lOMoARcPSD|7481831
Regulatory Framework and Legal Issues in Business Module
Midterms
BS Accountancy (Colegio de San Juan de Letran)
StuDocu is not sponsored or endorsed by any college or university
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
CONTENTS
The Law on Sales and Credit Transactions.
Evince Earl C. Columnas, CPA
REGULATORY
FRAMEWORK
AND LEGAL
ISSUES IN
BUSINESS
REGULATORY FRAMEWORK AND
ACCOUNTING STANDARDS
Midterm Module
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Republic of the Philippines
JOSE RIZAL MEMORIAL STATE UNIVERSITY
The Premier University in Zamboanga del Norte
Main Campus, Dapitan City
Registration No. 62Q17082
JRMSU- CBA-DEAN-006
Program: BS- Accountancy
College: College of Business and Accountancy
Instructor/Professor: Mr. Evince Earl C. Columnas, CPA
Pre-Requisites:
Unit Credit: 3 units
Lecture: 3 units / Laboratory: ____
No. of Hours: 54 hours
PHILOSOPHY
VISION
MISSION
GOALS
Course Code
AEACC15
Course Title
REGULATORY FRAMEWORK AND ACCOUNTING STANDARDS
Date & Time:
Room: __________
Consultation Hours:
Jose Rizal Memorial State University adheres to the principle of dynamism and cultural diversity in building a just and humane society.
A dynamic and diverse internationally recognized University.
Jose Rizal Memorial State University pledges to deliver effective and efficient services along research, instruction, production and extension. It commits to provide advanced
professional, technical and technopreneurial training with the aim of producing highly competent, innovative and self-renewed individuals.
Jose Rizal Memorial State University focuses on developing graduates who are exemplars of Rizal’s ideas that can:
E
X
C
E
L
L
E
N
C
E
-
xhibit relevant and responsive competencies across disciplines towards
enial delivery of services;
ommunicate ideas proficiently in both written and spoken form;
ngage in lifelong learning;
ead effectively and efficiently amidst socio-cultural diversity;
ive up the challenges of global community;
mbody professional, social and ethical responsibilities;
urture a harmonious environment;
onserve and promote Filipino cultural heritage; and
valuate their contribution to the local and global communities.
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
QUALITY POLICY
STATEMENT
COURSE
DESCRIPTION
Jose Rizal Memorial State University, a believer of holistic human development, excellence and quality service, provides quality training and development to students. It shall commit
to provide adequate, suitable and relevant sources and services with continuing quality management system for clients and customers’ satisfaction through an efficient and effective
quality system which conforms with national and international statutory and regulatory requirements.
This course is the third in the series of three courses that cover the topic on regulatory framework governing business transactions and business organizations/associations, and of
business laws including their legal implications. The courses provide the students an understanding of the pertinent legal provisions, general principles, concepts, and underlying
philosophy of the laws applicable to commerce and business. The students are given working knowledge to apply the various regulatory framework measures and the pertinent
provisions of the law relative to particular business scenarios. They are also familiarized with clients’ rights and remedies, with the handling of disputes on regulatory issues. The
various regulatory offices that they will be interacting with are discussed including basic regulations that they will derive benefit from.
This course deals with the law on sales, its nature, form and requisites. It discusses the rights and obligations of the vendor and vendee including remedies in case of defaults. It also
covers applicable laws on installment sales. The course also provides the students an understanding of the law on credit transactions such as pledges, real mortgages and chattel
mortgages.
Program Outcomes
Addressed by the
Course
COURSE LEARNING
OUTCOMES
This course also provides basic knowledge on the laws on other business transactions, to wit: PDIC Law, Secrecy of Bank Deposits and Unclaimed Balances Law, General Banking
Law with emphasis on loans, AMLA Law with emphasis on covered transactions, suspicious transactions and reportorial requirements, the New Central Bank Act with emphasis on
legal tender power over coins and notes, conservatorship and receivership and closures, and the Intellectual Property Law (except provisions under part I) with emphasis on the Law on
Patents, the Law on Trademark, Service Marks and Trade Names, and the Law on Copyright.
BSA01. Resolve business issues and problems, with a global and strategic perspective using knowledge and technical proficiency in the areas of financial accounting and reporting, cost
accounting and management, accounting and control, taxation, and accounting information system.
BSA02. Conduct accountancy research through independent studies of relevant literature and appropriate use of accounting theory and methodologies.
BSA03. Employ technology as a business tool in capturing financial and non-financial information, generating reports and making decisions.
BSA04. Apply knowledge and skills to successfully respond to various types of assessments; and (including professional licensure and certifications).
BSA05. Confidently maintain a commitment to good corporate citizenship, social responsibility and ethical practice in performing functions as an accountant.
At the end of the course, the students should be able to:
1. Demonstrate dynamism needed in various situations to apply the attributes of the VMGO.
2. Define a contract of sale and enumerate its elements and formalities.
3. Summarize the rights and obligations of the vendor and vendee in a contract of sale.
4. Explain the remedies of the vendor and vendee in case of breach.
5. Explain the rights and remedies of the parties in installment sales.
6. Prepare a contract of sale with all the required elements and formalities.
7. Define, compare and contrast a contract of pledge, mortgage, and chattel mortgage, along with their elements and formalities.
8. Prepare a contract of pledge, mortgage and chattel mortgage, with their elements and formalities.
9. Generalize the pertinent provisions of the law on other business transactions.
Page | 2
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
THE LAW ON SALES1
CHAPTER 1
Nature and Form of the Contract
Article 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership and to deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalent.
A contract of sale may be absolute or conditional. (1445a)
NOTES:
•
•
•
•
•
•
•
This article provides the definition of a contract of sale.
Parties to a contract of sale:
o Vendor/Seller – one who obligates himself to transfer the ownership and to
deliver a determinate thing
o Vendee/Buyer – one who obligates himself to pay a price certain in money or its
equivalent
Characteristics of a contract of sale:
o Consensual – perfected by mere consent of the parties
o Bilateral – both contracting parties are bound to fulfill reciprocal obligations to
each other
o Onerous – the thing sold is given in consideration of the price
o Commutative – the thing sold is considered equivalent of the price paid
o Nominate – it is given a special name in the Civil Code i.e. “Sale”
o Principal – it does not depend for its existence and validity upon another contract
Essential requisites of contract of sale – without which there can be no contract of sale
o CONSENT
o OBJECT/SUBJECT MATTER – the determinate thing which is the object of the
contract of sale
▪ Thing must be DETERMINATE or at least CAPABLE OF BEING
MADE DETERMINATE
▪ Subject matter may be real property (e.g. land) or personal/movable
property (e.g. car)
o CAUSE OR CONSIDERATION – the price certain in money or its equivalent
Natural elements of a contract of sale – deemed to exist in the absence of any contrary
stipulations (e.g. warranty against eviction or warranty against hidden defects)
Accidental elements of a contract of sale – those which may be present or absent
depending on the stipulations of the parties (e.g. conditions, interest, penalty, time or
place of payment, etc.)
Two Kinds of a Contract of Sale, as to presence or absence of conditions:
o Absolute – not subject to any condition whatsoever; title or ownership passes to
the buyer upon delivery of the thing sold
o Conditional – sale contemplates a contingency; subject to certain conditions.
Here, the delivery of the thing sold does not transfer ownership until the condition
is fulfilled
1
NOTE: Main reference for this topic is THE LAW ON SALES, AGENCY, AND CREDIT TRANSACTIONS by De
Leon and De Leon, Jr. It would be of utmost help for you to obtain a copy of this book.
Page | 3
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Article 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)
NOTES:
•
•
Requisites Regarding Object of Contract of Sale: (object of sale may be (a) things or (b)
rights) – absence of any of the following will make the contract VOID/INEXISTENT and
cannot be ratified
o (a) Things – must be within the commerce of men
▪ Determinate
▪ Licit or lawful
• Things may be illicit (illegal)
o per se – by its nature (e.g. decayed food)
o per accidens – because some provision of law declares it
illegal (e.g. illegal drugs)
▪ Not be impossible
o (b) Rights – must be transmissible (i.e. capable of being transmitted to other
persons; not strictly personal)
▪ Examples of transmissible rights – right to usufruct, right of conventional
redemption
▪ Examples of intransmissible rights – right to vote, right to custody over
children, marital rights
▪ Services cannot be the subject of a contract of sale (not a determinate
THING)
Right of vendor to transfer ownership
o One can only sell what he owns – seller must be the owner or at least authorized
by the owner of the thing sold
o Sufficient if right exists at time of delivery – not required that the vendor must
have the right to transfer ownership at the perfection of the contract.
Article 1460. A thing is determinate when it is particularly designated or physical
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)
NOTES:
•
Subject matter must be DETERMINATE (first paragraph Art. 1460) or
DETERMINABLE (Second paragraph Art. 1460). Otherwise, contract is VOID.
Article 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)
NOTES:
•
Future things not existing at the time the contract has been entered into may be the
subject of a contract of sale PROVIDED:
o It is reasonable certain that the thing will come into existence; and
o The title will vest in the buyer the moment the thing comes into existence
Page | 4
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Example: The sale of all the rice that may be harvested from the seller’s
ricefield within a given period of time is a valid sale
Sale of hope or expectancy – 2nd par. Art. 1461
o The sale of hope or expectancy itself is valid even if the thing hoped or expected
does not come into existence, unless the hope or expectancy is in vain, in which
case, the sale is void
▪ Example: If Berto buys a lotto ticket in the hope of winning the grand
prize, the object of the contract is not the prize, but the hope itself. Thus,
the sale is valid even if Berto does not win the prize. However, if Berto
buys an expired lotto ticket in the hope of winning the prize, the hope is in
vain, and thus, the sale is void.
▪
•
Article 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)
NOTES:
•
•
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. Hence, no actual sale and transfer of ownership has yet taken place as long as
the future goods are not yet in the hands of the seller. Upon acquisition by the seller of
the goods, either party then acquires the right to demand the execution of the contract of
sale.
