Sales Reviewer

Roan Salanga 2A Sales Page 1 of 53

Chapter 1: N A T U R E O F S A L E Definition of Sale 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 party to pay therefor a price certain in money or its equivalent.

A contract of sale may be absolute or conditional.

Nature of Obligations Created in a Sale 1. Obligation of the Seller

a. Transfer ownership; and b. Deliver the possession of the subject matter

2. Obligation of the Buyer a. Pay the price

These obligations are real obligations or obligations “to give” as contrasted from personal obligations “to do” and “not to do”

o Personal obligations cannot be enforced through actions for specific performance because of the public policy against involuntary servitude

o In Real obligations, in addition to the right to recover damages, one may compel the seller to make the delivery

Subject Matter of Sale 1460. A thing is determinate when it is particularly designated or physical segregated from all other of the same class.

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

The current Law on Sales expanded the coverage to include generic object which are at least “determinable”

Elements of Contract of Sale 1. Consent—meeting of the minds to transfer ownership in exchange

for the price 2. Subject matter 3. Price—certain in money or its equivalent

SC ruled that if some of the essential requisites are not present, it is a “no contract” situation *refrain from using the technical term “void”+

If all three elements are present, but there is a defect or illegality in any of the elements, the resulting contract is either voidable (when the defect constitutes a vitiation of consent), or void as mandated under Article 1409 of the Civil Code

Stages in the Life of Sale 1. Policitacion—negotiation or preparation stage o Covers the period from the time the prospective contracting

parties indicate their interests in the contract to the time the contract is perfected

2. Perfection—conception or “birth” o Takes place upon the occurrence of the essential elements of the

sale 3. Consummation—“death” o Begins when the parties perform their respective undertaking

under the contract of sale, culminating in the extinguishment thereof

Strictly speaking, there are only two stages in the “life” of a contract of sale: (a) perfection, and (b) consummation

Essential Characteristics of Sale 1. Nominate and Principal o Nominate contract—it has been given a particular name by law,

and its nature and consequences are governed by a set of rules in the Civil Code, under “Law on Sales”

o Principal contract—it can stand on its own and does not depend on another contract for its validity or existence

o Hence, the title given by the parties to the contract is not as significant as its substance since contracts are not defined by the parties thereto but by the principles of law

o All other contracts which have for their objective the transfer of ownership and delivery of possession of a determinate subject matter for a valuable consideration, are governed necessarily by the Law on Sales


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

o Consensual contract—perfected by mere consent as to the price o If the real price is not stated, the sale is valid but subject to

reformation o From the moment of the perfection of the sale, parties may

reciprocally demand performance even when they have not affixed their signatures to the written form of such sale, but subject to the provisions of law governing the form of contracts

o Actual delivery of the subject matter or payment of the price are not necessary components to establish the existence of a valid sale, and their non-performance do not invalidate or render the sale “void”

o However, 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 have been fully explained to the former (Art. 1332)

o Modalities affect the characteristic of consensuality Modalities—stipulations that are added into the contractual

relationship, such as a suspensive term or condition Although consensual, not all contracts of sale become

automatically and immediately effective like sales with assumption of mortgage [approval of the mortgagee on the assumption of mortgage is a condition precedent]

3. Bilateral and Reciprocal o Bilateral contract—imposes obligations on both parties to the

relationship whereby the obligation or promise of each party is the cause or

consideration for the obligation or promise of the other o Reciprocal obligation—arise from the same cause, and in which

each party is a debtor and a creditor of the other such that the obligation of one is dependent upon the obligation of the other

o Sale is a bilateral contract embodying reciprocal obligations, and the legal effects of such are:

a. Power to rescind is implied

b. Neither party incurs delay if the other party does not comply or is not ready to comply in a proper manner what is incumbent upon him

c. Default by the one party begins, without the need of prior demand, when one of the parties fulfills his obligation

4. Onerous o Onerous contract—imposes a valuable consideration as a

prestation, which ideally is a price certain in money or its equivalent

o The rules of interpretation would incline the scales in favor of “the greater reciprocity of interests” since sale is essentially an onerous contract

5. Commutative 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in consent, or that the parties really intended a donation or some other act or contract.

o Commutative contract—a thing of value is exchanged for equal value However, there is no requirement that the price be equal to the

exact value of the subject matter o Sale can be subordinated to a suspensive condition with the party

fully aware that “he assumes the risk of receiving nothing for what he gives,” although such stipulation may seem to be contrary to the commutative nature of a sale

o Hence, although “commutativeness” is an essential characteristic of a sale, the test for compliance therwith is not objective but rather subjective (so long as the party believes in all honesty that he is receiving good value for what he transferred)

o The consequences of negotiations and bargaining do not destroy the commutative nature of the sale

o Inadequacy of price may be a ground for setting aside an execution of sale but is not a sufficient ground for the cancellation of a voluntary contract of sale

6. Sale is Title and not Mode o Sale is not a mode that transfers ownership, it is merely a title that

creates the obligation on the part of the seller to transfer ownership and deliver possession


The delivery or “tradition” is the mode to transfer ownership and possession

o Ownership and real rights are acquired only pursuant to a legal mode or process title (such as sale) is the juridical justification

title—constitutes the legal basis by which to affect dominion or ownership

mode (like delivery) is the actual process of acquisition or transfer of ownership over a thing

mode—legal means by which dominion or ownership is created, transferred or destroyed

Sale distinguished from other similar contracts 1. Sale vs. Donation

Sale Donation

Onerous contract Gratuitous contract --act of liberality *a person disposes gratuitously of a thing or right in favor of another person, who accepts it

Consensual contract *Perfected by mere consent

Solemn contract *must comply with formalities mandated by law for its validity

In a valid sale for valuable consideration, *there is no diminution of the estate but merely substitution of values (property to money)

In donation by a decedent, *legal effect of such is to deprive the compulsory heirs of their legitimes

2. Sale vs. Barter

Sale Barter

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

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

thing

Governed by Law on Sales

Applicability of the Statute on Frauds regarding the sale of real and personal property bought at more than P500

Applicability of the right of legal redemption granted by law to an adjoining owner of an urban land

Rules to determine whether a contract is Sale or Barter 1468. If the consideration of the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the manifest intention of the parties. If such intention does not clearly appear, it shall be considered as barter if the value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent; otherwise, it is a sale.

a. Manifest intention of the parties b. When intention does not appear and consideration consists

partly in money and partly in another thing: i. It is a barter—where the value of the thing given as part of the

consideration exceeds the amount of money given or its equivalent

ii. It is a sale—where the value of the thing given as part of the consideration equals or is less than the amount of money given

Rules for barter contracts: a. If one of the parties, having received the thing promised 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

b. 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 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, but without prejudice to the rights acquired in good faith by a third person


3. Sale vs. Contract for Piece of Work

Contract for a piece-of-work—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

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

Two tests for the distinction: a. Manufacturing in the ordinary course of business to cover sales

contracts b. Manufacturing upon special order of customers to cover

contracts for piece-of-work o Requires the use of extraordinary skills or equipment if to be

performed by a manufacturer

The test of “special orders” is not one of timing, or habit, but actually must be drawn from the nature of the work to be performed and the products to be made, but more specifically, the intention of the parties

o If the essence is the object—contract is sale o If the essence is the service—contract is for piece-of-work

Sale Contract for a Piece-of-Work

client or customer walks away from the transaction bringing with him an object

Sale of an object Sale of service

Allow action for specific performance

Governed by Statute of Fraud

4. Sale vs. Agency to Sell/Buy

Contract of 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

1466. In construing a contract containing provisions characteristic of both the sale and of the contract of agency to sell, the essential clauses of the whole instrument shall be considered.

Sale Agency to Sell/Buy

Establishes a representative capacity in the person of the agent on behalf of the principal

Not unilaterally revocable Revocable since it covers a fiduciary relationship

Buyer, himself, pays for the price of the object

Agent is not obliged to pay the price but only to deliver the price which he may receive from the buyer

After deliver, buyer becomes the owner of the thing

Agent does not become the owner of the thing subject of the agency

Seller warrants Agent assumes no personal liability as long as he acts within his authority and in the name of the principal

Agent is disqualified from receiving any personal profit from the transaction covered by the agency; any profit received should pertain to the principal

Compliance to the Statutes of Fraud is essential for enforceability

5. Sale vs. Dacion en Pago

Dation in payment—property is alienated to the creditor in full satisfaction of a debt in money

o The elements of sale must be present, including a clear agreement that the things offered is accepted, for the extinguishment of the debt

To have a valid dation in payment, there must be:


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

b. There must be some difference between the prestation due and that which is given in substitution

c. There must be an agreement between the creditor and debtor that the obligation is immediately extinguished by reason of the performance of a prestation different from that due

Sale Dacion en Pago

Governed by Law on Sales

Involves the transfer of ownership of a subject matter

Objective novation of the obligation *thing offered as an accepted equivalent of the performance of an obligation is the object *debt is considered as the purchase price

A special mode of payment

Not in the realm of perfection of contract but in the stage of consummation

6. Sale vs. Lease

Contract of lease—lessor binds himself to give to lessee the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite

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:

a. Exact fulfillment of the obligation, should the vendee fail to pay b. Cancel the sale, should the vendee’s failure to pay cover two or

more installments c. 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.

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.

A conditional sale may be made in form of a “lease with option to buy” as a device to circumvent the provisions of Recto Law governing the sale of personal property on installments

Chapter 2: P A R T I E S O F S A L E

General Rule on Capacity of Parties

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, whether as seller or buyer

For natural persons—age of majority is 18 upon which age they have the capacity to act

For juridical persons—corporations, partnerships, associations and cooperatives, a juridical personality separate and distinct from that of the shareholders, partners or members, is expressly recognized by law with full “juridical capacity” to obligate themselves and enter into valid contracts

1327. The following cannot give consent to a contract: 1. Unemancipated minors 2. Insane or demented persons, and deaf-mutes who do not know how

to write

General Rule: minors, insane and demented persons, and deaf-mutes who do not know how to write, have no legal capacity to contract, and are disqualified from being parties to a sale

o Nonetheless, the contract entered by those persons are not void but only voidable, subject to annulment or ratification

1. Necessaries

Minor—is without legal capacity to give consent to a sale o However, the defective consent gives rise to a voidable sale

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 persons without capacity to act, he must pay a reasonable price therefor. Necessaries are those referred to in Article 290.


Necessaries—everything indispensible for sustenance, dwelling, clothing, medical attendance, education and transportation, in keeping with the financial capacity of the family *…+ (Art. 194 of the Family Code)

1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract.

In order for the sale of necessaries to minors be valid, there are two elements which need to be present:

a. Perfection of the sale b. Delivery of the subject necessaries

2. Emancipation

Emancipation would terminate parental authority over the person and property of the minor, who shall then be qualified and responsible for all acts of civil life

3. Senility and Serious Illness 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him.

General Rule (Domingo v. CA): a person is not incompetent to contract merely because of advanced years or by reason of physical infirmities

o However, when such age or infirmities have impaired the mental faculties so as to prevent the person from properly, intelligently and firmly protecting her property rights, then she is undeniably incapacitated

o But the contract should not be declared void ab initio but merely voidable

Sales by and between Spouses 1. Sales with Third Parties

Under Art. 73 of the Family Code, either spouse may exercise any legitimate profession, occupation, business or activity without the consent of the other; and the latter may object only on valid, serious and moral grounds *…+

The disposition or encumbrance of community property or conjugal property shall be void without authority of the court or the written consent of the other spouse (Art. 96 of the FC)

o As such, the transaction shall be construed as a continuing offer on the part of the consenting spouse and the third person, and may be perfected as binding contract upon the acceptance by the other spouse or authorization by the court before the offer is withdrawn by either or both offerors

2. Sales between spouses 1490. The husband and the wife cannot sell property to each other, except:

a. When a separation of property was agreed upon in the marriage settlements

b. When there has been a judicial separation of property under Article 191.

1492. The prohibitions in the two preceding articles are applicable to sales in legal redemption, compromises and renunciations.

a. Status of prohibited sale between spouses o Contracts entered into in violation of Arts. 1490 and 1492 are not

merely voidable, but are null and void o However, the only persons who can question the sale are:

1. Heirs of either of the spouses who have been prejudiced 2. Prior creditors 3. The State when it comes to the payment of proper taxes due

on the transactions b. Rationale for Prohibition

1. To prevent spouses defrauding his creditors by transferring his properties to the other spouse

2. To avoid a situation where the dominant spouse would unduly take advantage of the weaker spouse, thereby effectively defrauding the latter

3. To avoid an indirect violation of the prohibition against donations between spouses under Article 133 of the CC

c. Rationale for Exceptions to Prohibition 133. Every donation between the spouses during the marriage shall be void. This prohibition does not apply when the donation takes effect after the death of the donor.


