

• Formal requirements are for the benefit of third parties. Non-‐compliance does not affect the validity of the contract. Fule v. CA (286 SCRA 698)

• If a third party disputes the ownership of the property, the person against whom that claim is brought cannot present any proof of such sale and hence, has no means to enforce the contract. Thus, the Statute of Frauds is for the benefit of the parties in the sale. Claudel v. CA (199 SCRA 113)

o The Claudel ruling confirms the variance in principles involving movables and immovables. Art. 1403 treats partial execution as applicable only to “goods and chattel.”

o For movables, mere possession is enough to give a presumption of ownership (Art. 559). For immovables, a Torrens title is needed.

o Note the difference in the ruling of Claudel and Vda. De Jomoc. The controlling doctrine is that of Vda. De Jomoc: partial performance in sales of real property takes it out of the Statute of Frauds. However, it is still the registration in the Registry of Deeds which will bind third parties.

o Claudel shows the effect of having a sale of real property which isn’t reduced to writing. Thus, it emphasizes the importance of the Statute of Frauds. (Claudel was decided based on prescription, not according to the Statute of Frauds.)

• Reliance on testimony of witnesses as secondary evidence to prove a sale of real property will not prosper because such a sale must be evidenced by a written instrument when it involves third parties. Alba vda. De Rax v. CA (314 SCRA 36)

• Londres v. CA (394 SCRA 133) summarized the rulings on the matter: o Art. 1358 is only for convenience o Registration of the instrument is needed only to adversely affect

third parties o Non-‐compliance with formal requirements does not affect validity

• In the Torrens system, execution of a public document is not enough to bind third persons. Registration with the Registry of Deeds is the operative act. Secuya v. Vda. De Selma (326 SCRA 144)

Fule v. CA

Facts: Fule offered to sell his land to Dr. Cruz for the price of 40,000 and her



emerald cut diamond earrings (worth 160k). They met at the safety deposit box of Dr. Cruz and Fule examined the said jewelry. He nodded and took the earrings. Two hours after, he complained to Atty. Belarmino and Dr. Cruz that the jewelry given to him was a fake. He prayed for the annulment of the contract on the ground of vitiated consent through fraud.

Issue: Whether or not the sale was invalid due to fraud

Held: No. There was no fraud on the part of the private respondents. In fact, it was the petitioner through his agents who led Dr.Cruz to believe that the properties were worth P400,000 then supposedly discounted it to P200,000 to induce her to exchange the property. All elements were present a) consent b) subject matter and c) price. The land was constructively delivered via deed of absolute sale and the earrings transferred ownership when he left the Bank that day. Thus, contract can no longer be disputed.

Claudel v. CA

Facts: Cecilio Claudel’s heirs and siblings claimed title to the land. Siblings claim that subject lot was sold to their parents by Cecilio through an oral contract. Their proof of sale is a subdivision plan of the said land.

Issue: 1.Whether or not a contract of sale of land may be proven orally (NO)

2. Prescriptive period for filing an action for cancellation of titles and reconveyance with damages

Ratio: Contracts of sale are valid regardless of the form it may have been entered into except when third party, disputes the ownership of the property, the person against whom that claim is brought cannot present any proof of such sale and hence has no means to enforce the contract. As to the prescription ,Civil Code sates that under Art. 1145, actions regarding oral contracts must be commenced within 6 years.

Secuya v. Vda. De Selma

Facts: Maxima Caballera, through an agreement of partition, allotted Lot 5679 to Paciencia Sabellona. The latter then sold her share to Secuya. De Selma claims that

she owns the whole lot, including the portion bought by Secuya, presenting a TCT and a deed of sale executed by Cesaria Caballero.

Issue: Whether or not Secuya’s own the the property

Held: No. The Agreement is not one of partition, because there was no property to partition and the parties were not co-‐owners. Rather, it is in the nature of a trust agreement. As a result of the Agreement, Maxima Caballero held the portion specified therein as belonging to Paciencia Sabellona when the application was eventually approved and a sale certificate was issued in her name.Thus, she should have transferred the same to the latter, but she never did so during her lifetime.

Petitioners insist that Paciencia sold the disputed property to Dalmacio Secuya embodied in a private document. However, such document, which would have been the best evidence of the transaction, was never presented in court, allegedly because it had been lost. While a sale of a piece of land appearing in a private deed is binding between the parties, it cannot be considered binding on third persons, if it is not embodied in a public instrument and recorded in the Registry of Property

Nature and Coverage of Partial Performance

• Partial payment of the purchase price is not the only manner of partial performance.

• Other modes of partial performance: Ortega v. Leonardo (103 Phil. 870) o Possession o Making of improvements o Rendition of services o Payment of taxes o Relinquishment of rights

• Requisites of partial performance: o Must pertain to the subject matter or the price of the sale o Must involve an act or “complicity” on the party sought to be

charged



• Partial performance must amount to estoppel against the party sought to be charged.

Ortega v. Leonardo

Facts : Leonardo made a deal with Ortega to desist from pressing her claim and promised that he would sell to her a portion of the lot provided she paid for the surveying and subdivision of the Lot and provided further that after he acquired title, she could continue holding the lot as tenant by paying a monthly rental. Ortega accepted the offer. Defendant acquired title. Ortega tendered to Leonardo the purchase price for the lot, which the latter refused to accept, without cause or reason. Alleging partial performance, plaintiff sought to compel defendant to comply with their oral contract of sale of a parcel of land.

Issue: WON the partial performance of a sale of contract occurs only when part of the purchase price is paid (NO)

Ratio: American Jurisprudence enumerates other acts of partial performance (i.e. continuance in possession, making of valuable permanent improvements on the land, tender or offer of payment, relinquishment of rights). The complaint in this case described several circumstances indicating partial performance. Hence, there was partial performance and the principle excluding parol contracts for the sale of realty, does not apply.

Waiver of Provisions of Statute of Frauds

• This is the third ground which takes a contract out of the Statute of Frauds. • When a party fails to object during trial to the presentation of oral

evidence to prove the contract, he is deemed to have waived the defects of the contract. Thus, the contract will be enforceable. (Art. 140517)

17 Art. 1405 – Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefits under them.

• Cross-‐examination on the contract is deemed a waiver of the defense of the Statute of Frauds.

Value of Business Forms to Prove Sale

• Business forms (e.g. receipts, order slips, etc.) issued by the seller are not always fully accomplished to contain all the necessary information describing the business transaction.

• They serve as an acknowledgement that a business transaction did take place.

• By themselves, they are inadequate to establish the case for the vendor. Their probative value must be evaluated in conjunction with other evidence.

Toyota Shaw v. CA

Facts: Luna Sosa and Popong Bernardo, a sales representative executed a document entitled “Agreements between Sosa & Popong Bernardo of Toyota Shaw” for the purchase of a Toyota Lite Ace. A P 100,000.00 down payment was stipulated and that the Lite Ace would be available at the given date, with Bernardo guaranteeing that the vehicle would be delivered. At the given date of delivery, Lite Ace was unavailable. Sosa sued for damages.

Issue: WON there was a perfected contract of sale -‐ NO

Ratio: No perfected contract of sale. There was no agreement as to the price and the manner of payment – w/c are both essential to the perfection of the sale.

Sales Effected as Electronic Commerce (R.A. 8792)

• The main point of this entire section in the book is this: electronic documents are given the same legal recognition as paper documents. Thus, they are admissible as evidence in court.



Form in Equitable Mortgage Claims

• The Statute of Frauds does not stand in the way of treating an absolute deed of sale as a mortgage, when such was the intention of the parties. Cuyugan v. Santos (34 Phil. 100)

• A contract should be construed as a mortgage or a loan instead of a pacto de retro sale when its terms are ambiguous or the circumstances surrounding its execution or its performance are incompatible with a sale. Parol evidence becomes admissible to prove that the instrument was intended to be a security for a loan. Lapat v. Rosario (312 SCRA 539)

• An equitable mortgage is not different from a real estate mortgage, and the lien created thereby ought not to be defeated by requiring compliance with the formalities necessary to the validity of a voluntary real estate mortgage. Rosales v. Suba (408 SCRA 664)

Form in “Sales on Return or Approval”

Art. 1502

When goods are delivered to the buyer “on sale or return” to give the buyer an option to return the goods instead of paying the price, the ownership passes to the buyer on delivery, but he may revest the ownership in the seller by returning or tendering the goods within the time fixed in the contract, or, if no time has been fixed, within a reasonable time. (n)

When goods are delivered to the buyer on approval or on trial or on satisfaction, or other similar terms, the ownership therein passes to the buyer:

(1) When he signifies his approval or acceptance to the seller or does any other act adopting the transaction;

(2) If he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time. What is a reasonable time is a question of fact. (n)

• The Court has held that the conditions in Art. 1502 will only apply if there is an express stipulation that the sale is either a “sale on return” or a “sale on approval.” Industrial Textile Manufacturing Company of the Phil., Inc. v. LPJ Enterprises, Inc. (217 SCRA 322)

• Parol evidence will not be admitted to prove that a sale was a “sale on return” or “sale on approval.”

• The buyer cannot accept part of the goods and reject the rest.

Right of First Refusal Must Be Contained in Written Contract

• Verbal grants of such right are not enforceable. In effect, this is an addition to the Statute of Frauds. Sen Po Ek Marketing Corp. v. Martinez (325 SCRA 210)

When Sale Completely Simulated • When a sale is absolutely simulated, it is completely void and non-‐existent. • If the parties enter into a sale to which they did not intend to be legally

bound, the contract is void and not susceptible to ratification. Rosario v. CA (310 SCRA 464)

• Failure of the buyers to take possession of the property or to collect rentals is contrary to the principle of ownership. It shows simulation which renders the whole transaction void. Santiago v. CA (278 SCRA 98)

• Although the agreement to sell did not absolutely transfer ownership of the land to the buyer, the Court held that it did not show that the agreement was simulated. Delivery of the certificate of ownership and the execution of the deed of sale were suspensive conditions which gave rise to the obligation to pay the last installments. Villaflor v. CA (280 SCRA 297)

• “Simulation” – declaration of a fictitious will, made by agreement of the parties, in order to produce, for the purposes of deception, the appearance of a juridical act which does not exist or is different from what was really executed. Loyola v. CA (326 SCRA 285)

• In simulated contracts, the parties do not intend to be bound by the contract and the apparent contract is not really desired or intended to produce legal effect.

• Requisites of simulation: (DMD) o Outward declaration of will different from the will of the parties; o False appearance intended by mutual agreement o Purpose is to deceive third persons

• The allegation that a signature is forged must be proven by clear, positive and convincin evidence. R.F. Navarro & Co. v. Vailoces (361 SCRA 139)



• When a sale is void, the right to set up its nullity or non-‐existence is available to third persons who are affected.

• Action for declaration of nullity is likewise available. It does not prescribe. • Accion pauliana is also available when the subject matter is a conveyance

undertaken in fraud of creditors.

Law on Sales Chapter 6 – Performance or Consummation of Sale

Obligations of Seller To Preserve the Subject Matter

Art. 1163.

Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. (1094a)

• In the sale of a determinate object, the obligation of taking care of the subject matter arises upon perfection, even before delivery. Otherwise, the seller is liable for breach.

• It is an obligation “to do.”

To Deliver the Subject Matter

Art. 1495.

The vendor is bound to transfer the ownership of and deliver, as well as warrant the thing which is object of the sale. (1461a)

• Transfer of ownership is effected by delivery, actual or constructive.

• If there is no express stipulation that title shall not pass until payment of price, and the thing sold has been delivered, ownership passes from the moment the thing sold is placed in the possession and control of the buyer. Payment of price does not determine the effect of delivery. Kuenzle & Streiff v. Watson & Co. (13 Phil 26)

• Delivery transfers ownership ipso jure, without prejudice to the right of the seller to claim payment of the price. Ocejo, Perez & Co. v. International Banking Corp. (37 Phil. 631)

To Deliver the Fruits and Accessories

Art. 1164.

The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. (1095)

Art. 1537.

The vendor is bound to deliver the thing sold and its accessions and accessories in the condition in which they were upon the perfection of the contract.

All the fruits shall pertain to the vendee from the day on which the contract was perfected. (1468a)

• In a sale involving a determinate subject matter, even prior to delivery of ownership thereof to the buyer, the buyer already has certain rights enforceable against the seller.

To Warrant the Subject Matter

• Please see discussions in Chap. 12.

Tradition as a Consequence of a Valid Sale Essence of Tradition

Art. 1496.

The ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee.



• There is delivery if and when the thing sold is placed in the control and possession of the vendee. Delivery is a composite act, in which both parties must join and the minds of both parties concur. Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc. (370 SCRA 56)

• Tradition produces its legal consequences from the fact that delivery is effected pursuant to a valid sale. There is no transfer of ownership by the execution of a deed of sale merely intended to accommodate the buyer to enable him to generate funds for his business.

Actual Delivery

Art. 1497.

The thing sold shall be be understood as delivered, when it is placed in the control and possession of the vendee. (1462a)

• Although possession is the best gauge when there is control, nonetheless control can take other forms other than actual physical possession.

o In a case, the lot was considered to be in the buyer’s control when the buyer subsequently filed an ejectment suit against someone. Power Commercial and Industrial Corp. v. CA (274 SCRA 597)

Power Commercial and Industrial Corp. v. CA

Facts: PCIC bought a property from spouses Quiambao. PCIC also assumed mortgage on the land in favor of PNB. Spouses again mortgaged the land to PNB to guarantee a loan. PCIC assumed this mortgage also, so parties executed a Deed of Absolute Sale with Assumption of Mortgage, along with the application for assumption of mortgage, to PNB. PCIC filed for rescission of the contract for Quiambaos’ failure to eject the lessees and transfer physical possession to them. During the pendency of the case, the mortgage was foreclosed and PNB was the highest bidder at the public auction.

Issues: W/N the contract may be rescinded due to a substantial breach of the contract—failure to eject tenants and violation of warranty against eviction. -‐-‐-‐ NO

Held: Delivery can be actual or constructive. Symbolic delivery, as a species of constructive delivery, may be prevented if the vendor does not possess control over the thing sold, in which case this legal fiction must yield to reality. Here, the lot had been placed in PCIC’s control. That’s why they were able to file the ejectment cases subsequently. Since ejectment of lessees was not stipulated as a condition, it cannot be invoked as a cause to allow PCIC to rescind its contract. In fact, PCIC was

aware of the presence of the tenants when it entered into the contract of sale hence it assumed the risks of ownership and possession.

Constructive Delivery

• The essence of most forms of constructive delivery is the existence of an agreement between the seller and the buyer, and that the laatter is understood to have control of the subject matter of the sale.

Execution of Public Instrument

Art. 1498.

When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred.

With regard to movable property, its delivery may also be made by the delivery of the keys of the place or depository where it is stored or kept. (1463a)

Art. 1487.

The expenses for the execution and registration of the sale shall be borne by the vendor, unless there is a stipulation to the contrary. (1455a)

• Jurisprudence has held that a notarized deed of sale has two functions:

1. it operates as a formal or symbolic delivery of the property sold

2. it authorizes the buyer to use the document as proof of ownership

• Constructive delivery has the same legal effect as actual or physical delivery. Municipality of Victorias v. CA (149 SCRA 31)

• Prior physical possession it not legally required since the mere execution of the deed of conveyance in a public instrument is equivalent to the delivery of the property. Sabio v. International Corporate Bank (364 SCRA 385)

• Control is still necessary. If a public document was executed, but the buyer is not placed in control of the property, there is only a rebuttable



presumption of delivery which can be rebutted by clear and convincing evidence. Santos v. Santos (366 SCRA 395)

Santos v. Santos

Facts: Jesus and Rosalia Santos executed a deed of sale of a property in favor of Salvador and Rosa. Rosalia continued to lease and receive rentals from the apartment units. Jesus, Rosalia and Salvador died. Zenaida, Salvador’s wife, demanded rent from Antonio, Rosalia’s tenant. He refused. Rosalia’s siblings filed for reconveyance of the property alleging that the deed of sale was simulated for lack of consideration.

Issue: Is a sale though a public instrument tantamount to delivery of the thing sold? -‐-‐-‐ NO

Held: There is nothing in Article 1498 that provides that execution of a deed of sale is a conclusive presumption of delivery of possession; presumptive delivery can be negated by the failure of the vendee to take actual possession of the land or the continued enjoyment of possession by the vendor. For the execution of a public instrument to effect tradition, the purchaser must be placed in control of the thing sold. To effect delivery, there must be the actual intention of the vendor to deliver, and its acceptance by the vendee.

• Cases where execution of public instrument covering valid sales do not produce the effects of tradition:

1. When there is a contrary stipulation. Phil. Suburban Dev. v. Auditor (63 SCRA 397)

2. At the time of the execution of the public instrument, the subject matter was not subject to the control of the seller. Addison v. Felix (38 Phil. 404)

a. However, if there was an express agreement that the buyer had to take necessary steps to obtain material possession, and it was proven that the buyer knew the subject matter to be in possession of a third party, such agreement is valid. The seller is deemed to have complied with his obligation to deliver by the execution of the public instrument.

3. Not only must the seller have control at the execution of the instrument, such control or ability to transfer physical possesion

must subsist for a reasonable length of time. Pasagui v. Villablanca (68 SCRA 18)

Addison v. Felix

Facts: Spouses Marciana Felix and Balbino Tioco bought 4 parcels of land from A. A. Addison. Felix paid at the time of execution P3000 and the manner of payment for subsequent installments were stipulated by the parties. The contract also provided for a stipulation for rescission within 1 year from the issuance of title to the property, and shall effect restitution among the parties. Addison filed a suit in the CFI of Manila claiming the first installment of P2000. Defendants contested that the property was not delivered, hence they asked for a refund.

Issue: W/N there was delivery and, therefore, a transfer of ownership of the thing sold. -‐-‐-‐ NO

Held: The thing is considered to be delivered when it is placed "in the hands and possession of the vendee." (Art. 1462). It is true that the same article declares that the execution of a public instruments is equivalent to the delivery of the thing which is the object of the contract, but, in order that this symbolic delivery may produce the effect of tradition, it is necessary that the vendor shall have had such control over the thing sold that, at the moment of the sale, its material delivery could have been made. It is not enough to confer upon the purchaser the ownership and the right of possession. The thing sold must be placed in his control.

Danguilan v. IAC

Facts: Apolonia filed a complaint against Danguilan for recovery of two lots. She claimed to have purchased these lots from Domingo Melad and moved out because Danguilan asked if he could cultivate the lands. Domingo claims Domingo signed private instruments conveying said properties on the understanding that the latter would take care of the grantor and arrange for his burial.

Issue: Who has a better claim to the property? -‐-‐-‐ Danguilan

Held: Apolonia failed to show that she consummated the contract of sale by actual delivery of the properties to her, and her actual possession thereof in concept of owner. Such control should remain within a reasonable period after the execution of the instrument.

Pasagui v. Villablanca



Facts: Calixto Pasagui and Fausta Mosar purchased land from Eustaquia and Catalina Bocar for P 2,800.00. The sale was embodied in a public instrument. However, they failed to take possession of the property because Spouses Villablanca illegally took possession of the property and harvested coconuts therein. As such, Pasagui filed a case for ejectment against the Villablancas.

Issue: W/N there was constructive delivery upon the execution of the public instrument. – NO.

Held: The seller must have actual control of the object of sale at the time of the execution of the instrument, and such control/ability to transfer physical possession must subsist for a reasonable amount of time after the execution of the instrument. Pasagui had not yet acquired physical possession of the land because no delivery was ever made by the seller, even by constructive delivery that proves actual possession and control.

• The registration of a Deed of Sale involving land with the Registry of Deeds is necessary only to bind 3rd parties. As between the buyer and seller, ownership is transferred by the execution of the public document. Chua v. CA (401 SCRA 54)

Art. 1499.

The delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of the sale, or if the latter already had it in his possession for any other reason. (1463a)

• When it comes to a third-‐party and the issue centers on the title or ownership of the subject matter, constructive delivery by the execution of a public instrument would produce the effect of tradition, but only insofar as title is concerned, provided that at the time of the execution there was no legal impediment on the part of the seller to transfer title to the buyer, even if at the time of sale, control of possession of the subject matter was not in the hands of the seller. Dy, Jr. v. CA (198 SCRA 826)

Dy, Jr. v. CA

Facts: Wilfredo Dy obtained a loan from Libra to buy a truck and tractor, which were mortgaged to Libra as security. Perfecto Dy purchased the tractor from Wilfredo and assumed the mortgage debt. The tractor was in Libra’s possession

because Wilfredo failed to pay the amortization. Perfecto offered to pay the full amount but Libra refused since the loan was obtained not only for the tractor but the truck as well. There was a collection case pending filed by Gelac Trading against Wilfredo. The tractor was seized and sold at a public auction where Gelac Trading was the lone bidder. Gelac Trading sold the tractor to Antonio Gonzales.

Issue:

1. Whether or not there was constructive delivery at the time of the execution of the deed of sale in favor Perfecto. – YES

2. Whether or not Wilfredo must first have control and possession of the thing before he could transfer ownership by constructive delivery. – NO

Held: Art 1496 states that the ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified in Art 1497-‐1501 or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee. Although actual delivery of the tractor could not be made, there was constructive delivery already upon the execution of the public instrument pursuant to Art 1498 and upon the consent or agreement of the parties when the thing sold cannot be immediately transferred to the possession of the vendee.

Symbolic Delivery

• Must involve or cover the subject matter, and cannot take a form relating to the payment of the purchase price.

o The issuance of a receipt for partial payment cannot be taken to mean a transfer of ownership. Lorenzo Dev. Corp. v. CA (449 SCRA 99)

Constitutum Possessorium

• The seller held possession in the concept of owner, and pursuant to the contract, the seller continues possession, but as lessee, or any other form of possession other than in the concept of an owner.

Traditio Brevi Manu

• Opposite of constitutum possessorium

• The buyer is already in the possession of the property before the sale, but not in the concept of the owner. After the sale, the buyer becomes possesor in the concept of owner.

Traditio Longa Manu



• Delivery by mere agreement, such as when the seller points the property subject matter of the sale by way of delivery without need of actually delivering physical possession.

Delivery of Incorporeal Property

Art. 1501.

With respect to incorporeal property, the provisions of the first paragraph of Article 1498 shall govern. In any other case wherein said provisions are not applicable, the placing of the titles of ownership in the possession of the vendee or the use by the vendee of his rights, with the vendor’s consent, shall be understood as delivery. (1464)

• 3 types of constructive delivery specifically applicable to incorporeal property:

1. Execution of a public instrument, if the contrary does not appear

2. Placing of the titles of ownership in the possession of the buyer

3. Use and enjoyment by the buyer of the rights pertaining to the incorporeal property, with the seller’s consent

• For shares of stocks, delivery of the stock certificates is essential. Failure to deliver the stock certificates may amount to substantial breach, a ground for rescission. Raquel-‐Santos v. Court of Appeals, 592 SCRA 169

Delivery by Negotiable Document of Title

• A negotiable document of title represents the actual goods. If it is transferred in good faith and for value, and if the transferror had the ability to convey, it is equivalent to the transfer of the thing itself. (ex. Negotiable warehouse receipt)

• If the document of title has merely been assigned, and not negotiated, the transferee/assignee only acquires the transferor’s title.

Delivery through Carrier

• This mode only applies to the sale of goods. The general rule, and in the absence of contrary stipulation, delivery to the carrier is deemed delivery to the buyer. The carrier acts as an agent of the buyer.

Art. 1523.

Where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to the buyer, whether named by the buyer or not, for the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, except in the cases provided for in Article 1503, first, second and third paragraphs, or unless a contrary intent appears.

Unless otherwise authorized by the buyer, the seller must make such contract with the carrier on behalf of the buyer as may be reasonable, having regard to the nature of the goods and the other circumstances of the case. If the seller omit so to do, and the goods are lost or damaged in course of transit, the buyer may decline to treat the delivery to the carrier as a delivery to himself, or may hold the seller responsible in damage.

Unless otherwise agreed, where goods are sent by the seller to the buyer under circumstances in which the seller knows or ought to know that it is usual to insure, the seller must give such notice to the buyer as may enable him to insure them during their transit, and, if the seller fails to do so, the goods shall be deemed to be at his risk during such transit. (n)

a. F. A. S. Sales

• “Freight Along Side”

• the seller pays all charges and is subject to risk until the goods are placed alongside the vessel. Delivery of the goods alongside the vessel completes the effect of delivery.

b. F. O. B. Sales

• “free on board”

• “f. o. b. shipping point” – delivery of the goods to the carrier is equivalent to delivery to the buyer. Risk of loss pertains to the buyer.