The first paragraph of the above article does not apply if the goods are to be
manufactured especially for the buyer and not readily saleable to others in the
manufacturer’s ordinary course of business. This is a contract for a piece of work, and not
a contract of sale (see Art. 1467)
Article 1463. The sole owner of a thing may sell an undivided interest therein. (n)
NOTES:
•
Example: Sidro, the sole owner of a one-hectare parcel of land located in Dipolog City,
sells one-half thereof to Brenda, without specifying which particular part of the parcel of
land is being sold. Here, Sidro is selling an undivided interest in the thing (the ½ share of
the parcel of land). The sale is valid, and the effect thereof is to make the buyer a coowner in the thing sold.
o If Sidro specifies which particular part (by metes and bounds) of his one-hectare
parcel of land is to be sold to Brenda, the sale is not of an undivided interest of the
land. Hence, there is no co-ownership between Sidro and Brenda. Sidro becomes
the full owner of his portion while Brenda becomes the absolute owner of her
portion of the land.
Article 1464. In the case of fungible goods, there may be a sale of an undivided share of a
specific mass, though the seller purports to sell and the buyer to buy a definite number,
weight or measure of the goods in the mass, and though the number, weight or measure of
the goods in the mass, 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)
Page | 5
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
•
Fungible goods as used in this article is meant to be synonymous to “consumable” goods
of which any unit is, from its nature or by mercantile usage, treated as the equivalent of
any other unit
Example: In a stock of rice, the exact number of sacks of which is still unknown, Jose
buys 100 sacks. If there are really 150, Jose becomes the co-owner of the whole lot, his
own share being 2/3 thereof. If it turns out that there were really only 90 sacks of rice in
the stock, Jose becomes the sole owner of the whole lot, and the seller is bound to make
good the deficiency of 10 sacks to Jose.
Article 1465. Things subject to a resolutory condition may be the object of the contract of
sale. (n)
NOTES:
•
•
Resolutory condition – an uncertain event upon the happening of which the obligation (or
right) subject to it is extinguished.
Example: Susan (vendor a retro) sold a parcel of land to Bugoy (vendee a retro) subject
to the condition that Susan can repurchase the land within two years from the date of sale.
If within the said two-year period, Bugoy sells the land to Charlie, who knows of Susan’s
right to repurchase, and Susan exercises her right to repurchase, Charlie is bound to
respect Susan’s right.
Article 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)
NOTES:
•
Distinctions Between a ‘Contract of Sale’ and an ‘Agency to Sell’ (like a Consignment
for Sale):
(a) In sale, the buyer pays the price; the agent delivers the price which in turn he got from
his buyer.
(b) In sale, the buyer after delivery becomes the owner; the agent who is supposed to sell
does not become the owner, even if the property has already been delivered to him.
(c) In sale, the seller warrants; the agent who sells assumes no personal liability as long
as he acts within his authority and in the name of the principal.
Article 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 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)
NOTES:
• Contract for a piece of work – here, the contractor binds himself to execute a piece of
work for the employer, in consideration of a certain price or compensation.
• Distinctions between a Contract for a Piece of Work and a Contract of Sale:
o In the former, 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; while in the latter,
the thing transferred is one which would have existed and been the subject of sale
to some other person, even if the order had not been given.
Page | 6
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
•
Example:
o Juan buys a pair of size 11 Nike Air Force One shoes from a Jose, whose business
it is to sell Nike shoes. But at the moment, Jose does not have the shoes of Juan’s
size. Thus, Jose orders size 11 Nike Air Force One shoes from his supplier to sell
to Juan. This order will still be considered a contract of sale, as Jose would have
otherwise ordered and sold the same shoes regardless of Juan’s intention to buy.
o Pedro’s feet are deformed, such that he cannot wear normal shoes. He goes to
Penduko, a local shoemaker, to order shoes that will particularly fit his feet. This
is a contract of a piece of work, as Penduko would not have otherwise made the
special shoes had it not been for Pedro’s order.
Article 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)
NOTES:
•
•
Barter or exchange – one of the parties binds himself to give one thing in consideration of
the other’s promise to give another thing.
o On the other hand, in sale, the vendor gives a thing in consideration for a price in
money.
Rules to Determine Whether Contract is One of Sale or Barter
(a) First Rule — Intent. (The manifest intention of the parties shall prevail. Thus, if the
parties intend the transaction to be one of SALE, then regardless of whether the value of
the thing given exceeds the amount of the money or equivalent, the transaction will be
considered a sale.)
(b) If intent does not clearly appear —
1) if thing is more valuable than money — BARTER
2) if 50-50 — SALE
3) if thing is less valuable than the money — SALE
Article 1469. In order that the price may be considered certain, it shall be sufficient that it
be so with reference to another thing certain, or that the determination thereof be left to
the judgment of a special person or persons.
Should such person or persons be unable or unwilling to fix it, the contract shall be
inefficacious, unless the parties subsequently agree upon the price.
If the third person or persons acted in bad faith or by mistake, the courts may fix the price.
Where such third person or persons are prevented from fixing the price or terms by fault
of the seller or the buyer, the party not in fault may have such remedies against the party
in fault as are allowed the seller or the buyer, as the case may be. (1447a)
NOTES:
•
There is no sale if price is not certain or ascertainable in money (currency) or its
equivalent (promissory notes, checks, and other mercantile instruments generally
accepted as representing money.)
Page | 7
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
•
If no specific amount has been agreed upon, the price is still considered certain:
o if it be certain with reference to another thing certain (e.g. the price is the tuition
fee charged at the JRMSU College of Law for the first year, first semester of the
Juris Doctor degree);
o if the determination of the price is left to the judgment of a specified person or
persons;
o in the cases provided for under Art. 1472, Civil Code.
Article 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)
Article 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)
NOTES:
•
•
Effect of Gross Inadequacy of Price in Voluntary Sales:
o General Rule: Mere inadequacy of the price or the alleged hardness of the bargain
does not affect the validity of the sale where both parties are in a position to form
an independent judgment concerning a transaction.
▪ Example: If a member of the Subanen tribe sells his parcel of land for a
ridiculously low sum, admits the fact of sale, does nothing about it for a
number of years, he should not be allowed now to claim that the contract
was invalid. The fact that the bargain was a hard one is not important, the
sale having been made freely and voluntarily. (Askay v. Cosolan, 46 Phil.
179). The rule holds true even if the price seems too inadequate as to
shock the conscience of man. (Alarcon v. Kasilag, 40 O.G. Sup. No. 16, p.
203).
o EXCEPTION: Where low price indicates defect in the consent, such as when
fraud, mistake, or undue influence is present, in which case the contract may be
annulled not because of the inadequacy of the price, but because the consent is
vitiated (recall lesson on vices of consent in your Obligations and Contracts)
Example of Art. 1471:
o Sokka wants to transfer his parcel of land to Katara, his sister, but he wants to
minimize the payment of his taxes on the transfer (assume this is before the
effectivity of the train law, when the tax on donation was higher than the tax on
sale of land by an individual). Thus, instead of executing a deed of donation,
Sokka, cunning as he is, executes a deed of sale to Katara, for the amount of
P1,000,000, and then registered the sale. But in reality, Sokka had no intention to
receive money from Katara, as he just wanted to give the land to her. The price in
this case is therefore simulated (i.e. false). The legal effect is that the sale is void,
but the contract shall be valid as a donation.
Article 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)
Article 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)
Page | 8
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTE:
•
Reason why price fixing cannot be left to the discretion of one of them: the other could
not have consented to the price, for he did not know what it was.
Article 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)
Article 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)
NOTES:
•
•
•
•
The contract of sale being consensual, it is perfected upon the meeting of the minds of the
parties, without the necessity of any other circumstances.
But the ownership is not transferred until the delivery of the thing. (see Art. 1477)
Requirements for perfection:
o (a) When parties are face to face, when an offer is accepted without conditions
and without qualifications. (A conditional acceptance is a counter-offer.) (NOTE:
If negotiated thru a phone, it is as if the parties are face to face.)
o (b) When contract is thru correspondence or thru telegram, there is perfection
when the offeror receives or has knowledge of the acceptance by the offeree.
[NOTE: If the buyer has already accepted, but the seller does not know yet of the
acceptance, the seller may still withdraw. (Laudico v. Arias, 43 Phil. 270).]
o (c) When a sale is made subject to a suspensive condition, perfection is had from
the moment the condition is fulfilled.
Advertisements are mere invitations to make an offer (Art. 1325, Civil Code) and,
therefore, one cannot compel the advertiser to sell.
Article 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.
(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)
Page | 9
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Article 1477. The ownership of the thing sold shall be transferred to the vendee upon the
actual or constructive delivery thereof. (n)
Article 1478. The parties may stipulate that ownership in the thing shall not pass to the
purchaser until he has fully paid the price. (n)
NOTES:
•
GENERAL RULE: It is only after delivery of the thing sold that the purchaser acquires a
real right or ownership over it. In other words, ownership of the thing sold is transferred
only upon delivery.
o EXCEPTION: Where the parties otherwise stipulate. (e.g. 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.)
Article 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 promisor if the promise is supported by a consideration distinct from the
price. (1451a)
NOTES:
•
•
•
A unilateral promise or offer to sell or to buy a thing which is not accepted creates no
judicial effect or legal bond. Such an unaccepted offer is called policitation.
Option – a privilege existing in one person for which he has paid a consideration which
gives him the right to buy/sell, if he chooses, at any time within the agreed period at a
fixed price, or under, or in compliance with certain terms and conditions. This is what is
being referred to in the second paragraph of the above article.
Effect of accepted unilateral promise (2nd paragraph):
o A unilateral promise to sell or to buy a determinate thing for a price certain does
not bind the promisor 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.
o
Article 1480. Any injury to or benefit from the thing sold, after the contract has been
perfected, from the moment of the perfection of the contract to the time of delivery, shall be
governed by articles 1163 to 1165, and 1262.
This rule shall apply to the sale of fungible things, made independently and for a single
price, or without consideration of their weight, number, or measure.
Should fungible things be sold for a price fixed according to weight, number, or measure,
the risk shall not be imputed to the vendee until they have been weighed, counted, or
measured and delivered, unless the latter has incurred in delay. (1452a)
NOTES:
•
Rules on risk of loss or deterioration (for paragraph 1 and 2 of Art. 1480):
o If thing lost before perfection – seller bears the loss (res perit domino)
o If thing lost at the time of perfection – contract void; no object
o If thing lost after perfection but before delivery – buyer bears the loss
o If thing lost after delivery – buyer bears the loss
Page | 10
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
•
Rule for paragraph 3:
o 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. Par. 3 is an
exception to the rule that vendee bears the risk of loss after perfection but before
delivery.