Neither does this prohibition apply to moderate gifts which the spouses may give each other on the occasion of any family rejoicing.

o There are only two ways by which a complete separation of property regime could exist between married spouses, namely, by the execution of a pre-nuptial agreement stipulating such property regime to apply, or by the spouses going to court to ask for the dissolution of the prevailing CPG or ACP

o The absolute prohibition under Art. 133 should also be made to apply to sales between spouses, irrespective of their property regime Because there is no assurance that a dominant spouse would

not insist upon his desires Applicability of Incapacity to Common Law Spouses o If transfers or conveyances between spouses were allowed during

marriage, that would destroy the system of CPG, a basic policy in civil law

Specific Incapacity Mandated by Law 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

o This enumeration is under the provision of Article 1492. o Art. 1491 does not state the legal consequences of having entered

into contracts in violation of said article However, since the abandonment of the Manresa doctrine,

where it states that it is merely voidable or annullable and not void, these contracts entered into in violation of Art. 1491 are now considered void

1. Different form of “ratification” o First group is covered by 1941(1), (2), and (3)—after the inhibition

has ceased, the only real wrong that subsists is the private wrong to the ward, principal or estate; therefore, if private parties wish to condone the private wrongs among themselves, the State would not stand in the way

o Second group is covered by 1941(4) and (5)—even when the inhibition has ceased, there exists not only the private wrong, but in fact a public wrong, which is damage to public service or to the high esteem that should be accorded to the administration of justice in our society Private parties cannot ratify or compromise among themselves

matters contrary to public interests 2. Proper Party to Raise Issue of Nullity o If the contract has already been fulfilled, an action is necessary to

declare its inexistence since nobody can take the law into his own hands and thus the intervention of the competent court is necessary to declare the absolute nullity of the contract and to decree the restitution of what has been given under it

o If the contract is still fully executor, no party need bring an action to declare its nullity; but if any party should bring an action to enforce it, the other party can simply set up the nullity as defense

3. Fraud or Lesion not relevant for nullity Agents

“Brokers” do not come within the coverage of the prohibition as their authority consist merely in looking for a buyer or a seller, and to bring them together to consummate the transaction


Guardians, Administrators and Executors

They are necessary officers of the courts since they are appointed or confirmed to such position pursuant to judicial proceedings

Even a court-approved sale would not stand against the inhibition provided by Art. 1941

Proof of advantage or benefit to the ward, estate or the principal would not take the transaction out of the prohibition of Art. 1491

Hereditary Rights not included in Coverage o Hereditary rights pertain immediately to the heirs upon the death

of the decedent and do not form part of the estate under the administration of the administrator or executor

o Hereditary rights fall under 1491 because it would be clear that a conflict-of-interest situation will arise if an administrator or executor were not disqualified from purchasing or having interests in the hereditary rights

Judges, Justices and Those involved in administration of Justice o To fall under the prohibition, it is not required that some contest or

litigation over the property itself should have been tried by the said judge

o Property is in litigation from the moment that it became subject to the judicial action of the judge, such as levy on execution

Attorneys

Public policy prohibits the transactions in view of the fiduciary relationship involved

Any violation of this prohibition would constitute malpractice and is a ground for suspension

This prohibition applies only during the period the litigation is pending

The public interest and public policy remain paramount and do not permit of compromise or ratification

Non-application of the prohibition: o a lawyer who acquired the property prior to the time he

intervened as counsel in a suit involving such property o Contingent fee arrangements or contingent fee based on the value

of property involved in litigation

Because the transfer or assignment of the property in litigation takes effect only after the finality of a favorable judgment

An obligation subject to a suspensive condition A case of two handicapped persons venturing together into the

unknown, or at least the uncertain Subject to the supervision of the courts with respect to the

stipulated amount and may be reduced or nullified Limitations on contingency fee arrangements for it to be valid

and enforceable: a. Lawyer does not exert undue influence on his client b. No fraud is committed or imposition applied c. Compensation is clearly not excessive as to amount to

extortion

Chapter 3: S U B J E C T M A T T E R Requisites of Valid Subject Matter

A valid contract of sale would result from the meeting of the minds of the parties on a subject matter that has at the time of perfection the following requisites:

1. “Possible Thing”—it must be existing, having potential existence, a future thing, or even contingent or subject to a resolutory condition; ensures the demandability and enforceability of the underlying obligation of the seller to deliver 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.

o A sale emptio rei speratae (potential existence) is strictly a contract covering future things, determinate or specific, and subject to a suspensive condition that the subject matter will come into existence

o Emptio spei—subject matter is a mere hope or expectancy

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, whose acquisition by the seller depends upon a contingency which may or may not happen.

Art. 1465. Things subject to a resolutory condition may be the object of the contract of sale.

o A contract of sale, being an onerous and commutative contract, the rules of interpretation would incline the scales in favor of “the greatest reciprocity of interests,” and unless the stipulation is clear, a clause should be interpreted as a term rather than as a condition

2. It must be Licit—where the subject matter is illicit, the resulting

contract is void

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.

Art. 1347. All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts.

No contract may be entered into upon future inheritance except in cases expressly authorized by law.

All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract.

Sale of future hereditary rights Waiver of an acquired hereditary rights

Presumes existence of a contract of sale

Mode of extinction of ownership in favor of co-heirs

A non-heir cannot conclusively claim ownership over the property

Art. 1575. The sale of animals suffering from contagious diseases shall be void.

A contract of sale of animals shall also be void if the use or service for which they are acquired has been stated in the contract, and they are found to be unfit therefor.

o Sales declared illegal by law due to prohibited subject matters like narcotics, wild birds or mammals, rare wild plants, poisonous plants or fruits, dynamited fish, gunpowder and explosives, firearms and ammunitions, sale of friar land without consent of the Sec. of Agriculture, sales in violation of land reform laws, and sale of realty by non-Christians

3. It must be Determinate or at least Determinable

Art. 1460. A thing is determinate when it is particularly designated or physical segregated from all other of the same class.

o Thing is determinable only when two requisites are present: a. If at perfection of the sale, the subject matter is capable of

being made determinate—“capacity to segregate” test b. Without the necessity of a new or further agreement between

the parties—“no further agreement” test o The requisite of being “determinable” is met when at perfection,

the agreement between parties included a formula which can be used by the courts to establish the subject matter upon which the obligation to deliver can be enforced, without needing to get back to any one or both the parties of the object for their intention

o When one seeks to sell or buy a real property, one sells or buys the property as he sees it in its actual setting and by its physical metes and bounds, and not by the mere lot number assigned to it in the certificate of title (Atilano vs Atilano) The defect in the final deed would not work to invalidate the

contract where all the essential elements for its validity are present and can be proven

o The meeting of minds on the quantity of the goods as subject matter is necessary for the validity of the sale, because such aspect go into the very core of such contract embodying the essential characteristic of mutuality or obligatory force; however,

Art. 1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties.


o The courts have power to set the appropriate quality of the subject matter of sale when the same is determinable generic

Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration.

o Sale of undivided interest Art. 1463. The sole owner of a thing may sell an undivided interest therein.

o Sale of undivided share in mass 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 common 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 goods of the same kind and quality, unless a contrary intent appears.

o Sale of mortgaged property A prior mortgage of the property does not prevent the

mortgagor from selling the property, since mortgage is merely encumbrance on the property and does not extinguish the title of the debtor who does not lose his principal attribute as owner to dispose of the property (Pineda vs CA)

Lack of any requisites would either engender a “no contract” situation, or the resulting contract of sale would be void under various cases provided under Art. 1409 Art. 1409. 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.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

o Consequently, in case of payment of the agreed price, in a “no contract” situation the buyer can still recover the amount based on the principle of “unjust enrichment”

o When a contract of sale that has been performed is declared void, then restoration of what has been given is in order, since the relationship between parties in any contract even if subsequently voided must always be characterized and punctuated by good faith and fair dealing

o Even when the subject matter does not exist at the time of perfection of the sale, the contract is still valid, however, when the subject matter is of such nature that it cannot come to existence—an impossible thing—the contract is indeed void

General Rule: a perfected contract of sale cannot be challenged on the ground that seller had no ownership of the thing sold at the time of perfection, it is sufficient that he be the owner or has the right to transfer ownership at the time of delivery; otherwise, he may be held liable for breach of warranty against eviction

o Exception: in case of judicial sale like a foreclosure sale 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.

o The problem with the doctrine proposed by Nool is that in order to hold the sale void by the holding that the sellers were not the owners of the subject matter thereof, it equated the primary obligation to transfer ownership and deliver possession as “service” and therefore constitutes them as personal obligations “to do.” That position is not correct since the obligations of the


seller in a contract of sale are real obligations “to give” and which would make them enforceable by specific performance

Subsequent acquisition of title by seller 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.

o Requisites under Art. 1434 a. There should exist a valid sale b. Previous physical delivery of the subject matter must have been

done

Chapter 4: P R I C E A N D O T H E R C O N S I D E R A T I O N Definition

“Price”—ideal consideration for a contract of sale; a sum certain in money or its equivalent

o It is possible, however, that a sale may still be valid when it has for its cause or consideration an item other than price

Consideration or Cause—can take different forms, such as the prestation or promise of a thing or service by another

o e.g. transfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale

Meaning of Price

Sum stipulated as the equivalent of the thing sold and also every incident taken into consideration for the fixing of the price put to the debit of the buyer and agreed to by him

o Seller cannot unilaterally increase the price previously agreed upon with the buyer, even when the need to adjust the price of sale is due to increased construction cost

o For the reason that it would be a violation of the essential characteristic of “obligatory force” of contract of sale which is 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

Requisites for Valid Price

These requisites promote the onerous, commutative and bilateral-reciprocal characteristics of the contract of sale

These requisites for price or consideration must be present at the time of the perfection of the sale:

1. It must be REAL 1471. If the price is simulated, the sale is void, but the act may be shown to have been in reality a donation, or some other act or contract.

o Price is real: when at the perfection of the sale, there is legal intention on the part of the buyer to pay the price, and legal expectation on the part of the seller to receive such price as the value of the subject matter he obligates himself to deliver

o Price is simulated: when neither of the party to the sale had any intention whatsoever that the amount will be paid Such contract is void for lack of consideration Simulated price—if there was no intent by the parties at the

time of perfection to pay and to receive the price stipulated

Affects the delivery as no transfer of ownership can be made An absolutely simulated contract is void and the parties may

recover from each other what they may have given under the contract

Principle of in pari delicto nonovitar actio should apply, which denies all recovery to the guilty parties inter se

However, where the nullity arises from the illegality of the consideration or the purpose of the contract, but does not apply to inexistent and void contracts where the price is merely simulated

No title over the subject matter of the sale can be conveyed Indication of simulation of price—when in the covering of the

instrument, price has been agreed upon and paid when in fact there has been no such payment

o Price is false: there is a real price upon which the minds of the parties had met, but not declared, and what is stated in the covering deed is not the one intended to be paid Such contract is valid but subject to reformation to indicate the

real price upon which the minds of the parties have met Relative simulation of the contract is valid and enforceable but

subject to reformation Parties may be held bound by the false price indicated in the

instrument under estoppel principle, especially when the


interest of the Government or third parties would be adversely affected by the reformation of the instrument

o Effect of Non-payment of price If the price is fixed but is later on remitted or condoned, this is

perfectly all right, for then the price would not be fictitious It is not the fact of payment of the price that determines the

validity of a contract of sale since sale is not a “real contract” If the minds of the parties have met as to the price, the

contract of sale is valid, irrespective of the manner of payment they agreed upon or even by the breach of that manner of payment agreement upon

Non-payment of the price is a cause either for specific performance or for rescission

The non-payment of the price is a resolutory condition which extinguishes the transaction

Such doctrine is controversial because there is difference between failure to pay the consideration, which results in a right to demand the fulfillment or cancellation of the obligation under existing valid contract, and lack of consideration, which prevents the existence of a valid contract

2. It must be in MONEY or its EQUIVALENT (It must be VALUABLE

CONSIDERATION) 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.

o “equivalent”—something representative of money Art. 1468. If the consideration of the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter if the value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent; otherwise, it is a sale.

o Consideration can be the price and other additional consideration

o Adequacy of price: the apparent inadequacy is of no moment since it is the usual practice in deeds of conveyance to place a nominal amount although there is a more valuable consideration given In our jurisdiction, it is possible for parties to a sale to agree on

an adequate consideration, and though they will state a false or nominal consideration in their covering deed, it would not affect the validity of the contract of sale, provided that valuable consideration was in fact agreed upon

3. It must be CERTAIN or ASCERTAINABLE o Price is certain: it has been expressed and agreed in terms of

specific persons and/or centavos Money represents the best model of valuable consideration

o Price is ascertainable: sufficient that it be so with reference to another thing certain, or that the determination thereof be left to the judgment of a specified person or persons

o Price fixed by third party: such designation makes the price ascertainable as to give rise to a valid contract of sale Fixing the price cannot be left to the discretion of one of the

contracting parties 1469. In order that the price may be considered certain, it shall be sufficient that it be so with reference to another thing certain, or that the determination thereof be left to the judgment of a special person or persons.

Should such person or persons be unable or unwilling to fix it, the contract shall be inefficacious, unless the parties subsequently agree upon the price.

If the third person or persons acted in bad faith or by mistake, the courts may fix the price.

Where such third person or persons are prevented from fixing the price or terms by fault of the seller or the buyer, the party not in fault may have such remedies against the party in fault as are allowed the seller or the buyer, as the case may be.

Effect of unscertainability 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.

o Price ascertainable in reference to other things certain 1472. The price of securities, grain, liquids, and other things shall also be considered certain, when the price fixed is that which the thing sold would have on a definite day, or in a particular exchange or market, or when an amount is fixed above or below the price on such day, or in such exchange or market, provided said amount be certain.

4. Manner of Payment of Price must be Agreed upon o Terms or manner of payment of the price—deemed to be an

essential ingredient before a valid and binding contract of sale can be said to exist, since it is part of the prestation of the contract, and without which there can be no valid sale, nor can an action for specific performance be made against the alleged seller

o The manner of payment of purchase price is discussed after “acceptance,” then such “acceptance” did not produce a binding and enforceable contract of sale There was therefore no complete meeting of the minds and

there is no basis to sue on a “contract” that does not exist (Navarro v. Sugar Producer’s Corp.)

o Terms of payment do not always have to be expressly agreed when the law supplies by default such terms 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once.

Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event.

5. When there is Sale even when No Price has been agreed upon o Article 1474 allows the courts to have authority to fix the

reasonable price for the subject matter appropriated by the buyer

Meant to be a remedy clause in favor of the seller who has delivered the subject matter in accordance with an agreement with the buyer who has received and appropriated it

“appropriate”—cover the situation of “acceptance” by the buyer as the counterpart of delivery on the part of the seller, and having treated thereafter the subject matter as his own, even when it does not involve transformation

Not applicable to real estate o Inefficacious—sales which are not void because the price, though

not certain, is ascertainable o Where the buyer accepts delivery knowing the price claimed by

the seller, he cannot thereafter refuse to pay for it at that price, even if there is no agreement as to that price

o Important points of Art. 1474 a. Based on the principle of unjust enrichment directed against

the buyer who is not allowed to retain the subject matter of the sale without being liable to pay the price even when no such agreement on the price was previously made

b. Applies even when there is a “no contract” situation because of no meeting of the minds as to the price, although there was a meeting of the minds as to the subject matter, and may also apply to void sale contract situation where the defect is as to the price

o There would nevertheless be a valid contract of sale upon which an action for specific performance would prosper for the recovery of the price when the following elements are present:

a. There was a meeting of the minds of the parties of sale and purchase as to the subject matter

b. There was an agreement that price would be paid which fails to meet the criteria of being certain or ascertainable

c. There was delivery by the seller and appropriation by the buyer of the subject matter of sale

Rulings on Receipts and other documents embodying Price

Sales invoices—not evidence of payment since they are only evidence of the receipt of the goods

Official receipt—if issued by the seller, it is the best evidence to prove payment of the price


Sale being governed by the Statute of Frauds, requires that the memorandum that would evidence the contract should contain all the essential requisites of the subject matter and price

Sale of real property on installments even when the receipt or memorandum evidencing the same does not provide for the stated installments, when there has already been partial payment, the Statute of Frauds is not applicable because it only applies to executor and not to completed, executed, or partially executed contracts

Inadequacy of Price

1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once.

Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event.