• “f. o. b. destination” – delivery to the buyer takes place upon arival of the vessel at the point of destination. Prior to arrival, risk of loss pertains to the seller.

c. C. I. F. Sales

• “costs, insurance, and freight”



• the price fixed covers not only the costs of the goods, but also the expense of freight, and insurance

• Two schools of thought on the effect of delivery under c.i.f. sales:

1. The carrier acts as an agent of the buyer, and therefore, delivery to the carrier is delivery to the buyer. The buyer thus obtained ownership. (ex. General Foods v. NACOCO, 100 Phil 637)

2. Both parties agree that the seller takes on the responsibility of insuring the goods. Delivery to the carrier is not equivalent to delivery to the buyer. (ex. Behn, Meyer & Co. v. Yangco, 38 Phil 602)

• These shipping arrangements create presumptive effects which can guide the courts in construing when constructive delivery occurs. However, such presumptions must necessarily give way to any stipulation or intimation to the contrary, as these show the intent of the parties. It is still the intention of the parties which control the agreement.

Behn, Meyer & Co. v. Yangco

Facts: The contract was for delivery of caustic soda, price including cost, insurance and freight, to be shipped and delivered to Manila and paid upon delivery. From shipping point at New York (carrier), British authorities detained the ship at Penang and some of the caustic soda was removed.

Issue: Is the seller liable? YES.

Ratio: Contract provided for “c.i.f. Manila…” The term c.i.f. presumes that property passes (considered delivered) to the buyer upon delivery to the common carrier. F.o.b. presumes that the seller is responsible until delivery is made to destination. But these are just presumptions. Intent is still controlling. Although “c.i.f.” was used, it is clear from the contract that the parties intended the seller to be liable until delivery was made to destination (Manila). Not having been fulfilled, buyer has a right to rescind for substantial breach.

General Foods v. NACOCO

Facts: NACOCO sold 1000 tons of copra to GFC. It was shipped to GFC aboard the SS Mindoro. NACOCO withdrew from GFC’s letter of credit the amount corresponding to the copra. But GFC only received 800 tons so it demanded a refund

corresponding to the price of the deficiency. NACOCO’s defense is that since the contract was c.i.f., delivery to the carrier (SS Mindoro) was equivalent to delivery to the buyer (GFC).

Issue: Is NACOCO liable to refund? YES.

Ratio: While in ordinary c.i.f. delivery to the carrier is delivery to the buyer, the parties can insert stipulations. Here, the parties stipulated that the price to be paid would be based on the exact net weight upon arrival at port of destination. NACOCO had burden to prove that the deficiency in weight was owing to risks of the voyage or allowable weighing errors and not the drying up of the copra. It did not prove.

Pacific Vegetable Oil Corp. v. Singzon

Facts: Singzon contracted with PVOC to deliver to latter 500 tons of copra, c.i.f. The former failed and after subsequent agreement, Singzon failed again. PVOC sued him for damages

Issue: Singzon liable? YES.

Ratio: Under their arrangement, the vendor was not only to pay for cost, but also freight and insurance expenses. So before arrival at the destination, the risk of loss should be for the account of the seller.

Effects and Completeness of Delivery 2 Things Must Be Present to make delivery produce its lefal effect:

1. Delivery must be made pursuant to a valid sale

• Tradition pertains to the consummation stage of sale, thus, it presupposes a valid sale.

• When a sale is fictitious, no title over the subject matter of the sale can be conveyed.

2. Delivery must be made when seller has ownership over the subject matter of sale so delivered

• No man can dispose of that which does not belong to him.

To Whom Delivery Must Be Made



• General Rule: Delivery must be made to the buyer or his duly authorized representatives named in the contract. Lagoon v. Hooven Comalco Industries, Inc. (349 SCRA 363)

• However, parties can validly stipulate how delivery is to be made and to whom.

• Even if the buyer refuses to accept, the delivery by the seller will produce its legal effects. However, the seller is still legally obliged to to take certain steps as not to be held liable for consequent loss or damage to the goods.

Art. 1588.

If there is no stipulation as specified in the first paragraph of Article 1523, when the buyer’s refusal to accept the goods is without just cause, the title thereto passes to him from the moment they are placed at his disposal. (n)

Rules on Effects of Delivery for Movables

Art. 1522.

Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them, but if the buyer accepts or retains the goods so delivered, knowing that the seller is not going to perform the contract in full, he must pay for them at the contract rate. If, however, the buyer has used or disposed of the goods delivered before he knows that the seller is not going to perform his contract in full, the buyer shall not be liable for more than the fair value to him of the goods so received.

Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the buyer may acept the goods included in the contract and reject the rest. If the buyer accepts the whole of the goods so delivered, he must pay for them at the contract rate.

Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract, the buyer may accept the goods which are in accordance with the contract and reject the rest.

In the preceeding two paragraphs, if the subject matter is indivisiable, the buyer may reject the whole of the goods.

The provisions of this article are subject to any usage of trade, special agreement, or course of dealing between the parties. (n)

• When goods are in the possession of a third party at the time of the sale, the seller has not fulfilled his obligation to deliver unless and until the third person acknowledges to the buyer that he holds the goods on the buyer’s behalf. (Art. 1521, CC)

Reservation of Ownership

• Ownership will not transfer to the buyer in case of express reservation in the contract, such as when the parties stipulate that ownership will not transfer until the purchase price is full paid, or until certain conditions are fulfilled. (Art. 1478; Art. 1503)

o Technically speaking, this does not refer to conditional contracts of sale or contracts to sell where the conditions refer to the perfection of the contract.

o The conditions mentioned here refer to the consummation stage of the contract.

• Article 1503 of the Civil Code gives instances where reservation of ownership is implied:

1. Goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, the seller reserves ownership of the goods. But, if except from the form of the bill of lading, ownership would have passed to the buyer, the seller’s property in the goods shall be deemed to be only for purpose of securing performance of the buyer’s obligation, in which case thebuyer bears the risk of loss.

2. Goods are shipped, and by the bill of lading the goods are deliverable to the buyer, but possession of the bill of lading is retained by the seller, the seller reserves a right to the possession of the goods, and ownership is still transferred to the buyer

3. Seller draws on the buyer for the price, and transmits the bill of exchange and the bill of lading together to the buyer, the buyer is bound to return the bill of lading if he does not honor the bill of



exchange. If he retains the bill of lading, he does not acquire no added right.

a. If the bill of lading provides that the goods are deliverable to the buyer, one who purchases in good faith and for value the bill of lading or the goods from the buyer, will obtain ownership, provided that the bill of lading is indorsed to such purchaser.

Sale in Mass of Movables

• Sale of movables in Article 1522 must be distinguished from the sale of specific mass under Article 1480 which refers to sale of fungible things.

• If there is no provision in the contract for the measuring or weighing of the fungible thing, nor is the price agreed upon by the parties to be based on such measurement, the subject matter of the sale is the mass itself, as a determinate object. The obligation therefore, of the seller is to deliver the whole mass, regardless of the quantity. Gaite v. Fonacier (2 SCRA 830)

Sale by Description and/or Sample

Art. 1481.

In the contract of sale of goods by description or by sample, the contract may be rescinded if the bulk of the goods delivered do not correspond with the the description or the sample, and if the contract be by sample as well as by description, it is not sufficient that the bulk of goods correspond with the samplet if they do not also correspond with the description.

The buyer shall have a reasonable opportunity of comparing the bulk with the description or the sample. (n)

• There is a sale by sample when a small quantity is exhibited by the seller as a fair specimen of the bulk, which is not present and there is no opportunity to inspect or examine the same; and the parties treated the sample as the standard of quality and that they contracted with reference to the sample with the understanding that the product to be delivered would correspondent with the sample. Mendoza v. David (441 SCRA 172)

• If the buyer had agreed to deviations between the sample and what has been delivered, rescision will not be available. Engel v. Mariano Velasco & Co., 47 Phil. 115

• If a certain piece of machinery delivered is in accordance with the description, and yet, it cannot be used for the purposes intended by the buyer, he cannot refuse to pay if the seller was not made aware of the intended purpose. Pacific Commercial Co. v. Ermita Market & Cold Stores, 56 Phil. 617

“On Sale or Return” and “Sale on Approval, Trial, Satisfaction, or Acceptance”

Art. 1502.

When goods are delivered to the buyer “on sale or return” to give the buyer an option to return the goods instead of paying the price, the ownership passes to the buyer on delivery, but he may revest the ownership in the seller by returning or tendering the goods within the time fixed in the contract, or, if no time has been fixed, within a reasonable time. (n)

When goods are delivered to the buyer on approval or on trial or on satisfaction, or other similar terms, the ownership therein passes to the buyer:

When he signifies his approval or acceptance to the seller or does any other act adopting the transaction;

If he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time. What is a reasonable time is a question of fact. (n)

• When the sale of a movable is “sale on acceptance,” no ownership could have been transferred to the buyer despite delivery and possession because there was still no perfected contract when delivery was done. The acceptance by the buyer is a suspensive condition which will give rise to the perfected contract of sale. Vallarta v. CA (150 SCRA 336)

• In order for Art. 1502 to apply, it must be clearly expressed in writing that the sale is that of “sale or return” or “sale on approval.” It cannot be proved by parol evidence. Industrial Textile Manufacturing Co. v. LPJ Enterprises (217 SCRA 322)

Written Proof of Delivery



• Delivery of goods is generally evidenced by a written acknowlegment of receipt. Lao v. CA (325 SCRA 694)

o A bill of lading cannot substitute for a delivery receipt. It is a written acknowledgment of receipt of the goods by the carrier. It is not evidence of receipt of goods by the consignee or the person named in the bill of lading

o A factory consignment invoice is not evidence of actual delivery. It is just a detailed statement of the nature, quantity and cost of the thing sold. It does not prove that the goods were actually delivered to the buyer or consignee.

Time and Place of Delivery

Art. 1521.

Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a qustion depending in each case on the contrract, express or implied, between the parties. Apart from any such contract, express or implied or usage of trade to the contrary, the place of delivery is the seller’s place of business if he has one, and if not his residence; but in case of a contract of sale of specific goods, which to the knowledge of the parties when the contract or the sale was made were in some other place, then that place is the place of delivery.

Where by contract of sale the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable time.

Where the goods at the time of sale are in the possession of a third person, the seller has not fulfilled his obligation to deliver to the buyer unless and until such third person acknowledges to the buyer that he holds the goods on the buyer’s behalf.

Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is a reasonable hour is a question of fact.

Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state must be borne by the seller. (n)

• The expenses for delivery are to be borne by the seller since they are expenses pertaining to “putting the goods into a deliverable state.”

Rules on Effects of Delivery for Immovables Where Imovables Sold per Unit or Number

Art. 1539.

The obligation to deliver the thing sold includes that of placing in the control of the vendee all that is mentioned in the contract, in conformity with the following rules:

If the sale of real estate should be made with a statement of its area, at the rate of a certain price for a unit of measure or number, the vendor shall be obliged to deliver to the vendee, If the latter should demand it, all that may have been stated in the contract; but, should this be not possible, the vendee may choose between a proportional reduction of the price and the rescission of the contract, provided that, in the latter case, the lack in the area be not less than one-‐tenth of that stated.

The same shall be done, even when the area is the same, if any part of the immovable is not of the quality specified in the contract.

The rescission, in this case, shall only take place at the will of the vendee, when the inferior value of the thing sold exceeds one-‐tenth of the price agreed upon.

Nevertheless, if the vendee would not have bought the immovable had he known of its smaller area or inferior quality, he may rescind the sale. (1469a)

Art. 1540.

If, in the case of the preceeding article, there is a greater area or number in the immovable than that stated in the contract, the vendee may accept the area included in the contract and reject the rest. If he accepts the whole area, he must pay for the same at the contract rate. (1470a)

Art. 1541.

The provisions of the two preceeding articles shall apply to judicial sales. (n)



• In a unit price sale, the statement of the area of immovable is not conclusive and the price may be reduced or increased depending on the area actually delivered. Rudolf Lietz, Inc. v. Court of Appeals (478 SCRA 451)

o If the vendor delivers less than the area agreed upon, the vendee may oblige the vendor to deliver all that is stated in the contract or demand for the proportionate reduction of the purchase price if delivery is not possible.

o If the vendor delivers more than the area stated in the contract, the vendee has the option to accept only the amount agreed upon or to accept the whole area, provided he pays for the additional area at the contract rate.

Rudolf Leitz, Inc. v. CA

Facts: Buriol leased 1 hectare of land to Italians. He sold 5 hectares (including the leased one) to Rudolf. The deed of sale described the property in terms of area and boundaries, not price per unit. Rudolf later on found out that Buriol did not own one of the hectares, and one other hectare was leased (to the Italians). So he sought reduction of the price because all he really got was 3 hectares, in accordance with Art. 1539 CC.

Issue: Will his case prosper? NO.

Ratio: Art. 1542 (lump sum sale of land) applies. There shall be no reduction in price even if the area delivered is less than that stated in the contract. The area within the boundaries as stated in the contract shall control over shall control over the area agreed upon in the contract.

Where Immovables sold for a Lump Sum

Art. 1542.

In the sale of real estate, made for a lump sum and not at the rate of a certain sum for a unit of measure or number, there shall be no increase or decrease of the price, although there be a greater or lesser areas or number than that stated in the contract.

The same rule shall be applied when two or more immovables are sold for a single price; but if, besides mentioning the boundaries, which is indispensable in every conveyance of real estate, its area or number

should be designated in the contract, the vendor shall be bound to deliver all that is included within said boundaries, even when it exceeds the area or number specified in the contract; and, should he not be able to do so, he shall suffer a reduction in the price, in proportion to what is lacking in the area or number, unless the contract is rescinded because the vendee does not accede to the failure to deliver what has been stipulated. (1471)

Art. 1543.

The actions arising from Articles 1539 and 1542 shall prescribe in six months, counted from the day of delivery. (1472a)

• In a contract of sale of land in a mass, the specific boundaries stated in the contract must control over any statement with respect to the area contained within its boundaries. Salinas v. Faustino (566 SCRA 18)

• Exception to Art. 1542: The sale of land under the description “more or less” or similar words covers “only a reasonable excess or deficiency.” Lietz v. CA (478 SCRA 431)

o Exception to the exception: The buyer assumes the risk on the actual loss of the actual area of the land. Garcia v. Velasco (72 Phil 248)

Expenses of Delivery and Registration on Real Estate

• In the 2002 case of Jose Clavano v. HLURB (378 SCRA 172), the SC held that a judgment on a sale that decrees the obligations of th seller to execute and deliver the deed of absolute sale and the certificate of title, does not necessarily include the obligation on the part of the seller to pay for expenses in notarizing the deed of sale and in obtaining a new certificate of title.

• In the 2003 case of Chua v. CA (401 SCRA 54), the Court held that the obligation of the seller is to transfer ownership which is done by the execution of a public instrument. Thus, expenses for registration in the Registry of Deeds, which merely binds third persons but does not transfer ownership, is to be borne by the buyer. Capital gains tax remains liability of the seller.

• In the 2004 case of Vive Eagle Land, Inc. v. CA (444 SCRA 445), the SC held that registration of the sale should be shouldered by the seller unless there is a contrary stipulation.



• CLV doesn’t say which case is correct, but he seems to favor Chua v. CA since he keeps saying that the other 2 cases are in stark contrast to Chua.

Chua v. CA

Facts: Chua bought a house and lot from Valdes Choy. Chua paid P100,000 as earnest money. Receipt had a stipulation that failure to pay balance on or before 15 July 1989 forfeits the earnest money. Chua required that the Property be registered first in his name before he would turn over the check to Valdes-‐Choy. This angered Valdes-‐Choy, claiming that what Chua required was not part of their agreement.

Issue: W/N Chua can compel Valdes-‐Choy to cause the issuance of a new TCT in Chua's name even before payment of the full purchase price. -‐-‐-‐ NO

Held: The obligation of the seller is to transfer to the buyer ownership of the thing sold. There is a difference between transfer of the certificate of title in the name of the buyer, and transfer of ownership to the buyer. Registration of title is separate mode from execution of public instrument. The recording of the sale with the proper Registry of Deeds and the transfer of the certificate of title in the name of the buyer are necessary only to bind third parties to the transfer of ownership. As between the seller and the buyer, the transfer of ownership takes effect upon the execution of a public instrument conveying the real estate. The submission by a seller to the buyer of the following papers would complete a sale of real estate: (1) owner’s duplicate copy of the Torrens title; (2) signed deed of absolute sale; (3) tax declaration; and (4) latest realty tax receipt.

Vive Eagle Land, Inc v. CA

Facts: Tatic Corp. purchased 2 parcels of land from Spouses Flores. Tatic sold the lot to VELI. VELI sold the lot to Genuino. Genuino demanded VELI to pay capital gains tax, evict informal settlers and to register title in its name. VELI rejected the demand.

Issue: W/N petitioner VELI is obliged to pay for the expenses for transfer of the property and the issuance of the titles to and under the name of the respondent -‐-‐-‐ YES

Held: Under Article 1495 of the New Civil Code, petitioner VELI, as the vendor, is obliged to transfer title over the property and deliver the same to the vendee. Unless otherwise stipulated, under Art. 1487 the expenses for the registration of the sale should be shouldered by the vendor.

Double Sales Art. 1544.

If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property.

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

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. (1473)

Two Divergent Systems When It Comes to Land Registered Land under the Torrens System (PD 1529)

• Sec. 51 of PD 1529 embodies the “registration in good faith as the operative act” doctrine.

• Art. 1544 does not overcome the priority rules under PD 1529.

o “Registration” in Art. 1544 refers to the annotation of contracts, transactions and legal processes in the Registry of Deeds

• When two certificates of title are issued to different persons covering the same land, Art. 1544 cannot apply. Instead, the principle of the Torrens system will apply. The earlier title will prevail. Liao v. CA (323 SCRA 430)

• Art. 1544 will also not apply in a case where a first buyer bought the land not under the Torrens system, but under Act No. 3344, and a subsequent buyer bought the same property when it was already registered under the Torrens system of PD 1529. The Torrens title will prevail. Naawan Community Rural Bank, Inc. v. CA (395 SCRA 43); Abrigo v. De Vera (432 SCRA 544); Dagupan Trading Co. v. Macam (14 SCRA 179)

Naawan Community Rural Bank v. CA

Facts: Lumos bought a land from Comayas and acquired TCT in his name. Upon application for tax declaration, he found out that it had already been declared for taxes by NCRB. What had happened was: Comayas mortgaged the land to NCRB



before; it was foreclosed and land sold to NCRB. Sheriff’s certificate was recorded under Act 3344. Subsequently though, Comayas obtained title in his name (that’s how he was able to sell to Lumos). Basically, when bank acquired the land by conveyance, it was untitled. When Lumos acquired it, it was already titled.

Issue: Who has better right? Lumos.

Ratio: Issuance of OCT had the effect of relieving the land of any claims except those annotated therein. At the time of deed of final conveyance to NCRB, the title had already been issued to Comayas (without any annotation of NCRB’s claim). Thus, Lumos was not required to go beyond the title and was entitled to rely on it. “Priority in time” principle applies to Act 3344, not Torrens system.

Dagupan Trading Co. v. Macam

Maron siblings sold their co-‐owned unregistered property to Macam, issuing 2 deeds of sale that were similarly unregistered. Subsequently, an OCT was issued in favor of the Maron siblings without the deeds of sale to Macam being annotated. Later on, a judgment was rendered against Sammy Maron, leading to the foreclosure sale of his 1/8 interest in the co-‐owned property. The 1/8 interest was eventually sold to DTC.

Doctrine: When first sale is over unregistered land and the second sale is when it is registered, the rules on double sale do not apply.

Decision: The OCT issued in favor of the Maron siblings not containing an annotation of the sale to Macam cannot defeat the sale to Macam because ownership had already been transferred. (This decision was promulgated before PD 1529, which provides that the buyer can rely on the certificate alone etc etc).

Naval v. CA

Facts: Unregistered parcel of land was sold by Idelfonso to Gregorio in 1969. Gregorio sold it to other people, who then took possession. In comes Juanita who was able to obtain an OCT in her name, saying the same land was sold to her by Idelfonso in 1972. Remember that both initial conveyances were made while land was unregistered.

Issue: Who has better right? Gregorio.

Ratio: The last was unregistered under the Torrens system at the time of the first sale. The applicable law is Act 3344, under which registration by first buyer under

the Register of Deeds is constructive notice to the second buyer. So the latter cannot be deemed in good faith. Juanita having been able to obtain an OCT in her name does not cleanse her title of the defect carried under the provisions of Act 3344.

Unregistered Land

• Rules on double sales for immovables under Art. 1544 are applicable to unregistered land, but only insofar as they do not undermine specific rules, such as the “without prejudice to better right” provision in Act No. 3344, now Sec. 113, PD 1529.

• If a piece of land is sold through a private deed of sale but was never registered. The land was then sold in public auction and the sale to the second buyer was registered under Act No. 3344. The applicable provision is that of Sec. 33, Rule 39 of the Rules of Court, not Art. 1544. Carumba v. CA (31 SCRA 558)

• Under Act 3344, registration of instruments affecting unregistered lands is “without prejudice to a third party with a better right,” which means that mere registration does not give the buyer any right over the land if the seller was not anymore the owner of the land having previously sold the same to somebody else even if the earlier sale was unrecorded. The rules on double sale under Art. 1544 has no application to land not registered under the Torrens system. Acabal v. Acabal, (454 SCRA 555)

Abrigo v. De Vera

Villafania sold property to Salazar-‐Go with a right to repurchase within 1 year. Villafania failed to repurchase so land became Salazar-‐Go’s absolute property. Despite that, Villafania obtained a free patent over the property and sold the same to De Vera. Meanwhile, Salazar-‐Go sold the same to Sps. Abrigo.

Doctrine: De Vera has a better right since he bought and registered the property in good faith.

Spouses Abrigo registered the property under Act No. 3344 because it was unknown to them that it was covered under the Torrens System, while De Vera registered the same under the Torrens System because Villafania procured the TCT upon purchase. De Vera’s right prevails, spouses Abrigo cannot validly argue that they were fraudulently misled into believing that the property was unregistered. A Torrens title, once registered, serves as a notice to the whole



world. All persons must take notice, and no one can plead ignorance of the registration.

The rules in double sale under Article 1544, whereby the buyer who is able to first register the purchase in good faith “is in full accord with Section 51 of PD 1529 which provides that no deed, mortgage, lease, or other voluntary instrument – except a will purporting to convey or affect registered land shall take effect as a conveyance or bind the land until its registration. Thus, if the sale is not registered, it is binding only between the seller and the buyer but it does not affect innocent third persons.

Carumba v. CA

Facts: Amado sold an unregistered land to Carumba through a private document. Amado owed a sum of money from Balbuena. Balbuena successfully obtained a judgment on his credit against Amado. Sheriff issued a Definite Deed of Sale (on the same property sold to Carumba) in favor of Balbuena and registered it before RoD. CFI said levy was void and declared Carumba as owner because he already had possession of the land. CA said there was a double sale and Balbuena should be declared owner because his sale was registered in good faith.

Issue: Was there a double sale? NO.

Doctrine: Art. 1544 does not apply to unregistered land. The purchaser of an unregistered land at a sheriff’s execution sale only steps into the shoes of the judgment debtor and merely acquires the latter’s interest in the property sold as of the time that the property was levied upon. The first Deed of Sale while only embodied in a private document but coupled with the fact that Carumba had taken possession of the land sold, sufficed to vest ownership on the buyer. So when the levy was made by the Sheriff, the judgment debtor no longer had dominical interest nor any real right over the land. No double sale.

Acabal v. Acabal

If unregistered land, once it is registered under the Torrens System, registration gives indefeasibility to the title. It cleanses the title if registration was made in good faith.

What if land is sold BEFORE it was registered and then sold a second time by the same person AFTER it was registered, will 1544 apply? No. 1544 will not apply because registration was different for both transactions; albeit, no registration at all

in the first one.

Ownership of the land will then depend on:

1) If 2nd buyer, in good faith, registered the land under the Torrens System, he prevails because of the indefeasibility of a Torrens Title.

2) But if registration was made under Act No. 3344, ownership by the buyer of the land is still dependent on other better rights of a third party. Mere registration does not give a buyer any right over the land if the seller was not anymore the owner of the land having previously sold the same to somebody else.