Article 1481. In the contract of sale of goods by description or by sample, the contract may
be rescinded if the bulk of the goods delivered do not correspond with the description or
the sample, and if the contract be by sample as well as description, it is not sufficient that
the bulk of goods correspond with the sample if they do not also correspond with the
description.
The buyer shall have a reasonable opportunity of comparing the bulk with the description
or the sample. (n)
NOTES:
•
•
•
•
•
bulk of the goods – denotes the goods themselves, as distinguished from the sample
and/or description with which they must correspond
Sale by description – occurs when a seller sells things as being of a particular kind, the
buyer not knowing whether the seller’s representations are true or false, but relying on
them as true
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
In either case (description/sample), if the bulk of the goods do not correspond with the
description/sample, the contract may be rescinded
Sale by sample and by description – the goods must satisfy BOTH the sample and
description.
Article 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)
NOTES:
•
Earnest money is money given by the buyer to the seller to bind the bargain. It is a partial
payment and is considered proof of the perfection of the contract.
•
•
•
Earnest money
Part of the purchase price
Given only when there is already a
sale
When given, buyer bound to pay
the balance
•
•
•
Option money
Distinct consideration for the
option contract
Applies to a sale not yet perfected
Would-be buyer is not required to
buy
*But option money may become earnest money if the parties so agree
Article 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)
Page | 11
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
GENERAL RULE: Contract of sale may be entered into in any form, provided all the
essential requisites are present.
o EXCEPTION #1: If contract falls under Statute of Frauds (Recall discussion in
your Obligations and Contracts (See Art. 1403 par. 2)) – if not in writing, contract
is unenforceable
▪ Remember that Statute of Frauds applies only to executory contracts and
not to contracts which are totally or partially performed.
o EXCEPTION #2: For a sale of real property to be effective against third persons,
the sale must be registered in the Registry of Deeds of the province or city where
the property is situated. If not registered, sale is still valid as between the parties
only.
o EXCEPTION #3: The sale of a piece of land or interest therein when made thru
an agent is void (not merely unenforceable) unless the agent’s authority is in
writing. (Art. 1874, Civil Code). This is true even if the sale itself is in a public
instrument, or even registered.
Article 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more
installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted,
should the vendee's failure to pay cover two or more installments. In this case, he
shall have no further action against the purchaser to recover any unpaid balance of
the price. Any agreement to the contrary shall be void. (1454-A-a)
NOTES:
•
•
•
This is the Recto Law, which covers on the sale of personal property payable in
installments
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.
Right of vendor to recover unpaid balance of purchase price:
o Remedy of specific performance – the vendor may still recover from the purchaser
the unpaid balance of the price, if any on the real and personal properties of the
purchaser not exempt by law from attachment or execution
o 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.
o Remedy of foreclosure – if the vendor has chosen the third remedy of foreclosure
of the chattel mortgage, he shall have no further action against the vendee for the
recovery of any unpaid balance of the price and any agreement to the contrary is
void. The foreclosure is effected by selling the mortgaged personal property at
public auction and applying the proceeds of the sale to the satisfaction of the
claim secured by the mortgage.
Article 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)
Page | 12
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Article 1486. In the case 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)
RELEVANT SPECIAL LAW IN CONNECTION WITH ART. 1486:
AN ACT TO PROVIDE PROTECTION TO BUYERS OF REAL ESTATE ON
INSTALLMENT PAYMENTS. (Rep. Act No. 6552 a.k.a. MACEDA LAW)
Section 1. This Act shall be known as the "Realty Installment Buyer Act."
Section 2. It is hereby declared a public policy to protect buyers of real estate on
installment payments against onerous and oppressive conditions.
Section 3. In all transactions or contracts involving the sale or financing of real estate on
installment payments, including residential condominium apartments but excluding
industrial lots, commercial buildings and sales to tenants under Republic Act Numbered
Thirty-eight hundred forty-four, as amended by Republic Act Numbered Sixty-three
hundred eighty-nine, where the buyer has paid at least two years of installments, the
buyer is entitled to the following rights in case he defaults in the payment of succeeding
installments:
(a) To pay, without additional interest, the unpaid installments due within the total
grace period earned by him which is hereby fixed at the rate of one month grace
period for every one year of installment payments made: Provided, That this right
shall be exercised by the buyer only once in every five years of the life of the
contract and its extensions, if any.
(b) If the contract is canceled, the seller shall refund to the buyer the cash
surrender value of the payments on the property equivalent to fifty per cent of the
total payments made, and, after five years of installments, an additional five per
cent every year but not to exceed ninety per cent of the total payments made:
Provided, That the actual cancellation of the contract shall take place after thirty
days from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in the computation
of the total number of installment payments made.
Section 4. In case where less than two years of installments were paid, the seller shall
give the buyer a grace period of not less than sixty days from the date the installment
became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the
seller may cancel the contract after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act.
Section 5. Under Section 3 and 4, the buyer shall have the right to sell his rights or assign
the same to another person or to reinstate the contract by updating the account during the
grace period and before actual cancellation of the contract. The deed of sale or
assignment shall be done by notarial act.
Section 6. The buyer shall have the right to pay in advance any installment or the full
unpaid balance of the purchase price any time without interest and to have such full
payment of the purchase price annotated in the certificate of title covering the property.
Page | 13
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Section 7. Any stipulation in any contract hereafter entered into contrary to the
provisions of Sections 3, 4, 5 and 6, shall be null and void.
Section 8. If any provision of this Act is held invalid or unconstitutional, no other
provision shall be affected thereby.
Section 9. This Act shall take effect upon its approval.
Article 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)
Article 1488. The expropriation of property for public use is governed by special laws.
(1456)
NOTES:
•
Expropriation is the exercise of the government of its power of eminent domain. Essential
to the exercise of this power is that the private property must be taken for a public
purpose, and there must be payment of just compensation.
MODULE ACTIVITIES
I.
Key terms. Define or give the meaning of the following:
1) Contract of sale;
2) Natural elements;
3) Sale by description;
4) Fungible goods; and
5) Conditional sale.
II.
Discussion. Discuss the following:
1) Distinguish earnest money from option money.
2) What remedies are available to a vendor in sale of personal property payable in
installments? In each of the remedies discussed, is the vendor allowed to recover
the unpaid balance of the price?
3) Give the characteristics of a contract of sale. Explain at least three of them.
4) Under the Statute of Frauds, what contract of sale must be in writing to be
enforceable by court action?
5) Give at least three distinctions between a contract of sale and a contract of
agency.
III.
Problems. Answer the questions that follow. Explain briefly the rule or reason for
your answer. A mere YES or NO answer is not allowed.
1) S sold to B certain goods. At the time of the sale, C is not the owner of the good.
May there be a valid sale to B?
2) Same example. The only problem now I that the goods sold have not yet been
identified at the time of the contract. May there be a valid sale to B?
3) The property sold by S is a portion of a parcel of land without indicating the
specific portion thereof. May there be a valid sale to B?
4) Same example. The only problem now is that S and B have not agreed upon a
definite price at the time of sale. May there be a valid contract of sale between
them?
5) Same example. The only problem in the case is that the price was fixed only by S.
Is the sale valid?
Page | 14
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
CHAPTER 2
Capacity to Buy or Sell
Article 1489. All persons who are authorized in this Code to obligate themselves, may enter
into a contract of sale, saving the modifications contained in the following articles.
Where necessaries are those sold and delivered to a minor or other person without capacity
to act, he must pay a reasonable price therefor. Necessaries are those referred to in article
290. (1457a)
NOTE:
•
•
•
•
GENERAL RULE: All persons, whether natural or juridical, who can bind themselves by
contract have also legal capacity to buy and sell.
EXCEPTIONS: If the law otherwise states that a party is incapacitated.
Kinds of Incapacity:
o Absolute – persons who cannot bind themselves (e.g. minor or insane)
o Relative – exists only with reference to certain persons or a certain class of
property (e.g. Art. 1490)
Necessaries – things which are needed for sustenance, dwelling, clothing, and medical
attendance, in keeping with the financial capacity of the family of the incapacitated
person
o Generally, contracts entered into by incapacitated persons are voidable. However,
where necessaries are sold to him, he must pay a reasonable price therefor. The
contract is, in such a case, valid.
Article 1490. The husband and the wife cannot sell property to each other, except:
(1) When a separation of property was agreed upon in the marriage settlements; or
(2) When there has been a judicial separation of property under article 191. (1458a)
NOTES:
•
A sale between a husband and wife is generally VOID AB INITIO, except in paragraphs
(1) and (2) above.
Article 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 intrusted to
them, unless the consent of the principal has been given;
(3) Executors and administrators, the property of the estate under administration;
(4) Public officers and employees, the property of the State or of any subdivision
thereof, or of any government-owned or controlled corporation, or institution, the
administration of which has been intrusted to them; this provision shall apply to
judges and government experts who, in any manner whatsoever, take part in the
sale;
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts,
and other officers and employees connected with the administration of justice, the
Page | 15
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
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)
NOTE:
•
Status of sale in violation of this article: VOIDABLE only. Can be ratified.
Article 1492. The prohibitions in the two preceding articles are applicable to sales in legal
redemption, compromises and renunciations. (n)
MODULE ACTIVITIES
Key Terms. Define or give the meaning of the following:
I.
1. Necessaries;
2. Compromise
II.
Discussions. Discuss the following:
1. Are husband and wife allowed to sell property to each other?
2. Under the law, who may enter into a contract of sale?
III.
Problems. Answer the questions that follow. A mere YES or NO answer is not
allowed.
1. B, a minor, bought a pair of imported shoes worth P3,000 from a department
store. Can F, father, cancel the sale on the ground of the minority of B?
2. H and W are husband and wife. After selling his property to W, H borrowed a big
amount of money from C. It appears that H is now bankrupt. Has C the right to
question the sale of H’s property to W in order to have said property answer for
H’s indebtedness to him?
CHAPTER 3
Effects of the Contract When the Thing Sold Has Been Lost
Article 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)
NOTES:
•
•
Effect of loss of thing at the time of sale (perfection):
o Thing entirely lost – contract is inexistent and void, there being no object
o Thing partially lost – vendee may elect between:
▪ withdrawing from the contract; or
▪ demanding the remaining part, paying its proportionate price.