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

There is gross inadequacy in price if a reasonable man will not agree to dispose of his property at that amount

Requiring a one-to-one correspondence between the value of the subject property and the price is difficult, and would leave no room for bargaining and discounts

Inadequacy of price may be a ground for setting aside an execution sale, but it is not sufficient ground for the cancellation of a voluntary contract of sale which is otherwise free from invalidating defects, such as vitiated consent, even if shocking to the conscience

Judicial Sale

Gross inadequacy may avoid judicial sale of real property o The property of the supposed seller would be sold at public auction

without his intervention. In such case, the courts must be allowed to come in to protect the supposed seller from a bad bargain that is really not of his own doing

o For a judicial sale to be set aside on the ground of inadequacy of price, the inadequacy must be such as to be shocking to the

conscience of man, and there must be showing that, in the event of resale, a better price can be obtained

o Judicial sale will not be aside by the court when there is a right of redemption, since the more inadequate the winning bid at public sale, the more easily it is for the owner to redeem the property

Sales with Right to Repurchase

Under this kind of sale, the gross inadequacy of price raises a presumption of equitable mortgage 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.

o Proper remedy for the alleged seller—not to rescind the contract but to have it reformed or declared a mortgage contract and to pay off the indebtedness which is secured

o Proper remedy for the alleged buyer—not to appropriate the subject matter but to foreclose on the equitable mortgage

When motive nullifies the sale

When the primary motive is illegal, the sale is void because the illegal motive predetermined the purpose of the contract


Cause v. Motive

Cause Motive

Essential reason which moves the contracting parties to enter into it and is the immediate, direct and proximate reason which justifies the creation of an obligation through the will of the contracting parties

Particular reason of a contracting party which does not affect the other party

Ordinarily, a party’s motive for entering into the contract do not affect the contract. However, when the motive predetermines the cause, the motive may be regarded as the cause

Chapter 5: F O R M A T I O N O F S A L E

Stages in the Life of Sale 4. Policitacion—negotiation or preparation stage o The period of negotiation and bargaining, ending at the moment of

perfection o Covers the period from the time the prospective contracting

parties indicate their interests in the contract to the time the contract is perfected

5. Perfection—conception or “birth” o The point in time when the parties come to agree on the terms of

the sale o Takes place upon the occurrence of the essential elements of the

sale 6. Consummation—“death” o The process of fulfillment or performance of the terms agreed

upon in the contract o Begins when the parties perform their respective undertaking

under the contract of sale, culminating in the extinguishment thereof

Policitacion Stage

Deals with legal matters arising prior to the perfection of sale, dealing with the concepts of:

a. Invitation to make offer

b. Offer c. Acceptance d. Right of first refusal e. Option contract f. Supply agreement g. Mutual promises to buy and sell h. Contracts to sell i. Agency to sell or buy

Negotiation is formally initiated by an offer which must be certain o An imperfect promise (policitacion) is merely an offer by an offeror

to an offeree o Prior to acceptance, it does not give rise to any obligation or right

and creates no privity between the purported sell (offeror) and buyer (offeree)

o These relations, until a contract is perfected, are not considered binding commitments

At this stage, there is a “freedom to contract” which signifies the right to choose with whom to contract and what to contact

This stage is populated of legal creatures which are not contracts of sale as defined under Art. 1458, but each of them has, as the main object of their existence, the fervent hope of becoming or effecting into realization, a valid and binding sale

Advertisements and Invitations

1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer.

1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears.

General Rule: Advertisements are less than offers and constitute merely invitations to make an offer, or mere proposals

o Direct acceptance of such advertisements thereof does not give rise to a valid and binding sale

Exception: when “it appears otherwise” o In this case, the advertisement will constitute offers, and if certain

and accepted directly, will give rise to a valid and binding sale o When the advertisement specifies a determinate subject matter,

the price and terms of payment, as to be equivalent to an offer


certain, then it constitutes an offer and once absolutely accepted would give rise to a valid and binding contract to sell

A.A (According to the Author): even when the advertisement contains a certain offer, it remains legally a mere invitation so long as it is addressed to the public at large, and the exception comes in whenever it expressly provides that the first absolute acceptance shall be binding, or when it is addressed to a particular offeree

Offers

Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with.

Art. 1322. An offer made through an agent is accepted from the time acceptance is communicated to him.

Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed.

Art. 1324. When the offerer 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.

The offeree has only the choice to accept or reject the offer in its entirety, thus, he has no choice to reject that portion of the offer which is disadvantageous and accept only that which is beneficial

Offeree has the choice to indicate further negotiations by making a counter-offer which would then replace and repeal the original offer

o Counter-offer—considered in law a rejection of the original offer and has the effect of extinguishing the original offer; a qualified or conditional acceptance

An offer which has not been accepted absolutely would thereby be extinguished and cannot be further accepted

Option Contracts A. Determining the “Location” of Options

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.

o When the option under (Art. 1324) is founded upon a proper consideration, then the offer may not be withdrawn at any time during the option period

This has essentially become a contracted offer bounded by the principles of mutuality and obligatory force

B. Definition and Essence of Option Contact o Option Contract—a privilege existing in one person, for which he

had paid a consideration and which gives him the right to buy certain merchandise or certain specified property, from another person, if he chooses, at any time within the agreed period at a fixed price

Sometimes called as an “unaccepted offer”

Option is not itself a purchase but merely secures the privilege to buy; it is not a sale of property but a sale of the right to purchase

A preparatory contract in which one party grants to the other, for a fixed and under specified conditions, the power to decide whether or not to enter into a principal contract

A separate agreement distinct from the contract which the parties may enter into upon the consummation of the option

o It imposes no binding obligation on the person holding the option aside from the consideration of the offer

o Until acceptance, it is not a contract and does not vest, transfer or agree to transfer any title to, or any interest or right in the subject matter

o Deed of option or the option clause in a contract to be valid and enforceable must, among other things, indicate the definite price at which the person granting the option is willing to sell

o It binds the party who has given the option not to enter into the principal contract with another person during the designated period, and within that period, to enter into such contract with the one whom the option was granted, if the latter should decide to use the option

C. Characteristics and Obligations Constituted in an Option Contract o It is an onerous contract for it must have a separate consideration

form the purchase price to be valid o A consensual contract since the meeting of the minds as to the

subject matter and the price would also give rise to the option


contract even when the separate consideration for the option itself has not been paid

o A unilateral contract since only the optioner is obliged under an option contract even when the optionee has not paid the separate consideration

o The subject matter of an option contract is actually not the subject matter of the sought sale because the subject matter in an option contract is the option to purchase such subject matter which essentially is an intangible subject matter or right; an accepted promise to sell or an accepted promise to buy

o A valid option in essence is a “contracted certain offer” o Obligations on the part of the offeror:

1. Personal obligation not to offer to any third party the sale of the object of the option during the option period

2. Personal obligation not to withdraw the offer or option during option period

3. Obligation to hold the subject matter for sale to the offeree in the event that the offeree exercises his option during the option period

o An option contract is not covered by the Statute of Frauds, and therefore can be proved by parol evidence

D. Elements of a Valid Option Contract 1. Consent o Meeting of the minds upon subject matter and prestation

2. Subject Matter o Option right to an unaccepted unilateral offer to sell/accepted

promise to sell, or unaccepted unilateral offer to buy/accepted promise to buy:

a. A determinate or determinable object b. For a price certain, including the manner of payment thereof

3. Prestation o A consideration separate and distinct from the purchase price

for the option given

It is the why of the contracts, the essential reason which moves the contracting parties to enter into the contract

Although no consideration is expressly mentioned in an option contract, it is presumed that it exists and may be proved, and once proven, the contract is binding

When any of the requisites is missing, even when the option is supported by a separate consideration, it is void as an option contract and its existence will not result into a valid sale

E. When option is without Separate Consideration o Without a consideration separate from the purchase price, an

option contract would be void as a contract, but would still constitute a valid offer (Sanchez vs Rigos)

In an accepted unilateral promise to sell without a cause or consideration, the promissory is not bound by his promise and may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted promise partakes of the nature of an offer to sell which, if accepted, results in a perfected contract of sale

o However, there has been a movement back towards the previously discarded Southwestern Sugar ruling which states that “when an option is not supported by a separate consideration, it is void and can be withdrawn notwithstanding the acceptance made previously by the offeree”

o The Sanchez ruling can only be applied if the option has been accepted and such acceptance is communicated to the offeror

F. Option not deem part of Renewal of Lease o Option to purchase attached to a contract of lease when not

exercised within the original period is extinguished and cannot be deemed to have been included in the implied renewal of the lease even under the principle of tacit reconduccion

G. Period of Exercise of Option Art. 1144. The following actions must be brought within ten years from the time the right of action accrues: (1) Upon a written contract; (2) Upon an obligation created by law; (3) Upon a judgment.

o Even when an option is exercised within the option period by the proper tender of the amount due, nevertheless the action for specific performance to enforce the option to purchase must be filed within 10 years from the accrual of the cause of action


H. Proper Exercise of Option o Notice of the exercise of option 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

o Notice within the option period of clear intention to purchase the property pursuant to such option, with request for leeway within which to be able to raise the funds to close the deal is a valid or at least substantial exercise of the option

o In a valid option contract, the refusal of the offeror to comply with the demand by the offeree to comply with the exercise of his option may be enforced by an action for specific performance

I. Effects of Exercise of Option o When an option is properly exercised, then there is already a sale

contract existing, and the laws applicable to sales shall then apply J. Summary rules when period is granted to promise (Ang Yu Asuncion

doctrine) a. If the period itself is not founded upon or supported by a separate

consideration, offeror is still free and has the right to withdraw the offer before its acceptance, or if an acceptance has been made before the offeror’s coming to know of such fact, by communicating that withdrawal to the offeree (Sanchez doctrine)

b. Right to withdraw must not be exercised whimsically or arbitrarily, otherwise, it could give rise to a damage claim under Art. 19 of the Civil Code

c. If the period has a separate consideration, a contract of “option” is deemed perfected and it would be a breach to withdraw the offer during the agreed period

d. If the optioner-offeror withdraws the offer before its acceptance by the optionee-offeree, the latter may not sue for specific performance on the proposed contract since it has failed to reach its own stage of perfection, however, it renders the optioner-offeror liable for damages for breach of the option

e. Care should be taken of the real nature of the consideration given for it has been intended to be part of the consideration of the main contract

This doctrine, however, does not provide for a “commercially sound” doctrine because its treatment is not consistent with the doctrine of Right of First Refusal

Right 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 promissee

Guerrero doctrine, the Court would not allow an action for specific performance or a rescission of the sale to a third party which constitute the breach of the promise, even when the third party buyer was entering into the purchase of the subject property in bad faith. The only remedy afforded to the promissee was an action to recover damages

Guerrero doctrine was reversed in Guzman, Bocaling & Co. case o Where the right of first refusal was included in a contract of lease,

but lessor subsequently sold the property to another entity, holding that “respondent court correctly held that the Contract of Sale was not voidable but rescissible. Under Art. 1380 to 1381(3), a contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons

o A buyer of a real property who is aware of existing lease agreement over it cannot claim good faith nor lack of awareness of the right of first priority provided therein, for it is its duty to inquire into the terms of the lease contract, and failing to do so, it has only itself to blame

Equatorial Realty doctrine: in a contract of lease which gave the lessee a 30-day exclusive option to purchase the leased property in the event the lessor should desire to sell the same, such contractual stipulation which does not provide for a price certain nor the terms of payment, actually grants a right of first refusal and is not an option clause or an option contract

o There need not be a separate consideration in a right of first refusal since such stipulation is part and parcel of the entire contract of lease to which it may be attached to

o In a situation where the right of first refusal clause found in a valid lease contract was violated, the same price by which the third-party buyer bought the property shall be deemed to be the price by which the right of first refusal shall therefore be exercisable

A. Limited Application of Equatorial Realty ruling o This applies only to rights of first refusal attached to a valid

principal contract like a contract of lease


o This has no application, and that the Ang Yu Asuncion ruling would still apply, to rights of first refusal constituted as separate contracts

B. Rentals deemed to be Consideration to support right o It is not correct to say that there is no consideration for the grant

of first refusal if such is embodied in the same contract of lease. Since the stipulation forms part of the entire lease contract, the consideration for the lease includes the consideration for the grant of the right of first refusal

C. Sublessee may not take advantage of right of first refusal of sublessor

o A right of first refusal granted in the contract of lease in favor of the lessee cannot be availed by the sublessee because such sublessee is a stranger to the lessor who is bound to respect the right of first refusal in favor of the lessee only

o But if the contract of lease granted the lessee the right to assign the lease, then the assignee would be entitled to exercise such right as he steps into the shoes of the assignor-lessee

D. Right does not extend with the extension of the lease o A provision entitling the lessee the option to purchase the leased

premises is not deemed incorporated in the impliedly renewed contract because it is alien to the possession of the lessee

o The right to exercise the option to purchase expired with the termination of the original contract of lease

E. Alternative doctrine of enforceability of rights of first refusal o A right of first refusal cannot have the effect of a contract because,

by its very essence, certain basic terms would have yet to be determined and fixed (Equatorial Realty, dissent by J. Vitug)

o A right of first refusal when supported by a separate consideration, such an agreement would be a valid contractual relation, within the coverage of the innominate contract of do ut facias, I give that you may do. Under such premise, Agreement on Right of First Refusal would

be a binding contract between the promissory and the promissee, when supported by a separate consideration, like much in the case of a valid option contract and would be akin to the mutual promise to buy and sell.

o Since the underlying obligation in a right of first refusal contract is a personal obligation to do, its breach can never be remedied by an action for specific performance, because of the underlying public policy against involuntary servitude The remedy of rescission for breach of contract would be

available rather than the difficult cause of an action for recovery of damages based on “abuse right” under Art. 19

F. Enforceability of Option Rights should be at par with, if not at a higher level than, Rights of First Refusal

o Option—a preparatory contract in which one party grants to another, for a fixed period and at a determined price, the privilege to buy or sell, or to decide whether or not to enter into a principal contract

o Right of First Refusal—the exercise of right would be dependent not only on the grantor’s eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that are yet to be firmed up

o Offer—may be withdrawn anytime by communicating the withdrawal to the other party

o The better rule: Option supported by a separate consideration—optionee shall

have the right to exercise the option or to accept the offer at anytime during the option period and the same would give rise to a valid and binding contract of sale

Separate consideration has been received—optioner cannot withdraw the offer during the option period, and any attempt to so withdraw the offer during the option period shall be void

Third party buyer in bad faith—he would be a proper party to the action for specific performance that the optionee can bring against the optioner once he has exercised his option

Third party buyer in good faith—he is protected by law and the remedy of the optionee is to sue the optioner for recovery of damages for breach of contract of sale, rather than to sue for damages for breach of the option contract as held in Ang Yu Asuncion


Mutual Promise to Buy and Sell

Promise to sell a determinate thing coupled with a correlative promise to buy at a specified price is binding as an executory agreement

o Certainty of price must exists otherwise, there is no valid and enforceable contract to sell

o This contract is really within the policitacion stage

An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed, can be obligatory on the parties, and compliance therewith may accordingly be exacted, which means that action for specific performance is available. This ruling covers a form of “contract to sell” that are within the perfection stage of sales (Asuncion)

Acceptance of the option offered is equivalent to an acceptance of an offer to sell for a price certain and creates a bilateral contract to sell and buy and upon acceptance, the offeree, ipso facto assumes the obligation of a buyer. This is in stark contrast that a contract to sell merely contains obligations “to agree” to enter into contracts of sale, and being personal obligations may not be enforced by specific performance (Villamor vs CA)

Agreement to buy and sell, which is an executory contract, title to the property does not pass to the promissee and the contracting parties are merely given the right to demand fulfillment of the contract in the proper cases, or damages for breach thereof where it is not possible to carry out its terms (Gan vs Reforma)

In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the purchase price, ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The prospective seller still has to convey the title to the prospective buyer by entering into a contract of absolute sale (Coronel vs CA)

Perfection Stage

A contract of sale is born from the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price and the manner of its payment

Consent may be vitiated by any of the following: (but they do not make the contract void ab initio but only voidable)

a. Mistake d. Undue influence b. Violence e. Fraud c. Intimidation

Consent that Perfects a Sale Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made.

