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SALES
Chapter 1
NATURE AND FORM OF THE
CONTRACT
ART. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the
other to pay therefor a price certain in money or its
equivalent.
A contract of sale may be absolute or conditional.
(1445a)
Concept of contract of sale.
The contract of sale is an agreement whereby one of the parties
(called the seller or vendor) obligates himself to deliver something
to the other (called the buyer or purchaser or vendee) who, on
his part, binds himself to pay therefor a sum of money or its
equivalent (known as the price).
Under the Spanish Civil Code, the contract was referred to as
a contract of “purchase and sale.” As every “sale” necessarily
presupposes a “purchase,” this name was regarded as redundant.
Hence, the name of Title VI has been simplified by calling it “sales”
and the name of the contract has been changed for the same reason to “contract of sale.” (Report of the Code Commission, p. 141.)
“It is required in the proposed Code that the seller transfers the ownership of the thing sold. (Arts. 1458, 1459, 1495,
1547.) In the present Code (Art. 1445.), his obligation is merely
to deliver the thing, so that even if the seller is not the owner,
he may validly sell, subject to the warranty (Art. 1474.) to
maintain the buyer in the legal and peaceful possession of the
4
Art. 1458
NATURE AND FORM OF THE CONTRACT
5
thing sold. The Commission considers the theory of the
present law unsatisfactory from the moral point of view.”
(Ibid.)
Characteristics of a contract of sale.
The contract of sale is:
(1) Consensual, because it is perfected by mere consent without any further act;
(2) Bilateral,1 because both the contracting parties are bound
to fulfill correlative obligations towards each other — the seller,
to deliver and transfer ownership of the thing sold and the buyer,
to pay the price;
(3) Onerous, because the thing sold is conveyed in consideration of the price and vice versa (see Gaite vs. Fonacier, 2 SCRA 820
[1961].);
(4) Commutative, because the thing sold is considered the
equivalent of the price paid and vice versa. (see Ibid.) However,
the contract may be aleatory2 as in the case of the sale of a hope
(e.g., sweepstakes ticket);
(5) Nominate, because it is given a special name or designation in the Civil Code, namely, “sale”; and
(6) Principal, because it does not depend for its existence and
validity upon another contract.
ILLUSTRATIVE CASES:
1. Trial Court decided that there was no payment by buyer of
lumber covered by invoices of seller but Court of Appeals held that
1
Obligations are bilateral when both parties are mutually bound to each other. They
are reciprocal when the performance one is designed to be the equivalent and the condition for the performance of the other. In a contract of sale, in the absence of any stipulation, the obligations of the seller and buyer are reciprocal, the obligation or promise of
each party is the cause or consideration for the obligation or promise by the other. The
reciprocal obligations would normally be, in the case of the buyer, the payment of the
agreed price and in the case of the seller, the fulfillment of certain express warranties.
2
Art. 2010. By an aleatory contract, one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do
upon the happening of an event which is uncertain, or which is to occur at an indeterminate time.
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Art. 1458
delivery of lumber was not duly proved because counter-receipts issued by buyer merely certified to receipt of certain statement on claims
for the lumber allegedly delivered.
Facts: S filed a complaint for collection of a sum of money
against B for lumber purchased on credit and received by B. B
denied all the material allegations of the complaint. The trial
court rendered judgment in favor of S. On appeal, the Court of
Appeals reversed the judgment on the ground that the delivery of the lumber to B was not duly proved.
S asserts that the case having been tried and decided by
the trial court on the issue of whether or not there was payment by B of the lumber covered by invoices of S and counterreceipts issued by B, it is alone on this issue that the Court of
Appeals should have decided the case and not on the issue of
whether or not there was delivery of the lumber in question.
The Court of Appeals found that the counter-receipts merely
certified the fact of having received from S certain statements
on claims for lumber allegedly delivered.
Issue: Did the Court of Appeals decide the case on a new
issue not raised in the pleadings before the lower court?
Held: No. The issue of delivery is no issue at all. For delivery and payment in a contract of sale, or for that matter in quasicontracts, are so interrelated and interwined with each other
that without delivery of the goods there is no corresponding
obligation to pay. The two complement each other. (see Art.
1458, par. 1.) It is clear that the two elements cannot be dissociated, for the contract of purchase and sale is, essentially, a bilateral contract, as it gives rise to reciprocal obligations. (Pio
Barretto Sons, Inc. vs. Compania Maritima, 62 SCRA 167 [1975].)
———
————
———-
2. To secure payment of the balance of the purchase price of
iron ore, buyer executed a surety bond in favor of seller, the buyer,
however, claiming that such payment was subject to a suspensive
condition — the sale of the iron ore by buyer.
Facts: B, owner of a mining claim, appointed S as attorneyin-fact to enter into a contract with any individual or juridical
person for the exploration and development of said claim on a
royalty basis. S himself embarked upon the exploitation of the
claim.
Art. 1458
NATURE AND FORM OF THE CONTRACT
Subsequently, B revoked the authority granted by him to S
who assented thereto subject to certain conditions. As a result,
a document was executed wherein S transferred to B all of S’s
rights and interests over the “24 tons of iron ore, more or less”
that S had already extracted from the mineral claims in consideration of the sum of P75,000.00, P10,000.00 of which was paid
upon the signing of the agreement, and “the balance of
P65,000.00 will be paid from and out of the first letter of credit
covering the first shipment of iron ores and of the first amount
derived from the local sale of iron ore” from said claims.
To secure the payment of the balance, B executed in favor
of S a surety bond. No sale of approximately 24,000 tons of iron
ore had been made nor had the balance of P65,000.00 been paid
to S.
Issue: Is the shipment or local sale of the iron ore a condition precedent (or suspensive condition) to the payment of the
balance, or only a suspensive period or term?
Held: (1) Obligation of B one with a term. — The words of the
contract express no contingency in the buyer’s obligation to
pay. There is no uncertainty that the payment will have to be
made sooner or later; what is undetermined is merely the exact
date at which it will be made. By the very terms of the contract,
therefore, the existence of the obligation to pay is recognized;
only its maturity or demandability is deferred.
Furthermore, to subordinate B’s obligation to the sale or
shipment of the ore as a condition precedent would be tantamount to leaving the payment at his discretion (Art. 1182.), for
the sale or shipment could not be made unless he took steps to
sell the ore.
(2) A contract of sale is normally commutative and onerous. —
In a contract of sale, not only does each one of the parties assume a correlative obligation, but each party anticipates performance by the other from the very start.
Nothing is found in the record to evidence that S desired
or assumed to run the risk of losing his right over the ore without getting paid for it, or that B understood that S assumed any
such risk. This is proved by the fact that S insisted on a bond to
guarantee the payment of the P65,000.00 and the fact that B did
put such bond, indicated that he admitted the definite existence of his obligation to pay the balance of P65,000.00. The only
7
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Art. 1458
rational view that can be taken is that the sale of the ore to B
was a sale on credit, and not an aleatory contract, where the
transferor, S, would assume the risk of not being paid at all by
B. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)
Essential requisites of a contract of sale.
The rules of law governing contracts in general are applicable to sales. Like every contract, “sale” has the following requisites or elements:
(1) Consent or meeting of the minds. — This refers to the consent on the part of the seller to transfer and deliver and on the
part of the buyer to pay. (see Art. 1475.) The parties must have
legal capacity to give consent and to obligate themselves. (Arts.
1489, 1490, 1491.) The essence of consent is the conformity of the
parties on the terms of the contract, the acceptance by one of the
offer made by the other. The contract to sell is a bilateral contract.
Where there is merely an offer by one party without the acceptance of the other, there is no consent. (Salonga vs. Farrales, 105
SCRA 359 [1981].) The acceptance of payment by a party is an
indication of his consent to a contract of sale, thereby precluding
him from rejecting its binding effect. (Clarin vs. Rulova, 127 SCRA
512 [1984].)
There may, however, be a sale against the will of the owner in
case of expropriation (see Art. 1488.) and the three different kinds
of sale under the law, namely: an ordinary execution sale (see
Rules of Court, Rule 39, Sec. 15.), judicial foreclosure sale (Ibid.,
Rule 68.), and extra-judicial foreclosure sale. (Act No. 3135,
as amended.) A different set of law applies to each class of sale
mentioned. (see Fiestan vs. Court of Appeals, 185 SCRA 751
[1990].)
The sale of conjugal property requires the consent of both the
husband and the wife. The absence of the consent of one renders
the sale null and void (see Art. 124, Family Code.) while the vitiation thereof (see Art. 1390.) makes it merely voidable. (Guiang vs.
Court of Appeals, 95 SCAD 264, 290 SCRA 372 [1998].)
(2) Object or subject matter. — This refers to the determinate thing
which is the object of the contract. (Art. 1460.) The thing must be
Art. 1458
NATURE AND FORM OF THE CONTRACT
9
determinate or at least capable of being made determinate because
if the seller and the buyer differ in regard to the thing sold, there
is no meeting of the minds; therefore, there is no sale. The subject
matter may be personal or real property. The terms used in the
law are “thing” (e.g., Art. 1458), “article” (Art. 1467), “goods” (e.g.,
Art. 1462), “personal property” (e.g., Art. 1484), “property” (e.g.,
Art. 1490), “movable property” (e.g., Art. 1498), “real estate” (e.g.,
Art. 1539), “immovable” (e.g., Ibid.), “immovable property” (e.g.,
Art. 1544), and “real property.” (Art. 1607.)
A buyer can only claim right of ownership over the object of
the deed of sale and nothing else. Where the parcel of land described in the transfer certificate of title is not in its entirety the
parcel sold, the court may decree that the certificate of title be
cancelled and a correct one be issued in favor of the buyer, without having to require the seller to execute in favor of the buyer an
instrument to effect the sale and transfer of the property to the
true owner. (Veterans Federation of the Philippines vs. Court of
Appeals, 138 SCAD 50, 345 SCRA 348 [2000].)
The sale of credits and other incorporeal rights is covered by
Articles 1624 to 1635; and
(3) Cause or consideration. — This refers to the “price certain
in money or its equivalent” (Art. 1458.) such as a check or a promissory note, which is the consideration for the thing sold. It does
not include goods or merchandise although they have their own
value in money. (see Arts. 1468, 1638.) However, the words “its
equivalent” have been interpreted to mean that payment need not
be in money, so that there can be a sale where the thing given as
token of payment has “been assessed and evaluated and [its] price
equivalent in terms of money [has] been determined.” (see Republic vs. Phil. Resources Dev. Corp., 102 Phil. 968 [1958].)
The price must be real, not fictitious; otherwise, the sale is void
although the transaction may be shown to have been in reality a
donation or some other contract. (Art. 1471.) A seller cannot render
invalid a perfected contract of sale by merely contradicting the
buyer’s allegation regarding the price and subsequently raising
the lack of agreement as to the price. (David vs. Tiongson, 111
SCAD 242, 313 SCRA 63 [1999].)
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Art. 1458
The absence of any of the above essential elements negates
the existence of a perfected contract of sale.3 Sale, being a consensual contract (see Art. 1475.), he who alleges it must show its existence by competent proof. (Dizon vs. Court of Appeals, 302
SCRA 288 [1999].)
Natural and accidental elements.
The above are the essential elements of a contract of sale or
those without which no sale can validly exist. They are to be distinguished from:
(1) Natural elements or those which are deemed to exist in certain contracts, in the absence of any contrary stipulations, like
warranty against eviction (Art. 1548.) or hidden defects (Art.
1561.); and
(2) Accidental elements or those which may be present or absent depending on the stipulations of the parties, like conditions,
interest, penalty, time or place of payment, etc.
ILLUSTRATIVE CASES:
1. Supposed sale was evidenced by a receipt acknowledging receipt of P1,000.00.
Facts: B bought on a partial payment of P1,000.00, evidenced
by a receipt, a portion of a subdivision from S, administrator of
the testate estate of his deceased spouse. Subsequently, S was
authorized by the court to sell the subdivision. In the meantime, PT Co. became the new administrator. It sold the lot to
another which sale was judicially approved.
B files a complaint which seeks, among other things, for
the quieting of title over the lot in question.
Issue: Was there a valid and enforceable sale to B?
Held: No. An examination of the receipt reveals that the
same can neither be regarded as a contract of sale nor a prom3
When a contract of sale is void, the possessor is entitled to keep the fruits during
the period for which he held the property in good faith. Good faith of the possessor
ceases when an action to recover possession of the property is filed against him and he
is served summons therefor. (Development Bank of the Phils. vs. Court of Appeals, 316
SCRA 650 [1999]; see Arts. 526, 528.)
Art. 1458
NATURE AND FORM OF THE CONTRACT
ise to sell. There was merely an acknowledgment of the sum
P1,000.00. There was no agreement as to the total purchase price
of the land nor to the monthly installments to be paid by B. The
requisites for a valid contract of sale are lacking. (Leabres vs.
Court of Appeals, 146 SCRA 158 [1986].)
———— ———— ————
2. Buyer did not sign draft of Contract to Sell because it covered seven (7) lots instead of six (6), but sent to seller five (5) checks
as down payment which the seller did not encash.
Facts: B Company and S, subdivision developer, agreed to
enter into a new Contract to Sell whereby S will sell seven (7)
lots at P423,250.00 with a down payment of P42,325.00 and the
balance payable in 48 monthly installments of P7,395.94. The
draft of the Contract to Sell prepared by S was sent to B Company but B’s president did not sign it although he sent five (5)
checks covering the down payment totalling P27,542.72. S received the checks but did not encash it because B’s president
did not sign the draft contract, the reason given by the latter
was that the draft covered seven (7) lots instead of six (6).
Since no written contract was signed, S sued B to recover
possession of the lots still occupied by the latter.
Issues: (1) May the unsigned draft be deemed to embody
the agreement between the parties?
(2) May the receipt of the five (5) checks by S serve to produce the effect of tender of down payment by B?
Held: (1) Based on the facts, the parties had not arrived at a
definite agreement. The only agreement they arrived at was
the price indicated in the draft contract. The number of lots to
be sold was a material component of the Contract to Sell. Without an agreement on the matter, the parties may not in any way
be considered as having arrived at a contract under the law.
(2) Moreover, since the five (5) checks were not encashed,
B should have deposited the corresponding amount of the said
checks as well as the installments agreed upon. A contract to
sell, as in this case, involves the performance of an obligation,
not merely the exercise of a privilege or a right. Consequently,
performance or payment may be effected not by tender of payment alone but by both tender and consignation. It is consignation which is essential to extinguish B’s obligation to pay the
balance of the purchase price. (see Arts. 1256-1258.) B did not
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Art. 1458
even bother to tender and make consignation of the installments
or to amend the contract to reflect the true intention of the parties as regards the number of lots to be sold. (People’s Industrial
Commercial Corp. vs. Court of Appeals, 88 SCAD 559, G.R. No.
112733, Oct. 24, 1997.)
Effect of absence of price/nonpayment of price.
(1) There can be no sale without a price. (see Art. 1474.) Technically, the cause in sale is, as to the seller, the buyer’s promise to
pay the price, and as to the buyer, the seller’s promise to deliver
the thing sold. A contract of sale is void and produces no effect
whatsoever where the same is without cause or consideration (Art.
1409[3].) in that the purchase price, which appears thereon as paid,
has, in fact, never been paid by the buyer to the seller. Such sale is
nonexistent and cannot be considered consummated. (Mapalo vs.
Mapalo, 17 SCRA 116 [1966]; Ladanga vs. Court of Appeals, 31
SCRA 361 [1984]; Castillo vs. Galvan, 85 SCRA 526 [1978].)
Where the figures referred to by the buyer as prices are mere
estimates given them by the seller of the condominium units in
question, the transaction lacks an essential requisite for the perfection of the contract of sale. (Raet vs. Court of Appeals, 98 SCAD
584, 295 SCRA 677 [1998].)
(2) Non-payment of the purchase price is a resolutory condition for which the remedy is either rescission or specific performance under Article 1191 of the Civil Code. It constitutes a very
good reason to rescind a sale, for it violates the very essence of
the contract of sale. (Central Bank of the Philippines vs. Bachara,
328 SCRA 807 [2000].)
But the failure to pay the price in full within a fixed period
does not, by itself, dissolve a contract of sale in the absence of any
agreement that payment on time is essential (Ocampo vs. Court
of Appeals, 52 SCAD 610, 233 SCRA 551 [1994]; see Art. 1592.), or
make it null and void for lack of consideration, but results at most
in default on the part of the vendee for which the vendor may
exercise his legal remedies. (Balatbat vs. Court of Appeals, 73
SCAD 660, 261 SCRA 128 [1996].) It is incumbent upon the party
challenging the recital of a notarized deed of sale that the vendor
Art. 1458
NATURE AND FORM OF THE CONTRACT
13
has received the purchase price to prove his claim with clear and
convincing evidence. A notarized document is evidence of high
character. (Diaz vs. Court of Appeals, 145 SCRA 346 [1986].)
An action to declare a contract void or inexistent does not
prescribe. (Art. 1410.)
Transfer of title to property for a price,
essence of sale.
(1) Obligations to deliver and to pay. — The transfer of title to
property or agreement to transfer title for a price actually paid or
promised, not a mere physical transfer of the property, is the essence of sale. (see Ker & Co., Ltd. vs. Lingad, 38 SCRA 524 [1971];
see Gardner vs. Court of Appeals, 131 SCRA 585 [1984]; Santos
vs. Court of Appeals, 337 SCRA 67 [2000].) But neither is the delivery of the thing bought nor the payment of the price necessary
for the perfection of the contract of sale. Being consensual, it is
perfected by mere consent. (See Art. 1475.) However, where the
seller can no longer deliver the object of the sale to the buyer because the latter has already acquired title and delivery thereof
from the rightful owner, such contract may be deemed to be inoperative and may thus fall, by analogy, under Article 1409(5) of
the Civil Code: “those which contemplate an impossible service,’’
since delivery of ownership is no longer possible. (Nool vs. Court
of Appeals, 84 SCAD 941, 276 SCRA 149 [1997]; Heirs of San
Miguel vs. Court of Appeals, 364 SCRA 523 [2001].)
It is only upon the existence of the contract of sale that the
seller is obligated to transfer ownership to the buyer and the buyer,
to pay the purchase price to the seller. (Chua vs. Court of Appeals, 401 SCRA 54 [2003].) In defining the contract of sale, Article 1458 merely specifies the obligations of the parties to transfer
ownership and to pay under the contract. The parties will have
these obligations even without Article 1458.
ILLUSTRATIVE CASE:
Spouses exchanged their properties for no par shares of a corporation as a result of which they gained control of the corporation.
Facts: Spouses H & W, stockholders of DT Corporation, conveyed to said DT a parcel of land leased to E, in exchange for
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Art. 1458
2,500 shares of stock equivalent to 55% majority in the corporation. E questioned the transaction on the ground that it was not
given the first option to buy the leased property pursuant to
the proviso in the lease agreement.
Issue: Is the “deed of exchange” a contract of sale which, in
effect, prejudiced E’s right of first refusal over the leased property?
Held: No. In effect, DT Corporation is a business conduit of
H and W. What they really did was to invest their properties
and change the nature of their ownership from unincorporated
to incorporated form by organizing DT to take control of their
properties and at the same time save on inheritance taxes. The
deed of exchange cannot be considered a contract of sale. There
was no transfer of actual ownership interests by H and W to a
third party. They merely changed their ownership from one
form to another. The ownership remained in the same hands.
Hence, E has no basis for its claim of a right of first refusal under the lease contract. (Delpher Trades Corporation vs. Intermediate Appellate Court, 157 SCRA 349 [1988].)
(2) Where transfer of ownership not intended by the parties. —
A contract for the sale or purchase of goods/commodity to be
delivered at a future time, if entered into without the intention
of having any goods/commodity pass from one party to another, but with an understanding that at the appointed time,
the purchaser is merely to receive or pay the difference between
the contract and the market prices, is illegal. Such contract falls
under the definition of what is called “futures” in which the
parties merely gamble on the rise or fall in prices and is declared null and void by law.4 (Onapal Philippines Commodities,
Inc. vs. Court of Appeals, 218 SCRA 281 [1993].)
Kinds of contract of sale.
(1) As to presence or absence of conditions. — A sale may be
either:
4
Art. 2018. If a contract which purports to be for the delivery of goods, securities or
shares of stock is entered into with the intention that the difference between the price
stipulated and the exchange or market price at the time of the pretended delivery shall
be paid by the loser to the winner, the transaction is null and void. The loser may recover what he has paid.
Art. 1458
NATURE AND FORM OF THE CONTRACT
15
(a) Absolute. — where the sale is not subject to any condition whatsoever and where title passes to the buyer upon
delivery of the thing sold. Thus, it has been held that a deed
of sale is absolute in nature although denominated as a “Deed
of Conditional Sale” in the absence of any stipulation that the
title to the property sold is reserved in the vendor until full
payment of the purchase price nor a stipulation giving the
vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period. (Dignos vs.
Court of Appeals, 158 SCRA 375 [1988]; Pingol vs. Court of
Appeals, 44 SCAD 498, 226 SCRA 118 [1995]; People’s Industrial and Commercial Corporation vs. Court of Appeals, 88
SCAD 559, 281 SCRA 206 [1997].) In such case, ownership of
the property sold passes to the vendee upon the actual or constructive delivery thereof. (see Art. 1497.)
Payment of the purchase price is not essential to the transfer of ownership as long as the property sold has been delivered. Such delivery (see Art. 1497.) operates to divest the vendor of title to the property which may not be regained or recovered until and unless the contract is resolved or rescinded
in accordance with law (Philippine National Bank vs. Court
of Appeals, 82 SCAD 472, 272 SCRA 291 [1997].); or
(b) Conditional. — where the sale contemplates a contingency (Arts. 1461, 1462, par. 2; Art. 1465.), and in general,
where the contract is subject to certain conditions (see Art.
1503, par. 1.), usually, in the case of the vendee, the full payment of the agreed purchase price (Art. 1478; see People’s
Homesite & Housing Corp. vs. Court of Appeals, 133 SCRA
777 [1984].) and in the case of the vendor, the fulfillment of
certain warranties, e.g., the timely eviction of squatters on the
property sold. (Romero vs. Court of Appeals, 65 SCAD 621,
250 SCRA 223 [1995].)
In sales with assumption of mortgage, the assumption of
mortgage is a condition to the seller-mortgagor’s consent to
the sale so that without approval by the mortgagee no sale is
perfected and the seller remains the owner and mortgagor of
the subject property with the right to redeem in the case of
foreclosure. (Ramos vs. Court of Appeals, 87 SCAD 24, 279
SCRA 118 [1997].)
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Art. 1458
However, a sale denominated as a “Deed of Conditional
Sale’’ is still absolute where the contract is devoid of any proviso that title is reserved or the right to unilaterally rescind is
stipulated, e.g., until or unless the price is paid. (Heirs of Juan
San Andres vs. Rodriguez, 332 SCRA 769 [2000].)
The delivery of the thing sold does not transfer title until
the condition is fulfilled. Where the condition is imposed, instead, upon the perfection of the contract the failure of such
condition would prevent such perfection (Galang vs. Court of
Appeals, 43 SCAD 737, 225 SCRA 37 [1993]; Roque vs. Lapuz,
96 SCRA 741 [1980]; Babasa vs. Court of Appeals, 94 SCAD 679,
290 SCRA 532 [1998].) or the juridical relation itself from coming into existence.
If the condition is imposed on an obligation of a party (e.g.,
ejection by the vendor of squatters within a certain period
before delivery of property) not upon the perfection of the
contract itself, which is not complied with, the other party may
either refuse to proceed or waive said condition. (see Art. 1545;
Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223
[1995].) The stipulation that the “payment of the full consideration [of a parcel of land] shall be due and payable in five
(5) years from the execution of a formal deed of sale’’ is not a
condition which affects the efficacy of the contract of sale. It
merely provides the manner by which the full consideration
is to be computed and the time within which the same is to be
paid. (Heirs of Juan San Andres vs. Rodriguez, supra.) Similarly, the mere fact that the obligation of the buyer to pay
the balance of the purchase price was made subject to the
condition that the seller first deliver the reconstituted title of
the house and lot sold does not make the contract a contract
to sell for such condition is not inconsistent with a contract of
sale. (Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643
[2000].)
(2) Other kinds. — There are, of course, other kinds of sale
depending on one’s point of view, e.g., as to the nature of the subject matter (real or personal, tangible or intangible), as to manner
of payment of the price (cash or installment), as to its validity
(valid, rescissible, unenforceable, void), etc.
Art. 1458
NATURE AND FORM OF THE CONTRACT
17
Contract of sale and contract to sell
with reserved title distinguished.
At this stage, it would be desirable to point out that there are
distinctions between the two contracts.
(1) Transfer of title. — In a contract of sale, title passes to the
buyer upon delivery of the thing sold, while in a contract to sell
(or of “exclusive right and privilege to purchase”), where it is
stipulated that ownership in the thing shall not pass to the purchaser until he has fully paid the price (Art. 1478.), ownership is
reserved in the seller and is not to pass until the full payment of
the purchase price. In the absence of such stipulation, especially
where the buyer took possession of the property upon execution
of the contract, indicates that what the parties contemplated is a
contract of absolute sale.
(2) Payment of price. — In the first case, non-payment of the
price is a negative resolutory condition (see Art. 1179.), and the
remedy of the seller is to exact fulfillment or to rescind the contract (see Arts. 1191, 1592.), while in the second case, full payment
is a positive suspensive condition, the failure of which is not a
breach, casual or serious, of the contract but simply an event that
prevents the obligation of the vendor to convey title from acquiring binding force. (Manvel vs. Rodriguez, 109 Phil. 1 [1960]; Roque
vs. Lapuz, 96 SCRA 741 [1980]; Jacinto vs. Kaparaz, 209 SCRA 246
[1992]; Adelfa Properties, Inc. vs. Court of Appeals, 58 SCAD 462,
240 SCRA 565 [1995].) Where the seller promises to execute a deed
of absolute sale upon full payment of the purchase price, the agreement is a contract to sell. (Rayos vs. Court of Appeals, 434 SCRA
365 [2004].)
(3) Ownership of vendor. — Being contraries, their effect in law
cannot be identical. In the first case, the vendor has lost and cannot recover the ownership of the thing sold and delivered, actually or constructively (see Art. 1497.), until and unless the contract of sale itself is resolved and set aside. In the second case,
however, the title remains in the vendor if the vendee does not
comply with the condition precedent of making payment at the
time specified in the contract. (see Heirs of P. Escanlar vs. Court
of Appeals, 88 SCAD 532, 281 SCRA 176 [1997]; People’s Industrial and Commercial Corporation vs. Court of Appeals, 281 SCRA
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Art. 1458
206 [1997]; Luzon Brokerage Co. vs. Maritime Bldg. Co., Inc., 43
SCRA 93 [1972] and 86 SCRA 305 [1978]; Katigbak vs. Court of
Appeals, 4 SCRA 243 [1962]; Lim vs. Court of Appeals, 182 SCRA
564 [1990]; Tuazon vs. Garilao, 152 SCAD 699, 362 SCRA 654
[2001].) There is no actual sale until and unless full payment of
the price is made (see Bowe vs. Court of Appeals, 220 SCRA 158
[1993].) and a contract of sale is entered into to consummate the
sale. If the vendor should eject the vendee for failure to meet the
condition precedent he is enforcing the contract and not rescinding it. Article 11915 is not applicable. A contract to sell is commonly
entered into so as to protect the seller against a buyer who intends
to buy a property in installments by withholding ownership over
the property until the buyer effects full payment therefore. (City
of Cebu vs. Heirs of C. Rubi, 106 SCAD 61, 306 SCRA 408 [1999].)
A stipulation in a contract providing for automatic rescission
upon non-payment of the purchase price within the stipulated
period is valid. (see Art. 1191.) It is in the nature of an agreement
granting a party the right to rescind a contract unilaterally in case
of breach without need of going to court. (Pangilinan vs. Court
of Appeals, 87 SCAD 408, 279 SCRA 590 [1997].)
ILLUSTRATIVE CASES:
1. Vendor “sells, transfers, and conveys” a land to the vendee
who may sell or assign the land prior to full payment of all
installments.
Facts: The dispositive part of a deed entitled “Deed of Sale
of Real Property” states: “for and in consideration of the sum
of P140,000, payable under the terms and conditions stated in
the foregoing premises, the VENDOR sells, transfers and con-
5
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
(1124)
Art. 1458
NATURE AND FORM OF THE CONTRACT
veys unto the VENDEE x x x” the property in question as of
December 22, 1971, the date of said document.”
In paragraph 5 thereof, it is provided that “should the
VENDEE prior to the full payment of all the amounts aforementioned, decide to sell or to assign part or all of the aforementioned parcel of land, the VENDOR shall be informed in
writing and shall have the option to repurchase the property x
x x. Should the VENDOR herein decide to repurchase and the
property is sold or transferred to a third person, the balance of
the consideration herein still due to the VENDOR shall constitute automatically a prior lien on the consideration to be paid
by the third person to herein VENDEE.”
Issue: Is the above instrument a contract to sell?
Held: No. (1) Title to land transferred to vendee. — “It is a deed
of sale in which title to the subject land was transferred to the
vendee as of the date of the transaction, notwithstanding that
the purchase price had not yet been fully paid at that time.
Under the first-cited stipulation, what is deferred is not the
transfer of ownership but the full payment of the purchase price,
which is to be made in installments, on the dates indicated.
Under the second stipulation, it is recognized that the vendee
may sell the property even ‘prior to full payment of all the
amounts aforementioned,’ which simply means that although
the purchase price had not yet been completely paid, the vendee
had already become the owner of the land. As such, he could
sell the same subject to the right of repurchase reserved to the
vendor.”
(2) Right of vendor where land sold by vendee. — “In fact, the
contract also provides for the possibility of the vendee selling
the property to a third person, in which case the vendor, if she
wishes to repurchase the land, shall have a lien on any balance
of the consideration to be paid by the third person to the
vendee.” (Filoil Marketing Corp. vs. Intermediate Appellate Court,
169 SCRA 293 [1989].)
———— ———— ————
2. The sale of scrap iron is subject to the condition that the
buyer will open a letter of credit in favor of the seller for P250,000.00
on or before May 15, 1983.
Facts: In May 1, 1983, B (buyer) and S (seller) entered into a
contract entitled “Purchase and Sale of Scrap Iron” whereby S
19
20
SALES
Art. 1458
bound itself to sell the scrap iron upon the fulfillment by B of
his obligation to make or indorse an irrevocable and unconditional letter of credit not later than May 15, 1983.
On May 17, 1983, B, through his men, started to dig and
gather scrap iron at S’s premises. S cancelled the contract because of B’s alleged non-compliance with the essential preconditions among which is the opening of the letter of credit. It
appeared that the opening of the letter of credit was made on
May 26, 1983 by a corporation which was not a party to the
contract, with a bank not agreed upon, and was not irrevocable
and unconditional, for it was without recourse and stipulated
certain conditions.
In his complaint, B, private respondent, prayed for judgment ordering S, petitioner corporation, to comply with the
contract and to pay damages.
Issue: Is the transaction between S and B a mere contract to
sell or promise to sell, and not a contract of sale?
Held: (1) The contract is not one of sale. — “The petitioner
corporation’s obligation to sell is unequivocally subject to a
positive suspensive condition, i.e., the private respondent’s
opening, making or indorsing of an irrevocable and unconditional letter of credit. The former agreed to deliver the scrap
iron only upon payment of the purchase price by means of an
irrevocable and unconditional letter of credit. Otherwise stated,
the contract is not one of sale where the buyer acquired ownership over the property subject to the resolutory condition that
the purchase price would be paid after delivery. Thus, there
was to be no actual sale until the opening, making or indorsing
of the irrevocable and unconditional letter of credit. Since what
obtains in the case at bar is a mere promise to sell, the failure of
the private respondent to comply with the positive suspensive
condition cannot even be considered a breach — casual or serious — but simply an event that prevented the obligation of
petitioner corporation to convey title from acquiring binding
force.”
(2) The obligation of the petitioner corporation to sell did not
arise. — “Consequently, the obligation of the petitioner corporation to sell did not arise; it, therefore, cannot be compelled by
specific performance to comply with its prestation. In short,
Article 1191 of the Civil Code does not apply; on the contrary,
pursuant to Article 1597 of the Civil Code, the petitioner cor-
Art. 1458
NATURE AND FORM OF THE CONTRACT
poration may totally rescind, as it did in this case, the contract.’’
Since the refusal of petitioner to deliver the scrap iron was
founded on the “non-fulfillment by the private respondent of a
suspensive condition,’’ it cannot be held liable for damages.
(Visayan Sawmill Company, Inc. vs. Court of Appeals, 219 SCRA
381 [1993].)
Romero, J., dissenting:
(1) The contract reached the stage of perfection. — “Evidently,
the distinction between a contract to sell and a contract of sale
is crucial in this case. Article 1458 has this definition: x x x. Article 1475 gives the significance of this mutual undertaking of
the parties, thus: x x x. Thus, when the parties entered into the
contract entitled “Purchase and Sale of Scrap Iron” on May 1,
1983, the contract reached the stage of perfection, there being a
meeting of the minds upon the object which is the subject matter of the contract and the price which is the consideration.
Applying Article 1475 from that moment, the parties may reciprocally demand performance of the obligations incumbent upon
them, i.e., delivery by the vendor and payment by the vendee.
(2) The seller has placed the goods in the control and possession
of the vendee. — From the time the seller gave access to the buyer
to enter his premises, manifesting no objection thereto but even
sending 18 or 20 people to start the operation, he has placed
the goods in the control and possession of the vendee and delivery is effected. For, according to Article 1497, “The thing sold
shall be understood as delivered when it is placed in the control and possession of the vendee.”
(3) That payment of the price in any form was not yet effected is
immaterial to the transfer of ownership. — “That payment of the
price in any form was not yet effected is immaterial to the transfer of the right of ownership. In a contract of sale, the nonpayment of the price is a resolutory condition which extinguishes
the transaction that, for a time, existed and discharges the obligations created thereunder. x x x.
“Consequently, in a contract of sale, after delivery of the
object of the contract has been made, the seller loses ownership
and cannot recover the same, unless the contract is rescinded.
But in the contract to sell, the seller retains ownership and the
buyer’s failure to pay cannot even be considered a breach,
whether casual or substantial, but an event that prevented the
seller’s duty to transfer title to the object of the contract.”
21
22
SALES
Art. 1458
(4) The transaction is an absolute contract of sale and not a contract to sell. — “The phrase in the contract ‘on the following
terms and conditions’ is standard form which is not to be construed as imposing a condition, whether suspensive or resolutory, in the sense of the happening of a future and uncertain
event upon which an obligation is made to depend. There must
be a manifest understanding that the agreement is in what may
be referred to as “suspended animation” pending compliance
with provisions regarding payment. The reservation of title to
the object of the contract in the seller is one such manifestation.
Hence, it has been decided in the case of Dignos vs. Court of
Appeals (158 SCRA 375 [1988].) that, absent a proviso in the contract that the title to the property is reserved in the vendor until full payment of the purchase price or a stipulation giving
the vendor the right to unilaterally rescind the contract the
moment the vendee fails to pay within the fixed period, the
transaction is an absolute contract of sale and not a contract to
sell.”
Contract to sell and conditional sale
distinguished.
A contract to sell may be defined as a bilateral contract
whereby the prospective seller, while expressly reserving the
ownership of the subject property despite delivery thereof to the
prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition
agreed upon, that is, full payment of the purchase price.
(1) Transfer of title to the buyer. — A contract to sell as defined
above may not even be considered as a conditional contract of sale
where the seller may likewise reserve title to the property subject
of the sale until the fulfillment of the suspensive condition, because in a conditional contract of sale, the first element of consent is present, although it is conditioned upon the happening of
a contingent event which may or may not occur. If the suspensive
condition is not fulfilled, the perfection of the contract of sale is
completely abated. (cf. Homesite and Housing Corp. vs. Court of
Appeals, 133 SCRA 777 [1984].) However, if the suspensive condition is fulfilled, the contract of sale is thereby perfected, such
that if there had already been previous delivery of the property
subject of the sale to the buyer, ownership thereto automatically
Art. 1458
NATURE AND FORM OF THE CONTRACT
23
transfers to the buyer by operation of law without any further act
having to be performed by the seller.
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 title to the prospective buyer by
entering into a contract of absolute sale to consummate the transaction.
(2) Sale of subject property to a third person. — It is essential to
distinguish between a contract to sell and a conditional contract
of sale specially in cases where the subject property is sold by the
owner not to the party the seller contracted with, but to a third
person. In a contract to sell, there being no previous sale of the
property, a third person buying such property despite the
fulfillment of the suspensive condition such as the full payment
of the purchase price, for instance, cannot be deemed a buyer in
bad faith and the prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case.
Title to the property will transfer to the buyer after registration
because there is no defect in the owner-seller’s title per se, but the
latter, of course, may be sued for damages by the intending buyer.6
In a conditional contract of sale, however, upon the fulfillment
of the suspensive condition, the sale becomes absolute and this will
definitely affect the seller’s title thereto. In fact, if there had been
previous delivery of the subject property, the seller’s ownership
or title to the property is automatically transferred to the buyer,
such that the seller will no longer have any title to transfer to any
third person. Applying Article 1544 of the Civil Code, such second buyer of the property who may have had actual or constructive knowledge of such defect in the seller’s title, or at least was
charged with the obligation to discover such defect, cannot be a
registrant in good faith. Such second buyer cannot defeat the first
buyer’s title. In case a title is issued to the second buyer, the first
6
A prior contract to sell made by a decedent during his lifetime prevails over a
subsequent sale made by an administrator without probate court approval. The estate is
bound to convey the property upon full payment of the consideration. (Liu vs. Loy, Jr.,
438 SCRA 244 [2004].)
24
SALES
Art. 1458
buyer may seek reconveyance of the property subject of the sale.
(Coronel vs. Court of Appeals, 75 SCAD 141, 263 SCRA 15 [1996].)
Other cases of contract to sell.
(1) Where the subject matter is not determinate (Arts. 1458,
1460.) or the price is not certain (Art. 1458.), the agreement is
merely a contract to sell. (Yu Tek vs. Gonzales, 29 Phil. 384 [1915];
Ong & Jang Chuan vs. Wise & Co., 33 Phil. 339 [1916].) For purposes of the perfection of a contract of sale (see Art. 1475.), there
is already a price certain where the determination of the price is
left to the judgment of a specified person or persons (see Art. 1469,
par. 1.), and notwithstanding that such determination has yet to
be made.
(2) A sale of future goods (see Art. 1462.) even though the
contract is in the form of a present sale operates as a contract to
sell the goods.
(3) Where the stipulation of the parties is that the deed of sale
and corresponding certificate of sale would be issued only after
full payment of the purchase price, the contract entered into is a
contract to sell and not a contract of sale. (David vs. Tiongson,
111 SCAD 242, 313 SCRA 63 [1999].)
It has been held that the act of the vendor of delivering the
possession of the property (land) to the vendee contemporaneous with the contract (deed of sale in a private instrument) was
an indication that an absolute contract of sale was intended by
the parties and not a contract to sell. (Dignos vs. Court of Appeals,
158 SCRA 375 [1988].)
ILLUSTRATIVE CASE:
Seller of interest in a business claims the profits derived by business before the price thereof was fixed by appraisers designated by the
parties in the contract.
Facts: S sold to B his interest in a company, the price to be
ascertained by three (3) appraisers. After six (6) months, the
appraisers rendered their report at which time S signed a document whereby he acknowledged receipt of the price arrived at
and relinquished any claim that he had in the business. The
Art. 1459
NATURE AND FORM OF THE CONTRACT
25
report of the appraisers did not contain any segregation of the
assets of the business from the accumulated profits.
S is now claiming the profits from B from the time of the
execution of the sale to the time he acknowledged receipt of
the price on the ground that before the price was fixed by the
appraisers, the contract was not a sale but merely a contract to
sell.
Issue: Is this contention of S tenable?
Held: No. The contract of sale is perfected when the parties
agree upon the thing sold and upon the price (see Art. 1475.), it
being sufficient for the price to be certain that its determination be left to the judgment of a specified person. (Barretto vs.
Sta. Maria, 26 Phil. 200 [1913].)
ART. 1459. The thing must be licit and the vendor
must have a right to transfer the ownership thereof at
the time it is delivered. (n)
Requisites concerning object.
(1) Things. — Aside from being (a) determinate (Arts. 1458,
1460.), the law requires that the subject matter must be (b) licit or
lawful, that is, it should not be contrary to law, morals, good customs, public order, or public policy (Arts. 1347, 1409[1, 4].), and
should (c) not be impossible. (Art. 1348.) In other words, like any
other object of a contract, the thing must be within the commerce of
men.
If the subject matter of the sale is illicit, the contract is void
and cannot, therefore, be ratified. (Art. 1409.) In such a case, the
rights and obligations of the parties are determined by applying
the following articles of the Civil Code:
“Art. 1411. When the nullity proceeds from the illegality of
the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of
effects or instruments of a crime shall be applicable to the things
or the price of contract.
This rule shall be applicable when only one of the parties is
26
SALES
Art. 1459
guilty; but the innocent one may claim what he has given, and
shall not be bound to comply with his promise.”
“Art. 1412. If the act in which the unlawful or forbidden
cause consists does not constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the
contract, or demand the performance of the other’s undertaking;
(2) When only one of the contracting parties is at fault, he
cannot recover what he has given by reason of the contract, or
ask for the fulfillment of what has been promised him. The
other, who is not at fault, may demand the return of what he
has given without any obligation to comply with his promise.”
(2) Rights. — All rights which are not intransmissible or personal may also be the object of sale (Art. 1347.), like the right of
usufruct (Art. 572.), the right of conventional redemption (Art.
1601.), credit (Art. 1624.), etc.
Examples of intransmissible rights are the right to vote, right
to public office, marital and parental rights, etc.
No contract may be entered upon future inheritance except
in cases expressly authorized by law. (Art. 1347, par. 2.) While
services may be the object of a contract (Art. 1347, par. 3.), they
cannot be the object of a contract of sale. (Art. 1458; see Art. 1467.)