Compare this article with Art. 1480 (previously discussed).
Page | 16
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
•
A thing is considered 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.
Article 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)
NOTES:
•
•
While Art. 1493 applies to specific things, this article (1494) deals with specific goods.
Specific goods are goods identified and agreed upon at the time a contract of sale is
made.
Paragraph 2 above applies only if the sale is divisible, that is, its consideration is made up
of several parts. If it is indivisible, apply the rule in Art. 1493, par. 2.
MODULE ACTIVITIES
I.
Key Terms. Define or give the meaning of the following:
1. Specific goods; and
2. Divisible contract.
II.
Discussions. Discuss the following:
1. When is a thing sold considered lost?
2. Give the effect in case the thing sold is
a. Lost totally; and
b. Lost partially.
III.
Problems. Explain or state briefly the rule or reason for your answer. A mere YES or
NO answer is not allowed.
1. S sold to B 100 bags of sugar at P70.00 per bag for a total price of P70,000. S was
able to deliver only 98 bags because the two (2) bags were stolen without the fault
of S. Has S the right to insist that B pay for the 98 bags since there was no fault in
his part and only two (2) bags are lacking? What rights, if any, are given by law to
B?
2. Same example. The price was fixed at P70,000 for the whole lot, irrespective of
the number of bags which happens to be also 100 bags. Will your answer be the
same? Why or why not?
Page | 17
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
CHAPTER 4
Obligations of the Vendor
SECTION 1
General Provisions
Article 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)
NOTES:
•
•
Principal obligations of the vendor:
o To transfer the ownership of the determinate thing sold
o To deliver the thing
o To warrant against eviction and hidden defects
o To take care of the thing, pending delivery, with proper diligence
o To pay for the expenses for the execution and registration of the deed of sale,
unless there is a stipulation to the contrary.
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)”
Article 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)
NOTES:
• NO DELIVERY (actual/constructive), NO TRANSFER OF OWNERSHIP
• Ways of effecting delivery:
o Actual or real delivery – physical delivery of the thing
o Constructive or legal delivery
▪ By execution of a public instrument
▪ By traditio symbolica
▪ By traditio longa manu
▪ By traditio brevi manu
▪ By traditio constitutum possessorium
▪ By quasi-delivery or quasi-traditio
o Delivery in any other manner signifying an agreement that the possession is
transferred to the vendee
SECTION 2
Delivery of the Thing Sold
Article 1497. The thing sold shall be understood as delivered, when it is placed in the
control and possession of the vendee. (1462a)
Page | 18
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
•
•
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
Delivery of the thing, together with the payment of the price, marks the consummation of
the contract of sale.
See Art. 1480.
Article 1498. When the sale is made through a public instrument, the execution thereof
shall be equivalent to the delivery of the thing which is the object of the contract, if from
the deed the contrary does not appear or cannot clearly be inferred.
With regard to movable property, its delivery may also be made by the delivery of the keys
of the place or depository where it is stored or kept. (1463a)
NOTES:
•
•
•
•
A public instrument is one which is acknowledged before a notary public or any official
authorized to administer oath, by the person who executed the same.
Execution of public instrument as a manner of delivery applies to movable as well as
immovable property.
Symbolic delivery by the execution of a public instrument is equivalent to actual delivery
only when the thing is subject to the control of the vendor. In other words, a seller cannot
deliver constructively if he cannot delivery actually even if he wants to.
o Example: Soriano sold his parcel of land to Brigondo, and the delivery was
effected by the execution of a public instrument. Unknown to Brigondo, the
parcel of land in question was actually occupied by a group of squatters who do
not recognize Soriano’s title and refuse to vacate the premises. In this case, no
constructive or symbolic delivery has taken place. The ownership of the land still
belongs to Soriano despite the execution of the public instrument, as he does not
have control over the thing sold.
Paragraph 2 of this article refers to symbolic tradition. This is when, to effect the
delivery, the parties make use of a token symbol to represent the thing delivered.
o Example: the giving of the keys to a warehouse where the thing sold is stored
Article 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)
NOTES:
•
•
The first part of this article refers to traditio longa manu. It 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.
The second part of the article refers to traditio brevi manu. Here, 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.
Article 1500. There may also be tradition constitutum possessorium. (n)
Page | 19
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
•
Tradition constitutum possessorium 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.
Some examples:
o Simone sells a car to Basilio. However, at the moment of sale, the car is being
kept at a garage outside town. Simone simply tells Basilio the directions to the
garage and states that he can get it any time Basilio desires. This is traditio longa
manu.
o Barry is currently renting a condominium unit belonging to Selma. Selma tells
Barry that she is selling the condo to him for a specified sum. Barry accepts. This
is traditio brevi manu, as Barry, the vendee, is already in possession of the thing
sold (the condo) at the time of sale.
o Samson sold a house and lot to Belilah for a specified sum, which the latter
accepts. After delivery of the house and lot, Samson immediately realizes that he
has no place to stay. He thus pleaded with Belilah to let him stay in the
aforementioned house as a lessee, which the latter agreed to. This is tradition
constitutum possessorium. Here, Samson, the vendor, continues in possession of
the property sold (the house) not as owner, but as a lessee.
Article 1501. With respect to incorporeal property, the provisions of the first paragraph of
article 1498 shall govern. In any other case wherein said provisions are not applicable, the
placing of the titles of ownership in the possession of the vendee or the use by the vendee of
his rights, with the vendor's consent, shall be understood as a delivery. (1464)
NOTES:
•
This is what is referred to as quasi-traditio.
o Here, delivery is effected:
▪ By the execution of a public instrument;
▪ If the above is not applicable, by the placing of titles of ownership in the
possession of the vendee; or
▪ By allowing the vendee to use his rights as new owner with the consent of
the vendor
Article 1502. When goods are delivered to the buyer "on sale or return" to give the buyer
an option to return the goods instead of paying the price, the ownership passes to the buyer
on delivery, but he may revest the ownership in the seller by returning or tendering the
goods within the time fixed in the contract, or, if no time has been fixed, within a
reasonable time. (n)
When goods are delivered to the buyer on approval or on trial or on satisfaction, or other
similar terms, the ownership therein passes to the buyer:
(1) When he signifies his approval or acceptance to the seller or does any other act
adopting the transaction;
(2) If he does not signify his approval or acceptance to the seller, but retains the
goods without giving notice of rejection, then if a time has been fixed for the return
of the goods, on the expiration of such time, and, if no time has been fixed, on the
expiration of a reasonable time. What is a reasonable time is a question of fact. (n)
Page | 20
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
•
Sale or return – a contract by which the 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.
Sale on trial or approval – a contract in the nature of an option to purchase if the goods
prove satisfactory, the approval of the buyer being a condition precedent. Here, 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 give notice of dissatisfaction to the seller
within the time contemplated by the parties.
Sale or return
1. Sale subject to a resolutory condition
2. Depends entirely on the will of the
buyer
3. Ownership of the goods passes to the
buyer on delivery and subsequent
return of the goods reverts ownership
in the seller
4. The risk of loss rests upon the buyer
Sale on trial
1. Sale subject to a suspensive condition
2. Depends on the character or quality of
the goods
3. Ownership remains in the seller until
the buyer signifies his approval or
acceptance to the seller
4. Risk still remains with the seller
Article 1503. When there is a contract of sale of specific goods, the seller may, by the terms
of the contract, reserve the right of possession or ownership in the goods until certain
conditions have been fulfilled. The right of possession or ownership may be thus reserved
notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the
purpose of transmission to the buyer.
Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or
his agent, or to the order of the seller or of his agent, the seller thereby reserves the
ownership in the goods. But, if except for the form of the bill of lading, the ownership
would have passed to the buyer on shipment of the goods, the seller's property in the goods
shall be deemed to be only for the purpose of securing performance by the buyer of his
obligations under the contract.
Where goods are shipped, and by the bill of lading the goods are deliverable to order of the
buyer or of his agent, but possession of the bill of lading is retained by the seller or his
agent, the seller thereby reserves a right to the possession of the goods as against the buyer.
Where the seller of goods draws on the buyer for the price and transmits the bill of
exchange and bill of lading together to the buyer to secure acceptance or payment of the
bill of exchange, the buyer is bound to return the bill of lading if he does not honor the bill
of exchange, and if he wrongfully retains the bill of lading he acquires no added right
thereby. If, however, the bill of lading provides that the goods are deliverable to the buyer
or to the order of the buyer, or is indorsed in blank, or to the buyer by the consignee
named therein, one who purchases in good faith, for value, the bill of lading, or goods from
the buyer will obtain the ownership in the goods, although the bill of exchange has not been
honored, provided that such purchaser has received delivery of the bill of lading indorsed
by the consignee named therein, or of the goods, without notice of the facts making the
transfer wrongful. (n)
Page | 21
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
As a general rule, delivery, be it only constructive, passes title in the thing sold; and
delivery to the carrier is deemed to be a delivery to the buyer
o EXCEPTIONS:
▪ If a contrary intention appears by the terms of the contract
▪ In the cases provided in the second, third, and last paragraphs of Art. 1503
Article 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery has been
made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been
retained by the seller merely to secure performance by the buyer of his obligations
under the contract, the goods are at the buyer's risk from the time of such delivery;
(2) Where actual delivery has been delayed through the fault of either the buyer or
seller the goods are at the risk of the party in fault. (n)
NOTES:
•
•
•
GENERAL RULE: res perit domino. The risk is borne by the owner of the thing at the
time of the loss.
This article discusses the exceptions to the rule on res perit domino, as follows:
o Where the seller reserves the ownership of the goods merely to secure the
performance by the buyer of his obligations under the contract, the buyer still
bears the loss
o Where actual delivery has been delayed through the fault of either the buyer or
seller, the goods are at the risk of the party at fault with respect to any loss which
might not have occurred but for such fault.
Compare this article to the discussion in Article 1480.
Article 1505. Subject to the provisions of this Title, where goods are sold by a person who is
not the owner thereof, and who does not sell them under authority or with the consent of
the owner, the buyer acquires no better title to the goods than the seller had, unless the
owner of the goods is by his conduct precluded from denying the seller's authority to sell.