Essential Elements for Applicability of Art. 1544 a) There must be two valid sales

• If one sale is valid, and the other is void, Art. 1544 will not apply. Fudot v. Cattleya Land, Inc. (533 SCRA 350)

• Art. 1544 will not apply when one contract is that of sale, ant the other is a contract to sell. Strictly speaking, in a contract to sell, there is still no transfer of ownership involved. San Lorenzo Dev. Corp. v. Court of Appeals (449 SCRA 99); Mendoza v. Kalaw, (42 Phil. 236); Adalin v. CA (280 SCRA 536); Cheng v. Genato (300 SCRA 722)

Cheng v. Genato

Genato sold lands to Da Jose spouses, subsequently executing an Affidavit to Annul the contract to sell without informing the latter. Cheng offered to buy the land and tendered partial payment, which was subsequently returned by Genato so that the latter may continue with his contract with the spouses.

Doctrine: Requisites for Double Sale:

(a) The two (or more) sales transactions in issue must pertain to exactly the same subject matter, and must be valid sales transactions.

(b) The two (or more) buyers at odds over the rightful ownership of the subject matter must each represent conflicting interests; and

(c) The two (or more) buyers at odds over the rightful ownership of the subject matter must each have bought from the very same seller.



San Lorenzo Dev. Corp. v. CA

Spouses Lu alleged that they entered into a contract to sell lands with Babasanta, the same later on having been rescinded by the latter because of a disagreement with the former. Subsequently, the lands were sold to San Lorenzo Dev’t Corp (SLDC) evidenced by a Deed of Absolute Sale with Mortgage.

Doctrine: SLDC has a better right. Article 1544 does NOT apply where one of the contract is a contract to sell.

Contract of Sale Contract to Sell

Title passes to the vendee upon the delivery of the thing sold

By agreement the ownership is reserved in the vendor and is not to pass until the full payment of the price

The vendor has lost and cannot recover ownership until and unless the contract is resolved or rescinded

Title is retained by the vendor until the full payment of the price, such payment being a positive suspensive condition and failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective

Mendoza v. Kalaw

Mendoza filed a petition for the registration of a parcel of land he purchased from Canet by way of an absolute sale. Kalaw opposed stating that he bought the same subject matter from Canet (by way of a conditional sale).

Doctrine: Mendoza is favored. Two sales were executed, a conditional sale and an absolute sale. Actual possession was obtained by Mendoza first. Mendoza also fully paid the purchase price, while Kalaw’s payment depended upon the performance of certain conditions mentioned in the contract of sale. A conditional sale, before the performance of the condition, can hardly be said to be a sale of property. Art. 1473 (now Art. 1544) will not be applicable.

Adalin v. CA

Kado siblings sold property to Yu and Lim, the latter executing a Deed of Conditional Sale, which stated that Elena Kado (one of the siblings had to evict the tenants of

the property as condition to the sale). Elena failed to fulfill this condition. Kado siblings backed out of the sale and, subsequently, sold same property to Carlos, et al. by way of a Deed of Sale.

Doctrine: Elena, in behalf of Kado siblings, already committed to sell the property to Yu and Lim and Loreto Adalin. She understood her obligation to eject the tenants on the subject property. Payment of balance was subject to the condition that she would secure eviction of tenants. Sale transaction not yet complete and both sellers and buyers have respective obligations to be fulfilled—buyers, pay price, sellers, ejectment. Deed of Conditional Sale may be an accurate denomination of the transaction, and the choice of who to sell the property to had already been made by the sellers and no longer subject to any condition. Sale made by Elena to Yu and Lim (considered by the Court) is absolute.

Court ruled that no amount of legal rationalizing can sanction the breach of contract. Elena committed in accepting offer after having earlier sold property to Yu and Lim.

Subsequent sale smacks of bad faith considering the tenants knew of negotiations between Elena and Yu Lim.

Deed of Conditional Sale (Yu, Lim and Kado) was given preference over the Deed of Sale of Registered Land (Carlos, Co and Kado).

b) Exact same subject matter

c) Exact same seller for both sales

• Article 1544 on double sales has no application in cases where the sales involved were initiated not by just one vendor but by several successive vendors. Mactan-‐Cebu International Airport Authority v. Tirol (588 SCRA 635)

Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of Appeals

Madrid sold property to Gamiao/Dayag (did not register), who later on sold the the same property’s northern half to Hernandez, and the southern half to Teodoro dela Cruz (deceased). Years later, Madrid sold the same to Marquez, who registered in the RD. Marquez mortgaged the property to CRBI. Heirs of Teodoro assailed the mortgage and asked for reconveyance to their father.

Doctrine: Article 1544 cannot apply.

For Article 1544 to apply, it is necessary that the conveyance must have been made



by a party who has an existing right in the thing and the power to dispose of it. It cannot be invoked where the two different contracts of sale are made by two different persons, one of them not being the owner of the property sold. And even if the sale was made by the same person, if the second sale was made when such person was no longer the owner of the property, because it had been acquired by the first purchaser in full dominion, the second purchaser cannot acquire any right

Registration in Good Faith as First Priority Meaning of “Registration”

• Annotation of adverse claim is considered as registration. Carbonnel v. Court of Appeals (69 SCRA 99)

• Registration means any entry made in the books of the registry, including both registration in its ordinary and strict sense, and cancellation, annotation, and even marginal notes. Cheng v. Genato (300 SCRA 722)

• Declaration of purchase for taxation purposes does not comply with the required registration, and the fact alone does not even itself constitute evidence of ownership. Bayoca v. Nogales (340 SCRA 154)

• “There can be no constructive notice to the second buyer through registration under Act 3344 if the property is registered under the Torrens system.” Amodia Vda. De Melencion v. Court of Appeals (534 SCRA 62, 82)

Registration must always be in good faith

• What matters is if the buyer registers in good faith. If he buys in good faith, but subsequently registers in bad faith, he will not have a better title, even if he registers first.

• Good faith means no notice of defect in title of the property sold. For the second buyer to be in good faith, he must not know of the prior sale to the first buyer.

• In spite of the three levels of tests provided under Art. 1544, the Court seems to recognize only registration in good faith by the second buyer and does not characterize the meaning of the last two tests of possession and oldest title. Carillo v. Court of Appeals (503 SCRA 66)

Carillo v. CA

Facts: Both Gonazales and Dabons claim to have bought the land from Aristotle Manio. In litgitating against Manio’s alleged attorneys-‐in-‐fact for the issuance of the deed of sale, Gonzales never impleaded Manio himself, or the Dabons. Court orders

were issued in favor of Gonzales for execution of deed of sale as well as issuance of TCT in her name.

Issue: Do the Dabons have a right to seek annulment of the court order? YES.

Ratio: There was extrinsic fraud as the necessary parties in interest were not given their day in court. Dabons may seek annulment of the court orders. On the issue of double sale, court outlined the provisions of Art. 1544 and stressed that in order for this provision to be availed of, there must have been both acquisition in good faith and registration in good faith. Case was remanded.

Knowledge of the first buyer of the second sale does not amount to registration in favor of the second buyer

• If the first buyer registers the sale despite knowing about the second sale, he will still have better right, provided, that the second buyer had not registered it in good faith before the first buyer’s registration.

• For the second buyer to displace the first, he must prove that he acted in good faith throughout the process, from acquisition until registration. Uraca v. CA (278 SCRA 702)

• The first buyer’s good faith remains all throughout despite his subsequent knowledge of the second sale. Kings Properties Corp. v. Galido (606 SCRA 137)

Registration in Good Faith always pre-‐empts Possession in Good Faith

• Between two buyers, the one who registers the land is preferred over the one who merely possesses it. Tañedo v. CA (252 SCRA 80)

Possession refers to Both Material and Symbolic Possession Absent any registration, possession will determine which has better right, based on these guidelines:

d) Possession mentioned in Article 1544 includes not only material but also symbolic possession;

e) possessors in good faith are those who are not aware of any flaw in their title or mode of acquisition;

f) Buyers of real property that is in the possession of persons other than the seller must be wary – they must investigate the rights of the possessors; and



g) good faith is always presumed, upon those who allege bad faith on the part of the possessors rests the burden of proof. Ten Forty Realty and Dev. Corp. v. Cruz (410 SCRA 484)

Who is a Purchaser in Good Faith?

• To determine whether a buyer is in good faith, the reckoning point must be at the time of perfection of the contract. Estate of Lino Olaguer v. Ongjoco (563 SCRA 373)

• Requisites of good faith: o No notice that another person as a right to or interest in the

property o Must have paid in full price

• Good faith is a question of fact which must be proven in court. The burden of proof is on the one who asserts it. Good faith as a presumption is not enough. Tio v. Abayata (556 SCRA 175); Tanglao v. Parungao (535 SCRA 123)

Estate of Lino Olaguer v. Ongjoco

Administrators of the Lino Olaguer’s (deceased) estate sold parcels of lands (including Lot 76) to Bacani. The latter sold back Lot 76 to the administrators. Later on, a TCT for the land was issued to Eduardo and Olivia (the administrators). Jose, husband of Olivia, sold portions of the same land to Ongjoco. There were 2 deeds of sale for each transaction. Olaguer’s estate filed annulment case against Ongjoco et al.

Doctrine: In the determination of whether or not a buyer is in good faith, the point in time to be considered is the moment the parties actually entered into the contract of sale.

Decision: Ongjoco can’t claim good faith on the sale of Lots 1 and 2 because a power of attorney to sell the land was never presented to him.

Instances where there is no good faith

1. Being in the realty business • A person in the realty business (just like banks) is charged with

extraordinary diligence in ascertaining that there are no other persons with rights over the land. Expresscredit Financing Corp. v. Velasco (473 SCRA 570)

2. Close relationship

• If the buyer is a child of the seller, or a close family friend who lived in the same area, they are deemed to have known of the circumstances of the land and are thus, not really third parties. Pilapil v. Court of Appeals (250 SCRA 566); Aguirre v. CA (421 SCRA 310)

3. Gross inadequacy of price • To be a badge of bad faith, the price must be grossly inadequate or

shocking to the conscience such that the mind revolts against it and such that a reasonable man would neither directly or indirectly be likely to consent to it. Tio v. Abayata (556 SCRA 175)

4. Obligation to investigate or to follow leads • When there are certain facts which would put a reasonable man on guard

and prompt him to investigate the property, he is expected to do so. Actual lack of knowledge of flaw in title is not enough if these facts exist. Mathay v. CA (295 SCRA 556)

• Examples of facts necessitating further investigation on the property: o There are occupants on the land, whether or not they possess it in

the concept of owner. Martinez v. CA (358 SCRA 38) o When the seller is a company which is closing shop and liquidating

assets. They might be dissipating their assets to defraud creditors. Samson v. CA (238 SCRA 397)

o The property was titled and transferred with undue haste within a short period of time and that the land was a vast tract of land in a prime location. Eagle Realty Corp v. Republic (557 SCRA 77)

o When the buyer deals with someone who is not a registered owner, he is expected to examine the certificate of title as well as the authority and capacity of the seller to sell the land. R.R. Paredes v. Caliling (517 SCRA 369); Chua v. Soriano (521 SCRA 68)

• A buyer of registered land is required to at least ask the seller to show the title to the land. If he does not ask for it, he will be in bad faith. Santiago v. CA (247 SCRA 336)

5. When there are stipulations in the deed showing bad faith • In a case, the Court held that a stipulation in the deed of sale providing

that any losses which the buyer may incur in the event the title turns out to be vested in another person are to bo borne by the buyer alone, showed that the buyer did not purchase the subject matter in good faith without notice of any defect in the title of the seller. Limketkai Sons Milling, Inc. v. CA (250 SCRA 523)

6. Land in adverse possession • When the land is in possession of a third person, the buyer should

investigate the rights of those in possession. Without such inquiry, the



buyer can hardly be regarded as a buyer in good faith. Republic v. De Guzman (326 SCRA 267)

• A buyer who could not have failed to know or discover that the land sold to him was in the adverse possession of another is a buyer in bad faith. Heirs of Ramon Durano, Sr. v. Uy (344 SCRA 238)

7. Existence of Lis Pendens or Adverse Claim • An annotation of lis pendens is a notice to the world that any right that

anyone will acquire over the property is subject to the result of the suit. Republic v. De Guzman (326 SCRA 267)

• Any subsequent buyer of the registered land annotated with lis pendens or adverse claim is thus in bad faith. Kings Properties Corp. v. Galido (606 SCRA 137)

• Even if the annotation of lis pendens was subsequently cancelled but there was a pending appeal, the buyer cannot invoke good faith. Po Lam v. CA (316 SCRA 86)

o Exception: When knowledge of lis pendens was acquired at the time there was order to have it cancelled.

8. Annotation of Lien in Settlement of Estate • Such annotation is a warning to third persons on the possible interest of

excluded heirs or unpaid creditors in these properties. The buyers of these properties must be ready for the possibility that their title be subject to rights of excluded parties. Tan v. Benolirao (604 SCRA 36)

When Article 1544 Does Not Apply, Priority in Time Rule Applies

• Situations where Art. 1544 will not apply: o Not all the requisites are present o The requisites are present, but either the first to register rule or

first to possess rule were not complied with • In these cases, the general rule of Prius tempore, potior jure (Priority in

time, priority in right) will apply. o This is actually the main rule for double sales. Carbonell v. CA (69

SCRA 99) o The rules in Art. 1544 only provide for special rules for certain

circumstances. • The priority contemplated in this instance is that of who acquired title first.

The question to ask, therefore, is who among the buyers had the first perfected and valid contract of sale.

Carbonell v. CA

Facts: Poncio was owner of land mortgaged to bank. He offered to sell to Carbonell,

who accepted and applied for assumption of mortgage. Later on, Poncio informed Carbonell that he could no longer continue with their sale because he’d already sold the same land to one Infante. Upon learning this, Carbonell registered an adverse claim. Subsequently, Infante registered her deed of sale. TCT was issued in Infante’s name but with annotation of the adverse claim of Carbonell.

Issue: better claim? Carbonell.

Ratio: When Carbonell’s sale was perfected, she was in good faith because Poncio was the owner. Her good faith did not cease even when she registered the adverse claim, notwithstanding knowledge of the second sale to Infante. Infante, on the other hand, was in bad faith because she actually knew of the first sale. Furthermore, she was aware of an adverse claim on the land when she registered it. Carbonell was also in possession of the land when Infante bought it, so the latter should have inquired.

Obligations of Buyer Pay the Price

Art. 1582.

The vendee is bound to accept delivery and to pay the price of the thing sold at the time and place stipulated in the contract.

If the time and place should not have been stipulated, the payment must be made at the time and place of the delivery of the thing sold. (1500a)

• When seller cannot show title to the subject matter, then he cannot compel the buyer to pay the price. Heirs of Severina San Miguel v. CA (364 SCRA 523).

• Mere sending of a letter by the buyer expressing the intention to pay without the accompanying payment is not considered a valid tender of payment and consignation of the amount due are essential in order to extinguish the obligation to pay and oblige the seller to convey title. Torcuator v. Bernabe (459 SCRA 439).

• Unless there is a contrary stipulation, payment to be effective must be made to the seller in accordance with Article 1240 which provides that “Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it.” Montecillo v. Reynes (385 SCRA 244).



Accept Delivery of Thing Sold

Art. 1583.

Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by installments.

Where there is a contract of sale of goods to be delivered by stated installments, which are to be separately paid for, and the seller makes defective deliveries in respect of one or more installments, or the buyer neglects or refuses without just cause to take delivery of or pay for one more installments, it depends in each case on the terms of the contract and the circumstances of the case, whether the breach of contract is so material as to justify the injured party in refusing to proceed further and suing for damages for breach of the entire contract, or whether the breach is severable, giving rise to a claim for compensation but not to a right to treat the whole contract as broken. (n)

Art. 1584.

Where goods are delivered to the buyer, which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract if there is no stipulation to the contrary.

Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract.

Where goods are delivered to a carrier by the seller, in accordance with an order from or agreement with the buyer, upon the terms that the goods shall not be delivered by the carrier to the buyer until he has paid the price, whether such terms are indicated by marking the goods with the words "collect on delivery," or otherwise, the buyer is not entitled to examine the goods before the payment of the price, in the absence of agreement or usage of trade permitting such examination. (n)

Art. 1585.

The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him, and he does any act in relation to them which is inconsistent with the ownership of the seller, or when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them. (n)



Chapter 7 – Documents of Title

Definition and Function • Any bill of lading, dock warrant, "quedan," or warehouse receipt or order

for the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by endorsement or by delivery, goods represented by such document. (Art. 1636)

o Example: Warehouse Receipts, Bonded Warehouse Receipts • 2 Functions:

o As evidence of the possession or control of the goods described therein

o As the medium of transferring title and possession over the goods described therein, without having to effect actual delivery thereof

• Delivery and possession of the document of title is tantamount to delivery and possession of the goods which the document of title represents. It represents that one who has possession of the receipt has been entrusted has the title to the goods. Philippine Trust co. v. National Bank (42 Phil. 413); Siy Cong Bieng v. HSBC (56 Phil. 598)

Types of Documents of Title Negotiable Document of Title

Art. 1507.

A document of title in which it is stated that the goods referred to therein will be delivered to the bearer, or to the order of any person named in such document is a negotiable document of title. (n)

Non-‐Negotiable Document of Title

• Documents of title which are not deliverable “to bearer” or “to order.”

Effects of Errors on Documents of Title

• Clerical errors do not affect the negotiability of the instrument.

Effects of Use of “Non-‐Negotiable” Terms on Negotiable Documents of Title

Art. 1510.

If a document of title which contains an undertaking by a carrier, warehouseman or other bailee to deliver the goods to bearer, to a specified person or order of a specified person or which contains words of like import, has placed upon it the words "not negotiable," "non-‐negotiable" or the like, such document may nevertheless be negotiated by the holder and is a negotiable document of title within the meaning of this Title. But nothing in this Title contained shall be construed as limiting or defining the effect upon the obligations of the carrier, warehouseman, or other bailee issuing a document of title or placing thereon the words "not negotiable," "non-‐negotiable," or the like. (n)

Negotiation of Negotiable Documents of Title How Negotiation Properly Effected

Art. 1508.

A negotiable document of title may be negotiated by delivery:

1) Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to deliver the goods to the bearer; or

2) Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to deliver the goods to the order of a specified person, and such person or a subsequent endorsee of the document has indorsed it in blank or to the bearer.

Where by the terms of a negotiable document of title the goods are deliverable to bearer or where a negotiable document of title has been indorsed in blank or to bearer, any holder may indorse the same to himself or to any specified person, and in such case the document shall thereafter be negotiated only by the endorsement of such endorsee. (n)



Art. 1509.

A negotiable document of title may be negotiated by the endorsement of the person to whose order the goods are by the terms of the document deliverable. Such endorsement may be in blank, to bearer or to a specified person. If indorsed to a specified person, it may be again negotiated by the endorsement of such person in blank, to bearer or to another specified person. Subsequent negotiations may be made in like manner. (n)

Who Can Negotiate

Art. 1512.

A negotiable document of title may be negotiated:

(1) By the owner therefor; or

(2) By any person to whom the possession or custody of the document has been entrusted by the owner, if, by the terms of the document the bailee issuing the document undertakes to deliver the goods to the order of the person to whom the possession or custody of the document has been entrusted, or if at the time of such entrusting the document is in such form that it may be negotiated by delivery. (n)

Effects of Proper Negotiation

Art. 1513.

A person to whom a negotiable document of title has been duly negotiated acquires thereby:

(1) Such title to the goods as the person negotiating the document to him had or had ability to convey to a purchaser in good faith for value and also such title to the goods as the person to whose order the goods were to be delivered by the terms of the document had or had ability to convey to a purchaser in good faith for value; and

(2) The direct obligation of the bailee issuing the document to hold possession of the goods for him according to the terms of the document as fully as if such bailee had contracted directly with him. (n)

Effects of Merely Transferring/Delivering of “Order” Negotiable Documents of Title

Art. 1511.

A document of title which is not in such form that it can be negotiated by delivery may be transferred by the holder by delivery to a purchaser or donee. A non-‐negotiable document cannot be negotiated and the endorsement of such a document gives the transferee no additional right. (n)

Art. 1515.

Where a negotiable document of title is transferred for value by delivery, and the endorsement of the transferor is essential for negotiation, the transferee acquires a right against the transferor to compel him to endorse the document unless a contrary intention appears. The negotiation shall take effect as of the time when the endorsement is actually made. (n)

Effects and Consequences of Unauthorized Negotiation

Art. 1518.

The validity of the negotiation of a negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the document was deprived of the possession of the same by loss, theft, fraud, accident, mistake, duress, or conversion, if the person to whom the document was negotiated or a person to whom the document was subsequently negotiated paid value therefor in good faith without notice of the breach of duty, or loss, theft, fraud, accident, mistake, duress or conversion. (n)



Assignment of Non-‐Negotiable Documents of Title How Assigment Made

Art. 1514.

A person to whom a document of title has been transferred, but not negotiated, acquires thereby, as against the transferor, the title to the goods, subject to the terms of any agreement with the transferor.

If the document is non-‐negotiable, such person also acquires the right to notify the bailee who issued the document of the transfer thereof, and thereby to acquire the direct obligation of such bailee to hold possession of the goods for him according to the terms of the document.

Prior to the notification to such bailee by the transferor or transferee of a non-‐negotiable document of title, the title of the transferee to the goods and the right to acquire the obligation of such bailee may be defeated by the levy of an attachment of execution upon the goods by a creditor of the transferor, or by a notification to such bailee by the transferor or a subsequent purchaser from the transfer of a subsequent sale of the goods by the transferor. (n)

Effects of Transfer by Assignement

Warranties on Negotiation and Assignment of Documents of Title Art. 1516.

A person who for value negotiates or transfers a document of title by endorsement or delivery, including one who assigns for value a claim secured by a document of title unless a contrary intention appears, warrants:

(1) That the document is genuine;

(2) That he has a legal right to negotiate or transfer it;

(3) That he has knowledge of no fact which would impair the validity or worth of the document; and

(4) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose, whenever such warranties would have been implied if the contract of the parties had been to transfer without a document of title the goods represented thereby. (n)

Rules on Levy/Garnishment of Goods Covered by Documents of Title When Non-‐Negotiable Document of Title

Art. 1514.

A person to whom a document of title has been transferred, but not negotiated, acquires thereby, as against the transferor, the title to the goods, subject to the terms of any agreement with the transferor.

If the document is non-‐negotiable, such person also acquires the right to notify the bailee who issued the document of the transfer thereof, and thereby to acquire the direct obligation of such bailee to hold possession of the goods for him according to the terms of the document.

Prior to the notification to such bailee by the transferor or transferee of a non-‐negotiable document of title, the title of the transferee to the goods and the right to acquire the obligation of such bailee may be defeated by the levy of an attachment of execution upon the goods by a creditor of the transferor, or by a notification to such bailee by the transferor or a subsequent purchaser from the transfer of a subsequent sale of the goods by the transferor. (n)

When Negotiable Document of Title

Art. 1519.

If goods are delivered to a bailee by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner and a negotiable document of title is issued for them they cannot thereafter, while in possession of such bailee, be attached by garnishment or otherwise or be levied under an execution unless the



document be first surrendered to the bailee or its negotiation enjoined. The bailee shall in no case be compelled to deliver up the actual possession of the goods until the document is surrendered to him or impounded by the court. (n)

Art. 1520.

A creditor whose debtor is the owner of a negotiable document of title shall be entitled to such aid from courts of appropriate jurisdiction by injunction and otherwise in attaching such document or in satisfying the claim by means thereof as is allowed at law or in equity in regard to property which cannot readily be attached or levied upon by ordinary legal process. (n)

Chapter 8 – Sale By a Non-‐Owner or By One Having Voidable Title

When Seller is Not Owner of Subject Matter At Perfection

• Seller need not be the owner at perfection, provided he acquires title later on, but when delivery of ownership is no longer possible, the sale should be considered void. Nool v. CA (276 SCRA 149)

• Perfection merely creates the obligation to transfer ownership, but it does not by itself transfer ownership.

At Consummation

Art. 1505.

Subject to the provisions of this Title, where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell.

Nothing in this Title, however, shall affect:

(1) The provisions of any factors' act, recording laws, or any other provision of law enabling the apparent owner of goods to dispose of them as if he were the true owner thereof;

(2) The validity of any contract of sale under statutory power of sale or under the order of a court of competent jurisdiction;

(3) Purchases made in a merchant's store, or in fairs, or markets, in accordance with the Code of Commerce and special laws. (n)

• Note that the provision does not say that the contract is void. • It is at the consummation stage where the principle of nemo dat quod non

habet (one cannot give what one does not have) applies. Cavite Dev’t. Bank v. Spouses Syrus Lim (324 SCRA 346)



Paulmitan v. CA

A co-‐owner could only sell that portion which may be allotted to him upon termination of the co-‐ownership. A sale of the entire property by one co-‐owner without the consent of the other co-‐owners is not null and void. However, only the rights of the co-‐owner-‐sell are transferred, thereby making the buyer a co-‐owner of the property.