Offer must be “Certain”

Offer certain—met by an “absolute acceptance”

Absence of even just one of the essential requisites pertaining to either subject matter or price in the terms of the offer, makes such offer “not certain,” and cannot give rise to a valid sale, even when such offer is absolutely accepted by the offeree

Acceptance must be “Absolute”

Acceptance must be plain and unconditional, and it will not be so, if it involves any new proposition, for in that case, it will not be in conformity with the offer (Zayco vs Serra)

Promises are binding when and so long as they are accepted in the exact terms in which they are made, and that it would not be legally proper to modify the conditions imposed by the offeror without his consent (Beaumont vs Prieto)

The use of the term “to negotiate” in the acceptance was held to indicate that there was as yet no absolute acceptance of the offer made

Placing the word “noted” and signing such note at the bottom of the written offer cannot be considered an acceptance that would give rise to a valid sale

An acceptance may contain a request for certain changes in the terms of the offer and yet be a binding acceptance (Villonco case)

The moment a party accepts without qualification another party’s offer to sell within the period stipulated therein, a sale is perfected.


And although subsequently, the seller required a much higher price than the original offer, and the buyer negotiated on the matter but no final agreement was reached, the first sale remained valid and binding and is not deemed novated by the fact of negotiation thereafter done on the price (Uraca vs CA)

A. When deviation is allowed o When there was a correction or modification contained in the

acceptance but the changes were not substantial but merely clarificatory

B. Acceptance may be express or implied o Acceptance may be evidenced by some act, or conduct,

communicated to the offeror, either in a formal or an informal manner, that clearly manifest the intention or determination to accept the offer to buy or sell

C. Acceptance by letter or telegram o Acceptance made by letter or telegram does not bind the offeror

except from the time it came to his knowledge (actual knowledge) D. Acceptance subject to suspensive condition o Even when there is meeting of minds as to the subject matter and

the price, there is deemed to be no perfected sale, if the sale is subject to suspensive condition

o When a sale is made subject to a suspensive condition, there is already a contract upon the meeting of the minds, since the principles of mutuality and obligatory force come into play, but because the condition has not happened, the contract itself and its underlying conditions are not yet demandable; and in case of non-happening of the condition, then the contract is extinguished as though the contract has never been entered into, as the consequence of the retroactive effect of the non-happening of a suspensive condition (“uber” Supreme Justice Villanueva)

E. Acceptance in Auction Sales o A sale by auction is perfected when the auctioneer announces its

perfection by the fall of the hammer, or in other customary manner

o A right to bid may be reserved expressly by or on behalf of the seller. Where notice has not been given that the sale by auction is subject to a right to bid on behalf of the seller, it shall be unlawful

for the seller to bid himself or to employ or induce any person to bid at such sale on his behalf

o 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

Earnest Money A. Function of Earnest Money

Art. 1482. 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.

o This presumption is founded upon the fact that there must first be a valid sale

o However, this presumption does not apply when earnest money is given in a contract to sell (Serrano vs Caguiat)

o Nothing prevents the parties to the sale to treat earnest money differently

B. Distinguishing earnest money and option money

Earnest money Option money

Part of the purchase price Money given as a distinct consideration for an option contract

Given only when there is already a sale

Applies to a sale not yet perfected

When given, the buyer is bound to pay the balance

When given, the would-be buyer is not required to buy, but may even forfeit it depending on the terms of the option

C. Effect of rescission of earnest money o In the absence of specific stipulation, the seller cannot keep the

earnest money received to answer for the damages sustained in the event the sale fails due to the fault of the prospective buyer

o It could not be forfeited in case the buyer should fail to pay the balance of the price, especially in the absence of a clear and express agreement thereon Because when the seller seeks to rescind the sale under Art.

1385, such rescission creates the obligation to return the things


which were the object of the contract together with their fruits and interests

D. Place of perfection o General Rule: the sale’s place of perfection is where there is a

meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract (Art. 1319)

o In case of acceptance through letter or telegram: presumed that the contract was entered into in the place where the offer was made

E. Expenses of Execution and Registration 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.

Art. 1521. x x x Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state must be borne by the seller.

o The duty to withhold taxes due on the sale is imposed on the seller F. Performance should not affect Perfection o Since sale is a consensual contract, then the ability of the parties to

perform the contract after perfection does not affect the perfection of the contract, which occurs when the minds of the parties have met as to the subject matter, price and terms of payment

o Non-payment of price does not render void nor reverse the effects of the perfection of the contract, it only creates a right to demand the fulfillment of the obligation or to rescind the contract (Balatbat vs CA) However, when the seller is no longer the owner of the land sold

at the time of sale, the contract is void, in spite of the fact that Arts. 1402 and 1459 recognize that a sale is valid even the subject matter is not owned by the seller at the time of perfection, provided the seller has a right to transfer ownership at the time of delivery (Dignos vs CA)

This situation was compared to an “impossible service” which renders a contract void (Nool vs CA)

o The comparison to “impossible service” is misplaced because the obligations created under a valid sale are real obligations “to give” and not personal obligations or service (USJ Villanueva)

C H A P T E R 6 : P E R F O R M A N C E O R C O N S U M M A T I O N O F S A L E

OBLIGATIONS OF SELLER 1. To preserve the subject matter

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.

The ancillary obligation to preserve the subject matter of the sale involves a personal obligation “to do,” rather than a real obligation “to give,” and arises as a necessary legal assurance to the buyer that the seller would be able to comply fully with the main obligation to deliver the object of the sale

2. To deliver the subject matter 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.

Art. 1495. The vendor is bound to transfer the ownership of and deliver, as well as warrant the thing which is the object of the sale.

Although the wordings of both articles 1458 and 1495 seem to separate “delivery” of the subject matter from the “transfer of ownership,” nonetheless, the means by which the seller can transfer the ownership of the subject matter is by the mode of tradition or delivery, whether actual or constructive

Title passes from the moment the thing sold is placed in the possession and control of the buyer. In spite of the reciprocal nature of a sale, it is not the prior payment of price that determines the effects of delivery of the subject matter (Kuenzle & Streiff v. Watson & Co.)

3. 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. 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.

Principle of “res perit domino”—it is the owner of the thing who bears the risk of loss and benefits from the fruits of the thing owned

o In contrast with sale involving a determinate subject matter, even prior to delivery and transfer of ownership to the buyer, the buyer already has certain rights enforceable against the seller, pertaining to the subject matter

4. To warrant the subject matter

Refer to Art. 1495 TRADITION AS A CONSEQUENCE OF A VALID SALE 1. Essence of Tradition

Delivery is a composite act, in which both parties must join and the minds of both parties concur; it is an act by which one party parts with the title to and the possession of the property, and the other acquires the right to and the possession of the same

Critical factor in the different modes of effecting delivery, which gives legal effect to the act is the actual intention of the vendor to deliver, and its acceptance by the vendee (Santos v. Santos)

Principle on tradition based on two factors: A. Acceptance, although an obligation on the part of the buyer, is

not essential for delivery by the seller to achieve its legal effects B. Express intention on the matter by the parties to a sale, at the

point of delivery is not essential for tradition to produce its legal consequences

Legal effects of the parties’ intention must be gauged at the point of perfection by which the obligation to deliver the subject matter is created

Types of Delivery 1. Actual Delivery

1497. The thing sold shall be understood as delivered, when it is placed in the control and possession of the vendee.

2. Constructive Delivery 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.

Essence of most forms of constructive delivery o Existence of an agreement between the seller and the buyer, and

that the latter is understood to have control of the subject matter of sale

“execution of a public instrument pursuant to a valid sale”—prime example of constructive delivery

A. Execution of Public Instrument 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.

Two functions of notarized deed of sale: 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

General rule: execution of a public instrument has the same legal effects of actual or physical delivery

a. Constructive Delivery has the Same Legal Effect as Actual or Physical Delivery

o Under 1498, the mere execution of the deed of conveyance in a public instrument is equivalent to the delivery of the property, prior physical delivery or possession is not legally required

b. When Execution of Public Instrument Does Not Produce Effects of Delivery

o This express reservation or contrary inference would be present when:

1. A certain date is fixed for the purchaser to take possession of the property subject of the conveyance

2. In case of sale by installments, it is stipulated that until the last installment is made, the title to the property should remain with the seller


3. When the seller reserves the right to use and enjoy the property until the gathering of the pending crops

4. Where the seller has no control over the thing sold at the moment of the sale, and, therefore, its material delivery could not have been made

o Addison Ruling: It is the duty of the seller to deliver the thing sold, and that

symbolic delivery by the execution of a public instrument is equivalent to actual delivery only when the thing sold is subject to the control of the seller, so that “at the moment of sale, its material delivery could have been made,” which talks of capacity rather than an actual physical delivery

If the sale had been made under the express agreement of imposing upon the purchaser the obligation to take the necessary steps to obtain the material possession of the thing sold, and it were proven that she knew that the thing was in the possession of a third person claiming to have property rights therein, such agreement would perfectly be valid, and there would have been full compliance by the seller of his obligations under the sale by mere execution of the public instrument

o In order that the execution of public instrument to produce the effect of tradition, not only must the seller have actual control of the object of the sale at the execution of the instrument, but that such control or ability to transfer physical possession and enjoyment must subsist for a reasonable length of time after the instrument’s execution (Pasagui v. Villablanca)

B. Symbolic Delivery o Symbolic delivery must involve or cover the subject matter,

and cannot take a form relating to the payment of the purchase price

1498. x x x

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.

C. Constitutum Possessorium o At the time of the perfection of the sale, the seller held

possession of the subject matter in the concept of owner, and pursuant to the contract, the seller continues to hold physical possession thereof no longer in the concept of an owner, but as a lessee or any other form of possession other than in the concept of owner

D. Traditio Brevi Manu o The would-be buyer was already in possession of the would-be

subject matter of a sale, say as a lessee, and pursuant to sale, he would now hold possession in the concept of an owner

E. Traditio Longa Manu o Delivery of a thing merely by 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 thereof

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.

F. Delivery of Incorporeal Property o Three types of constructive delivery specifically applicable to

incorporeal property: 1. 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

2. By the placing of the titles of ownership in the possession of the buyer

3. The use and enjoyment by the buyer of the rights pertaining to the incorporeal property, with the seller’s consent

G. Delivery by Negotiable Document of Title o A person to whom a negotiable document of title has been

duly negotiated acquires thereby such title to the goods as transferor had or had ability to convey to a purchaser in good faith for value, and also the title of the persons to whom the documents was originally


o The buyer to whom a document of title has been transferred by assignment, acquires only his transferor’s title to the goods, and always subject to the terms of any agreement with the transferor

o Since invoice is not a negotiable document of title, the issuance thereof would not constitute constructive delivery

H. Delivery Through Carrier o General Rule: delivery to carrier is deemed delivery to the

buyer, the premise being that the carrier acts as an agent of the buyer

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 a carrier, 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 case 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 damages.

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.

1. F.A.S. Sales o Under this arrangement, the seller pays all charges and is

subject to risk until the goods are placed alongside the vessel o Delivery of the goods alongside the vessel completes the

effect of tradition 2. F.O.B. Sales o “Free On Board”, under this arrangement, the seller shall

bear all expenses until the goods are delivered. Depending

on whether the goods are to be delivered “f.o.b.” at the point of shipment or at the point of destination

o “f.o.b., shipping point”—delivery of the goods to the carrier is equivalent to delivery to the buyer, and at that point the risk of loss pertains to the buyer

o “f.o.b., destination”—only when the vessel has arrived at the point of destination would there be delivery to the buyer and prior to that point in time, the risk of loss over the subject matter of the sale will be borne by the seller

3. C.I.F. Sales o “Costs, Insurance, and Freight”—the price fixed covers not

only the costs of the goods, but the expense of freight and insurance to be paid by the seller

o Two schools of thought on the effects of c.i.f. sales: a. The carrier acts as an agent of the buyer who pays the

freight, and therefore delivery to the carrier is delivery to the buyer; and since the insurance over the goods shipped is for the account of the buyer, then clearly the buyer has obtained ownership over the goods during the shipment period

b. In quoting a c.i.f. price, both parties agree that the seller takes on the responsibility of insuring the goods and providing for their shipment to the buyer, and for which responsibility he gets a package price Delivery by the seller of the goods to the carrier is not

equivalent to delivery to the buyer and the seller must continue to bear the risk of loss during the shipment period

o Behn, Meyer Ruling: if the buyer is to pay the freight, it is reasonable to suppose that he does so because the goods become his at the point of shipment. But, if the seller is to pay the freight, the duty of the seller is to have the goods transported to their ultimate destination and that title to property does not pass until the goods have reached their destination

o The shipping arrangements in a sale create, by commercial usage, certain presumptive effects; however, such


presumptive effects must give away, rather easily, to any stipulation or even intimation to the contrary

EFFECTS AND COMPLETENESS OF DELIVERY

For tradition to produce legal consequences, two principles must apply:

a. Delivery must be made pursuant to a valid sale—since tradition takes effect in the consummation stage of sale

b. Delivery must be effected when seller has ownership over the subject matter of sale so delivered—reason: no man can dispose of that which does not belong to him

To Whom Delivery Must Be Made o To the buyer or his duly authorized representative named in the

contracts o Unless the buyer specifically designated someone to receive

delivery

When Buyer Refuses To Accept o Acceptance by the buyer is not a condition for the completeness of

delivery since this is an obligation on the part of the seller 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.

Rules on Effects of Delivery for Movables 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 accept 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 preceding two paragraphs, if the subject matter is indivisible, 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.