Nothing in this Title, however, shall affect:
(1) The provisions of any factors' act, recording laws, or any other provision of law
enabling the apparent owner of goods to dispose of them as if he were the true
owner thereof;
(2) The validity of any contract of sale under statutory power of sale or under the
order of a court of competent jurisdiction;
(3) Purchases made in a merchant's store, or in fairs, or markets, in accordance
with the Code of Commerce and special laws. (n)
NOTES:
•
•
GENERAL RULE: No one can give what he has not. The buyer gets only such rights as
the seller had. A spring cannot rise higher than its source.
EXCEPTIONS TO THE RULE:
Page | 22
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
o Where the owner of the goods is, by his own conduct, precluded from denying the
seller’s authority to sell
o Where the law enables the apparent owner to dispose of the goods as if he were
the true owner thereof
o Where the sale is sanctioned by statutory or judicial authority
o Where the sale is made at merchant’s stores, fairs, or markets
o Where the seller has a voidable title which has not been avoided at the time of the
sale; and
o Where the seller subsequently acquires title
Article 1506. Where the seller of goods has a voidable title thereto, but his title has not been
avoided at the time of the sale, the buyer acquires a good title to the goods, provided he
buys them in good faith, for value, and without notice of the seller's defect of title. (n)
NOTES:
•
•
If the seller has only a voidable title to the goods, the buyer acquires a good title to the
goods provided he buys them:
o Before the title of the seller has been avoided;
o In good faith and for value; and
o Without notice to the seller’s defect of title.
Example: Sasha, a minor, sold her iPhone to Bertholdt. Under the law, the sale is
voidable as a minor is incapacitated to enter into a contract of sale. If Bertholdt
subsequently sells the iPhone to Reiner, who buys the same in good faith and for value,
and has no knowledge of Bertholdt’s defective title to the iPhone, Reiner acquires a good
title thereto, provided the sale to Reiner was made before Sasha’s sale was annulled.
[Arts. 1507-1520 discuss negotiable documents of title, which is not included in the CPA
examination syllabus effective 2019. It is thus omitted from the coverage of this course.]
Article 1521. Whether it is for the buyer to take possession of the goods or of the seller to
send them to the buyer is a question depending in each case on the contract, express or
implied, between the parties. Apart from any such contract, express or implied, or usage of
trade to the contrary, the place of delivery is the seller's place of business if he has one, and
if not his residence; but in case of a contract of sale of specific goods, which to the
knowledge of the parties when the contract or the sale was made were in some other place,
then that place is the place of delivery.
Where by a contract of sale the seller is bound to send the goods to the buyer, but no time
for sending them is fixed, the seller is bound to send them within a reasonable time.
Where the goods at the time of sale are in the possession of a third person, the seller has not
fulfilled his obligation to deliver to the buyer unless and until such third person
acknowledges to the buyer that he holds the goods on the buyer's behalf.
Demand or tender of delivery may be treated as ineffectual unless made at a reasonable
hour. What is a reasonable hour is a question of fact.
Unless otherwise agreed, the expenses of and incidental to putting the goods into a
deliverable state must be borne by the seller. (n)
Article 1522. Where the seller delivers to the buyer a quantity of goods less than he
contracted to sell, the buyer may reject them, but if the buyer accepts or retains the goods
so delivered, knowing that the seller is not going to perform the contract in full, he must
pay for them at the contract rate. If, however, the buyer has used or disposed of the goods
delivered before he knows that the seller is not going to perform his contract in full, the
buyer shall not be liable for more than the fair value to him of the goods so received.
Page | 23
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell,
the buyer may accept the goods included in the contract and reject the rest. If the buyer
accepts the whole of the goods so delivered he must pay for them at the contract rate.
Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a
different description not included in the contract, the buyer may accept the goods which
are in accordance with the contract and reject the rest.
In the preceding two paragraphs, if the subject matter is indivisible, the buyer may reject
the whole of the goods.
The provisions of this article are subject to any usage of trade, special agreement, or course
of dealing between the parties. (n)
EXAMPLES:
•
Santa sold to Boris 100 cavans of rice at P1,000 per cavan or for a total price of
P100,000, delivery to be made at the place of business of Boris. If Santa delivers only 50
cavans, Boris can refuse to accept them. If he accepts them knowing that Santa is not
going to perform the contract in full, he is liable to pay at the rate agreed upon for the 50
cavans, or P50,000.
But if Boris was not aware that full delivery would not be made, he would be liable only
for the fair value of the goods at the time of delivery even if it should be less than the
contract price.
Of course, Boris cannot be liable, in any case, for more than the contract price of P50,000
with respect to the 50 cavans actually received.
•
In the preceding example, if Santa delivered 150 cavans of rice, B may accept only 100
and reject the rest. If he accepts the entire delivery, he may pay for them at the same
contract rate of P1,000 per cavan or P150,000 for the 150 cavans.
•
Sasuke agreed to sell to Boruto a live carabao with a weight of not less than 100 kilos but
not more than 120 kilos. Sasuke delivered a carabao weighing 130 kilos. Boruto may
reject the carabao.
•
If the agreement is for Sakura to delivery “pilit” rice mixed with corn of a particular
variety and the rice or corn delivered is of a different variety, Benjie may reject the
whole of the goods.
Article 1523. Where, in pursuance of a contract of sale, the seller is authorized or required
to send the goods to the buyer, delivery of the goods to a carrier, whether named by the
buyer or not, for the purpose of transmission to the buyer is deemed to be a delivery of the
goods to the buyer, except in the cases provided for in article 1503, first, second and third
paragraphs, or unless a contrary intent appears.
Unless otherwise authorized by the buyer, the seller must make such contract with the
carrier on behalf of the buyer as may be reasonable, having regard to the nature of the
goods and the other circumstances of the case. If the seller omit so to do, and the goods are
lost or damaged in course of transit, the buyer may decline to treat the delivery to the
carrier as a delivery to himself, or may hold the seller responsible in damages.
Unless otherwise agreed, where goods are sent by the seller to the buyer under
circumstances in which the seller knows or ought to know that it is usual to insure, the
seller must give such notice to the buyer as may enable him to insure them during their
Page | 24
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
transit, and, if the seller fails to do so, the goods shall be deemed to be at his risk during
such transit. (n)
NOTES:
•
•
GENERAL RULE: When the seller is authorized or required to send the goods to the
buyer, delivery of such goods to the carrier constitutes delivery to the buyer, whether the
carrier is named by the buyer or not.
EXCEPTIONS: See paragraphs 1, 2 and 3 of Art. 1503; or when a contrary intention
appears
Article 1524. The vendor shall not be bound to deliver the thing sold, if the vendee has not
paid him the price, or if no period for the payment has been fixed in the contract. (1466)
NOTES:
•
•
GENERAL RULE: the thing shall not be delivered unless the price be paid
EXCEPTION: if a time for the payment has been fixed in the contract
o Example: Sonja sold to Bravo the former’s Playstation 4 for P15,000. No date is
fixed by the parties for the performance of their respective obligations. In this
case, Sonja is not bound to deliver the PS4, if Bravo himself does not pay the
price. But if a time for payment has been fixed in the contract, say, within two
months, then Sonja is obliged to deliver the PS4 where the term of credit has not
expired although Bravo has not yet paid the price.
Article 1525. The seller of goods is deemed to be an unpaid seller within the meaning of this
Title:
(1) When the whole of the price has not been paid or tendered;
(2) When a bill of exchange or other negotiable instrument has been received as
conditional payment, and the condition on which it was received has been broken by
reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise.
In articles 1525 to 1535 the term "seller" includes an agent of the seller to whom the bill of
lading has been indorsed, or a consignor or agent who has himself paid, or is directly
responsible for the price, or any other person who is in the position of a seller. (n)
NOTE:
•
A seller is unpaid within the definition of this article whether title has or has not passed.
Article 1526. Subject to the provisions of this Title, notwithstanding that the ownership in
the goods may have passed to the buyer, the unpaid seller of goods, as such, has:
(1) A lien on the goods or right to retain them for the price while he is in possession
of them;
(2) In case of the insolvency of the buyer, a right of stopping the goods in transitu
after he has parted with the possession of them;
(3) A right of resale as limited by this Title;
(4) A right to rescind the sale as likewise limited by this Title.
Page | 25
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in
addition to his other remedies a right of withholding delivery similar to and coextensive
with his rights of lien and stoppage in transitu where the ownership has passed to the
buyer. (n)
NOTE:
•
These are the remedies of the unpaid seller.
Article 1527. Subject to the provisions of this Title, the unpaid seller of goods who is in
possession of them is entitled to retain possession of them until payment or tender of the
price in the following cases, namely:
(1) Where the goods have been sold without any stipulation as to credit;
(2) Where the goods have been sold on credit, but the term of credit has expired;
(3) Where the buyer becomes insolvent.
The seller may exercise his right of lien notwithstanding that he is in possession of the
goods as agent or bailee for the buyer. (n)
NOTES:
•
(a) This article refers to the cases when the unpaid seller has a possessory lien.
o Example: S sold B a specific car. No term of credit was given. S can exercise a
possessory lien until he is paid.
Article 1528. Where an unpaid seller has made part delivery of the goods, he may exercise
his right of lien on the remainder, unless such part delivery has been made under such
circumstances as to show an intent to waive the lien or right of retention. (n)
Article 1529. The unpaid seller of goods loses his lien thereon:
(1) When he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the ownership in the goods or the right
to the possession thereof;
(2) When the buyer or his agent lawfully obtains possession of the goods;
(3) By waiver thereof.
The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that
he has obtained judgment or decree for the price of the goods. (n)
Article 1530. Subject to the provisions of this Title, when the buyer of goods is or becomes
insolvent, the unpaid seller who has parted with the possession of the goods has the right of
stopping them in transitu, that is to say, he may resume possession of the goods at any time
while they are in transit, and he will then become entitled to the same rights in regard to
the goods as he would have had if he had never parted with the possession. (n)
NOTES:
•
Right of stoppage in transitu – seller may resume possession of the goods while they are
in transit when the buyer is or becomes insolvent
o Requisites for exercise of right of stoppage in transitu:
Page | 26
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
▪
▪
▪
▪
▪
▪
Seller must be unpaid
Buyer must be insolvent
Goods must be in transit
Seller must either actually take possession of the goods sold or give notice
of his claim to the carrier or other person in possession
The seller must surrender the negotiable document of title, if any, issued
by the carrier or bailee
The seller must bear the expenses of delivery of the goods after the
exercise of the right
Article 1531. Goods are in transit within the meaning of the preceding article:
(1) From the time when they are delivered to a carrier by land, water, or air, or
other bailee for the purpose of transmission to the buyer, until the buyer, or his
agent in that behalf, takes delivery of them from such carrier or other bailee;
(2) If the goods are rejected by the buyer, and the carrier or other bailee continues
in possession of them, even if the seller has refused to receive them back.