Kinds of illicit things.
The thing may be illicit per se (of its nature) or per accidens (because of some provisions of law declaring it illegal).
Article 1459 refers to both. Decayed food unfit for consumption is illicit per se, while lottery tickets (Art. 195, Revised Penal
Code.) are illicit per accidens. Land sold to an alien is also per accidens because the sale is prohibited by the Constitution.7 The rule
7
A sale of land in violation of the constitutional prohibition against the transfer of
lands to aliens (Art. XII, Sec. 7, Constitution.) is void (see Art. 1409[1, 7].) and the seller
or his heirs may recover the property. But where a land is sold to an alien, who later sold
it to a Filipino, the sale to the latter cannot be impugned. (Herrera vs. Tuy Kim Guan, 1
SCRA 406 [1961]; Godinez vs. Fong Pak Luen, 120 SCRA 223 [1983].)
Art. 1459
NATURE AND FORM OF THE CONTRACT
27
is well-settled that the mortgagor (or pledgor) continues to be the
owner of the property mortgaged, and, therefore, has the power
to alienate the same; however, he is obliged, under pain of penal
liability, to secure the consent of the mortgagee. (Service Specialist, Inc. vs. Intermediate Appellate Court, 174 SCRA 80 [1989].)
Right to transfer ownership.
(1) Seller must be owner or authorized by owner of thing sold. —
It is essential in order for a sale to be valid that the vendor must
be able to transfer ownership (Art. 1458.) and, therefore, he must
be the owner or at least must be authorized by the owner of the
thing sold. This rule is in accord with a well-known principle of
law that one can not transmit or dispose of that which he does
not have — nemo dat quod non-habet. Accordingly, one can sell only
what one owns or is authorized to sell, and the buyer can acquire
no more than what the seller can transfer legally. (Azcona vs.
Reyes & Larracas, 59 Phil. 446 [1934]; Manalo vs. Court of Appeals,
366 SCRA 752 [2001]; Tangalin vs. Court of Appeals, 159 SCAD
343, 371 SCRA 49 [2001]; for exceptions, see Art. 1505.)
Thus, a sale of paraphernal (separate) property of the deceased
wife by the husband who was neither an owner nor administrator of the property at the time of sale is void ab initio. Such being
the case, the sale cannot be the subject of ratification by the administrator or the probate court. (Manotok Realty, Inc. vs. Court
of Appeals, 149 SCRA 372 [1987].) Only so much of the share of
the vendor-co-owner can be validly acquired by the vendee even
if he acted in good faith in buying the shares of the other co-owners. (Segura vs. Segura, 165 SCRA 368 [1988].) Where the sale from
one person to another was fictitious as there was no consideration, and, therefore, void and inexistent, the latter has no title to
convey to third persons. (Traders Royal Bank vs. Court of Appeals,
80 SCAD 12, 269 SCRA 15 [1997].)
(2) Right must exist at time of delivery. — Article 1459, however,
does not require that the vendor must have the right to transfer
ownership of the property sold at the time of the perfection of the
contract. (Martin vs. Reyes, 91 Phil. 666 [1952].) Perfection per se
does not transfer ownership which occurs upon the actual or constructive delivery of the thing sold. Sale, being a consensual con-
28
SALES
Art. 1459
tract, it is perfected by mere consent (see Art. 1475.), and ownership by the seller of the thing sold is not an element for its perfection. It is sufficient if the seller has the “right to transfer the ownership thereof at the time it is delivered.” Thus, the seller is
deemed only to impliedly warrant that “he has a right to sell the
thing at the time when the ownership is to pass.” (Art. 1547[1].)
The reason for the rule is obvious. Since future goods (Arts.
1461, par. 1; 1462 par. 1.) or goods whose acquisition by the seller
depends upon a contingency (Art. 1462, par. 2.) may be the subject matter of sale, it would be inconsistent for the article to require that the thing sold must be owned by the seller at the time
of the sale inasmuch as it is not possible for a person to own a
thing or right not in existence. An agreement providing for the
sale of property yet to be adjudicated by a court is thus valid and
binding. (Republic vs. Lichauco, 46 SCRA 305 [1972].)
(3) Where property sold registered in name of seller who employed
fraud in securing his title. — Although generally a forged or fraudulent deed is a nullity and conveys no title, there are instances when
such a document may become the root of a valid title. One such
instance is where the certificate of title was already transferred
from the name of the true owner to the forger, and while it remained that way, the land was subsequently sold to an innocent
purchaser for value. Where there is nothing in the certificate to
indicate any cloud or vice in the ownership of the property, or any
encumbrance thereon, or in the absence of any fact or circumstance
to excite suspicion, the purchaser is not required to explore further than what the Torrens title upon its face indicates in quest
for any hidden defect or inchoate right that may subsequently
defeat his right thereto.
If the rule were otherwise, the efficacy and conclusiveness of
the certificate of title which the Torrens System seeks to insure
would entirely be futile and nugatory. The established rule is that
the rights of an innocent purchaser for value must be respected
and protected, notwithstanding the fraud employed by the seller
in securing his title. The proper recourse of the true owner of the
property who was prejudiced and fraudulently dispossessed of
the same is to bring an action for damages against those who
caused or employed the fraud, and if the latter are insolvent, an
Art. 1459
NATURE AND FORM OF THE CONTRACT
29
action against the Treasurer of the Philippines may be filed for
recovery of damages against the Assurance Fund. (Fule vs. Legare,
7 SCRA 351 [1951]; Pino vs. Court of Appeals, 198 SCRA 434 [1991];
Phil. National Bank vs. Court of Appeals, 187 SCRA 735
[1990]; Eduarte vs. Court of Appeals, 68 SCAD 179, 256 SCRA 391
[1996].)
(4) Where properly sold in violation of a right of first refusal of
another person. — The prevailing doctrine is that a contract of sale
entered into in violation of a right of first refusal of another person, while valid is rescissible. (Guzman, Bocaling and Co. vs.
Bonnevie, 206 SCRA 668 [1992]; Conculada vs. Court of Appeals,
156 SCAD 624, 367 SCRA 164 [2001].) A right of first refusal is
neither “amorphous nor merely preparatory’’ and can be executed
according to its terms. In contracts of sale, the basis of the right of
first refusal must be the current offer of the seller to sell or the
offer to purchase of the prospective buyer. Only after the grantee
fails to exercise his right under the same terms and within the
period contemplated can the owner validly offer to sell the property to a third person, again, under the same terms as offered to
the grantee. (Polytechnic University of the Philippines vs. Court
of Appeals, 368 SCRA 691 [2001]; Equatorial Realty Development,
Inc. vs. Mayfair, Inc., 76 SCAD 407, 264 SCRA 483 [1996];
Parañaque King’s Enterprises, Inc. vs. Court of Appeals, 79 SCAD
936, 268 SCRA 727 [1997].) Where, however, there is no showing
of bad faith on the part of the vendee, the contract of sale may not
be rescinded (see Arts. 1380-1381[3].), and the remedy of the person with the right of first refusal is an action for damages against
the vendor. (Rosencor Development Corporation vs. Inquing, 145
SCAD 484, 354 SCRA 119 [2001].)
(5) Where real property, subject of unrecorded sale, subsequently
mortgaged by seller which mortgage was registered. — The mortgagee’s registered mortgage right over the property is inferior to that
of the buyer’s unregistered right. The unrecorded sale between
the buyer and the seller is preferred for the reason that if the seller
the original owner, had parted with his ownership of the thing
sold then, he no longer had ownership and free disposal of that
thing so as to be able to mortgage it again. Registration of the
mortgage is of no moment since it is understood to be without
prejudice to the better right of third parties. (State Investment
30
SALES
Art. 1460
House, Inc. vs. Court of Appeals, 69 SCAD 135, 254 SCRA 368
[1996]; Dela Merced vs. GSIS, 154 SCAD 816, 365 SCRA 1 [2001].)
ART. 1460. A thing is determinate when it is particularly designated or physically segregated from all
others of the same class.
The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing
is capable of being made determinate without the necessity of a new or further agreement between the
parties. (n)
Subject matter must be determinate.
(1) When thing determinate. — A thing is determinate or specific (not generic) when it is particularly designated or physically
segregated from all others of the same class. (see Art. 1636[1].) This
requisite that the object of a contract of sale must be determinate
is in accordance with the general rule that the object of every contract must be determinate as to its kind. (Art. 1349.) A determinate thing is identified by its individuality, e.g., my car (if I have
only one); the watch I am wearing; the house located at the corner of Rizal and Del Pilar Streets, etc.;
(2) Sufficient if subject matter capable of being made determinate.
— It is not necessary that the thing sold must be in sight at the
time the contract is entered into. It is sufficient that the thing is
determinable or capable of being made determinate without the
necessity of a new or further agreement between the parties (Art.
460, par. 2; see Melliza vs. City of Iloilo, 23 SCRA 477 [1968].) to
ascertain its identity, quantity, or quality. The fact that such an
agreement is still necessary constitutes an obstacle to the existence of the contract (Art. 1349.) and renders it void. (Art. 1409[3].)
Thus, a person may validly sell all the cavans of rice in a particular bodega or a parcel of land located at a particular street but
if the bodega is not specified and the seller has more than one
bodega or owns more than one parcel of land at the particular
street, and it cannot be known what may have been sold, the contract shall be null and void. (Arts. 1378, par. 2; 1409[6].) Similarly,
an obligation by a person to sell one of his cars is limited to the
Art. 1460
NATURE AND FORM OF THE CONTRACT
31
cars owned by him. The subject matter is determinable; it becomes
determinate the moment it is delivered.
In a case, the respondent purchased a portion of a lot containing 345 square meters, which portion is located in the middle of
another lot with a total area 854 square meters, and referred to in
the receipt as the “previously paid lot.’’ held: “Since the lot subsequently sold to respondent is said to adjoin the ‘previously paid
lot’ on three sides thereof, the subject lot is capable of being determined without the need of any new contract. The fact that the
exact area of these adjoining residential lots is subject to the result of a survey does not detract from the fact that they are determinate or determinable.’’ (Heirs of Juino San Andres vs.
Rodriguez, 337 SCRA 769 [2000].)
ILLUSTRATIVE CASES:
1. Tobacco factory sold was specifically pointed out. — A tobacco factory with its contents having been specifically pointed
out by the parties and distinguished from all other tobacco factories was held sold under a contract which did not provide for
the delivery of the price of the thing until a future time.
(McCullough vs. Aenille Co., 13 Phil. 284 [1909].)
———
————
———-
2. Payment of price was withheld pending proof by vendor of
his ownership. — A sale of a specific house was held perfected
between the vendor and the vendee, although the delivery of
the price was withheld until the necessary documents of ownership were prepared by the vendee. (Borromeo vs. Franco, 5 Phil.
49 [1905].)
———— ———— ————
3. Purchase price agreed upon had not yet been paid. — A quantity of hemp delivered by the vendor into the warehouse of the
vendee and thus set apart and distinguished from all other
hemp was held sold, although the purchase price which had
been agreed upon had not yet been paid. (see Tan Leoncio vs. Go
Inqui, 8 Phil. 531 [1907].)
———— ———— ————
4. Subject matter is sugar of specified quantity and given quality. — A contract whereby a party obligates himself to sell for a
32
SALES
Art. 1460
price certain (P3,000.00) a specified quantity of sugar (600 piculs)
of a given quality (of the first grade and second grade) without
designating a particular lot of sugar, is not perfected until the
quantity agreed upon has been selected and is capable of being
physically designated and distinguished from all other sugar.
(Yu Tek & Co. vs. Gonzales, 29 Phil. 348 [1915]; De Leon vs. Aquino,
87 Phil. 193 [1950].)
In this case, the contract is merely an executory contract to
sell, its subject matter being a generic or indeterminate thing. A
thing is generic when it is indicated only by its kind and cannot
be pointed out with particularity.
———— ———— ————
5. Subject matter is flour of a certain brand and specified quantity. — Similarly, the undertaking of a party to sell 1,000 sacks
of “Mano” flour at P11.05 per barrel, 500 to be delivered in September and 500, in October, is a promise to deliver a generic
thing and not a determinate thing within the meaning of Article 1460. Hence, there is no perfected sale. (Ong & Jang Chuan
vs. Wise & Co., 33 Phil. 339 [1916].)
———— ———— ————
6. Subject matter are palay grains produced in the farmland.
— Where S initially offered to sell palay grains in his farmland
to NFA and the latter accepted to buy 2,640 cavans, there was
already a meeting of the minds between the parties. The object
of the contract, being the palay grains produced in S’s farmland and the NFA was to pay the same depending upon its
quality. The fact that the exact number of cavans of palay to be
delivered has not been determined does not affect the perfection of the contract.
In this case, there was no need for NFA and S to enter into
a new contract to determine the exact number of cavans of palay
to be sold. S can deliver so much of his produce as long as it
does not exceed 2,640 cavans. (National Grains Authority vs. Intermediate Appellate Court, 171 SCRA 131 [1989].)
———— ———— ————
7. Lots sold were described by their lot numbers and area and
as the ones needed according to a named development plan. — The
deed of sale describes the four parcels of land sold by their lot
numbers and area; and then it goes on to further describe not
only those lots already mentioned but the lots object of the sale,
Art. 1460
NATURE AND FORM OF THE CONTRACT
by stating that said lots are the ones needed for the construction of the City Hall site, avenues and parks according to the
Arellano Plan, the development plan of the city, which was then
in existence.
It was held that the specific mention of some of the lots
plus the statement that the lots object of the sale are the ones
needed, etc., according to the aforementioned plan, sufficiently
provide a basis, as of the time of the execution of the contract,
for rendering determinate said lots without the need of a new
and further agreement of the parties. (Melliza vs. City of Iloilo,
23 SCRA 477 [1968].)
———— ———— ————
8. Receipt issued stated that the lot being purchased was the
one earlier earmarked for the buyer’s sister. — B presented the following receipt signed by S, seller, as evidence of payment: “Received from B the sum of P500.00 as additional partial payment
for the lot which is the portion formerly earmarked for T
wherein she already paid the sum of P1,500; hence, by agreement of B and T, who are sisters, the sum of P1,500.00 is applied as additional payment for and in behalf of B, thereby
making the total payments made by B to said lot in the sum of
P2,000.00.’’ The subject lot is adequately described in the receipt, or at least can be easily determinable. Any mistake in the
designation of the lot does not vitiate the consent of the parties
or affect the validity and binding effect of the contract of sale.
(David vs. Tiongson, 111 SCAD 242, 313 SCRA 63 [1999].)
———— ———— ————
9. Sugar quota of certain number of piculs sold without specification of the land to which it relates. — Section 4 of R.A. No. 1825
(An Act to Provide for the Allocation, Reallocation and Administration of the Absolute Quota of Sugar) reads: “The production allowance or quota corresponding to each piece of land
under the provisions of this Act shall be deemed to be an improvement attaching to the land entitled thereto.
The intangible property that is the sugar quota should be
considered as real property by destination, an improvement
attaching to the land entitled thereto.” Sugar quota allocations
do not have existence independently of any particular tract of
land. There can be no sale simply of sugar quota of a certain
number of piculs without specification of the land to which it
33
34
SALES
Art. 1461
relates. Such a sale would be void for want of a determinate
subject matter. (Compania General De Tabacos De Filipinos vs. Court
of Appeals, 185 SCRA 284 [1990].)
ART. 1461. Things having a potential existence may
be the object of the contract of sale.
The efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing
will come into existence.
The sale of a vain hope or expectancy is void. (n)
Sale of things having potential existence.
Even a future thing (Arts. 1461, par. 1; 1347, par. 1.) not existing at the time the contract is entered into may be the object of
sale provided it has a potential or possible existence, that is, it is
reasonably certain to come into existence as the natural increment
or usual incident of something in existence already belonging to
the seller, and the title will vest in the buyer the moment the thing
comes into existence.
Thus, a valid sale may be made of “the wine a vine is expected to produce; or the grain a field may grow in a given time;
or the milk a cow may yield during the coming year; or the wool
that shall thereafter grow upon a sheep; or what may be taken at
the next cast of a fisherman’s net; or the goodwill of a trade, or
the like. The thing sold, however, must be specific and identified.
They must be also owned by the vendor at the time.” (Sibal vs.
Valdez, 50 Phil. 522 [1927]; Pichel vs. Alonzo, 111 SCRA 341 [1982];
see 46 Am. Jur. 223.)
Sale of a mere hope or expectancy.
The efficacy of the sale of a mere hope or expectancy is deemed
subject to the condition that the thing contemplated or expected
will come into existence. (par. 2.)
The sale really refers to an “expected thing” which is not yet
in existence, and not to the hope or expectancy which already
exists, in view of the condition that the thing will come into existence. But the sale of a mere hope or expectancy is valid even if the
Art. 1461
NATURE AND FORM OF THE CONTRACT
35
thing hoped or expected does not come into existence, unless the
hope or expectancy is vain in which case, the sale is void. (par. 3.)
A plan whereby prizes can be obtained without any additional
consideration (when a product is purchased at the usual price plus
the chance of winning a prize) is not a lottery. (Phil. Refining Co.
vs. Palomar, 148 SCRA 313 [1987].)
EXAMPLES:
(1) S binds himself to sell for a specified price to B a parcel
of land if he wins a case for the recovery of said land pending
in the Supreme Court.
Here, the obligation of S to sell will arise, if the “expected
thing,’’ the land, will come into existence, i.e., if he wins the
case.
Before a decision is rendered, there is only “the mere hope
or expectancy’’ that the thing will come into existence.
(2) B buys a sweepstakes ticket in the hope of winning a
prize. Here, the object of the contract is the hope itself. The sale
is valid even if B does not win a prize because it is not subject
to the condition that the hope will be fulfilled.
Sale of thing expected and sale of hope
itself distinguished.
Emptio rei speratae (sale of thing expected) is the sale of a thing
not yet in existence subject to the condition that the thing will exist
and on failure of the condition, the contract becomes ineffective
and hence, the buyer has no obligation to pay the price. On the
other hand, emptio spei is the sale of the hope itself that the thing
will come into existence, where it is agreed that the buyer will pay
the price even if the thing does not eventually exist.
(1) In emptio rei speratae, the future thing is certain as to itself
but uncertain as to its quantity and quality. Such sale is subject to
the condition that the thing will come into existence (see Art. 1545,
par. 2.), whatever its quantity or quality. In emptio spei (like the
sale of a sweepstake ticket), it is not certain that the thing itself
(winning a prize) will exist, much less its quantity and quality.
(2) In the first, the contract deals with a future thing, while in
36
SALES
Art. 1461
the second, the contract relates to a thing which exists or is present
— the hope or expectancy.
(3) In the first, the sale is subject to the condition that the thing
should exist, so that if it does not, there will be no contract by
reason of the absence of an essential element. On the other hand,
the second produces effect even though the thing does not come
into existence because the object of the contract is the hope itself,
unless it is a vain hope or expectancy (like the sale of a falsified
sweepstake ticket which can never win).
Presumption in case of doubt.
In case of doubt, the presumption is in favor of emptio rei
speratae which is more in keeping with the commutative character of the contract. (see 10 Manresa 29-30.)
ILLUSTRATIVE CASE:
Buyer executed a surety bond in favor of seller to secure payment
of the balance of purchase price of iron ore, which balance shall be
paid out of amount derived from sale by buyer of the iron ore.
Facts: S embarked upon the exploration and development
of mining claims belonging to B. Later, they executed a document wherein S transferred to B all of S’s rights and interest
over the 24,000 tons of iron ore, “more or less” that S had already extracted from the mineral claims in consideration of a
down payment of P10,000.00, and the balance of P65,000.00
which will be paid out of the “first shipment of iron ore and of
the first amount derived from the local sale of iron ore made”
from said claims, which amount was secured by a surety bond
executed by B in favor of S.
No sale of the approximately 24,000 tons of iron ore had
been made nor had the P65,000.00 been paid.
Issue: Is the obligation of B to pay the remaining P65,000.00
subordinated to the sale or shipment of the ore as a condition
precedent?
Held: No. A contract of sale is normally commutative and
onerous (see Art. 1458.): not only does each one of the parties
assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold and the buyer to pay the price),
Art. 1462
NATURE AND FORM OF THE CONTRACT
37
but such party anticipates performance by the other from the
very start.
(1) Contingent character of obligation to pay must clearly appear. — Where in a sale, the obligation of one party can be lawfully subordinated to an uncertain event, so that the other understands that he assumes that risk of receiving nothing for
what he gives as in the case of a sale of hopes or expectations
(emptio spei), it is not in the usual course of business to do so,
hence, the contingent character of the obligation must clearly
appear.
(2) Surety bond negates such contingent character. — In the
case at bar, nothing is found in the record to evidence that S
desired or assumed to run the risk of losing his rights over the
ore without getting paid for it, or that B understood that S assumed any such risk. This is proven by the fact that S insisted
on a bond by a surety company to guarantee payment of the
P65,000.00; and the fact that B did put up such bond indicates
that he admitted the definite existence of his obligation to pay
the balance of P65,000.00. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)
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. (n)
Goods which may be the object of sale.
Goods which form the subject of a contract of sale may be either:
(1) Existing goods or goods owned or possessed by the seller;
or
(2) Future goods or goods to be manufactured (like the sale of
milk bottles to be manufactured with the name of the buyer
pressed in the glass), raised (like the sale of the future harvest of
38
SALES
Art. 1462
palay from a ricefield), or acquired (like the sale of a definite parcel of land the seller expects to buy).8 (Art. 1460.)
Future goods as object of sale.
A sale of future goods, even though the contract is in the form
of a present sale, is valid only as an executory contract to be fulfilled by the acquisition and delivery of the goods specified.
In other words, “property or goods which at the time of the
sale are not owned by the seller but which thereafter are to be
acquired by him, cannot be the subject of an executed sale but may
be the subject of a contract for the future sale and delivery thereof,”
even though the acquisition of the goods depends upon a contingency which may or may not happen. In such case, the vendor
assumes the risk of acquiring the title and making the conveyance, or responding in damages for the vendee’s loss of his bargain. (Martin vs. Reyes, 91 Phil. 666 [1952]; 77 C.J.S. 604.)
Paragraph 1 of Article 1462 does not apply if the goods are to
be manufactured especially for the buyer and not readily saleable
to others in the manufacturer’s regular course of business. The
contract, in such case, must be considered as one for a piece of
work. (Art. 1467.)
Article 1462 contemplates a contract of sale of specific goods
where one of the contracting parties binds himself to transfer the
ownership of and deliver a determinate thing and the other to pay
therefor a price certain in money or its equivalent. The said article
requires that there be delivery of goods, actual or constructive, to
be applicable. It does not apply to a transaction where there was
no such delivery; neither was there any intention to deliver a determinate thing. Thus, a “futures” contract where the parties
merely speculate on the rise and fall on the price of the goods
subject matter of the transaction is a form of gambling was declared null and void by Article 2018 of the Civil Code. (see note 2.)
8
Art. 751. Donations cannot comprehend future property. By future property is understood anything which the donor cannot dispose of at the time of the donation. (635)
Art. 1347. x x x No contract may be entered into upon future inheritance except in
cases expressly authorized by law. x x x.
Arts. 1463-1464
NATURE AND FORM OF THE CONTRACT
39
ART. 1463. The sole owner of a thing may sell an
undivided interest therein. (n)
Sale of undivided interest in a thing.
The sole owner of a thing may sell the entire thing; or only a
specific portion thereof; or an undivided interest therein and such
interest may be designated as an aliquot part of the whole.
The legal effect of the sale of an undivided interest in a thing
is to make the buyer a co-owner in the thing sold. As co-owner,
the buyer acquires full ownership of his part and he may, therefore, sell it. Such sale is, of course, limited to the portion which
may be allotted to him in the division of the thing upon the termination of the co-ownership. (Article 493.)9 This rule operates
similarly with respect to ownership of fungible goods. (Art. 1464.)
Article 1463 covers only the sale by a sole owner of a thing of
an undivided share or interest thereof.
EXAMPLE:
S is the owner of a parcel of land with an area of 1,000 square
meters. As the sole owner, S can sell to B the entire portion; or
only 500 square meters of the land by metes and bounds in
which case he becomes the sole owner of the remaining 500
meters and B the portion sold; or he may sell an undivided half
of the land without specially designating or identifying the
portion sold, in which case they become co-owners.
As a co-owner, S or B can convey or transfer only the title
pertaining to the undivided half of the land, for vital to the
validity of a contract of sale is that the vendor be the owner of
the thing sold. (Art. 1459.)
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
9
Art. 493. Each co-owner shall have the full ownership of his part and of the fruits
and benefits pertaining thereto, and he may therefore alienate, assign or mortgage it,
and even substitute another person in its enjoyment, except when personal rights are
involved. But the effect of the alienation or the mortgage, with respect to the co-owners,
shall be limited to the portion which may be allotted to him in the division upon the
termination of the co-ownership. (399)
40
SALES
Art. 1464
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. (n)
Sale of an undivided share of a specific mass.
The Civil Code classifies movable goods into consumable or
non-consumable (Art. 418.), thereby discarding the old classification (Art. 334, old Civil Code.) into fungible and non-fungible.
This change of classification seems to be in name only as the definition of fungible goods as those which cannot be used without
being consumed under the old Civil Code is precisely that of consumable goods. Article 1464, however, still speaks of fungible
goods.
(1) Meaning of fungible goods. — It means goods of which any
unit is, from its nature or by mercantile usage, treated as the
equivalent of any other unit (Uniform Sales Act, Sec. 76.), such as
grain, oil, wine, gasoline, etc.
(2) Effect of sale. — The owner of a mass of goods may sell only
an undivided share thereof, provided the mass is specific or capable of being made determinate. (Art. 1460.)
(a) By such sale, the buyer becomes a co-owner with the
seller of the whole mass in the proportion in which the definite share bought bears to the mass.
(b) It must follow that the aliquot share of each owner can
be determined only by the measurement of the entire mass. If
later on it be discovered that the mass of fungible goods contains less than what was sold, the buyer becomes the owner
of the whole mass and furthermore, the seller shall supply
Art. 1464
NATURE AND FORM OF THE CONTRACT
41
whatever is lacking from goods of the same kind and quality,
subject to any stipulation to the contrary.
(3) Risk of loss. — If the buyer becomes a co-owner, with the
seller, or other owners of the remainder of the mass, it follows that
the whole mass is at the risk of all the parties interested in it, in
proportion to their various holdings.
(4) Subject matter. — Take note that in the sale of an undivided
share, either of a thing (Art. 1463.) or of that of mass of goods (Art.
1464.), the subject matter is an incorporeal right. (Art. 1501.) Here,
ownership passes to the buyer by the intention of the parties.
EXAMPLE:
S owns 1,000 cavans of palay stored in his warehouse. If S
sells to B 250 cavans of such palay which cavans are not segregated from the whole mass, B becomes a co-owner of the said
mass to the extent of 1/4. If the warehouse happens to contain
only 200 cavans, S must deliver the whole 200 cavans and supply the deficiency of 50 cavans of palay of the same kind and
quality.
In the same example, the number of cavans in the warehouse may be unknown or undetermined and S may sell only
1/4 share of the contents. The legal effect of such a sale is to
make B a co-owner in that proportion. It is obvious that in such
case, the obligation of the seller “to make good the deficiency”
will not arise.
(5) Applicability of Article 1464 to non-fungible goods. — Although Article 1464 speaks of “fungible goods,” nevertheless it
may also apply to goods not strictly fungible in nature. “Indeed,
the earliest case in which the doctrine was applied related to barrels of flour. Though flour of the same grade is fungible in the
strictest sense, barrels of flour are necessarily so. Other cases also
have applied the doctrine to goods in barrels. So it has been applied to bales of cotton and even to cattle or sheep. It is obvious
that all cattle are not alike and that some cattle in a herd are more
valuable than the others. But in the cases under consideration, the
parties had virtually agreed to act on the assumption that all were
alike and it can be seen that this is really the essential thing.” (1
Williston on Sales, 3rd ed., pp. 421-423.)
42
SALES
Arts. 1465-1466
ART. 1465. Things subject to a resolutory condition may be the object of the contract of sale. (n)
Sale of thing subject to a resolutory condition.
A resolutory condition is an uncertain event upon the happening of which the obligation (or right) subject to it is extinguished.
Hence, the right acquired in virtue of the obligation is also extinguished. (see Arts. 1179, 1181.)
EXAMPLES:
(1) S (vendor a retro) sold a parcel of land to B (vendee a
retro) subject to the condition that S can repurchase the property within two years from the date of sale. If S exercises the
right to repurchase, then the sale made by B to C before the
lapse of the two (2)-year period falls.
The rule, however, that a vendor cannot transfer to his
vendee a better right than he had himself, suffers an exception
in case of property with Torrens title. (see Hernandez vs.
Katigbak Vda. de Salas, 69 Phil. 748 [1940].)
(2) For failure to pay his debt, the land of S (mortgagor)
was sold to B, the highest bidder and purchaser in an extrajudicial foreclosure of a real estate mortgage.
Under the law (Act No. 3135, as amended.), the mortgagor
may redeem the property at any time within one year from and
after the date of the registration of the sale. If S redeems the
property, then the sale made to B is extinguished.
One of the obligations of the vendor is to transfer the ownership of the thing object of the contract. (Art. 1458.) If the resolutory condition attaching to the object of the contract, which
object may include things as well as rights (Arts. 1427, 1347, par.
1.), should happen, then the vendor cannot transfer the ownership of what he sold since there is no object.
ART. 1466. In construing a contract containing provisions characteristic of both the contract of sale and
of the contract of agency to sell, the essential clauses
of the whole instrument shall be considered. (n)
Art. 1466
NATURE AND FORM OF THE CONTRACT
43
Sale distinguished from agency to sell.
By the contract of agency, a person binds himself to render some
service or to do something in representation or on behalf of another, with the consent or authority of the latter. (Art. 1868.)
In order to classify a contract, due regard must be given to its
essential clauses. A contract is what the law defines it to be, and
not what it is called by the contracting parties. (Quiroga vs. Parson Hardware Co., 38 Phil. 501 [1918]; Baluran vs. Navarro, 79
SCRA 309 [1977].) Sale may be distinguished from an agency to
sell, as follows:
(1) In a sale, the buyer receives the goods as owner; in an
agency to sell, the agent receives the goods as the goods of the
principal who retains his ownership over them and has the right
to fix the price and the terms of the sale and receive the proceeds
less the agent’s commission upon the sales made;
(2) In a sale, the buyer has to pay the price; in an agency to
sell, the agent has simply to account for the proceeds of the sale
he may make on the principal’s behalf;
(3) In a sale, the buyer, as a general rule, cannot return the
object sold; in an agency to sell, the agent can return the object in
case he is unable to sell the same to a third person;
(4) In a sale, the seller warrants the thing sold (see Arts. 1547,
1548, 1561.); in an agency to sell, the agent makes no warranty
for which he assumes personal liability as long as he acts within
his authority and in the name of the seller; and
(5) In a sale, the buyer can deal with the thing sold as he
pleases being the owner; in an agency to sell, the agent in dealing
with the thing received, must act and is bound according to the
instructions of his principal.10
10
An agreement that the buyer shall deal exclusively with the products of the seller
— a well-known practice in the business world — is not inconsistent with the contract
of sale, much less convert it into one of agency; and where the entire control and direction of the business operation remains with the dealer, the latter cannot be considered a
mere alter ego of the manufacturer. (Asbestos Integrated Manufacturing, Inc. vs. Peralta,
155 SCRA 213 [1987].)
44
SALES
Art. 1466
ILLUSTRATIVE CASES:
1. One given exclusive right to sell beds furnished by manufacturer, agreed to pay discounted invoice price at a certain period.
Facts: S granted B the exclusive right to sell the former’s
beds in Visayas. S was to furnish B with the beds which the
latter might order. The price agreed upon was the invoice price
of the beds in Manila with a discount of from 20% to 25%. Payment was to be made at the end of sixty days.
Issue: S claimed that the contract was an agency to sell while
B maintained that it was a sale.
Held: The stipulations are precisely the essential features of
a contract of purchase and sale. There was the obligation on
the part of S to supply the beds and on the part of B, to pay
their price.
These features exclude the legal conception of an agency
or order to sell whereby the mandatory or agent receives the
thing to sell it and does not pay its price but delivers to the
principal the price he obtains from the sale of the thing to a
third person, and if he does not succeed in selling, he returns it.
By virtue of the contract between S and B, the latter, on receiving the beds was necessarily obliged to pay their price within
the terms fixed without any other consideration and regardless as to whether he had sold the beds. (Quiroga vs. Parson
Hardware Co., 38 Phil. 501 [1918].)
———— ———— ————
2. Partial payments were made without mention of goods unsold and without stipulation for their return.
Facts: B received from S 350 pairs of shoes, the price of which
is stated as P2,450.00 or P7.00 per pair. B made partial payments
on account thereof.
Issue: On the issue of the nature of the transaction, S claimed
that it was an absolute sale and not a consignment.
Held: The transaction was an absolute sale. In making
said partial payments, B made no mention whatsoever of the
number of shoes sold by him and the number of shoes remaining unsold which he should have done had the sale been
on the consignment basis. He merely mentioned the balance
of the purchase price after deducting the several payments
made by him.
Art. 1467
NATURE AND FORM OF THE CONTRACT
45
Furthermore, if the sale had been on consignment, a stipulation as to the period of time for the return of the unsold shoes
should have been made but that had not been done and B kept
the shoes unsold more or less indefinitely. (Royal Shirt Factory,
Inc. vs. Co Bon Tic, 94 Phil. 994 [1954].) It has been held that
where a foreign company has an agent here selling its goods
and merchandise, the same agent could not very well act as
agent for local buyers because the interests of his foreign principal and those of the buyers would be in direct conflict. He
could not serve two masters at the same time. (G. Puyat & Sons,
Inc. vs. Arco Amusement, 72 Phil. 402 [1941]; see Far Eastern Export & Import Co. vs. Lim Teck Suan, 97 Phil. 171 [1955].)
Contract creating both a sale and an agency
relationship.
The transfer of title or agreement to transfer it for a price paid
or promised is the essence of sale. If such transfer puts the transferee in the position of an owner and makes him liable for the
agreed price, the transaction is a sale. On the other hand, the essence of an agency to sell is the delivery to an agent, not as his
property, but as the property of his principal, who remains the
owner and has the right to control sales, fix the price and terms,
demand and receive the proceeds less the agent’s commission
upon sales made. (Ker & Co., Inc. vs. Lingad, 38 SCRA 524 [1971];
Schmid and Oberly, Inc. vs. RJL Martinez Fishing Corp., 166 SCRA
493 [1988].)
In some circumstances, however, a contract can create both a
sale and an agency relationship. For example: An automobile
dealer receives title to the cars he orders from the manufacturer
and that transaction is a sale; but he is an agent to the extent that
he is authorized to pass on to the ultimate purchaser the limited
warranty of the manufacturer. In any event, the courts must look
at the entire transaction to determine if it is a principal-agent relationship or a buyer-seller relationship. (1 Williston on Sales, 4th
ed., pp. 16-17.)
ART. 1467. A contract for the delivery at a certain
price of an article which the vendor in the ordinary
course of his business manufactures or procures for
46
SALES
Art. 1467
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. (n)
Sale distinguished from contract
for a piece of work.
By the contract for a piece of work the contractor binds himself
to execute a piece of work for the employer, in consideration of a
certain price or compensation. The contractor may either employ
his labor or skill, or also furnish the material. (Art. 1713.)
The distinction between a contract of sale and one for work,
labor or materials or for a piece of work is tested by the inquiry
whether the thing transferred is one not in existence and which
never would have existed but for the order of the party desiring
to acquire it, or a thing which would have existed and been the
subject of sale to some other person, even if the order had not been
given.
(1) In the first case, the contract is one for work, labor and
materials and in the second, one of sale. (Inchausti & Co. vs.
Cromwell, 20 Phil. 345 [1911]; see Celestino Co. & Co. vs. Coll., 99
Phil. 841 [1956]; Comm. vs. Engineering Equipment and Supply
Co., 64 SCRA 590 [1975]; Comm. vs. Arnoldus Carpentry Shop,
Inc., 159 SCRA 199 [1988]; Engineering & Machinery Corp. vs.
Court of Appeals, 67 SCAD 113, 252 SCRA 156 [1996].)
(2) In the first case, the risk of loss before delivery is borne by
the worker or contractor, not by the employer (the person who
ordered). (Arts. 1717, 1718.) A contract is for a piece of work if
services dominate that contract even though there is a sale of
goods involved. Where the primary objective of a contract is a sale
of a manufactured item, it is a sale of goods even though the item
is manufactured by labor furnished by the seller and upon previous order of the customer. (see 1 Williston, 4th ed., p. 23.)
(3) The importance of marking the line that divides contracts
for a piece of work from contracts of sale arises from the fact that
the former is not within the Statute of Frauds. (see Art. 1483.)
Art. 1468
NATURE AND FORM OF THE CONTRACT
47
EXAMPLE:
If B is buying a pair of shoes of a particular style and size
from S which the latter ordinarily manufactures or procures
for the general market but the same is not available, an order
for one would be a contract of sale, since the article would have
existed and been the subject of sale to some other person even
if the order had not been given.
On the other hand, if B places an order for a pair of shoes of
a particular shape because his feet are deformed, the fact that
such kind of shoes is not suitable for sale to others in the ordinary course of the seller’s business and is to be manufactured
especially for B and upon his special order, makes the contract
one for a piece of work.
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. (1446a)
Sale distinguished from barter.
By the contract of barter or exchange, one of the parties binds
himself to give one thing in consideration of the other’s promise
to give another thing. (Art. 1638.) On the other hand, in a contract of sale, the vendor gives a thing in consideration for a price
in money. (Art. 1458.)
(1) The above distinction is not always adequate to distinguish one from the other. Hence, the rule in Article 1468 for those
cases in which the thing given in exchange consists partly in
money and partly in another thing.
(a) In such cases, the manifest intention of the parties is
paramount in determining whether it is one of barter or of sale
and such intention may be ascertained by taking into account
the contemporaneous and subsequent acts of the parties. (Art.
1371.)
48
SALES
Art. 1468
(b) If this intention cannot be ascertained, then the last sentence of the article applies. But if the intention is that the contract shall be one of sale, then such intention must be followed
even though the value of the thing given as a part consideration is more than the amount of the money given.
(2) The only point of difference between the two contracts is
in the element which is present in sale but not in barter, namely:
“price certain in money or its equivalent.” (see Art. 1641.)
EXAMPLES:
(1) S, a sugar miller, and B, a manufacturer and dealer of
whisky, entered into an agreement whereby S was to deliver
sugar worth P20,000.00 to B who was to give 100 bottles of
whisky worth also P20,000.00. This is a contract of barter.
(2) Suppose at the date of delivery, B had only 25 bottles
of whisky. With the consent of S, S paid the difference of P15,000
in cash. In this case, the contract is still barter. The consideration for the sugar is not cash but the whisky, and the amount of
P15,000.00 paid by B is in consideration for the 75 bottles of
liquor.
(3) Suppose, in the same example, B had no whisky at the
stipulated date of delivery and he paid S P20,000.00 instead of
giving whisky. Did the contract become one of sale? No, because the payment is in consideration of the value of the whisky,
and not of the sugar. The manifest intention of the parties was
to enter into a contract of barter. But if B had whisky at the date
of delivery and he paid P20,000.00 with the consent of S, the
contract would become one of sale.
(4) Assume now that the contract between S and B was for
S to deliver sugar to B who agreed to give 100 bottles of whisky
or to pay P20,000.00 cash. If B, instead of whisky, paid P20,000.00
cash, it is clear that the resulting contract is that of sale, and not
barter.
(5) If the obligation of B is to deliver 50 bottles of whisky
and pay P10,000.00 cash, or 75 bottles of whisky and P5,000.00
cash, or 25 bottles of whisky and P15,000.00 cash, the transaction shall be considered a barter or sale depending on the manifest intention of the parties. Under Article 1468, if such intention does not clearly appear, the contract shall be considered a
Art. 1468
NATURE AND FORM OF THE CONTRACT
49
barter, where the cash involved is P5,000.00, or a sale, in case it
is P15,000.00, or either in case it is P10,000.00.
Sale distinguished from lease.
In the lease of things, one of the parties binds himself to give to
another the enjoyment or use of a thing for a price certain and for
a period which may be definite or indefinite. (Art. 1643.) In other
words, in a lease, the landlord or lessor transfers merely the temporary possession and enjoyment of the thing leased. In a sale,
the seller transfers ownership of the thing sold.
Sale distinguished from dation in payment.
Dation in payment (or dacion en pago) is the alienation of property to the creditor in satisfaction of a debt in money. (see Art.
1619.) It is governed by the law on sales. (Art. 1245.) As such the
essential elements of a contract of sales, namely, consent: object
certain, and cause or considerations, must be present.
The distinctions are the following:
(1) In sale, there is no preexisting credit, while in dation in
payment, there is;
(2) In sale, obligations are created, while in dation in payment,
obligations are extinguished;
(3) In sale, the cause is the price paid, from the viewpoint of
the seller, or the thing sold, from the viewpoint of the buyer, while
in dation in payment, the extinguishment of the debt, from the
viewpoint of the debtor, or the object acquired in lieu of the credit,
from the viewpoint of the creditor;11
(4) In sale, there is more freedom in fixing the price than in
dation in payment; and
(5) In sale, the buyer has still to pay the price, while in dation
in payment, the payment is received by the debtor before the contract is perfected. (see 10 Manresa 16-17.)
11
What actually takes place in dation in payment is an objective novation of the
obligation where the thing offered as an accepted equivalent of the performance of an
obligation is considered as the purchase price. (see Art. 1291[1], Civil Code.)
50
SALES
Art. 1469
EXAMPLE:
S owes B P10,000.00. To pay his debt, S, with the consent of
B, delivers a specific television set. If the value of the television
set, however, is only P8,000.00, S is still liable for P2,000.00 unless the parties have considered the conveyance as full payment.