Sales by Co-‐owner of Whole Property or Definite Portion Thereof

• None of the co-‐owners may claim any right, title or interest to a particular portion of the thing owned in common.

• A co-‐owner can demand partition, but before such, he has no right to divide the lot into two parts, and convey the whole of one part by metes and bounds. Lopez v. Ilustre (5 Phil 567)

• A co-‐owner, however, has the power to alienate his undivided share over the property. Thus, if before partition, he sells the entire property or a definite portion thereof without consent of other co-‐owners, the sale will only be valid with regard to his undivided share in the property. The sale cannot be considered as null and void. Bailon-‐Casilao v. CA (160 SCRA 738); Paulmitan v. CA (215 SCRA 866)

o The buyer thus becomes a co-‐owner of the property. • The remedy of the buyer therefore is to demand partition of the entire

property. He will have this right since he became a co-‐owner himself. Nullification of the sale is not proper. Tomas Claudio Memorial College, Inc. v. Court of Appeals (316 SCRA 502)

o CLV’s comment: The rulings seem to disregard the commercial fact that sellers and buyers agree on the price based on the size of the property (i.e. buyers will pay more if they expect to acquire the entire property; buyers will pay less if they expect to acquire just a part). The proper remedy, according to CLV, is to uphold the validity of the sale, but allow the buyer to either (1) seek rescission for breach of the seller’s obligation to deliver the object agreed upon, or (2) accept partial delivery with appropriate reduction in price.

Exceptions to Rule on Effect of Sale of Definite Portion of Co-‐owner Memory aid: iTaco J

1) The subject matter is indivisible by nature or by intent. It renders the contract void since the buyer would not have entered into the transaction except to acquire all of the properties purchased by him. Mindanao Academy, Inc. v. Yap (13 SCRA 190)

2) If the sale of a particular portion is with consent of other co-‐owners, the sale as to that portion is valid. Lack of objection by the co-‐owners is in effect already a partial partition. Pamplona v. Moreto (96 SCRA 775)

3) A co-‐owner who sells one of the two lands owned in common with another co-‐owner, and does not turn-‐over one-‐half of the proceeds of the sale to the other co-‐owner, the latter may by law and equity lay exclusive claim to the remaining parcel of land. Imperial v. Court of Appeals (259 SCRA 65)

4) Ipso jure transfer of ownership under Art. 1434. When the co-‐owner-‐seller subsequently acquires title to the definite portion or the entire property subject matter of the sale, the title automatically passes to the buyer. Pisueña v. Heirs of Petra Unating (313 SCRA 384)

5) Registration under the Torrens system. If the Torrens title shows that the property is owned solely by the seller (i.e. no indication that property is co-‐owned), the buyer can rely on the Torrens title. Cruz v. Leis (327 SCRA 570)

Mindanao Academy, Inc. v. Yap

Facts: Rosenda and her son sold to Yap 4 parcels of land including buildings, equipments, books, and other fixtures of 2 schools therein which although technically they owned, was under a co-‐ownership together with Rosenda’s other children and such were sold by Rosenda without their consent.

Doctrine: The contract of sale was void because the problem with the sale went into one of the essential requisites of a sale. There was no meeting of the minds as to the subject matter. If the problem is one of the essential requisites and was only found during the consummation stage, the contract can be voided even if already at the consummation stage. If the problem is only with regard to the performance of an obligation, it does not affect the perfection of the sale.



Exceptions to Rules on Legal Effects of Sale by a Non-‐Owner When Real Owner Estopped

Art. 1434.

When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee.

Bucton v. Gabar

Doctrine: When a person who is not the owner of a thing sells and delivers it, and later the seller acquires title thereto, such title passes by operation of law to the buyer. Seller is subsequently barred by estoppel from claiming otherwise.

Recording Laws

• The buyer of registered land has the right to rely on the Torrens title of the said land, absent any factual circumstances which would lead a prudent man to inqurie further if the vendor has the capacity to transfer interest to the land. Sy v. Capistrano, Jr. (560 SCRA 103)

Statutory Power; Judicial Sale

• Judgments of courts divesting the registered owner of title and vesting them in the other party are valid.

• Sale by a sheriff of land levied upon at public auction would validly transfer ownership to the highest bidder.

• When a defeated party refuses to execute the absolute deed of sale in accordance with the judgment, the court may direct the act to be done at the cost of the disobedient party by some other person appointed by the court and the act when so done shall have the like effect as is done by the party. Manila Remnant Co., Inc. v. CA (231 SCRA 281)

Sale at a Merchant Store

• This is an example of an imperfect or void title ripening into a valid one. The rights and interest of an innocent purchaser for value is protected in

order to facilitate commercial sales on movables and to give stability to business transaction. Sun Brothers & Co. v. Velasco (54 O.G. 5143)

• “Store” – any place where goods are kept for sale or where goods are deposited and sold by one engaged in buying and selling them. City of Manila v. Bugsuk Lumber Co. (101 Phil. 859)

City of Manila v. Bugsuk

Doctrine: The necessary element of “store” is that there are good or wares displayed or stored therein. Also, the firm must be actually engaged in the business of buying and selling. If a firm produces, manufactures, and delivers its own produce from its warehouses and they have no stores open for sale, firm is not a merchant store.

Sun Brothers & Co. v. Velasco

Doctrine: The general rule is that when a person who is not the owner of a thing sells the same, the buyer acquires no better title than the seller has. However, a purchase in good faith in a merchant store, or fair, or market is protected by law. It is an exception to the general rule that no transfer of ownership may be had through an act of a non-‐owner. The rights and interest of an innocent buyer for value who bought a thing from a merchant store should be protected when it comes into clash with the right and interests of a vendor. The buyer cannot be reasonably expected to look behind the title of articles he buys in a store.

Sale by a Seller Who has Voidable Title on the Subject Matter Sold

Art. 1506.

Where the seller of goods has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith, for value, and without notice of the seller's defect of title. (n)

• Since the provision talks of payment by the buyer and transfer of title to the buyer, the provision applies to the consummation stage of the contract.

• If after perfection but before consummation, the seller’s voidable title becomes void, the buyer does not obtain good title.



Applicable Rules to Immovables

• Articles 1505 and 1506 do not apply to immovables. When the seller of a parcel of land has only voidable or void title to the property, the buyer, even though in good faith and for value, takes only the same title as the seller had.

• For land, the Torrens system still prevails. Heirs of Spouses Benito Gavino. v. Court of Appeals (291 SCRA 495)

o However, the defense of indefeasibility of Torrens title is unavailing to properties and other improvements situated or built on the land. Tsai v. CA (366 SCRA 324)

• A person who deals with registered land through someone who is not the registered owner is expected to look beyond the certificate of title and examine all the factual circumstances thereof in order to determine if the vendor has the capacity to transfer any interest in the land. Sy v. Capistrano, Jr. (560 SCRA 103)

“Title” as to Movable Properties

Art. 559.

The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof may recover it from the person in possession of the same.

If the possessor of a movable lost or which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor. (464a)

Exceptions to Art. 559

• By cross-‐reference to Art. 1505, the owner cannot recover the movable if it was bought at a merchant store

• By cross-‐reference to Art. 1506, if the possessor in good faith acquired title from a seller who at the time of delivery had a voidable title thereto, the original owner cannot recover the movable.

Tagatac v. Jimenez

Facts: Tagatac sold her car to Feist. Feist paid by postdated PNB check but he really had no account thereat. In short, estafa. Feist sold it to Sanchez, then Sanchez sold

it to Jimenez who had the car exhibited in a car expo.

Issue: Is Jimenez a purchaser in bad faith? Is Tagatac entitled to possession?

Doctrine: Whenever there is a contract of sale which grants to the culprit-‐buyer (Feist) a voidable title, even if accomplished through estafa or swindling, the buyer in good faith (Jimenez) is granted a better title as against the original owner (Tagatac) even though the latter (Tagatac) may be classified to have been “unlawfully deprived” of the subject matter (Art. 1506). Jimenez is therefore not a purchaser in bad faith having no knowledge of any flaw in the title of the person from whom he acquired it. Tagatac is not entitled to possession. Fraud and deceit only made the sale voidable. But he wasn’t by any means unlawfully deprived thereof.

EDCA Publishing v. Santos

Facts: EDCA sold 406 books to Jose Cruz wherein the latter issued a check as payment. Cruz in turn sold 120 of those books to Leonor Santos. Meanwhile, EDCA became suspicious of Cruz when he placed his second order. They investigated and found out that Jose Cruz was an impostor and the check he issued was drawn against a closed account. EDCA then forcibly took the 120 books from Santos.

Held: Santos was a purchaser in good faith and exercised due diligence when he asked for the invoice from EDCA before purchasing it from Cruz. Non-‐payment only creates a right to demand payment or to rescind the contract, or to criminal prosecution in the case of bouncing checks. But absent the stipulation that ownership shall not pass until full payment, delivery of the thing sold will effectively transfer ownership to the buyer who can in turn transfer it to another.

Aznar v. Yapdiangco

Facts: Santos was selling the car to Marella. Santos instructed his son, Irineo not to part with De dios (Marella’s nephew) until he has received the full payment of the car. De dios and his companion ran away with the papers and the car, leaving Ireneo at the supposed place where payment was to be made. Marella sold the care the same day to Aznar, the PC then seized the car. The issue here is who has a better right over the car.

Held: It should be recalled that while there was indeed a contract of sale between Marella and Santos, the former, as vendee, took possession of the subject matter thereof by stealing the same while it was in the custody of the latter's son. He



neither had a voidable title under Art. 1506 nor was it delivered to him. Santos has a better right.

Moreover Art. 559 (Irrevindicability) does not apply. The common law principle that where 1 of 2 innocent persons must suffer by a fraud perpetrated by another, the law imposes the loss upon the party who, by his misplaced confidence, has enabled the fraud to be committed, cannot be applied in a case which is covered by an express provision of law.

Cruz v. Pahati

Facts: Belizo sold an automobile to Cruz. Belizo offered to sell the sell the same car to a certain buyer. Cruz agreed and since the certificate of registration was missing, Cruz made a letter addressed to the Motor Section of the Bureau of Public Works for the issuance of a new certificate which he gave to Belizo. The letter was falsified, making it appear that a deed of sale was executed in favor of Belizo, who then got a certificate of registration on his name. Belizo was able to sell the car to respondent Bulahan who later sold it to Pahati.

Held: Cruz, has the better right because plaintiff had been illegally deprived through ingenious schemes by Belizo. Art 559, “one who has lost any movable or has been lawfully deprived thereof, may recover it from the person in possession of the same and the only defense is if the other party has acquired it in good faith and at a public sale” and 1505, “sellers who are not owners xxx buyer acquires no better right than the seller” are applicable in this situation.

Dizon v. Suntay

Facts: Suntay (owner of the ring) and Clarita Sison entered into a transaction wherein the ring would be sold on commission. After her demands, she was given a pawnshop ticket, she learned that sison’s niece pledged the said item to the pawnshop of Dizon.

Held: Owner of diamond ring may recover possession of the same form the pawnshop where the owner's agent has pledged it without authority to do so. Art 559 applies and the defense that the pawnshop acquired possession without notice of any defect of the pledgor-‐agent is unavailing.

Chapter 9 – Loss and Deterioration, Fruits and Other Benefits

• The prevailing doctrines in our jurisdiction on risk of loss and deterioration and the benefits of the fruits and improvement is a combination of civil law and common law concepts.

• The basic concept is res perit domino (the owner shall bear the risk of loss). (This is derived from common law.)

• Ownership can only be transferred by delivery. (This is from civil law.)

No Application When Subject Matter is Determinable Art. 1263.

In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. (n)

Before Perfection • The purported seller owns the thing. Loss, deterioration, fruits and

improvements pertain to him. • The purported buyer still has no legal relationship to the thing.

Roman v. Grimalt

Facts: Roman and Grimalt entered into a contract of sale for a schooner payable by 3 instalments provided the title papers to the vessel were in proper form. The vessel sank before Roman could present his title and as a result, Grimalt refused to pay the price in the contract.

Held: If no contract of sale was actually executed by the parties the loss of the vessel must be borne by its owner and not by a party who only intended to purchase it and who was unable to do so on account of failure on the part of the owner to show proper title to the vessel and thus enable them to draw up the contract of sale.



At the Time of Perfection Art. 1493.

If at the time the contract of sale is perfected, the thing which is the object of the contract has been entirely lost, the contract shall be without any effect.

But if the thing should have been lost in part only, the vendee may choose between withdrawing from the contract and demanding the remaining part, paying its price in proportion to the total sum agreed upon. (1460a)

Art. 1494.

Where the parties purport a sale of specific goods, and the goods without the knowledge of the seller have perished in part or have wholly or in a material part so deteriorated in quality as to be substantially changed in character, the buyer may at his option treat the sale:

(1) As avoided; or

(2) As valid in all of the existing goods or in so much thereof as have not deteriorated, and as binding the buyer to pay the agreed price for the goods in which the ownership will pass, if the sale was divisible. (n)

• Note that Art. 1493 says that the contract is “without any effect.” It does not use the term void because it highlights the fact that the perfection of the contract is not affected by the loss of the subject matter.

o However, the effect of the loss is that as if the sale was void.

After Perfection But Before Delivery Art. 1538.

In case of loss, deterioration or improvement of the thing before its delivery, the rules in Article 1189 shall be observed, the vendor being considered the debtor. (n)

Art. 1189.

When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed

in case of the improvement, loss or deterioration of the thing during the pendency of the condition:

(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished;

(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered;

(3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;

(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case;

(5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor;

(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary. (1122)

General Rule

Art. 1504.

Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk whether actual delivery has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of the contract and the ownership in the goods has been retained by the seller merely to secure performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from the time of such delivery;

(2) Where actual delivery has been delayed through the fault of either the buyer or seller the goods are at the risk of the party in fault. (n)



• After perfection, but before delivery, the risk of loss is borne by the seller under the rule of res perit domino. Union Motor Corp. v. CA (361 SCRA 506)

Loss by Fault of a Party

• If the loss is thru the fault of the seller, the buyer shall have the right to recover damages. (Art. 1189)

Loss by Fortuitous Event

Art. 1480.

Any injury to or benefit from the thing sold, after the contract has been perfected, from the moment of the perfection of the contract to the time of delivery, shall be governed by Articles 1163 to 1165, and 1262.

This rule shall apply to the sale of fungible things, made independently and for a single price, or without consideration of their weight, number, or measure.

Should fungible things be sold for a price fixed according to weight, number, or measure, the risk shall not be imputed to the vendee until they have been weighed, counted, or measured and delivered, unless the latter has incurred in delay. (1452a)

Art. 1262.

An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (1182a)

• Paras and Padilla say that even if the subject matter is lost by fortuitous event, the buyer is still obliged to pay. They don’t cite any authority for this position.

• Tolentino says that the obligation of the buyer to pay is also extinguished since sale creates a reciprocal obligation. The seller should thus return whatever was paid by the buyer, if there had been payment already.

• CLV agrees with Tolentino’s view. He says that this view better harmonizes Art. 1480, 1538 and 1504.

Deterioration

• Art. 1189 shall apply.

Fruits and Improvements

Art. 1537.

The vendor is bound to deliver the thing sold and its accessions and accessories in the condition in which they were upon the perfection of the contract.

All the fruits shall pertain to the vendee from the day on which the contract was perfected. (1468a)

Art. 1164.

The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. (1095)

After Delivery • After delivery to the buyer, ownership is transferred to the buyer. The

goods shall then be at the buyer’s risk. o If delivery to the buyer was made, but ownership was retained by

the seller only for the purpose of securing the buyer’s obligation to pay, the buyer shall still bear the risk.

• If the thing is lost when the buyer bears the risk, the buyer shall still pay the balance of the purchase price. Song Fo & Co. v. Oria (33 Phil. 3)

Lawyer’s Cooperative v. Tabora

Facts: Tabora bought books from LCPC and it was delivered to Tabora’s office in Naga. A fire incident burned all of the books in his library and after that Tabora failed to pay his monthly instalments. He refuses to pay and raises force majeure asa defense.

Held: The contract specifically stated that after delivery, Buyer would bear the loss. Moreover under Art. 1504, When title/ownership remains in seller merely to secure performance by buyer of his obligations, the goods are at the buyer’s risk from time



of delivery. The rule that the obligor should be exempt when loss occurs through force majeure only applied when the obligation consists in the delivery of a determinate thing.

Chapter 10 – Remedies of Parties

REMEDIES IN CASES OF MOVABLES

Ordinary Remedies of Seller Movables in General

Art. 1593.

With respect to movable property, the rescission of the sale shall of right take place in the interest of the vendor, if the vendee, upon the expiration of the period fixed for the delivery of the thing, should not have appeared to receive it, or, having appeared, he should not have tendered the price at the same time, unless a longer period has been stipulated for its payment. (1505)

Sale of Goods Non-‐payment of price by the buyer

Art. 1595.

Where, under a contract of sale, the ownership of the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract of sale, the seller may maintain an action against him for the price of the goods.

Where, under a contract of sale, the price is payable on a certain day, irrespective of delivery or of transfer of title and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price although the ownership in the goods has not passed. But it shall be a defense to such an action that the seller at any time before the judgment in such action has manifested an inability to perform the contract of sale on his part or an intention not to perform it.

Although the ownership in the goods has not passed, if they cannot readily be resold for a reasonable price, and if the provisions of article 1596, fourth paragraph, are not applicable, the seller may offer to deliver the goods to the buyer, and, if the buyer refuses to receive them, may notify the buyer that the goods are thereafter held by the seller as bailee



for the buyer. Thereafter the seller may treat the goods as the buyer's and may maintain an action for the price. (n)

When buyer wrongfully neglects or refuses to accept goods

Art. 1596.

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for nonacceptance.

The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events from the buyer's breach of contract.

Where there is an available market for the goods in question, the measure of damages is, in the absence of special circumstances showing proximate damage of a different amount, the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for acceptance, then at the time of the refusal to accept.

If, while labor or expense of material amount is necessary on the part of the seller to enable him to fulfill his obligations under the contract of sale, the buyer repudiates the contract or notifies the seller to proceed no further therewith, the buyer shall be liable to the seller for labor performed or expenses made before receiving notice of the buyer's repudiation or countermand. The profit the seller would have made if the contract or the sale had been fully performed shall be considered in awarding the damages. (n)

Art. 1597.

Where the goods have not been delivered to the buyer, and the buyer has repudiated the contract of sale, or has manifested his inability to perform his obligations thereunder, or has committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his election so to do to the buyer. (n)

Special Remedies of “Unpaid Seller” of Goods Definition of “Unpaid Seller”

Art. 1525.

The seller of goods is deemed to be an unpaid seller within the meaning of this Title:

(1) When the whole of the price has not been paid or tendered;

(2) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise.

In Articles 1525 to 1535 the term "seller" includes an agent of the seller to whom the bill of lading has been indorsed, or a consignor or agent who has himself paid, or is directly responsible for the price, or any other person who is in the position of a seller. (n)

Rights of Unpaid Seller 4 Special Remedies available to the unpaid seller

1. Possessory lien 2. Stoppage in transitu 3. Special right to resell goods 4. Special right to rescind

• These remedies have a hierarchichal application. • The last two are called “special” because they are rights accorded only to

the unpaid seller, and are of a different nature from the right of rescission in Art. 1191.

Art. 1526.

Subject to the provisions of this Title, notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid seller of goods, as such, has:

(1) A lien on the goods or right to retain them for the price while he is in possession of them;



(2) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the possession of them;

(3) A right of resale as limited by this Title;

(4) A right to rescind the sale as likewise limited by this Title.

Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies a right of withholding delivery similar to and coextensive with his rights of lien and stoppage in transitu where the ownership has passed to the buyer. (n)

Possesory Lien

• If the ownership of the goods has passed to the buyer, the unpaid seller still has a lien on the goods or right to retain them for the price while he is in possession.

• If ownership has not passed to the buyer, the unpaid seller has a right of witholding delivery.

When possessory lien may be exercised

Memory aid: STI

Art. 1527.

Subject to the provisions of this Title, the unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price in the following cases, namely:

(1) Where the goods have been sold without any stipulation as to credit;

(2) Where the goods have been sold on credit, but the term of credit has expired;

(3) Where the buyer becomes insolvent.

The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer. (n)

When Negotiable Document of Title has been issued

• No seller’s lien shall defeat the rights of an innocent purchaser for value to whom such document has been negotiated.

When partial delivery is made

Art. 1528.

Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an intent to waive the lien or right of retention. (n)

Instances when possessory lien is lost

Memory aid: DOW

Art. 1529.

The unpaid seller of goods loses his lien thereon:

(1) When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the ownership in the goods or the right to the possession thereof;

(2) When the buyer or his agent lawfully obtains possession of the goods;

(3) By waiver thereof.

The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained judgment or decree for the price of the goods. (n)

• The unpaid seller losses his possessory lien when he parts with physical possession of the goods. In this case, he still has the remedy of stoppage in transitu, but only when the buyer is insolvent.

Stoppage in Transitu

Art. 1530.

Subject to the provisions of this Title, when the buyer of goods is or becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right of stopping them in transitu, that is to say, he may resume possession of the goods at any time while they are in transit, and he will then become entitled to the same rights in regard to the goods as he would have had if he had never parted with the possession. (n)



When a negotiable document of title is issued

Art. 1535.

Subject to the provisions of this Title, the unpaid seller's right of lien or stoppage in transitu is not affected by any sale, or other disposition of the goods which the buyer may have made, unless the seller has assented thereto.

If, however, a negotiable document of title has been issued for goods, no seller's lien or right of stoppage in transitu shall defeat the right of any purchaser for value in good faith to whom such document has been negotiated, whether such negotiation be prior or subsequent to the notification to the carrier, or other bailee who issued such document, of the seller's claim to a lien or right of stoppage in transitu. (n)

When is the buyer insolvent?

• A buyer is deemed insolvent when he either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due. [Art. 1636(2)]

• Insolvency proceedings need not be commenced. • Buyer must be insolvent for stoppage in transitu to apply.

When Goods are Deemed “In Transit”

Art. 1531.

Goods are in transit within the meaning of the preceding article:

(1) From the time when they are delivered to a carrier by land, water, or air, or other bailee for the purpose of transmission to the buyer, until the buyer, or his agent in that behalf, takes delivery of them from such carrier or other bailee;

(2) If the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them, even if the seller has refused to receive them back.

Goods are no longer in transit within the meaning of the preceding article:

(1) If the buyer, or his agent in that behalf, obtains delivery of the goods before their arrival at the appointed destination;

(2) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent; and it is immaterial that further destination for the goods may have been indicated by the buyer;

(3) If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf.

If the goods are delivered to a ship, freight train, truck, or airplane chartered by the buyer, it is a question depending on the circumstances of the particular case, whether they are in the possession of the carrier as such or as agent of the buyer.

If part delivery of the goods has been made to the buyer, or his agent in that behalf, the remainder of the goods may be stopped in transitu, unless such part delivery has been under such circumstances as to show an agreement with the buyer to give up possession of the whole of the goods. (n)

• Art. 1531 presupposes that the carrier through him delivery is made is NOT an agent of the buyer. Delivery to such carrier is not delivery to the buyer.

How Stoppage in transitu may be exercised

Art. 1532.

The unpaid seller may exercise his right of stoppage in transitu either by obtaining actual possession of the goods or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case the notice, to be effectual, must be given at such time and under such circumstances that the principal, by the exercise of reasonable diligence, may prevent a delivery to the buyer.

When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in possession of the goods, he must redeliver the goods to, or according to the directions of, the seller. The expenses of such delivery must be borne by the seller. If, however, a negotiable document of title representing the goods has been issued by the carrier or other bailee, he



shall not obliged to deliver or justified in delivering the goods to the seller unless such document is first surrendered for cancellation. (n)

Special Right to Resell Goods

Art. 1533.

Where the goods are of perishable nature, or where the seller expressly reserves the right of resale in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time, an unpaid seller having a right of lien or having stopped the goods in transitu may resell the goods. He shall not thereafter be liable to the original buyer upon the contract of sale or for any profit made by such resale, but may recover from the buyer damages for any loss occasioned by the breach of the contract of sale.

Where a resale is made, as authorized in this article, the buyer acquires a good title as against the original buyer.

It is not essential to the validity of resale that notice of an intention to resell the goods be given by the seller to the original buyer. But where the right to resell is not based on the perishable nature of the goods or upon an express provision of the contract of sale, the giving or failure to give such notice shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the resale was made.

It is not essential to the validity of a resale that notice of the time and place of such resale should be given by the seller to the original buyer.