Goods are no longer in transit within the meaning of the preceding article:
(1) If the buyer, or his agent in that behalf, obtains delivery of the goods before their
arrival at the appointed destination;
(2) If, after the arrival of the goods at the appointed destination, the carrier or other
bailee acknowledges to the buyer or his agent that he holds the goods on his behalf
and continues in possession of them as bailee for the buyer or his agent; and it is
immaterial that further destination for the goods may have been indicated by the
buyer;
(3) If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer
or his agent in that behalf.
If the goods are delivered to a ship, freight train, truck, or airplane chartered by the
buyer, it is a question depending on the circumstances of the particular case,
whether they are in the possession of the carrier as such or as agent of the buyer.
If part delivery of the goods has been made to the buyer, or his agent in that behalf, the
remainder of the goods may be stopped in transitu, unless such part delivery has been
under such circumstances as to show an agreement with the buyer to give up possession of
the whole of the goods. (n)
Article 1532. The unpaid seller may exercise his right of stoppage in transitu either by
obtaining actual possession of the goods or by giving notice of his claim to the carrier or
other bailee in whose possession the goods are. Such notice may be given either to the
person in actual possession of the goods or to his principal. In the latter case the notice, to
be effectual, must be given at such time and under such circumstances that the principal,
by the exercise of reasonable diligence, may prevent a delivery to the buyer.
When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in
possession of the goods, he must redeliver the goods to, or according to the directions of,
the seller. The expenses of such delivery must be borne by the seller. If, however, a
negotiable document of title representing the goods has been issued by the carrier or other
bailee, he shall not be obliged to deliver or justified in delivering the goods to the seller
unless such document is first surrendered for cancellation. (n)
Page | 27
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
Ways of effecting a stoppage in transitu:
o By taking actual possession of the goods; or
o By giving notice of his claim to the carrier or bailee
Article 1533. Where the goods are of perishable nature, or where the seller expressly
reserves the right of resale in case the buyer should make default, or where the buyer has
been in default in the payment of the price for an unreasonable time, an unpaid seller
having a right of lien or having stopped the goods in transitu may resell the goods. He shall
not thereafter be liable to the original buyer upon the contract of sale or for any profit
made by such resale, but may recover from the buyer damages for any loss occasioned by
the breach of the contract of sale.
Where a resale is made, as authorized in this article, the buyer acquires a good title as
against the original buyer.
It is not essential to the validity of resale that notice of an intention to resell the goods be
given by the seller to the original buyer. But where the right to resell is not based on the
perishable nature of the goods or upon an express provision of the contract of sale, the
giving or failure to give such notice shall be relevant in any issue involving the question
whether the buyer had been in default for an unreasonable time before the resale was
made.
It is not essential to the validity of a resale that notice of the time and place of such resale
should be given by the seller to the original buyer.
The seller is bound to exercise reasonable care and judgment in making a resale, and
subject to this requirement may make a resale either by public or private sale. He cannot,
however, directly or indirectly buy the goods. (n)
NOTES:
•
•
•
When right of resale exists:
o (a) perishable goods
o (b) express stipulation
o (c) unreasonable default
Goods are perishable if they are of a nature that they deteriorate rapidly.
Note that the deficiency in the price may be obtained as damages. This happens when the
resale price is lower than the original selling price. On the other hand, any excess in the
price goes to the seller.
Article 1534. An unpaid seller having the right of lien or having stopped the goods in
transitu, may rescind the transfer of title and resume the ownership in the goods, where he
expressly reserved the right to do so in case the buyer should make default, or where the
buyer has been in default in the payment of the price for an unreasonable time. The seller
shall not thereafter be liable to the buyer upon the contract of sale, but may recover from
the buyer damages for any loss occasioned by the breach of the contract.
The transfer of title shall not be held to have been rescinded by an unpaid seller until he
has manifested by notice to the buyer or by some other overt act an intention to rescind. It
is not necessary that such overt act should be communicated to the buyer, but the giving or
failure to give notice to the buyer of the intention to rescind shall be relevant in any issue
Page | 28
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
involving the question whether the buyer had been in default for an unreasonable time
before the right of rescission was asserted. (n)
NOTES:
•
•
•
•
This Article refers to the right to rescind the transfer of title and to resume the ownership
in the goods.
This applies in case there has been:
1) express stipulation or reservation;
2) unreasonable default.
Note that damages may be recovered for the breach of contract.
What should be done in order to rescind the transfer of title?
o ANS.: There must be notice to the buyer or there must be an overt act showing an
intention to rescind.
Article 1535. Subject to the provisions of this Title, the unpaid seller's right of lien or
stoppage in transitu is not affected by any sale, or other disposition of the goods which the
buyer may have made, unless the seller has assented thereto.
If, however, a negotiable document of title has been issued for goods, no seller's lien or
right of stoppage in transitu shall defeat the right of any purchaser for value in good faith
to whom such document has been negotiated, whether such negotiation be prior or
subsequent to the notification to the carrier, or other bailee who issued such document, of
the seller's claim to a lien or right of stoppage in transitu. (n)
Article 1536. The vendor is not bound to deliver the thing sold in case the vendee should
lose the right to make use of the terms as provided in article 1198. (1467a)
NOTES:
•
•
Under Art. 1198, the debtor shall lose every right to make use of the period:
o (a) When after the obligation has been contracted, he becomes insolvent, unless
he gives a guaranty or security for the debts;
o (b) When he does not furnish to the creditor the guaranties which he has
promised;
o (c) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory;
o (d) When the debtor violates any undertaking, in consideration of which the
creditor agreed to the period;
o (e) When the debtor attempts to abscond.
In the cases enumerated, the vendor is not bound to deliver.
Article 1537. The vendor is bound to deliver the thing sold and its accessions and
accessories in the condition in which they were upon the perfection of the contract.
All the fruits shall pertain to the vendee from the day on which the contract was perfected.
(1468a)
NOTES:
(a) Example of accession: Fruits
(b) Example of accessories: In the sale of a car, the jack is considered an accessory.
Page | 29
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Article 1538. In case of loss, deterioration or improvement of the thing before its delivery,
the rules in article 1189 shall be observed, the vendor being considered the debtor. (n)
NOTE:
•
Article 1189. When the conditions have been imposed with the intention of suspending
the efficacy of an obligation to give, the following rules shall be observed in case of the
improvement, loss or deterioration of the thing during the pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is unknown or it cannot
be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is
to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation and its fulfillment, with indemnity for
damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure
to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than
that granted to the usufructuary2.
Article 1539. The obligation to deliver the thing sold includes that of placing in the control
of the vendee all that is mentioned in the contract, in conformity with the following rules:
If the sale of real estate should be made with a statement of its area, at the rate of a certain
price for a unit of measure or number, the vendor shall be obliged to deliver to the vendee,
if the latter should demand it, all that may have been stated in the contract; but, should this
be not possible, the vendee may choose between a proportional reduction of the price and
the rescission of the contract, provided that, in the latter case, the lack in the area be not
less than one-tenth of that stated.
The same shall be done, even when the area is the same, if any part of the immovable is not
of the quality specified in the contract.
The rescission, in this case, shall only take place at the will of the vendee, when the inferior
value of the thing sold exceeds one-tenth of the price agreed upon.
2
Article 579. The usufructuary may make on the property held in usufruct such useful improvements or expenses
for mere pleasure as he may deem proper, provided he does not alter its form or substance; but he shall have no right
to be indemnified therefor. He may, however, remove such improvements, should it be possible to do so without
damage to the property.
Article 580. The usufructuary may set off the improvements he may have made on the property against any damage
to the same.
Page | 30
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Nevertheless, if the vendee would not have bought the immovable had he known of its
smaller area of inferior quality, he may rescind the sale. (1469a)
NOTES:
•
Sale of Real Estate By the Unit
(a) This refers to the sale of real estate by the unit. Hence, if A buys from B a piece of
land supposed to contain 1,000 square meters at the rate of P10,000 per square meter, but
the land has only 800 sq.m., the additional 200 must be given to A should A demand
them. If this cannot be done, A may pay only P8 million (for the 800 sq.m.) or rescind the
contract.
(b) If in the above example, there are only 950 square meters, can A ask for rescission?
ANS.: As a rule no, because the lack is only 50 square meters. (The lack must be at least
1/10 of the area stated.) However, if A would not have bought the land had he known of
its smaller area, he may rescind the sale.
[NOTE: The one-tenth part referred to in the article applies to 1/10 of the area stated in
the contract, not to 1/10 of the true or actual area. This is evident because of the wording
of the law –– area “stated.”]
Article 1540. If, in the case of the preceding article, there is a greater area or number in the
immovable than that stated in the contract, the vendee may accept the area included in the
contract and reject the rest. If he accepts the whole area, he must pay for the same at the
contract rate. (1470a)
NOTE:
•
The vendee may not withdraw from the contract.
Article 1541. The provisions of the two preceding articles shall apply to judicial sales. (n)
Article 1542. In the sale of real estate, made for a lump sum and not at the rate of a certain
sum for a unit of measure or number, there shall be no increase or decrease of the price,
although there be a greater or less area or number than that stated in the contract.
The same rule shall be applied when two or more immovables as sold for a single price; but
if, besides mentioning the boundaries, which is indispensable in every conveyance of real
estate, its area or number should be designated in the contract, the vendor shall be bound
to deliver all that is included within said boundaries, even when it exceeds the area or
number specified in the contract; and, should he not be able to do so, he shall suffer a
reduction in the price, in proportion to what is lacking in the area or number, unless the
contract is rescinded because the vendee does not accede to the failure to deliver what has
been stipulated. (1471)
NOTES:
•
•
If the sale is made for a lump sum, the cause of the contract is the thing sold, irrespective
of its number or measure.