ART. 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 specified
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. (1447a)
When price considered certain.
The price in a contract of sale ought to be settled for there can
be no sale without a price. (see Borromeo vs. Borromeo, 98 Phil.
432 [1955].) It must be certain or capable of being ascertained in
money or its equivalent; and money is to be understood as currency, and its equivalent means promissory notes, checks and
other mercantile instruments generally accepted as representing
money.
The fact that the exact amount to be paid for the thing sold is
not precisely fixed, is no bar to an action to recover such compensation, provided the contract, by its terms furnishes a basis or
measure for ascertaining the amount agreed upon. (Majarabas vs.
Leonardo, 11 Phil. 272 [1908]; Villanueva vs. Court of Appeals, 78
SCAD 484, 267 SCRA 89 [1997].)
Art. 1469
NATURE AND FORM OF THE CONTRACT
51
Under the above article, the price is certain if:
(1) The parties have fixed or agreed upon a definite amount;
or
(2) It be certain with reference to another thing certain (see
Art. 1472; Majarabas vs. Leonardo, 11 Phil. 272 [1908].); or
(3) The determination of the price is left to the judgment of a
specified person or persons and even before such determination. (see Barretto vs. Sta. Maria, 26 Phil. 200 [1913], under Art.
1458.)
It must be understood that the last two cases are applicable
only when no specific amount has been stipulated by the parties.
ILLUSTRATIVE CASES:
1. Price was fixed at 10% below the price in the inventory, at
the invoice price, and in accordance with the price list less 20% discount.
Facts: S sold to B a tobacco and cigarette factory together
with the trademark “La Maria Cristina,” the stocks of tobacco,
machinery, labels, wrappers, etc. for a sum subject to modification, in accordance with the result shown by the inventory to
be drawn up. In this inventory the value of each individual
price of furniture was fixed at 10% below the price in the partnership inventory. The value of the tobacco, both in leaf and in
process of manufacture, was fixed at the invoice price.
The value of tobacco made up into cigars was fixed in accordance with the price list of the company less 20% discount.
Issue: Under the terms of the agreement, may the price of
the property sold be considered certain within the meaning of
the law?
Held: The price may be considered certain. The articles
which were the subject of the sale were definitely and finally
agreed upon. The price for each article was fixed. It is true that
the price of the tobacco, for example, was not stated in pesos
and centavos. But by its terms B agreed to pay therefor the
amount named in the invoices then in existence. The price could
be made certain by a mere reference to these invoices.
(McCullough vs. Aenille & Co., 13 Phil. 258 [1909].)
———— ———— ————
52
SALES
Art. 1469
2. Price was fixed at a certain amount subject to modifications
based on known factors.
Facts: S contracted to sell large quantity of coal to B. The
basic price fixed in the contract was P9.45 per long ton but it
was stipulated that the price was subject to modifications “in
proportion to variations in calories and ash content and not
otherwise.”
Issue: Is the price certain within the meaning of the law?
Held: By stipulation, the price could be made certain by the
application of known factors (Art. 1469.), and for the purposes
of this case, it may be assumed that the price was fixed at P9.45
per long ton. (Mitsui Bussan Kaisha vs. Manila B.R.R. and L. Co.,
39 Phil. 624 [1919].)
———— ———— ————
3.
Price (compensation) promised was the cost of maintenance.
Facts: X rendered services as wet nurse and governess to
Y’s infant daughter. Y promised to compensate X for the services, providing for the maintenance of X, her husband and her
children during all the time that the services were required.
Y contends that there was no valid contract of lease of services because the price thereof was not fixed.
Issue: Does the contract furnish a basis or measure by which
the amount of compensation may be ascertained?
Held: Yes. In this case, the cost of maintenance determines
the compensation according to the agreement of the parties.
(Majarabas vs. Leonardo, supra.)
———— ———— ————
4.
ter.”
Price was fixed at “not greater than P210.00 per square me-
Facts: Under the contract of lease with option to buy entered into in 1975, the lessee was given the option to purchase
the parcel of land lease within a period of 10 years from the
date of signing of the contract “at a price not greater than P210.00
per square meter.”
Issue: Is the price certain or definite?
Held: Yes, given the circumstances of the case. “Contracts
are to be construed according to the sense and meaning of the
terms which the parties themselves have used. In the present
Art. 1469
NATURE AND FORM OF THE CONTRACT
53
dispute, there is evidence to show that the intention of the parties is to peg the price of P210 per square meter. This was confirmed by the petitioner [lessor] himself in his testimony as follows. x x x
Moreover by his subsequent acts of having the land titled
under the Torrens System, and in pursuing the back [lessee]
manager to effect the sale immediately means that he understood perfectly well the terms of the contract. He even had the
same property mortgaged to the respondent back sometime in
1979, without the slightest hint of wanting to abandon his offer
to sell the property at the agreed price of P210 per square meter.’’ (Serra vs. Court of Appeals, 47 SCAD 55, 229 SCRA 60 [1994].)
Effect where price fixed by third person
designated.
As a general rule, the price fixed by a third person designated
by the parties is binding upon them. There are, however, exceptions such as:
(1) When the third person acts in bad faith or by mistake as
when the third person fixed the price having in mind not the thing
which is the object of the sale, but another analogous or similar
thing in which case the court may fix the price. But mere error in
judgment cannot serve as a basis for impugning the price fixed;
and
(2) When the third person disregards specific instructions or
the procedure marked out by the parties or the data given him,
thereby fixing an arbitrary price. (see 10 Manresa 53-54.)
EXAMPLE:
S sold to B a diamond ring. The determination of the price
was left to C whom the parties thought was a jeweler.
If C acted by mistake, as when he is incompetent to know
the price of the diamond ring, or in bad faith, as when he connived with S, the court may fix the price.
ILLUSTRATIVE CASE:
Price was fixed on the basis of a certain proportion of total net
value of business to be ascertained by appraisers.
54
SALES
Art. 1470
Facts: S executed a document whereby he agreed to transfer to B “the whole of the right, title, and interest” in a business.
This whole was 4/173 of the entire net value of the business.
The parties agreed that the price should be 4/173 of the total
net value. The ascertainment of such net value was left unreservedly to the judgment of the appraisers.
Issue: Is the price certain?
Held: Yes, for the minds of the parties have met on the thing
and the price. Nothing was left unfinished and all questions
relating thereto were settled. This is an example of a perfected
sale. (Barretto vs. Santa Maria, 26 Phil. 200 [1913].)
Effect where price not fixed by third
person designated.
(1) If the third person designated by the parties to fix the price
refuses or cannot fix it (without fault of the seller and the buyer),
the contract shall become ineffective, as if no price had been agreed
upon unless, of course, the parties subsequently agree upon the
price. (par. 2.)
(2) If such third person is prevented from fixing the price by
the fault of the seller or the buyer, the party not in fault may obtain redress against the party in fault (par. 2.) which consists of a
choice between rescission or fulfillment, with damages in either
case. (Art. 1191, par. 2; see Art. 1594.) If the innocent party chooses
fulfillment, the court shall fix the price.
ART. 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. (n)
Effect of gross inadequacy of price
in voluntary sales.
(1) General rule. — While a contract of sale is commutative,
mere inadequacy of the price or alleged hardness of the bargain
generally does not affect its validity when both parties are in a
position to form an independent judgment concerning the transaction. (Askav vs. Cosalan, 46 Phil. 79 [1924]; Ereñeta vs. Bezore,
Art. 1470
NATURE AND FORM OF THE CONTRACT
55
54 SCRA 13 [1973]; Auyong Hian vs. Court of Appeals, 59 SCRA
110 [1974]; see Ong vs. Ong, 139 SCRA 133 [1985].) This rule holds
true in voluntary contracts of sale otherwise free from invalidating defects. A valuable consideration, however small or nominal,
if given or stipulated in good faith is, in the absence of fraud,
sufficient. (Rodriguez vs. Court of Appeals, 207 SCRA 553 [1992].)
In determining whether the price is adequate or not, the price
obtaining at the date of the execution of the contract, not those
obtaining a number of years later, should be considered.
(Siopongco vs. Castro, [C.A.] No. 12448-R, Jan. 18, 1957.)
(2) Where low price indicates a defect in the consent. — The inadequacy of price, however, may indicate a defect in the consent such
as when fraud, mistake, or undue influence is present (Art. 1355.)
in which case the contract may be annulled not because of the
inadequacy of the price but because the consent is vitiated. Contracts of sale entered into by guardians or representatives of absentees are rescissible whenever the wards or absentees whom
they represent suffer lesion by more than 1/4 of the value of the
things which are the object thereof. (Art. 1381[1, 2].)
The unsupported claim that the sale of property was made
for an inadequate price is a mere speculation which has no place
in our judicial system. Since every claim must be substantiated
by sufficient evidence, such a conjectural pretension cannot be
entertained. Allegation of inadequacy of price must be proven.
(Ng Cho Cio vs. Ng Diong, 1 SCRA 275 [1961].)
(3) Where price so low as to be “shocking to conscience”. — While
it is true that mere inadequacy of price is not a sufficient ground
for the cancellation of a voluntary contract of sale, it has been held
that where the price is so low that “a man in his senses and not
under a delusion” would not accept it, the sale may be set aside
and declared an equitable mortgage to secure a loan. (Aguilar vs.
Rubiato, 40 Phil. 570 [1919]; De Leon vs. Salvador, 36 SCRA 507
[1970]; Art. 1602[1].) But where the price paid is much higher than
the assessed value of the property and the sale is effected by a
father to his daughter in which filial love must be taken into account, the price is not to be construed “as so inadequate to shock
the court’s conscience.” (Alsua-Bett vs. Court of Appeals, 92 SCRA
332 [1979]; Jocson vs. Court of Appeals, 170 SCRA 333 [1989].)
56
SALES
Art. 1470
ILLUSTRATIVE CASES:
1.
Selling price is 1/26 of value of property.
Facts: S sold to B with pacto de retro (right to repurchase) a
land valued at P26,000 for only P1,000.00.
Issue: May the contract be construed as an equitable mortgage? (see Arts. 1602, 1603.)
Held: As the price is so grossly inadequate, the contract will
be interpreted to be one of loan with equitable mortgage with
the price paid as principal of said loan and the land given merely
as security. (Aguilar vs. Rubiato, 40 Phil. 570 [1919].)
———— ———— ————
2. Purchaser of property earned greater profit by its subsequent
resale than that earned by seller by the sale to such purchaser.
Facts: S bought a land for P870.00. One year later, he sold
the same land to B for P1,125.00. Subsequently, B sold 1/20 of
the land for P681.00. S brought action to have the sale annulled,
claiming that the price of the land was “so inadequate as to
shock the conscience of men’’ as shown by B’s sale of 1/20 of
the land for more than half of what was paid to S.
Issue: Is the price of P870.00 grossly inadequate?
Held: Having sold the land to B for the sum of P1,125.00
one year after he had purchased it for P870.00 at a profit of
about 28%, S had no ground for complaint. A sale may not be
annulled simply because the purchaser subsequently resold the
property or a part of it at a greater profit than that earned by
his vendor. (Alarcon vs. Kasilag, [C.A.] 40 O.G. [Supp. 11] 203.)
———— ———— ————
3. Conveyance of property is for P1.00 and other valuable considerations.
Fact: S, for and in consideration of P1.00 and other valuable considerations, executed in favor of B then a minor, a
Quitclaim Deed whereby she transferred to B all her rights and
interests in the 1/2 undivided portion of a parcel of land. Later,
S claimed that the deed is null and void as it is equivalent to a
Deed of Donation, acceptance of which by the donee is necessary to give it validity.
lssue: Is the Quitclaim Deed a conveyance of property with
a valid cause or consideration?
Art. 1470
NATURE AND FORM OF THE CONTRACT
57
Held: Yes. The cause or consideration is not the P1.00 alone
but also other valuable considerations. Although the cause is
not stated in the contract it is presumed that it is existing unless the debtor proves the contrary. (Art. 1354.) This presumption cannot be overcome by a simple assertion of lack of consideration especially when the contract itself states that consideration was given, and the same has been reduced into a
public instrument with all due formalities and solemnities.
Moreover, even granting that the Quitclaim Deed is a donation, Article 741 of the Civil Code provides that the requirement of the acceptance of the donation in favor of a minor by
parents or legal representatives applies only to onerous and
conditional donations where the donee may have to assume
certain charges or burdens. (Ong vs. Ong, 139 SCRA 133 [1985].)
Effect of gross inadequacy of price
in involuntary sales.
(1) General rule. — A judicial or execution sale is one made by
a court with respect to the property of a debtor for the satisfaction of his indebtedness.12
Like in a voluntary sale, mere inadequacy of price is not a
sufficient ground for the cancellation of an execution sale if there
is no showing that in the event of a resale, a better price can be
obtained. It has been held that the public sale of a lot valued at
P40,500.00 for P12,000.00 cash “does not appear to be inadequate.”
(see Cu Bie vs. Court of Appeals, 15 SCRA 306 [1965]; Pascua vs.
Heirs of Segundo Simeon, 161 SCRA 1 [1988].)
(2) Where price so low as to be “shocking to the conscience.” — If
the “price is so inadequate as to shock the conscience of the Court”,
“such that the mind revolts at it and such that a reasonable mind
would neither directly or indirectly be likely to consent to it,’’ a
judicial sale, say, of real property, will be set aside. (National Bank
vs. Gonzales, 45 Phil. 693 [1923]; Warnes, Barnes & Co. vs. Santos,
12
There are three (3) types of sale arising from failure to pay a mortgage debt, namely,
the extra-judicial foreclosure sale, the judicial foreclosure sale, and the ordinary execution sale. They are governed by three (3) different laws which are, respectively, Act No.
3135, Rule 68, and Rule 39 of the Rules of Court. (Abaca Corporation of the Phils. vs.
Court of Appeals, 81 SCAD 635, 272 SCRA 475 [1997].)
58
SALES
Art. 1471
15 Phil. 446 [1910]; Paras vs. Court of Appeals, 91 Phil. 389 [1952];
Cometa vs. Court of Appeals, 143 SCAD 90, 351 SCRA 294 [2001].)
Thus, where a land with an assessed value of more than P60,000.00
was sold for only P867.00, the sale was set aside. (Director of Lands
vs. Abarca, 61 Phil. 70 [1934]; Jalandoni vs. Ledesma, 64 Phil. 1058
[1937].)
Similarly, an execution sale whereby 33 hectares of land were
ceded to the judgment creditor to satisfy a liability for 146 cavans
of palay was held void for inadequacy of price. (Singson vs.
Babida, 79 SCRA 111 [1977].) So, also the price of the sale of properties at around 10% of their value was held to be grossly inadequate. (Provincial Sheriff of Rizal vs. Court of Appeals, 68 SCRA
329 [1975].)
(3) Where seller is given the right to repurchase. — The validity
of the sale is not necessarily affected where the law gives to the
owner the right to redeem, as when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for
the owner to effect the redemption. (De Leon vs. Salvador, 36
SCRA 567 [1970]; Ravanera vs. Imperial, 93 SCRA 589 [1979];
Ramos vs. Pablo, 146 SCRA 24 [1986]; Francia vs. Intermediate
Appellate Court, 162 SCRA 753 [1988]; Abaca Corporation of the
Phils. vs. Garcia, 81 SCAD 635, 272 SCRA 475 [1997].) He may
reacquire the property or also sell his right to redeem and thus
recover the loss he claims he suffered by reason of the price obtained at the execution sale. (Tolentino vs. Agcaoli, [unrep.] 91 Phil.
917 [1952]; Barrozo vs. Macaraeg, 83 Phil. 378 [1949]; Velasquez
vs. Coronel, 5 SCRA 985 [1962]; Dev. Bank of the Phils. vs. Moll,
43 SCRA 82 [1972].)
ART. 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. (n)
Effect where price is simulated.
(1) If the price is simulated or false such as when the vendor
really intended to transfer the thing gratuitously, then the sale is
void but the contract shall be valid as a donation. (Arts. 1471, 1345,
1353.)
Art. 1471
NATURE AND FORM OF THE CONTRACT
59
EXAMPLE:
S sold to B a parcel of land worth P50,000.00 for only
P30,000.00. This contract of sale is valid although the price is
grossly inadequate. However, if it is shown that B induced S to
sell the land through fraud, mistake, or undue influence, the
contract may be annulled on that ground.
If the price is simulated, B may prove another consideration like the liberality of S and if such liberality is proved, then
the contract is valid as a donation; or B may prove that the act
is in reality some other contract, like barter and, therefore, the
transfer of ownership is unaffected.
(2) If the contract is not shown to be a donation or any other
act or contract transferring ownership because the parties do not
intend to be bound at all (Art. 1345, ibid.), the ownership of the
thing is not transferred. The contract is void and inexistent. (Art.
1409[2].) The action or defense for the declaration of the inexistence of a contract does not prescribe. (Art. 1410; see Catindig vs.
Heirs of Catalina Roque, 74 SCRA 83 [1976].)
(3) Simulation occurs when an apparent contract is a declaration of a fictitious will deliberately made by agreement of the
parties, in order to produce, for the purpose of deception, the
appearance of a juridical act which does not exist or is different
from that which was really executed. Its requisites are (a) an outward declaration of will different from the will of the parties; (b)
the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive third persons. (Tongoy vs.
Court of Appeals, 123 SCRA 99 [1983]; Bayongayong vs. Court of
Appeals, 430 SCRA 210 [2004].)
The fact that the seller continues to pay realty taxes on the land
sold even after the execution of the contract to sell does not necessarily prove ownership, much less simulation of said contract.
The non-payment of the price does not prove simulation; at most,
it gives the seller the right to sue for collection. Generally, in a
contract of 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. (Villaflor vs. Court of
Appeals, 87 SCAD 778, 280 SCRA 297 [1997].) The non-payment
of the price by the supposed buyer, a minor, when taken into ac-
60
SALES
Arts. 1472-1473
count together with the many intrinsic defects of the deed of sale,
may, however, show that the price is simulated, making the sale
void. (Lebagela vs. Santiago, 371 SCRA 360 [2001].)
ART. 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. (1448)
Price on a given day at particular market.
The above provision follows the principle in Article 1469 that
a price is considered certain if it could be determined with reference to another thing certain.
Note the last phrase of the above article: “provided said
amount be certain.” When an amount is fixed above or below the
price on a given day or in a particular exchange or market, the
said amount must be certain; otherwise, the sale is inefficacious
(Art. 1474.) because the price cannot be determined.
This article is especially applicable to fungible things like securities, grain, liquids, etc. the price of which are subject to fluctuations of the market.
ART. 1473. The fixing of the price can never be left
to the discretion of one of the contracting parties.
However, if the price fixed by one of the parties is accepted by the other, the sale is perfected. (1449a)
Fixing of price by one of the contracting
parties, not allowed.
The reason for the rule is obvious.
(1) If consent is essential to a contract of sale, the determination of the price cannot be left to the discretion of one of the contracting parties; otherwise, it cannot be said that the other consented to a price he did not and could not previously know. (see
Art. 1474
NATURE AND FORM OF THE CONTRACT
61
10 Manresa 6061.) The validity or compliance of the contract cannot be made to depend upon the will of one party. (Art. 1308.)
(2) Moreover, to be just, the price must be determined impartially by both parties (Art. 1458.) or left to the judgment of a specified person or persons. (Art. 1469.)
However, where the price fixed by one party is accepted by
the other, the contract is deemed perfected because in this case,
there exists a true meeting of minds upon the price. (Art. 1475.)
ART. 1474. Where the price cannot be determined
in accordance with the preceding articles, or in any
other manner, the contract is inefficacious. However,
if the thing or any part thereof has been delivered to
and appropriated by the buyer, he must pay a reasonable price therefor. What is a reasonable price is a
question of fact dependent on the circumstances of
each particular case. (n)
Effect of failure to determine price.
(1) Where contract executory. — If the price cannot be determined in accordance with Articles 1469 and 1472, or in any other
manner, and the bargain is still executory, the contract is without
effect. Price certain is an essential element of the contract of sale.
(Art. 1458.) Consequently, there is no obligation on the part of the
vendor to deliver the thing and on the part of the vendee to pay.
(2) Where delivery has been made. — If the thing or any part
thereof has already been delivered and appropriated by the buyer,
the latter must pay a reasonable price therefor. This obligation of
the buyer is sometimes contractual (if the agreement omits any
reference to price), and sometimes, quasi-contractual (if the agreement provides that the parties are thereafter to agree on the price).
(see Art. 2142.)
(a) If a buyer, for example, orders a cavan of rice from a
store, nothing being said as to the price, the parties intend and
understand that a reasonable price shall be paid. The obligation here is contractual. The law merely enforces the intention
of the parties.
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Art. 1474
(b) Article 1474 applies only where the means contemplated by the parties for fixing the price have, for any reason,
proved ineffectual. In this case, the obligation of the buyer to
pay a reasonable price is an obligation imposed by law as distinguished from a contractual obligation. It is based on the
fundamental principle that no one should enrich himself at the
expense of another. (Ibid.) In case, however, the parties do not
intend to be bound until after the price is settled, the buyer
must return any goods already received or if unable to do so,
must pay their reasonable value at the time of delivery, and
the seller must return any portion of the amount received.
Concept of reasonable price.
The reasonable price or value of goods is generally the market price at the time and place fixed by the contract or by law for
the delivery of the goods. Under special circumstances of unnatural conditions in the market, the market price does not furnish
the only test. In the leading case upon this point, the court said:
“A reasonable price may or may not agree with the current price of the commodity at the port of shipment when such
shipment is made. The current price of the day may be highly
unreasonable from accidental circumstances, as on account of
the commodity having been purposely kept back by the vendor himself, or with reference to the price at the other ports in
the immediate vicinity, or from various other causes. This
doctrine has been applied in cases where the market has been
monopolized.” (1 Williston,13 op. cit., p. 447.)
Determination of fair market value.
Offers to sell are not competent evidence of the fair market
value of a property, because they are no better than offers to buy,
which have been held to be inadmissible as proof of said values.
(City of Manila vs. Estrada, 25 Phil. 208 [1913]; Manila Railroad
Co. vs. Aguilar, 35 Phil. 118 [1913].)
“In discussing the term ‘market value’, the author of a wellknown treatise on the subject of damages observes that to make a
13
If not indicated, the 3rd edition thereof.
Art. 1475
NATURE AND FORM OF THE CONTRACT
63
market there must be both buying and selling; and the ‘market
value’ is that ‘reasonable’ sum which property would bring on a
fair sale by a man willing but not obliged to sell to a man willing
but not obliged to buy.” (Sedgewick on Damages, Sec. 245, cited
in Compagnie Franco-Indo Chinoise vs. Deutsch-Australiache, 39
Phil. 474 [1919]; Perez vs. Araneta, 6 SCRA 457 [1962].)
ART. 1475. The contract of sale is perfected at the
moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.
From that moment, the parties may reciprocally
demand performance, subject to the provisions of the
law governing the form of contracts. (1450a)
Perfection of contract of sale.
This article follows the general rule that contracts are perfected
by mere consent. (Art. 1315.) The contract of sale being consensual, it is perfected at the moment of consent without the necessity of any other circumstances. From the moment there is a meeting of minds upon the thing which is the object of the contract
and upon the price (see Art. 1624.), the reciprocal obligations of
the parties arise even when neither has been delivered. (see Pacific Oxygen & Acetylene Co. vs. Central Bank, 37 SCRA 685
[1971]; Villongco Realty Co. vs. Bormacheco, Inc., 65 SCRA 352
[1975]; Vargas Plow Factory, Inc. vs. Central Bank, 27 SCRA 84
[1969]; Xentrex Automotive, Inc. vs. Court of Appeals, 94 SCAD
923, 290 SCRA 66 [1998].) The essence of consent is the conformity of the parties on the term of the contract, the acceptance by
one of the offer made by the other. (Salonga vs. Farrales, 105 SCRA
359 [1981]; Firme vs. Buklod Enterprises and Dev. Corp., 414 SCRA
190 [2003].)
(1) Conduct of the parties. — Appropriate conduct by the parties may be sufficient to establish an agreement. While there may
be instances where interchanged correspondence does not disclose
the exact point at which the deal was closed, the actions of the
parties may indicate that a binding obligation has been undertaken. (Maharlika Publishing Corp. vs. Tagle, 142 SCRA 553
[1986].) There is, however, no perfected sale where it is conditional
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Art. 1475
(e.g., approval by higher authorities) and the condition is not fulfilled. (see People’s Homesite & Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984].)
(2) Transfer of ownership. — The ownership is not transferred
until the delivery of the thing. (Arts. 1496, 1164.14) The parties,
however, may stipulate that the ownership in the thing, notwithstanding its delivery, shall not pass to the purchaser until after he
has fully paid the purchase price thereof. (Arts. 1478, 1306.)
(3) Form of contract. — Generally, a contract of sale is binding
regardless of its form. (Art. 1356.) However, in case the contract
of sale should fall within the provisions of the Statute of Frauds
(Art. 1403[2].) or of any other applicable statute which requires a
certain form for its enforceability or validity (Art. 1356.), then that
form must be complied with. (Art. 1483.) A contract of sale may
be in a private instrument; the contract is valid and binding between the parties upon its perfection and a party may compel the
other to execute a public instrument embodying the contract. (see
Arts. 1357, 1358.)
A sale of real estate, whether made as a result of a private transaction or of a foreclosure or execution sale, becomes legally effective against third persons only from the date of its registration.
(Campillo vs. Phil. National Bank, 28 SCRA 720 [1969].)
In a case, a letter-offer to buy a particular property for a specified price was received by the offeree who annotated on the copy
the phrase “Received original, 9-4-89’’ beside which appears his
signature. Held: The receipt can neither be regarded as a contract
of sale nor a promise to sell. Such an annotation by the offeree
amounts to neither a written nor an implied acceptance of the
offer. It is merely a memorandum of the receipt by him of the offer. The requisites of a valid contract of sale are lacking in said
receipt. (Jovan Land, Inc. vs. Court of Appeals, 79 SCAD 428, 268
SCRA 160 [1997].)
(4) Consent reluctantly given. — There is no difference in law
where a person gives his consent reluctantly and even against his
14
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. 1475
NATURE AND FORM OF THE CONTRACT
65
good sense and judgment as when he acts voluntarily and freely.
(Acasio vs. Corp. de los PP. Dominicos de Filipinas, 100 Phil. 253
[1956].)
(5) Notarized deed of sale states receipt of price. — The unsupported verbal claim of the seller that the sale of a motor vehicle
was not consummated for failure of the purchaser to pay the purchase was held insufficient to overthrow a notarized deed of sale
wherein it is recited that the seller “sold, transferred and conveyed” the motor vehicle to the purchaser “for and in consideration of the amount of P10,000 and other valuable considerations,
receipt of which is hereby acknowledged.”
To overcome a public document solemnly executed before a
notary public, the evidence to the contrary must be clear, strong,
and convincing. Parol evidence will not suffice to negate the clear
and positive recitals of a public document not otherwise tainted
with fraud or falsification. (Regalario vs. Northwest Finance Corporation, 117 SCRA 45 [1982].)
(6) Applicant’s qualification to buy still subject for investigation.
— In a case, the agreement denominated as “contract of sale” was
considered by the court as a mere application to buy the land in
question, and not a perfected contract of sale. Although it embodied all the essential elements of a contract of sale by installment,
it appearing that “after the approval of such application it was
still necessary to have the [applicant’s] qualifications investigated
as well as whether or not he has complied with the provisions of
the law regarding the disposition of lands by the Board of Liquidators,” the application was subject to revocation in case the applicant was found not to possess the qualifications necessary.
(Alvarez vs. Board of Liquidators, 4 SCRA 95 [1962]; Galvez vs.
Tagle Vda. de Kangleon, 6 SCRA 162 [1962].)
(7) Chattel mortgage of car by mortgagor-buyer prior to transfer of
title to his name. — The fact that the chattel mortgage of a car by
the buyers in favor of the seller was executed on a date earlier
than the transfer of the registration certificate thereof in the name
of the buyers does not render the said mortgage made by the
buyers invalid, because the mortgagors were already the owner
of the car when the mortgage was executed, inasmuch as at the
time of the sale wherein the parties agreed over the car and the
66
SALES
Art. 1475
price, the contract became perfected, and when part of the purchase price was paid and the car was delivered, upon the execution of the promissory note and the mortgage by the mortgagors,
the sale became consummated. The registration of the transfer of
automobiles and of the certificates of license for their use in the
Bureau of Land Transportation merely constitutes an administrative proceeding which does not bear any essential relation to the
contract of sale entered into between the parties. (Montano vs. Lim
Ang, 7 SCRA 250 [1963].)
Registration of motor vehicles is required not because it is the
operative act that transfers ownership in vehicles (as in land registration cases), but because it is the means to identify the owner
thereof in case of accident so that responsibility for the same can
be fixed. (De Peralta vs. Mangusang, 11 SCRA 598 [1964].)
(8) Non-fulfillment by one party of his obligation. — In case one
of the contracting parties should not comply with what is incumbent upon him, the injured party may sue for fulfillment or rescission with the payment of damages in either case. (Art. 1191,
pars. 1 and 2.) This right is predicated on the violation of the reciprocity between the parties brought about by a breach of obligation by one of them.
ILLUSTRATIVE CASES:
1. Purchase order form directed to seller asking delivery of a
piano carries the address of purchaser in Dipolog City while delivery
receipt form directed to purchaser carries address of seller in Cagayan
de Oro City.
Facts: B, an appliance center of Dipolog City, issued a purchase order to S, an appliance center of Cagayan de Oro City,
directing the latter to furnish the former a Weinstein Accousticon
Piano. The order was honored by S, which issued a delivery
receipt for the item. B’s representative received the piano, and
signed the delivery receipt at Cagayan de Oro, and assumed
the responsibility and expenses of bringing it to Dipolog City.
Upon the refusal of B to pay, S filed a complaint for collection with the City Court of Cagayan de Oro. B filed a motion to
dismiss alleging that there being no written agreement between
the parties specifying where the action arising out of the con-
Art. 1475
NATURE AND FORM OF THE CONTRACT
tract should be filed, the venue of the case properly falls in
Dipolog City under Section 1(b), Rule 4 of the Rules of Court.
Issue: Where is the place of the execution of the contract or
the place where there was meeting of the minds of the parties?
Held: The meeting of minds took place in Cagayan de Oro
City when S received the purchase order, agreed to its terms,
and acted upon it. As a matter of fact, it was not the meeting of
minds alone but also the consummation of the contract which
happened in Cagayan de Oro City.
Under the circumstances of the case, the documents evidencing the contract show the place of execution to be Cagayan
de Oro City. The purchase order is the contract sued upon. By
itself, it was only an offer to buy directed to S with address at
Cagayan de Oro City. It was brought to said city to be acted
upon at that place. The delivery receipt indicates the acceptance of the offer and the delivery of the piano also at Cagayan
de Oro City. The entry on the delivery receipt showing that the
purchased item was delivered to B of Dipolog City merely indicates the name and address of the buyer but not the place of
the execution of the contract. (Raza Appliance Center vs. Villaraza,
117 SCRA 576 [1982].)
———— ———— ————
2. A co-owner sold 10 hectares portion of a land owned in common which portion was to be surveyed, with acknowledgment of the
receipt of an initial payment.
Facts: S executed two documents: in the first, S agreed to
sell and B agreed to buy, for P2,500.00, 10 hectares of land, which
is part and parcel of a bigger lot owned in common by S and
his sister although the boundaries of the 10 hectares would be
delineated at a later date and in the second, S acknowledged
receipt as initial payment of P800.
Additional payments of P300 were made. B filed a complaint for specific performance after S returned the amounts
paid.
Issue: Was there a perfected contract of sale between the
parties?
Held: Yes. While it is true that the two documents are in
themselves not contracts of sale, there are, however, clear evidence that a contract of sale was perfected. S’s acceptance of
67
68
SALES
Art. 1475
the initial payment of P800.00 clearly showed his consent to
the contract thereby precluding him from rejecting its binding
effect. With the contract being partially executed, the same is
no longer covered by the requirements of the Statute of Frauds
in order to be enforceable. As co-owner, S cannot dispose of a
specific portion of the land, but his share shall be bound by the
effect of the sale under Article 493 of the Civil Code. (Clarin vs.
Rulona, 127 SCRA 512 [1984].)
When definite agreement on manner
of payment essential.
As a consensual contract, a contract of sale becomes a binding and valid contract upon the meeting of the minds of the parties as to the price, despite the manner of payment, or even the
breach of that manner of payment. It is not the act of payment of
price that determines the validity of a contract of sale. (Buenaventura vs. Court of Appeals, 416 SCRA 263 [2003].)
Where the parties, however, still have to meet and agree on
how and when the downpayment and installment payments are
to be made, it cannot be said that a contract of sale has been perfected.
Thus, in a case where the buyer is “to give a down-payment
of P10,000 to be followed by P20,000 and the balance of P70,000
would be paid in installments, the equal monthly amortization
of which has to be determined as soon as the P30,000 had been
completed,” it was held that the fact that the buyer delivered the
sum of P1,000 as part of the downpayment cannot be considered
as sufficient proof of the perfection of any purchase and sale agreement between the parties under Article 1482. In this case, a definite agreement on the manner of payment of the purchase price
is an essential element in the formation of a binding and enforceable contract of sale. (Velasco vs. Court of Appeals, 51 SCRA 439
[1973]; Limketkai Sons Milling, Inc. vs. Court of Appeals, 69 SCAD
976, 255 SCRA 626 [1996]; see Navarro vs. Sugar Producers Corp.
Mktg. Assoc., 1 SCRA 1180 [1961]; Co vs. Court of Appeals, 286
SCRA 76 [1998].)
It appears, however, that the parties in the Velasco case agreed
on the purchase price of P100,000. It is believed that upon the
meeting of the minds of the parties on the thing which is the ob-
Art. 1475
NATURE AND FORM OF THE CONTRACT
69
ject of the contract and the price (P100,000), the contract of sale
must be deemed to have been perfected. (Art. 1475.) The terms
and conditions of payment are merely accidental, not essential,
elements of the contract of sale except where the parties themselves clearly stipulate that in addition to the subject matter and
the price, they are essential or material to the contract. (see A.
Magsaysay, Inc. vs. Cebu Portland Cement Co., 100 Phil. 351
[1956].) A disagreement on the manner of payment is tantamount
to a failure to agree on the price. (Swedish Match, AB vs. Court of
Appeals, 441 SCRA 1 [2004].)
Article 119715 of our Civil Code authorizes courts to fix the
period or periods of payment where there is lack of agreement
regarding the same.
In Uraca vs. Court of Appeals (86 SCAD 734, 278 SCRA 702
[1997].), S sent a letter to B, offering to sell a lot and commercial
building for P1,050,000. B sent a reply-letter within the 3-day period contained in the offer accepting the aforesaid offer. Later, B
was told by S that the price was P1,400,000 in cash or manager’s
check and not P1,050,000 as erroneously dated in the letter-offer.
B agreed to the price of P1,400,000 but counter-proposed that
payment be paid in installments, with a downpayment of
P1,000,000 and the balance of P400,000 to be paid in 30 days. It
was held that a contract of sale was perfected at the original price
of P1,050,000 but there was no agreement in the sale at the increased price of P1,400,000. The qualified acceptance by B constitutes a counter-offer and, in effect, a rejection of S’s offer. (Art.
1319.) Since there was no definite agreement on the manner of the
payment of the purchase price of P1,400,000, the first sale for
P1,050,000 remained valid and existing.
Although the law does not expressly state that the minds of
the parties must also meet on the terms or manner of payment of
15
Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will
of the debtor.
In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the
period cannot be changed by them. (1128a)
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SALES
Art. 1475
the price, the same is needed. Agreement on the manner of payment goes into the price such that a disagreement on the manner
of payment is tantamount to failure to agree on the price. (Toyota
Shaw, Inc. vs. Court of Appeals, 61 SCAD 310, 244 SCRA 320
[1995]; San Miguel Properties Philippines, Inc. vs. Huang, 130
SCAD 713, 336 SCRA 737 [2000].) An agreement on the price but
a disagreement on the manner of its payment will not result in
consent. This lack of consent is separate and distinct from lack of
consideration where the contract states that the price has been paid
when in fact it has never been paid. (Montecillo vs. Reyes, 170
SCAD 440, 385 SCRA 244 [2002], infra.)
ILLUSTRATIVE CASE:
The buyer, having failed to open a letter of credit as required by
the seller, claimed that there was no perfected contract of sale between
the parties.
Facts: B (buyer) established contact with S (seller) through
the Philippine Consulate General in Hamburg, West Germany,
because he wanted to purchase MAN bus spare parts from Germany.
On October 16, 1981, B submitted to S a list of the parts he
wanted to purchase, with specific parts number and description. On December 17, 1971, S submitted its formal offer containing the item number, quantity, part number, description,
unit price and total to B. On December 24, 1981, B informed S
of his desire to avail of the prices of the parts at that time and
enclosed its Purchase Order containing the item number, part
number and description. On December 29, 1981, B personally
submitted the quantities he wanted to the General Manager of
S in the Philippines. H, trading partner of S, sent a pro forma
invoice to be used by B in applying for a letter of credit; said
invoice required that said letter be opened in favor of J.
On February 16, 1982, S reminded B to open the letter of
credit to avoid delay in the shipment and payment of interest.
On October 18, 1982, S again reminded B of his order and advised that the case may be endorsed to its lawyers. B replied that
he did not make any valid Purchase Order and that there was
no definite contract between him and S. Subsequently, S filed a
complaint for recovery of actual or compensatory damages,
unearned profits, interest, attorney’s fees and costs against B.
Art. 1475
NATURE AND FORM OF THE CONTRACT
Issue: The issue posed for resolution is whether or not a
contract of sale has been perfected between the parties.
Held: (1) A meeting of the minds has occurred. — “The offer by
petitioner [S] was manifested on December 17, 1981 when petitioner submitted its proposal containing the item number, quantity, part number, description, the unit price and total to private respondent [B]. On December 24, 1981, private respondent informed petitioner of his desire to avail of the prices of the
parts at that time and simultaneously enclosed its Purchase
Order No. 0101 dated December 14, 1981. At this stage, a meeting of the minds between vendor and vendee has occurred, the
object of the contract being the spare parts and the consideration, the price stated in petitioner’s offer dated December 17,
1981 and accepted by the respondent on December 24, 1981.
Although said purchase order did not contain the quantity
he wanted to order, private respondent made good his promise to communicate the same on December 29, 1981. At this juncture, it should be pointed out that private respondent was already in the process of executing the agreement previously
reached between the parties.’’
(2) B has accepted S’s offer. — “There appears this statement
made by private respondent: “Note above P.O. will include a
3% discount. The above will serve as our initial P.O.” This notation on the purchase order was another indication of acceptance on the part of the vendee, for by requesting a 3% discount,
he implicitly accepted the price as first offered by the vendor.
The immediate acceptance by the vendee of the offer was impelled by the fact that on January 1, 1982, prices would go up,
as in fact, the petitioner informed him that there would be a 7%
increase effective January 1982. On the other hand, concurrence
by the vendor with the said discount requested by the vendee
was manifested when petitioner immediately ordered the items
needed by private respondent from Schuback Hamburg which
in turn ordered from NDK, a supplier of MAN spare parts in
West Germany.”
(3) Contract was perfected on December 24, 1981. — “While
we agree with the trial court’s conclusion that indeed a perfection of the contract was reached between the parties, we differ
as to the exact date when it occurred, for perfection took place,
not on December 29, 1981, but rather on December 24, 1981.
Although the quantity to be ordered was made determinate on
71
72
SALES
Art. 1475
only December 24, 1991, quantity is immaterial in the perfection of sales contract. What is of importance is the meeting of
the minds as to the object and cause, which from the facts disclosed, show that as of December 24, 1981, these essential elements had already concurred.”
(4) Opening of letter was not intended as a suspensive condition. — “On the part of the buyer, the situation reveals that private respondent failed to open an irrevocable letter of credit
without recourse in favor of Johannes Schuback of Hamburg,
Germany. This omission, however, does not prevent the perfection of the contract between the parties, for the opening of a
letter of credit is not to be deemed a suspensive condition. The
facts herein do not show that petitioner reserved title to the
goods until private respondent had opened a letter of credit.
Petitioner, in the course of its dealings with private respondent, did not incorporate any provision declaring their contract
of sale without effect until after the fulfillment of the act of opening a letter of credit. The opening of a letter of credit in favor of
vendor in only a mode of payment. It is not among the essential requirements of a contract of sale enumerated in Articles of
day of which will prevent the perfection of the contract from
taking place.” (Johannes Schuback & Sons Phil. Trading Corp. vs.
Court of Appeals, 46 SCAD 240, 227 SCRA 717 [1993].)
Effect of failure to pay price.
Failure to pay the consideration of contract is different from
lack of consideration; the former results in a right to demand
fulfillment or cancellation of the obligation under an existing valid
contract, while the latter prevents the existence of a valid contract.
(Montecillo vs. Reyes, 170 SCAD 440, 385 SCRA 244 [2002].)
(1) The failure to pay the stipulated price after the execution
of the contract does not convert the contract into one without cause
or consideration as to vitiate the validity of the contract, it not
being essential for the existence of cause that payment or full
payment be made at the time of the contract. (Puato vs. Mendoza,
64 Phil. 417 [1937].) Non-payment of the purchase price is not
among the instances where the law declares a contract of sale to
be null and void. (Peñalosa vs. Santos, 153 SCAD 531, 363 SCRA
545 [2001].) Such failure does not ipso facto resolve the contract in
the absence of any agreement to that effect. (De la Cruz vs.
Art. 1475
NATURE AND FORM OF THE CONTRACT
73
Legaspi, 98 Phil. 43 [1955]; Ocampo vs. Court of Appeals, 52 SCAD
610, 233 SCRA 551 [1994].)