The seller is bound to exercise reasonable care and judgment in making a resale, and subject to this requirement may make a resale either by public or private sale. He cannot, however, directly or indirectly buy the goods. (n)

When the right is excercisable (PERU)

• The unpaid seller has previously excercised possessory lien or stoppage in transitu

• The goods are of perishable nature • Seller has expressly reserved such right

• Buyer has been in default for an unreasonable length of time

Note: The buyer need not rescind the first contract judicially before reselling the thing. If he is obliged to sell it for less than the contract price, the non-‐paying buyer is liable for the difference. Katigbak v. CA (4 SCRA 243. The seller is not obliged to give the original owner the profits (i.e. difference of contract price and sale price), if any. (Art. 1533)

Transfer of Ownership

• Special right to resell can be excercised even if the seller had already transferred ownership to the original buyer.

• However, because of Art. 1533, the second buyer will still be able to get a good title against the original buyer.

• This is a special feature of this right to resell. The seller can still vest ownership in the second buyer even if at the time of the second sale, he did not have ownership anymore.

Special Right to Rescind

Art. 1534.

An unpaid seller having the right of lien or having stopped the goods in transitu, may rescind the transfer of title and resume the ownership in the goods, where he expressly reserved the right to do so in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time. The seller shall not thereafter be liable to the buyer upon the contract of sale, but may recover from the buyer damages for any loss occasioned by the breach of the contract.

The transfer of title shall not be held to have been rescinded by an unpaid seller until he has manifested by notice to the buyer or by some other overt act an intention to rescind. It is not necessary that such overt act should be communicated to the buyer, but the giving or failure to give notice to the buyer of the intention to rescind shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the right of rescission was asserted. (n)

When the right may be exercised (RED)

• Unpaid seller has exercised his possessory lien or stoppage in transitu



• Seller expressly reserved the right to rescind in case of default • Buyer has been in default for an unreasonable length of time

Remedies of Buyer Failure of Seller to Deliver

Art. 1598.

Where the seller has broken a contract to deliver specific or ascertained goods, a court may, on the application of the buyer, direct that the contract shall be performed specifically, without giving the seller the option of retaining the goods on payment of damages. The judgment or decree may be unconditional, or upon such terms and conditions as to damages, payment of the price and otherwise, as the court may deem just. (n)

Breach of Seller’s Warranty Art. 1599 provides the following remedies to the buyer in case the seller breaches his warranty:

1. Accept or keep the goods and set up agains the seller the breach of warranty by way of recoupment in diminution or extinction of the price

2. Accept or keep the goods and maintain an action for damages agains the seller

3. Refuse to accept the goods and maintain an action for damages 4. Rescind the sale and refuse to receive the goods or if the goods have

already been received, return them or offer to return them to the seller and recover the price paid.

• These remedies are alternative. However, the buyer still has a right to rescind if he has chosen specific performance but it has become impossible. This is based on Art. 1191(2).

Suspension of Payments in Antipication of Breach

Art. 1590.

Should the vendee be disturbed in the possession or ownership of the thing acquired, or should he have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend the payment of the price until the vendor has caused the

disturbance or danger to cease, unless the latter gives security for the return of the price in a proper case, or it has been stipulated that, notwithstanding any such contingency, the vendee shall be bound to make the payment. A mere act of trespass shall not authorize the suspension of the payment of the price. (1502a)

RECTO LAW: Sales of Movables on Installments

Art. 1484.

In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (1454-‐A-‐a)

Rationale of Recto Law

• It was originally passed in 1939 and was eventually incorporated in the Civil Code as Art. 1484.

• The purpose is to prevent the abuses of mortgagees who foreclose on the chattel mortgage, buy the property at a low price, and then suing the mortgagor for deficiency.

Coverage of the Law

• Installment sales are covered. o It is an “installment sale” if the price is payable in two or more

future payments, whether or not there is a downpayment. Levy v. Gervacio (69 Phil. 52)

• Contracts to Sell are not covered. Visayan Sawmill Co. v. CA (219 SCRA 378) • Financing transactions derived or arising from sales of movables on

installments are covered.



o In this case, the seller assigned his credit to the financing company. The financing company is thus bound by Art. 1484. Zayas v. Luneta Motor Company (117 SCRA 726)

Levy Hermanos v. Gervacio

Facts: Levy Hermanos, Inc., sold to Lazaro Blas Gervacio, who after downpayment, executed a promissory note for the balance of P2,400, payable on or before June 15, 1937, and mortgage the car. Gervacio failed to pay and the mortgage was foreclosed, Hermanos instituted a civil action for the balance.

Held: The suggestion that the cash payment made in this case should be considered as an installment in order to bring the contract sued upon under the operation of the law, is untenable. A cash payment cannot be considered as a payment by installment, and even if it can be so considered, still the law does not apply, for it requires non-‐payment of two or more installments in order that its provisions may be invoked. Here, only one installment was unpaid.(Applying Art. 1454)

Zayas v. Luneta Motor Company

Facts : Petitioner Eutropio Zayas, Jr. purchased on installment basis a motor vehicle from Escaño Enterprises in Cagayan de Oro City, dealer of Respondent Luneta Motor Company. Car was delivered to Zayas who executed a promissory note on the balance and in addition a chattel mortgage on the car in favor of Luneta. Zayas was unable to pay further prompting Luneta to extra-‐judicially foreclose chattel mortgage; car sold at public auction with Luneta as highest bidder. Luneta filed civil case for recovery of balance of P1,551.74 plus interest. He denied applicability of Art1484 because contract was only a mere loan and not sale on installment Issue: WON Article 1484 would apply to a person or entity which financed purchase on installments of a motor vehicle where the seller subsequently assigns loan documents to the financing person or entity. Held/Ratio: Yes. Escaño was an agent of Luneta Motor Company and that the certification from the cashier of Escaño Enterprises (submitted in evidence) on monthly installments aid by Zayas mentioned that the note was in favor of Luneta. Escaño assigned its rights vis-‐à-‐vis the sale to Luneta Motor Company, the nature of the transaction didn't change and as an assignee, Luneta had no better rights than assignor Escano under the same transaction. Transaction would still be a sale of personal property in installments covered by Art. 1484; to rule otherwise would pave the way for

subverting the policy underlying Art 1484 on the foreclosure of chattel mortgages over personal property sold on installment basis.

Remedies Provided Under Article 1484 Nature of the remedies in Art. 1484

• The article provides for three remedies. • These are alternative and exclusive, and the exercise of one would bar the

exercise of the others. Delta Motor Sales Corp. v. Niu Kim Duan (213 SCRA 259)

o This is the “vertical” barring effect. • However, seeking a writ of replevin is consistent with any of the three

remedies. Universal Motors Corp. v. Dy Hian Tat (28 SCRA 161) • In installment sales, if the action instituted is for specific performance and

the mortgaged property is subsequently attached and sold, the sale does not amount to a foreclosure of the mortgage, has been upheld in subsequent decisions and seems now well-‐established. Industrial Finance Corp. v. Ramirez (77 SCRA 152)

Delta Motor Sales Corp. v. Niu Kim Duan

Facts: Defendants purchased from the plaintiff 3 units of ‘DAIKIN’ air-‐conditioner, after paying the amount of P6,966.00, the defendants failed to pay at least two (2) monthly instalments. The contract has stipulations that incase the contract is rescinded the defendant should pay the expenses of the suit, 25% of the unpaid obligation.

Held: The vendor in a sale of personal property payable in installments may exercise one of three remedies

(1) exact the fulfillment of the obligation, should the vendee fail to pay; (2) cancel the sale upon the vendee's failure to pay two or more installments; (3) foreclose the chattel mortgage, if one has been constituted on the property sold, upon the vendee's failure to pay two or more instalments.

The third remedy, however, is subject to the limitation that the vendor cannot recover any unpaid balance of the price and any agreement to the contrary is void (Art. 1484) The three remedies are alternative and NOT cumulative. If the creditor chooses one remedy, he cannot avail himself of the other two.



Remedy of Specific Performance

• This remedy is alternative. However, it can be argued that if the obligation to pay becomes impossible, the seller may still seek rescission based on Art. 1191. CLV however says that the generic obligation to pay can’t become impossible.

• The seller is deemed to have chosen specific performance when he files an action in court for recovery. Sending of demand letter to the buyer is not enough.

• When judgment is rendered in favor of the seller, the buyer becomes a judgment debtor. His obligation can be executed on all personal and real properties of the buyer which are not exempt from execution.

• The fact that the seller obtained a writ of execution against the property mortgaged, but pursuant to an action for specific performance with a plea for a writ of replevin, does not amount to a foreclosure of the chattel mortgage covered by the Recto Law. Tajanglangit v. Southern Motors (101 Phil. 606)

Tajanglangit v. Southern Motors

FACTS: Spouses Tajanlangit bought 2 tractors and 1 Thresher from Southern Motors on installment basis by issuing a Promissory Note to that effect. They then defaulted on the installment payments. The court entered judgment for the total sum of the purchased machineries (P25,575) plus interest and collection costs. The sheriff then levied on the machineries and sold them on auction for P10K to the highest bidder, which was also Southern Motors. Since the judgment called for so much more, Southern Motors obtained an alias writ of execution so that the sheriff could levy attachment on the other real properties of the Tajanlangits. ISSSUE: WON SouthMo had already foreclosed on the chattel mortgage and thus have no more further action against them. HELD/RATIO: There was NO foreclosure sale since SouthMo elected 1484(1) and sued on the Note exclusively. SouthMo had the choice what remedy in Art.1484 to use. Neither was there cancellation of the sale which was also affirmed by the sheriff. There was an execution against on the property mortgaged not a cancellation/foreclosure on the sale. The fact that the seller obtained a writ of execution against the property mortgaged, but pursuant to an action for specific performance with a plea for a writ of replevin, does not amount to a foreclosure of the chattel mortgage covered by the Recto Law

Remedy of Recission

• Rescission obliges both parties to make restitution. However, under Art. 1486, a stipulation that the installments or rents paid shall not be returned is valid, as long as they are not unconscionable. Delta Motor Sales Corp. v. Niu Kim Duan (213 SCRA 259)

• A stipulation which provides for the forfeiture of the amounts paid by the buyer when the contract is rescinded is not contrary to law. Such forfeited amounts are like the damages which can also be recovered in rescission.

• Mutual restitution prevents recovering on the balance of the purchase price. Nonato v. IAC (140 SCRA 255)

When Rescission Deemed Chosen

• There is a clear indication by the seller that he wants to end the contract. o Sends a notice of recission to the buyer o Takes possession of the subject matter of the sale o Files an action for rescission

• When the seller’s assignee, a financing company, is able to take back possession of the motor vehicle with a condition that the car can be redeemed by the buyers within 15 days, such possession is clearly with the intent to cancel the contract. Nonato v. IAC (140 SCRA 255)

• The retaking of possession of the property must be coupled with an unequivocal desire on the part of the seller to rescind. Vda. De Quiambao v. Manila Motor Co. (3 SCRA 445)

Barring Effect of Rescission

• Even if not explicitly stated in the law, rescission still bars the seller from recovering deficiency or unpaid balance, in the same way that foreclosure on chattel mortgage does.

• It is because of the nature of rescission which requires mutual restitution. When the subject matter is returned, and damages are paid, or payments are forfeited, the two parties are deemed to have been mutually compensated. The seller cannot have its cake and eat it too. Nonato v. IAC (140 SCRA 255)

Nonato v. IAC

Facts: Restituto and Ester Nonato purchased a Volkswagen Sakbayan from the People's Car, Inc., on installment basis. The defendants executed a promissory note and a chattel mortgage in favor of People's Car, inc. It then assigned its rights and interests over the note and mortgage in favor of Investor's Finance Corporation



(IFC). For failure of defendants to pay two or more installments, despite demands, the car was repossessed by IFC. Despite repossession, IFC demanded that Nonatos pay the balance of the price of the car. ISSUE: Whether a vendor who had cancelled the sale of a motor vehicle for failure of the buyer to pay two or more of the stipulated installments, may also demand payment of the balance of the purchase price. Held/RATIO: Hell no. The applicable law in the case at bar is Art. 1484. These remedies have been recognized as alternative, not cumulative, that the exercise of one would bar the exercise of the others. The acts performed by the corporation are wholly consistent with the conclusion that it had opted to cancel the contract of sale of the vehicle. It is thus barred from exacting payment of the balance of the price of the vehicle. It cannot have its cake and eat it too.

Foreclosure of Chattel Mortgage Constituted on Subject Property When Remedy of Foreclosure is Deemed Chosen

• The seller is deemed to have chosen to foreclose only at the time of actual sale of the subject property at public auction. Manila Trading & Supply Co. v. Reyes (62 Phil. 461); Manila Motor Co., Inc. v. Fernandez (99 Phil. 782)

• The filing for and issuance of a writ of replevin (and the subsequent recovery of possession) does not mean that the seller will foreclose on the mortgage. Universal Motors Corp. v. Sy Hian Tat (28 SCRA 161)

o (Filing of a writ of replevin is usually a preliminary step to foreclose so that the seller will be able to regain possession.)

• If the seller files an action denominated as “replevin with damages” which seeks to recover possession and in the alternative, to recover the unpaid balance of the price, he is still not considered as having chosen foreclosure as a remedy. Industrial Finance Corp. v. Ramirez (77 SCRA 152)

Barring Effect of Foreclosure

• It is the foreclosure and actual sale at public auction which bars further recovery by the seller.

• If the seller had filed an action for foreclosure and before the public auction, he receives further payment from the buyer, the seller is not obliged to refund the payments. Northern Motors, Inc. v. Sapinoso (33 SCRA 356)

Northern Motors, Inc. v. Sapinoso

FACTS: Sapinoso purchased from Northern Motors, Inc. an Opel Kadett car executing a promissory note for the balance of P10,540.00 payable in installments with interest at 12% per annum with a chattel mortgage on the car. The vendee-‐mortgagor failed to pay several installments. Northern Motors, Inc. filed a complaint against Sapinoso and sought foreclosure. Subsequent to the commencement of the action, but before the filing of his answer, defendant Sapinoso made two payments on the promissory note. The court allowed the foreclosure but however ordered plaintiff to reimburse the sum of P1,250.00 which the plaintiff had received from the latter after having filed the present case. ISSUE: WON the court erred in ordering Northern Motors to reimburse the sum of P1,250 received by plaintiff after having filed the present case. HELD/RATIO: Yes. The Court erred in concluding that the legal effect of the filing of the action was to bar plaintiff-‐appellant from accepting further payments on the promissory note. There has not yet been a foreclosure sale resulting in a deficiency. Article 1484(3) – prohibits "further action against the purchaser to recover any unpaid balance of the price”

• There is no reason why a mortgage creditor should be barred from accepting, before a foreclosure sale, payments voluntarily tendered by the debtor-‐mortgagor who admits a subsisting indebtedness.

• Even a mortgage creditor, before the actual foreclosure sale, is not precluded from recovering the unpaid balance of the price although he has filed an action of replevin for the purpose of extrajudicial foreclosure

• Even a mortgage creditor who has elected to foreclose but who subsequently desists from proceeding with the auction sale, without gaining any advantage or benefit, and without causing any disadvantage or harm to the vendee-‐mortgagor, is not barred from suing on the unpaid account.

Barring Effect on Other Securities Given for Payment of Price

• If the seller had already foreclosed on the chattel mortgage, it cannot seek deficiency judgment by foreclosing on the real estate mortgage constituted by third-‐party mortgagors. Cruz v. Filipinas Investment & Finance Corp. (23 SCRA 791)



o The Court held that if the third-‐party mortgagor is forced to pay, then he as the guarantor will be allowed to recover from the principal debtor. This would be an indirect subversion of Art. 1484.

o The action being barred also includes extrajudicial proceedings, not just judicial proceedings.

• The seller is likewise precluded from further extrajudicially foreclosing on any additional security which the buyer himself has constituted. Ridad v. Filipinas Investment and Finance Corp. (120 SCRA 246)

• When the real estate mortgage constituted by a third-‐party is foreclosed first, the seller cannot anymore foreclose on the chattel mortgage constituted by the buyer. BUT the barring effect as to prevent recovery of deficiency judgment does not come into play. Borbon II v. Servicewide Specialists, Inc. (258 SCRA 634)

• The original wording of the Recto Law contained “any unpaid balance” instead of “any unpaid balance of the price.” The Court has interpreted “any unpaid balance” to include even interest on the principal, attorney’s fees, expenses of collection, and other costs. Maconday & Co., Inc. v. Eustaqio. (64 Phil. 446)

o Even if this case is a 1937 case, it remains good law, despite the change in wording in what is now Art. 1484 of the Civil Code. This doctrine was reiterated in the 1969 case of Filipinas Investment & Finance Corp. v. Ridad, infra.

Cruz v. Filipinas Investment & Finance Corp.

Facts: Cruz purchased from Far East Motor Corp an Isuzu Diesel Bus for P44,616.24 in installments with a chattel mortgage in favor of FEMC over the bus. An additional security was given by Felicidad Vda. de Reyes (Reyes) in the form of a Second mortgage on a parcel of land owned by her, along with the building. Thereafter, FEMC, for value received, indorsed the PN and assigned all its rights in the Chattel Mortgage and Real Estate Mortgage to herein defendant, Filipinas Investment and Finance Corp. (FIFC). Cruz defaulted in payment. Thus, FIFC took steps to foreclose the chattel mortgage on the bus and after for the other security for the deficiency. Issues: WON FIFC, having already foreclosed the chattel mortgage, also can foreclose the real estate mortgage? Held/Ratio: Art 1484 applies. The remedies therein provided are alternative, not cumulative – exercise of one bars exercise of others. Established rule is that foreclosure and actual sale of a Chattel Mortgage bars further recovery by the

vendor of any balance not satisfied by such sale. A contrary ruling would be open to abuse coz mortgagees could buy the property at a foreclosure at a much lower price, then go after the second security. It would have the effect of depriving the mortgagor of his property, yet with almost the whole debt being due. Neither may FIFC recover from the guarantor. If the guarantor (Reyes) was compelled to pay the balance, thus she would be allowed to recover what she has paid from the vendee (Cruz). Thus, ultimately, Cruz would be made to bear the balance, even if the CM was already foreclosed. Protection of Art 1484 would be subverted which cannot be allowed to happen.

Ridad v Filipinas Investment & Finance Corp.

Facts: Plaintiffs Ridad bought 2 brand new Ford Consul sedans. They executed a promissory note and a chattel mortgage on the two cars AND another car AND plaintiff’s taxi operation franchise or certificate of public convenience. The vendor assigned its rights, title and interest to the promissory note and chattel mortgage to Filipinas Investment and Finance Corp. The buyers defaulted on their payment. FIFC foreclosed extra-‐judicially on the chattel mortgage and they were the highest bidder. Another auction sale was held at a later date for the remaining properties, including the taxi franchise. FIFC was again the highest bidder. It subsequently sold and conveyed the taxi franchise to Jose Sebastian who filed with the PSC for approval of the sale. Plaintiff then filed an action for annulment of contract and the subsequent sales with the CFI of Rizal. Issue: WON the chattel mortgage was valid. Held:NO. Art. 1484 of the Civil Code applies. • These remedies are alternative, not cumulative. In this case, the mortgagee chose to foreclose on the chattel mortgage on the 2 new Ford vehicles. Because they chose this option, they may not anymore have any further action to recover the unpaid balance pursuant to Art. 1484(3). They are thus precluded from having a recourse against the additional security put up by a guarantor.

Borbon II v. Servicewide Specialists, Inc.

FACTS: (B&B) jointly and severally signed a promissory note in favor Pangasinan Auto Mart, Inc. for P122,856.00 to be payable in installments without need of notice or demand with a Chattel Mortgage on 1 Brand new 1984 Isuzu KCD 20 Crew



Cab. The rights of Pangasinan Auto Mart, Inc. was later assigned to Filinvest Credit Corporation, with notice to the defendants. Because the defendants did not pay their monthly installments, Filinvest demanded from the defendants the payment of their installments due on January 29, 1985 by telegram. Filinvest Credit Corporation thereafter assigned all its rights, interest and title over the Promissory Note and the chattel mortgage to Servicewide Specialists, inc. (SSI). The plaintiff attempted to collect by sending a demand letter to the defendants for them to pay their entire obligation. The defendants claim that what they intended to buy from Pangasinan Auto Mart was a jeepney type Isuzu K. C. Cab. Defendants further claim that they are not in default of their obligation because the Pangasinan Auto Mart was first guilty of not fulfilling its obligation in the contract. The defendants claim that neither party incurs delay if the other does not comply with his obligation ISSUE: W/N awards made by the court a quo of liquidated damages and attorney's fees to private respondent appropriate. Attorney’s fees (YES) Liquidated Damages (NO) RATIO: When the seller assigns his credit to another person, the latter is likewise bound by the same law. Accordingly, when the assignee forecloses on the mortgage, there can be no further recovery of the deficiency, and the seller-‐mortgagee is deemed to have renounced any right to the unpaid balance. Thus there must be no payment of liquidated damages, however grant of attorney's fees were allowed.

Macondray & Co., Inc. v. Eustaquio

FACTS: Macondray sold a de Soto car Sedan from Eustaquio for P595, and for which he executed a note where he undertook to pay the car in 12 monthly installments, 12% interest per annum. He mortgaged same car to guarantee his note; he paid the first installment but failed to pay any of the remaining. So plaintiff brought an action to obtain possession of the car AND recover the balance owing him (interest, attorney's fees, expenses and costs)

DOCTRINE: The Recto law prevents the mortgagee from seizing the mortgaged property, buying it at foreclosure sale and then bringing a suit against the mortgagor for a deficiency judgment. This is to close the door to abuses already committed in connection with the foreclosure of the chattel mortgages when sales were payable in installments.

"All amounts barred from recovery."

"Any unpaid balance" refers to the deficiency judgment including interest on principal, attorney's fees, expenses of collection, and the costs.

Rules on Perverse Buyer-‐Mortgagor

• General Rule: The Eustaquio doctrine bars all amounts from recovery in case the seller-‐mortgagee forecloses on the chattel mortgage.

• Exception: When the buyer-‐mortgagor refuses to surrender the chattel to allow the seller to be able to proceed with foreclosure, the seller is allowed to recover expenses and attorney’s fees incurred in trying to obtain possession of the chattel. Filipinas Investment & Finance Corp. v. Ridad (30 SCRA 564)

Filipinas Investment & Finance Corp. v. Ridad

FACTS: Ridad purchased from Filipinas a Ford Sedan on installment basis but failed to pay 5 installments. Extrajudicial foreclosure ensued, spouses Ridad were considered in default for failure to appear in court, and court awarded attorney's fees and actual expenses of seizure to Filipinas.

DOCTRINE: Although the purpose of the Recto law is to protect the buyers on installment who were victimized by sellers who succeeded in unjustly enriching themselves at the expense of the buyers, the mortgagee (seller) is also entitled protection against PERVERSE MORTGAGORS. Perverse mortgagors are those where after failing to pay 2 or more installments, refuse to deliver chattel to the mortgagee or conceals it in a place outside the reach of the mortgagor. Since the mortgagee would enforce his rights through the means and within the limits delineated by law, the next step is to file an action for replevin to recover immediate possession of the chattel. In this case, the necessary expenses should be borne by the mortgagor.

Lease with Option to Purchase Art. 1485.

The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing. (1454-‐A-‐a)



Art. 1486.

In the case referred to in two preceding articles, a stipulation that the installments or rents paid shall not be returned to the vendee or lessee shall be valid insofar as the same may not be unconscionable under the circumstances. (n)

• Some sellers opt to making contracts in the form of leases with an option to buy for a small consideration at the end of the term. These contracts must be regarded as installment sales, with the rent payments as the installments paid. Vda. De Jose v. Barrueco (67 Phil. 191)

• Even if an option to purchase is not expressly stipulated, the stipulations in the contract can still show that such was the intention of the parties. PCI Leasing & Finance, Inc. v. Giraffe-‐X Creative Imaging, Inc. (527 SCRA 405)

PCI Leasing & Finance, Inc. v. Giraffe-‐X Creative Imaging, Inc.

FACTS: Parties entered into a Lease Agreement where PCI leased two office equipment from Giraffe-‐ X. The lease agreement contained the monthly rental (expensive!) a guaranty deposit and embodied a standard acceleration clause operative in the event Giraffe failed to pay any rental and/or accounts due. Giraffe defaulted for 3 months and were given a formal pay OR surrender equipment type of demand letter.