Where area or number stated together with boundaries – if the vendor cannot deliver to
the vendee all that is included within the boundaries mentioned in the contract, the latter
has the option to reduce the price in proportion to the deficiency or to set aside the
contract.
Page | 31
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Article 1543. The actions arising from articles 1539 and 1542 shall prescribe in six months,
counted from the day of delivery. (1472a)
Article 1544. If the same thing should have been sold to different vendees, the ownership
shall be transferred to the person who may have first taken possession thereof in good
faith, if it should be movable property.
Should it be immovable property, the ownership shall belong to the person acquiring it
who in good faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith
was first in the possession; and, in the absence thereof, to the person who presents the
oldest title, provided there is good faith. (1473)
NOTES:
•
Rules as to preference of ownership in case of a double sale:
o If Property sold is movable:
▪ First to take possession thereof in good faith shall be the owner
o If Property sold is immovable, ownership shall belong to:
▪ (1) Vendee who first registers the sale in good faith in the Registry of
Property
▪ (2) In the absence of (1), the vendee who first takes possession in good
faith; and
▪ (3) in the absence of both (1) and (2), the vendee who presents the oldest
title (first bought the property) in good faith.
SECTION 3
Conditions and Warranties
Article 1545. Where the obligation of either party to a contract of sale is subject to any
condition which is not performed, such party may refuse to proceed with the contract or he
may waive performance of the condition. If the other party has promised that the condition
should happen or be performed, such first mentioned party may also treat the
nonperformance of the condition as a breach of warranty.
Where the ownership in the thing has not passed, the buyer may treat the fulfillment by the
seller of his obligation to deliver the same as described and as warranted expressly or by
implication in the contract of sale as a condition of the obligation of the buyer to perform
his promise to accept and pay for the thing. (n)
NOTES:
•
Presence of Conditions and Warranties
o Conditions may be waived.
o Conditions may be considered as warranties.
Article 1546. Any affirmation of fact or any promise by the seller relating to the thing is an
express warranty if the natural tendency of such affirmation or promise is to induce the
buyer to purchase the same, and if the buyer purchases the thing relying thereon. No
affirmation of the value of the thing, nor any statement purporting to be a statement of the
seller's opinion only, shall be construed as a warranty, unless the seller made such
affirmation or statement as an expert and it was relied upon by the buyer. (n)
Page | 32
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
•
Warranty – any representation made by the seller of the ting with respect to its character,
quality, or ownership, by which he induces the buyer to purchase the same relying on
said representation.
o Express warranty – any affirmation of fact or any promise by the seller relating to
the thing, the natural tendency of which is to induce the buyer to purchase the
thing, and the buyer, thus induced, does purchase the same
▪ Part of the contract of sale. It is immaterial whether the seller did not
know that it was false or true. He shall be liable for his express warranty.
Dealer’s talk like “excellent,” cannot be considered as an express warranty. A little
exaggeration is apparently allowed by the law as a concession to human nature. This is in
accordance with the civil law maxim “simplex commendation non-obligat” or the
principle “caveat emptor” (let the buyer beware).
Article 1547. In a contract of sale, unless a contrary intention appears, there is:
(1) An implied warranty on the part of the seller that he has a right to sell the thing
at the time when the ownership is to pass, and that the buyer shall from that time
have and enjoy the legal and peaceful possession of the thing;
(2) An implied warranty that the thing shall be free from any hidden faults or
defects, or any charge or encumbrance not declared or known to the buyer.
This article shall not, however, be held to render liable a sheriff, auctioneer,
mortgagee, pledgee, or other person professing to sell by virtue of authority in fact
or law, for the sale of a thing in which a third person has a legal or equitable
interest. (n)
NOTES:
•
•
•
Implied warranty – that which the law derives by implication or inference from the nature
of the transaction or the relative situation or circumstances of the parties, irrespective of
any intention of the seller to create it.
Implied warranties in sale:
o Implied warranty as to seller’s title – that the seller guarantees that he has the
right to sell the thing sold and to transfer ownership to the buyer who shall not be
disturbed in his legal and peaceful possession thereof
o Implied warranty against hidden defects or unknown encumbrances – that the
seller guarantees that the thing sold is free from any hidden faults or defects or
any charge or encumbrance not declared or known to the buyer
o Implied warranty as to fitness or merchantability – that the seller guarantees that
the thing sold is reasonably fit for the known particular purpose for which it was
acquired by the buyer or, where it was bought by description, that it is of
merchantable quality.
When implied warranty not applicable:
o As is where is sale – means nothing more than that the vendor makes no warranty
as to the quality or the workable condition of the goods, and that the vendee takes
them in the condition in which they are found and from the place they are located.
o Sale of second hand articles – no implied warranty as to the condition, adaptation,
fitness or suitability for the purpose for which made, or the quality of an article
sold as and for a second-hand article.
o Sale by virtue of authority in fact or law
Page | 33
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
SUBSECTION 1. Warranty in Case of Eviction
Article 1548. Eviction shall take place whenever by a final judgment based on a right prior
to the sale or an act imputable to the vendor, the vendee is deprived of the whole or of a
part of the thing purchased.
The vendor shall answer for the eviction even though nothing has been said in the contract
on the subject.
The contracting parties, however, may increase, diminish, or suppress this legal obligation
of the vendor. (1475a)
NOTES:
•
•
•
Essential elements of the warranty against eviction:
o The vendee is deprived in whole or in part of the thing purchased;
o He is so deprived by virtue of a final judgment;
o The judgment is based on a right prior to the sale or an act imputable to the
vendor;
o The vendor was summoned in the suit for eviction at the instance of the vendee;
and
o There is no waiver on the part of the vendee.
Mere trespass in fact does not give rise to the application of the doctrine of eviction.
There is a mere act of trespass when the trespasser claims no right whatever. The vendor
is not liable therefor.
The buyer and the seller are, of course, allowed to add to, subtract from, or suppress this
legal obligation on the part of the seller. Thus, it has been held that the vendor’s liability
for warranty against eviction in a contract of sale is generally waivable and may be
renounced by the vendee. (See Arts. 1533-1634, Civil Code; see also Andaya v.
Manansala, L-14714, Apr. 30, 1960).
Article 1549. The vendee need not appeal from the decision in order that the vendor may
become liable for eviction. (n)
Article 1550. When adverse possession had been commenced before the sale but the
prescriptive period is completed after the transfer, the vendor shall not be liable for
eviction. (n)
Article 1551. If the property is sold for nonpayment of taxes due and not made known to
the vendee before the sale, the vendor is liable for eviction. (n)
Article 1552. The judgment debtor is also responsible for eviction in judicial sales, unless it
is otherwise decreed in the judgment. (n)
Article 1553. Any stipulation exempting the vendor from the obligation to answer for
eviction shall be void, if he acted in bad faith. (1476)
NOTES:
•
Effect of Stipulation Waiving Liability for Eviction
o If seller was in good faith –– the exemption is valid, but without prejudice to Art.
1554.
o If seller was in good faith –– the stipulation is VOID.
Article 1554. If the vendee has renounced the right to warranty in case of eviction, and
eviction should take place, the vendor shall only pay the value which the thing sold had at
Page | 34
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
the time of the eviction. Should the vendee have made the waiver with knowledge of the
risks of eviction and assumed its consequences, the vendor shall not be liable. (1477)
NOTES:
•
Kinds of waiver of eviction:
o Consciente - the waiver is voluntarily made by the vendee without the knowledge
and assumption of the risks of eviction
▪ The vendor shall only pay the value which the thing sold had at the time of
eviction
o Intencionada – the waiver is made by the vendee with knowledge of the risk of
eviction and assumption of its consequences
▪ The vendor is exempted from the obligation to answer for eviction
provided he did not act in bad faith
Article 1555. When the warranty has been agreed upon or nothing has been stipulated on
this point, in case eviction occurs, the vendee shall have the right to demand of the vendor:
(1) The return of the value which the thing sold had at the time of the eviction, be it
greater or less than the price of the sale;
(2) The income or fruits, if he has been ordered to deliver them to the party who
won the suit against him;
(3) The costs of the suit which caused the eviction, and, in a proper case, those of the
suit brought against the vendor for the warranty;
(4) The expenses of the contract, if the vendee has paid them;
(5) The damages and interests, and ornamental expenses, if the sale was made in bad
faith. (1478)
NOTES:
•
What Seller Must Give in Case of Eviction
Keyword — VICED
V — value
I — income (or fruits)
C — costs
E — expenses
D — damages (and interests and ornamental expenses) if seller was in bad faith
Article 1556. Should the vendee lose, by reason of the eviction, a part of the thing sold of
such importance, in relation to the whole, that he would not have bought it without said
part, he may demand the rescission of the contract; but with the obligation to return the
thing without other encumbrances that those which it had when he acquired it.
He may exercise this right of action, instead of enforcing the vendor's liability for eviction.
The same rule shall be observed when two or more things have been jointly sold for a lump
sum, or for a separate price for each of them, if it should clearly appear that the vendee
would not have purchased one without the other. (1479a)
NOTES:
•
Rules in Case of Partial Eviction
Page | 35
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
o Remedy here is either:
▪ rescission, or
▪ enforcement of warranty.
o When Enforcement of the Warranty Is the Proper Remedy
If the circumstances set forth in paragraph 1 are not present (as when there
are new encumbrances), the only remedy is to enforce the warranty.
Article 1557. The warranty cannot be enforced until a final judgment has been rendered,
whereby the vendee loses the thing acquired or a part thereof. (1480)
Article 1558. The vendor shall not be obliged to make good the proper warranty, unless he
is summoned in the suit for eviction at the instance of the vendee. (1481a)
Article 1559. The defendant vendee shall ask, within the time fixed in the Rules of Court
for answering the complaint, that the vendor be made a co-defendant. (1482a)
Article 1560. If the immovable sold should be encumbered with any non-apparent burden
or servitude, not mentioned in the agreement, of such a nature that it must be presumed
that the vendee would not have acquired it had he been aware thereof, he may ask for the
rescission of the contract, unless he should prefer the appropriate indemnity. Neither right
can be exercised if the non-apparent burden or servitude is recorded in the Registry of
Property, unless there is an express warranty that the thing is free from all burdens and
encumbrances.