The situation is rather one in which there is failure to pay the
consideration, with its resultant consequences. The vendor’s remedy in such case is generally to demand specific performance or
rescission with damages in either case under Article 1191. (De la
Cruz vs. Legaspi, supra; Chua Hai vs. Kapunan, Jr., 103 Phil. 110
[1958]; Lebrilla vs. Intermediate Appellate Court, 180 SCRA 188
[1989].)
(2) But a contract of sale is null and void where the purchase
price, which appears thereon as paid, has, in fact, never been paid
by the buyer to the seller. In such case, the sale is without cause or
consideration. (Art. 1409[3].) Such sale is non-existent or cannot
be considered consummated. It produces no effect whatsoever.
(Mapalo vs. Mapalo, 17 SCRA 114 [1966]; Yu Bun Guan vs. Ong,
157 SCAD 38, 367 SCRA 559 [2001]; Montecillo vs. Reyes, supra.)
If the real price is not stated in the contract, then the contract
is valid but subject to reformation. If there is no meeting of the
minds of the parties as to the price, because the price stipulated
in the contract is simulated, then the contract is void. Article 1471
states that if the price is simulated, the sale is void. (Buenaventura
vs. Court of Appeals, 416 SCRA 263 [2003].)
ILLUSTRATIVE CASES:
1. Seller is authorized by the contract, in case of buyer’s default, to recover interest sold in property which was subsequently
damaged, and buyer defaulted.
Facts: S and B were the co-owners in equal shares of a motor boat. By written contract, S sold her undivided interest in
the boat to B payable in three (3) equal installments. In case of
default “the buyer authorizes the seller to recover her one-half
participation of ownership of the boat without obligation to
reimburse the payments made by the buyer.” B defaulted after
P750.00 was paid. Later, the boat was damaged by a typhoon.
S filed action to recover the balance of the purchase price.
B answered that he had notified S to take over her half interest
in the boat, which she refused to do.
Issue: Under the contract, is B relieved of the obligation to
pay the purchase price?
74
SALES
Art. 1475
Held: No. The sole fact that the contract of sale between the
parties only provides that in case of default “the buyer authorizes xxx,” and is silent on the seller’s right to exact payment of
the outstanding balance, there being no other stipulations incompatible therewith, does not import that the seller has thereby
lost the alternative right to demand full payment. (see Cui vs.
Sun Chuan, 41 Phil. 523.) This becomes more apparent from the
circumstance that the contract as written confers upon the seller
the right (“buyer authorizes the seller”) to rescind the sale and
recover her half interest, but does not obligate her to do so.
Since S chose to collect full payment as she is entitled to
do, the loss of the boat without fault of the buyer (B) is irrelevant to the case. The generic obligation to pay monthly is not
excused by fortuitous loss of any specific property of the debtor.
(Ramirez vs. Court of Appeals, 98 Phil. 225 [1956].)
———— ———— ————
2. Subject matter of sale is “24,000 tons of iron ore, more or
less” already extracted, for a lump sum, and buyer, refusing to pay,
claims short-delivery and asks for damages.
Facts: S embarked upon the exploration and development
of mining claims belonging to B. Later, they executed a document wherein S transferred to B all of S’s rights and interest
over the “24,000 tons of iron ore, more or less” that S had already extracted from the mineral claims in consideration of a
downpayment of P10,000.00 and the balance of P65,000.00
which will be paid out of the “first shipment of iron ore and of
the first amount derived from the local sale of iron ore made”
from said claims, which amount was secured by a surety bond
executed by B in favor of S.
No sale of the approximately 24,000 tons of iron ore had
been made nor had the P65,000.00 been paid. S brought suit for
the recovery of the balance of the purchase price. B claims a
short delivery, and asks for damages. There is no charge that S
did not deliver to B all the ore found in the stockpiles in the
mining claims in question.
Issue: If there had been short delivery, as claimed by B, is
he entitled to the payment of damages?
Held: No. (1) Contract is sale of specific mass of tangible goods.
— “The sale between the parties is a sale of specific mass of
fungible goods because no provision was made in their con-
Art. 1476
NATURE AND FORM OF THE CONTRACT
75
tract for the measuring or weighing of the ore sold in order to
complete or perfect the sale nor was the price of P75,000.00
agreed upon based upon any such measurement. (Art. 1480,
par. 2.) The subject matter of sale is a determinate object, the
mass, for a single price or lump sum (the quantity ‘24,000 tons
of iron ore, more or less,’ being a mere estimate by the parties
of the total tonnage weight of the mass), and not the actual
number of units or tons contained therein so that all that was
required of S was to deliver in good faith to B all the ore found
in the mass, notwithstanding that the quantity delivered is less
than the amount estimated by them.’’
(2) Reasonable percentage of error considered. — “Even granting the estimate of 21,889.7 tons made by B is correct, considering that the actual weighing of each unit of the mass was practically impossible, a reasonable percentage of error should be
allowed anyone making an estimate of the exact quantity in
tons found in the mass. In this case, both parties predicated
their respective claims only upon an estimated number of cubic meters of ore multiplied by the average tonnage factor per
cubic meter. Furthermore, the contract expressly stated the
amount to be 24,000 tons more or less.’’ (Gaite vs. Fonacier, 2
SCRA 830 [1961].)
Right of owner to fix his own price.
(1) The owner of a thing has the right to quote his own price,
reasonable or unreasonable. It is up to the prospective buyer to
accept or reject it. He may even impose a condition hard to fulfill
and name a price quite out of proportion to the real value of the
thing offered for sale. (Cornejo vs. Calupitan, 87 Phil. 555 [1950].)
(2) He is also well within his right to quote a small or nominal consideration (see Arts. 1470-1471.) and such consideration is
just as effectual and valuable a consideration as a larger sum stipulated or paid. (see Pelacio vs. Adiosola, [C.A.] No. 7572-R, Sept.
10, 1952.)
ART. 1476. In the case of a sale by auction:
(1) Where goods are put up for sale by auction in
lots, each lot is the subject of a separate contract of
sale.
76
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Art. 1476
(2) A sale by auction is perfected when the auctioneer announces its perfection by the fall of the hammer, or in other customary manner. Until such announcement is made, any bidder may retract his bid;
and the auctioneer may withdraw the goods from the
sale unless the auction has been announced to be
without reserve.
(3) A right to bid may be reserved expressly by or
on behalf of the seller, unless otherwise provided by
law or by stipulation.
(4) Where notice has not been given that a sale by
auction is subject to a right to bid on behalf of the
seller, it shall not be lawful for the seller to bid himself or to employ or induce any person to bid at such
sale on his behalf or for the auctioneer, to employ or
induce any person to bid at such sale on behalf of the
seller or knowingly to take any bid from the seller or
any person employed by him. Any sale contravening
this rule may be treated as fraudulent by the buyer. (n)
Rules governing auction sales.
(1) Sales of separate lots by auction are separate sales. — Where
separate lots are the subject of separate biddings and are separately knocked down, there is a separate contract in regard to each
lot. As soon as the hammer falls on the first lot, the purchaser of
that lot has a complete and separate bargain. He need not make
another. When a second lot is put up and knocked down to the
highest bidder, there is a separate complete contract as to the said
lot whether the bidder who secured the first lot or whether another person happens to be the highest bidder. Such is the rule in
No. (1) though no doubt the parties may subsequently consolidate all the purchases into one transaction — as by giving a single note — for the aggregate price. (see 2 Williston on Sales [1948
Rev. Ed.], pp. 199-200.)
(2) Sale perfected by the fall of the hammer. — In putting up the
goods for sale, the seller is merely making an invitation to those
present to make offers which they do by making bids (Art. 1326.),
one of which is ultimately accepted. Each bid is an offer and the
Art. 1476
NATURE AND FORM OF THE CONTRACT
77
contract is perfected only by the fall of the hammer or in other
customary manner. It follows that the bidder may retract his bid
and the auctioneer may withdraw the goods from sale any time
before the hammer falls. However, if the sale has been announced
to be without reserve, the auctioneer cannot withdraw the goods
from sale once a bid has been made and the highest bidder has a
right to enforce his bid. (see 2 Williston, op. cit., pp. 200-201, 204205.)
(3) Right of seller to bid in the auction. — The seller or his agent
may bid in an auction sale provided: (a) such right was reserved;
(b) notice was given that the sale is subject to a right to bid on
behalf of the seller; and (c) the right to bid by the seller is not prohibited by law or by stipulation.16
(a) Where no notice given of right to bid. — Where there is no
notice that the sale is subject to seller’s right to bid, it shall be
unlawful for the seller to bid either directly or indirectly or for
the auctioneer to employ or induce any person to bid on behalf of the seller. (No. 4.) The purpose of the notice is to prevent puffing or secret bidding by or on behalf of the seller by
people who are not themselves bound. The employment of a
puffer or by bidder to enhance or inflate the price of the goods
sold is a fraud upon the purchaser and a sufficient ground for
relieving him from his bid and avoiding the sale. (see Fisher
vs. Hersey, 17 Hun. [N.Y.] 370.) This is true although the employment of the puffer by the auctioneer was without the
owner’s knowledge, since the auctioneer is the owner’s agent.
(b) Where notice of right to bid given. — Though bidding by
the seller or his agent is fraudulent, a right to bid may be expressly reserved by or on behalf of the seller. (No. 3.) It is,
therefore, the secrecy of puffing which renders it a fraud upon
bidding. (2 Williston, op. cit., p. 208.) Where there is notice of
the intention to bid by the seller, the bidding in such a case
would not operate as a fraud.
16
Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the only bidder.
Art. 2114. All bids at the public auction shall offer to pay the purchase price at once.
If any other bid is accepted, the pledgee is deemed to have received the purchase price,
as far as the pledgor or owner is concerned.
78
SALES
Arts. 1477-1478
(4) Contract not to bid. — A sale may be fraudulent not only
because of conduct of the seller, but because of conduct of the
buyer. It is not permissible for intending buyers at auction or other
competitive sales to make an agreement for a consideration that
only one of them shall bid, in order that the property may be
knocked down at a low price. The bargain is fraudulent as regards
the seller though the agreement is without consideration, if it is
actually carried out, for the fraud against the seller is the same as
if there were considerations. (Ibid., pp. 209-219.)
(5) Advertisements for bidders. — They are simply invitations
to make proposals, and the advertiser is not bound to accept the
highest or lowest bidder, unless the contrary appears. (Art. 1326.)
Right of owner to prescribe terms
of public auction.
The owner of property which is offered for sale, either at public
or private auction, has the right to prescribe the manner, conditions, and terms of such sale. He may provide that all of the purchase price or any portion thereof should be paid at the time of
the sale, or that time will be given for that payment, or that any
or all bids may be rejected.
The conditions of a public sale announced by an auctioneer
or by the owner of the property at the time and place of the sale
are binding upon all bidders, whether they knew of such conditions or not. (Leoquinco vs. Postal Savings Bank, 47 Phil. 772
[1925].)
ART. 1477. The ownership of the thing sold shall
be transferred to the vendee upon the actual or constructive delivery thereof. (n)
ART. 1478. The parties may stipulate that ownership in the thing shall not pass to the purchaser until
he has fully paid the price. (n)
Ownership of thing transferred
by delivery.
The delivery of the thing sold is essential in a contract of sale.
Without it, the purchaser may not enjoy the thing sold to him. It
Arts. 1477-1478
NATURE AND FORM OF THE CONTRACT
79
is only after the delivery of the thing sold that the purchaser acquires a real right or ownership over it. (Arts. 1164, 1496-1497.)
In the absence of stipulation to the contrary, the ownership of
the thing sold passes on to the vendee upon delivery thereof. (see
Froilan vs. Pan Oriental Shipping Co., 12 SCRA 276 [1964]; Boy vs.
Court of Appeals, 427 SCRA 196 [2004].) This is true even if the
purchase has been made on credit. Payment of the purchase price
is not essential to the transfer of ownership, as long as the property sold has been delivered. (Sampaguita Pictures, Inc. vs.
Jalwindor Manufacturers, Inc., 93 SCRA 420 [1979].) Non-payment
only creates a right to demand payment or to rescind the contract,
or to criminal prosecution in the case of bouncing checks. (EDCA
Publishing and Distributing Corp. vs. Santos, 184 SCRA 614
[1990].)
The delivery may be actual (Art. 1497.) or constructive. (Arts.
1498-1501.) The contract is consummated by the delivery of the
thing sold and of the purchase money.
In all forms of delivery, it is necessary that the act of delivery,
whether actual or constructive, should be coupled with the intention of delivering the thing sold. The act without the intention is
insufficient; there is no tradition. (Union Motor Corporation vs.
Court of Appeals, 151 SCAD 714, 361 SCRA 506 [2001].) It has been
held that the issuance of a sales invoice does not prove transfer
of ownership of the thing sold to the buyer, an invoice being nothing more than a detailed statement of the nature, quantity, and
cost of the thing sold, and considered not a bill of sale. (Ibid., citing P.T. Cerna Corporation vs. Court of Appeals, 221 SCRA 19
[1993]; Norkis Distributor’s, Inc. vs. Court of Appeals, 93 SCRA
694 [1991].)
Exceptions to the rule.
(1) Contrary stipulation. — The ownership of things is transferred by delivery, and not by mere payment. However, the parties may stipulate that despite the delivery, the ownership of the
thing shall remain with the seller until the purchaser has fully paid
the price. (see Art. 1503.) In other words, non-payment of the price,
after the thing has been delivered, prevents the transfer of ownership only if such is the stipulation of the parties. This stipula-
80
SALES
Arts. 1477-1478
tion is usually known as pactum reservati dominii or contractual
reservation of title, and is common in sales on the installment plan.
(Jovellanos vs. Court of Appeals, 210 SCRA 126 [1992].) A contract which contains this kind of stipulation is considered a contract to sell. The agreement may be implied. (Adelfa Properties,
Inc. vs. Court of Appeals, 58 SCAD 462, 240 SCRA 565 [1995].)
(a) Where in a contract of sale the seller agreed that the
ownership of the goods shall remain with the seller until the
purchase price shall have been fully paid, merely to secure the
performance by the buyer of his obligation, such stipulation
cannot make the seller liable in case of loss of the goods. (see
Lawyers Cooperative Publishing Co. vs. Tabora, 13 SCRA 762
[1965]; see Art. 1503, par. 2.)
(b) If there is doubt by the wording of the contract whether
the parties intended a suspensive condition (Art. 1478.) or a
suspensive period (Art. 1193, par. 1.) for the payment of the
stipulated price, the doubt shall be resolved in favor of the
greatest reciprocity of interests. (see Art. 1378.) There can be
no question that greater reciprocity will be obtained if the
buyer’s obligation is deemed to be actually existing, with only
its maturity (due date) postponed or deferred. Sale is essentially onerous. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)
(c) A stipulation that ownership in the thing sold shall not
pass to the purchaser until after he has fully paid the price
thereof could only be binding upon the contracting parties,
their assigns, and heirs (see Art. 1311, par. 1.) but not upon third
persons without notice. Such a stipulation is only a kind of
security for the benefit of the vendor who has not been fully
paid.
(2) Contract to sell. — In contracts to sell, where ownership is
retained by the seller and is not to pass until the full payment of
the price, such payment is a positive suspensive condition, the failure of which is not a breach, casual or serious, but simply an event
that prevents the obligation of the vendor to convey title from
acquiring binding force. To say that there is only a casual breach
is to proceed from the assumption that the contract is one of absolute sale, where non-payment is a resolutory condition, which
is not the case. (Luzon Brokerage Co., Inc. vs. Maritime Bldg., Co.
Art. 1479
NATURE AND FORM OF THE CONTRACT
81
Inc., 43 SCRA 93 [1972] and 86 SCRA 305 [1978]; Manuel vs.
Rodriguez, 109 Phil. 1 [1960]; Roque vs. Lapuz, 96 SCRA 741
[1980]; see Art. 1184.)
(3) Contract of insurance. — A perfected contract of sale even
without delivery vests in the vendee an equitable title, an existing
interest over the goods sufficient to be the subject of insurance.
(see Sec. 14[a], Insurance Code.) Thus, a perfected contract of sale
between the vendee-consignee and the shipper of goods operates
to vest in the former an equitable title even before delivery or
before he performed the conditions of the sale, the contract of
shipment, whether under F.O.B., or C.I.F., or C & F, being immaterial in the determination of whether the vendee has an insurable interest or not in the goods. (Filipino Merchants Insurance
Co., Inc. vs. Court of Appeals, 179 SCRA 638 [1989].)
ART. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon
the promissor if the promise is supported by a consideration distinct from the price. (1451a)
Kinds of promise treated in Article 1479.
The above article refers to three kinds of promises, namely:
(1) An accepted unilateral promise to sell in which the promisee (acceptor) elects to buy;
(2) An accepted unilateral promise to buy in which the promisee (acceptor) elects to sell; and
(3) A bilateral promise to buy and sell reciprocally accepted
in which either of the parties chooses to exact fulfillment. (see 10
Manresa 71.)
Effect of unaccepted unilateral promise.
A unilateral promise or offer to sell or to buy a thing which is
not accepted creates no juridical effect or legal bond. Such
unaccepted imperfect promise or offer is called policitacion. A pe-
82
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Art. 1479
riod may be given to the offeree within which to accept the offer.
(infra.)
EXAMPLE:
S offers or promises to sell to B his car at a stated price and
B just let the promise go by without accepting it. Neither S nor
B is bound by any contract. Obviously, this is not the one contemplated in Article 1479.
Meaning of option.
An option is a privilege existing in one person for which he
has paid a consideration which gives him the right to buy/sell,
for example, certain merchandise or certain specified property,
from/to another person, if he chooses, at any time within the
agreed period at a fixed price, or under, or in compliance with
certain terms and conditions.
Nature of option contract.
(1) An option is a contract. It is a preparatory contract, separate and distinct from the main contract itself (subject matter of
the option) which the parties may enter into upon the consummation of the option.
(2) It gives the party granted the option the right to decide,
whether or not to enter into a principal contract, while it binds
the party who has given the option, not to enter into the principal contract with any other person during the agreed time and
within that period, to enter into such contract with the one to
whom the option was granted if the latter should decide to use
the option.17 (see Carceller vs. Court of Appeals, 103 SCAD 258,
302 SCRA 718 [1999]; Litonjua vs. L & R Corporation, 328 SCRA
796 [2000].)
(3) An option must be supported by a consideration distinct
from the price. (Co. vs. Court of Appeals, 312 SCRA 528 [1999];
Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643 [2000];
17
In a right of first refusal, while the object might be made determinate, the exercise
of the 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. (Vasquez vs. Ayala Corporaton, 443 SCRA 218 [2004].)
Art. 1479
NATURE AND FORM OF THE CONTRACT
83
Abalos vs. Macatangay, Jr., 439 SCRA 649 [2004].) The promisee
has the burden of proving such consideration. (see Vasquez vs.
Court of Appeals, 199 SCRA 102 [1991].)
(4) A consideration of an option contract is just as important
as the consideration for any other kind of contract. (see Enriquez
de la Cavada vs. Diaz, 37 Phil. 982 [1918].) An option without
consideration is void; the effect is the same as if there was no
option.
Effect of accepted unilateral promise.
The second paragraph of Article 1479 refers to what is called
as “option” in the commercial world.
A unilateral promise to sell or to buy a determinate thing for
a price certain does not bind the promissor even if accepted and
may be withdrawn at any time. It is only if the promise is supported by a consideration distinct and separate from the price that
its acceptance will give rise to a perfected contract.
The optionee (holder of the option), after accepting the option
and before he exercises it, has the right, but not the obligation, to
buy or sell, as the case may be. Once the option is exercised, i.e.,
offer is accepted before a breach of the option, a bilateral promise
to sell and to buy ensues and both parties are then reciprocally
bound to comply with their respective undertakings. It would be
a breach of the option for the optioner-offeror to withdraw the offer
during the agreed period. If in fact, he withdraws the offer before
its acceptance (exercise of the option) 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. The
offeror, however, renders himself liable for damages for breach of
the option.18 (Asuncion vs. Court of Appeals, 56 SCAD 163, 238
SCRA 602 [1994].)
18
An option imposes no binding obligation on the optionee, aside from the consideration for the offer. Until accepted, it is not, properly speaking, treated as a contract.
(Tayag vs. Lacson, 426 SCRA 282 [2004]; Adelfa Properties, Inc. vs. Court of Appeals,
240 SCRA 565 [1995].) When the consideration given, for what otherwise would have
been an option, partakes the nature in reality of a part payment of the purchase price
(termed as earnest money [Art. 1482.] and considered as an initial payment thereof), an
actual contract of sale is deemed entered into and enforceable as such. (Asuncion vs.
Court of Appeals, supra.)
84
SALES
Art. 1479
Consideration in an option contract may be anything of value,
unlike in sale where it must be the price certain in money or its
equivalent. Lacking any proof of such consideration, the option
is unenforceable. (San Miguel Properties Philippines, Inc. vs.
Huang, 130 SCAD 713, 336 SCRA 737 [2000].) A contract of option to buy is separate from the contract to sell, and both contracts
need separate and distinct considerations for validity. (Dijamco
vs. Court of Appeals, 440 SCRA 190 [2004].)
EXAMPLE:
In the preceding example, even if B accepts the promise of
S (this is a case of an accepted unilateral promise to sell), S is
not bound to sell his car to B because there is no promise, in
turn, on the part of B to buy.
However, if the promise is covered by a consideration distinct from the price of the car, as when B paid or promised to
pay a sum of money to S for giving him the right to buy the car
if he chooses within an agreed period at a fixed price, its acceptance produces consent or meeting of the minds. A legally binding and independent contract of option is deemed perfected.
ILLUSTRATIVE CASE:
Stipulation in mortgage deed gives mortgagees option to purchase mortgaged property within a certain period at an agreed price.
Facts: A provision in a mortgage deed states: “That it has
likewise been agreed that if the financial condition of the mortgagees will permit, they may purchase said land absolutely on
any date within the two-year term of this mortgage at the agreed
price of P3,900.” The mortgagors contend that as such, they
cannot be deprived of the right to redeem the mortgaged property because such right is inherent in and inseparable from this
kind of contract.
Issue: Having reasonably advised the mortgagors that they
had decided to buy the land in question pursuant to the
aforequoted provision, are the mortgagees entitled to specific
performance consisting of the execution by the mortgagors of
the corresponding deed of sale?
Held: Yes. The added special provision renders the mortgagors’ right to redeem defeasible at the election of the mortgagees. There is nothing illegal or immoral in this. It is simply an
Art. 1479
NATURE AND FORM OF THE CONTRACT
85
option to buy sanctioned by Article 1479. In this case, the mortgagors’ promise to sell is supported by the same consideration
as that as the mortgage itself, which is distinct from that which
would support the sale, an additional amount having been
agreed upon, to make up the entire price of P3,900, should the
option be exercised. The mortgagors’ promise was in the nature of a continuing offer, non-withdrawable during a period
of two years which, upon acceptance by the mortgagees, gave
rise to a perfected contract of purchase and sale. (Soriano vs.
Bautista, 6 SCRA 946 [1962]; see Direct Funders Holdings Corp.
vs. Laviña, 373 SCRA 645 [2002].)
Full payment of price not necessary
for exercise of option to buy.
The obligations under an option to buy are reciprocal obligations — the performance of one obligation is conditioned upon
the simultaneous fulfillment of the other obligation. (Art. 1169.)
In an option to buy, the party who has an option may validly
and effectively exercise his right by merely notifying the owner
of the former’s decision to buy and expressing his readiness to
pay the stipulated price.
The notice need not be coupled with actual payment of the
purchase price so long as this is delivered to the owner of the
property upon the execution and delivery by him of the deed of
sale. The payment of the price is contingent upon the delivery of
the deed of sale. Unless and until the owner shall have done this,
the buyer who has the option is not and cannot be held in default
in the discharge of his obligation to pay. (Nietes vs. Court of Appeals, 46 SCRA 654 [1972].) Consequently, since the obligation to
pay is not yet due, consignation19 in court of the purchase price is
not required. (Heirs of Luis Bacus vs. Court of Appeals, 341 SCRA
2295 [2003].)
An option to buy is not, of course, a contract of purchase and
sale. (Kilosbayan, Inc. vs. Morato, 63 SCAD 97, 246 SCRA 540
[1995].)
19
Consignation is the act of depositing the thing or sum due with the proper court
whenever the creditor cannot accept or refuses to accept payment. It generally requires
a prior tender of payment. Where no debt is due and owing, consignation is not proper.
(see Arts. 1256, 1257, 1258; Legaspi vs. Court of Appeals, 142 SCRA 82 [1986].)
86
SALES
Art. 1479
Article 1479 and Article 1324 compared.
Article 1324 of the Civil Code provides as follows:
“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.”
Under the above-quoted article, the general rule regarding
offer and acceptance (see Art. 1319.) is that, when the offerer has
allowed the offeree a certain period within which to accept the
offer, the offer may be withdrawn as a matter of right at any time
before acceptance. But if the option is founded upon a separate
consideration, the offerer cannot withdraw his offer, even if the
same has not yet been accepted, before the expiration of the stipulated period. Regardless of whether it is supported by a consideration or not, the offer, of course, cannot be withdrawn after acceptance of the offer.
This general rule as embodied in Article 1324 was interpreted
as modified by the provision of Article 1479 which applies specifically to a promise “to buy or to sell.” As already stated, this
rule requires that for a promise to sell to be valid, it must be supported by a consideration distinct from the price. American authorities which hold that an offer, once accepted, cannot be withdrawn, regardless of whether or not it is supported by a consideration (62 Am. Jur. 528.), uphold the general rule applicable to
offer and acceptance as contained in our Civil Code. (Art. 1319;
see Southern Sugar & Mollasses Co. vs. Atlantic Gulf & Pacific
Co., 97 Phil. 249 [1955]; Mendoza vs. Comple, 15 SCRA 162 [1965].)
In a later case (Sanchez vs. Rigos, 45 SCRA 368 [1972], infra.),
the Supreme Court abandoned the view adhered to in Southwestern Sugar (supra.) which holds that an option to sell can still be
withdrawn, even if accepted, if the same is not supported by any
consideration, and reaffirmed the doctrine in Atkins, Kroll & Co.,
Inc. vs. Cua Hian Tek (102 Phil. 948 [1958], infra.), holding that it
could no longer be withdrawn after acceptance. In other words,
if acceptance is made before withdrawal, it constitutes a binding
contract of sale although the option is given without considera-
Art. 1479
NATURE AND FORM OF THE CONTRACT
87
tion. Before acceptance, the offer may be withdrawn as a matter
of right.20 Be that as it may, the offerer cannot revoke, before the
period has expired, in an arbitrary or capricious manner the offer
without being liable for damages which the offeree may suffer
under Article 19 of the Civil Code.
ILLUSTRATIVE CASES:
1. Promissor withdrew an option to sell, which is not supported
by any consideration, after its acceptance by promisee.
Facts: S and B executed an instrument, entitled “Option to
Purchase,” whereby S agreed, promised, and committed “x x x
to sell” to B for a certain sum a parcel of land within two (2)
years with the understanding that said option shall be deemed
“terminated and elapsed” if B shall fail to exercise the right to
buy the property “within the stipulated period.’’
Inasmuch as several tenders of payment made by B were
rejected by S, the former commenced an action for specific performance.
Issue: Can the promissor withdraw an option to sell, after
acceptance, if the option is not supported by any consideration?
20
Article 1324 may be interpreted to refer to a bilateral promise (e.g., to buy and
sell). Hence, the offer (to sell or buy) may not be withdrawn after acceptance of the offer.
The offer may be withdrawn before acceptance since there is no meeting of minds yet,
unless an option supported by a consideration has been granted. A unilateral promise to
sell or buy does not bind the offerer even after acceptance except where the promise is
supported by a consideration distinct from the price.
In Rural Bank of Parañaque vs. Remolado (135 SCRA 409 [1985].), the commitment by
a bank to resell a property within a specified period, although accepted by the party in
whose favor it was made, was considered an option not supported by a consideration
distinct from the price and, therefore, not binding upon the promissor. Lacking such
consideration, the option was held void pursuant to Southwestern Sugar and Molasses Co.
case.
To the same effect is the recent case of Natno vs. Intermediate Appellate Court. (179
SCRA 323 [1991].) Citing Rural Bank of Parañaque, Inc. case, the Supreme Court held that
the promise made by the President of a bank to allow the petitioners to buy (or to re-sell
to them) the foreclosed property (not redeemed since the offer took place after the expiration of the redemption period) at any time they have money is not binding on the
bank because it was a promise unsupported by a consideration distinct from the repurchase price.
In Diamante vs. Court of Appeals (206 SCRA 52 [1992].), the Option to Repurchase
executed by the vendee after the sale in favor of the vendor was held merely a promise
to sell governed by Article 1479, sale in the absence of a separate consideration was not
binding upon the promissor (vendee) even if the promise was accepted.
88
SALES
Art. 1479
Held: No. (1) Acceptance resulted in perfected contract of sale.
— “Since there may be no valid contract without cause or consideration, the promissor (S) is not bound by his promise and
may accordingly withdraw it. Pending notice of its withdrawal,
his accepted promise partakes, however, of the nature of an
offer to sell which, if accepted, results in a perfected contract of
sale. This view has the advantage of avoiding a conflict between
Article 1324 (on the general principles on contracts) and Article 1479 (on sales) of the Civil Code, in line with the cardinal
rule of statutory construction that, in construing different provisions of one and the same law or code, such interpretation
should be favored as will reconcile or harmonize said provisions and avoid a conflict between the same.’’
(2) Exceptions not favored. — “Moreover, the decision in the
Southwestern case (supra.), in effect, considers Article 1479 as an
exception to Article 1324, and exceptions are not favored unless the intention to the contrary is clear, and it is not so insofar
as said two (2) articles are concerned. What is more, the reference, in both the second paragraph of Article 1479 and Article
1324, to an option or promise supported by or founded upon a
consideration, strongly suggests that the two (2) provisions intended to enforce or implement the same principle.
The doctrine laid down in the Atkins case (supra.) is reaffirmed, and, insofar as inconsistent therewith, the view adhered
to in Southwestern case should be deemed abandoned or modified.21 (Sanchez vs. Rigos, supra.)
————
————
————
21
In the case of Cronico vs. J.M. Tuazon & Co., Inc. (78 SCRA 331 [1977].), the Supreme
Court said: “In order that a unilateral promise may be binding upon a promissor, Article
1479 . . . requires the concurrence of the condition that the promise be supported by a
consideration distinct from the price.” To the same effect is Montilla vs. Court of Appeals
(161 SCRA 167 [1988].) and Salame vs. Court of Appeals, 57 SCAD 631, 239 SCRA 356
(1994).
In an earlier case, the Supreme Court, in rejecting the holding of the Court of Appeals, “that Isabel Ariolas’ promise (to sell) does not bind Rowena Teodoro (petitioner)
because it is not supported by a consideration distinct from the price pursuant to Article
1479, held: “That consideration is expressed in Exhibit ‘A’ under which the petitioners
shouldered all rental expenses payable by Ariola for her occupation of the property
(leased and subsequently sold to her by the former owner). This should be distinguished
from a sublease arrangement in which the sublessee’s responsibility as and for rents
due the lessor is subsidiary. But here, the petitioners bound themselves primarily to
answer for the rents. That is enough consideration to support Ariola’s promise.” (Teodoro
vs. Court of Appeals, 155 SCRA 547 [1987].)
Art. 1479
NATURE AND FORM OF THE CONTRACT
2. The Deed of Option which was in the same document does
not provide for the period within which the parties may demand the
performance of their respective undertakings.
Facts: R, owner of a 600-meter lot, sold a portion of 300
square meters of the lot to spouses V, for P21,000.00 or P70.00
per square meter. Subsequently, R, with the consent of her husband, executed a Deed of Option in favor of V in which the
remaining 300 square meters portion of the property would be
sold to V under the conditions stated therein. The Court of
Appeals ruled that the Deed of Option was void for lack of
consideration.
Issue: The pivotal issue to be resolved is the validity of the
Deed of Option whereby the private respondents (R and her
husband) agreed to sell their lot to petitioners (spouses V)
“whenever the need of such sale arises” on the part of either
parties.
Held: (1) Option supported by a consideration. — “As expressed
in Gonzales vs. Trinidad (67 Phil. 682 [1939].), consideration is
‘the why of the contract, the essential reason which moves the
contracting parties to enter into the contract’. The cause or the
impelling reason on the part of private respondent in executing the deed of option as appearing in the deed itself is the
petitioners’ having agreed to buy the 300 square meters of private respondents’ land at P70.00 per square meter portion
‘which was greatly higher than the actual reasonable prevailing price’. This cause or consideration is clear from the deed
which stated: ‘That the only reason why the spouses-vendees
Julio Villamor and Marina V. Villamor agreed to buy the said
one-half portion at the above-stated price of about P70.00 per
square meter, is because I, and my husband Roberto Reyes, have
agreed to sell and convey to them the remaining one-half portion still owned by me x x x.’
The respondent appellate court failed to give due consideration to petitioners’ evidence which shows that in 1969 the
Villamor spouses bought an adjacent lot from the brother of
Macaria Labing-isa for only P18.00 per square meter which the
private respondents did not rebut. Thus, expressed in terms of
money, the consideration for the deed of option is the difference between the purchase price of the 300-square meter portion of the lot in 1971 (P70.00 per sq.m.) and the prevailing reasonable price of the same lot in 1971. Whatever it is (P25.00 or
P18.00), though not specifically stated in the deed of option,
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Art. 1479
was ascertainable. Petitioners’ allegedly paying P52.00 per
square meter for the option may, as opined by the appellate
court, be improbable but improbabilities do not invalidate a
contract freely entered into by the parties.”
(2) Private respondents as well were granted an option to sell.
— “The ‘deed of option’ entered into by the parties in this case
had unique features. Ordinarily, an optional contract is a privilege existing in one person, for which he had paid a consideration and which gives him the right to buy, for example, certain
merchandise or certain specified property, from another person,
if he chooses, at any time within the agreed period at a fixed
price. (Enriquez de la Cavada vs. Diaz, 37 Phil. 982 [1918].) If
we look closely at the ‘deed of option’ signed by the parties, we
will notice that the first part covered the statement on the sale
of the 300-square-meter portion of the lot to Spouses Villamor
at the price of P70.00 per square meter ‘which was higher than
the actual reasonable prevailing value of the lands in that place
at that time (of sale).’
The second part stated that the only reason why the
Villamor spouses agreed to buy the said lot at a much higher
price is because the vendor (Reyeses) also agreed to sell to the
Villamors the other half-portion of 300 square meters of the land.
Had the deed stopped there, there would be no dispute that the
deed is really an ordinary deed of option granting the Villamors
the other half-portion of 300 square meters of the lot in consideration of their having agreed to buy the other half of the land
for a much higher price. But, the ‘deed of option’ went on and
stated that the sale arises, either on our (Reyeses) part or on the
part of the Spouses Julio Villamor and Marina V. Villamor. It
appears that while the option to buy was granted to the
Villamors, the Reyeses were likewise granted an option to sell.
In other words, it was not only the Villamors who were granted
an option to buy for which they paid a consideration. The
Reyeses as well were granted an option to sell should the need
for such sale on their part arises.”
(3) Offer to sell had been accepted. — “In the instant case, the
option offered by private respondents had been accepted by
the petitioner, the promisee, in the same document. The acceptance of an order to sell for a price certain created a bilateral
contract to sell and buy and upon acceptance, the offeree ipso
facto assumes obligations of a vendee. (see Atkins, Kroll & Co.
vs. Cua Hian Tek, 102 Phil. 948 [1958].) Deman dability may be
exercised at any time after the execution of the deed. In Sanchez
Art. 1479
NATURE AND FORM OF THE CONTRACT
vs. Rigos (45 SCRA 368 [1972].), We held: ‘In other words, since
there may be no valid contract without a cause of consideration, the promissor is not bound by this promise and may accordingly withdraw it. Pending notice of its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell which,
if accepted, results in a perfected contract of sale.”
(4) Acceptance created a perfected contract of sale. — A contract of sale is, under Article 1475 of the Civil Code, perfected
at the moment there is a meeting of minds upon the thing which
is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts.
Since there was, between the parties, a meeting of minds upon
the object and the price, there was already a perfected contract
of sale. What was, however, left to be done was for either party
to demand from the other their respective undertakings under
the contract. It may be demanded at any time either by the private respondents, who may compel the petitioners to pay for
the property or the petitioners, who may compel the private
respondents to deliver the property.”
(5) Action to enforce contract had prescribed. — “However,
the Deed of Option did not provide for the period within which
the parties may demand the performance of their respective
undertakings in the instrument. The parties could not have contemplated that the delivery of the property and the payment
thereof could be made indefinitely and render uncertain the
status of the land. The failure of either parties to demand performance of the obligation of the other for an unreasonable
length of time renders the contract ineffective.
Under Article 1144(1) of the Civil Code, actions upon a written contract must be brought within ten (10) years. The Deed of
Option was executed on November 11, 1971. The acceptance,
as already mentioned, was also accepted in the same instrument. The complaint in this case was filed by the petitioners on
July 13, 1987, seventeen (17) years from the time of the execution of the contract. Hence, the right of action had prescribed.’’
(Villamor vs. Court of Appeals, 202 SCRA 607 [1991].)
———— ———— ————
3. The contract of lease gives the lessee 30-day exclusive option
to purchase the leased premises
Facts: A contract of lease in paragraph 8 provides: “x x x
that if the lessor [R] should desire to sell the leased premises,
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Art. 1479
the LESSEE [E] shall be given 30 days exclusive option to the
same. In the event, however, that the leased premises is sold to
someone other than the LESSEE, the LESSOR is bound and
obligated, as it hereby binds and obligates itself, to stipulate in
the Deed of Sale thereof that the purchaser shall recognize this
lease and be bound by all the terms and conditions thereof.’’
The lessor later sold his property including the leased
premises located thereon to petitioner (P).
Rereading the law on the matter of sales and option contracts, respondent Court of Appeals differentiated between
Article 1324 and Article 1479 of the Civil Code, analyzed their
application to the facts of this case, and concluded that since
paragraph 8 of the two lease contracts does not state a fixed
price for the purchase of the leased premises, which is an essential element for a contract of sale to be perfected, what paragraph 8 is, must be a right of first refusal and not an option
contract. Besides the ruling that paragraph 8 vests in E the right
of first refusal as to which the requirement of distinct consideration indispensable in an option contract has no application,
respondent appellate court also addressed the claim of R that
assuming arguendo that the option is valid and effective, it is
impossible of performance because it covered only the leased
premises and not the entire property of R whose offer to sell
pertained to the entire property in question.
Issue: Does the contractual stipulation provide for an option clause or an option contract?
Held: (1) Contractual stipulation is an option clause. — “We
agree with the respondent Court of Appeals that the aforecited
contractual stipulation provides for a right of first refusal in
favor of Mayfair [E]. It is not an option clause or an option contract. It is a contract of a right of first refusal.
As early as 1916, in the case of Beaumont vs. Prieto (41 Phil.
670.), unequivocal was our characterization of an option contract as one necessarily involving the choice granted to another
for a distinct and separate consideration as to whether or not
to purchase a determinate thing at a predetermined fixed price.
xxx
The rule so early established in this jurisdiction is that the
deed of option or the option clause in a contract, in order to be
valid and enforceable, must, among other things, indicate the
Art. 1479
NATURE AND FORM OF THE CONTRACT
definite price at which the person granting the option is willing to sell.
Notably, in one case we held that the lessee loses his right
to buy the leased property for a named price per square meter
upon failure to make the purchase within the time specified
(Tuazon, Jr. vs. De Asis, 107 Phil. 131 [1960].); in one other case
we freed the landowner from her promise to sell her land if the
prospective buyer could raise P4,500.00 in three weeks because
such option was not supported by a distinct consideration
(Mendoza vs. Comple, 15 SCRA 162 [1965].); in the same vein
in yet one other case, we also invalidated an instrument entitled, “Option to Purchase’’ a parcel of land for the sum of
P1,510.00 because of lack of consideration (Sanchez vs. Rigor,
45 SCRA 368 [1972].); and as an exception to the doctrine enumerated in the two preceding cases, in another case, we ruled
that the option to buy the leased premises for P12,000.00 as
stipulated in the lease contract, is not without consideration
for in reciprocal contracts, like lease, the obligation or promise
of each party is the consideration for that of the other. (Vda. de
Quirino vs. Palanca, 29 SCRA 1 [1969].) In all these cases, the
selling price of the object thereof is always predetermined and
specified in the option clause in the contract or in the separate
deed of option. x x x.
In the light of the foregoing disquisition and in view of the
wording of the questioned provision in the instant case, we so
hold that no option to purchase in contemplation of the second
paragraph of Article 1479 of the Civil Code, has been granted
to E under the lease contract.
Respondent Court of Appeals correctly ruled that the said
paragraph 8 grants the right of first refusal to E and is not an
option contract. It also correctly reasoned that as such, the requirement of a separate consideration for the option has no applicability in the instant case.’’
(2) Right of first refusal is an integral part of the contract of
lease. — “An option is a contract granting a privilege to buy or
sell within an agreed time and at a determined price. It is a
separate and distinct contract from that which the parties may
enter into upon the consummation of the option. It must be
supported by consideration. In the instant case, the right of first
refusal is an integral part of the contract of lease. The consideration is built into the reciprocal obligations of the parties.
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Art. 1479
To rule that a contractual stipulation such as that found in
paragraph 8 of the contract is governed by Article 1324 on withdrawal of the offer or Article 1479 on promise to buy and sell
would render ineffectual or “inutile’’ the provisions on right of
first refusal so commonly inserted in leases of real estate nowadays. The Court of Appeals is correct in stating that paragraph
8 was incorporated into the contract of lease for the benefit of E
which wanted to be assured that it shall be given the first crack
or the first option to buy the property at the price which R is
willing to accept. It is not also correct to say that there is no
consideration in an agreement of right of first refusal. The stipulation is part and parcel of the entire contract of lease. The consideration for the lease includes the consideration for the right
of first refusal. Thus, E is in effect stating that it consents to
lease the premises and to pay the price agreed upon provided
the lessor also consents that, should it sell the leased property,
then, E shall be given the right to match the offered purchase
price and to buy the property at that price.’’