DOCTRINE: Recto law applies because the contract is actually a lease with option to buy. It was not a straight lease because the petitioner stands to make P13M++ in a year's time out of an investment of P8.1M. The intention of the parties must be looked into. Also, the demand letter was fashioned in the alternative: payment of the unpaid full balance OR the surrender of the financed asset, suggesting that Giraffe can keep the equipment if it exercises its option to acquire the same. This reflects a situation where a financing company conceals up to the last moment its intention to sell the property in an attempt to circumvent the Recto law. Sellers in this case have resorted to the device of making contracts in the form of leases either with options to the buyer to purchase for a small consideration at the end of term, provided the so-‐ called rent has been duly paid, or with stipulations that if the rent throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such transactions are leases only in name. In choosing replevin, PCI now waived its right to bring an action to recover unpaid rentals on the leased items. Remedies under Article 1484 are alternative, not cumulative.

What is the Barring Effect on Such Contracts?

• Key question: When the lessor retakes possession of the object upon non-‐payment, is this considered as a foreclosure or a rescission?

o CLV cites a lot of cases which show that the Court hasn’t really made a definitive answer to this question.

• However, CLV says that the Court seems to treat installment sales of movables which are structured as lease with option to purchase as equivalent to a chattel mortgage executed on the thing itself.

• Therefore, when the purported lessor takes possession of the subject matter, it is treated legally as a foreclosure. Thus, the barring effect of foreclosure applies.

REMEDIES IN CASES OF IMMOVABLES

Remedies of Seller Anticipatory Breach

Art. 1591.

Should the vendor have reasonable grounds to fear the loss of immovable property sold and its price, he may immediately sue for the rescission of the sale.

Should such ground not exist, the provisions of Article 1191 shall be observed. (1503)

Failure of Buyer to Pay Price

Art. 1592.

In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term. (1504a)



• The Court has tended to interpret Art. 1592 liberally in favor of the buyer to give him every opportunity to comply with his obligation and proceed to take the subject immovable.

• Art. 1592 only covers contracts of sale. Contracts to sell are not covered. • The Court has also resorted to equitable resolutions in the application of

Art. 1592. Such was the case in Legarda Hermanos v. Saldaña. (55 SCRA 324)

Legarda Hermanos v. Saldaña

FACTS: Saldana bought two lots from Legarda for P1, 500 each, payable in 10 years, divided into 120 equal monthly installments with 10% interest per annum. Saldana paid for 8 continuous years about 95 monthly installments total P3, 582 (P1.8K interest, 1.6K applied to principal), then he stopped payment. Trial Court upheld cancellation of contract to sell, CA reversed saying that Saldana suspended payment because the lots were under under water/ no improvements he so it could not be delivered to him.

DOCTRINE: The total amount paid as principal amounted to P1, 682. 23 more than the amount of one lot. Therefore, it is just and fair in accordance with law and equity to consider one lot as fully paid. There was already substantial performance. Under Article 1234-‐ If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee.

Remedies of Buyer Suspension of Payment

Art. 1590.

Should the vendee be disturbed in the possession or ownership of the thing acquired, or should he have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend the payment of the price until the vendor has caused the disturbance or danger to cease, unless the latter gives security for the return of the price in a proper case, or it has been stipulated that, notwithstanding any such contingency, the vendee shall be bound to make the payment. A mere act of trespass shall not authorize the suspension of the payment of the price. (1502a)

In Case of Subdivision or Condominium Projects

• P.D. 957 is known as The Subdivision and Condominium Buyers’ Protective Decree.

o This decree was issued in the wake of numerous reports that subdivision and condominium developers had reneged on their representations and obligation to provide subdivision roads, drainage, sewerage, water systems, lighting system, etc. Casa Filipinas Realty Corp. v. Office of the President (241 SCRA 165)

Section 20. Time of Completion.

Every owner or developer shall construct and provide the facilities, improvements, infrastructures and other forms of development, including water supply and lighting facilities, which are offered and indicated in the approved subdivision or condominium plans, brochures, prospectus, printed matters, letters or in any form of advertisement, within one year from the date of the issuance of the license for the subdivision or condominium project or such other period of time as may be fixed by the Authority.

Section 23. Non-‐Forfeiture of Payments.

No installment payment made by a buyer in a subdivision or condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice to the owner or developer, desists from further payment due to the failure of the owner or developer to develop the subdivision or condominium project according to the approved plans and within the time limit for complying with the same. Such buyer may, at his option, be reimbursed the total amount paid including amortization interests but excluding delinquency interests, with interest thereon at the legal rate.

• Section 20 of P.D. 957 directs every owner and developer of real property to provide the necessary facilities, improvements, infrastructure and other forms of development, failure to carry out which is sufficient cause for the buyer to suspend payment, and any sums of money already paid shall not be forfeited. Tamayo v. Huang (480 SCRA 156)

• In case the seller fails to comply with his obligations in Sec. 20 of P.D. 957, the buyer has two options: Relucio v. Brillante-‐Griffin (187 SCRA 405)

o Demand reimbursement of the amount paid. o Wait for further development of the subdivision or condominium.

In this case, the buyer may suspend payment until the seller



fulfills his obligations. He may not be ousted from the subdivision. Tamayo v. Huang (480 SCRA 156)

• Sec. 23 does not require that a notice be given first by the buyer to the seller before a demand for refund can be made as the notice and demand can be made in the same letter or communication. Casa Filipinas Realty Corp v. Office of the President (241 SCRA 165)

• The buyer has the right to compel the seller to complete the roads and other facilities on the subdivisioin, even if it wasn’t stipulated in the sale. The seller cannot shift to the buyer the burden of providing for access to and from the subdivision. Lim v. Delos Santos (8 SCRA 798); Consing v. CA (177 SCRA 14)

o If the seller defaults, the buyer should be entitled to a proportionate reduction in the purchase price.

• Buyers of condominium units would be justified in suspending payments, when the developer-‐seller fails to give them a copy of the Contract to Sell despite repeated demands. Gold Loop Properties, Inc. v. CA (350 SCRA 371)

o However, when the Reservation Agreement provides that the buyer shall be entitled to a Contract to Sell only upon its payment of at least 30% of the total contract price, the non-‐happening yet of that condition does not render the seller in default as to warrant the buyer the right to rescind the sale and demand a refund. G.G. Sportwear Mfg. Corp. v. World Class Properties, Inc. (614 SCRA 75)

• Nothing in P.D. 957 provides for the nullification of a contract to sell in the event the seller, at the time the contract was entered into, did not possess a certificate of registration or a license to sell, sale being a consensual contract. Co Chien v. Sta. Lucia Realty (513 SCRA 570)

• P.D. 957 may be applied retroactively since it is the intent of the law as shown from its preamble. It is an instrument of social justice. Eugenio v. Drilon (252 SCRA 106)

Right to Grace Period Stipulated

• When a grace period is provided for in the contract of sale, it should be construed as a right, not an obligation of the debtor, and when unconditionally conferred, the grace period is effective without further need of demand either calling for the payment of the obligation or for honoring the right. Bricktown Dev. Corp. v. Amor Tierra Dev. Corp. (239 SCRA 126)

MACEDA LAW: Sales of Real Estate on Installments • R.A. 6552 is known as the “Realty Installment Buyer Protection Act.” • It declared a public policy to protect buyers of real estate on installment

payments against onerous and oppressive conditions. (Sec. 2, RA 6552) • The courts have used the Maceda Law as a policy statement of the State in

protecting the interests of buyers of residential real estate on installments. • At times, the Court has also applied the Maceda Law retroactively. Siska

Dev. Corp. v. Office of the President (231 SCRA 674)

Transactions Covered

• It covers primarily residential real estate bought on installment. • It also covers the financing of real estate on installment. • The Maceda Law also covers contracts to sell. This is evidenced by the use

of the word “cancellation” in the law itself. • The Maceda Law uses the same definition of “sale on installment” as the

Recto Law.

Transactions Excluded From Coverage The following transactions are excluded from coverage of the Maceda Law: (ICA)

1. Sales covering industrial lots 2. Sales covering commercial buildings and lots 3. Sales to tenants under agrarian reform laws

The Maceda Law Cannot be invoked by the Highest Bidder in Foreclosure Proceedings

• Such person is not the real party to the original installment sales • He does not have any rights promoted under the Maceda Law.

Rights Granted When the buyer has paid at least 2 years of installment

Section 3.

In all transactions or contracts involving the sale or financing of real estate on installment payments, including residential condominium apartments but excluding industrial lots, commercial buildings and sales to tenants under RA 3844, as amended by RA 6389, where the buyer has paid at least



two years of installments, the buyer is entitled to the following rights in case he defaults in the payment of succeeding installments:

(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him which is hereby fixed at the rate of one (1) month grace period for every one (1) year of installment payments made: Provided, That this right shall be exercised by the buyer only once in every five (5) years of the life of the contract and its extensions, if any.

(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to fifty per cent (50%) of the total payments made, and, after five (5) years of installments, an additional five per cent (5%) every year but not to exceed ninety per cent (90%) of the total payments made: Provided, That the actual cancellation of the contract shall take place after thirty (30) days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer.

Down payments, deposits or options on the contract shall be included in the computation of the total number of installment payments made.

• The cancellation of the contract under the Maceda Law must follow the following steps: (GNR)

o First, the seller should extend the buyer a grace period of at least sixty (60) days from the due date of the installments.

o Second, at the end of the grace period, the seller shall furnish the buyer with a notarial notice of cancellation or demand for rescission, effective thirty (30) days from the buyer’s receipt thereof; a mere notice or letter, short of a notarial act, would not suffice. McLaughlin v. CA (144 SCRA 693)

o Third, for contracts covering more than two years of payments, there must be return to the buyer of the cash surrender value. Villdara, Jr. v. Zabala (545 SCRA 325)

• The additional formality of a demand on [the seller’s] part for rescission by notarial act would be unnecessary since the seller therein filed an action for annulment of contract, which is a kindred concept of rescission by notarial act. Layug v. IAC (167 SCRA 627)

• A decision rendered in an ejectment case operated as the required notice of cancellation under the Maceda Law. Leaño v. Court of Appeals (369 SCRA 36)

• A formal letter demand upon buyer to vacate the premises is not the same as the notice of cancellation or demand for rescission by a notarial act required by R.A. No. 6552. Evidently, the case of unlawful detainer filed by petitioner does not exempt him from complying with the said requirement. Pagtulungan v. Dela Cruz Vda. De Manzano (533 SCRA 242)

• Where the buyers under a contract to sell offers to pay the last installment a year and a half after the stipulated date, that was beyond the sixty-‐day grace period under Section 4 of the Maceda Law. The buyers cannot use the second sentence of Section 4 of the Maceda Law against the sellers’ alleged failure to give an effective notice of cancellation or demand for rescission because the sellers merely sent the notice to the address supplied by the buyers in the Contract to Sell. Garcia v. Court of Appeals (619 SCRA 280)

Garcia v. CA

FACTS: A contract to sell was entered into, down payment was made, and the rest was payable in 3 installments. The last installment was not paid. In the contract it said that failure to comply with the terms of payment would cause rescission, and possession shall be retained until a deed of absolute sale is executed by the buyers. DoAS shall be executed upon full payment.

DOCTRINE: Maceda law inapplicable since the said law applies to contracts of real estate on installment payments, example: condominium. Subject lands are not residential real estate within the contemplation of the Maceda Law. Even if it did apply, offer of payment was made beyond the 60-‐day grace period.

When the buyer has paid less than 2 years of installments

Sec. 4.

In case where less than two (2) years of installments were paid, the seller shall give the buyer a grace period of not less than sixty (60) days from the date the installment became due.

If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty (30) days from



receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act.

Formula to Compute the Installment Mode

• The proper formula to apply in deterining how many installments have been made is to include any payment made as downpayment or reservation fee as part of the installments made, and then divide them by the stipulated mode of payment, i.e., whether it is monthly, quarterly, semi-‐annual or annual. Jestra Dev. & Mgt. Corp v. Pacifico (513 SCRA 413)

Jestra Dev. Mgt. Corp v. Pacifico

FACTS: Pacifico signed a Reservation Application for the purchase of a house and lot. Upon full payment of DP, Pacifico will sign a contract to sell. 70% balance of purchase price payable in 10 years + interest, at a monthly installment.

DOCTRINE: The proper formula to apply in determining how many installments have been made is to include any payment made as down payment OR reservation fee as part of the installments made, and then to divide the stipulated mode of payment (i.e. monthly, quarterly, annually, semi-‐ annually) (page 419, Sales Book)

Since after applying this formula, Pacifico failed to pay at least 2 years of installments, he is not entitled to a refund of the cash surrender value of his payments. Section 4 is applicable. The cancellation is a 2 step process: a. The seller should extend the buyer a grace period of at least 60 days from the due date of the installment; b. At the end of the grace period, the seller shall furnish the buyer with a notice of cancellation or demand for rescission through a notarial act, effective 30 days from the buyer's receipt thereof. Despite the notice of dishonor, Pacifico took no action and 60 days had lapsed.

Interpretation of Grace Period and Mode of Cancellation

• The ruling in McLaughlin v. CA provides for 2 grace periods: a. The 60-‐day period provided by law before a notice of cancellation

is served to the buyer b. The before rescission or cancellation actually takes place.

• Actual cancellation occurs 30 days after the notice of cancellation or demand for rescission is received by the buyer.

o However, if the seller does not refund the buyer pursuant to Sec. 3(b) of the Maceda Law, rescission or cancellation will not take

place despite the effectivity of the notice of cancellation. Leaño v. CA (369 SCRA 36)

McLaughlin v. CA

FACTS: A contract of conditional sale payable in installments was entered into by McLaughlin and Flores. Due to the latter's failure to pay the balance, a complaint for rescission was filed in court. Parties submitted a Compromise Agreement which had a stipulation that in case of failure to comply, McLaughlin is entitled to a writ of execution rescinding the Deed of Conditional Sale of Real Property and Flores waives his right to appeal. Also, in case of rescission all payments made by Flores will be forfeited in favor of Flores.

DOCTRINE: Under Section 4 of the Maceda Law: "In case where less than 2 years of installments were paid, the seller shall give the buyer a grace period of not less than 60 days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after 30 days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by notarial act." Any stipulation contrary to this is void. Flores made a valid tender of payment within 30 days from receipt of motion for execution.

2 Doctrines applicable to Maceda Law:

a. although the law seems to require rescission and cancellation to be both by notarial act, this case would hold notarial act as merely applicable to rescission, whereas "notice of cancellation" need not be by notarial act.

b. Even after the expiration of the grace period provided by law, the buyer can still prevent rescission or cancellation of the contract within the 30 day period when rescission or cancellation is to take effect. (p. 420, Sales book)

Other Rights Granted to Buyer

Sec. 5.

Under Sec. 3 and 4, the buyer shall have the right to sell his rights or assign the same to another person or to reinstate the contract by updating the account during the grace period and before actual cancellation of the contract. The deed of sale or assignment shall be done by notarial act.



Sec. 6.

The buyer shall have the right to pay in advance any installment or the full unpaid balance of the purchase price any time without interest and to have such full payment of the purchase price annotated in the certificate of title covering the property.

Effect of Contrary Stipulation

Sec. 7.

Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3, 4, 5 and 6, shall be null and void.

Maceda Law Cannot Be Availed of by Developer

• The Maceda Law is aimed at protecting the buyers of real estate on installment payments. One who buys the development from the developer and then becomes his successor-‐in-‐interest is not covered by the law. Lagandoan v. CA (290 SCRA 330)

Rescission on Sales of Non-‐Residential Immovables on Installments

• Pertinent provisions: Art. 1191 and Art. 1592, supra • Articles 1191 and 1592 on rescission cannot apply to a contract to sell

since “there can be no rescission of an obligation that is still non-‐existent, the suspensive condition not having happened.” Valarao v. CA (304 SCRA 155)

• Article 1592 allows the buyer of an immovable to pay as long as no demand for rescission has been made; and the consignation of the balance of the purchase price before the trial court operates as full payment. Province of Cebu v. Heirs of Rufina Morales (546 SCRA 315)

• Automatic rescission clauses are not valid nor can be given legal effect under Articles 1191 and 1592. Iringan v. Court of Appeals (366 SCRA 41)

o Indeed, rescission requires under the law a positive act of choice on the party of the non-‐defaulting party. Olympia Housing v. Panasiatic Travel Corp. (395 SCRA 298)

• Vendor cannot recover ownership of the thing sold until and unless the contract itself is resolved and set aside; a party who fails to invoke judicially or by notarial act the resolution of a contract of sale would be

prevented from blocking the consummation of the same in light of the precept that mere failure to fulfill the contract does not operate ipso facto as rescission. Platinum Plans Phil., Inc. v. Cucueco (488 SCRA 156)

Cancellation of Judicial Sale • Where a judicial sale is voided without fault of the purchaser, the latter is

entitled to reimbursement of the purchase money paid by him. A judicial sale can only be set aside upon the return to the buyer of the purchase price with simple interest, together with all sums paid out by him in improvements introduced on the property, taxes, and other expenses by him. Seven Brothers Shipping Corp. v. CA (246 SCRA 33)

Law on Sales Chapter 12 – Conditions and Warranties

Conditions Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive performance of the condition. If the other party has promised that the condition should happen or be performed, such first mentioned party may also treat the nonperformance of the condition as a breach of warranty.

Where the ownership in the thing has not passed, the buyer may treat the fulfillment by the seller of his obligation to deliver the same as described and as warranted expressly or by implication in the contract of sale as a condition of the obligation of the buyer to perform his promise to accept and pay for the thing. (n)

n Two remedies where obligation of the other party to a contract of sale is subject to a condition, and such is not performed.

o Refusal to proceed with contract o Waive performance of the condition

n Romero v. CA – distinction between condition imposed on perfection and imposed on performance.

o Failure to comply with former results in failure of the contract



o Failure to comply with the latter results in the two remedies being avialable to the other party.

n Heirs of Escanlar v. CA – contract of sale to become effective upon happening of the condition

o Non-‐happening did not affect validity of the contract o Only the effectivity

n David vs Tiongson – stipulation that deed of sale would issue after the condition does not prevent perfection of the contract

Distinctions between Conditions and Warranties n Non-‐happening of condition does not amount to a breach : non-‐fulfillment

of warranty constitutes a breach n When ownership has not passed, buyer may treat the fulfillment of the

seller of his obligation under the contract as a condition for his obligation to accept and pay.

n If the party promised that a condition would be performed/would happen, other party may treat non-‐performance of such as a breach of warranty.

o Such stipulation elevates the condition to a warranty o And entitle the other party to damages

Other Differences Condition Warranty Goes into root of existence of the obligation

Goes into performance May constitute an obligation in itself

Must be stipulated by the parties May form part of the obligation by provision of law, even without stipulation

May attach to the seller or to the buyer Relates to subject matter itself, or obligations of the seller as to the subject matter

Express Warranties Art. 1546. Any affirmation of fact or any promise by the seller relating to the thing is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the same, and if the buyer purchase the thing relying thereon. No affirmation of the value of the thing, nor any statement purporting to be a statement of the seller's opinion only, shall be construed as a warranty, unless the seller made such affirmation or statement as an expert and it was relied upon by the buyer. (n)

n Two requisites for the existence of an express warranty

o It must be an affirmation of fact, or any promise by the seller relating to the subject matter of the sale

o Natural tendency of such affirmation is to induce buyer to purchase the thing; and

o Buyer purchases relying on such affirmation/promise thereon n Goodyear Philippines v. Sy

o Warranty : affirmation/promise made by seller in relation to the thing sold

o Decisive test : whenther seller assumes to assert a fact of which the buyer is ignorant of.

n Affirmation of value or statement of seller’s opinion is not a warranty o Unless seller made such statement as an expert, and was relied

upon by the buyer o Art 1341 : mere expression of opinion does not signify fraud,

unless made by expert and other party relies on such special knowledge



n Azarraga v. Gay o Assertions concerning the property’s characteristics are the usual

and ordinary means of sellers to get a high price o “A man who relis upon such affirmation…does so at his own

peril.”

Implied Warranties Art. 1547.

In a contract of sale, unless a contrary intention appears, there is:

(1) An implied warranty on the part of the seller that he has a right to sell the thing at the time when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal and peaceful possession of the thing;

(2) An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer.

This Article shall not, however, be held to render liable a sheriff, auctioneer, mortgagee, pledgee, or other person professing to sell by virtue of authority in fact or law, for the sale of a thing in which a third person has a legal or equitable interest. (n)

n Those which by law constitute part of every contract of sale, whether or not the parties were aware of intended them.

n Only a seller is bound by the implied warranties. o Express stipulation in contract may make the agent of the seller

bound by these. n Warranty that Seller has Right to Sell

o Implied warranty that seller has the right to sell the thing at the time the ownership is to pass

o Refers only to the transfer of ownership at the point of consummation

o Not any representation as to ownership at the point of perfection o It shall not be applicable to render liable a sheriff, auctioneer,

mortgagee, pledgee § Or any other person professing to sell by virtue of

authorityin fact or law § For the sale of a thing in which a third person has a

legal/equitable interest o There can be no legal waiver of this warranty without changing

basic nature of the relationship § Right to sell -‐-‐ Requisite of sale § Unless it amounts to clear assumption of risk on the part

of the buyer n Warranty Against Eviction

o Implied warranty that when ownership will pass, buyer shall have legal and peaceful possession

o Vendor shall answer for the eviction even if there is no stipulation regarding eviction

o When there is breach of this warranty § Purchaser has been deprived of/evicted from the whole

or part of the thing sold; § Eviction is by final judgment; § Basis thereof is a right prior to the sale made by the

seller; and § Seller has been summoned and made co-‐defendant in

the suit for eviction at the instance of the buyer. o Warranty cannot be enforced until the buyer loses the thing by

final judgment § He need not appeal from the decision to make seller

liable § No need for buyer to resist fully the action



o Power Commercial v. CA – no action for breach of this warranty when buyer was well awar of the presence of tenants, and even undertook the job of ejecting these squatters

o Jovellano v. Lualhati – vendee only needs to give notice of the complaint. This perfects the right to the warranty.

o Escaler v. CA – cannot be enforced against seller when buyer merely mailed seller a copy of the opposition of buyer to the eviction suit

§ He did not formally summon the seller to be part of the suit.

§ The vendors should be made parties to the suit at the instance of vendees.

o Eviction in Part § If the part lost is of such importance that the buyer

would not have bought the thing without it, he may demand rescission

• With obligation to return the thing itself. § Same rule applies when two or more things have beeen

jointly sold, when it appears that the buyer would not have purchased one without the other

o Particular causes Given by Law § Adverse possesion has been commenced prior to sale,

but prescriptive period is completed after the transfer, seller is not liable for breach of this warranty

§ Property is sold for nonpayment of taxes due, not made known to buyer before sale, seller is liable for the eviction.

o Applicability to Judicial Sales § Judgment debtor is also responsible for eviction in

judicial sales, unless otherwise decreed in the judgment § However, Santiago Land Dev v. CA

• Buyer at execution sales takes property subject to superior right of other parties

§ Allure Mfg v. CA – caveat emptor applies in execution sale

• Sheriff does not warrant the title to the property

• Not incumbent upon him to place purchaser in possession

o Amounts for which seller is liable in case of eviction

Art. 1555. When the warranty has been agreed upon or nothing has been stipulated on this point, in case eviction occurs, the vendee shall have the right to demand of the vendor:

(1) The return of the value which the thing sold had at the time of the eviction, be it greater or less than the price of the sale;

(2) The income or fruits, if he has been ordered to deliver them to the party who won the suit against him;

(3) The costs of the suit which caused the eviction, and, in a proper case, those of the suit brought against the vendor for the warranty;

(4) The expenses of the contract, if the vendee has paid them;

(5) The damages and interests, and ornamental expenses, if the sale was made in bad faith. (1478

o Waiver of warranty and Effects § Effect of waiver depends on nature of such waiver

• General or specific? • Good faith or bad faith on seller’s part?