When goods are held by third party Art. 1521. x x x 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.

Reservation of Ownership o Despite delivery, ownership will not transfer to the buyer in case of

express reservation, such as when parties stipulate that ownership will not transfer until the purchase price is fully paid or until certain conditions are fulfilled

o Instances of implied reservation of ownership: 1503. When there is a contract of sale of specific goods, the seller may, by the terms of the contract, reserve the right of possession or ownership in the goods until certain conditions have been fulfilled. The right of possession or ownership may be thus reserved notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer.

Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, or to the order of the seller or of his agent, the seller thereby reserves the ownership in the goods. But, if except for the form of the bill of lading, the ownership would have passed to the buyer on shipment of the goods, the seller's property in the goods shall be deemed to be only for the purpose of securing performance by the buyer of his obligations under the contract.

Where goods are shipped, and by the bill of lading the goods are deliverable to order of the buyer or of his agent, but possession of the bill of lading is retained by the seller or his agent, the seller thereby reserves a right to the possession of the goods as against the buyer.

Where the seller of goods draws on the buyer for the price and transmits the bill of exchange and bill of lading together to the buyer to secure acceptance or payment of the bill of exchange, the buyer is bound to


return the bill of lading if he does not honor the bill of exchange, and if he wrongfully retains the bill of lading he acquires no added right thereby. If, however, the bill of lading provides that the goods are deliverable to the buyer or to the order of the buyer, or is indorsed in blank, or to the buyer by the consignee named therein, one who purchases in good faith, for value, the bill of lading, or goods from the buyer will obtain the ownership in the goods, although the bill of exchange has not been honored, provided that such purchaser has received delivery of the bill of lading indorsed by the consignee named therein, or of the goods, without notice of the facts making the transfer wrongful.

Obligations as to Accessories and Accessions 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.

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.

Sale in Mass of Movables o Distinguish Art. 1480 (sale of specific mass) from Art. 1522 (sale of

movables) Art. 1480. x x x

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.

Sale by Description and/or Sample 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 description or the sample, and if the contract be by sample as well as description, it is not sufficient that the bulk of goods correspond with the sample 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.

On Sale or Return, Sale on Approval, Trial, Satisfaction or Acceptance 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 of 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.

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.

Form of Such Special Sales o Under Uniform Sales Act, it requires an express written agreement

to make a sales contract either a “sale of return” or a “sale on approval”

Written proof of delivery o Delivery is generally evidenced by a written acknowledgement of a

person that the has actually received the thing or the goods, as in delivery receipts

o A bill of lading and a factory consignment invoice are not evidence of actual delivery of the goods

Time and place of delivery o Apart from contract, express or implied, or usage of trade to the

contrary, the place of delivery is seller’s place of business, if he has one, and if not, his residence

o In case 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

o If no time for sending is fixed, seller is bound to send them within a reasonable time


o Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour; and what may be a reasonable hour is a question of fact

Seller shall pay expenses of delivery o Unless otherwise agreed, the expenses in putting the goods into a

deliverable state must be borne by the seller

Rules on Effects of Delivery for Immovables A. Where immovables sold per unit or number

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 of inferior quality, he may rescind the sale. Art. 1540. If, in the case of the preceding 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.

Art. 1541. The provisions of the two preceding articles shall apply to judicial sales.

B. Where immovables sold for a lump sum 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 less area or number than that stated in the contract.

The same rule shall be applied when two or more immovables as 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.

o Art. 1542 admits of exception because the sale of land under description “more or less” or similar words in designating quantity covers “only a reasonable excess or deficiency”

C. Where Immovables Sold in Mass o A judicial sale in mass of separate known lots or parcels will not

be set aside, unless it is made to appear that a larger sum could have been realized from a sale in parcels or that a sale of less than the whole would have been sufficient to satisfy the debt

D. Expenses of Delivery and Registration on Real Estate o Although the buyer of a parcel of land has more interest in

having the capital gains tax paid immediately since this is a pre-requisite to the issuance of a new Torrens title in his name, nevertheless, as far as the government is concerned, the capital gains tax remains a liability of the seller since it is a tax on the seller’s gain from the sale of the real estate (Chua v. CA) Payment of the capital gains tax is not a pre-requisite to the

transfer of ownership to the buyer, and that the transfer of ownership took effect upon the signing and notarization of the deed of absolute sale

DOUBLE SALES A. Rules on Double Sales must be considered as Rules on Tradition o Various rules on double sales usually can only operate under the

same premise that tradition, whether actual or constructive, can be made operative, that is:

1. Conflicting sales are all valid and demandable sales, pursuant to which tradition was or could be effected

2. Seller who effected multiple sales to various buyers over the same subject matter actually had ownership to convey


B. Art. 1544 as the Platform for Discussion o If the same thing should have been sold to different buyers, the

ownership shall be given: 1. When subject matter is movable, to the buyer: Who may have first taken possession thereof in good faith

2. When subject matter is immovable, to the buyer: Who in good faith recorded the sale in the Registry of Property Should there be no inscription, to the person who in good faith

was first in the possession of the subject matter In the absence thereof, to the person who presents the oldest

title, provided there is good faith o Possession and enjoyment of movable property are considered to

be the public’s best gauge of who owns a movable as expressed in Art. 559 which provides that “possession of movable property acquired in good faith is equivalent to title”

C. Two Divergent Systems when it comes to Land 1. The Case for Registered Land

Section 51 of PD 1529. Conveyance and other dealings by registered owner. An owner of registered land may convey, mortgage, lease, charge or otherwise deal with the same in accordance with existing laws. He may use such forms of deeds, mortgages, leases or other voluntary instruments as are sufficient in law. But 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, but shall operate only as a contract between the parties and as evidence of authority to the Register of Deeds to make registration.

The act of registration shall be the operative act to convey or affect the land insofar as third persons are concerned, and in all cases under this Decree, the registration shall be made in the office of the Register of Deeds for the province or city where the land lies.

o “registration” under Art. 1544 is intended to cover the annotation or inscription of a contract, transaction or legal process in the Register of Deeds covering a property, which may or may not be registered land

o The rules on double sales under Art. 1544 do not overcome nor pre-empt the specific rules under the Torrens system for registered land, which provide that registration is the “operative act” by which dealings on registered land, whether voluntary or

involuntary, shall be recognized as existing and binding upon third parties Hence, when two certificates of title are issued to different

persons covering the same land in whole or in part, the rules on double sales cannot formally be applied, and instead the particular doctrine under Torrens system would apply

Legal priority of registration of sale under PD 1529 cannot be overcome by an earlier registration under Act No. 3344 which is not effective form of registration under Art. 1544

2. The Case for Unregistered Land o “without prejudice to a third party with a better right” under Act

No. 3344 is now embodied in Sec. 113 of PD 1529

Section 113. Recording of instruments relating to unregistered lands. No deed, conveyance, mortgage, lease, or other voluntary instrument affecting land not registered under the Torrens system shall be valid, except as between the parties thereto, unless such instrument shall have been recorded in the manner herein prescribed in the office of the Register of Deeds x x x

It shall be understood that any recording made under this section shall be without prejudice to a third party with a better right.

o Rules on double sales have no application to unregistered land o A.A.: rules on double sales for immovables under Art. 1544 are

applicable to unregistered land, but only insofar as they do not undermine specific rules and legislations that have a higher hierarchical enforcement value, such as “without prejudice to a better right”

o Who is the party with a better right? A buyer having in his favor an earlier deed of sale (Lichauco v.

Berenguer) o Registration under Act No. 3344 would have legal effect only

when it is consistent with the principle of protect “a third party with a better right” which essentially refers to the first buyer in a double sales situation involving unregistered land

o Art. 1544 is not wholly inapplicable to unregistered land, but that the specific provision of now Sec. 33, Rule 39 of the 1997 Rules of Civil Procedure providing that the purchaser at public auction “shall be substituted to and acquire all the rights, title, interest and claim of the judgment obligor to the property as of the time


of the levy,” overrides the provision of Art. 1544 when it involves unregistered land since under Act No. 3344 registration of instruments affecting unregistered lands is “without prejudice to a third party with a better right” (Carumba ruling)

o Where the owner sold his parcel of unregistered land to two different parties—assuming that both sales are valid—the buyer whose deed of sale was first registered under provisions of Act No. 3344 would have a better right (Espiritu v. Valerio)

D. Global Rules on Double Sales o Registration in good faith under the Torrens system is considered

to be of the highest order, providing for absolute first priority to the buyer who has it in his favor

o Where one of the two conflicting sales of a piece of land was executed before the land was registered, while the other was an execution sale in favor of the judgment creditor of the owner made after the same property has been registered and issued a title “free from all liens and encumbrances,” Art. 1544 should not apply, and what should determine the rights of the second buyer would be the then Sec. 35, Rule 39 of the Revised Rules of Court on execution sale (Dagupan Trading Co. v. Macam) If the property covered by the conflicting sales were

unregistered land then the first buyer would undoubtedly have the better right in view of the fact that his claim is based on a prior sale

Were the land involved in the conflicting transaction was a duly registered land, the second buyer at public auction would prevail since the registration of the deed of sale is the operative act that gives validity to the transfer

o Under Act No. 3344, registration by the first buyer is constructive notice to the second buyer that can defeat his right as such buyer in good faith, and that registration of an instrument involving unregistered land in the Registry of Deeds creates constructive notice and binds third person who may subsequently deal with the same property (Naval ruling)

E. Essential Elements for Applicability of Art. 1544 o Whether the subject matter is movable or immovable, the

following requisites must concur: a. Two or more sales transactions must constitute valid sales

b. Two or more sales transactions must pertain to exactly the same subject matter

c. Two or more buyers at odds over the rightful ownership of the subject matter must each represent conflicting interests

d. Two or more buyers at odds over the rightful ownership of the subject matter must each have brought from the very same seller

1. Nature of Two Sales Involved o Sales involved must be valid, or at least be voidable, sales

2. Applicability of Rules on Double Sales to Contracts to Sell and Adverse Claims

o Since rules on double sales are rules pertaining to tradition at consummation stage, they have no application when the covered valid contracts are not yet demandable sales, such as when one or both contracts in dispute are contracts to sell

o It is essential to distinguish a contract to sell and conditional contract of sale because when one of the sales is a contract to sell, the rules of Art. 1544 do not apply, and the buyer under the contract of sale albeit conditional is always preferred, as being effectively “the first in time” (Coronel v. CA)

3. There must be “Sameness” of Subject Matter o In a case where one buyer bought the parcel of land, and the

other buyer bought the right to redeem the same parcel of land, Art. 1544 was deemed to be inapplicable, because the subject of the second sale is not the land itself, but the right to redeem

4. There must involve the Same Seller o Successors and predecessors-in-interest theories are not

applicable to be able to obtain application of the provisions of Art. 1544

5. Art. 1544 is Not a Contest Between Two Protagonists Running the Same Race

o The positive steps provided under Art. 1544 are directed to buyer 2, if he wishes to obtain preference of title to the subject matter, but not to buyer 1 because he is already by the rule of “first in time priority in rights” the preferred buyer

o Even if buyer 1 learns of the second buyer, so long as buyer 2 has not registered his sale, buyer 1 can end the race by registering his sale, because his good faith remains throughout


o Before the second buyer can obtain priority over the first, he must show that he acted in good faith throughout from the time of acquisition until the title is transferred to him by registration or failing registration, by delivery of possession (Uraca v. CA)

6. Who is Purchaser in Good Faith? o A buyer without knowledge of any defect in the title of the

property sold a. Burden of Proof o He who asserts the status of a purchaser in good faith and for

value has the burden of proving such assertion o There is no legal presumption of good faith, however, good

faith is always presumed in the absence of any direct evidence of bad faith

b. Requisite of Full Payment o Purchaser in good faith—one who buys the property of

another without notice that some other person has a right to or interest in such property and pays a full and fair price for the same at the time of such purchase or before he has notice of the claim or interest of some other person in the property

o It actually includes as an element of good faith that there must be full payment on the part of the buyer

c. Obligation to Investigate known Facts o Actual lack of knowledge of the flaw in title by one’s transferor

is not enough to constitute a buyer to be in good faith o It is expected from the purchaser of a valued piece of land to

inquire first into the status or nature of possession of the occupants

o An ocular inspection of the premises involved is a safeguard a cautious and prudent purchaser usually takes

d. Special Rule on Real Estate Market Players o Persons or entities who regularly engage in dealing with real

estate, they cannot simply rely upon the title, but are obliged to enter upon an investigation of the actual condition and occupants of the subject property

e. Land in Adverse Possession o A buyer of real property which is in the possession of persons

other than the seller must be wary and should investigate the

rights of those in possession, otherwise without such inquiry, the buyer can hardly be regarded as a buyer in good faith

f. Existence of Lis Pendens o A buyer could not be considered an innocent purchaser where

it ignored the notice of lis pendens on the title when it bought the lot

g. Annotation of Adverse Claim o In the realm of double sales, the registration of an adverse

claim places any subsequent buyer of the registered parcel of land in bad faith

h. Existence of Relationship o Sale to one’s daughter and sons will give rise to the conclusion

that the buyers, not being really third parties, knew of the previous sales and cannot be considered in good faith, since the buyers are deemed to have constructive knowledge by virtue of their relationship to their sellers (Pilapil v. CA)

o Also, a buyer in bad faith is a person who lived in the same area and was familiar to the members of the family of the seller

i. Stipulations in Deed showing Bad Faith o 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 be 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

j. When Dealing with Non-Registered Owner o One who buys from one who is not the registered owner is

expected to examine not only the certificate of title but all factual circumstances necessary for him to determine if there are any flaws in the title of the transferor, or in his capacity to transfer the land

7. Requisites of Prior Registration o “Registration”—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

o Prior registration of the disputed property by the second buyer does not by itself confer ownership or a better right over the


property, and that Art. 1544 requires that such registration must be coupled with good faith

8. First to Possess in Good Faith o In the absence of inscription in double sales, the law gives

preferential right to the buyer who in good faith is first in possession, under the following jurisprudential parameters:

a. Possession includes not only material but also symbolic possession

b. Possessors in good faith are those who are not aware of any flaw in their title or mode of acquisition

c. 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

d. Good faith is always presumed, upon those who allege bad faith on the part of the possessors rests the burden of proof

o Under double sales, presumption of good faith cannot apply, and the buyer has the burden of showing that he was the first to register or possess in good faith

A. Registration in Good Faith always Pre-empts Possession in Good Faith

o Buyer-registrant in good faith always has preference to the buyer-possessor in good faith, even when in point in time, the possession in good faith happened ahead of the registration in good faith

B. Possession under Art. 1544 refers to Material and Symbolic Possession

C. Possession acquired in Good Faith is Stable Status 9. When Art. 1544 Does Not Apply, Priority in Time Rule Applies

A. Where not all the requisites necessary to make Art. 1544 applicable are present

o The general rule of “prius tempore, potior jure” or “priority in time, priority in right” applies

B. Where the requisites to make Art. 1544 applicable were present, but that either the first to register or first to possess rules were not complied with

o Ownership should go “to the person who presents the oldest title, provided there is good faith”

OBLIGATIONS OF BUYER A. Pay the Price o Buyer is obliged to pay for the price at the time and place

stipulated in the contract o 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

o Buyer is also obliged to pay interest for the period between delivery of the subject matter and the payment of the price when:

1. The same has been stipulated 2. Should object delivered produce fruits or income 3. In case the buyer is in default, from the time of judicial or

extrajudicial demand o In sale, payment of the price is a resolutory condition and the

remedy of the seller is to exact fulfillment or, in case of a substantial breach, to rescind the contract under Art. 1191

B. Accept Delivery of Thing Bought o Buyer is bound to accept delivery of the thing bought at the time

and place stipulated in the contract o If time and place should not have been stipulated, payment must

be made at the time and place of the delivery of the thing sold 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.