(3) Consequential rights, obligations and liabilities of R, E, and
P. — “It is undisputed that R did recognize this right of E, for it
informed the latter of its intention to sell the said property in
1974. There was an exchange of letters evidencing the offer and
counter-offers made by both parties. R, however, did not pursue the exercise to its logical end. While it initially recognized
E’s right of first refusal, R violated such right when without
affording its negotiation with E the full process to ripen to at
least an interface of a definite offer and a possible corresponding acceptance within the “30-day exclusive option’’ time
granted E, R abandoned negotiations, kept a low profile for
some time, and then sold, without prior notice to E, the entire
Claro M. Recto property to Equatorial (P).
Since P is a buyer in bad faith, this finding renders the sale
to it of the property in question rescissible. We agree with respondent Appellate Court that the records bear out the fact that
P was aware of the lease contract because its lawyers had, prior
to the sale, studied the said contract. As such, P cannot tenably
claim to be a purchaser in good faith, and, therefore, rescission
lies.
xxx
xxx
Since E has a right of first refusal, it can execise the right
only if the fraudulent sale is first set aside or rescinded. All of
these matters are now before us and so there should be no piece-
Art. 1479
NATURE AND FORM OF THE CONTRACT
meal determination of this case and leave festering sores to
deteriorate into endless litigation. The facts of the case and considerations of justice and equity require that we order rescission here and now.
xxx
xxx
This Court has always been against multiplicity of suits
where all remedies according to the facts and the law can be
included. Since R sold the property for P11,300,000.00 to P, the
price at which E could have purchased the property is, therefore, fixed. It can neither be more nor less. There is no dispute
over it. The damages which E suffered are in terms of actual
injury and lost opportunities. The fairest solution would be to
allow E to exercise its right of first refusal at the price which it
was entitled to accept or reject which is P11,300,000.00.
xxx
xxx
Under the Ang Yu Asuncion vs. Court of Appeals (57 SCAD
163, 238 SCRA 602 [1994].) decision, the Court stated that there
was nothing to execute because a contract over the right of first
refusal belongs to a class of preparatory juridical relations governed not by the law on contracts but by the codal provisions
on human relations. This may apply here if the contract is limited to the buying and selling of the real property. However,
the obligation of R to first offer the property to E is embodied
in a contract. It is Paragraph 8 on the right of first refusal which
created the obligation. It should be enforced according to the
law on contracts instead of the panoramic and indefinite rule
on human relations. The latter remedy encourages multiplicity
of suits. There is something to execute and that is for R to comply with its obligation to the property under the right of the
first refusal according to the terms at which they should have
been offered then to E, at the price when that offer should have
been made. Also, E has to accept the offer. This juridical relation is not amorphous nor it is merely preparatory.
On the question of interest payments on the principal
amount of P11,300,000.00, it must be borne in mind that both R
and P acted in bad faith. R knowingly and deliberately broke a
contract entered into with E. x x x On the part of P, it cannot be
a buyer in good faith because it bought the property with notice and full knowledge that E had a right to or interest in the
property superior to its own. R and P took unconscientious
advantage of E.
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Art. 1479
Neither may R and P avail of considerations based on equity which might warrant the grant of interests. The vendor
received as payment from the vendee what, at the time, was a
full and fair price for the property. It has used the P11,300,000.00
all these years earning income or interest from the amount. P,
on the other hand, has received rents and otherwise profited
from the use of the property turned over to it by R. In fact,
during all the years that this controversy was being litigated, E
paid rentals regularly to the buyer who had an inferior right to
purchase the property. E is under no obligation to pay any interest arising from the judgment to either R and P.’’ (Equatorial
Realty Development, Inc. vs. Mayfair Theater, Inc., 76 SCAD 407,
264 SCRA 483 [1996].)
———— ———— ————
4. Lessee with right of first refusal, offered to buy leased property at P5.000 per square meter, which property was sold by the lessor-owner to another for P5,300 per sq. meter.
Facts: Under the contract of lease executed by defendant
Reyes (lessor) with plaintiff Riviera (lessee), the “Lessee shall
have the right of first refusal should the lessor decide to sell the
property during the term of the lease.’’
Since the beginning of the negotiation between the plaintiff and defendant Reyes for the purchase of the property, in
question, the plaintiff was firm and steadfast in its position,
expressed in writing by its President Vicente Angeles, that it
was not willing to buy the said property higher than P5,000.00,
per square meter, which was far lower than the asking price of
defendant Reyes for P6,000.00, per square meter, undoubtedly,
because, in its perception, it would be difficult for other parties
to buy the property, at a higher price than what it was offering,
since it is in occupation of the property, as lessee, the term of
which was to expire after about four (4) years more.
In the petition at bar, Riviera posits the view that its right
of first refusal was totally disregarded or violated by Reyes by
the latter’s sale of the subject property to Cypress and Cornhill
at P5,300 per square meter. It contends that the right of first
refusal principally amounts to a right to match in the sense that
it needs another offer for the right to be exercised.
Issue: Has Riviera lost its right of first refusal?
Held: Yes. (1) Concept and interpretation of the right of first
refusal. — “The concept and interpretation of the right of first
Art. 1479
NATURE AND FORM OF THE CONTRACT
refusal and the consequences of a breach thereof evolved in
Philippine juristic sphere only within the last decade. It all
started in 1992 with Guzman, Bocaling & Co. vs. Bonnevie (206
SCRA 668 [1992].), where the Court held that a lease with a
proviso granting the lessee the right of first priority ‘all things
and conditions being equal’ meant that there should be identity of the terms and conditions to be offered to the lessee and
all other prospective buyers, with the lessee to enjoy the right
of first priority. A deed of sale executed in favor of a third party
who cannot be deemed a purchaser in good faith, and which is
in violation of a right of first refusal granted to the lessee is not
voidable under the Statute of Frauds but rescissible under Articles 1380 to 1381(3) of the New Civil Code.
Subsequently in 1994, in the case of Ang Yu Asuncion vs.
Court of Appeals (238 SCRA 602 [1994].), the Court en banc departed from the doctrine laid down in Guzman, Bocaling & Co.
vs. Bonnevie and refused to rescind a contract of sale which violated the right of first refusal. The Court held that the so-called
“right of first refusal” cannot be deemed a perfected contract
of sale under Article 1458 of the new Civil Code and, as such, a
breach thereof decreed under a final judgment does not entitle
the aggrieved party to a writ of execution of the judgment but
to an action for damages in a proper forum for the purpose.
In the 1996 case of Equatorial Realty Development, Inc. vs.
Mayfair Theater, Inc. (264 SCRA 483 [1996].), the Court en banc
reverted back to the doctrine in Guzman Bocaling & Co. vs.
Bonnevie stating that rescission is a relief allowed for the protection of one of the contracting parties and even third persons
from all injury and damage the contract may cause or to protect some incompatible and preferred right by the contract.
Thereafter in 1997, in Parañaque Kings Enterprises, Inc. vs.
Court of Appeals (268 SCRA 727 [1997].), the Court affirmed the
nature of and the concomitant rights and obligations of parties
under a right of first refusal. The Court, summarizing the rulings in Guzman, Bocaling & Co. vs. Bonnevie and Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc., held that in order
to have full compliance with the contractual right granting petitioner the first option to purchase, the sale of the properties
for the price for which they were finally sold to a third person
should have likewise been first offered to the former. Further,
there should be identity of terms and conditions to be offered
to the buyer holding a right of first refusal if such right is not to
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Art. 1479
be rendered illusory. Lastly, the basis of the right of first refusal
must be the current offer to sell of the seller or offer to purchase
of any prospective buyer.’’
(2) Prevailing doctrine. — “Thus, the prevailing doctrine is
that a right of first refusal means identity of terms and conditions to be offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of a right of
first refusal of another person, while valid, is rescissible. However, we must remember that general propositions do not decide specific cases. Rather, laws are interpreted in the context
of the peculiar factual situation of each proceeding. Each case
has its own flesh and blood and cannot be ruled upon on the
basis of isolated clinical classroom principles. Analysis and construction should not be limited to the words used in the contract, as they may not accurately reflect the parties’ true intent.
The court must read a contract as the average person would
read it and should not give it a strained or forced construction.’’
(3) Riviera intractable in its position. — “As clearly shown
by the records and transcripts of the case, the actions of the
parties to the contract of lease, Reyes and Riviera, shaped their
understanding and interpretation of the lease provision ‘right
of first refusal’ to mean simply that should the lessor Reyes
decide to sell the leased property during the term of the lease,
such sale should first be offered to the lessee Riviera. And that
is what exactly ensued between Reyes and Riviera, a series of
negotiations on the price per square meter of the subject property with neither party, especially Riviera, unwilling to budge
from his offer, as evidenced by the exchange of letters between
the two contenders.
It can clearly be discerned from Riviera’s letters dated December 2, 1988 and February 4, 1989 that Riviera was so intractable in its position and took obvious advantage of the knowledge of the time element in its negotiations with Reyes as the
redemption period of the subject foreclosed property drew near.
Riviera strongly exhibited a ‘take-it or leave-it’ attitude in its negotiations with Reyes. It quoted its ‘fixed and final’ price as Five
Thousand Pesos (P5,000.00) and not any peso more. It voiced out
that it had other properties to consider so Reyes should decide
and make known its decision ‘within fifteen days.’ x x x.”
(4) Reyes under no obligation to Riviera to disclose his offer to
another. — “Nary a howl of protest or shout of defiance spewed
Art. 1479
NATURE AND FORM OF THE CONTRACT
forth from Riviera’s lips, as it were, but a seemingly whimper
of acceptance when the counsel of Reyes strongly expressed in
a letter dated December 5, 1989 that Riviera had lost its right of
first refusal. Riviera cannot now be heard that had it been informed of the offer of Five Thousand Three Hundred Pesos
(P5,300.00) of Cypress and Cornhill it would have matched said
price. Its stubborn approach in its negotiations with Reyes
showed crystal-clear that there was never any need to disclose
such information and doing so would be just a futile effort on
the part of Reyes. Reyes was under no obligation to disclose
the same. Pursuant to Article 1339 of the New Civil Code, silence or concealment, by itself, does not constitute fraud, unless there is a special duty to disclose certain facts, or unless
according to good faith and the usages of commerce the communication should be made. We apply the general rule in the
case at bar since Riviera failed to convincingly show that either
of the exceptions are (sic) relevant to the case at bar.’’ (Riviera
Filipina, Inc. vs. Court of Appeals, 380 SCRA 245 [2002].)
———— ———— ————
5. Petitioner claims that there was a perfected contract to sell
while respondents argue that what was perfected between them was a
mere option.
Facts: The Receipt that contains the contract between petitioner L and respondent spouses H and W, provides substantially as follows:
“Received from L the sum of P20,000 as earnest money with
option to purchase a parcel of land owned by H located at x x x
with an area of x x x. Should the transaction not materialize
without the fault of the buyer [L], I [H] obligate myself to return the P20,000; if through the fault of the buyer the said
amount shall be forfeited. I guarantee to notify L or her representative and get her conformity should I sell or encumber the
property to a third person. The option to buy is good within 10
days x x x.
Issue: Is the agreement between the parties a contract of
option or a contract to sell?
Held: (1) Contract of option. — “The above Receipt really
shows that respondent spouses and petitioner only entered into
a contract of option; a contract by which respondent spouses
agreed with petitioner that the latter shall have the right to buy
the former’s property at a fixed price of P34.00 per square me-
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Art. 1479
ter within ten (10) days from 31 July 1978. Respondent spouses
did not sell their property; they did not also agree to sell it; but
they sold something, i.e., the privilege to buy at the election or
option of petitioner. The agreement imposed no binding obligation on petitioner, aside from the consideration for the offer.’’
(2) Option money. — “The consideration of P20,000.00 paid
by petitioner to respondent spouses was referred to as ‘earnest
money.’ However, a careful examination of the words used indicates that the money is not earnest money but option money.
‘Earnest money’ and ‘option money’ are not the same but distinguished thus: (a) earnest money is part of the purchase price,
while option money is the money given as a distinct consideration for an option contract; (b) earnest money is given only
where there is already a sale, while option money applies to a
sale not yet perfected; and (c) when earnest money is given,
the buyer is bound to pay the balance, while when the wouldbe buyer gives option money, he is not required to buy (De Leon,
Comments and Cases on Sales, 1986 Rev. Ed., p. 67.), but may
even forfeit it depending on the terms of the option.
(3) Contents of Receipt. — “There is nothing in the Receipt
which indicates that the P20,000.00 was part of the purchase
price. Moreover, it was not shown that there was a perfected
sale between the parties where earnest money was given. Finally, when petitioner gave the ‘earnest money,’ the Receipt did
not reveal that she was bound to pay the balance of the purchase price. In fact, she could even forfeit the money given if
the terms of the option were not met. Thus, the P20,000.00 could
only be money given as consideration for the option contract.
That the contract between the parties is one of option is buttressed by the provision therein that should the transaction of
the property not materialize without fault of petitioner as buyer,
respondent Lorenzo de Vera obligates himself to return the full
amount of P20,000.00 “earnest money” with option to buy or
forfeit the same on the fault of petitioner. It is further bolstered
by the provision therein that guarantees petitioner that she or
her representative would be notified in case the subject property was sold or encumbered to a third person. Finally, the Receipt provided for a period within which the option to buy was
to be exercised, i.e., ‘within ten (10) days’ from 31 July 1978.
(4) Absence of acceptance by L. — “Doubtless, the agreement
between respondent spouses and petitioner was an ‘option con-
Art. 1479
NATURE AND FORM OF THE CONTRACT
tract’ or what is sometimes called an ‘unaccepted offer.’ During the option period the agreement was not converted into a
bilateral promise to sell and to buy where both respondent
spouses and petitioner were then reciprocally bound to comply with their respective undertakings as petitioner did not
timely, affirmatively and clearly accept the offer of respondent
spouses. x x x But there is nothing in the acts, conduct or words
of petitioner that clearly manifest a present intention or determination to accept the offer to buy the property of respondent
spouses within the 10-day option period. The only occasion
within the option period when petitioner could have demonstrated her acceptance was on 5 August 1978 when, according
to her, she agreed to meet respondent spouses and the Ramoses
at the Office of the Register of Deeds of Makati. Petitioner’s
agreement to meet with respondent spouses presupposes an
invitation from the latter, which only emphasizes their persistence in offering the property to the former. But whether that
showed acceptance by petitioner of the offer is hazy and dubious. On or before 10 August 1978, the last day of the option
period, no affirmative or clear manifestation was made by petitioner to accept the offer. Certainly, there was no concurrence
of private respondent spouses’ offer and petitioner’s acceptance thereof within the option period. Consequently, there was
no perfected contract to sell between the parties.
xxx
xxx
The option period having expired and acceptance was not
effectively made by petitioner, the purchase of subject property by respondent SUNVAR was perfectly valid and entered
into in good faith.” (Limson vs. Court of Appeals, 147 SCAD 887,
357 SCRA 209 [2001].)
———— ———— ————
6. Under a contract to sell a parcel of land, full payment was
not made by the vendee because of the non-fulfillment of a suspensive
condition, which property was later sold absolutely by the vendor to
another.
Facts: S and B entered into a contract to sell a parcel of land
evidenced by a memorandum of agreement which stipules, inter alia, that S, vendor, reserves to herself ownership and possession of the property until full payment of the purchase price
by B and that the balance thereof was payable within six (6)
months from the date S would notify B that the certificate of
101
102
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Art. 1479
title of the property could be transferred to B. Subsequently, S
executed a deed of absolute sale of the property in favor of T.
It appeared that S exerted efforts to register the property
and B had no intention to buy the property and was only interested in dealing with other buyers to make a profit. S even
pleaded with him several times to purchase the property, less
the expenses of registration, as there were other interested buyers.
Issue: Is the memorandum of agreement contract of sale, an
option to purchase, or a contract to sell?
Held: (1) Contract to Sell. — “An examination of said Memorandum of Agreement shows that it is neither a contract of sale
nor an option to purchase, but it is a contract to sell. An option
is a contract granting a privilege to buy or sell at a determined
price within an agreed time, the specific length or duration of
which is not present in the Memorandum of Agreement. In a
contract to sell, the title over the subject property is transferred
to the vendee only upon the full payment of the stipulated consideration. Unlike in a contract of sale, the title in a contract to
sell does not pass to the vendee upon the execution of the agreement or the Delivery of the thing sold. x x x
The agreement was in the nature of a contract to sell as the
vendor, Encarnacion Diaz Vda. de Reston, clearly reserved to
herself ownership and possession of the property until full payment of the purchase price by the vendees, such payment being a positive suspensive condition, the failure of which is not
considered a breach, casual or serious, but simply an event
which prevented the obligation from acquiring obligatory
force.’’
(2) No perfected sale. — “Petitioners, however, argue that
their obligation to pay the balance of the purchase price had
not arisen as the Memorandum of Agreement stipulated that
the balance of P18,042.00 was payable within six (6) months
from the date the vendor would notify them that the certificate
of title of the property could already be transferred in their
names. Said argument, however, does not change the nature of
the contract they entered into, being a contract to sell, so that
there was no actual sale until full payment was made by the
vendees, and that on the part of the vendees, no full payment
would be made until a certificate of title was ready for transfer
in their names.’’ (Buot vs. Court of Appeals, 148 SCAD 615, 357
SCRA 846 [2001].)
Art. 1480
NATURE AND FORM OF THE CONTRACT
103
Effect of bilateral promise to buy
and sell.
When the promise is bilateral, that is, one party accepts the
other’s promise to buy and the latter, the former’s promise to sell
a determinate thing for a price certain, it has practically the same
effect as a perfected contract of sale since it is reciprocally demandable.
EXAMPLE:
S promised to sell his car to B and B promised to buy the
said car for P100,000.00. The parties are bound by their contract so that in case one of them should not comply with what
is incumbent upon him, the other has the right to choose between the fulfillment and the recission of the obligation, with
the payment of damages in either case. (Art. 1191, par. 2.)
ILLUSTRATIVE CASE:
Promissor withdrew an option to sell which is not supported by
any consideration, after its acceptance by promisee.
Facts: S wrote B making a “firm offer for the sale” at a definite price of a determinate quantity of sardines. B accepted the
offer unconditionally.
Issue: Is there a perfected contract of sale?
Held: Yes, as the promise is bilateral, i.e., a promise to buy
and sell. Before accepting the promise of S and before exercising his option, B is not bound to buy. Upon accepting S’s offer,
a bilateral promise to sell and to buy ensues; B assumes ipso
facto the obligations of a purchaser, and not merely the right
subsequently to buy or not to buy. The concurrence of both acts
— the offer and the acceptance — generates a binding contract
of sale. (see Atkins, Kroll & Co., Inc. vs. Cua Hian Tek, 102 Phil.
948 [1958].)
ART. 1480. Any injury to or benefit from the thing
sold, after the contract has been perfected, from the
moment of the perfection of the contract to the time
of delivery, shall be governed by articles 1163 to 1165,
and 1262.
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Art. 1480
This rule shall apply to the sale of fungible things,
made independently and for a single price, or without
consideration of their weight, number, or measure.
Should fungible things be sold for a price fixed
according to weight, number, or measure, the risk shall
not be imputed to the vendee until they have been
weighed, counted, or measured, and delivered, unless the latter has incurred in delay. (1452a)
Risk of loss or deterioration.
Four rules may be given regarding risk of loss:
(1) If the thing is lost before perfection, the seller and not the
one who intends to purchase it bears the loss (see Roman vs.
Grimalt, 6 Phil. 96 [1906].) in accordance with the principle that
the thing perishes with the owner (res perit domino);
(2) If the thing is lost at the time of perfection, the contract is
void or inexistent. (Art. 1409[3].) The legal effect is the same as
when the object is lost before the perfection of the contract of sale
(see Art. 1493.);
(3) If the thing is lost after perfection but before its delivery, that
is, even before the ownership is transferred to the buyer, the risk
of loss is shifted to the buyer as an exception to the rule of res perit
domino (Arts. 1480, pars. 1 and 2, 1538, 1189, and 1269.); and
(4) If the thing is lost after delivery, the buyer bears the risk of
loss following the general rule of res perit domino.
Scope of Article 1480.
Article 1480 contemplates two rules:
(1) The first rule — where the thing is lost after perfection but
before its delivery (see Rule No. 3, supra.) — applies to non-fungible things (par. 1.) and fungible things sold independently and
for a single price or for a price fixed without consideration of their
weight, number, or measure. (par. 2.)
Under this rule, which follows the Roman Rule, the risk of the
thing sold passes to the buyer, even though the thing has not yet
been delivered to him. Therefore, if a house (sold) be destroyed
Art. 1480
NATURE AND FORM OF THE CONTRACT
105
wholly or partly by fire the loss falls upon the buyer who must
pay the price, even though he has not received the thing. For the
seller is not liable for anything which happens without his fraud
or negligence. But if after the sale any alluvion has accrued to the
land, the benefit goes to the buyer for the benefit ought to belong
to him who has the risk. (Sherman, Inchiridion Romani Juris, Sec.
296.) In other words, the buyer assumes the risk of loss caused by
fortuitous event (Art. 1174.) without the fault of the seller (Art.
1262.), that is, in spite of the exercise of due diligence on his part
(Art. 1163.) and before he has incurred in delay (Arts. 165, 1170,
1262.) after the perfection of the contract to the time of delivery.
(Art. 1480, par. 1.) With respect to the fruits, the buyer has a right
to the same from the time the obligation to deliver the thing arises.
(Art. 1164.) If the risk ought to belong to the buyer before delivery, the benefit ought to belong to him who has the risk. (see Arts.
1538, 1189[5].)
Article 1480, paragraph 1 is applicable only where the thing
is determinate. (Art. 1460.) It also applies to fungible things sold
for a price not fixed in relation to weight, number, or measure
because in such case the fungible things have been “particularly
designated or physically segregated.” (Ibid., par. 2.)
Is Article 1480 above in conflict with Article 1504 (infra.)?
(2) The second rule relates to fungible things sold for a price
fixed in relation to weight, number, or measure. Under the third
paragraph, “the risk shall not be imputed to the vendee until they
have been weighed, counted, or measured, and delivered.” (see U.S.
vs. De Vera, 43 Phil. 1001 [1922].) Paragraph 3 is an exception to
the rule that the vendee bears the loss after the perfection of the
contract and before delivery. However, the vendee assumes the
risk if he has incurred in delay in receiving the goods sold. (North
Negros Sugar Co., Inc. vs. Compania General Tabacos de Filipinas,
100 Phil. 1103 [1957].)
ILLUSTRATIVE CASES:
1. The sugar which the seller intended to deliver was destroyed
by flood.
Facts: B advanced P3,000 to S in payment of 600 piculs of
sugar. The written contract did not specify that the sugar was
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Art. 1480
to come from the crop on S’s land which was destroyed by a
flood.
Issue: S claimed that the fortuitous cause excused non-performance by him of the contract.
Held: S promised to deliver a generic thing. Any sugar of
the quality stipulated, regardless of origin or however acquired,
(lawfully) would be obligatory on the part of B to receive and
would discharge the obligation. It seems, therefore, plain that
the sugar to be sold not having been segregated, the sale was
not perfected and the loss of the crop even through force majeure, did not extinguish S’s obligation to deliver the sugar.
Flood, like other catastrophes, was a contingency, a collateral incident, which S should have provided for by proper stipulations. Genus nunquam perit (genus never perishes). (Yu Tek &
Co. vs. Gonzales, 29 Phil. 384 [1915]; De Leon vs. Soriano, 87 Phil.
193 [1950]; Bunge Corp. vs. Camenforte & Co., 91 Phil. 861
[1954].)
———— ———— ————
2. Buyer denies liability for price of tobacco delivered to its agent
by seller for inspection, grading and weighing, because it was burned
before it could be inspected, graded, and weighed.
Facts: S (vendor) delivered the tobacco in question to the
redrying plant of A, trading agent of B (vendee). The tobacco
was burned while awaiting inspection, grading, and weighing.
It appeared that S directed, supervised, and controlled A in
receiving shipments of tobacco and in the performance of its
activities, and that shipments, once received from trading entities like S, were under B’s control, and not subject to withdrawal
without its authority.
Issue: Should B be considered as having accepted the tobacco shipments as of the fire and, therefore, should bear the
loss?
Held: Yes. The contract of sale has been perfected at the time
of the loss (see Art. 1475.) and the shipment was placed in the
control and possession of B. The technical defect that the tobacco in question “were still to be inspected, graded and
weighed” cannot suffice to overturn the decision. Aside from
raising an issue of fact (for B’s own fieldmen had the responsibility of such tobacco being graded, weighed, baled and loaded
on trucks duly sealed for transportation to its redrying plant
Art. 1480
NATURE AND FORM OF THE CONTRACT
and that responsibility was fulfilled according to the trial court),
the delay was traceable to the fault of B and A and that A was
negligent in causing the fire, whereas S had done everything
that was required of him by B’s regulations in order to have the
tobacco inspected and paid for.
Furthermore, for sometime after the conflagration, there
was no question raised by B as to its liability. It would, therefore, be the height of injustice to deny S’s claim for payment.
(Phil.-Virginia Tobacco Adm. vs. De Los Angeles, 87 SCRA 9 [1978].)
Dissenting opinion by R.C. Aquino, J.: The judgment is erroneous. The sale was not consummated because there was no
tradition or delivery to B of the tobacco which was lost when it
was still owned by S. A was merely an agent of B. Even as agent,
A had not yet accepted delivery of the tobacco before it was
lost during the fire. There was no acceptance of delivery because the tobacco, at the time it was lost, had not yet been properly inspected, graded and weighed. Under the contract between B and A, the latter’s responsibility as agent of the former
begins from the moment the tobacco had been delivered, received and accepted from the trading entities (like S) and the
same had been properly graded and weighed.
These requirements had not yet been satisfied at the time
the tobacco was lost in A’s redrying plant. Inasmuch as B did
not become the owner of the lost tobacco and as S was still the
owner thereof, the loss should be borne by S, not by B. Res perit
domino. Hence, B was not obligated to pay for the tobacco. S’s
cause of action was really against A. S did not appeal from the
lower court’s judgment absolving A. Under the contract between B and A, the latter was supposed to advance to the trading entities the payment for the tobacco delivered to A, and B
would then reimburse A for its advances. No such advances
were made by A, a circumstance which may signify that the
sale was not consummated.
Author’s Note: The buyer assumes the risk of loss caused by
fortuitous event after the perfection of the contract even before
the delivery of the thing sold. (see Rule 3 under “Risk of loss or
deterioration.”) In the mind of the author, the opinion of Justice Aquino is that no contract of sale was perfected between S
and B; neither was there delivery of the tobacco to B before it
was lost. The opinion expresses its conformity to the following
excerpts, among others, from the brief of the Solicitor General
for PVTA (B):
107
108
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Art. 1480
“Viewed thus, the conclusion is inescapable that the
tobacco shipments brought to the redrying plant to be inspected, graded, and weighed are considered not delivered
and sold in legal contemplation, until after grading and
weighing where the ‘meeting of minds’ takes place because
the price or consideration is determined by the grade and
weight thereof. And without agreement as to price, the sale
is not perfected. It is worth emphasizing that before the tobacco shipments were graded and weighed, they remained
properties of the respondent trading entities (S and others)
subject to their control and possession, and at their risk;
consequently, respondents shall bear the loss which occurred prior to the grading and weighing of the tobaccos.”
———— ———— ————
3. Bales of tobacco were lost while in the control and possession
of buyers’ agent before they were graded and weighed.
Facts: PVTA, a government corporation, entered into a contract of procuring, redrying and servicing with FVTR for the
1963 tobacco trading operation. Petitioners ATC shipped to
FVTR bales of tobacco. Not all the bales of tobacco were graded
and weighed because some officers and employees in the
premises of FVTR asked for money to have the remaining bales
graded and weighed. The remaining ungraded and unweighed
bales were lost while they were in the possession of FVTR.
Having learned of such loss, ATC demanded for their value
and the application of the same to ATC’s merchandising loan
with PVTA but both the latter and the FVTR refused to heed
said demands.
Issue: Was the contract of sale between ATC and PVTA perfected by ATC’s delivery of all bales of tobacco to FVTR, a
contractee of PVTA, so as to hold PVTA liable for the loss of
said bales while in the possession of FVTR?
Held: (1) Delivery to buyer’s agent (FVTR) proven. — “Under
the Santiago Virginia Tobacco Planters Assoc. vs. PVTA (31 SCRA
528 [1970].) case, shipping documents and checklists which are
accomplished prior to delivery do not prove actual delivery. To
prove such delivery, documents such as the weigher’s tally sheet
and the warehouse receipts which are accomplished when the
actual delivery is made, are necessary. The factual circumstances
extant in this case are different from those in the Santiago case.
Art. 1480
NATURE AND FORM OF THE CONTRACT
In said case, there was a need to prove actual delivery because
the petitioner therein demanded for the payment of tobacco
shipments which were allegedly delivered to the FVTR. In other
words, the actual physical delivery of the shipments was not
proven. On the other hand, in this case, the lower court established from the testimonies of witnesses the fact that petitioner
entrusted to the FVTR a total of 263 bales of tobacco, 89 bales of
which were even actually weighed and graded in the redrying
plant. However, for reason beyond the control of the petitioner,
the FVTR refused to weigh and grade the remaining 174 bales.
On top of this, the FVTR also refused to grant petitioner’s request to withdraw the unweighed and ungraded shipments.
As it turned out later, said shipments were lost while in the
custody of FVTR, thereby placing the petitioner in a ‘no win’
situation.’’
(2) Seller (ATC) lost possession and control over shipment. —
“The Civil Code provides that ownership of the thing sold shall
be transferred to the vendee upon the actual or constructive
delivery thereof. (Art. 1477.) There is delivery when the thing
sold is placed in the control and possession of the vendee. (Art.
1497.) Indeed, in tobacco trading, actual delivery plays a pivotal role. The peculiar procedure undergone in trading, which
procedure was set out at length in both the Santiago and the
PVTA vs. De los Angeles (87 SCRA 197 [1978].) cases, reveals that
delivery seals the contract of sale because the trader loses not
only possession but also control over the shipment. Outlined
by the PVTA pursuant to its power ‘to take over and assume,
and, therefore, exclusively direct, supervise and control, all functions and operations with respect to the processing, warehousing, and trading of Virginia tobacco, the provisions of any existing law to the contrary notwithstanding, the procedure is
observed by everyone involved in the trade.’”
(3) Tobacco traders placed at a disadvantage. — “Verily, the
tobacco trading procedure conceived and formulated by the
PVTA is akin to a contract of adhesion wherein only one party
has a hand in the determination of the terms. But observance
of the procedure more often than not renders a trader at a disadvantage. The moment the shipment is placed in the hands of
the PVTA or its representative and it is lost, the trader is left
empty-handed. While the flaw may not really be in the procedure itself, the same way may be found in the persons charged
with the implementation of the procedure. Some personnel
109
110
SALES
Art. 1481
mishandle the shipment to the detriment of the trader. Some
demand grease money to facilitate the trading process. Sadly,
this is what happened in this case.”
(4) Delivery considered effective delivery to seller (PVTA). —
“Hence, while under an ideal situation, there would have been
merit in respondent PVTA’s contention that the contract of sale
could not have been perfected pursuant to Article 1475 because
to determine the price of the tobacco traded, the shipment
should first be inspected, graded and weighed, a strict interpretation of the provision may result in adverse effects to small
planters who would not be paid for the lost products of their
toil. Such situation was what the ruling in PVTA vs. De los Angeles sought to avoid.
Equity and fair dealing, the anchor of said case, must once
more prevail. Since PVTA had virtual control over the lost
tobacco bales, delivery thereof to the FVTR should also
be considered effective delivery to the PVTA.” (Alliance Tobacco, Inc. vs. Phil. Virginia Tobacco Administration, 179 SCRA 336
[1989].)
ART. 1481. In the contract of sale of goods by description or by sample, the contract may be rescinded
if the bulk of the goods delivered do not correspond
with the description or the sample, and if the contract
be by sample as well as by description, it is not sufficient that the bulk of goods correspond with the 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. (n)
Sale of goods by description
and/or sample.
The above article covers a sale of goods by description, by
sample, and by sample as well as by description. It provides a
cause for rescission distinct from those stated in Article 1597.
(1) Sale by description. — Sale by description occurs where a
seller sells things as being of a particular kind, the buyer not know-
Art. 1481
NATURE AND FORM OF THE CONTRACT
111
ing whether the seller’s representations are true or false, but relying on them as true; or, as otherwise stated, where the purchaser
has not seen the article sold and relies on the description given
him by the vendor, or has seen the goods but the want of identity
is not apparent on inspection. (77 C.J.S. 1170.)
The reason for the rule is that a dealer who sells an article
describing it as the kind of an article of commerce the identity of
which is not known to the purchaser, must understand that such
purchaser relies upon the description as a representation by the
seller that it is the thing described. (55 C.J. 739.) If the bulk of the
goods delivered do not correspond with the description, the contract may be rescinded. (Art. 1481.) But if the thing delivered is as
described, the fact that the buyer cannot use the thing sold for the
purpose for which it was intended without the seller’s fault does
not exempt the buyer from paying the purchase price agreed
upon. (see Pacific Commercial Co. vs. Ermita Market & Cold
Stores, 55 Phil. 617 [1931].)
(2) Sale by sample. — To constitute a sale by sample, it must
appear that the parties contracted solely with reference to the
sample, with the understanding that the bulk was like it. But a
mere exhibition of a sample by the seller in the absence of any
showing that it was an inducement of the sale or formed the sole
basis thereof, does not amount to a sale by sample as where the
quality of the articles to be furnished is expressly described in the
contract without reference to the sample or the parties agree that
the goods ordered shall differ from the sample in some particular matter. Whether a sale is by sample is determined by the intent of the parties as shown by the terms of the contract and the
circumstances surrounding the transaction. (77 C.J.S. 925.) In a sale
by sample, the vendor warrants that the thing sold and to be delivered by him shall conform with the sample in kind, character,
and quality. (77 C.J.S. 1169; see Art. 1565.)
A sale by sample is really a species of sale by description. The
sample is employed instead of words to communicate to the buyer
the characteristics of the goods being sold. It is itself a tacit assertion of the qualities of the bulk it represents.
(3) Sale by description and sample. — When a sale is made both
by sample and by description, the goods must satisfy all the
112
SALES
Art. 1482
warranties (see Art. 1565.) appropriate to either kind of sale, and
it is not sufficient that the bulk of the goods correspond with the
sample if they do not also correspond with the description, and
vice versa. (77 C.J.S. 1172.)
Meaning of bulk of goods.
In this article, the term “bulk of goods” is not used to designate the greater portion of the goods. Rather, it is used to denote
the goods as distinguished from the sample with which they must
correspond. The word “goods” in the phrase is an oppositional
genitive defining “bulk.” In other words “bulk of goods” mean
the same as “goods” which, as a whole body, must correspond
substantially with the sample and description. (see 77 C.J.S. 1172.)
The buyer is given a reasonable opportunity of comparing the
bulk with the description or the example. (Art. 1481, par. 2.)
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.
(1454a)
Meaning of earnest money.
Earnest money is something of value given by the buyer to the
seller to show that the buyer is really in earnest, and to bind the
bargain. It is actually a partial payment of the purchase price and
is considered as proof of the perfection of the contract. (see
Villongco Realty vs. Bormaecheco, 65 SCRA 352 [1975]; Topacio
vs. Court of Appeals, 211 SCRA 291 [1992]; see Laforteza vs.
Machuca, 127 SCAD 798, 333 SCRA 643 [2000].) Since earnest
money constitutes an advance payment, it must be deducted from
the total price.22
22
Hence, it cannot 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. In a case, by
reason of its failure to make payment, petitioner, through its agent, informed private
respondents that it would no longer push through with the sale. In other words, petitioner resorted to extra-judicial rescission of the contract with private respondents who
did not interpose any objection to the rescission. (Golden, Ltd., Inc. vs. Court of Appeals, 299 SCRA 141 [1998].)
Art. 1482
NATURE AND FORM OF THE CONTRACT
113
Note: By agreement of the parties, the amount given may be
merely a deposit of what would eventually become earnest money
or downpayment should a contract of sale be made by them, not
as a part of the purchase price and as proof of the perfection of
the contract of sale but only as a guarantee that the buyer would
not back out of the sale. Thus, it is not really the giving of earnest
money but the proof of the concurrence of all the essential elements of a contract which establishes the existence of the perfected
contract. There is no sale where the parties still have to agree on
the acceptable terms of payment. (San Miguel Properties Philippines, Inc. vs. Huang, 130 SCAD 713, 336 SCRA 737 [2000].) The
earnest money forms part of the consideration only if the sale is
consummated upon full payment of the purchase price. (Chua vs.
Court of Appeals, 401 SCRA 54 [2003].)
Under Article 145423 of the old Civil Code, it has been held
that the delivery of part of the purchase price should not be understood as constituting earnest money to bind the agreement in
the absence of something in the contract showing that such was
the intention of the parties. (Salas Rodriguez vs. Leuterio, 47 Phil.
818 [1925].)
Earnest money and option money
distinguished.
They may be distinguished as follows:
(1) Earnest money is part of the purchase price, while option
money (see Art. 1479, par. 2.) is the money given as distinct consideration for an option contract;
(2) Earnest money is given only where there is already a sale,
while option money applies to a sale not yet perfected; and
(3) When earnest money is given, the buyer is bound to pay
the balance, while the would-be buyer who gives option money
is not required to buy. (Adelfa Properties, Inc. vs. Court of Appeals, 58 SCAD 962, 240 SCRA 565 [1995] and Limson vs. Court
23
In this article, it is declared that “When earnest money or a pledge had been given
to bind a contract of purchase and sale, the contract may be rescinded if the vendee
should be willing to forfeit the earnest money or pledge or the vendor to return double
the amount.”
114
SALES
Art. 1483
of Appeals, 357 SCRA 209 [2001], quoting De Leon, Comments and
Cases on Sales, 1986 rev. ed., p. 67.)
But option money may become earnest money if the parties
so agree.
ART. 1483. Subject to the provisions of the Statute of Frauds and of any other applicable statute, a
contract of sale may be made in writing, or by word of
mouth, or partly in writing and partly by word of mouth,
or may be inferred from the conduct of the parties. (n)
Form of contract of sale.
(1) General rule. — The form of a contract refers to the manner
in which it is executed or manifested. As a general rule, a contract may be entered into in any form provided all the essential
requisites for its validity are present. (Art. 1356.) It may be in
writing; it may be oral; it may be partly in writing and partly oral.
It may even be inferred from the conduct of the parties. Sale is a
consensual contract and is perfected by mere consent. (Art. 1475.)
(2) Where form is required in order that a contract may be enforceable. — In case the contract of sale should be covered by the Statute of Frauds, the law requires that the agreement (or some note
or memorandum thereof) be in writing subscribed by the party
charged, or by his agent; otherwise, the contract cannot be enforced by action. (see Art. 1403[2].)
Under the Statute of Frauds (Art. 1403[2, a, d, e].) of the Civil
Code, the following contracts must be in writing; otherwise, they
shall be unenforceable by action:
(a) Sale of personal property at a price not less than
P500.00;
(b) Sale of real property or an interest therein regardless
of the price involved; and
(c) Sale of property not to be performed within a year
from the date thereof regardless of the nature of the property
and the price involved.
The purpose of the Statute of Frauds is to prevent fraud and
perjury in the enforcement of obligations depending for their
Art. 1483
NATURE AND FORM OF THE CONTRACT
115
evidence upon the unassisted memory of witnesses by requiring
certain enumerated contracts and transactions to be evidenced in
writing. (Claudel vs. Court of Appeals, 199 SCRA 113 [1991], citing 4 Tolentino, Civil Code of the Phils., p. 580 [1973].) Contracts
infringing the Statute of Frauds are ratified when the defense fails
to object to the introduction of parol evidence, or asks questions
on cross-examination, which elicits evidence proving the existence of a perfected contract of sale. (Limketkai Sons Milling, Inc.
vs. Court of Appeals, 66 SCAD 136, 250 SCRA 523 [1995].)
The Statute of Frauds refers to specific kinds of transactions
and cannot apply to any other transaction that is not enumerated
therein. The application of the Statute presupposes the existence
of a perfected contract. A right of first refusal is not among those
listed as unenforceable under the statute. At best, it is a contractual grant not of the sale of the property involved, but of the right
of first refusal over the property sought to be sold. Hence, a right
of first refusal need not be written to be enforceable and may be
proven by oral evidence. (Rosencor Development Corporation vs.
Inquing, 145 SCAD 484, 354 SCRA 119 [2001].)
(3) Where form is required in order that a contract may be valid. —
Where the “applicable statute” requires that the contract of sale
be in a certain form for its validity, the required form must be
observed in order that the contract may be both valid and enforceable. (see Art. 1356.)
(4) Where form is required only for the convenience of the parties.
— In certain cases, a certain form (e.g., public instrument) is required for the convenience of the parties in order that the sale may
be registered in the Registry of Deeds to make effective as against
third persons the right acquired under such sale. As between the
contracting parties, the form is not indispensable since they are
allowed by law to compel each other to observe that form. (Arts.
1357, 1358[1].) Hence, the fact that the deed of sale of a parcel of
land still had to be signed and notarized does not mean that no
contract had already been perfected. A sale of land is valid regardless of the form it may have been entered into as long as the requisites for a valid contract of sale are present.
On the other hand, the fact that a deed of sale is a notarized
document does not necessarily justify the conclusion that the said
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sale is a true conveyance to which the parties thereto are irrevocably bound. Though its notarization vests in its favor the presumption of regularity and due execution (Manzano vs. Perez, 152
SCAD 473, 362 SCRA 430 [2001].), it is not the function of the
notary public to validate and make binding an instrument never
intended by the parties to have any binding legal effect upon them.