§ If seller acted in bad faith, then any stipulation exempting seller from answering eviction shall be void

§ If buyer merely renounces the warranty in general terms, no knowledge of a particular risk



• Seller only pays value of thing at time of eviction § General waiver limits liability of seller. § If buyer waived with knowledge of risks (specific waiver)

seller shall not be liable. § JM Tuazon v. CA – even when no specific waiver, buyer

cannot hold seller liable when he is aware of a third party claim (HE MUST BE IN GOOD FAITH).

n Warranty Against Non-‐apparent Servitudes o Shall apply when the following conditions are present

§ Immovable sold is encumbered by non-‐apparent burden/servitude, not mentioned in the agreement; and

§ Nature of such makes it so that the buyer would not have acquired the immovable had be been aware of it.

o This warranty does not apply § When servitude is mentioned in the agreement § If it is recorded in the RoD

• Unless there is an express warranty that the thing is free from all burdens and encumbrances

o Remedies and Prescriptive Period § Buyer may bring action for rescission or sue for damages

within one year from execution of the deed § If this has elapsed, he may only bring an action for

damages within one year from when he discovered the servitude.

n Warrant against hidden defects o Seller shall be responsible when…

§ Nature of hidden defect is such that it would render the subject manner unfit for the use for which it was intended

§ Diminish its fitness to such an extent that buyer would not have bought it or he would have paid a lower price for it.

o Seller not answerable for patent defects, or those which are visible

§ Even for those which are invisible, if the buyer should know about them by reason of his trade/profession

o Seller responsible even if he was not aware of these hidden defects

o Applies to both movable and immovable o Requisites for breach

§ Defect must be hidden § Must exist at time of the sale § Must ordinarily have been excluded from the contract § Must be important (render thing unfit or decrease fitness

considerably) § Action must be instituted within Statute of Limitations

o Remedies of Buyer/Obligation of Seller § Buyer should withdraw (accion redhibitoria) § Or demand a reduction of the price (action quanti

minoris) • Damages in either case. • Only when the thing has not been lost

§ If it has been lost – obligations of seller depend on cause of loss, knowledge of hidden defect by seller, and whether there was a waiver of the warranty

• Lost through hidden faults o If seller was aware – he shall bear the

loss, and return the price and expenses of the contract, with damages.

o If seller was not aware – only obliged only to return the price and interest thereon, and reimburse the expenses of contract, but no damages.

• If lost through FE or through fault of buyer o If seller was not aware – buyer may

demand the price he paid, less value of the thing when it was lost



o If seller in bad faith, he shall pay damages to the buyer

o When there is a waiver of warranty § If seller not aware – loss will not make seller liable § If seller was in bad faith – seller still liable on the

warranty o Applicability to Judicial Sales

§ It shall apply to judicial sales, but judgment debtor shall not be liable for damages.

o Prescriptive Period § Six months from delivery of the thing sold

n Redhibitory Defects of Animals o Even when professional inspection is made, if the defect is such

that it would not be discovered even by experts, the defect is considered redhibitory.

o If veterinarian is ignorant or in bad faith, and thus does not discover/disclose the flaw, he shall be liable for damages

o Sale of team § If two or more animals are sold together, redhibitory

effect of one shall only affect the one, and not the others • Unless buyer would not have purchased the

others without the defective one. • This shall be presumed when a team, yoke, pair

or set is bought, even if separate price had been fixed for each animal

§ Foregoing rules with respect to animals shall be applicable to other things.

o Other Rules – see 1574-‐75. o Prescriptive period – see 1577-‐78. o Obligation of buyer to return – see 1578 o Remedies of buyer

§ Withdrawal from contract § Demand proportionate reduction of the price.

Implied Warranties in Sale of Goods Warranty as to Fitness or Quality

Art. 1562.

In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are acquired, and it appears that the buyer relies on the seller's skill or judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose;

(2) Where the goods are brought by description from a seller who deals in goods of that description (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be of merchantable quality. (n)

n Requisites for Breach o Buyer sustained injury because of the product o Injury occurred because product was defective/unreasonably

unsafe o Defect existed when product left the hands of the seller

n Nutrimix Feeds v. CA – seller cannot be held liable if there is no proof that the product was defective.

o Product must have reached user without substantial change in condition

n Measure of Damage o Difference between value of goods at the time of delivery and the

value they would have had if the warranty was complied with § Applies in absence of special circumstances showing

damage of a greater amount

Sale of Goods by Sample/Description



Art. 1565.

In the case of a contract of sale by sample, if the seller is a dealer in goods of that kind, there is an implied warranty that the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample. (n)

n Mendoza v. David : there is an implied warranty in such sales that the goods are free from any defect which is no apparent upon examination that would render the goods unmerchantable.

n Buyer’s Option – See Art. 1599 o Accept or keep goods, enforce warranty by way of recoupment o Accept or keep goods, sue for damages o Refuse to accept, sue for damages o Rescind sale.

n These remedies are alternative. n Waiver of remedies – he cannot rescind sale if…

o When goods were received by buyer without protest, and with knowledge of the breach,

o Or when he fails to notify the seller of his intent to rescind within reasonable time

o He fails to return/offer to return the goods to the seller § Deterioration caused by the breach of warranty, buyer

may still rescind. n Oblgitation of Buyer on thePrice

o When buyer rescinds, he is not liable for the price when he returns/offers to return the goods

o If price/part has been paid, seller should repay what has been paid when the buyer returns/offers to return

n Refusal of seller to accept Return of Goods o When seller refuses to accept the offer of buyer to return the

goods, buyer is deemed to hold them as bailee for the seller, but subject to a lien to secure payment of any part of the purchase price already paid

o It also includes remedies for the enforcement of such lien allowed to an unpaid seller in Art. 1526.

Addtitional Terms of Warranties for Consumer Goods See RA 7394, the Consumer Act of the Philippines. (discussion in the book is basically the codal).

Chapter 13 – Extinguishment of Sale

In General • Same grounds by which obligations in general are extinguished also apply

to extinguishment of obligations arising from sale o PA-‐LO-‐RE-‐CO-‐CO-‐NO

§ Payment • Only extinguishes obligations to which they pertain in a contract of sale

• Not necessarily the contract itself § Loss § Remission § Compensation § Confusion § Novation

o Annulment o Rescission o Resolutory Condition o Prescription o Article 1600 – Conventional Or Legal Redemption

Conventional Redemption Art. 1601 – Conventional Redemption Defined



Conventional Redemption shall take place when the vendor reserves the right to repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations which may have been agreed upon.

Definition – Conventional Redemption takes place… n When the seller reserved for himself the right to repurchase the thing sold,

with obligation to o Return price of the sale o Return expenses of the contract o Any other legitimate payments made by reason of the sale o Necessary and useful expenses of the thing sold.

n Even when sale is one with right to repurchase, buyer is subrogated to the seller’s rights and actions18 even during the period where redemption can be made – right to redemption does not prevent full consummation

n Who may exercise? o Seller in whom right is recognized by contract o Any person to whom such right may have been transferred o In the case of legal redemption, the person so entitled by law

Proper Reservation of Right to Repurchase n Distinguishing right to redeem from option to purchase19

o Art. 1601 : Right of repurchase must be reserved by the vendor through stipulation to that effect in the contract of sale

§ Not a right granted to the vendor by the vendee § It is one of the stipulations in the contract § Once instrument executed, vendor may no longer reserve

18 Art. 1609 – vendee is subrogated to the vendor’s rights and actions. 19 Villarica v. CA, Misterio v. Cebu State College, Nool v. CA

o Any right thereafter granted to the vendor, by the vendee cannot be considered a right to repurchae, but some other right,like an option to buy.

n Essence of pacto de retro – title and ownership is immediately vested in the vendee a retro, subject to a restrictive condition of repurchase by the vendor within the redemption period.

n Valid existence of a right to repurchase hinges upon fact that the underlying contract of sale is valid, and that there has been performance.

Right of Repurchase Provable by Parol Evidence n Right to repurchase : merely a feature in the contract of sale

o Thus, it is governed by the Statute of Frauds o However, SC has held : when the contract of sale is in writing, parol

evidence may be adduced to prove the right to repurchase § This is because the Deed of Sale and the verbal agreement

allowing the right to repurchase are an integral whole § The deed of sale itself is the “note or memorandum” required

to remove the contract from the SoF. o Also, if there is no objection to such parol evidence, it will be admissible

in trial. n SC : “Best Evidence” Rule not an obstacle to the adducement of such parol

evidence o When parol agreement was the moving cause of the written contract o When written contract was executed on the faith/representation of the

parol contract o Right to repurchase proved orally is consistent with terms of written

contract.

Distinguished from Option to Purchase Right to Redeem Option to Purchase Not a separate contract – merely part of a main contract of sale – cannot exist unless reserved at time of perfection

Generally a principal contract, created independent of another contract

Must be imbedded into the contract of sale upon its perfection

May exist before or after the perfection of the sale, or be imbedded in another contract upon its perfection

Does not need a separate consideration Must have consideration separate and



to be valid and effective distinct from the purchase price Redemption period cannot exceed 10 years

Period for an option may exceed 10 years

Exercise requires that notice be accompanied by tender of payment – consignment when tender cannot be made

Requires only a notice of exercise to be given to the optioner

Exercise extinguishes contract of sale Results in perfection of a contract of sale

Period of Redemption

Art. 1606.

The right referred to in Article 1601, in the absence of an express agreement, shall last four years from the date of the contract.

Should there be an agreement, the period cannot exceed ten years.

However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase.

a. When No Period Agreed Upon n Stipulated right to redeem : in absence of agreement as to period of exercise, it

shall last 4 years from date of the contract n Misterio v. Cebu State College

o Four year period held to begin from happening of condition contained in deed of sale (rather than date of contract)

o This is inexplicable! – CLV § To be discussed later.

b. When Period Agreed Upon n If there is an agreement as to period, it cannot exceed 10 years n if it exceeds 10 years, the agreement is only valid for the first 10 years. n Anchuel v. IAC

o Stipulation : Vendor cannot redeem within 19 years from execution

o SC : Such is void – violative of Art. 1601 o SC fixed period of redemption at ten years.

n Tayao v. Dulay o Stipulation : right of redemption cannot be exercised within 10 years

§ Again, SC held that it was void § However : such nullity does not convert contract into a mere

indebtedness nor an equitable mortgage § Art. 1606 would apply – seller may exercise right to

redemption within a period of 10 years form date of contract o Although stipulation as to the period may be unclear or void, there is still

a stipulation! § Thus, we follow the 10 year period for redemption § We do not consider the right of redemption as being one

without a stipulated period. n Bandong v. Austria

o Contract : sellers could exercise in March of any year o Such could be exercised for a period of 10 years from date thereafter, but

not after 10 years n Ochagabia v. CA

o Right to redeem had prescribes when exercised after 10 years.

c. Pendency of Action Tolls Redemption Period n Ong Chua v. Carr : pendency of an action brought in good faith and relating to

the validity of a sale a retro tolls the running of the period of redepmption n Misterio : Pendency of a litigation does not toll the period

o Such period is not suspended merely because there is a divergence of opinion between the parties as to when the condition upon which the right to repurchase is triggered.

o Existence of right to repurchase is not dependent upon the interpretation by the court of said condition

n CLV : No contradiction between these two cases o Important consideration : “vesting” of the exercise of the right by its

proper exercise (requiring notice and tender)



o Thus, in essence, completion of redemption process (payment of amounts required in Art. 1616) is tolled by the filing of a civil action relating to the issue of such redemption

§ Provided that both exercise and filing would be done withing redemption period.

d. Non-‐payment of Price Does Not Affect Running of Redemption Period n Catangcatang v. Legayada – nonpayment of purchase price does not serve to

suspend the period of redemption o Sale was consummated upon execution of document, and delivery of land

to the vendee o Nonpayment of the balance of the price does not suspend the efficacy of

the provisions of the valid contract.

Possession of Subject Matter During Period of Redemption n In a sale a retro, buyer has the right to immediate possession of property sold,

unless otherwise agreed upon. n Title and ownership of property are immediately vested in the buyer a retro,

subject only to the resolutory condition of the repurchase by the seller within the period.

n Pending repurchase, the buyer may alienate, mortgage, or encumber the property o But such alienation, mortgage or encumbrance is as revocable as his right. o When right exercised, the buyer has to return the property free from all

encumbrances imposed by him.

How Redemption Effected

Article 1616 :

The vendor cannot avail himself of the right of repurchase without returning to the vendee the price of the sale, and in addition:

(1) The expenses of the contract, and any other legitimate payments made by reason of the sale;

(2) The necessary and useful expenses made on the thing sold.

n Three things need to be returned o Price of the sale. o Expenses of contract, and any other legitimate payments made by reason

of the sale. o Necessary and useful expenses made on the thing sold.

n Seller may bring his action against every possessor who derives right from the buyer o Even if there is no mention of the right to repurchase in the contract

between buyer and subsequent buyer o Without prejudice to provisions of Property Registration Decree and the

Mortgage Law, with respect to mortgagees/purchasers in good faith and for value.

n Failure to pay useful improvements entitles buyer a retro to retain possession of the land until actual reimbursement is done.

n Art. 1616 is not exclusive o It should be construed with Art. 1601 which states that in order to

redeem, Art. 1616 must be complied with as well as “other stipulations agreed upon.”

a. How Redemption Exercised n In order to exercise right to redeem, tender of payment is sufficient. n Mere sending of letters expressing desire to repurchase, without tender, does

not comply with the requirement of law. n Where tender of payment cannot be validly made (because buyer cannot be

located) seller must file a suit for consignation of the redemption price within the redemption period.

n Lee Chuy Realty v. CA o Formal offer to redeem accompanied by tender of redemption price not

essential when right to redeem is exercised through a judicial action within the redemption period, simultaneous with consignation of the redemption price

o No prescribed form for an offer to redeem o Thus, we have two ways of redeeming

§ Formal offer accompanied by bona fide tender of payment



• Only necessary to preserve right of redemption for further enforcement. (as opposed to exercised).

§ Exercise through judicial action accompanied with simultaneous deposit of the redemption price.

• Filing of action is equivalent to formal offer. o When is right of redemption deemed “vested”

§ Formal offer to redeem, accompanied by bona fide tender of payment, within redemption period.

§ Thus, the right is “vested” – it may be enforced even beyond redemption period.

b. In Multy-‐Party Cases n In a sale a retro, buyer of part of an undivided immovable who acquires the

whole thereof under Art. 49820 may compel the seller to redeem the whole property, if the seller wants to make use of the right to redemption. o Seller wants to repurchase only his part : Buyer may compel him to

repurchase the whole thing. n Several persons, jointly and in the same contract, sell an undivided immovable

with right to repurchase. o None of them may exercise this right for more than his respective share.

n Same rule applies if the seller who sold the immovable alone has several heirs. o Heirs may only redeem part which he may have acquired.

n In these cases, the buyer may demand that the vendors/co-‐heirs come to an agreement upon the repurchase of the whole thing sold. o If they cannot, buyer cannot be compelled to consent to a partial

redemption.

20 Whenever the thing is essentially indivisible and the co-‐owners cannot agree that it be allotted to one of them who shall indemnify the others, it shall be sold and its proceeds distributed. – Thus, the above discussion refers to the guy who buys this property.

n Co-‐owner of undivided immovable who sells his share separately may independently exercise the right of repurchase upon his own share, and buyer cannot compel him to redeem the whole.

n Creditors of the seller cannot make use of the right of redemption against the buyer, until after they have exhausted the property of the seller.

n De Guzman v. CA o If one of the co-‐owners/co-‐heirs alone redeem the whole property, he

will be a mere trustee with respect to the shares of the co-‐owners/co-‐heirs.

o Thus, no prescription lies against the rights of these co-‐owners/co-‐heirs to demand from the redemptioner their share in the property.

When Redemption not Made

Art. 1607.

In case of real property, the consolidation of ownership in the vendee by virtue of the failure of the vendor to comply with the provisions of article 1616 shall not be recorded in the Registry of Property without a judicial order, after the vendor has been duly heard. (n)

n Before the new Civil Code : when no redemption made, buyer automatically acquired full ownership.

n Now, Art. 1607 above applies. o This proceeding for consolidation is an orindary civil action, not a motion

incident to another action. o If such is denied because contract was actually an equitable mortgage,

then another action may be filed to collect/foreclose. n Art. 1607 abolished automatic consolidation of ownership upon expiration of

period by requiring the above action (where the vendor may be heard). o If buyer proves that the transaction was a pacto de retro, the vendor is

then given a grace period of 30 days within which to repurchase. n Recording in the Registry of Deeds of the consolidation of ownership to the

buyer is not a condition sine qua non to transfer of ownership o Buyer would still be the owner.



o Essence of pacto de retro – title and ownership are immediately vested in buyer, subject to resolutory condition of repurchase.

o Failure of seller to perform the said condition vests absolute title and ownership over the property sold.

o Failure to consolidate title under 1607 does not impair buyer’s ownership – the method prescribed is merely for purposes of registration.

Grant of 30-‐day Redemption Right in Case of Litigation and Article 1606 n Last paragraph of Art. 1606 – “vendor may still exercise the right to repurchase

within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase.”

n Expiration of period ipso jure extinguishes right to redeem o However : when there was a previous suit on the nature of the contract :

seller may still exercise right to repurchase within 30 days from the time final judgment was rendered.

n Tapas v. CA o 30 day period contemplates a case involving a controversy as to the

nature of the contract o Court decides whether it is a pacto de retro or an equitable mortgage.

n Pangilinan v. Ramos o 30 day period does not apply to a contract found to be an absolute sale. o It is a requisite to the exercise of the right to redempton – policy of law is

not to leave title in uncertainty beyond such 30 day period. n Rationale for 30 day period

o Seller may have considered the sale to be an equitable mortgage. o Allowing the expiration of the redemption period is consistent with his

claim that the sale was an equitable mortgage. o Thus, upon finding of the court that it was indeed a pacto de retro, then

the seller mut be granted a final 30-‐day period within which to decide and if ever, exercise his right to redeem.

n However : if issue was whether the contract was an absolute sale or sale a retro o Judgment of sale a retro does not give the seller the 30 day period. o In such a case, seller is negligent for not exercising the right to redeem.

Feigning Equitable Mortgage Situation to Avail of Article 1606 n What if seller feigns defense of equitable mortgage in order to get the 30 day

period? n Adorable v. Inacala

o Where evidence established no honest doubt as to parties’ intentions to make it a sale pacto de retro, seller would not be entitled to art. 1606’s benefits.

n Vda. De Macoy v. CA & Felicen v. Orias o There must be honest belief on part of vendor that the agreement was in

reality a mortgage, merely to give security for an obligation. n Abilla v. Gobonseng

o When sale is judicially declared pacto de retro, and after vendors take the position that it was an equitable mortgage, having no honest belief to that effect – vendors may not avail of the additional 30 day period.

§ If they truly believed that the sale was an equitable mortgage, they should have consigned with the trial court the amount representing the alleged loan.

n However, this was reversed – Article 1606 only applies when the nature of the transaction was put in issue before the court. o It applies in a situation where one party claimes that it was a pacto de

retro, and the other claimed that it was an equitable mortgage, and the courts decided that it was a pactto de retro sale.

o However, applicability still rests on the bona fire intent of the seller a retro, if he truly beleieved that the transaction was an equitable mortgage.

o It doesn’t matter what the buyer intended the transaction to be.

Fruits

Art. 1617.

If at the time of the execution of the sale there should be on the land, visible or growing fruits, there shall be no reimbursement for or prorating of those existing at the time of redemption, if no indemnity was paid by the purchaser when the sale was executed.



Should there have been no fruits at the time of the sale and some exist at the time of redemption, they shall be prorated between the redemptioner and the vendee, giving the latter the part corresponding to the time he possessed the land in the last year, counted from the anniversary of the date of the sale.

n Almeda v. Daluro – Art. 1617 applies only when parties have not provided for their sharing arrangement with respect to the fruits.

Equitable Mortgage

Art. 1602.

The contract shall be presumed to be an equitable mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws.

a. Definition of Equitable Mortgage n Matanguihan v. CA – “one which although lacking in some formality, or form or

words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real proerty as security for a debt, and contains nothing impossible or contrary to law.”

n Also enumerated essential requisites o Parties entered into a contract denominated as a contract of sale; and o The intention was to secure an existing debt by way of a mortgage

n San Pedro v. Lee – when the two above conditions are not proven, the existence of any circumstance enumerated in Art. 1602 cannot be the basis to treat the transaction as an equitable mortgage. o In other words, we look at the two requisites first before going to Art.

1602. n When in doubt, courts construe transactions as equitable mortgages – lesser

transmission of rights.21 o Lapat v. Rosario : contract should be considered as a mortgage or as a

loan instead of pacto de retro when its terms are ambiguous or the circumstances are inconsistent with a sale.

n Molina v. CA – intention of parties is showed by all surrounding circumstances, not by the terminology used in the contract.

Pactum Commissorium

Art. 2088.

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a)

21 Art. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. (n)



n Vda. de Zulueta v. Octaviano o Stipulation : upon redemption by buyer from third party, that instrument

would be considered a deed of absolute sale from seller to buyer. o Another instrument was executed entitled “option to repurchase.” o This was not a sale a retro – option to repurchase was in a separate

document. o Neither was it an equitable mortgage – not meant to secure a loan, no

application of Art. 1602. o SC : It was not a pactum commissorium either

§ Seller was not a debtor § Nothing was offered as security.

o Public Policy on pactum commissorium applies only when the transaction is a mortgage or other security contract – no application to a true sale or transfer transaction.

n Guerrero v. Ynigo – “mortgage with conditional sale” o Mortgagor reserved for himself the right to redeem property by paying

backthe amount loaned. o On failure of mortgagor to exercise such right, title would pass and be

vested in the mortgagee. o SC: Such stipulation cannot be construed as giving mortgagee right to

own the property upon failure of the mortgagor to pay – this is void for being pactum commissorium.

n Montevirgin v. CA o Equitable mortgage guised as a sale a retro cannot be enforced as a sale o When a purported sale a retro is found to be an equitable mortgage, the

proper remedy in case the borrower does not pay the “price” is to foreclose on the mortgage.

§ There can be no loss of the “seller’s” right to redeem for that would be pactum commissorium.

§ Return of redemption price would be equa; to paying the principal loan – extinguishing the equitable mortgage

n Solid Homes v. CA o Parties entered into a Dacion en Pago with Right to Repurchase

§ If borrower failed to comply with new terms of payment, agreement would cause the obligation for the borrower to

transfer and assign the real property to the lender in full payment

§ Such was not pactum commissorium

Rationale Behind Provisions on Equitable Mortgages n Designed to fight circumvention of usury laws and the policy against pactum

commissorium n They envision contracts of sale w/ right to repurchase where the real intention

of the parties is that the repurchase price is money loaned, and the “pacto de retro sale” is a means of securing the loan.

When Presumed Equitable Mortgage n See Art. 1602 above. n Existence of any one of these conditions suffices to give rise to the

nonconclusive presumption that the contract is an equitable mortgage. n Lim v. Calaguas – in order for presumption to apply, the parties must have

intended the contract to be a mortgage and not a pacto de retro . n Lim enumerates the following circumstances to treat the contract as an

equitable mortgage. o Terms used in power-‐of-‐attorney indicate that conveyance was intended

to be a loan secured by a mortgage o Price paid in relation to value of property is grossly inadequate

§ Mere allegation of insufficency of selling price does not create the presumption if there is no proof regarding the market values of the area and property in question

• Inadequacy of price : Consideration so far short of the real value ast to startle the mind.

• Even with the assertion that the price in a pacto de retro is not the assessed price, does not justify the conclusion that the contract is one of equitable mortgage.

o Practice in pacto de retro sale is to fix a relatively reduced price.

o Seller at time of alleged sale was in urgent need of money



o Supposed seller invested money he obtained in making improvements on the property sold

o Seller remained in possession § Although the seller only remained in possession for a year,

such stipulation did not detract from the fact that possession (an indicium of ownership) was retained by the vendor, and that the vendor retained part of the purchase price.

• This pointed to an equitable mortgage. § Continued possession where sellers promised to vacate, but

did not – tolerated possession is not enough to prove equitable mortgage.

o Seller paid land tax o Buyer accepted partial payments, such acceptance being incompatible

with idea of irrevocability of the title of ownership of the purchaser at the expiration of the term stipulated in the original contract for the exercise of the right to redemption

o Seller remained bound for the repayment of the money o Transaction had origin in a borrowing of money.

§ When true intention was not to convey ownership, but to secure housing loan of “buyer” in which “seller” had a direct interest since proceeds were to be applied to their outstanding mortgage obligations. – Equitable Mortgage

§ Alleged loan disbursed on installments – no proof as to inadequacy of price – continued receipt of rentals by seller was found to be a gesture of generosity : considered sale on installments

o There was a previous debt between the parties that was not extinguished by the sale but remained subsisting.

n Delay in transferring title does not give rise to presumption.

Applicability to Deeds of Absolute Sale

Art. 1604.

The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale. (n)

n Two requisites for this provision to apply o Parties entered into contract denominated as a contract of sale. o Intention was to secure an existing debt by way of mortgage.

Proof by Parole Evidence; Best Evidence Rule n Parole evidence is admissible to support claims that the documents were really

given as security for payment of a loan – provided that nature of agreement is placed in issue.

n Matanguihan v. CA o Parol evidence is competent to prove that the instrument in question was

given merely as a security. o Upon proof of the truth of such allegations, court will enforce the

agreement as they truly intended. n Austria v. Gonzales – non-‐application of “best evidence rule” to equitable

mortgage situations o Decisive factor in evaluating intent in such agreements is not always the

document itself o But all the surrounding circumstances o Thus parole evidence is acceptable.