1. Opportunity to Inspect Goods 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.

Exception: C.O.D. Sales 1584. x x x

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.

2. Goods Sold Deliverable by Installments 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 instalments, or the buyer neglects or refuses without just cause to take delivery of or pay for one more instalments, 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.

3. Effect of Acceptance of Goods on Seller’s Warranty 1586. In the absence of express or implied agreement of the parties, acceptance of the goods by the buyer shall not discharge the seller from liability in damages or other legal remedy for breach of any promise or warranty in the contract of sale. But, if, after acceptance of the goods, the buyer fails to give notice to the seller of the breach in any promise of warranty within a reasonable time after the buyer knows, or ought to know of such breach, the seller shall not be liable therefor.

4. Refusal to Accept Goods 1587. Unless otherwise agreed, where goods are delivered to the buyer, and he refuses to accept them, having the right so to do, he is not bound to return them to the seller, but it is sufficient if he notifies the seller that he refuses to accept them. If he voluntarily constitutes himself a depositary thereof, he shall be liable as such.

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.

C H A P T E R 7 : D O C U M E N T S O F T I T L E Definition and Function

“Document of title of goods” includes any a. Bill of lading b. Dock warrant c. Quedan d. Warehouse receipt or order for the delivery of goods e. Any other document used in the ordinary course of business in the

sale or transfer of goods

Functions of documents of title: 1. As evidence of the possession or control of the goods described

therein 2. As the medium of transferring title and possession over the goods

described therein, without having to effect actual delivery thereof

Dealings through documents of title represent a species of constructive delivery, and therefore operate under the same premise as other forms of delivery

The provisions of the Warehouse Receipts Act and Bonded Warehouse Act constitute the primary sets of rules governing warehouse receipts, and the provisions of Arts. 1507 to 1520 of the Civil Code should be treated as having suppletory effect

Types of Documents of Title A. Negotiable Document of Title o A document of title in which it is stated that the goods referred to

therein are deliverable “to bearer,” or “to order” of any person named in such document

B. Non-Negotiable Document of Title o A document of title which does not state that the goods referred

to therein are deliverable either to bearer or to the order of any person named therein

C. Effects of Errors on Documents of Title o Clerical errors like “by the order” instead of “to the order” does

not destroy the negotiability of a warehouse receipt


D. Effects of Use of “Non-negotiable” terms on Negotiable Documents of Title

o Such document may nevertheless be negotiated by the holder and is a negotiable document of title

Negotiation of Negotiable Documents of Title A. Who can Negotiate

1. By the owner thereof 2. By any person to whom the possession or custody of the document

has been entrusted by the owner, if, by the terms thereof the bailee 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

B. How Negotiation Properly Effected 1. By delivery alone

a. Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to deliver the goods “to bearer”

b. Even when originally the document of title was issued “to the order” of a specified person, where such person or a subsequent endorsee of the document has endorsed it in blank or to the bearer

o In either cases, any holder may endorse 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

2. By endorsement and delivery

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.

3. Effects of Proper Negotiation 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.

o Legal effect of proper negotiation is the assurance to the buying or negotiating public of the protective mantle that the law places upon their faith in accepting a negotiable document of title as a medium to transact on the goods covered thereby

4. Effects of Merely Transferring/Delivering of “Order” Negotiable Documents of Title

o Legal effects when a negotiable document of title deliverable to order is not properly negotiated:

a. Transferee would thereby own the document of title 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.

b. Between the transferor and the transferee, the goods are owned by the transferee, but not as to the rest of the world, including the bailee 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.

c. Negotiation shall take effect as of the time when the endorsement is actually made 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.


5. Effects and Consequences of Unauthorized Negotiation o Under 1518, the validity of the negotiation of a negotiable

document of title is not impaired by the following facts if the person to whom the document was negotiated paid value therefor in good faith without notice of such facts:

a. Negotiation was a breach of duty on the part of the person making the negotiation

b. Owner of the document was deprived of the possession of the same by: loss fraud theft conversion accident mistake duress

o The legal consequences as to the effects of unauthorized negotiation thereof would also pertain to the goods that it describes

o Even when the owner loses the negotiable document of title to a thief, and it is deliverable to bearer, the latter may validly impart title thereto to a holder in due course, who is essentially a buyer in good faith and for value

o Between the owner of a negotiable document of title who endorsed it in blank and entrusted it to a friend, and the holder of such negotiable document of title to whom it was negotiated and who received it in good faith and for value, the latter is preferred, under the principle that as between two innocent persons, he who made the loss possible should bear the loss

Assignment of Non-Negotiable Documents of Title A. How assignment made o Non-negotiable document cannot be negotiated and the

indorsement of such a document gives the transferee no additional right

o 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 done

o Non-negotiable document of title constitutes an incorporeal rights—its sale constitutes actually an assignment which is perfected by mere consent, but is required its appearance in a public instrument, otherwise it “shall produce no effect as against third persons”

B. Effects of transfer of assignment o A person to whom a non-negotiable document of title has been

duly assigned acquires thereby, as against the transferor: 1. Title to the goods, subject to the terms of any agreement with

the transferor 2. 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

o Under this, there is no legal relationship between the assignee and the bailee until the latter is informed by the former of the assignment of the covering document of title

Warranties on Negotiation and Assignment of Documents of Title 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.

1517. The endorsement of a document of title shall not make the endorser liable for any failure on the part of the bailee who issued the document or previous endorsers thereof to fulfill their respective obligations.

Under 1628, the seller/assignor of the document of title also warrants the existence and legality of the documents of title at the time of sale, unless it has been sold as doubtful; but that he does not warrant 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


Effects when Owner of the Document of Title has No Legal Title to the Goods A. When Goods covered by Non-Negotiable Document o Where the owner had neither lost nor been unlawfully deprived of

the goods—assignee-buyer’s title to the goods is preferred even against the owner who can no longer recover the goods Assignee-buyer’s ownership to the goods is not derived from the

assignor-seller but is granted directly under Art. 559 which states that “the possession of the movable property acquired in good faith is equivalent to title”

o Where the owner had lost the goods or been unlawfully deprived thereof—owner may recover against the assigner-buyer, even when the latter is in good faith and bought for value, because Art. 559 expressly does not give tot the assignee-buyer any original title; and in such case, the assignee-buyer’s title to the goods must be derived from that of the assignor-seller’s who has no title to the goods

B. When Goods covered by Negotiable Document o Where the owner had neither lost nor been unlawfully deprived of

the goods—holder-buyer acquires valid ownership of such goods because his possession in good faith and for value is clearly evidenced by his being a holder in due course of the negotiable document of title

o Where the owner had lost or been unlawfully deprived of the goods—owner may recover against the bailee and therefore against the holder-buyer, even when the latter is a holder in due course with respect to the negotiable document of title, and a possessor in good faith and for value with respect to the goods

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.

Rules on Levy/Garnishment of Goods Covered by Documents of Title A. When Non-Negotiable Document of Title o Assignment or sale by the original owner of the non-negotiable

document of title, even when executed in a public instrument, does not transfer possession or title over the goods covered by the document of title, until actual notification is made to the bailee of the transfer or assignment of the goods, actions can be taken by the original owner to defeat the transfer of the title and/or possession of the goods

1514. x x x

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.

B. When Negotiable Document of Title 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.


CHAPTER 8: SALE BY A NON-OWNER OR BY ONE HAVING VIODABLE TITLE THE “LIFE” OF CONTRACT OF SALE

Perfection Stage Consummation Stage

Point in time when the sale, as a contractual reality begins to exist

Covers the period when the obligations that arise from the legal existence of the sale are to be performed

Upon meeting of the minds as to subject matter to be delivered and the price to be paid

Delivery of possession and transfer of ownership by the seller, and payment of the price by buyer

Does not necessarily result into every aspect of the consummation stage

Presupposes that perfection stage has happened

Goes into the very essence or birth of the sale

Goes into the performance or manner by which the sale as a contract leads out its life

Stage that determines whether the contract exists at all and the nature of its existence, valid, voidable, unenforceable, rescissible, or void

“living-out” of that kind of life: Valid remains valid throughout Voidable valid until annulled or it can be ratified Rescissible subject to rescission with the period provided by law Unenforceable although valid, it cannot be enforced in court, unless it falls within the exception Void no attempt at performance can change its inexistence

Breach / Rescission

Breach Rescission

Any party does not comply with what is incumbent upon him under the contract, as a consequence

Other party not at fault may rescind or resolve the sale (Art. 1191)

Presupposes the existence of a valid sale

Necessarily pertain to the consummation stage and does not attack the very essence of perfection

When Seller is Not Owner of the Subject Matter 1. At Perfection

Consent or perfection of the sale is manifested by the meeting of the offer and the acceptance on the

a. Subject matter b. Price c. Terms of payment of the price

Perfection merely creates the obligation on the part of the seller to transfer ownership, but by itself does not transfer ownership

o Therefore, it is not critical for valid perfection of a sale to come about, that the seller at the time is the owner of the subject matter of the sale, or even that the subject matter exist at the time of perfection

2. At Consummation 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.

The article does not say that the sale of goods by a non-owner renders the contract void; it describes the consequences when delivery under a sale is effected when the seller is not the owner of the thing delivered

o To annul such contract is improper; and it is the failure to comply with the obligation to transfer of ownership that would give rise to an action for rescission with damages

However, if there is an execution of a deed of sale, as a public instrument, equivalent to constructive delivery to transfer ownership of the subject matters, then such sale is ineffective as of the date of execution if the seller could not validly transfer ownership

Effect of nullity of sale and rescission of sale is the same that it entitles the purchaser to recover the money paid by him; restitution

Seller’s obligations are real obligations “to give” and therefore do not fall within the category of “impossible service,” and if indeed the obligation to deliver ownership can no longer be complied


with, the remedy is not to declare the sale void, but actually to rescind the sale for breach of contract

3. Sale by Co-Owner of the Whole Property or Definite Portion thereof

When prior to partition, a co-owner sells the entire property owned in common, the sale of the property itself is void, but valid as to his spiritual share

When a co-owner prior to partition sells a definite portion of the property owned in common, the sale as to that portion is not valid as to other co-owners, but valid as to his spiritual share, if indeed the buyer would have still bought such spiritual share had he known that the definite portion sold would not be acquired by him

Since a co-owner is entitled to sell his undivided share, a sale of entire property by one co-owner without the consent of the other co-owners is not null and void. Only the rights of the co-owner-seller are transferred, thereby making the buyer a co-owner of the property (Bailon-Casilao Ruling)

When a co-owner sells the entire property, sale is valid as to his spiritual share since “a co-owner is entitled to sell his individual share” and the proper action to take is not nullification of the sale, or for recovery of possession of the property owned in common from other co-owners, but for division or partition of the entire property (Tomas Claudio Memorial College Ruling)

A.A.: under this situation, the sale is void under Art. 1409(6) “where intention of the parties relative to the principal object of the contract cannot be ascertained”

o To compel the buyer to stick by the terms of the contract would lead to either or both

a. You compel the buyer to accept a subject matter to which he never agreed to buy

b. To pay the agreed price for a subject matter which commands a smaller value in the market

o If parties mandate that buyer will be paying a smaller amount as the price for spiritual portion, then it amounts to making a new contract between them

o Proper solution A.A.: a. Option is granted to the buyer to either seek for rescission for

breach of seller’s obligation to deliver the object agreed upon

b. Accept partial delivery with appropriate reduction of price, similar to the rules in sale of real property per unit of measure or number

4. Exceptions to Rule on Effect of Sale of Definite Portion by Co-owner

General Rule: sale of entire property owned in common by one of the co-owners is void as a sale of the whole property or any definite portion thereof but valid as to the co-owner-seller’s spiritual share

Exceptions: a. It does not apply to a situation where the subject matter is

indivisible in nature or by intent b. Ipso jure transfer of ownership under Art. 1434 which upholds

the validity of a sale by one who previously did not have, but who subsequently acquired, title to the property sold

c. Sale of a particular portion of the thing owned in common is with the consent of the other co-owners

o Where there has been no express partition of the subject matter owned in common, the co-owners who sells points out to his buyers the boundaries of the part he was selling, and the other co-owners make no objection, there is in effect a partial partition (Pamplona Ruling)

d. A co-owner selling one of the lands owned in common with another co-owner, and does not turn-over ½ of the proceeds of sale to the other co-owner, latter by law and equity may lay exclusive claim to the remaining parcel of land

e. The binding effect of registration under the Torrens System o When Torrens title indicates that it belongs only to one of the

co-owners, then one who buys such property from the named owner in good faith and for value will acquire valid title thereto

Exceptions to Rules on Legal Effects of Sale by a Non-Owner

Art. 1505 provides that 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 except:

a. When owner is, by his conduct, precluded from denying the seller’s authority to sell

b. When contrary is provided for in recording laws


c. When sale is made under statutory power of sale or under the order of a court of competent jurisdiction

d. When sale is made in a merchant’s store in accordance with Code of Commerce and special laws

Other exceptions to the main principle under Art. 1505 are: a. Art. 1506, sale by a seller who at the time of delivery had voidable

title to the thing delivered b. In case of movables, Art. 559, acquisition of possession in good

faith under a claim of ownership, where the real owner has not lost or been unlawfully deprived of the movable, makes the possessor the rightful owner of the movable

c. Special rights of an unpaid seller of goods to resell under Arts. 1526 and 1533

1. When Real Owner Estopped

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.