The intention of the parties still and always is the primary consideration in determining the true nature of the contract. (Suntay
vs. Court of Appeals, 66 SCAD 711, 251 SCRA 430 [1995];
Nazareno vs. Court of Appeals, 343 SCRA 637 [2000].) Where the
vendor did not personally appear before the notary public, such
fact raises doubt regarding the vendor’s consent to the sale notwithstanding that the deed states the contrary. (Tan vs. Mandap,
429 SCRA 711 [2004].)
An invalidly notarized deed of sale must be considered merely
as a private document. Even if validly notarized, the deed would
still be classified as a private document if it is merely subscribed
and sworn to by way of jurat but was not properly acknowledged.
(Tigno vs. Aquino, 444 SCRA 61 [2004].)
Sale of real property or an interest
therein.
(1) A sale of a piece of land or interest therein when made
through an agent is void unless the agent’s authority is in writing.
(Art. 1874; see Copon vs. Umali, 87 Phil. 91 [1950].)
(2) For the sale of real property to be effective against third
persons, the sale must be registered in the Registry of Deeds (or Property) of the province or city where the property is located. The
sale must be in a public document (e.g., acknowledged before a
notary public or any public officer authorized by law to administer oath) for otherwise, the registration will be refused.
(3) The real purpose of registration of a contract of sale being
to give notice to third persons and to protect the buyer against
claims of third persons arising from subsequent alienations by the
vendor, it is certainly not necessary to give efficacy to the deed of
sale, as between the parties to the contract (Phil. Suburban Dev.
Corp. vs. The Auditor General, 63 SCRA 397 [1975].) and their
privies because actual notice is equivalent to registration. It is set-
Art. 1483
NATURE AND FORM OF THE CONTRACT
117
tled that registration is not a mode of acquiring ownership.
(Bollozo vs. Yu Tieng Su, 155 SCRA 50 [1987].)
(4) The sale of land in a private instrument is valid and binding upon the parties, for the time-honored rule is that even a verbal contract of sale of real estate produces legal effects between the
parties (Bucton vs. Gabar, 55 SCRA 499 [1974]; Gallar vs. Husain,
20 SCRA 186 [1967].), since sale is a consensual contract and is
perfected by mere consent. (Carbonell vs. Court of Appeals, 69
SCRA 99 [1976].)
(5) The fact that the notarization of a deed of sale of real property is false is of no consequence, for it need not be notarized; it is
enough that it be in writing. (Heirs of Amparo del Rosario vs.
Santos, 108 SCRA 43 [1981].)
EXAMPLES:
(1) S orally sold to B a parcel of land. The sale is valid (Art.
1356; Lopez vs. Alvarez, 9 Phil. 28 [1907]; Guerrero vs. Raquel,
10 Phil. 52 [1908].) but it is unenforceable because the law requires that it be in writing to be enforceable. (Art. 1403[e].)
(2) If the contract of sale above is in private writing, then
it is valid and binding but only as between the parties and their
privies (Soriano vs. Latoño, 87 Phil. 757 [1950]; Gallar vs.
Husain, supra.) and not as against third persons without notice
until the sale is registered in the Registry of Property. B has the
right to compel S to put the contract in a public instrument so
that it can be registered to affect third persons. (Art. 1357; see
Carbonell vs. Court of Appeals, supra; Mahilum vs. Court of
Appeals, 17 SCRA 482 [1966].)
Modes of satisfaction of the Statute
of Frauds.
The statute specifies three ways in which contracts of sales of
goods within its terms may be made binding, namely:
(1) the giving of a memorandum;
(2) acceptance and receipt of part of the goods (or things in
action) sold and actual receipt of the same (see Art. 1585.); and
(3) payment or acceptance at the time some part of the purchase price.
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The requirement of a memorandum is obviously suitable either for a contract to sell or a sale. The other two modes of satisfaction seem more naturally to apply to sales than to executory
contracts. (Williston, op. cit., Sec. 73.)
The Statute of Frauds applies not only to goods but to things
in action as well. (see Art. 1403[2, d].) Thus, an assignment of credit
(Art. 1624.) at a price not less than P500.00 is within the operation
of the Statute.
Statute of Frauds applicable only
to executory contracts.
The Statute of Frauds is applicable only to executory contracts
(where no performance, i.e., delivery and payment, has as yet been
made by both parties) and not to contracts which are totally (consummated) or partially performed. (see Vda. de Espiritu vs. CFI
of Cavite, 47 SCRA 354 [1972].) It does not forbid oral evidence to
prove a consummated sale. (Diama vs. Macalebo, 74 Phil. 70
[1942].)
(1) Reason for the rule. — The reason is that partial performance like the writing, furnishes reliable evidence of the intention
of the parties or the existence of the contract. A contrary rule
would result in injustice or unfairness to the party who has performed his obligation, and would promote fraud or bad faith on
the part of the party who has not performed his obligation, for it
would enable him to keep the benefits already derived by him
from the transaction and at the same time, evade the responsibilities or liabilities assumed or contracted by him. (Carbonnel vs.
Poncio, 103 Phil. 655 [1958]; Art. 1405.)
Thus, where a parol contract of sale is adduced not for the
purpose of enforcing it, but as a basis of the possession of the
person claiming to be the owner, the Statute of Frauds is not applicable, in the same way that it does not apply to contracts which
are either totally or partially performed upon the theory that there
is a wide field for the commission of frauds in executory contracts
which can only be prevented by requiring them to be in writing,
a fact which is reduced to a minimum in executed contracts because the intention of the parties become apparent by their execution. (Pascual vs. Realty Invest., Inc., 91 Phil. 257 [1952].)
Art. 1483
NATURE AND FORM OF THE CONTRACT
119
(2) Circumstances indicating partial performance. — Where there
is partial performance of a parol contract of sale of realty, the principle excluding evidence of such contract does not apply.
Other circumstances indicating partial performance of an oral
contract of sale of realty are relinquishment of rights, continued
possession by a purchaser who is already in possession, building
of improvements, tender of payment, rendition of services, payment of taxes, surveying of the land at the vendee’s expense
(Ortega vs. Leonardo, 103 Phil. 870 [1958]; see 49 Am. Jur. 44, 755756, 772.), and acceptance of initial payment. (Clarin vs. Rulona,
127 SCRA 512 [1984].)
The application of the Statute of Frauds presupposes the existence of a perfected contract and requires only that a note or
memorandum subscribed by the party charged or by his agent
be executed in order to compel judicial enforcement. Where there
is no perfected contract, there is no basis for the application of
the Statute. (Villanueva vs. Court of Appeals, 78 SCAD 484, 267
SCRA 89 [1997].) Thus, the annotation on the letter-offer of the
phrase “Received original, 9-4-89,’’ beside which appears the signature of the addressee, can neither be regarded as a contract of
sale nor a promise to sell. It is merely a memorandum of the receipt of the offer. Hence, the alleged transaction is unenforceable
as the requirements under the Statute of Frauds have not been
complied with. (Jovan Land, Inc. vs. Court of Appeals, 79 SCAD
428, 268 SCRA 160 [1997].)
Legal recognition of electronic data messages
and electronic documents.
The following are the pertinent provisions of the implementing rules and regulations of R.A. No. 8792, otherwise known as
the “Electronic Commerce Act.’’
(1) Validity and enforceability. — Information shall not be denied validity or enforceability solely on the ground that it is in
the form of an electronic data message or electronic document,
purporting to give rise to such legal effect. Electronic data messages or electronic documents shall have the legal effect, validity
or enforceability as any other document or legal writing. In particular, subject to the provisions of R.A. No. 8792 and the Rules:
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(a) A requirement under law that information is in writing is satisfied if the information is in the form of an electronic
data message or electronic document.
(b) A requirement under law for a person to provide information in writing to another person is satisfied by the provision of the information in an electronic data message or electronic document.
(c) A requirement under law for a person to provide information to another person in a specified non-electronic form
is satisfied by the provision of the information in an electronic
data message or electronic document if the information is
provided in the same or substantially the same form.
(d) Nothing limits the operation of any requirement under law for information to be posted or displayed in specified
manner, time or location; or for any information or document
to be communicated by a specified method unless and until a
functional equivalent shall have been developed, installed,
and implemented. (Sec. 7, Rules.)
(2) Incorporation by reference. — Information shall not be denied validity or enforceability solely on the ground that it is not
contained in an electronic data message or electronic document
but is merely incorporated by reference therein. (Sec. 8, Ibid.)
(3) Writing. — Where the law requires a document to be in
writing, or obliges the parties to conform to a writing, or provides
consequences in the event information is not presented or retained
in its original form, an electronic document or electronic data
message will be sufficient if the latter:
(a) maintains its integrity and reliability; and
(b) can be authenticated so as to be usable for subsequent
reference, in that:
1) It has remained complete and unaltered, apart
from the addition of any endorsement and any authorized change, or any change which arises in the normal
course of communication, storage and display; and
2) It is reliable in the light of the purpose for which it
was generated and in the light of all relevant circumstances. (Sec. 10, Ibid.)
Art. 1483
NATURE AND FORM OF THE CONTRACT
121
(4) Original. — Where the law requires that a document be
presented or retained in its original form, that requirement is met
by an electronic document or electronic data message if:
(a) There exists a reliable assurance as to the integrity of
the electronic document or electronic data message from the
time when it was first generated in its final form and such
integrity is shown by evidence aliunde (that is, evidence other
than the electronic data message itself) or otherwise; and
(b) The electronic document or electronic data message is
capable of being displayed to the person to whom it is to be
presented.
(c) For the purposes of No. (1) above:
1) The criteria for assessing integrity shall be whether
the information has remained complete and unaltered,
apart from the addition of any endorsement and any
change which arises in the normal course of communication, storage and display; and
2) The standard of reliability required shall be assessed in the light of the purpose for which the information was generated and in the light of all relevant circumstances.
An electronic data message or electronic document meeting
and complying with the requirements of Section 6 or 7 of R.A. No.
8792 shall be the best evidence of the agreement and transaction
contained therein. (Sec. 11, Ibid.)
(5) Solemn contracts. — No provision of the R.A. No. 8792 shall
apply to vary any and all requirements of existing laws and relevant judicial pronouncements respecting formalities required in
the execution of documents for their validity. Hence, when the
law requires that a contract be in some form in order that it may
be valid or enforceable, or that a contract is proved in a certain
way, that requirement is absolute and indispensable. (Sec. 12, Ibid.)
Legal recognition of electronic signatures.
The following are the pertinent provisions of the implementing rules and regulations:
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Art. 1483
An electronic signature relating to an electronic document or
electronic data message shall be equivalent to the signature of a
person on a written document if the signature:
(1) is an electronic signature as defined in Section 6(g) of the
Rules; and
(2) is proved by showing that a prescribed procedure, not
alterable by the parties interested in the electronic document or
electronic data message, existed under which:
(a) A method is used to identify the party sought to be
bound and to indicate said party’s access to the electronic
document or electronic data message necessary for his consent
or approval through the electronic signature;
(b) Said method is reliable and appropriate for the purpose for which the electronic document or electronic data
message was generated or communicated, in the light of all
circumstances, including any relevant agreement;
(c) It is necessary for the party sought to be bound, in
order to proceed further with the transaction, to have executed
or provided the electronic signature; and
(d) The other party is authorized and enabled to verify the
electronic signature and to make the decision to proceed with
the transaction authenticated by the same.
The parties may agree to adopt supplementary or alternative procedures provided that the requirements of paragraph
(b) are complied with. (Sec. 13, Rules.)
Communication of electronic data messages
and electronic documents.
The following are the pertinent provisions of the implementing rules and regulations:
(1) Formation and validity of electronic contracts. — Except as
otherwise agreed by the parties, an offer, the acceptance of an offer
and such other elements required under existing laws for the formation and perfection of contracts may be expressed in, demonstrated and proved by means of electronic data message or electronic documents and no contract shall be denied validity or en-
Art. 1484
NATURE AND FORM OF THE CONTRACT
123
forceability on the sole ground that it is in the form of an electronic data message or electronic document, or that any or all of
the elements required under existing laws for the formation of the
contracts is expressed, demonstrated and proved by means of
electronic documents. (Sec. 21, Rules.)
(2) Consummation of electronic transactions with banks. — Electronic transactions made through networking among banks, or
linkages thereof with other entities or networks, and vice versa,
shall be deemed consummated under rules and regulations issued
by the Bangko Sentral ng Pilipinas, upon the actual dispensing of
cash or the debit of one account and the corresponding credit to
another, whether such transaction is initiated by the depositor or
by an authorized collecting party. The obligation of one bank,
entity, or person similarly situated to another arising therefrom
shall be considered absolute and shall not be subjected to the process of preference of credits. The foregoing shall apply only to transactions utilizing the Automated Teller Machine switching network.
Without prejudice to the foregoing, all electronic transactions
involving banks, quasi-banks, trust entities, and other institutions
which under special laws are subject to the supervision of the
Bangko Sentral ng Pilipinas shall be covered by the rules and regulations issued by the same pursuant to its authority under Section 59 of R.A. No. 8791 (The General Banking Act), R.A. No. 7653
(the Charter of the Bangko Sentral ng Pilipinas) and Section 20,
Article XII of the Constitution. (Sec. 22, Ibid.)
(3) Recognition by parties of electronic data message. — As between the originator and the addressee of an electronic data message or electronic document, a declaration of will or other statement shall not be denied legal effect, validity or enforceability
solely on the ground that it is in the form of an electronic data
message or electronic document. (Sec. 23, Ibid.)
ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the
vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the
vendee fail to pay;
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(2) Cancel the sale, should the vendee’s failure to
pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing
sold; if one has been constituted, should the vendee’s
failure to pay cover two or more installments. In this
case, he shall have no further action against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void. (1454-Aa)
Remedies of vendor in sale of personal
property payable in installments.
The vendor of personal property payable in installments may
exercise any of the following remedies:
(1) elect fulfillment upon the vendee’s failure to pay; or
(2) cancel the sale, if the vendee shall have failed to pay two
or more installments; or
(3) foreclose the chattel mortgage, if one has been constituted,
if the vendee shall have failed to pay two or more installments.
Remedies alternative.
These remedies are alternative and are not to be exercised
cumulatively or successively and the election of one is a waiver
of the right to resort to the others. (Pacific Commercial Co. vs. De
la Rama, 62 Phil. 380 [1935]; Erlanger & Galinger, Inc. vs. Flor,
[C.A.] 57 O.G. 482; Cruz vs. Filipinas Invest. & Finance Corp., 23
SCRA 791 [1968]; Filipinas Invest. & Finance Corp. vs. Ridad, 30
SCRA 564 [1969]; Industrial Finance Corp. vs. Tobias, 78 SCRA 28
[1977]; Nonato vs. Intermediate Appellate Court, 140 SCRA 255
[1985].)
Thus, where from the prayer of the vendor in its brief, it asks
the appellate court to order the vendee to pay the remaining unpaid sum under the promissory note, it thereby waives the other
remedies. (Servicewide Specialists, Inc. vs. Intermediate Appellate Court, 174 SCRA 80 [1989].) To file an action containing the
three remedies: to collect the purchase price; to seize the property purchased by suing for replevin; and to foreclose the mort-
Art. 1484
NATURE AND FORM OF THE CONTRACT
125
gage executed thereon, is not only irregular but is a flagrant circumvention of the prohibition of the law. (Luneta Motor Co. vs.
Dimagiba, 3 SCRA 884 [1961].)
Applicability of Article 1484.
The law is aimed at those sales of personal property where
the price is payable in several installments.
(1) Sale of personal property not payable in installments. — Article 1484 does not apply to a sale of personal property on straight
term or partly in cash and partly in term. Where the balance, after payment of the initial sum, should be paid in its totality at the
time specified, the transaction is not by installment as contemplated in Article 1484. (Levi Hermanos, Inc. vs. Gervacio, 69 Phil.
52 [1939].)
(2) Sale or mortgage of real estate. — Neither does the article
apply to sale of immovable property nor to real estate mortgage.
Under Article 1484, the creditor is given the right or option to seize
the chattel and dispose of the same in accordance with the Chattel Mortgage Law, while the mortgage on real property may only
be foreclosed in conformity with the provisions of the Rules of
Court, or those of Act No. 3135, if a special power to sell is granted
to the creditor under the contract. (Pacific Commercial Co. vs.
Jocson, [C.A.] 39 O.G. 1859.)
(3) Action of replevin. — It does not also apply to an action of
replevin. (Universal Motors Corp. vs. Dy Hian Tat, 28 SCRA 161
[1969].) An action by the mortgagee for recovery of possession of
personal property with replevin as a provisional remedy is not
an action for collection much less for foreclosure (extra-judicial)
of chattel mortgage. It is a preliminary step to foreclosure which
should be conducted in accordance with Section 14 of Act No.
1508. (Universal Motors Corp. vs. Velasco, 98 SCRA 545 [1980];
PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals, 109
SCAD 7, 310 SCRA 281 [1999].)
Right of vendor to recover unpaid balance
of purchase price.
(1) Remedy of specific performance. — The vendor who has chosen to exact the fulfillment of the obligation is not limited to the
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Art. 1484
proceeds of the sale of the mortgaged goods. He may still recover
from the purchaser the unpaid balance of the price, if any (see
Tajanlangit vs. Southern Motors, Inc., 101 Phil. 606 [1957]; Vda.
de Quimba vs. Manila Motor Co., Inc., 3 SCRA 444 [1961].), on
the real and personal properties of the purchaser not exempt by
law from attachment or execution. (Southern Motors, Inc. vs.
Magbanua, 101 Phil. 155 [1957].) The mere fact that the seller secures possession of the personal property through an attachment
after filing an action for collection of the unpaid balance, with a
prayer for an issuance of a writ of preliminary attachment does
not necessarily mean that he intends to resort to a foreclosure of
the mortgage. Unlike in a judicial foreclosure sale, there is no need
for the court to confirm the sale on execution. (Palma vs. Court of
Appeals, 52 SCAD 38, 232 SCRA 714 [1994].)
(2) Remedy of cancellation. — If the vendor chooses rescission
or cancellation of the contract upon the vendee’s failure to pay
two or more installments, the latter can demand the return of
payments already made unless there is a stipulation about forfeiture. (see Art. 1486.) In a case, for failure of the buyer to pay two
or more installments, the vendor-mortgagee (or his assignee) repossessed the car. The receipt issued by the vendor’s assignee to
the vendee when it took possession of the vehicle states that the
vehicle could be redeemed within 15 days, meaning that should
the vendee fail to redeem within the said period by paying the
balance of the purchase price, the assignee would retain permanent possession of the vehicle as it did in fact. It was held that by
this act, the vendor exercised its option to cancel the contract of
sale, barring it from exacting payment of the balance of the purchase price. “It cannot have its cake and eat it too.” (Nonato vs.
Intermediate Appellate Court, 140 SCRA 255 [1985].)
(3) Remedy of foreclosure. — If the vendor has chosen the third
remedy of foreclosure of the chattel mortgage if one has been given
on the property, he is not obliged to return to the vendee the
amount of the installments already paid should there be an agreement to that effect. (Ibid.) But he shall have no further action
against the vendee for the recovery of any unpaid balance of the
price remaining after the foreclosure and actual sale of the mortgaged chattel, and any agreement to the contrary is void. (Zayas,
Art. 1484
NATURE AND FORM OF THE CONTRACT
127
Jr. vs. Luneta Motor Company, 117 SCRA 726 [1982]; PAMECA
Wood Treatment Plant, Inc. vs. Court of Appeals, 310 SCRA 281
[1999].)
(a) Recovery by mortgagee of other than unpaid balance of purchase price. — Article 1484(3) is inapplicable where the amounts
adjudged in favor of the vendor-mortgagee were not part of
the unpaid balance of the purchase price or in the concept of
a deficiency judgment but were expenses of the suit. (Universal Motors Corp. vs. Velasco, 98 SCRA 545 [1980], infra.) Where
the mortgagor plainly refuses to deliver the chattel subject of
the mortgage upon his failure to pay two or more installments
or if he conceals the chattel to place it beyond the reach of the
mortgagee it logically follows as a matter of common sense,
that the necessary expenses incurred in the prosecution by the
mortgagee in the prosecution of the action for replevin so that
he can regain possession of the chattel, should be borne by the
mortgagor. Recoverable expenses would include expenses
properly incurred in effecting seizure of the chattel and attorney’s fees in prosecuting the action for replevin. (Agustin vs.
Court of Appeals, 81 SCAD 827, 271 SCRA 457 [1997].)
(b) Recourse of mortgagee against guarantor of vendee. — Neither can the vendor after the foreclosure of the chattel mortgage proceed against any third party who may have guaranteed the vendee’s performance of his obligation, for “if the
guarantor should be compelled to pay the balance of the purchase price, the guarantor will, in turn, be entitled to recover
what he has paid from the debtor-vendee (Art. 2066.); so that
ultimately, it will be the vendee who will be made to bear the
payment of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus, the protection given by Article 1484 (to the unpaid vendor) would be
indirectly subverted, and public policy overturned.” (Cruz vs.
Filipinas Invest. & Finance Corp., 23 SCRA 791 [1968]; Pascual
vs. Universal Corporation, 61 SCRA 121 [1974].)
(c) Recourse of assignee against mortgagee. — When the vendor assigns his credit to another person, the latter is likewise
bound by the same law. Accordingly, when the assignee forecloses on the mortgage, there can be no further recovery of the
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Art. 1484
deficiency and the seller-mortgagee is deemed to have renounced any right thereto. (Borbon II vs. Servicewide Specialists, Inc., 72 SCAD 111, 258 SCRA 634 [1996].) Article 1484(3),
however, does not bar one to whom the seller-mortgagee has
assigned on a with-recourse basis his credit against the buyer
from recovering from the seller the assigned credit in full although the seller may have no right of recovery against the
buyer for the deficiency. (Filipinas Invest. & Finance Corp. vs.
Vitug, Jr., 28 SCRA 658 [1969].)
ILLUSTRATIVE CASE:
Seller-mortgagee assigned on a recourse basis a promissory note
covering purchase price of motor vehicle executed by buyer-mortgagor who defaulted, and assignee seeks to recover from assignor unpaid balance remaining after foreclosure.
Facts: B delivered to S a promissory note covering the purchase price of a motor vehicle bought by B from S, secured by a
chattel mortgage over such automobile. S negotiated the note
to C, assigning all S’s rights to the same, the assignment including the right of recourse against S.
B defaulted. The car was sold at public auction but the proceeds still left a deficiency.
Issue: After the foreclosure and sale by C, could it hold S
liable for the payment of the outstanding balance, plus attorney’s fees and costs?
Held: Yes. Article 1483 is not applicable. The transaction between S and C was purely an ordinary discounting transaction.
The remedy sought by C is not against the buyer (B) of the car
but against the seller (S), independent of whether or not S may
have a right of recovery against B, which in this case, he does
not have. What Article 1484(3) seeks to protect are only the
buyers on installment. Surely, Congress could not have intended
to impair and much less to do away with the right of the seller
to make commercial use of his credit against the buyer, provided
said buyer is not burdened beyond what the law allows.
The contention by S that since what were assigned to C
were only whatever rights it had against B (the buyer), it should
follow that inasmuch as S has no right to recover from B beyond the proceeds of the foreclosure sale, C, as assignee, should
Art. 1484
NATURE AND FORM OF THE CONTRACT
129
have also no right to recover any deficiency is untenable. The
very fact that C was given the right of recourse against S negates the idea that the parties contemplated to limit the recovery of C to only the proceeds of the mortgage sale. (Ibid.)
Note: In the case of Cruz vs. Filipinas Invest. & Finance Corp.
(supra.), the Supreme Court broadened the scope of the Recto
Law (now Art. 1484.) beyond its letter and held that within its
spirit, a seller of goods on installments does not have any right
of action against a third party who, in addition to the buyer’s
mortgage of the goods sold, furnishes additional security for
the payment of said installment or the purchase price of said
goods. That case is entirely different from the one at bar. In that
case, the corporation was trying to recover from the guarantor
of the buyer, whereas in the present case, it is precisely stipulated, in effect, that C had a right of recourse against the seller
should the buyer failed to pay the assigned credit in full. (Ibid.)
Meaning of certain terms as used
in Article 1484.
(1) “Exercise.” — In a case, the issue was “whether the plaintiff (mortgagee) is precluded to press for collection of an account
secured by a chattel mortgage, after it shall have informed the
defendant (mortgagor) of its intention to foreclose on the same
mortgage and the voluntary acceptance of such step (foreclosure)
by the defendants.”
The Supreme Court held that such desistance of the plaintiff,
on its own initiative, from proceeding with the auction sale without gaining any advantage or benefit, and without causing any
disadvantage or harm to the defendant-mortgagor, rendered useless its previous choice to foreclose, and for this reason, it could
not be considered as having “exercised” (the Code uses the word
“exercise”) the remedy of foreclosure because of its incomplete
implementation. Therefore, the plaintiff was not barred from suing on the unpaid account. In desisting from a foreclosure of chattel mortgage, and suing instead for the unpaid balance, the creditor does not assume really inconsistent positions, nor is he
estopped considering that detriment to the opposing party is a
prerequisite to the operation of estoppel. (Radiowealth, Inc. vs.
Lavin, 7 SCRA 804 [1963].)
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Art. 1484
(2) “Action.” — Considering the purpose for which the prohibition contained in Article 1484 was intended, the word “action”
used therein may be construed as referring to any judicial or extra-judicial proceeding by virtue of which the vendor may lawfully be enabled to exact recovery of the supposed unsatisfied
balance of the purchase price from the purchaser or his privy.
(Cruz vs. Filipinas Investment and Finance Corp., 23 SCRA 791
[1968].)
(3) “Any unpaid balance.” — The phrase should be interpreted
as having reference to the deficiency judgment to which the mortgagee may be entitled where, after the mortgaged chattel is sold
at public auction, the proceeds obtained therefrom are insufficient
to cover the full amount of the secured obligation. It includes all
other claims that may likewise be called for such as interest on
the principal, attorney’s fees, expenses of collection, and the costs.
Were it the intention of the legislature to limit its meaning to the
unpaid balance of the principal, it would have so stated.
(Macondray & Co., Inc. vs. Eustaquio, 64 Phil. 446 [1937].) Thus,
where the mortgagor unjustifiably refused to surrender the chattel subject of the mortgage upon failure of two or more
installments, or if he concealed the chattel to place it beyond the
reach of the mortgagee, that thereby constrained the latter to seek
court relief, the expenses incurred for the prosecution of the case,
such as attorney’s fees, could rightly be awarded. (Borbon II vs.
Servicewide Specialists, Inc., 72 SCAD 111, 258 SCRA 634 [1996].)
(4) “Foreclosure.” — Article 1484(3), in referring to foreclosure
of a chattel mortgage given to secure payments in installments of
the purchase price of the thing sold, means foreclosure by the
usual methods including sale of the thing at public auction.
(a) Where there is no sale because the sheriff released the
property without proceeding to sell the same and the sale was
not rescinded by the vendor, the latter was not precluded from
suing the vendee for the balance of the purchase price. (Pacific Commercial Co. vs. De La Rama, 72 Phil. 380 [1941].)
(b) Similarly, where the action instituted is for specific performance and the mortgaged property is subsequently attached and sold by virtue of an execution, the sale thereof does
not amount to a foreclosure of the mortgage; hence, the seller-
Art. 1484
NATURE AND FORM OF THE CONTRACT
131
creditor is entitled to deficiency judgment (Southern Motors,
Inc. vs. Moscoso, 2 SCRA 168 [1961].) and for an alias writ of
execution for the portion of the judgment that has not been
satisfied. (Industrial Finance Corp. vs. Ramirez, 77 SCRA 152
[1977].)
(c) Under the law, the delivery by the mortgagor of the
possession of the mortgaged chattel to the mortgagee preparatory for its foreclosure sale can only operate to extinguish the
mortgagor’s liability if the mortgagee had actually caused the
foreclosure of the property when it recovered possession
thereof. It is the fact of foreclosure and actual sale of the mortgaged chattel that bars the recovery by the vendor of the balance of the vendee’s outstanding obligation not satisfied by
the sale. Accordingly, if the vendor desisted, on his own initiative, from consummating the auction sale when it discovered that foreclosure would be impractical, such desistance
would operate as a timely disavowal of the remedy of foreclosure, and the vendor can still sue for specific performance.
The mortgagee who accepted delivery of the mortgaged property is not estopped from demanding payment of the unpaid
obligation in the absence of clear consent on his part to accept
the delivery in full satisfaction of the mortgaged debt in the
concept of dacion en pago.24 (Filinvest Credit Corp. vs. Phil.
Acetylene Co., Inc., 111 SCRA 421 [1982]; see De la Cruz vs.
Asian Consumer & Industrial Finance Corp., 214 SCRA 103
[1992].)
(d) In ordinary alternative obligations, a mere choice categorically and unequivocally made and then communicated
by the person entitled to exercise the option concludes the
parties. The creditor may not thereafter exercise any other
option, unless the chosen alternative proves to be ineffectual
or unavailing due to no fault on his part. This rule, in essence,
is the difference between alternative obligations, on the one
hand, and alternative remedies, upon the other hand, where,
in the latter case, the choice generally becomes conclusive only
24
Art. 1245. Dation in payment, whereby property is alienated to the creditor in
satisfaction of debt in money, shall be governed by the law on sales.
132
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Art. 1484
upon the exercise of the remedy. For instance, in one of the
remedies expressed in Article 1484 of the Civil Code, it is only
when there has been a foreclosure of the chattel mortgage that
the vendee-mortgagor would be permitted to escape from a
deficiency liability. Thus, if the case is one for specific performance, even when this action is selected after the vendee has
refused to surrender the mortgaged property to permit an
extrajudicial foreclosure, that property may still be levied on
execution and an alias writ may be issued if the proceeds
thereof are insufficient to satisfy the judgment credit. So, also,
a mere demand to surrender the object which is not heeded by
the mortgagor will not amount to a foreclosure, but the repossession thereof by the vendor-mortgagee would have the effect of foreclosure. (Borbon II vs. Servicewide Specialists, Inc.,
supra.)
(e) Actual sale in accordance with the Chattel Mortgage
Law (Act No. 1508, Sec. 14.) resulting in a deficiency of the
mortgaged chattel is the foreclosure contemplated by law.
(Manila Motor Co. vs. Fernandez, 99 Phil. 782 [1956]; Northern Motors, Inc. vs. Sapinoso, 33 SCRA 356 [1970]; Industrial
Finance Corp. vs. Tobias, 78 SCRA 28 [1977]; see Vda. de
Quiambao vs. Manila Motor Co., 3 SCRA 444 [1961].) But the
taking by the mortgagee of the mortgaged chattel without
proceeding to the sale of the same at public auction is not lawful. The express purpose of taking the mortgaged property is
to sell the same and/or foreclose the mortgage constituted
thereon either judicially or extra-judicially and thereby liquidate the indebtedness in accordance with law. (Esguerra vs.
Court of Appeals, 173 SCRA 1 [1989].)
ILLUSTRATIVE CASES:
1. Defaulting buyer-mortgagor was given by assignee the option to pay unpaid balance of truck brought on installments or to
surrender the same, and the assignee, having learned after buyer exercised the second option that the truck had met an accident, filed suit
for recovery of unpaid balance of price.
Facts: B bought a truck on installments from S. Payment
was secured by a chattel mortgage. The promissory note and
the mortgage was assigned by S to C. B defaulted on the
Art. 1484
NATURE AND FORM OF THE CONTRACT
installment payments. As a consequence, C demanded payment
of the entire unpaid balance of the price or surrender of the
truck. B replied that he was voluntarily surrendering the truck
to C. He said the truck was being repaired at the shop of S as it
had met with an accident, that there was too much delay in the
repair, and that he was not satisfied with the repair of the finished portions.
C decided not to get the truck. It filed a suit for the recovery of the balance of the obligation.
Issue: Is C estopped to insist on its claim on the balance of
the promissory note when it demanded the return or surrender of the truck?
Held: No. C did not know about the accident. Even B cannot expect C to accept the term of surrender because aside from
the fact that the truck being surrendered met an accident, C
was not satisfied with the repair of the finished portions of the
truck in question. C, therefore, was justified in refusing to accept such surrender and in bringing suit to recover the balance
of the purchase price.
Since the case involves the sale of personal property on
installments, Article 1484 of the Civil Code should apply. The
remedies provided for in Article 1484 are considered alternative, not cumulative such that the exercise of one would bar the
exercise of the others. Here, C has not cancelled the sale, nor
has it exercised the remedy of foreclosure. Foreclosure, judicial
or extrajudicial, presupposes something more than a mere demand to surrender possession of the object of the mortgage.
Since C has not availed itself of the remedy of cancelling the
sale of the truck in question or of foreclosing the chattel
mortgage on said truck, C is still free to avail of the remedy of
exacting fulfillment of the obligation of B, the vendee of the
truck in question. (Industrial Finance Corp. vs. Tobias, 78 SCRA
28 [1977].)
———— ———— ————
2. In a suit for recovery of unpaid balance of purchase price of
mortgaged truck sold on installments, seller caused the attachment
and subsequent sale of the vehicle.
Facts: B bought from S a truck on installment basis. Upon
making a downpayment, B executed a promissory note for the
unpaid balance of the purchase price to secure the payment of
which a chattel mortgage was constituted on the truck in favor
133
134
SALES
Art. 1484
of S. B failed to pay S installments on the balance. S filed a complaint for recovery of the unpaid balance. Pursuant to a writ of
attachment, the truck and other properties of A were attached.
B contends that S had availed of the third remedy provided
in Article 1484, viz., the foreclosure of the chattel mortgage on
the truck. On the other hand, S claims that in filing the complaint, it availed of the first remedy, i.e., to exact fulfillment of
the obligation (specific performance).
Issue: Do the attachment and subsequent sale of the mortgaged truck amount to a foreclosure of the mortgage, hence, S
(seller-creditor) is not entitled to deficiency judgment?
Held: No. There is nothing unlawful or irregular in B’s act
of attaching the mortgaged truck. Since S has chosen to exact
the fulfillment of B’s obligation, it may enforce execution of the
judgment that may be favorably rendered thereon, on all personal and real properties of B not exempt from execution sufficient to satisfy such judgment. (Southern Motors, Inc. vs. Moscoso,
2 SCRA 168 [1961].)
Note: There is a substantial difference between the effect of
foreclosing a chattel mortgage and attaching the mortgaged
chattel. The variance lies in the ability of the debtor to retain
possession of the property attached by giving a counterbond
and thereby discharging the attachment. This remedy the debtor
does not have in the event of foreclosure. (Reyes, J.B.L., J., concurring.)
———— ———— ————
3. Seller brought suit to recover mortgaged truck sold on
installment basis preparatory to foreclosure, and lower court held that
expenses of suit adjudged in his favor may be enforced only against
proceeds of the vehicle.
Facts: B brought from S a truck on installment basis. To secure the balance of the purchase price B executed a promissory
note and a chattel mortgage. B defaulted in his payments. S
asked him to surrender the vehicle in accordance with the chattel mortgage contract, but B failed to surrender the truck. S filed
an action to recover the truck preparatory to foreclosure of the
mortgage. By virtue of a writ of replevin, S was able to repossess the truck. The parties submitted a stipulation of facts which
mentioned, among other things, the expenses incurred by S in
securing possession of the vehicle.
Art. 1484
NATURE AND FORM OF THE CONTRACT
On the basis of the stipulation, the lower court rendered a
decision which said, among other things, that the sums adjudged in S’s favor may be enforced only against the proceeds
of the vehicle mortgaged.
Issue: Is the third paragraph of Article 1484 applicable to
the case at bar?
Held: No. First, the action instituted in the court a quo was
not for foreclosure of the chattel mortgage but for replevin; and
second, the amounts adjudged in favor of the plaintiff were
not part of the unpaid balance of the purchase price or in
the concept of deficiency judgment but were for the expenses
of the suit. (Universal Motors Corp. vs. Velasco, 98 SCRA 545
[1980].)
———— ———— ————
4. Chattel mortgage covers not only the personal property sold
on installment payments but other personal property of the vendeemortgagor.
Facts: B purchased from S two Ford sedans payable in
installments. B executed a promissory note and a deed of chattel mortgage covering not only the two new cars but also an
old car and his certificate of public convenience for the operation of a taxicab fleet. With the conformity of B, S assigned its
rights to the note and the mortgage to F. Due to the failure of B
to pay the installments, F foreclosed the chattel mortgage extra-judicially. At the public auction, F was the purchaser. Another auction sale was held because B’s obligation was not fully
satisfied by the sale of the vehicles. At the second sale, the franchise to operate the taxicab service was sold to F. B filed an
action for annulment of the contract of mortgage. The trial court
held the chattel mortgage was null and void insofar as the taxicab franchise and the old car were concerned.
Issue: Is the chattel mortgage valid insofar as the franchise
and the subsequent sale thereof are concerned?
Held: The resolution of said issue is unquestionably governed by the provisions of Article 1484 of the Civil Code. Under the article, the vendor of personal property the purchase
price of which is payable in installments, has the right, should
the vendee default in the payment of two or more of the agreed
installments, to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the
135
136
SALES
Art. 1484
purchased personal property, if one was constituted. Whichever right the vendor elects, he cannot avail of the other, these
remedies being alternative, not cumulative. Furthermore, if the
vendor avails himself of the right to foreclose his mortgage,
the law prohibits him from further bringing an action against
the vendee for the purpose of recovering whatever balance of
the debt secured not satisfied by the foreclosure sale.
Consequently, the lower court rightly declared the nullity
of the chattel mortgage in question insofar as the taxicab franchise and the used car of B are concerned. F has to content himself with the proceeds of the sale at the public auction of the
two cars which were sold on installment and mortgaged to S,
his assignor. To allow the sale of other properties would be
equivalent to obtaining a writ of execution against B concerning said properties which are separate and distinct from those
which were sold on installment. This would be contrary to public policy and the very spirit and purpose of the law limiting
the vendor’s right to foreclose the chattel mortgage only on the
thing sold. (Ridad vs. Filipinas Investment and Finance Corp., 120
SCRA 246 [1983]; see Levi Hermanos, Inc. vs. Pacific Commercial, 71 Phil. 587 [1941].)
Recovery of deficiency after foreclosure
prohibited.
(1) Purpose of prohibition. — The principal object of Article 1484
(3) is to remedy the abuses committed in connection with foreclosure of chattel mortgages. This amendment prevents 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. The almost invariable result of this procedure
was that the mortgagor found himself minus the property and still
owing practically the full amount of his original indebtedness. In
other words, in all proceedings for the foreclosure of chattel mortgages, the mortgagee is limited to the property included in the
mortgage. (Bachrach Motor Co. vs. Milan, 61 Phil. 409 [1935];
Manila Trading & Supply Co. vs. Reyes, 62 Phil. 461 [1935].) He has
no more cause of action against the purchaser or his guarantor.
(Luneta Motor Co. vs. Salvador, 108 Phil. 1057 [1960].) “Although,
of course, the purchaser must suffer the consequences of his imprudence and lack of foresight, the chastisement must not be to the
Art. 1484
NATURE AND FORM OF THE CONTRACT
137
extent of ruining him completely and, on the other hand, enriching the vendor in a manner which shocks the conscience.” (Manila
Trading and Supply Co. vs. Reyes, supra.)
(2) Prohibition not affected by assignment by vendor of his rights.
— The assignment by the vendor of his rights to the sale of personal property on installment basis covered by Article 1484 of the
Civil Code does not change the nature of the transaction between
the parties — the vendor and the vendee. It remains the same.
Hence, the assignee can have no better rights than the assignor.
Accordingly, where the obligation of the vendee had already been
discharged by sale at public auction of the property subject of the
chattel mortgage, no deficiency amount can be recovered by the
assignee. To rule otherwise would pave the way for subverting
the policy underlying Article 1484 on the foreclosure of chattel
mortgages over personal property sold on installment basis.
(Zayas, Jr. vs. Luneta Motor Company, 117 SCRA 726 [1982].)
Sale or financing of real estate
on installment payments.
(1) Rights of buyer. — In transactions or contracts involving the
sale or financing of real estate on installment payments (see Appendix “B.”), including residential condominium apartments, the
following are the rights given to the buyer who has paid at least
two (2) years of installments in case he defaults in the payment of
succeeding payments:
(a) To pay without additional interest, the unpaid
installments due within the total grace period earned by him
fixed at the rate of one (1)-month grace period for every one
(1) year of installment payments made. This right however,
shall be exercised by him only once in every five (5) years of
the life of the contract and its extension, if any; and
(b) 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
five (5) years of installments, an additional 5% every year but
not to exceed 90% of the total payments made. (Sec. 3, R.A. No.
6552 [Realty Installment Buyer Protection Act]; see Layug vs.
Intermediate Appellate Court, 67 SCRA 627 [1988].)
138
SALES
Art. 1484
(c) The buyer has the right to sell his right or assign the
same before actual cancellation of the contract (see Sec. 5, R.A.
No. 6552.) and to pay in advance any unpaid installment
anytime without interest and to have such full payment of the
purchase price annotated in the certificate of title covering the
property. (see Sec. 6, ibid.)
(2) Conditions for cancellation of sale by seller. — The actual cancellation shall take place after 30 days from receipt by the buyer
of the notice of cancellation or the demand for rescission by a
notarial act and upon full payment of the cash surrender value to
the buyer. Down payments, deposits or options on the contract
shall be included in the computation of the total number of
installment payments made. (Sec. 3, Ibid.; see McLaughlin vs.
Court of Appeals, 144 SCRA 693 [1986].)
In case the defaulting buyer has paid less than two (2) years
of installments, the seller shall give him a grace period of not less
than 60 days from the date the installment became due. If he fails
to pay the installments due at the expiration of the grace period,
the seller may cancel the contract after 30 days from receipt by
the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act. (Sec. 4, R.A. No. 6552.)
(3) Installment sales not covered. — The Act excludes from its
operation sales on installments of industrial lots, commercial
buildings, and sales to tenants under the Code of Agrarian Reforms.25 (Ibid.) In other words, in the case of such kind of property, the Act recognizes the vendor’s right unqualifiedly to cancel the sale upon the buyer’s default. (Luzon Brokerage Co., Inc.
vs. Maritime Bldg. Co., Inc., 86 SCRA 305 [1978]; see Art. 1592.)