Effects When Sale Adjudged to Be an Equitable Mortgage

Art. 1605.

In the cases referred to in Articles 1602 and 1604, the apparent vendor may ask for the reformation of the instrument. (n)

n When a contract is construed to be an equitable mortgage, the following may result o Any money, fruit or benefit to be received by the buyer as rent shall be

considered as interest subject to usury laws; o The apparent “Seller” may ask for reformation of the instrument; o Court may decree that “buyer”-‐debtor must pay his outstanding loan to

“Seller”-‐creditor o Where trial court did not pass upon the mortgagor’s claim that he paid

the mortgage obligation, a remand of the case to trial court is in order § To determine whether the mortgage had been settled



§ And if not, how much mortgagor should pay to settle the same.

n Tolentino v. CA o Although 1605 allows for reformation, nothing precludes pursuit of other

remedies to protect his interest. § Declaration of nullity for the deed of sale § Specific performance

n However, nullification proposed by Tolentino would be unfair – it would leave buyer without the necessary security contract, which remains valid o Reformation should be the proper remedy to enforce true intention

n In the event property had been sold to a third party, nullification of that sale and reconveyance should be allowed provided security arrangement over the property is preserved

n Balatero v. IAC o If a sale a retro is construed to be an equitable mortgage, execution of an

affidavit of consolidation is of no consequence, and “constructive possession” would not ripen to ownership

o It was not in concept of an owner. n Briones-‐Vasquez v. CA

o consolidation of ownership in person of the mortgagee would amount to pactum commissorium

n Expiration of “period of redemption” in an equitable mortgage does not prevent the purported seller from extinguishing the main contract of loan, and thus also the equitable mortgage contract o As long as foreclosure has not been done.

Legal Redemption

Definition

Art. 1619.

Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a

thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title. (1521a)

Rationale for Legal Redemption n Reasons of public policy n Benefit and convenience of redemptioner, to afford him a way out of what

might be an inconvenient association n Intended to minimize co-‐ownership

o Law grants a co-‐owner the exercise of said right of redemption when shares of other owners are sold to a third person

n Avila v. Barabat o Once property is subdivided and distributed among the co-‐owners, no

more reason to sustain any right of legal redemption.

Salient Distinctions between Conventional and Legal Right of Redemption n Conventional = “right a retro”

Conventional Legal Can only be constituted by express reservation in a contract of sale at time of perfection

Does not have to be expressly reserved, covers other onerous transfers of title

In favor of the seller Given to a third-‐party to the sale. Exercise extinguishes the underlying contract of sale, as though there was never any contract at all

Constitutes a new sale in substitution of the original sale

Legal Redemption Under Civil Code

Among Co-‐Heirs

Art. 1088.

Should any of the heirs sell his hereditary rights to a stranger before the partition, any or all of the co-‐heirs may be subrogated to the rights of the purchaser by reimbursing him for the price of the sale, provided they do so within the period of one month from the time they were notified in writing of the sale by the vendor. (1067a)



n No right of legal redemption available to co-‐heirs when sale covers a particular property of the estate

n Heirs who participated in the sale to a third person of their shares are bound – co-‐heirs who did not participate have the right to redeem under this article.

Among Co-‐Owners

Art. 1620.

A co-‐owner of a thing may exercise the right of redemption in case the shares of all the other co-‐owners or of any of them, are sold to a third person. If the price of the alienation is grossly excessive, the redemptioner shall pay only a reasonable one.

n Right of redemption may be exercised by a co-‐owner only when part of the community property is sold to a stranger. o When sold to another co-‐owner, there is no new participant.

n Should two or more co-‐owners desire to exercise the right of redemption, they may do so only in proportion to the share they have in the co-‐owned thing.

n Right of redemption of co-‐owners excludes adjoining owners.

Effect of de Facto Partition Among Co-‐Heirs and Co-‐Owners n Vda de Ape v. CA – when heir-‐co-‐owners partitioned property and treated

definite portions as their own, co-‐ownership has ceased and sale by one of the heirs of his definite portion cannot trigger right of redemption

n Co-‐ownership must exist at the time of the conveyance.

Distinguishing Between the Rights of Redemption of Co-‐Heirs and Co-‐Owners n Art. 1620 includes doctrine that a redemption by a co-‐owner of the property

owned in common, even when his own fund is used, within period, inures to benefit of all other co-‐owners.

n Art. 1088 – heir may redeem for himself the heredity rights sold by a co-‐heir. n Mariano v. CA – co-‐heir exercised elgal redemptiion over parcel of land

belonging to estate of decedent -‐-‐ which redemption clause to apply? o Distinction between 1088 and 1620 o When sake of particular property or interest in property, Art. 1620

o When sale of hereditary right itself, Art. 1088.



Among Adjoining Owners of Rural Lands

Art. 1621.

The owners of adjoining lands shall also have the right of redemption when a piece of rural land, the area of which does not exceed one hectare, is alienated, unless the grantee does not own any rural land.

This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other apparent servitudes for the benefit of other estates.

If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first requested the redemption. (1523a)

n Both the land sought to be redeemed and the property belonging to the redemptioner must be rural lands.

Among Adjoining Owners of Urban Land

Art. 1622.

Whenever a piece of urban land which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be re-‐sold, the owner of any adjoining land has a right of pre-‐emption at a reasonable price.

If the re-‐sale has been perfected, the owner of the adjoining land shall have a right of redemption, also at a reasonable price.

When two or more owners of adjoining lands wish to exercise the right of

pre-‐emption or redemption, the owner whose intended use of the land in question appears best justified shall be preferred. (n)

n Ortega v. Orcine – purpose of this provision o Discourage speculation in real estate and the aggravantion of the housing

problems o “Urban” refers to the character of the community/vicinity in which it is

found. n Redemption of Urban land only applies when there is resale

o No right of redemption when urban land is “exchanged.” n Legaspi v. CA – practically did away with requirement of having puchased land

previously for speculation n Sen Po Ek Marketing v. Martinez

o 1262 only deals with small urban lands bought for speculation o Right does not apply to a lessee trying to buy the land he is leasing.



Sale of Credit in Litigation

Art. 1634.

When a credit or other incorporeal right in litigation is sold, the debtor shall have a right to extinguish it by reimbursing the assignee for the price the latter paid therefor, the judicial costs incurred by him, and the interest on the price from the day on which the same was paid.

A credit or other incorporeal right shall be considered in litigation from the time the complaint concerning the same is answered.

The debtor may exercise his right within thirty days from the date the assignee demands payment from him.

When Legal Redemption Period Begins to Run

Art. 1623.

The right of legal pre-‐emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof to all possible redemptioners.

The right of redemption of co-‐owners excludes that of adjoining owners.

n Cabrera v. Villanueva o Court accepted affidavit saying that seller gave written notice to co-‐

owners as proof of compliance with 1623. n Primary Structures Corp v. Valencia

o Affirmed need for strict compliance with 1623. o Existence of a clause in deed of sale saying that seller had complied is not

the written affirmation under ouath that the required notice has been met – thus it was not deemed to be in compliance with 1623.

n CLV : Primary Structures is the better rule – why? n Butte v. Manuel Uy and Sons Inc.

o Notice must be given by the seller o Notice given by the buyer, even if written, does not start the 30 day

period. n Castillo v. Samonte

o Letter and spirit of law argue against a wider scope of the notice specified in Art. 1088.

o Written notice is essential to start the running of the 30 day period. n Conejero v. CA

o Any compliance with written notice suffices – no specific mode n Garcia v. Calaliman

o Applied Samonte doctrine to 1623. o Written notice is indispensable in order to remove all uncertainty as to

the sale. o Method of notification is exclusive – must be in writing – but no specific

form. n Vda de Ape v. CA

o Annotation of adverse claim on title does not comply with art 1623.

1) Notice Must Cover Perfected Sale n Spouses Doromal v. CA

o 30 day period does not run when transaction covered in notice was not a perfected contract of sale

o Notice must be with execution and delivery of the deed of sale. o Period should not be deemed to have commenced unless notice is made

after execution of formal deed of disposal. n This doctrine cannot be applied to legal pre-‐emption.

2) Summation on Strict Rules on Notice n Hermoso v. CA

o Notice in writing is needed in 3 other species of legal redemption § Case where share of co-‐owners are sold to a third person § Redemption of adjoining rural land § Redemption of adjoining urban land

o Interpretation in these cases tilts in favor of the redemptioner o Written notice required was enacted to remove all doubts about the

alienation.



n Francisco v. Boiser – Requirements under Art 1623 o Notice must be given by seller in order for 30 day redemption period to

run. o No particular form is prescribed. o Filing of suit for ejectment or collection of rentals dispenses with need for

written notice – filing of the suit amounts to actual knowledfge of the sale.

n Fernandez v. Tarun o Other co-‐owner signs deed of partition embodying disposition of property

– proper notice.

3) Exceptions to Written Notice Requirement n Alonzo v. IAC – exception to 1088

o Situation where co-‐heirs lived with purchaser in the same lot § Action was brought only after 13 years of knowing about the

same o Deemed to have received actual notice of the same. (even if no written

notice) o Laches seems to be the main principal.

n Pilapil v. CA o Requirement of written notice was rendered inutile when no co-‐owners

questioned the sale, even when buyers immediately took possession. n Distrito v. CA – Exception to the Alonzo Exception

o When co-‐owner himself is middleman to effect sale to third party, notice is no longer necessary

o He already has actual knowledge of the sale o 30 day period begins from such knowledge

n Verdad v. CA – Alonzo and Distrito are special exceptions o Co-‐owner learned of the sale through city treasurer o Her exercise of right of redemption was timely : no written notice of sale

was ever given to her, thus the 30 day period had not yet run.

Other Instances where Right of Legal Redemption is Granted

a. Redemption of Homesteads

Sec. 119 – Public Land Act

Every conveyance of land acquired under the free patent or homestead provisions, when proper, shall be subject to repurchase by the applicant, his widow, or legal heirs, within a period of five years from the date of the conveyance.

n Sale within 5 years void even when in favor of homesteader’s own child. n Right to repurchase under homestead patent granted by law

o Need not be provided for in deed of sale. o Cannot be waived.

n Where homestead was sold at extrajudicial foreclosure, 5 year period begins to run after expiration of one year period of repurchase allowed in extrajudicial foreclosure.

n All other cases – from date of sale, not from date of registration. n Sec 119 of Public Land act should be read with 1616 of NCC – there should be a

return of the price/tender of payment. o Mere notice of intnent to redeem is insufficient.

b. Redemption in Tax Sales

SEC. 214 – NIRC -‐-‐ Redemption of Property Sold.

Within one (1) year from the date of sale, the delinquent taxpayer, or any one for him, shall have the right of paying to the Revenue District Officer the amount of the public taxes, penalties, and interest thereon from the date of delinquency to the date of sale, together with interest on said purchase price … The owner shall not, however, be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption.



c. Redemption by Judgment Debtor

d. Redemption in Extrajudicial Foreclosure

e. Redemption in Judicial Foreclosure

f. Foreclosures by Banking Institutions

g. Period of Redemption when rural bank forecloses

h: legal right to redeem under Agrarian Reform Code

Chapter 14 – Assignment

Nature of Assignment in the Scheme of Things Art. 1624.

An assignment of creditors and other incorporeal rights shall be perfected in accordance with the provisions of Article 1475. (n)

n Assignment : the sale of credits and other incorporeal rights. n Though intangible things may be the object of sale as defined in Art. 1458, the

more proper term is “assignment.” n Assignment, more or less, is the same as sale – why then do we have a separate

chapter in our Civil Code? o Even though they’re not technically the same, they come from the same

genus – “sale” n What’s the point? – characteristics of the genus “sale” must necessarily pertain

to assignment o All jurisprudential doctrines pertaining to sale pertain to assignment, with

some modifications. n Assignment shares characteristics of sale

o Nominate o Consensual

o Reciprocal o Onerous

§ However – Nyco v. BA Finance – Assignments may be done gratuitously or onerously

o Commutative n Some definitions of Assignment

o Prior to New Civil Code, assignment was not limited to the genus of sale – it could be dation, or donation, etc.

o However, with the provisions of the NCC, there should be little doubt – assignment should only cover “sales” of credits (however : see Nyco)

o Except in case of donation, the transaction of assignment is still covered by the law on sales.

§ Assignment by dation § Assignment by barter § Assignment of credit as guaranty (mortgage contract)

What Makes Assignment Different? n PNB v. CA – characterized assignment

o Transfer or making over to another of the whole of any proeprty, real or personal, in possession or in action, or of any estate or right therein.

o Includes transfers of all kinds…peculiarly applicable to intangible personal property

o Ordinarily employed to describe the trasnfer of non-‐negotiable choses in action and rights connected with property distinguished from the actual item

n PNB v. CA implies that assignment may also refer to tangible property o CLV: Properly speaking, such is a sale, not an assignment.

Validity and Binding Effect n Subject matter of assignment : intangible property

o Main difference of assignment from sale n Consensual contract – perfected the same as sale.

o Confirmed by Art. 1624. “in accordance with Art. 1475.” o Assignment does not cover donation involving intangibles

§ Donations = formal contracts



n Any ambiguity in the meaning of an assignment shall be resolved against the party who prepared the deed of assignment.

Binding Effect as to Third Parties n Binding effect as to third persons not present unless it appears in a public

document, or in the Registry of Property if real rights are assigned. n Remember, assignment deals with Intangible property : the only evidence as to

the transfer is the public instrument n Without the public instrument, assignment is valid

o But enforceable only between assignor and assignee, and their successors in interest

n When assignment is still executory (not evidenced in writing) it is covered by the Statute of Frauds.

n Exception : When assignment involves document of title o Assignment does not bind the bailee unless specific notice of the transfer

of the covering document of title is given by transferor/transferee to the bailee

Effect of Assignment of Credit on Debtor n C&C Commercial v. PNB

o Meeting of the minds : between assignor and assignee o Debtor’s consent not necessary o It is sufficient that the assignment be brought to the debtor’s knowledge

in order to be binding n Debtor’s consent not needed for assignment to produce legal effects

o Duty to pay assignee does not depend on debtor’s consent o Otherwise, creditors would have a hard time assigning credit. o Purpose of notice : only to inform debtor that he should pay someone

else, not the original creditor. n This change is a novation – however, liability is not extinguished. n Even though knowledge/consent of debtor is not required for validity of the

assignment, lack of such has effects

o When a credt is assigned, if the debtor pays his creditor because he didn’t know of the assignment, his payment shall release him from further obligations (Art 1626, CC)22

o Art. 1285 – assignment of rights made by creditor to 3rd person without knowledge of debtor

§ Debtor may set up against the assignee the compensation pertaining to him against the assignor

• All credits prior to the assignment • All later ones until he had knowledge of the

assignment. § If debtor consented to such assignment : he cannot set up

such compensation unless debtor reserved the right § If he had knowledge, but no consent : he may set up

compensation of previous debts, but not subsequent ones

Transfer of Ownership n Project Builders v. CA – assignment of credit : transferring right to an assignee

who could proceed against principal debtor o Transfer takes place on perfection of contract

n CLV Disagrees : Assignment is also not a mode, but only a title. o Thus the transfer does not take place on perfection. o It should be effected the same way as sale – constructive delivery, like

executing a public instrument. o Effects of tradition of sale in general should also apply

§ Except that doctrines on actual/physical delivery have no application

n Art 1508 of Civil Code supports this – placing of titles of incorporeal rights in possession of vendee is equal to delivery

22 Art. 1626. The debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation.



o However, without registration/execution in a public instrument, such delivery would not bind third parties.

n Leonido v. Capitol Dev Corp – notarization of the assignment of credit converted into a public document

a. Accessories and Accessions n Assignment of credit includes all accessory rights (Art. 1627)

o Guaranty o Mortgage o Pledge o Preference

b. Warranties

Art. 1628.

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.

Even in these cases he shall only be liable for the price received and for the expenses specified in No. 1 of Article 1616.

The vendor in bad faith shall always be answerable for the payment of all expenses, and for damages. (1529)

Art. 1629.

In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired.

If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after the maturity. (1530a)

n Warranty against hidden defects does not apply to an intangible – no physical existence

n Assignor responsible for existence and legality of credit, at the time of sale. o Unless it was really sold as a doubtful account

n Assignor does not warrant the solvency of the debtor, unless o There is a stipulation to that effect; or o Insolvency of the debtor was prior to the assignment and of common

knowledge n Even when there is a warranty as to the debtor’s solvency, it doesn’t last

forever o 1 year from the assignment, if credit was already due o Otherwise, 1 year from the maturity of the credit

n If assignor in good faith is liable for a warranty o Only expenses of the contract o Other legitimate payments made by reason of assignment

n If assignor was in bad faith, and he breached warranties o Additional liability for necessary and useful expenses

n Lo v. KJS o When dacion takes the form of an assignment of credit (which is in the

nature of a sale) it extinguishes the obligation o However, assignor/seller still warrants the existence and legality of the

credit. n Other specific warranties

o Arts. 1631-‐1633.



Assignment of Credit in Litigation Art. 1634.

When a credit or other incorporeal right in litigation is sold, the debtor shall have a right to extinguish it by reimbursing the assignee for the price the latter paid therefor, the judicial costs incurred by him, and the interest on the price from the day on which the same was paid.

A credit or other incorporeal right shall be considered in litigation from the time the complaint concerning the same is answered.

The debtor may exercise his right within thirty days from the date the assignee demands payment from him. (1535)

n Reason for the rule on assignments in litis pendencia o Such are deemed speculative o Law would rather benefit the debtor, than the one who merely speculates

for profit o If assignor is willing to dispose of the credit at a low price, debtor should

benefit n Right to redeem on debtor’s part shall not exist when the law considers the

assignment as not for speculation. E.g., o Assignment of credit to the co-‐heir or co-‐owner of such credit/right o Assignment to a creditor in payment for his own credit; and o Assignment to the possessor of a tenement/piece of land which is subject

to the right in litigation that was assigned n In the foregoing cases, assignee has a legitimate purpose for taking the

assignment – not merely speculation

Differentiating from Subrogation n Licaros v. Gatmaitan – Differences between assignment and subrogation

Subrogation Assignment Extinguishes original obligation, gives rise to a new one

Same right passed from one person to another

Nullity of an old obligation may be cured Nullity of obligation not remedied

by subrogation (new one is valid) through assignment Agreement required between original parties and new creditor

Consent of debtor not required to produce legal effects

n Extinguishment of old obligation is an effect of conventional subrogation, not a requirement.

Assignment of Copyright n Owner of copyright may assign it in whole or in part

o Assignee entitled to all rights and remedies which assignor had with respect to copyright

n Not deemed assigned inter vivos unless there is written indication of such intention

n Submission of a work to a newspaper or magazine for publication shall constitute an assignment o But only for one publication o Unless a greater right is granted

n Two or more persons jointly own a copyright o Consent of other owners is needed for an owner to grant licenses

n Copyright is distinct from property subject to it o Transfer of copy right is not transfer of material object o In the same way, transfer of the work does not imply assignment of the

copyright.

Assignment as Equitable Mortgage n Assignment of intangibles may be used to secure loans n Principles pertaining to Equitable Mortgage will apply n DBP v. CA

o Assignment to secure payment of promissory notes o Such is equivalent to an equitable mortgage o Thus, nonpayment of loan cannot authorize assignee to register the

assigned rights in his name – Pactum Commissorium



Chapter 15 – Bulk Sales Law n Intended as a species of bankruptcy law to protect supply

creditors/businessmen against preferential/fraudulent transfers done by merchants

n Intended to prevent a situation where merchants would sell their businesses then vanish, leaving their creditors without recourse against the “buyers in good faith and for value.”

n Law covers all transactions, good faith or not, that are within the description of a “bulk sale”

n Primary Objective – compel seller in bulk to… o execute and deliver a verified list of creditors to the buyer o give notice of the intended sale to the creditors o Use the proceeds to pay outstanding liabilities

Transactions covered by the law Sec. 2. Sale and transfer in bulk. — Any sale, transfer, mortgage or assignment of a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor, mortgagor, transferor, or assignor, or sale, transfer, mortgage or assignment of all, or substantially all, of the business or trade theretofore conducted by the vendor, mortgagor, transferor, or assignor, or of all, or substantially all, of the fixtures and equipment used in and about the business of the vendor, mortgagor, transferor, or assignor, shall be deemed to be a sale and transfer in bulk, in contemplation of this Act: Provided, however, That if such vendor, mortgagor, transferor or assignor, produces and delivers a written waiver of the provisions of this Act from his creditors as shown by verified statements, then, and in that case, the provisions of this section shall not apply.

n Three Types of Transaction o Extraordinary sale of goods o Extraordinary sale of fixtures and equipment o Sale of Business Enterprise

n Motive/intention/consequence of sale is not an element

o As long as the transaction is within the description, no matter what it’s being done for, it is covered by the Bulk Sales Law.

n Qualification of “in the normal course of business” applies only to the first type o Second two types are by nature not in the normal course of business

n Bulk sales are of a nature that they do not fall within the normal course, which thus should warn parties to such transactions

“Bulk Sales” not Covered by Law n Some exceptions : even if transaction comes within Sec. 2, Bulk Sales Law does

not apply to these cases o Seller produces and delivers a written waiver of the provisions of the Law

from his creditors as shown by verified statements; and o Transactions effected by executors, administrators, receivers, assignees in

insolvency, or public officers, acting under legal process.

“Business” Covered by the Law n People v. Wong

o Bulk sales law should be construed strictly against the State and in favor of the accused

o In this case, accused was held liable for selling his foundry shop, along with all other assets

o SC : Bulk Sales Law contemplates sale of merchandise, stock, and goods – not the sale of the whole shop with the equipment, credits, etc.

o Foundry shop which does not sell merchandise is not uncluded. n Meaning of merchandise and Stock

o Merchandise : something sold everyday, going in and out of the store, replaced by other goods – things usually bought and sold in trade by merchants

o Stock : those goods kept for sale. n DBP v. RTC – reiterated the Wong ruling re : applicability to bulk sales not

involving merchandise and stock. n Thus – enumeration in the first type of bulk sales : only covers those sold in the

normal course of business. o Wong : “sale of fixtures and equipment” excludes materials used in the

process of production. n However, Wong and DPB rulings seem only to interpret the first type



o When it comes to the other two types, law does not limit the coverage to a particular type of business.

o We do not consider the Wong and DBP rulings when it comes to the other two types of Bulk sales

Obligations of Seller/Encumbrancer When Transaction is a Bulk Sale n See Sections 3-‐7 of the Bulk Sales Law.

Consequences of Violation of the Law n Sec 11 : Imprisonment of not less that 6 months, not more than 5 years, w/ fine

not exceeding P5,000. n We evaluate the effects of breaking the law from 3 different standpoints : on

the transaction itself, on the seller, on the buyer. n On the Transaction itself

o If sworn listing of creditors is not prepared, or if the proceeds are not applied to them, the sale shall be fraudulent and void.

o This is not merely a presumption : it is in fact treated as void o No legal effects arise from the transaction

§ No right of action accrues o Thus, the subject matter is still owned by the assignor, and still subject to

the satisfaction of his liabilities o People v. Mapoy

§ Sale is void, but the relationship between seller and creditor is unchanged.

§ Proper remedy of creditor is to collect on the credit against the defendant, and if he cannot pay, to attach on the property fraudulently sold/mortgaged

o Failure to make an advanced written disclosure to creditors does not render the sale fraudulent and void

o Legal consequences of a sale in Bulk for Nominal Value § Law declares it unlawful, but not fraudulent and void § However, if there was no other valuable consideration, we

have to declare it void for lack of cause/consideration

n On Seller/Mortgagor/Assignor o Violation of his obligations to prepare a list of creditors and apply the

proceeds of the sale to these creditors subjects him to criminal liability. o Sworn statement should be registered with DTI

§ Noncompliance with this does not affect validity nor does it subject him to criminal penalty

o If the list does not include all names of creditors, or with wrong amounts, it subjects him to criminal liability

o Failure to deliver advance notice does not subject him to criminal liability. o To sell the stocks/goods/merchandise for no consideration, or for

nominal consideration only, subject seller to criminal liability. n On Buyer/Mortgagee/Transferee

o No direct obligation o It can be said that no criminal liability attaches to the buyers

§ Some argue that they are principals by indispensable cooperation, if they were aware of the intent/conspired with the seller

o There are still effects though – recall : sale may be rendered fraudulent and void

§ Thus, he would find himself not entitled to the things he paid for.

§ He may also be sued for recovery of what he has obtained. § He may also be liablie for damages for having helped defraud

creditors.