2. Recording Laws o Except on the effect of registration of chattel mortgage and its

subsequent foreclosure and sale at public auction, and the jurisprudential rules that have come to govern hierarchy of claims on shares of stock of a corporation, there are at present no other recording laws pertaining to movables that provide the same principle as “registration as the operative act”

3. Statutory Power; Judicial Sale o Judgments of courts divesting the registered owner of title and

vesting them in the other party are valid although the courts may not be the owner of the land

o Sale by a sheriff of land levied upon at public auction would validly transfer ownership to the highest bidder, although the sheriff in executing the certificate of sale has no ownership over said property

4. Sale at Merchant Store o This is a case of an imperfect or void title ripening into a valid one,

as a result of some intervening causes o The policy of the law has always been that where the rights and

interests of a vendor come into clash with that of an innocent buyer for value, the latter must be protected

o “merchant store”—any place where goods are kept for sale; or where goods are deposited and sold by one engaged in buying and selling them

5. Sale by a Seller who has Voidable Title on the Subject Matter Sold

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.

o Cut-off point under this article is the delivery of the subject matter to the buyer by the seller; hence, if the seller’s voidable title is avoided after the perfection of the sale but before delivery, the buyer does not obtain good title to the property

o Good-faith-bad-faith may be determined from the language of the deed of sale

6. Applicable Rules to Immovables o Where innocent third persons, relying on the correctness of the

certificate of title thus issued, acquire rights over the property, the court cannot disregard such rights and order the cancellation of the certificate, since the effect of such outright cancellation will be to impair public confidence in the certificate of title; the sanctity of the Torrens system must be preserved

o Despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy This is the doctrine of “mortgagee in good faith” based on the

rule that all persons dealing with property covered by a Torrens certificate of title are not required to go beyond what appears on the face of the title

o The principle is premised on the existence of a valid sale


7. “Title” as to Movable Properties 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.

o “unlawfully deprived”—cover situations where the original owner has been “dispossessed without his consent,” which includes not only cases of theft and robbery, but including one occasioned by swindling or estafa

o Exceptions to the rule under Art. 559: a. Even if the owner of a movable has lost it or has been unlawfully

deprived thereof, and even if he offers to reimburse the buyer, he cannot recover the movable from the buyer who bought it at a merchant store

b. Even if the owner of a movable has lost it or has been unlawfully deprived thereof, if the possessor in good faith acquired title from a seller who at the time of delivery had a voidable title thereto, then the original owner cannot recover the movable

o Art. 1506 represents an operative act which would constitute a further exception to Art. 559, which means that if the owner has been unlawfully deprived by means of deceit pertaining to the non-payment of the purchase price, but the one who takes the movable is able to sell and deliver the movable to another person who takes it in good faith and for value before the owner is able to rescind the earlier sale, the buyer obtains good title and the original owner has no cause of action to recover (Tagatac and EDCA Publishing rulings)

o 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 noted, delivery of the thing sold will effectively transfer ownership to the buyer who can in turn transfer it to another (EDCA Ruling)

CHAPTER 9: LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS Before Perfection

Such loss, deterioration, fruits and improvements shall pertain to the purported seller, since he owns the thing

Prior to perfection, the purported subject matter bears no legal or even equitable relationship to the purported buyer, and therefore no assumption of risk of loss or deterioration can be ascribed to the latter

At the Time of Perfection

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)

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.

Art. 1493 does not hold a sale at perfection to be “void” when the object is lost; it uses the phrase “without any effect.” However, if the subject matter is lost, there is really no point in pursuing the contract since the seller is not in a position to comply with his obligation to deliver the subject matter. Therefore, the law decrees the same effect as if the sale is void

The contract never comes into existence. There can be no sale without a thing to be sold. In such case, there is no need of an action to annul the contract, because there can be no annulment of something that does not exist


After Perfection but Before Delivery A. Loss of Subject Matter

It is the owner of the thing, the seller before delivery, who bears the consequences of its loss and this is under the rule of res perit domino

Conflicting doctrines: 1. General principle of res perit domino is covered by Art. 1504

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. x x x

o This only covers “goods” which includes all chattels personal and growing fruits or crops, but not things in action or money or legal tender

2. Under Art. 1165, the underlying obligation in a sale is a real obligation and therefore may be subject to the remedy of specific performance

1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery.

3. Whether it is the seller or the buyer who bears the risk of loss of the subject matter from perfection but before delivery, depends on the proper interpretation of the “extinguishment of obligation” clauses under Arts. 1189 and 1262, which is not well settled in our jurisdiction

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 x x x

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.

4. According to Paras: Arts. 1189 and 1262 mean that the obligation of the seller to deliver is extinguished, but the obligation of the buyer to pay is not extinguished as the necessary consequence even when the underlying contract is reciprocal

o Buyer should pay even if he does not receive the object lost through a fortuitous event, since there was a cause or consideration, at the time the contract was perfected, the thing purchase still existed

o The risk of loss is to be borne by the buyer, even when he is not yet the owner of the subject property

5. According to Tolentino: In reciprocal obligations, the extinguishment of the obligation due to loss of the thing affects both debtor and creditor; the entire juridical relation is extinguished, so that if the creditor has himself an obligation, this is likewise extinguished. The debtor must return to the creditor whatever the latter may have already delivered by reason of the obligation

o He who gives nothing has no reason to demand anything o The risk of loss is still to be borne by the seller from the time of

perfection up to before delivery of thing, but he would no longer be liable for damages if the thing is lost through fortuitous event

o This is consistent with Art. 1504 B. Deterioration, Fruits and Improvements

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.

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:

x x x (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.

The rules of risk of loss based on res perit domino determined by delivery are different from the rules pertaining to deterioration, fruits and improvement based on res perit domino under the common law and civil law rule determined by the perfection of the contract

Both the common law and civil law rule had a common point of transfer of the risk of loss and deterioration and the benefits of fruits and improvement: perfection of the sale; whereas, the hybrid rule on the risk of loss under the present Civil Code happens not at the point of perfection, but at the point of delivery

After Delivery

1504. x x x, 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.

After delivery, the buyer’s obligation does not pertain to the delivery of the subject matter but to the payment of the purchase price, and the ability to pay in money or legal tender is never lost through fortuitous event

Structuring Proper Doctrine on Loss, Deterioration, Fruits and Improvements

Prior to perfection, both title and beneficial interests pertain to the seller and therefore he must bear the risk of loss, deterioration, and benefits from the fruits and improvements

o Buyer has no risk nor participation in any of those aspects since neither title nor beneficial interest over the subject matter pertains to him, hence, there is no legal relationship

After delivery which effectively transfers title and beneficial interest to the buyer, buyer bears both the risk of loss and

deterioration, as well as benefits from the fruits and improvements of the subject matter of sale

o Neither title nor beneficial interests pertain to the seller, hence, he ceases to have any legal relation to the subject matter

After perfection but before delivery, title and beneficial interests actually do not pertain to the same person since title remains with the seller but beneficial interests actually pertains to the buyer

Proper Resolution: o When sale is conditional, perfection does not serve to transfer

title to the buyer, hence, title has remained with the seller but beneficial interest is with the buyer Person who should bear the risk of loss should be the party

who had greater stake on the subject matter at the point of loss, deterioration or improvement

He who bears the risk of loss or deterioration, and who benefits from the improvement of the thing, should be the party who at that point in time is understood to have the beneficial interest over the subject matter

CHAPTER 10: REMEDIES OF PARTIES

REMEDIES IN CASES OF MOVABLES A. Ordinary Remedies of Seller

1. Movables in General 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.

In case the buyer, upon 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, seller may maintain an action to rescind the sale

2. Sale of Goods a. Non-payment of Price by Buyer o Action for specific performance


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.

b. When Buyer Wrongfully Neglects/Refuses to Accept Goods 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.

B. Special Remedies of “Unpaid Seller” of Goods

Remedies of an unpaid seller are similar to the “doctrine of self-help” which authorizes the owner or lawful possessor of a thing to use force as may be reasonably necessary to repel or prevent an actual or threatened unlawful physical invasion or usurpation of his property

Minimum requirement here is that the goods are in the possession of the seller so as to prevent an actual physical tussle with the buyer in the exercise of such remedies

1. Definition of “Unpaid Seller” 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.

2. Rights of “Unpaid Seller” o Whether or not ownership over the goods has been transferred

to the buyer, the unpaid seller is entitled to the following rights or remedies:

a. Possessory lien c. Special right of resale b. Stoppage in transit d. Special right to rescind

o These 4 remedies have a hierarchical application o c and d can only be availed of when either of a and b have been

exercised by the unpaid seller o Designation of “special” is attached because they are rights

accorded only to the unpaid seller as technically defined by law and are not of the same nature as the right to rescind under Art. 1191


3. Possessory Lien 1524. The vendor shall not be bound to deliver the thing sold, if the vendee has not paid him the price, or if no period for the payment has been fixed in the contract.

o Art. 1524 is the general rule when it comes to movables o In the absence of stipulation to the contrary, delivery of goods to

the buyer transfers ownership to the latter, and the non-payment of the price does not prevent such transfer of ownership as a result of tradition to take effect

o The possessory lien of the unpaid seller is exercisable only in the following instances:

a. Where goods have been sold without any stipulation as to credit

b. Where goods have been sold on credit but the term of credit has expired

c. Where buyer becomes insolvent o Seller may exercise his right of lien notwithstanding he is in

possession of the goods as agent or bailee for the buyer o Unpaid seller’s right of lien is not affected by any sale, or other

disposition of the goods which the buyer may have made, unless the seller assented thereto

A. When Negotiable Document of Title Issued 1535. x x x

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.

B. When Part Delivery Effected 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.

C. Instances when Possessory Lien Lost 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.

4. Stoppage in Transitu o Notwithstanding that ownership in the goods may have passed

to the buyer, the unpaid seller of goods has, in case of the insolvency of the buyer, a right of stopping the goods in transit after he has parted with the possession of them

o Unpaid seller 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

a. When Negotiable Document of Title Issued (refer to Art. 1535) b. When Buyer is deemed “Insolvent”

1636. x x x

(2) A person is insolvent within the meaning of this Title who either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due, whether insolvency proceedings have been commenced or not.

c. When Goods are Deemed “In Transitu” 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.

d. When Goods are deemed No Longer in Transit 1531. x x x

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.

e. When Part Delivery already Made 1531. x x x

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.

f. How Right is Exercised 1532. The unpaid seller may exercise his right of stoppage in transitu either by

a. Obtaining actual possession of the goods or b. 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.

g. When Goods covered by Negotiable Document of Title 1532. x x x 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.

5. Special Right to Resell Goods o Notwithstanding that ownership in the goods may have passed

to the buyer, the unpaid seller has a special right of resale, but only under the conditions provided by law

a. When Right Exercisable o Special right of resale can be made only when unpaid seller has

previously exercised either his right of possessory lien or stoppage in transit, and under any of the following conditions:

1. Goods are of perishable nature 2. Seller has been expressly reserved in case the buyer should

make default 3. Buyer has been in default in the payment of the price for an

unreasonable time o Court had recognized the right of a seller, when the sale is still

executory in stage, to resell the movables subject matter of the sale when the buyer fails to pay the purchase price (Hanlon Ruling)

o If buyer fails to take delivery and pay the purchase price, the seller, without need of first rescinding the contract judicially, is entitled to resell the same, and if he is obliged to sell it for less than the contract price, the buyer is liable for the difference (Katigbak Ruling)

b. Effect of Having Exercised Right of Resale 1533. x x x 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.

c. Transfer of Ownership 1533. x x x

Where a resale is made, as authorized in this article, the buyer acquires a good title as against the original buyer.

o Not only is the unpaid seller able to destroy or obliterate the ownership over the goods in the original buyer, he is also able to transfer ownership to the subsequent buyer, even if at the time of tradition, he no longer had ownership over the goods

o This can be done even without judicial action


d. Notice to Defaulting Buyer 1533. x x x

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.

e. Standard of Care and Disqualification in Resale 1533. x x x

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.

6. Special Right to Rescind o Notwithstanding that ownership in the goods may have passed

to the buyer, the unpaid seller has a special right to extrajudicially rescind the sale

a. When Right may be Exercised 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

a. He expressly reserved the right to do so in case the buyer should make default, or

b. The buyer has been in default in the payment of the price for an unreasonable time.

b. Effect of Exercise of such Right 1534. x x x 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.

c. Transfer of Title 1534. x x x

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.

C. Remedies of Buyer

1. Failure of Seller to Deliver 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.

2. Breach of Seller’s Warranty 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:

(1) Accept or keep the goods and set up against 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 against the seller for damages for the breach of warranty; (3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of warranty; (4) Rescind the contract of 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 or any part thereof which has been paid.

When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can thereafter be granted, without prejudice to the provisions of the second paragraph of Article 1191.

o 2nd par. of Art. 1191 provides buyer’s right to rescind, even if previously he has chosen specific performance when fulfillment has become impossible

3. Suspension of Payments in Anticipation of Breach / Remedy of Buyer Pending Suit

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.

D. Recto Law: Sales of Movables on Installments

1. Coverage of Law 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.

a. Rationale of Recto Law o Passage of Recto Law was meant to remedy the abuses

committed in connection with the foreclosure of chattel mortgages and to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment

b. When is Sale “on Installments?” o Sales where the price is payable in several installments, for,

generally, it is in these cases that partial payments consists in relatively small amounts, constituting thus a great temptation for improvident purchasers to buy beyond their means

o Not sales on installments: 1. Price is to be paid in cash 2. Price is to be paid partly in cash and partly in one term 3. Where there was an initial payment and the balance payable

in the future—“straight sale” 4. Where only one payment to be paid in the future

c. Loans and Financing Transactions

o Provisions of Recto Law are applicable to financing transactions derived or arising from sales of movables on installments, even if the underlying contract at issue is a loan because the promissory note had been assigned or negotiated by original seller

o Art. 1484 would apply to a person or entity which has financed the purchase on installments of a subject matter, where the seller subsequently assigns the loan documents to the financing person or entity because the transaction remains to be a sale of personal property in installments

o Where the financing transaction is not derived from a sale, provisions of Recto law do not apply

d. Contracts to Sell Movables Not Covered o Under contracts to sell, the rules on rescission and substantial

breach are not applicable since when the suspensive condition upon which the contract is based fails to materialize, it would not extinguish the contract, and consequently, there is no contract to rescind

o However, provisions of Art. 1597 would apply which grants the seller the right to “rescind” the contract “by giving notice of his election to do so to the buyer”

2. Remedies Provided under Art. 1484 a. Nature of Remedies under Art. 1484 o The remedies are alternative, not cumulative, in that the

exercise of one would bar the exercise of others o Remedies cannot be pursued simultaneously

b. Two Groups of Barring Effects of Remedies o Two levels of barring effects under Art. 1484:

1. Choice of remedies (vertical) 2. Non-recovery of any unpaid balance when it comes to the

remedies of rescission and foreclosure (horizontal) o 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

3. Remedy of Specific Performance o General Rule: when the seller has chosen specific performance,

he can no longer seek for rescission nor foreclosure


o Exception: Art. 1191 provides that the non-defaulting party to a reciprocal obligation may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible It is difficult to see how the generic obligation of the buyer to

pay can ever become impossible o This remedy is done by filing an action in court for recovery

4. Remedy of Rescission o Rescission seeks to cancel the contract and to waive further

claim on the purchase price o General Rule: under this remedy, the seller is under obligation to

make restitution which would include the return of any amount of the purchase price that the buyer may have paid

o Exception: 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.