(4) Purpose of the law. — The purpose is to protect buyers of
real estate on installment payments against onerous and oppressive conditions. (Sec. 2, R.A. No. 6552.)
In a case, the petitioner claims that he is entitled to a conveyance of at least eight (8) of the 12 lots subject of the conditional
sale, on the theory that since the total price of the 12 lots was
P120,000, each lot then had a value of P10,000 and, therefore, with
25
R.A. No. 3844, as amended; now, R.A. No. 6657, the Comprehensive Agrarian
Reform Law of 1988.
Art. 1485
NATURE AND FORM OF THE CONTRACT
139
his P80,000.00, he had paid in full the price for the 8 lots. In support of his claim, he invokes earlier rulings in Legarda Hermanos
vs. Saldaña (55 SCRA 324 [1978].) and Calasanz vs. Angeles. (135
SCRA 323 [1985].)
In the first case, the contract of sale provided for payment of
the price of two (2) subdivision lots at P1,500.00 each, exclusive
of interest, in 120 monthly installments and at time of default, the
buyer had already paid P3,582.00, inclusive of interest; and in the
second, the agreement had a price of P3,720.00 with interest at 7%
per annum, and at time of default, the buyer had paid installments
totaling P4,533.38, inclusive of interest. Upon considerations of
justice and equity and in the light of the general provisions of the
civil law, the Supreme Court resolved in the first case to direct
the conveyance of one of the lots to the buyer since he had already
paid more than the value thereof, and in the second, to disallow
cancellation by the seller and direct transfer of title to the buyer
upon payment of the first installments yet unpaid.
In both cases, the Supreme Court equitably allocated the benefits and losses between the parties to preclude undue enrichment
by one at the expense of the other. It was held that the cited precedents are not applicable. The petitioner cannot be permitted to
claim that all his payments should be credited to him in their
entirety, without regard whatever, to the damages his default
might have caused to the seller. In any event, it is no longer possible to apply the rulings in the said cases to the case at bar, i.e., to
resort to principles of equity and the general provisions of the Civil
Code in the resolution of the present controversy, because at the
time of the execution of the contract in question and the breach
thereof, R.A. No. 6552 was already in force and applicable thereto.
It precludes resort to equity and analogous provisions of the Civil
Code, it being axiomatic that where there is an adequate remedy
at law available to the parties, equity should not come into play.
(Layug vs. Intermediate Appellate Court, 167 SCRA 627 [1988].)
ART. 1485. The preceding article shall be applied
to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived
the lessee of the possession or enjoyment of the thing.
(1454-A-a)
140
SALES
Art. 1485
Lease of personal property
with option to buy.
(1) Nature of transaction. — Leases of personal property with
option to buy on the part of the lessee who takes possession or
enjoyment of the property leased are really sales of personalty
payable in installments. Accordingly, the rules provided in Article 1484 are equally applicable to the so-called leases of personal
property. Sellers desirous of making conditional sales of their
goods but do not wish openly to make a bargain in that form, for
one reason or another, have frequently resorted to the device of
making contracts in the form of leases either with option to the
buyer to purchase for small consideration at the end of the term
provided the so-called rent has been duly paid, or with the stipulation that if the rent throughout the term is paid, the title shall
thereupon vest on in the lessee. (Filinvest Credit Corp. vs. Court
of Appeals, 178 SCRA 188 [1989].)
(2) Purpose of provision. — The evident purpose of Article 1485
is to prevent vendors from resorting to this form of contract which
usually is in reality contract of sale of personal property payable
in installments in contravention of the provisions of Article 1484.
Through the set-up, the vendor by retaining ownership over the
property in the guise of being the lessor, retains likewise the right
to repossess the same, without going through the process of foreclosure, in the event the vendee-lessee defaults in the payment of
the installments. There arises, therefore, no need to constitute a
chattel mortgage over the movable sold. More important, the
vendor, after repossessing the property and, in effect, cancelling
the contract of sale, gets to keep all the installments-cumrental
already paid. (Filinvest Credit Corp. vs. Court of Appeals, 178
SCRA 188 [1989].)
EXAMPLE:
B entered into a contract called “contract of lease” with S
whereby B leased the car of S. It is stipulated that B, the alleged lessee, shall pay P10,000.00, upon signing the contract,
and on or before the 5th day of every month, P2,000.00 by
way of rental.
The contract fixed the value of the vehicle to be
P100,000.00. It also provided that B has the option to pur-
Art. 1486
NATURE AND FORM OF THE CONTRACT
chase the car for the said amount and the payment made by
way of rentals shall be deducted from the amount agreed in
the option and upon the full value fixed being paid, the lease
would terminate and title to the leased property would be
transferred to B; and S would have the right to terminate the
contract and repossess the vehicle should B fail to make payments on the dates specified, and in such event, the payments
theretofore made should remain the property of S and not
be recoverable by B.
There can hardly be any question that the contract in this
case is one of sale on installments and not lease, with the socalled monthly rentals being in truth monthly amortizations
on the price of the car, and is, therefore, subject to the provision
that “when the lessor had deprived the lessee of the enjoyment
or possession” of the personal property, he shall have no further action against the lessee “to recover any unpaid balance”
owing by the latter, “any agreement to the contrary being void.”
In choosing the alternative remedy of depriving the lessee of
the enjoyment of the leased property, the lessor, in such case,
waives the right to bring an action for unpaid rentals on the
said vehicle. (see U.S. Commercial vs. Halili, 93 Phil. 271 [1953];
Manila Gas Corporation vs. Calupitan, 66 Phil. 646 [1938]; see
Elisco Tool Manufacturing Corp. vs. Court of Appeals, 307 SCRA
731 [1999].)
(3) Repossession by lessor need not be through court action. —
Even where the lessee voluntarily delivers the property to the
lessor, the case is not taken out of the purview of Article 1485 if
he does so in obedience to the lessor’s demands. The article
does not require that the deprivation of the enjoyment of the
property be brought about through court action. Specially where
the contract specifically authorizes the lessor to repossess the
property whenever the lessee defaults in the payment of rent,
court action for such purpose is not essential. (U.S. Commercial Co. vs. Halili, supra.)
ART. 1486. In the cases referred to in the two preceding articles, a stipulation that the installments or
rents paid shall not be returned to the vendee or lessee shall be valid insofar as the same may not be unconscionable under the circumstances. (n)
141
142
SALES
Art. 1487
Stipulation authorizing the forfeiture
of installments or rents paid.
In sales of personal property by installments or leases of personal property with option to buy, the parties may stipulate that
the installments or rents paid are not to be returned. Such a stipulation is valid “insofar as the same may not be unconscionable
under the circumstances’’; otherwise, the court has the power to
order the return of a portion of the total amount paid in
installments or rents. (Zaragosa vs. Dimayuga, [C.A.] 62 O.G. 7028;
see Art. 1229.)
Thus, in a case, where the monthly installment payable by
defendants (buyers) was P774.00 and the P5,655.92 installment
payments corresponded only to seven (7) monthly installments,
the treatment of the installment as rentals as stipulated in the
contract of sale for failure of the defendants to comply with the
terms thereof, was held not unconscionable, since they admitted
having used the air-conditioners sold for 22 months, meaning they
did not pay 15 monthly installments on the said air-conditioners
and were thus using the same free for said period to the prejudice of the plaintiff (seller). (Delta Motor Sales Corp. vs. Nui Kim
Duan, 213 SCRA 259 [1992].) In another case, the forfeiture of the
installments paid as rentals, was applied only to the purchase
price of P3,556 which was considered as fair and reasonable rental
for the period in which the property was under the control of the
awardee of the homelot but not to the overpayment of the amount
of P8,244.00 for “a contrary ruling would unjustly enrich the vendor to the prejudice of the vendee.’’ (Gomez vs. Court of Appeals,
134 SCAD 206, 340 SCRA 720 [2000].)
ART. 1487. The expenses for the execution and
registration of the sale shall be borne by the vendor,
unless there is a stipulation to the contrary. (1455a)
Expenses for execution and registration.
Under this article, the vendor has the duty to pay not only the
expenses for the execution of the sale but also for the registration
of the same in the absence of any agreement between the parties
to the contrary.
Art. 1487
NATURE AND FORM OF THE CONTRACT
143
Expenses incurred subsequent to the transfer of title are to be
borne by the buyer, unless caused by the fault of the seller.
ILLUSTRATIVE CASES:
(1) Vendee assumed liability for taxes and other expenses.
Facts: In the Deed of Absolute Sale, B, buyer, assumed liability for taxes and other expenses “relative to the execution
and/or implementation” of the Deed “including, among others, documentation, documentary and service stamps, expenses
for registration and transfer of titles.’’
Issue: Is B liable for overdue real estate taxes?
Held: No. The interpretation that B assumed a liability in
overdue real estate taxes for the years prior to the contract of
sale when he was neither the owner nor the beneficial owner of
the property is incongruent to the tax policy that the user of the
property bears the tax, because there was no immediate transfer of possession of the property previous to the full payment
of the purchase price. If he intended to assume liability, the contract should have specifically stated “real estate taxes” due for
the previous years. The payments made under protest cannot
be construed to be an admission of liability. Hence, the tax assessed and collected should be refunded. (Estate of C.T. Lim vs.
City of Manila, 182 SCRA 482 [1990].)
———— ———— ————
2. The Decision commands the petitioner (seller) to “execute a
Deed of Absolute Sate in favor of private respondents (buyers) and
deliver the corresponding certificate of title to them.”
Facts: See above.
Issue: Can it be inferred from these directives that petitioner
should also pay for the expenses in notarizing the deed and
obtaining a new certificate of title?
Held: No. “The obligation to pay for such expenses is unconnected with and distinct from the obligations to execute and
deliver the deed of absolute and the certificate of title. Since
there is no qualification that the duties to execute and to deliver shall also compel petitioner to assume the expenses for
transferring the pertinent title in favor of private respondents,
the ordinary and literal meaning of the words ‘execute’ and
144
SALES
Art. 1488
‘deliver’ should prevail, that is, for petitioner to perform all
necessary formalities of the deed of sale and give or cede the
res of the certificate of title (that certificate which naturally must
be in their possession since petitioner cannot give what it does
not have) to the actual or constructive control of private respondents. Needless to stress, petitioner can actually discharge
these obligations without settling for its own account the expenses which private respondents are demanding. In this regard, petitioner can appear before the notary public for
notarization of the deed of absolute sale and assist in the cancellation of the certificate of title in its name by giving this certificate together with the deed of absolute sale to private respondents for presentation at the Registry of Deeds, which it
has several times expressed willingness to do so.’’ (Jose Clavano,
Inc. vs. Housing and Land Use Regulatory Board, 378 SCRA 172
[2002].)
ART. 1488. The expropriation of property for public use is governed by special laws. (1456)
Expropriation of property for public use.
The procedure for the exercise of the power of eminent domain is provided for in Rule 67 of the Rules of Court. Expropriation must be decreed by competent authority and for public use
and always upon payment of just compensation. (Art. 435, par. 1,
Civil Code; Art. III, Sec. 9, Constitution.)
— oOo —
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ART. 1489. All persons who are authorized in this
Code to obligate themselves, may enter into a contract of sale, saving the modifications contained in
the following articles.
Where necessaries are sold and delivered to a
minor or other person without capacity to act, he must
pay a reasonable price therefor. Necessaries are those
referred to in article 290. (1457)
Person who may enter into a contract
of sale.
As a general rule, all persons, whether natural or juridical, who
can bind themselves have also legal capacity to buy and sell. There
are exceptions to this rule in those cases when the law determines
that a party suffers from either absolute or relative incapacity.
Kinds of incapacity.
Such incapacity is absolute in the case of persons who cannot
bind themselves; and relative where it exists only with reference
to certain persons or a certain class of property. (Wolfson vs. Estate of Martinez, 20 Phil. 340 [1911].) Persons who are merely relatively incapacitated are mentioned in Articles 1490-1491.
There are no incapacities except those provided by law and
such incapacities cannot be extended to other cases by implication for the reason that such construction would be in conflict with
the very nature of Article 1489. (Ibid.)
145
146
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Art. 1490
Liability for necessaries of minor or other
person without capacity to act.
Necessaries are those things which are needed for sustenance,
dwelling, clothing, medical attendance, education and transportation according to the financial capacity of the family of the incapacitated person. (see Art. 194, Family Code.) Whether the nature of the contract is such that it can under any circumstances,
be regarded as a contract for necessaries, is a question which depends upon the facts of the particular case.
Generally, the contracts entered into by a minor and other
incapacitated persons (e.g., insane or demented persons, deafmutes who do not know how to write), are voidable. (Arts. 1327,
1390.) However, where necessaries are sold and delivered to him
(without the intervention of the parent or guardian), he must pay
a reasonable price therefor. (Art. 1489, par. 2.) The contract is, therefore, valid but the minor has the right to recover any excess above
a reasonable value paid by him.
Sale by minors.
The courts have laid down the rule that the sale of real estate
effected by minors who have already passed the ages of puberty
and adolescence and are now in the adult age, when they pretended to have already reached their majority, while in fact they
have not, is valid, and they cannot be permitted afterwards to
excuse themselves from compliance with the obligations assumed
by them or to seek their annulment. (see Mercado and Mercado
vs. Espiritu, 37 Phil. 265 [1917].)
The doctrine is entirely in accord with the provisions of the
Rules of Court (see Rule 131, Sec. 1.) and the Civil Code (see Art.
1431.) which determine cases of estoppel.
ART. 1490. The husband and the wife cannot sell
property to each other, except:
(1) When a separation of property was agreed
upon in the marriage settlements; or
Art. 1490
CAPACITY TO BUY OR SELL
147
(2) When there has been a judicial separation of
property under article 191.* (1458a)
Relative incapacity of husband
and wife.
(1) The husband and the wife are prohibited by the above
article from selling property to each other. A sale between husband
and wife in violation of Article 1490 is inexistent and void from
the beginning because such contract is expressly prohibited by law.
(Art. 1409[7]; Uy Siu Pin vs. Chua Hue vs. Cantollas, 70 Phil. 55
[1940]; Camia de Reyes vs. Reyes de Ilano, 63 Phil. 629 [1936];
Medina vs. Collector of Internal Revenue, 1 SCRA 302 [1961].)
(2) They are also prohibited from making donations to each
other during the marriage except moderate gifts on the occasion
of any family rejoicing. (Art. 87, Family Code.) However, if there
has been a separation of property agreed upon in the marriage
settlements, or when there has been a judicial separation of property decreed between them by the court, the sales between husband and wife are allowed. They have, therefore, in the two cases
mentioned, capacity to buy from or to sell to each other.
Incidentally, a marriage settlement (also called “ante-nuptial
contract”) is an agreement entered into by persons who are about
to be united in marriage, and in consideration thereof, for the
purpose of fixing the property relations that would be followed
by them for the duration of the marriage. (see Arts. 74-80, Ibid.)
Reason for prohibition under Article 1490.
The reason for the law is not based so much on the union of
the personality of the husband and wife nor on the weakness of
the sex and on the possibility that the husband will induce his wife
to engage in ruinous operations, but primarily, for the protection
of third persons1 who, relying upon supposed property of either
*Now, Art. 135, Family Code.
1
The husband cannot alienate or encumber any real property of the conjugal partnership without the wife’s consent. (Art. 166.) An action to annul the questioned transaction may be instituted by the wife during the marriage and within 10 years from the
transaction. (Art. 173.) The lack of consent makes the transaction merely voidable. The
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Art. 1491
spouse, enters into a contract with either of them only to find out
that the property relied upon was transferred to the other spouse.
(see 10 Manresa 95-96.)
Persons permitted to question sale.
(1) Although certain transfers between husband and wife are
prohibited under Article 1490, such prohibition can be taken advantage of only by persons who bear such relation to the parties
making the transfer or to the property itself that such transfer
interferes with their rights or interests. Unless such a relationship
appears, the transfer cannot be attacked. Thus, the heirs of either
spouse, as well as creditors at the time of the transfer, can attack
the validity of the sale but not creditors who became such only
after the transaction. (Cook vs. McMicking, 27 Phil. 10 [1914].)
(2) The government is always an interested party in all matters involving taxable transactions. It is competent to question
their validity or legitimacy whenever necessary to block tax evasion. It can impugn sales between husband and wife. (Medina vs.
Collector of Internal Revenue, supra.)
ART. 1491. The following persons cannot acquire
by purchase, even at a public or judicial auction, either in person or through the mediation of another:
(1) The guardian, the property of the person or
persons who may be under his guardianship;
(2) Agents, the property whose administration or
sale may have been entrusted to them, unless the
consent of the principal has been given;
(3) Executors and administrators, the property of
the estate under administration;
(4) Public officers and employees, the property of
the State or of any subdivision thereof, or of any govlegal prohibition against the disposition of conjugal property by one spouse without the
consent of the other has been established for the benefit, not of third persons, but only of
the other spouse for whom the law desires to save the conjugal partnership from damages that might be caused. (Villaranda vs. Villaranda, 423 SCRA 571 [2004]; Papa vs.
Montenegro, 54 Phil. 331 [1930].)
Art. 1491
CAPACITY TO BUY OR SELL
149
ernment owned or controlled corporation, or institution, the administration of which has been entrusted
to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take
part in the sale;
(5) Justices, judges, prosecuting attorneys, clerks
of superior and inferior courts, and other officers and
employees connected with the administration of justice, the property and rights in litigation or levied upon
an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring
by assignment and shall apply to lawyers, with respect
to the property and rights which may be the object of
any litigation in which they may take part by virtue of
their profession;
(6) Any others specially disqualified by law.
(1459a)
Incapacity by reason of relation
to property.
The above article enumerates the persons who, by reason of
the relation of trust with the persons under their charge or their
peculiar control over the property, are prohibited from acquiring
said property either directly or indirectly and whether in private
or public sale. They are the: (1) guardians; (2) agents; (3) executors and administrators; (4) public officers and employees; (5)
judicial officers, employees and lawyers; and (6) others especially
disqualified by law. (Rubias vs. Batiller, 51 SCRA 120 [1973].)
The persons disqualified to buy referred to in Articles 1490
and 1491 are also disqualified to become lessees of the things
mentioned thereon. (Art. 1646.)
Reason for prohibitions under
Article 1491.
The disqualifications imposed by Article 1491 on the person
enumerated is grounded on public policy considerations which
disallow the transactions entered into by them, whether directly
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Art. 1491
or indirectly, in view of the fiduciary relationship involved or the
peculiar control exercised by these individuals over the properties or rights covered. (Mananquil vs. Villegas, 189 SCRA 335
[1990].)
The prohibitions seek to prevent frauds on the part of such
persons and minimize temptations to the exertion of undue and
improper influence. The fear that greed might get the better of
the sentiments of loyalty and disinterestedness is the reason underlying Article 1491. The law does not trust human nature to
resist the temptations likely to arise out of antagonism between
the interest of the seller and buyer. (23 Scaevola 403; Gregorio
Araneta, Inc. vs. Tuazon de Paterno, 91 Phil. 786 [1952].)
Prohibition with respect to guardians.
The relation between guardian and ward is so intimate, the
dependence so complete and the influence so great that any transaction between the two parties entered while the relationship
exists are, in the highest sense, suspicious and presumptively
fraudulent. This influence is presumed to last while the guardian’s functions are to any extent still unperformed, while the property is still under his control and until the accounts have been finally settled. (39 Am. Jur. 2d 160.)
Prohibition with respect to agents.
The agent’s incapacity to buy his principal’s property rests on
the fact that the agent and the principal form one juridical person. Like the guardian, the agent stands in a fiduciary relation with
his principal. A sale made by an agent to himself, directly or indirectly, without the permission of the principal is ineffectual. (see
Gregorio Araneta, Inc. vs. Tuazon de Paterno, supra; Barton vs.
Leyte Asphalt and Mineral Co., 46 Phil. 938 [1924].) The consent
of the principal removes the transaction out of the prohibition
contained in Article 1491(2). (Distajo vs. Court of Appeals, 132
SCAD 577, 339 SCRA 52 [2000].)
(1) The incapacity of the agent is only against buying the property he is required to sell during the existence of the relationship.
Therefore, an agent can buy for himself the property after the ter-
Art. 1491
CAPACITY TO BUY OR SELL
151
mination of the agency (Valera vs. Velasco, 51 Phil. 695 [1928].) or
other properties different from those he has been commissioned
to sell. (Moreno vs. Villonea, [C.A.] 40 O.G. 2322.)
(2) Of course, the agent may buy property placed in his hands
for sale or administration if the principal gives his consent thereto.
(Cui vs. Cui, 100 Phil. 913 [1957].)
(3) The prohibition does not apply where the sale of the property in dispute was made under a special power inserted in or
attached to the real estate mortgage pursuant to Section 5 of Act
No. 3135, as amended, a special law which governs extra-judicial
foreclosure of real estate mortgage. The power to foreclose is not an
ordinary agency that contemplates exclusively the representation
of the principal by the agent but is primarily an authority conferred upon the mortgagee for the latter’s own protection. By virtue of the exception, the title of the mortgagee-creditor over the
property cannot be impeached or defeated on the ground that the
mortgagee cannot be a purchaser at his own sale. (Fiestan vs.
Court of Appeals, 185 SCRA 751 [1990].)
Prohibition with respect to executors
and administrators.
The prohibition refers only to properties under the administration of the executor or administrator at the time of the acquisition and does not extend, therefore, to property not falling within
this class.
Executors do not administer the hereditary rights of any heir.
Such rights do not form part of the property delivered to the executor for administration. Consequently, the prohibition in No.
(3) of Article 1491 does not apply to a purchase by an executor of
such hereditary rights (e.g., 1/10 interest in the estate), even in
those cases in which the executor administers the property pertaining to the estate. (Naval vs. Enriquez, 3 Phil. 669 [1904]; see
Garcia vs. Rivera, 95 Phil. 831 [1954].)
ILLUSTRATIVE CASE:
Administrator sold certain properties of the estate to his son for a
grossly low price.
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Art. 1491
Facts: S, administrator of the estate of his deceased mother,
was authorized by the court to sell certain described properties
of the estate to settle its outstanding obligations at the best price
obtainable. The sale was made to B, S’s son, for P75,000. On the
same date, B executed a deed of sale of the same property for
P80,000 in favor of C. Z, etc., heirs of X, filed an action for the
annulment/revocation of the two sales. C claimed that the actual consideration was P225,000 and being a purchaser in good
faith and for value, his title to the property is indefeasible pursuant to law. It appears that S entered into a “mutual agreement of promise to sell’’ to spouses H and W the property already sold to C for P220,000 for which they paid P70,000 as
earnest money.
H and W alleged that both sales to B and C were simulated
and fictitious, made to defraud the estate and other heirs, and
that C supplied the consideration of the sale to B who was not
gainfully employed. After several hearings, the court allowed
all the interested parties to bid for the property. C offered to
buy for P280,000. H and W counter-offered at P282,000, spot
cash, which was increased to P300,000. Later all the parties,
except H and W and B, submitted an amicable settlement seeking approval of the two sales and accepting the offer of C. H
and W questioned the court’s approval of the amicable settlement and the non-acceptance of their offer.
Issue: Did the assent of practically all the heirs to the compromise agreement justify its approval by the court?
Held: No. (1) Sale is illegal, irregular and fictitious. — As administrator, S occupies a position of the highest trust and confidence. In the discharge of his functions, an administrator should
act with utmost circumspection to preserve the estate and guard
against its dissipation so as not to prejudice its creditors and
the heirs of the decedent who are entitled to the net residue
thereof. In the case at bar, the sale was made necessary “in order to settle other existing obligations of the estate, but it was
made, of all people, to his son B, and for a grossly low price of
only P75,000. B had no income whatsoever, was, in fact, still a
dependent of his father, and not a single centavo of the consideration was ever accounted for nor reported by B to the probate court. It was only after the sales were questioned in court
by H and W that B was compelled to admit that the actual consideration of the sale to C was P200,000.
Art. 1491
CAPACITY TO BUY OR SELL
153
The sale to B was not submitted to the probate court for
approval as mandated by the order authorizing S to sell. The
sale was indubitably illegal, irregular, and fictitious, and the
court’s approval of the assailed compromise agreement violated
Article 1409 and “cannot work to ratify a fictitious contract
which is non-existent and void from the very beginning.”
(2) Consent of heirs not a ground for court’s approval of sale. —
The assent of the parties-signatories “to such an illegal scheme
does not legalize the same nor does it impose an obligation upon
the court to approve the same to the prejudice not only of the
creditors of the estate, and of the government by the non-payment of the correct amount of taxes legally due from the estate.”
(3) Offer of H and W more advantageous. — The offer of H
and W “is decidedly more beneficial and advantageous not only
to the estate, the heirs of the decedent, but more importantly, to
its creditors for whose account and benefit the sale was made.
No satisfactory and convincing reason appeared given for the
rejection and non-acceptance of said offer, thus giving rise to a
well-grounded suspicion that a collusion of some sort exists
between the administrator and the heirs to defraud the creditors and the government.” (Lao vs. Genato, 137 SCRA 77 [1985].)
Prohibition with respect to public officials
and employees.
The prohibition refers only to properties: (1) belonging to the
State, or of any subdivision thereof, or of any government-owned
or -controlled corporation or institution, (2) the administration of
which has been entrusted to the public officials or employees.
Thus, a provincial governor or treasurer entrusted with the administration of property belonging to a province cannot buy said
property while the school superintendent who has no charge of
the same is not within the scope of the prohibition.
Note that the prohibition includes judges and government
experts who, in any manner, take part in the sale.
ILLUSTRATIVE CASE:
Land foreclosed by GSIS was sold by it at public auction to the
wife of a GSIS official.
Facts: For failure to comply with the conditions of sale, GSIS
cancelled the sale of a parcel of land to MPC and later sold the
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Art. 1491
property at public auction to T (as the highest bidder), the wife
of the Chief, Retirement Division, GSIS. MPC questioned the
validity of the sale to T.
Issue: Does the sale fall under the prohibited transactions
under Article 1491?
Held: Yes. (1) GSIS official with influence or authority. — “Public officers who hold positions of trust may not bid directly or
indirectly to acquire properties foreclosed by their offices and
sold at public auction. A division chief of the GSIS is not an
ordinary employee without influence or authority. The mere
fact that the husband of T exercises ample authority with respect to a particular activity, i.e., retirement, shows that his influence cannot be lightly regarded. The point is that he is a
public officer and his wife acts for and in his name in any transaction with the GSIS.
(2) Sale is void. — If he is allowed to participate in the public bidding of properties foreclosed or confiscated by the GSIS
there will always be the suspicion among other bidders and
the general public that the insider official has access to information and connections with his fellow GSIS officials as to allow him to eventually acquire the property. It is precisely the
need to forestall such suspicions and to restore confidence in
the public service that the Civil Code declares such transactions to be void from the beginning and not merely voidable.
(3) Reasons for prohibition. — The reasons are grounded on
public order and public policy.2 Assuming the transaction to be
fair and not tainted with irregularity, it is still looked upon with
disfavor because it places the officer in a position which might
become antagonistic to his public duty. (Maharlika Broadcasting
Corp. vs. Tagle, 142 SCRA 553 [1986].)
Note: Here, the GSIS official was not entrusted with the administration of the property in question.
Prohibition with respect to judges, etc.,
and lawyers.
The prohibition in Article 1491(5) applies only to the sale or
assignment of property which is the subject of litigation to the
2
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; x x x.
Art. 1491
CAPACITY TO BUY OR SELL
155
persons disqualified therein. For the prohibition to operate, the
sale or assignment must take place during the pendency of the
litigation involving the property. (Laig vs. Court of Appeals, 86
SCRA 641 [1978]; Valencia vs. Cabanteng, 196 SCRA 302 [1991].)
The prohibition applies when, for example, a lawyer has not paid
for the property and it was merely assigned to him in consideration of legal services rendered at a time when the property is still
subject of a pending case. (Ordonio vs. Eduarte, 207 SCRA 229
[1992].) The prohibition on purchase is all embracing to include
not only sales to private individuals but also public or judicial
sales. (Ramos vs. Ngaseo, 445 SCRA 529 [2004].)
(1) When property considered “in litigation.” — For property to
be considered “in litigation,” it is not required that some contest
or litigation over the property should have been tried by the judge.
Such property is “in litigation” from the moment it became subject to the judicial action of the judge who afterwards purchased
it. Hence, a purchase made by judge at a public auction of a property pursuant to an order of execution issued by said judge is
within the prohibition whether or not the property had been the
subject of litigation in his court. (Gontingco vs. Pobinguit, 35 Phil.
81 [1911].)
There is no violation of the prohibition (although it may be
improper under the Canons of Judicial Ethics) where the judge
purchased the property in question after the decision involving
the property had already become final because none of the parties therein filed an appeal within the reglementary period; hence,
the same was no longer in litigation. (Macariola vs. Asuncion, 114
SCRA 77 [1982].)
(2) Where property acquired by lawyer in foreclosure sale after termination of case. — A lawyer cannot purchase, directly or indirectly,
the property or rights which are the subject of litigation in which
he takes part by virtue of his profession. (see Rubias vs. Satiller,
51 SCRA 120 [1973].) The fact that the property in question was
first mortgaged by the client to his lawyer and only subsequently
acquired by the latter in a foreclosure sale long after the termination of the case will not remove it from the scope of the prohibition for at the time the mortgage was executed the relationship of
lawyer and client still existed, the very relation of trust and confidence sought to be protected by the prohibition, when a lawyer
156
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Art. 1491
occupies a vantage position to press upon or dictate terms to a
harassed client. To rule otherwise would be to countenance indirectly what cannot be done directly. (Fornilda vs. Regional Trial
Court, 166 SCRA 281 [1988].)
(3) Liability of lawyer for violation of prohibition. — A violation
of the prohibition constitutes a breach of professional ethics and
malpractice for which the lawyer may be reprimanded, suspended
or disbarred from the practice of the legal profession. Good faith
is not a defense. (In re Attorney Melchor E. Ruste, 70 Phil. 243
[1940]; Hernandez vs. Villanueva, 40 Phil. 775 [1920]; Mananquil
vs. Villegas, 189 SCRA 335 [1990].)
(4) Where lawyer member of law firm involved. — Contracts of
sale or lease where the vendee or lessee is a partnership, of which
a lawyer is a member, over a property involved in a litigation in
which he takes by virtue of his profession are covered by the prohibition.
(5) Cases not covered. — The prohibition does not include sale
of the property of the client effected before it became involved in
the action (Gregorio Araneta, Inc. vs. Tuazon de Paterno, 91 Phil.
786 [1952].); nor does it apply to an assignment of the amount of
a judgment made by a person to his attorney in payment of professional services in other cases (Municipal Council of Iloilo vs.
Evangelista, 55 Phil. 290 [1930].); nor to the sale of a parcel of
land, acquired by a client to satisfy a judgment in his favor, to his
attorney as long as the property was not the subject of the litigation. (Daroy vs. Abecia, 100 SCAD 376, 298 SCRA 239 [1998].) It
has also been held that the law does not prohibit a lawyer from
charging a contingent fee (to be given in a case the suit is won)
based on a certain percentage of the value of the property in litigation (Recto vs. Harden, 100 Phil. 427 [1954].), because the payment of said fee is not made during the pendency of the litigation but only after judgment has been rendered in the case handled by the lawyer. In fact, under the 1988 Code of Professional
Responsibility (Rule 16.03, Canon 10 thereof.), a lawyer may have
a lien over funds and property of his client and may apply so
much thereof as may be necessary to satisfy his lawful fees and
disbursements. (Fabillo vs. Intermediate Appellate Court, 195
SCRA 28 [1991].)
Art. 1491
CAPACITY TO BUY OR SELL
157
Other persons especially disqualified.
Examples of persons especially disqualified by law are:
(1) aliens who are disqualified to purchase private agricultural lands (Art. XII, Secs. 3, 7, Constitution; see Krivenko vs.
Register of Deeds, 79 Phil. 461 [1947].);
(2) an unpaid seller having a right of lien or having estopped
the goods in transitu, who is prohibited from buying the goods
either directly or indirectly in the resale of the same at a public or
private sale which he may make (Art. 1533, par. 5; Art. 1476[4].);
and
(3) The officer conducting the execution sale or his deputies
cannot become a purchaser, or be interested directly or indirectly
in any purchase at an execution sale. (Sec. 19, Rule 39, Rules of
Court.)
In the case of aliens, the disqualification is founded on express
provision of the Constitution and not by reason of any fiduciary
relationship. It has been held, however, that where a land is sold
to an alien who later sold it to a Filipino, the sale to the latter cannot be impugned. In such case, there would be no more public
policy to be served in allowing the Filipino seller or his heirs to
recover the land as the same is already owned by a qualified person. (Herrera vs. Tuy Kim Guan, 1 SCRA 406 [1961]; Godinez vs.
Fong Pak Luen, 120 SCRA 223 [1983].)
Effect of sale in violation of prohibition.
If the sale is made, would the transaction be void or merely
voidable?
(1) With respect to Nos. 1 to 3, the sale shall only be voidable
because in such cases only private interests are affected. (see
Wolfson vs. Estate of Martinez, 20 Phil. 340 [1911].) The defect can
be cured by ratification of the seller. (see Arts. 1392-1396.)
(2) With respect to Nos. 4 to 6, the sale shall be null and void,
public interests being involved therein. (see Art. 1409[1]; Rubias
vs. Batiller, 51 SCRA 120 [1973].)
In a case, the Supreme Court affirmed the decision of a lower
court declaring invalid the sale made by the client in favor of his
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SALES
Art. 1492
attorney. (Director of Lands vs. Abragat, 53 Phil. 147 [1929]; see
Fornilda vs. Regional Trial Court, 166 SCRA 281 [1988].)
Nullity of prohibited contracts
differentiated.
(1) Public officers, etc., justices, etc., and lawyers. — The nullity
of such prohibited contracts, i.e., by public officers and employees of government property entrusted to them and by justices,
judges, fiscals, and lawyers of property and rights in litigations
submitted to or handled by them, under paragraphs (4) and (5) is
definite and permanent and cannot be cured by ratification. The
public interest and public policy remain paramount and do not
permit of compromise or ratification. In this aspect, their disqualification is grounded on public policy.
(2) Guardian, agents, and administrators. — The disqualification
of public officers differs from the first three cases of guardians,
agents, and administrators, as to whose transactions, it has been
opined that they may be “ratified” by means of and in the form
of a new contract, in which case its validity shall be determined
only by the circumstances at the time of execution of such new
contract.
(a) The causes of nullity which have ceased to exist cannot impair the validity of the new contract. Thus, the object
which was illegal at the time of the first contract, may have
already become lawful at the time of the ratification or second
contract; or the service which was impossible may have become possible; or the intention which could not be ascertained
may have been clarified by the parties.
(b) The ratification or second contract could then be valid
from its execution; however, it does not retroact to the date of
the first contract. (Director of Lands vs. Abragat, supra.)
ART. 1492. The prohibitions in the two preceding
articles are applicable to sales by virtue of legal redemption, compromises and renunciations. (n)
Art. 1492
CAPACITY TO BUY OR SELL
159
Prohibition extends to sales in legal
redemption, etc.
(1) The relative incapacity provided in Articles 1490 and 1491
applies also to sales by virtue of legal redemption (see Art. 1619.),
compromises, and renunciations.
(a) Compromise is a contract whereby the parties, by reciprocal concessions, avoid a litigation or put an end to one already commenced. (Art. 2028.) It is the amicable settlement of
a controversy.
(b) By renunciation, a creditor gratuitously abandons his
right against his creditor. The other terms used by the law are
condonation and remission. (see Art. 1270.)
(2) The persons disqualified to buy referred to in Articles 1490
and 1491 are also disqualified to become lessees of the things
mentioned therein. (Art. 1646.)
— oOo —
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Chapter 3
EFFECTS OF THE CONTRACT WHEN
THE THING SOLD HAS BEEN LOST
ART. 1493. If at the time the contract of sale is perfected, the thing which is the object of the contract
has been entirely lost, the contract shall be without
any effect.
But if the thing should have been lost in part only,
the vendee may choose between withdrawing from
the contract and demanding the remaining part, paying its price in proportion to the total sum agreed upon.
(1460a)
Effect of loss of thing at the time
of sale.
The loss or injury referred to in this article is one which has
taken place before or at the time the contract of sale is perfected.
It must be distinguished from the loss or injury mentioned in
Articles 1480 and 1504 which occurs after the contract is perfected
but prior to the time of delivery.
(1) Thing entirely lost. — Where the thing is entirely lost at the
time of perfection, the contract is inexistent and void (Art. 1409[3].)
because there is no object. (Art. 1318, par. 2.) There being no contract, there is no necessity to bring an action for annulment.
(2) Thing only partially lost. — If the subject matter is only
partially lost, the vendee may elect between withdrawing from
the contract and demanding the remaining part, paying its proportionate price. (Art. 1493, par. 2.)
160
Art. 1494
EFFECTS OF THE CONTRACT WHEN THE THING
SOLD HAS BEEN LOST
161
EXAMPLES:
(1) S sold his car to B. Unknown to both of them, the car
has been totally destroyed before they agreed on the sale. In
this case, there is no valid contract of sale for lack of object. S,
as owner, bears the loss and B does not have to pay for the
price.
(2) If the car sold is only partially destroyed, there still remains of the object. However, since it is not of the character or
in the condition contemplated by the parties, the buyer may
withdraw from the contract or demand the delivery of the car,
paying its proportionate price.
When a thing considered lost.
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. (Art. 1189[2].)
The word “perishes” is sufficiently inclusive as to cover a case
where there has been material deterioration or complete change
in the nature of the thing in such a manner that it loses its former
utility taking into consideration the time the contract was entered
into. (see 10 Manresa 129.)
ART. 1494. Where the parties purport a sale of specific goods, and the goods without the knowledge of
the seller have perished in part or have wholly or in a
material part so deteriorated in quality as to be substantially changed in character, the buyer may at his
option treat the sale:
(1) as avoided; or
(2) as valid in all of the existing goods or in so
much thereof as have not deteriorated, and as binding the buyer to pay the agreed price for the goods in
which the ownership will pass, if the sale was divisible. (n)
Effect of loss in case of specific goods.
Article 1493 applies to a sale of specific thing. Article 1494, on
the other hand, applies to sales of goods, that is, the object of the
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SALES
Art. 1494
sale consists of a mass of “specific goods” which means “goods
identified and agreed upon at the time a contract of sale is made.”
(Art. 1636.)
Both articles have actually the same essence providing two
alternative remedies to the buyer in case of deterioration or partial loss of the object prior to the sale, namely: to rescind or withdraw from the contract or to give it legal effect, paying the proportionate price of the remaining object.
(1) Sale divisible. — The second option is available only if the
sale is divisible. (Art. 1494, par. 2.) A contract is divisible when its
consideration is made up of several parts. (see Art. 1420.) When
the consideration is entire and single, the contract is indivisible.
(2) Sale indivisible. — Suppose the sale is not divisible, what
price is the buyer to pay for the remaining goods if he elects to
continue with the sale? It is believed that the buyer should be
made to pay only the proportionate price of the remaining goods
as provided for in paragraph 2 of the preceding article. If the sale
is indivisible, the object thereof may be considered as a specific
thing.
EXAMPLE:
Suppose the subject matter sold was 100 cavans of rice in
the warehouse of S at P1,000.00 per cavan or for a total price of
P100,000.00. If 60 cavans of rice were lost, B may, at his option,
withdraw from the contract without the obligation to pay for
the rice; or demand the delivery of the 40 cavans, but binding
him to pay the agreed price thereof which is P40,000.00.
If the contract is indivisible, that is, the 100 cavans of rice
were sold for P100,000.00 fixed without consideration of the
number of cavans, B should be made to pay only the proportionate price of 40 cavans which is also P40,000.00.
— oOo —
163
Chapter 4
OBLIGATIONS OF THE VENDOR
SECTION 1. — General Provisions
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. (1461a)
Principal obligations of the vendor.
The principal obligations of a vendor are:
(1) to transfer the ownership of the determinate thing sold;
(2) to deliver the thing, with its accessions and accessories, if
any, in the condition in which they were upon the perfection of
the contract (Art. 1537.);
(3) to warrant against eviction and against hidden defects
(Arts. 1495, 1547.);
(4) to take care of the thing, pending delivery, with proper
diligence (see Art. 1163.); and
(5) to pay for the expenses of the deed of sale, unless there is
a stipulation to the contrary. (Art. 1487.)
Obligation to transfer ownership and deliver.
(1) Ownership by vendor at time of perfection of contract not essential. — The vendor need not be the owner of the thing at the
time of perfection of the contract; it is sufficient that he has “a right
to transfer the ownership thereof at the time it is delivered.” (Art.
1459.) The obligation to transfer ownership and to deliver is really implied in every contract of sale. (see Arts. 1458, 1459, 1547.)
163
164
SALES
Art. 1495
One who sells something he does not yet own is bound by the
sale when he acquires it later. (Bucton vs. Gabar, 55 SCRA 499
[1974].)
When a property belonging to a person is unlawfully taken
by another, the former has the right of action against the latter for
the recovery of the property. Such right may be transferred by the
sale or assignment of the property and the transferee can maintain such action against the wrongdoer. (Heirs of Q. Seraspi vs.
Court of Appeals, 331 SCRA 293 [2000]; Waite vs. Peterson, 8 Phil.
235 [1907].)
ILLUSTRATIVE CASE:
Goods which seller warranted as already on the way did not arrive.
Facts: B, vendee, gave his consent to the purchase and sale
of certain goods on the assertion of S, vendor, stated in the contract, that the goods were already on the way. The goods did
not arrive.
Issue: Has S the right to demand from B the payment of the
price?
Held: No. The assertion made by S is a warranty (see Arts.