This stipulation is not really contrary to the “mutual restitution” characteristic of the remedy of rescission since to a great extent, it offers a means of restitution to the obligee for the loss in value or deterioration of the thing subject of the sale, or recompense for the lost opportunity suffered by the seller due to the default of the buyer

a. When Rescission deemed Chosen o When the seller has clearly indicated to end the contract such

as 1. When he sends a notice of rescission 2. Takes possession of the subject matter of the sale 3. When he files an action for rescission

a. Barring Effect of Rescission o Although no barring effect is expressly provided for the remedy

of rescission under Art. 1484, the same is implicit from the nature of the remedy of rescission which requires mutual restitution

o When the unpaid seller shall have chosen the remedy of rescission, then generally he cannot seek further action on the purchase price against the buyer, and in fact, where there is no stipulation to the contrary, the seller is even obliged to return

any portion of the purchase price he received from the buyer, although he can recover damages

4. Foreclosure of Chattel Mortgage Constituted on Subject Property o Foreclosure seeks to purse and realize on the purchase price of

the sale a. When Remedy of Foreclosure deemed Chosen o General Rule: filing of an action for foreclosure should be the

point in which the seller is deemed to have chosen such remedy and at that time he can no longer resort to either the remedies of specific performance or rescission

o Ruling of the Court: point by which seller is deemed to have chosen the remedy of foreclosure is only at the time of actual sale of the subject property at public auction pursuant to the foreclosure proceedings commenced

o Action for issuance of a writ of replevin and actual recovery of possession of the subject property do not amount to a foreclosure

b. Barring Effect of Foreclosure o It is the foreclosure and actual sale at public auction of the

mortgaged chattel that shall bar further recovery by the seller of any balance on the purchaser’s outstanding obligation not satisfied by the sale

o Prior to that time, the seller has every right to receive payments on the unpaid balance of the price from the buyer

c. Barring Effect on Other Securities Given for Payment of Price o Further action being barred under Art. 1484 is not limited to

judicial proceedings, but should include extrajudicial proceedings

o When the assignee forecloses on the chattel mortgage, there can be no further recovery of the deficiency and the seller-mortgagee is deemed to have renounced any right thereto. A contrario, the Court held that in the event the seller-mortgagee first seeks the enforcement of the additional mortgages, guarantees or other security arrangement, he must then be held to have lost by waiver or non-choice his lien on the chattel mortgage of the personal property sold by and mortgaged back to him, although, similar to an action for specific performance, he may still levy on it (Borbon II Ruling)


d. Extent of Barring Effect o Barring effect is only on the purchase price and cannot cover

stipulations in the contract for damages, interests and attorney’s fees

e. Perverse Buyer-Mortgagor o When a defaulting buyer-mortgagor refuses to surrender the

chattel to the seller to allow the latter to be able to proceed with foreclosure, then the seller, even after actual foreclosure, should be allowed to recover expenses and attorney’s fees incurred in trying to obtain possession of the chattel (Ridad Ruling)

E. Lease with Option to Purchase

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.

Remedies are the same as under Art. 1484

Court has recognized that sellers who do not wish to enter into conditional contracts of sale have often resorted to lease with options to purchase, but that nevertheless, the underlying contract would not prevent the transfer of ownership of the subject matter to the buyer-lessee upon fulfillment of the condition of the full payment of the “rents”

What is the Barring Effect on Such Contracts? o Issue: w/n the taking back of possession or enjoyment of the

property leased as treated by Art. 1485 carries the concept of rescission or foreclosure A sale of movable on installment, when structured as a lease

with option to purchase is equivalent to a security arrangement whereby the subject movables are mortgaged by the buyer to the seller

Consequently, when the purported lessor takes possession of the subject movable, the same is treated legally as a foreclosure and the barring effect applicable to foreclosure remedy, not rescission, is given application

Halili Ruling and Filinvest Credit Corp. Ruling give the impression that the “taking back of possession or enjoyment of the leased movable by the seller-lessor would amount to both

a foreclosure that bars all other actions of whatever nature, and not rescission that would still authorize the seller the right to recover damages to make him whole”

REMEDIES IN CASES OF IMMOVABLES A. Remedies of Seller

1. Anticipatory Breach 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.

Art. 1191 provides that upon substantial breach by the buyer for failure to comply with his obligation to pay the price when due, the seller may sue for rescission of the sale

2. Failure of Buyer to Pay Price

Failure of the buyer to pay the price in full within a fixed period does not, by itself, bar the transfer of the ownership or possession, much less dissolve the sale

On failure of the buyer to pay the price, the seller has the option under Art. 1592 to rescind the sale upon judicial or notarial demand

a. Rescission under Art. 1592 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.

o In cases of residential immovables, 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

b. Contracts to Sell Not Covered by Art. 1592 o Art. 1592 applies only to ordinary sale transferring ownership

simultaneously with the delivery of the real property sold, but not to one in which the seller retained ownership of the


immovable object of the sale, merely undertaking to convey it provided the buyer strictly complied with the terms of the contract (Luzon Brokerage Ruling)

c. Resort to Equitable Resolutions o Court held that the buyer of 2 small residential lots on

installment contracts on a 10-year basis, who has paid for 8 continuous years on the principal alone, already more than the value of one lot, besides the larger stipulated interests on both lots, was entitled to the conveyance of one fully paid lot of his choice (Legarda Hermanos Ruling)

B. Remedies of Buyer 1. Suspension of Payment (refer to Art. 1590) 2. In case of Subdivision or Condominium Projects

Sec. 23 of PD 957. 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.

Sec. 24 of PD 957. Failure to Pay Installments. The rights of the buyer in the event of his failure to pay the installments due for reasons other than the failure of the owner or developer to develop the project shall be governed by Republic Act No. 6552.

Where the transaction or contract was entered into prior to the effectivity of Republic Act No. 6552 on August 26, 1972, the defaulting buyer shall be entitled to the corresponding refund based on the installments paid after the effectivity of the law in the absence of any provision in the contract to the contrary.

o Buyer of a condominium unit is justified in suspending payment of his monthly amortization where the seller fails to give a copy of the Contract to Sell despite repeated demands (Gold Loop Properties Ruling)

o Nothing in PD 957 provides for the nullification of a contract to sell in the event that the seller, at the time the contract was entered

into did not possess a certificate of registration and a license to sell (Cho Chien Ruling)

f. Notice Required under Sec. 23 of PD 957 o 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

g. Retroactive Application of PD 957 o While PD 957 did not expressly provide for retroactivity in its

entirety, yet the same can be plainly inferred from the unmistakable intent of the law to protect innocent lot buyers from scheming subdivision developers

o As between small lot buyers and the gigantic financial institution which the developers deal with, it is obvious that the law—as an instrument of social justice—must favor the weak

3. Right to Grace Period Stipulated o 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

C. Maceda Law: Sales of Real Estate on Installments

a. “Role” of Maceda Law o RA 6552 (Realty Installment Buyer Protection Act) declares as

“public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions”

o Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments, hence, under Maceda Law, there are formal requirements of rescission or cancellation

o This law recognizes the seller’s right of cancellation of sale on installments of industrial and commercial properties with full retention of previous payments

b. Retroactive Application of Law o RA 6552 does not expressly provide for its retroactive application

but the Court have rules otherwise on a case to case basis


1. Transaction Covered o Not only sales on installments of real estate but also financing of

such acquisitions o It covers all transactions or contracts involving sale or financing

of real estate on installment payments, including residential condominium apartments

o This includes both contracts of sale and contracts to sell a. Maceda Law Covers Contracts to Sell o Reasons for the coverage:

i. The coverage is based on the nature of the contract and subject matter at the time of perfection, and not what happens at consummation

ii. When conditions attaching to the contract to sell is not fulfilled, which have the effect of extinguishing the contract, the Maceda Law governs the effective remedies and consequences available to the parties

2. Transactions Excluded from Coverage o The enumeration below is not exclusive

i. Sales covering industrial lots ii. Sales covering commercial buildings and commercial lots by

implication iii. Sales to tenants under agrarian reform laws

b. Maceda Law Cannot be Invoked by Highest Bidder in Foreclosure Proceedings

o For the reason that the person or entity, although binding itself to the terms of the contracts of sale, is not the real party to the original installment sales and does not have any rights promoted under the Maceda Law

3. Right Granted a. At Least 2 years Installments Paid o Where the buyer has paid at least 2 years of installments, he is

entitled to the following rights in case he defaults in the payments of succeeding installments:

1. To pay, without additional interest, the unpaid installments due within the total grace period earned by him, which is fixed at the rate of 1 month grace period for every 1 year of installment payments

2. If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to 50% of the total payments made and, after 5 years of installments, an additional 5% every year but not to exceed 90% of the total payments made

i. Exercise of Grace Period o This can be exercised by the buyer once in every 5 years of

the life of the contract and its extensions, if any o Downpayments, deposits or options on the contract shall be

included in the computation of the total number of installments made

ii. How Cancellation of Contract can be Effected o Actual cancellation of the contract takes place after 30 days

from receipt by the buyer of the notice of cancellation or demand for rescission of the contract by notarial act and upon full payment of the cash surrender value to the buyer

b. Less than 2 years Installments Paid o Buyer shall still be entitled to a grace period of 60 days from

the date the installment became due o If buyer fails to pay the installments due at the expiration of

the grace period, seller may cancel the contract after 30 days from receipt by the buyer of the notice of cancellation or demand for rescission of the contract by notarial act

c. Compensation Rule on Amortization of Payments o When buyer fails to pay any monthly amortization, he is under

Art. 1169 already in default and liable for the damages stipulated in the contract. However, the default committed could be compensated by the interest and surcharges imposed upon the buyer under the contract (Leano Ruling)

d. Formula to Compute the Installment Mode o 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. monthly, quarterly, etc.

4. Interpretation of Grace Period and Mode of Cancellation o Formal reading of the provisions of Maceda Law implies that

once a buyer fails to avail of the grace period granted to him, then either rescission or cancellation of the contract becomes a


matter of right on the part of the seller, provided he complies with the procedure provided for in the Law

o The Court has interpreted it otherwise o Two basic doctrines applicable to Maceda Law (McLaughlin

Ruling): a. Notarial act to be applicable only to rescission whereas

“notice of cancellation” need not be by notarial act b. Even after the expiration of the grace period, the buyer still

can prevent rescission or cancellation of the contract within the 30 day period when rescission or cancellation is to take effect

o McLauglin Ruling provides for 2 grace periods: a. First is the one provided for expressly by the law, the

minimum 60 days—this is without interest and penalties even when these are stipulated in the contract

b. Other one is the period before rescission or cancellation actually takes effect—buyer is liable for and would have to include in his payments the stipulated interests and penalties incurred

5. Other Rights Granted to Buyer o Maceda Law provides for the following rights to the buyer:

a. 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 assignment shall be done by notarial act

b. 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

6. Effect of Contrary Stipulations o Under Sec. 7, any stipulation in any contract entered into

contrary to the provisions of the Law, shall be null and void 7. Maceda Law Cannot be Availed of by Developer o For the reason that the Law aims to protect “buyers of real

estate on installment payments” o The Law does not grant the developer any legal ground to cancel

the contracts to sell; rather, it prescribes the responsibility of the seller in case the contracts are cancelled

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

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

CHAPTER 11 REMEDIES OF RESCISSION AND CANCELLATION FOR

IMMOVABLES AT PERFECTION

A. Requisite Contractual Stipulations in a CONTRACT TO SELL 1. Full payment of the purchase price by the buyer constitutes a

suspensive condition on the obligation of the seller to sell and transfer ownership of the subject matter

2. Accompanied by stipulations or agreements that: i. Ownership of subject matter shall remain with the seller until

full payment of the price, and ii. Specific right is granted to the seller to extrajudicially rescind or

cancel the contract in case of default

B. Stipulation on Execution of DEED OF ABSOLUTE SALE o When there is a stipulation or promise that the seller shall

execute a deed of absolute sale upon completion of payment of the purchase price by the buyer agreement is CONTRACT TO SELL because it would be equivalent to reservation of title clause However, the above principle must be coupled with a

stipulation to the effect that title to the property is reserved in the seller until full payment of purchase price

C. Stipulation on the PAYMENT OF PRICE o In contract to sell, payment of price is a suspensive condition,

failure of which is not a breach, casual or serious but an event that prevents the obligation of the seller to convey title from acquiring obligatory force


If there has been substantial compliance, then cancellation cannot be effected

DURING CONSUMMATION STAGE

A. Legal effect of Delivery Made o In contract of sale title to the property passes to the buyer

upon the delivery of the thing sold o In contract to sell ownership is, by agreement, reserved in

seller and is not to pass to the buyer until full payment of the purchase price

B. Legal effect of Full Payment of Price o In contract to sell

i. If delivery of subject matter had been previously made ownership is ipso jure transferred to the buyer

ii. If delivery has not been made it allows the buyer to demand for specific performance

C. Legal effect of Non-payment of Price o In contract of sale non-payment is a breach, and when

substantial in nature, would allow seller to rescind the sale o In contract to sell not a breach but an event that prevents the

obligation of the vendor to convey title in accordance with Art. 1184

REMEDIES AVAILABLE

A. When condition on Price Payment not fulfilled

Contract of Sale Contract to Sell Conditional Sale

If subject matter has been delivered seller cannot recover ownership until and unless the contract is resolved or rescinded by court action

Contract is extinguished no action is necessary other than recovery of possession in case buyer refuses to voluntarily deliver

Non-happening of condition prevents the contract from coming

Non-happening of condition may be waived by the obligee

into existence and neither rescission or specific performance may be pursued

who may still seek specific performance

Issue of breach is completely irrelevant

Basis of rescission must be substantial breach

Rescission may be pursued with forfeiture of the amounts paid when that has been expressly provided for

Imperative that the amounts paid must be returned

Rescission may be pursued with forfeiture of the amounts paid when that has been expressly provided for

Arts. 1191, 1592 and 1545

Arts. 1185 and 1545

B. Requirements of the MACEDA LAW on grace period, cash

surrender value and prescribed manner of notarial rescission or cancellation must always apply, whether in a contract of sale or contract to sell, involving installment sales of residential real estate and residential condominium unit