1545, 1546.), the non-fulfillment of which constitutes a breach
of contract and deprives him the right to demand of B the payment of the price of the sale. Having elected to bind himself in
that way, S, as vendor, is responsible, even if the prompt transportation of the goods does not depend upon him but upon the
importers, for he who contracts and assumes an obligation is
presumed to know the circumstances under which it can be
complied with. (Soler vs. Chesley, 43 Phil. 529 [1922].)
(2) Transfer not essential to perfection of contract. — The transfer of ownership and the delivery of the thing sold are not essential to the perfection of the contract. But if the seller does not deliver at the time stipulated, the buyer may ask for the rescission
of the contract or fulfillment with the right to damages in either
case. (Art. 1191.)
(3) No obligation to make delivery during period of redemption. —
The purchaser in execution sales (see Rules of Court, Rule 39, Secs.
30, 35.), however, is not entitled to immediate possession of the
Art. 1495
OBLIGATIONS OF THE VENDOR
General Provisions
165
property sold. The effective conveyance of the land is accomplished by the deed which is issued only after the period of redemption has expired. (Flores vs. Lim, 50 Phil. 738 [1927];
Gonzales vs. Calimbas and Poblete, 51 Phil. 355 [1927].) In other
words, the debtor is not obliged to make delivery during the period of redemption. In all cases of extra-judicial foreclosure sale,
the mortgagor may redeem the real property sold within one year
from the date of registration of the sale. (see Act No. 3155, Sec. 6.)
In judicial foreclosure of real estate mortgage, the general rule is
that the mortgagor cannot exercise his right of redemption after
the sale is confirmed by the court. (see Rules of Court, Rule 68,
Sec. 3.)
(4) Right of vendee to transfer of certificate of title. — In a sale of
registered land, the vendee has a right to receive and the vendor
the corresponding obligation to transfer to him, not only the possession and employment of the land but also the certificate of title. (Gabila vs. Perez, 169 SCRA 517 [1989].)
(5) Right of buyer to recover the price paid. — The right of a party
to recover the amount given as a consideration has been passed
upon in a case where it was held that: “Whenever money is paid
upon the representation of the receiver that he has either a certain title in property transferred in consideration of the payment
or a certain authority to receive the money paid, when in fact he
has no such title or authority, then, although there be no fraud or
intentional misrepresentation on his part, yet there is no consideration for the payment. The money remains, in equity and good
conscience, the property of the payer and may be recovered by
him. (Development Bank of the Phils. vs. Court of Appeals, 65
SCAD 82, 249 SCRA 331 [1995], citing Leather Manufacturers
National Bank vs. Merchants National Bank, 128 U.S. 26; 9 S. C.T.
5; 32 L. ed., 362.) Therefore, the purchaser is entitled to recover
the money paid by him where the contract is set aside by reason
of the mutual material mistake of the parties as to the identity or
quantity of the land sold. And where the purchaser recovers the
purchase price from a vendor who fails or refuses to deliver the
title, he is entitled, as a general rule, to interest on the money paid
from the time of payment. (Ibid., citing Wolfinger vs. Thomas, 22
SD 57; 115 NW 100; Robinson vs. Bresslor, 122 Neb. 461; 240 NW
564.)
166
SALES
Art. 1496
ART. 1496. The ownership of the thing sold is acquired by the vendee from the moment it is delivered
to him in any of the ways specified in articles 1497 to
1501, or in any other manner signifying an agreement
that the possession is transferred from the vendor to
the vendee. (n)
Ways of effecting delivery.
The ownership of the thing sold shall be transferred to the
vendee upon the delivery thereof (see Art. 1477.) which may be
effected in any of the following ways or modes:
(1) by actual or real delivery (Art. 1497.);
(2) by constructive or legal delivery (Arts. 1498-1501.); or
(3) by delivery in any other manner signifying an agreement
that the possession is transferred to the vendee. (Arts. 1496-1499.)
In all the different modes of delivery, the critical factor which
gives legal effect to the act is the actual intention of the vendor to
deliver, and its acceptance by the vendee. The act, without the
intention, is insufficient. There is no tradition. (Norkis Distributors, Inc. vs. Court of Appeals, 195 SCRA 694 [1991]; Santos vs.
Santos, 156 SCAD 97, 366 SCRA 395 [2001].) Although transfer of
ownership is the primary purpose of sale, delivery remains an
indispensable requisite as our law does not admit the doctrine of
transfer of ownership of property by mere consent. (People’s Industrial & Commercial Corp. vs. Court of Appeals, 88 SCAD 559,
274 SCRA 597 [1997].) The delivery must be made to the vendee
or his authorized representative. Where the vendee did not name
any person to whom the delivery shall be made in his behalf, the
vendor is bound to deliver exclusively to him. (Lagon vs. Hooven
Comalco Industries, Inc., 141 SCAD 353, 349 SCRA 363 [2001].)
ILLUSTRATIVE CASE:
For rice sold, vendor was not paid by vendee who sold it to another, the second vendee, the latter refusing to return the rice after he
was repaid by first vendee.
Facts: S agreed to sell 170 cavans of rice to B at the price of
P37.25 per cavan, delivery to be made at T’s store. After the
Art. 1496
OBLIGATIONS OF THE VENDOR
General Provisions
167
goods were unloaded at T’s store, S’s driver tried to collect the
purchase price from T as B was nowhere to be found, but T
refused, stating that he had purchased the goods from B at
P33.00 per cavan and the price had already been paid to him.
This is a simple case of swindling perpetrated by B at the
expense of S and T. However, three days after delivery, T was
repaid by B.
Issue: Is T duty bound to return the 170 cavans of rice to S
or to pay its value?
Held: Yes. (1) Sale between B and T voluntarily rescinded by the
repayment. — There was a perfected sale. (Art. 1475.) Ownership of the rice, too, was transferred to the vendee, B, upon its
delivery at the place stipulated (Art. 1521.), and pursuant to
Articles 1477 and 1496. At the very least, B had a rescissible
title to the goods for non-payment of the purchase price but
which had not been rescinded at the time of the sale to T. Having been repaid the purchase price by B, the sale, as between B
and T, had been voluntarily rescinded, and T was thereby divested of any claim to the rice. Technically, therefore, he should
return the rice to B.
(2) Rule against unjust enrichment applies. — Since the rice
had not been returned to B who was ready to return the rice to
S, it follows that T should return the rice to S. T cannot be allowed to unjustly enrich himself at the expense of another by
holding on to property no longer belonging to him. (Art. 22.) In
law and in equity, therefore, S is entitled to recover the rice, or
the value thereof since he was not paid the price therefor. (Obaña
vs. Court of Appeals, 135 SCRA 557 [1985].)
Ways of effecting constructive delivery.
(1) Equivalent to actual delivery. — Constructive delivery is a
general term comprehending all those acts which, although not
conferring physical possession of the thing, have been held by
construction of law equivalent to acts of real delivery. (Banawa
vs. Mirano, 97 SCRA 517 [1980]; Aguilar vs. Court of Appeals, 129
SCAD 274, 335 SCRA 308 [2000].) It may be effected in any of the
following ways:
(a) by the execution of a public instrument (Art. 1498,
par. 1.);
168
SALES
Art. 1496
(b) by symbolical tradition or traditio symbolica (ibid., par.
2.);
(c) by traditio longa manu (Art. 1499.);
(d) by traditio brevi manu (Ibid.);
(e) by traditio constitutum possessorium (Art. 1500.); or
(f) by quasi-delivery or quasi-traditio. (Art. 1501.)
As a specie of constructive delivery, the execution of a public
document is also considered a form of symbolic delivery.
(2) Contrary may be stipulated. — The parties, however, may
stipulate that ownership in the thing shall pass to the purchaser
only after he has fully paid the price (Art. 1478.) or fulfilled certain conditions. In a contract of absolute sale, ownership is transferred simultaneously with the delivery of the thing sold. (Joseph
& Sons Enterprises, Inc. vs. Court of Appeals, 143 SCRA 663
[1986].)
— oOo —
169
SECTION 2. — Delivery of the Thing Sold
ART. 1497. The thing sold shall be understood as
delivered, when it is placed in the control and possession of the vendee. (1462a)
Concept of tradition or delivery.
Tradition is a derivative mode of acquiring ownership by virtue of which one who has the right and intention to alienate a
corporeal thing, transmits it by virtue of a just title to one who accepts the same. (10 Manresa 122.)
Importance of tradition.
(1) Transfer of ownership. — Article 1496 emphasizes the necessity of tradition for the transfer of ownership of the thing sold.
Our law does not admit the doctrine of transfer of property by
mere consent. (Chua vs. Court of Appeals, 401 SCRA 54 [2003].)
(a) The ownership over it is not transferred by contract
merely but by delivery, actual or constructive. The critical factor in all the different modes of effecting delivery which gives
legal effect to the act, is the actual intention of the creditor to
deliver, and its acceptance by the vendee. (Norkis Distributors,
Inc. vs. Court of Appeals, 195 SCRA 494 [1991].)
(b) Contracts only constitute titles or rights to the transfer or acquisition of ownership, while delivery or tradition is
the method of accomplishing the same, the title and the
method of acquiring it being different in our law. (Gonzales
vs. Roxas, 16 Phil. 51 [1910].) But, there is no delivery as to
transfer ownership where the vendee takes possession of the
personal property subject matter of the contract of sale by
169
170
SALES
Art. 1497
stealing the same while in the custody of the vendor or his
agent. (see Aznar vs. Yapdiangco, 13 SCRA 486 [1965].)
(c) It is during the delivery that the law requires the seller
to have the right to transfer ownership of the thing sold. In
general, a perfected contract of sale cannot be challenged on
the ground of the seller’s non-ownership of the thing sold at
the time of the perfection of the contract. (Alcantara-Daus vs.
De Leon, 404 SCRA 74 [2003].)
(2) Liability in case of loss. — When the thing subject of the sale
is placed in the control and possession of the vendee (Art. 1497.)
or his agent, the delivery is complete and the vendee cannot avoid
liability in case the thing is subsequently lost without the fault of
the vendor. (La Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217
[1968]; Phil. Virginia Tobacco Adm. vs. Delos Angeles, 87 SCRA
197 [1987]; see Chrysler Phils. Corp. vs. Court of Appeals, 133
SCRA 507 [1984].)
(3) Right of vendor to claim payment. — Delivery produces its
natural effects in law, the principal and most important of which
being the transfer of ownership without prejudice to the right of
the vendor to claim payment of the price. (Ocejo Perez & Co. vs.
International Banking Corp., 37 Phil. 631 [1918]; Municipality of
Victorias vs. Court of Appeals, 149 SCRA 32 [1987].)
Where the buyer has not become the owner for lack of delivery, his action is not accion reinvidicatoria but one against the vendor for specific performance or rescission, with damages in either
case. (Art. 1191.)
(4) Consummation of contract. — Delivery of the thing together
with the payment of the price, marks the consummation of the
contract of sale.1 (Phil. National Bank vs. Ling, 69 Phil. 611 [1940];
1
In a deed of sale of a parcel of land with a deed of mortgage to secure payment of
the balance of the purchase price, where title has been transferred to the buyer, the relationship between the parties is no longer one of buyer and seller because the contract of
sale has been perfected and consummated. It is already one of a mortgagor and a mortgagee. In consideration of the buyer’s promise to pay on installment basis the balance of
the purchase price, the seller has accepted the mortgage as security for the obligation,
thereby becoming the mortgagee. The buyer’s (mortgagor’s) breach of the obligation
will not be with respect to the perfected contract of sale but the obligations created by
the mortgage contract. (Suria vs. Intermediate Appellate Court, 151 SCRA 661 [1987].)
Art. 1497
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
171
Froilan vs. Pan Oriental Shipping Co., 12 SCRA 276 [1964]; La
Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217 [1968].) Perfection of the contract, on the other hand, relates to the moment when
the meeting of minds between the parties takes place. (Art. 1475.)
(5) Enjoyment of thing sold. — Delivery is also necessary to
enable the vendee to enjoy and make use of the property purchased.
Actual delivery of the thing sold.
(1) When deemed made. — There is actual delivery when the
thing sold is placed in the control and possession of the vendee
(Art. 1497.) or his agent. (see Alliance Tobacco Corp., Inc. vs. Phil.
Virginia Tobacco Administration, 179 SCRA 336 [1989].) This involves the physical delivery of the thing and is usually done by
the passing of a movable thing from hand to hand.
ILLUSTRATIVE CASE:
Bank (pledgee) took possession, as security, of the sugar sold and
delivered by unpaid seller to buyer (pledgor) who subsequently became insolvent.
Facts: S sold sugar to B. The sugar was delivered by S into
B’s warehouse, leaving it entirely subject to his control. B, however, failed to make payment after completion of delivery as
per agreement. C, a bank, took possession of the sugar pursuant to a contract of pledge entered into between the bank and B
to secure the latter’s indebtedness of P20,000. Subsequently, B
became insolvent.
Issue: Is S still the owner of the sugar as to entitle him to
recovery of its possession?
Held: No. When S delivered the sugar into B’s warehouse,
leaving it entirely subject to his control, it is difficult to see how
S could have divested himself more completely of the possession of the sugar, or how he could have placed it more completely under the control of the buyer. The fact that the price
has not yet been paid, in the absence of stipulation, was not,
nor could it be an obstacle to the acquisition of ownership by B,
without prejudice, of course, to the right of S to claim payment
of the sum due. (Ocejo Perez & Co. vs. International Bank, 37 Phil.
631 [1918].)
172
SALES
Art. 1498
(2) Not always essential to passing of title. — Actual or manual
delivery of an article sold is not always essential to the passing of
title thereto. (Art. 1475.) The parties to the contract may agree
when and on what conditions the ownership in the subject of the
contract shall pass to the buyer. As for example, the parties may
stipulate that ownership in the thing sold shall pass to the vendee
only after he has fully paid the price. (Art. 1478.)
ART. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of
the contract, if from the deed the contrary does not
appear or cannot clearly be inferred.
With regard to movable property, its delivery may
also be made by the delivery of the keys of the place
or depository where it is stored or kept. (1463)
Execution of a public instrument
or document.
(1) Possession transferred to buyer by notarized deed of conveyance.
— The execution of a public instrument (i.e., an instrument or
document attested and certified by a public officer authorized to
administer oath, such as a notary public) as a manner of delivery
applies to movable as well as immovable property since the law
does not make any distinction and it can be clearly inferred by
the use of the word “also” in paragraph 2 of Article 1498. This
manner of delivery is symbolic. The buyer may use the document
as proof of his ownership of the property sold (Florendo vs. Foz,
20 Phil. 388 [1911]; Municipality of Victorias vs. Court of Appeals,
149 SCRA 32 [1987]; see Dy, Jr. vs. Court of Appeals, 198 SCRA
826 [1991].), for purposes, for example, of mortgaging the same.
(Garcia vs. Court of Appeals, 312 SCRA 180 [1999].) Under Article 1498, possession is transferred to the vendee (or lessee) by
virtue of the notarized deed of conveyance (Ong Ching Po vs.
Court of Appeals, 57 SCAD 619, 239 SCRA 341 [1994].) (or lease)
including the incorporeal rights appurtenant thereto, e.g., right
to eject tenants or squatters from the property in question. Since
the execution of the deed of conveyance is deemed equivalent to
Art. 1498
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
173
delivery, prior physical delivery or possession is not legally required. Thus, notwithstanding the presence of illegal occupants
on the subject property, transfer of ownership by symbolic delivery under Article 1498 can still be effected through the execution
of the deed of conveyance. The key word is “control,’’ not possession, of the property. (Sabio vs. International Corporate Bank,
154 SCAD 377, 364 SCRA 385 [2001].)
(2) Delivery presumptive only. — Under Article 1498, the mere
execution of the deed of sale in a public document is equivalent
to the delivery of the property “if from the deed the contrary does
not appear or cannot clearly be inferred.” Therefore, prior physical delivery or possession is not required. (M.R. Dulay Enterprises,
Inc. vs. Court of Appeals, 44 SCAD 297, 225 SCRA 678 [1993].)
Article 1498, however, lays down the general rule. It confines itself to providing that “the execution thereof shall be equivalent”
to delivery, which means that there is only a presumptive (not
conclusive) delivery which can be rebutted by evidence to the
contrary. (Montenegro vs. Roxas Gomez, 58 Phil. 723 [1932].) Such
presumption is destroyed when the delivery is not effected because of a legal impediment. Nowhere in the Civil Code is it provided that the execution of a deed of sale is a conclusive presumption of delivery of the object of the sale. (Ten Realty and Development Corp. vs. Cruz, 410 SCRA 484 [2003].)
(a) If it appears from the document or it can be inferred
therefrom that it was not the intention of the parties to make
delivery, no tradition can be deemed to have taken place. Such
would be the case, for instance, where a certain date is fixed
when the purchaser should take possession of the thing, or
where the vendor reserves the right to use and enjoy the property until a certain period, or where it is stipulated that until
payment of the last installment is made, the title to the property should not be deemed to have been transmitted, or where
the vendor has no control over the thing sold at the moment
of the sale, and, therefore, its material delivery could not have
been made. (Phil. Suburban Dev. Corp. vs. The Auditor General, 63 SCRA 397 [1975]; see 10 Manresa 129; Aviles vs. Arcega,
44 Phil. 924 [1923]; Addison vs. Felix, 38 Phil. 404 [1918];
Masallo vs. Gaspar, 39 Phil. 134 [1918].)
174
SALES
Art. 1498
(b) Presumptive delivery by execution of public instrument can also be negated by failure of the vendee to take
material possession of the land subject of the sale in the concept of purchaser-owner. (Danguilan vs. Intermediate Appellate Court, 158 SCRA 22 [1988]; Pasaqui vs. Villablanca, 68
SCRA 18 [1975].) The continued possession by the vendor of
the property sold may make dubious the contract of sale between the parties. (Santos vs. Santos, 156 SCAD 47, 366 SCRA
395 [2001]; Alcos vs. Intermediate Appellate Court, 162 SCRA
823 [1988].)
ILLUSTRATIVE CASES:
1. After delivery of possession coupled with execution of the
deed of sale of real property embodied in a public instrument but before its registration and payment of the price, buyer is being made
responsible for the payment of the realty tax.
Facts: S (PSDC) and B (PHHC, a government corporation)
entered into a contract of sale embodied in a public instrument
whereby S conveyed unto B two parcels of land subject to certain terms and conditions among which that S should register
the deed of absolute sale and secure a new title in the name of
B before the latter can be compelled to pay the purchase price.
Prior to the signing of the deed, B had acquired possession
of the property with the consent of S. The provincial treasurer
requested B to withhold the amount of P30,000.00 from the purchase price to be paid by it to S representing the realty tax due
on the property involved.
Issue: Who is liable to the payment of the real property tax,
S or B?
Held: B. When the sale of real property is made in a public
instrument the execution thereof is equivalent to the delivery
of the thing object of the contract, if from the deed the contrary
does not appear or cannot clearly be inferred.
(1) Vendee actually placed in possession. — In the case at bar,
there is no question that the vendor (S) had actually placed the
vendee (B) in possession and control over the property sold,
even before the date of the sale.
(2) Payment of price not essential to transfer of ownership. —
The condition that S should first register the deed of sale and
Art. 1498
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
175
secure a new title in the name of B before the latter shall pay
the purchase price, did not preclude the transmission of ownership. In the absence of an express stipulation to the contrary,
the payment of the purchase price of the goods is not a condition precedent to the transfer of title to the buyer, but title passes
by the delivery of the goods.
(3) Title transferred to vendee. — Since the delivery of possession coupled with the execution of the deed of absolute sale,
had consummated the sale and transferred title to B, the payment of the real estate tax after such transfer is the responsibility of the purchaser.2 (Phil. Suburban Dev. Corp. vs. The Auditor
General, 63 SCRA 397 [1975].)
———— ———— ————
2. Lessor sold property leased to a third party in violation of
the “exclusive option to purchase the same,’’ given to lessee who filed
a suit for specific performance and annulment of the sale.
Facts: Respondent MT, Inc. leased portions of a commercial building together with the land owned by CB, lessor, which
it used as a movie theater. Under two contracts of lease, inter
alia, MT, Inc. “shall be given 30-days exclusive option to purchase the same,’’ if CB should desire to sell the leased premises.
CB sold the building to ERD, petitioner, which received
rents from MT, Inc. for sometime.
Subsequently, MT, Inc., claiming it had been denied its right
to purchase the leased property in accordance with the lease
contracts with CB, filed a suit for specific performance and annulment of sale with prayer to enforce its “exclusive option to
purchase’’ the property.
The dispute between MT, Inc., CB and ERD reached the
Supreme Court (referred to as “Mother case’’) which rescinded
the absolute sale to ERD, ordered CB to return to ERD the purchase price, directed ERD to execute the documents necessary
to return ownership of the disputed lots to CB, and ordered CB
to allow MT, Inc. to buy the said lots for P11,300,000. This decision became final and executory on March 17, 1997.
MT, Inc. filed with the trial court a motion for execution
which was granted. Subsequently, the Clerk of Court of the
2
Under Republic Act No. 1322 (Sec. 7 thereof.), however, the PHHC (now National
Housing Authority) was not subject to real property tax.
176
SALES
Art. 1498
Manila Regional Trial Court, as Sheriff, executed a deed of conveyance in favor of CB and a deed of sale in favor of MT, Inc.
On the basis of these documents, the Registry of Deeds of Manila cancelled ERD’s titles and issued new certificates of title in
the name of MT, Inc.
On September 18, 1997, or after the execution of the decision of the Supreme Court, ERD filed with the Regional Trial
Court an action for collection of a sum of money against MT, to
wit: (1) the sum of P11,548,941.76 plus legal interest, representing the total amount of unpaid monthly rentals/reasonable
compensation from June 1, 1987 to July 31, 1997; (2) the sums of
P849,567.12 and P458,853.44 a month, plus legal interest as
rental/reasonable compensation for the use and occupation of
the property from August 1, 1997 to May 1, 1997; and (3) the
sum of P500,000 as and for attorney’s fees, plus other expenses
of litigation, and the costs of the suit.
Issue: Is ERD entitled to back rentals?
Held: No. (1) Rental, a civil fruit of ownership. — “Rent is a
civil fruit that belongs to the owner of the property producing
it by right of accession. Consequently and ordinarily, the rentals
that fell due from the time of the perfection of the sale to petitioner until its rescission by final judgment should belong to
the owner of the property during that period.’’
(2) Ownership transferred by delivery. — “Ownership of the
thing sold is a real right, which the buyer acquires only upon delivery of the thing 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.’
This right is transferred, not by contract alone, but by tradition
or delivery. Non nudis pactis sed traditione dominia rerum
transferantur. And there is said to be delivery if and when the
thing sold ‘is placed in the control and possession of the vendee.’
Thus, it has been held that while the execution of a public instrument of sale is recognized by law as equivalent to the delivery of the thing sold, such constructive or symbolic delivery,
being merely presumptive, is deemed negated by the failure of
the vendee to take actual possession of the land sold.’’
(3) Concept of delivery. — “Delivery has been described as
a composite act, a thing 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
Art. 1498
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
the other acquires the right to and the possession of the same.
In its natural sense, delivery means something in addition to
the delivery of property or title; it means transfer of possession. In the Law on Sales, delivery may be either actual or constructive, but both forms of delivery contemplate ‘the absolute
giving up of the control and custody of the property on the
part of the vendor, and the assumption of the same by the
vendee.’’’
(4) ERD never took actual control and possession of the property sold to it. — “From the peculiar facts of this case, it is clear
that petitioner never took actual control and possession of the
property sold, in view of respondent’s timely objection to the
sale and the continued actual possession of the property. The
objection took the form of a court action impugning the sale
which, as we know, was rescinded by a judgment rendered by
this Court in the mother case. It has been held that the execution of a contract of sale as a form of constructive delivery is a
legal fiction. It holds true only when there is no impediment
that may prevent the passing of the property from the hands of
the vendor into those of the vendee. When there is such impediment, ‘fiction yields to reality — the delivery has not been
effected.’
Hence, respondent’s opposition to the transfer of the property by way of sale to ERD’s was a legally sufficient impediment that effectively prevented the passing of the property into
the latter’s hands.’’
(5) Presumption of delivery by execution of public instrument
is only prima facie. — “The execution of a public instrument gives
rise, therefore, only to a prima facie presumption of delivery.
Such presumption is destroyed when the instrument itself expresses or implies that delivery was not intended; or when by
other means it is shown that such delivery was not effected, because a
third person was actually in possession of the thing. In the latter
case, the sale cannot be considered consummated.’’
(6) ERD did not acquire rights to fruits of property. — “However, the point may be raised that under Article 1164 of the Civil
Code, ERD, as buyer, acquired a right to the fruits of the thing
sold from the time the obligation to deliver the property to petitioner arose. That time arose upon the perfection of the Contract of Sale on July 30, 1978, from which moment the laws provide that the parties to a sale may reciprocally demand per-
177
178
SALES
Art. 1498
formance. Does this mean that despite the judgment rescinding the sale, the right to the fruits belonged to, and remained
enforceable by, ERD?
Article 1385 of the Civil Code answers this question in the
negative, because ‘[r]escission creates the obligation to return
the things which were the object of the contract, together with
their fruits, and the price with its interest; x x x.’ Not only the
land and building sold, but also the rental payments paid, if
any, had to be returned by the buyer.’’
(7) Rental payments by MT, Inc. did not mean recognition of
ERD’s title. — “The fact that MT, Inc. paid rentals to ERD’s during the litigation should not be interpreted to mean either actual delivery or ipso facto recognition of ERD’s title. ERD as alleged buyer of the disputed properties and as alleged successor-in-interest of CB rights as lessor — submitted two ejectment
suits against MT, Inc. Filed in the Metropolitan Trial Court of
Manila, the first was docketed as Civil Case No. 121570 on July
9, 1987; and the second, as Civil Case No. 131944 on May 28,
1990. MT, Inc. eventually won them both. However, to be able
to maintain physical possession of the premises while awaiting the outcome of the mother case, it had no choice but to pay
the rentals. The rental payments made by MT, Inc., should not
be construed as a recognition of ERD as the new owner. They
were made merely to avoid imminent eviction.’’
(8) General principle that rescissible contract is valid until rescinded not applicable. — “At bottom, it may be conceded that,
theoretically, a rescissible contract is valid until rescinded. However, this general principle is not decisive to the issue of whether
ERD ever acquired the right to collect rentals. What is decisive
is the civil law rule that ownership is acquired, not by mere
agreement, but by tradition or delivery. Under the factual environment of this controversy as found by this Court in the mother
case, ERD was never put in actual and effective control or possession of the property because of MT, Inc. timely objection.
As pointed out by Justice Holmes, general propositions do
not decide specific cases. Rather, ‘laws are interpreted in the
context of the peculiar factual situation of each case. Each case
has its own flesh and blood and cannot be decided on the basis
of isolated clinical classroom principles.’ ”
(9) Sale of ERD not consummated. — “In short, the sale to
ERD may have been valid from inception, but it was judicially
Art. 1498
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
179
rescinded before it could be consummated. Petitioner never acquired ownership, not because the sale was void, as erroneously claimed by the trial court, but because the sale was not
consummated by a legally effective delivery of the property sold.’’
(10) Benefits precluded by ERD’s bad faith. — “Furthermore,
assuming for the sake of argument that there was valid delivery, petitioner is not entitled to any benefits from the ‘rescinded’
Deed of Absolute Sale because of its bad faith. This being the
law of the mother case decided in 1996, it may no longer be
changed because it has long become final and executory. x x x.’’
(Equatorial and Realty Development, Inc. vs. Mayfair Theater, Inc.,
158 SCAD 783, 370 SCRA 56 [2001].)
(3) Sale of thing not subject to control of vendor. — Symbolic
delivery by the execution of a public instrument is equivalent to
actual delivery only where the thing is subject to the control of
the vendor and there is no impediment that may prevent the passing of the property from the hands of the vendor into those of the
vendee. Hence, the vendor who executes said public instrument
fails in his obligation to deliver it, if the vendee cannot enjoy its
material possession because of the opposition or resistance of a
third person (e.g., squatter) who is in actual possession. The legal
fiction yields to reality. It is not enough to confer upon the purchaser the ownership and the right of possession. The thing sold must
be placed in his control in order that it can be said that delivery
has been effected. (Addison vs. Felix Tioco, 38 Phil. 404 [1918];
Power Commercial & Industrial Corp. vs. Court of Appeals, 84
SCAD 67, 274 SCRA 597 [1997].)
In other words, a seller cannot deliver constructively if he
cannot actually deliver even if he wants to. Of course, if the sale
had been made under the express agreement of imposing upon
the vendee the obligation to take the necessary steps to obtain the
material possession of the thing sold and if it were proven that
he knew that the thing was in the possession of a third person
claiming to have property rights thereon, such agreement would
be perfectly valid. (Ibid.)
(4) Sale of registered land. — The provisions of Article 1498 regarding passing of title upon delivery by execution of a public
instrument must be deemed modified by the provisions of the
180
SALES
Art. 1499
Property Registration Decree (Pres. Decree No. 1529.) insofar as
registered land is concerned. Section 51 of the decree is very clear
that no deed purporting to convey or affect registered land, shall
take effect as a conveyance or bind the land (as against third persons) until its registration. In accordance with this section, no act
of the parties can transfer the ownership of real estate under the
Torrens System. That is done by the act of registration of the conveyance which the parties have made. (see Tuazon vs. Raymundo,
28 Phil. 635 [1914]; Manuel vs. Rodriguez, 109 Phil. 1 [1960].)
(5) Possession of a part as constructive possession of whole. —
Where apart from the delivery de jure of a land sold by symbolic
tradition resulting from the execution of a public instrument of
sale, the evidence shows that the purchaser took actual possession of the considerable portion of the land sold by the exercise
of possessory acts of clearing the area of trees and of cultivating
the same through tenants, such possession and cultivation of a
part is logically and legally constructive possession of the whole.
(Ramos vs. Director of Lands, 39 Phil. 175 [1918].)
Symbolic tradition.
Constructive delivery is symbolic when to effect the delivery,
the parties make use of a token symbol to represent the thing
delivered.
The delivery of the key where the thing sold is stored or kept
is equivalent to the delivery of the thing (par. 2.) because the key
represents the thing. Similarly, there is symbolic delivery of goods
to vendee upon delivery to him of delivery orders (see Art.
1636[1].) which would authorize him to withdraw the goods from
a warehouse. Upon withdrawal, there is actual delivery (supra.)
which consummates the sale. (Lim Yhi Luya vs. Court of Appeals,
99 SCRA 668 [1980].)
ART. 1499. The delivery of movable property may
likewise be made by the mere consent or agreement
of the contracting parties, if the thing sold cannot be
transferred to the possession of the vendee at the time
of the sale, or if the latter already had it in his possession for any other reason. (1463a)
Arts. 1500-1501
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
181
Traditio longa manu.
The first part of Article 1499 refers to traditio longa manu.
This mode of delivery takes place by the mere consent or
agreement of the contracting parties as when the vendor merely
points to the thing sold which shall thereafter be at the control
and disposal of the vendee.
It should be noted that delivery “by the mere consent or agreement of the contracting parties” is qualified by the phrase “if the
thing sold cannot be transferred to the possession of the vendee
at the time of the sale.”
Traditio brevi manu.
This mode of legal delivery happens when the vendee has
already the possession of the thing sold by virtue of another title
as when the lessor sells the thing leased to the lessee. Instead of
turning over the thing to the vendor so that the latter may, in turn,
deliver it, all these are considered done by action of law.
ART. 1500. There may also be tradition constitutum
possessorium. (n)
Traditio constitutum possessorium.
This mode of delivery is the opposite of traditio brevi manu.
It takes place when the vendor continues in possession of the
property sold not as owner but in some other capacity, as for example, when the vendor stays as a tenant of the vendee. In this
case, instead of the vendor delivering the thing to the vendee so
that the latter may, in turn, deliver it back to the vendor, the law
considers that all these have taken place by mere consent or agreement of the parties. (see Amig vs. Teves, 96 Phil. 252 [1954];
Bautista vs. Sioson, 39 Phil. 615 [1919]; Carbonell vs. Court of
Appeals, 69 SCRA 99 [1970]; see 10 Manresa 124.)
ART. 1501. With respect to incorporeal property,
the provisions of the first paragraph of article 1498
shall govern. In any other case wherein said provisions are not applicable, the placing of the titles of
182
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Art. 1501
ownership in the possession of the vendee or the use
by the vendee of his rights, with the vendor’s consent, shall be understood as a delivery. (1464)
Quasi-traditio.
Tradition can only be made with respect to corporeal things.
In the case of incorporeal things, delivery is effected:
(1) by the execution of a public instrument; or
(2) when that mode of delivery is not applicable, by the placing of the titles of ownership in the possession of the vendee; or
(3) by allowing the vendee to use his rights as new owner with
the consent of the vendor.
This mode of delivery of incorporeal things or rights is known
as quasi-traditio. Thus, the delivery to a person of a negotiable
document of title in which it is stated that the goods referred to
therein will be delivered to the bearer amounts to delivery of the
goods to such person. (Arts. 1507, 1508.)
ILLUSTRATIVE CASES:
1. Property, title papers to which were delivered by debtor to
creditor as security for a debt, was included in the inventory of the
estate of debtor upon his death.
Facts: S owed B money and as security therefor delivered
to B the title papers over four parcels of land. It was orally agreed
that since S had no money, B was to have the land, permitting S
to cultivate upon condition that, after deducting expenses, 1/2
of the products was to go to B.
Then S died and the four parcels were included in the inventory of the estate of S. B brought action to exclude them
from the inventory.
Issue: Is there delivery of the property in contemplation of
law?
Held: Yes. The land should have been excluded in the inventory. The contract made between S and B although not in
writing, was valid and the delivery of the title deeds of the property was equivalent in its effect to a delivery of the property
itself. (Marella vs. Reyes & Paterno, 12 Phil. 1 [1908].)
Art. 1501
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
183
———— ———— ————
2. Before the sale at public auction, the property in question
was sold by the owner who merely delivered the title deeds thereof to
the first purchaser.
Facts: The lot and warehouse standing thereon belonging
to S were sold at public auction by the sheriff to B. D claimed
that the property was sold by S long before the auction sale to
C who, in turn, sold it to D. S merely delivered the title deeds
to C but remained in possession as lessee. C also delivered the
title deeds to D. D brought action for the recovery of the lot
and warehouse.
Issue: Is there delivery of the property in contemplation of
law?
Held: Yes. Although there was no material delivery of the
property, “the placing of the titles of ownership in the possession of the vendee or the use which he may make of his right
with the consent of the vendor shall be considered as delivery.” (Tablante vs. Aquino, 28 Phil. 35 [1914].)
Note: The Supreme Court in both cases cited Article 1464 of
the Spanish Civil Code. (Art. 1501 of our Civil Code.) It is submitted that Article 1501 refers to delivery merely of incorporeal rights. The result arrived at, however, may be sustained in
that the delivery of the title deeds may be considered a symbolical delivery, as the delivery of the key to a house constitutes a delivery of said house.
Intention to deliver and to accept
a transfer of possession.
(1) In all the forms of delivery, it is necessary that the act be
coupled with the intention of delivering the thing. For instance,
there is no constructive delivery, where the keys to the place where
the thing is deposited are delivered to the vendee in order only
that he may examine it or the titles of ownership of property are
placed in the possession of the vendee for his study or inspection
but not with the intention of making the delivery. The act, without the intention to deliver, is insufficient. (see 10 Manresa 132.)
Similarly, the issuance of a sales invoice does not prove transfer
of ownership of the thing sold to the buyer. An invoice is nothing
more than a detailed statement of the nature, quality and cost of
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Art. 1502
the thing sold and has been considered not a bill of sale. (Norkis
Distributors, Inc. vs. Court of Appeals, 193 SCRA 694 [1991]; P.T.
Cerna Corp. vs. Court of Appeals, 221 SCRA 19 [1993].)
(2) For the same reason, any act, although not provided for
in the preceding articles, but accompanied by the evident intention of the vendor to deliver or of the vendee to receive the thing
sold, will be considered as constituting tradition. It is the intention which is essential. (ibid.) It is a well-established rule that a
mere contract for the sale of goods, where nothing remains to be
made by the vendor, as when the parties agreed that the delivery
of the logs should be made alongside a vessel of the vendee and
that was done by the vendor, transfers the right of property although the price has not been paid, nor the thing sold actually
delivered to the vendee whose employees attempted to load them
in the vessel but failed to do so for want of the proper loading
equipment. (Bean Admir vs. Cadwallader Co., 10 Phil. 606 [1908].)
In other words, in all the different modes of effecting delivery, it is the real intention of the parties, to deliver on the part of
the vendor, and to accept on the part of the vendee, which gives
legal effect to the act. Without such intention, there is no tradition. (see Abuan vs. Garcia, 14 SCRA 759 [1965]; Norkis Distributors, Inc. vs. Court of Appeals, supra.)
ART. 1502. When goods are delivered to the buyer
“on sale or return” to give the buyer an option to
return the goods instead of paying the price, the ownership passes to the buyer on delivery, but he may
revest the ownership in the seller by returning or tendering the goods within the time fixed in the contract,
or, if no time has been fixed, within a reasonable time.
(n)
When goods are delivered to the buyer on approval
or on trial or on satisfaction, or other similar terms,
the ownership therein passes to the buyer.
(1) When he signifies his approval or acceptance
to the seller or does any other act adopting the transaction;
Art. 1502
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
185
(2) If he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed
for the return of the goods, on the expiration of such
time, and, if no time has been fixed, on the expiration
of a reasonable time. What is a reasonable time is a
question of fact. (n)
Contract of sale or return, and of sale on
trial or approval or satisfaction.
(1) In general. — It is evidently possible for the parties to agree
that the buyer shall temporarily take the goods into his possession to see whether they are satisfactory to him and that if they
are not, he may refuse to become owner. It is clear also that the
same object may be attained by an agreement that the property
shall pass to the buyer on delivery but that he may return the
goods if they are unsatisfactory. The question is one of fact in every
case whether the parties intend to make approval a condition,
without which the ownership shall not pass, or whether their intent is that the ownership shall pass at once with the right to return the goods.3 (see 2 Williston, op. cit., pp. 30-33.)
The question of what is a reasonable time for the return of the
property is one of fact to be determined upon the particular circumstances of the case. The duty of the buyer with regard to the
return of the goods requires, ordinarily, that they be returned in
the same or substantially the same condition in which they were
when the contract was made. Undoubtedly, if they are injured or
damaged substantially through negligence or misuse of the buyer,
his right to return is lost and the sale becomes absolute. (Ray vs.
Thompson, 12 Cush [Mass.] 281, 59 Am. Dec. 187.)
3
“The provision in the Uniform Sales Act and the Uniform Commercial Code from
which Article 1502 was taken, clearly requires an express written agreement to make a
sales contract either a “sale or return” or a “sale on approval.” Parol or extrinsic testimony could not be admitted for the purpose of showing that an invoice or bill of sale
that was complete in every aspect and purporting to embody a sale without a condition
or restriction constituted a contract of sale or return. If the purchaser desired to incorporate a stipulation securing to him the right of return, he should have done so at the time
the contract was made. (Industrial Textile Manufacturing Co. vs. LPJ Enterprises, Inc.,
217 SCRA 322 [1993], citing 67 Am. Jur. 2d 733.)
186
SALES
Art. 1502
(2) Sale or return. — It is a contract by which property is sold
but the buyer, who becomes the owner of the property on delivery, has the option to return the same to the seller instead of paying the price.
(a) Under this contract, the option to purchase or return
the goods rests entirely on the buyer without reference to the
quality of the goods. The buyer 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 (Art. 1502, par. 1.); otherwise, the sale becomes
absolute and the buyer is liable for the price. The seller cannot, in this type of sale, prevent the revesting of title by refusing to accept the return of the property.
(b) Since title passes to the buyer on delivery, the loss or
destruction of the property prior to the exercise of the buyer’s
option to return falls upon him and renders him responsible
to the seller for the purchase price or such part thereof as remains unpaid. (Art. 1504; 46 Am. Jur. 647.) The word “return”
itself implies a previous transfer of title.
(3) Sale on trial or approval. — It is a contract in the nature of
an option to purchase if the goods prove satisfactory, the approval
of the buyer being a condition precedent. (77 C.J.S. 938.)
(a) In this kind of contract, the title shall continue in the
seller until the sale has become absolute either by the buyer’s
approval of the goods, or by his failing to comply with the
express or implied conditions of the contract as to giving notice of dissatisfaction or as to returning the goods (Ibid., 655;
Art. 1502, Nos. 1 and 2.), or by his doing any other act adopting the transaction such as mortgaging the property or selling it to a third person.
(b) For the reason that the title to the goods does not pass
and the relationship between the seller and the purchaser is
that of bailor and bailee, the risk of loss or injury to the article
pending the exercise by the buyer of his option to purchase
or return it, is upon the seller except as the buyer may be at
fault in respect of the care and condition of the article, or may
have agreed to stand the loss. (see 67 Am. Jur. 2d 430-431.)
Art. 1503
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
187
(c) The buyer cannot accept part and reject the rest of the
goods since this falls outside the normal intent of the parties.
(Industrial Textile Manufacturing Co. vs. LPJ Enterprises, Inc.,
supra.)
“Sale or return” distinguished from sale on trial.
The distinctions are the following:
(1) “Sale or return” is a sale subject to a resolutory condition,
while sale on trial is subject to a suspensive condition;
(2) “Sale or return” depends entirely on the will of the buyer,
while sale on trial depends on the character or quality of the goods;
(3) In “sale or return,” the ownership of the goods passes to
the buyer on delivery and subsequent return of the goods reverts
ownership in the seller, while in sale on trial, the ownership remains in the seller until the buyer signifies his approval or acceptance to the seller; and
(4) In “sale or return,” the risk of loss or injury rests upon the
buyer, while in sale on trial, the risk still remains with the seller.
Note: Article 1502 uses the phrase “on sale or return.” If the
contract uses instead the phrase “for sale or return,” the intention may be to enter into a contract of agency.
ART. 1503. Where 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