Within one year, to be computed from the execution of the deed, the vendee may bring the
action for rescission, or sue for damages.
One year having elapsed, he may only bring an action for damages within an equal period,
to be counted from the date on which he discovered the burden or servitude. (1483a)
NOTES:
•
•
•
•
•
•
Rules in Case of Non-Apparent Servitudes
The defect contemplated in this Article is really a sort of “hidden defect” but remedy is
similar to that provided in the case of eviction. The servitudes contemplated are not legal
easements for these exist by virtue of the law. Therefore, it cannot be claimed that the
buyer was ignorant thereof.
Remedies: If made within a year:
o rescission;
o damages;
If after one year, only damages.
Effect if Burden or Easement is Registered
o No remedy if the burden is registered, EXCEPT if there is an express warranty
that the thing is free from all burdens and encumbrances.
Effect of Form of the Sale
o This article is applicable whether sale is:
▪ in public instrument;
▪ in private instrument;
▪ made orally.
[NOTE: There is no need of first compelling the seller to execute a public instrument before the
action is brought.]
Page | 36
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
SUBSECTION 2. Warranty Against Hidden Defects of or Encumbrances Upon the Thing
Sold
Article 1561. The vendor shall be responsible for warranty against the hidden defects
which the thing sold may have, should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have acquired it or would have given a lower
price for it; but said vendor shall not be answerable for patent defects or those which may
be visible, or for those which are not visible if the vendee is an expert who, by reason of his
trade or profession, should have known them. (1484a)
NOTES:
•
•
Requisites to Recover Because of Hidden Defects
o The defect must be hidden (not known and could not have been known to the
vendee);
o The defect must exist at the time the sale was made;
o The defect must ordinarily have been excluded from the contract;
o The defect must be important (renders thing UNFIT or considerably decreases
FITNESS);
o The action must be instituted within the statute of limitations:
▪ Six months from the delivery of the thing sold; or
▪ 40 days from the date of delivery in case of animals
Meaning of “unfit for the use intended”
o Here, the use must have been stated in the contract itself, or can be inferred from
the nature of the object or from the trade or occupation of the buyer.
Article 1562. In a sale of goods, there is an implied warranty or condition as to the quality
or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are acquired, and it appears that the buyer
relies on the seller's skill or judgment (whether he be the grower or manufacturer or
not), there is an implied warranty that the goods shall be reasonably fit for such
purpose;
(2) Where the goods are brought by description from a seller who deals in goods of
that description (whether he be the grower or manufacturer or not), there is an
implied warranty that the goods shall be of merchantable quality. (n)
NOTES:
•
•
•
Quality of goods includes their state or condition
Implied warranty of fitness applies only when:
o The buyer, expressly or by implication, manifests to the seller the particular
purpose for which the goods are acquired; and
o The buyer relies upon the seller’s skill or judgment
Implied warranty of merchantability – where goods are bought by description, the seller
impliedly warrants that the goods are of merchantable quality (i.e. fit for the general
purpose of a thing, and not necessarily the particular purpose for which it has been
acquired.)
Page | 37
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Warranty of merchantability
That goods are reasonably fit for the general
purpose for which they are sold
Warranty of fitness
That the goods are suitable for the special
purpose of the buyer which will not be
satisfied by mere fitness for general
purposes
Article 1563. In the case of contract of sale of a specified article under its patent or other
trade name, there is no warranty as to its fitness for any particular purpose, unless there is
a stipulation to the contrary. (n)
Article 1564. An implied warranty or condition as to the quality or fitness for a particular
purpose may be annexed by the usage of trade. (n)
Article 1565. In the case of a contract of sale by sample, if the seller is a dealer in goods of
that kind, there is an implied warranty that the goods shall be free from any defect
rendering them unmerchantable which would not be apparent on reasonable examination
of the sample. (n)
Article 1566. The vendor is responsible to the vendee for any hidden faults or defects in the
thing sold, even though he was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor was not
aware of the hidden faults or defects in the thing sold. (1485)
NOTES:
•
•
•
•
Why is the seller responsible for hidden defects even if he is in good faith?
o ANS.: Because he has to repair the damage done.
Seller and buyer agreed that seller would be exempted from hidden defects. But seller
knew of hidden defects. Would seller be liable?
o ANS.: Yes, because of his bad faith. To hold otherwise would be to legalize fraud.
Caveat emptor - buyer beware
Caveat venditor – seller beware (this is embodied in Art. 1566)
Article 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect
between withdrawing from the contract and demanding a proportionate reduction of the
price, with damages in either case. (1486a)
NOTES:
•
Alternative remedies of the buyer to enforce warranty:
o Withdraw from the contract (accion redhibitoria); or
o Demand a proportionate reduction of the price (accion quanti minoris)
o with a right to damages in either case
Article 1568. If the thing sold should be lost in consequence of the hidden faults, and the
vendor was aware of them, he shall bear the loss, and shall be obliged to return the price
and refund the expenses of the contract, with damages. If he was not aware of them, he
shall only return the price and interest thereon, and reimburse the expenses of the contract
which the vendee might have paid. (1487a)
Page | 38
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTE:
•
Note that whether the seller knew or did not know of the defects, he is still responsible.
However, in case of ignorance, there will be no liability for damages.
Article 1569. If the thing sold had any hidden fault at the time of the sale, and should thereafter
be lost by a fortuitous event or through the fault of the vendee, the latter may demand of the
vendor the price which he paid, less the value which the thing had when it was lost.
NOTES:
•
•
•
Here the hidden defect was NOT the cause of the loss. The cause was either:
o a fortuitous event;
o or thru the fault of the buyer.
The difference (price minus value at loss) represents generally the decrease in value due
to the hidden defect (hence, the amount by which the seller was enriched at the buyer’s
expense). It is understood that the decrease in value due to wear and tear should not be
compensated.
If the vendor acted in bad faith, he shall pay damages to the vendee. (1488a)
Article 1570. The preceding articles of this Subsection shall be applicable to judicial sales,
except that the judgment debtor shall not be liable for damages. (1489a)
Article 1571. Actions arising from the provisions of the preceding ten articles shall be
barred after six months, from the delivery of the thing sold. (1490)
Article 1572. If two or more animals are sold together, whether for a lump sum or for a
separate price for each of them, the redhibitory defect of one shall only give rise to its
redhibition, and not that of the others; unless it should appear that the vendee would not
have purchased the sound animal or animals without the defective one.
The latter case shall be presumed when a team, yoke pair, or set is bought, even if a
separate price has been fixed for each one of the animals composing the same. (1491)
NOTES:
•
Sale of two or more animals together:
o General rule: When there is a redhibitory defect of one or some of them but not in
all, the redhibition will not affect the others without it.
▪ Exception: when it can be shown that the vendee would not have
purchased the sound ones without those which are defective. In which
case, the presumption in paragraph 2 of Art. 1572 applies.
Article 1573. The provisions of the preceding article with respect to the sale of animals shall
in like manner be applicable to the sale of other things. (1492)
Article 1574. There is no warranty against hidden defects of animals sold at fairs or at
public auctions, or of live stock sold as condemned. (1493a)
Article 1575. The sale of animals suffering from contagious diseases shall be void.
A contract of sale of animals shall also be void if the use or service for which they are
acquired has been stated in the contract, and they are found to be unfit therefor. (1494a)
Page | 39
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Article 1576. If the hidden defect of animals, even in case a professional inspection has been
made, should be of such a nature that expert knowledge is not sufficient to discover it, the
defect shall be considered as redhibitory.
But if the veterinarian, through ignorance or bad faith should fail to discover or disclose it,
he shall be liable for damages. (1495)
NOTES:
•
Redhibitory vice or defect – defect in the article sold against which defect the seller is
bound to warrant
o Must not only be hidden, but must also be of such nature that expert knowledge is
not sufficient to discover it.
Article 1577. The redhibitory action, based on the faults or defects of animals, must be
brought within forty days from the date of their delivery to the vendee.
This action can only be exercised with respect to faults and defects which are determined
by law or by local customs. (1496a)
Article 1578. If the animal should die within three days after its purchase, the vendor shall
be liable if the disease which cause the death existed at the time of the contract. (1497a)
Article 1579. If the sale be rescinded, the animal shall be returned in the condition in which
it was sold and delivered, the vendee being answerable for any injury due to his negligence,
and not arising from the redhibitory fault or defect. (1498)
Article 1580. In the sale of animals with redhibitory defects, the vendee shall also enjoy the
right mentioned in article 1567; but he must make use thereof within the same period
which has been fixed for the exercise of the redhibitory action. (1499)
NOTES:
•
Alternative remedies of vendee in sale of animals:
o Accion redhibitoria
o Accion quanti minoris
Article 1581. The form of sale of large cattle shall be governed by special laws. (n)
MODULE ACTIVITIES
I.
Key Terms. Define or give the meaning of the following:
1.
2.
3.
4.
5.
6.
7.
8.
II.
Unpaid seller of goods;
Traditio brevi manu; - give an example
Sale or return;
Tradition; - in the legal sense
Redhibitory defect;
Implied warranty of fitness;
Eviction;
Caveat venditor
Discussions. Discuss the following:
Page | 40
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
1. Give the cases when a sale of property is valid although the seller is not the owner
thereof.
2. What are the different ways for effecting delivery to the buyer of the thing sold?
3. Give the requisites for the exercise by an unpaid seller of his right of stoppage in
transitu.
4. What are the implied warranties in a contract of sale?
5. Distinguish “sale or return” from “sale on trial.”
6. Suppose the parties failed to stipulate the place of delivery of the thing sold.
Where is the place of delivery?
7. What are the principal obligations of the vendor?
8. Suppose the thing sold is lost after perfection of the sale but before its delivery to
the buyer? Who shall bear the loss by a fortuitous event? Explain.
III.
Problems. Explain or state briefly the rule or reason for your answer.
1. S sold to B a parcel of land with an area of 500 sq. meters at P2000 per sq. meter.
It turns out that the area is only 451 sq. meters. Has B the right to cancel or
rescind the sale even if S is willing to accept a proportionate reduction of the
price, or only P902,000?
2. Same example, but the price is fixed at P1,000,000 without a statement of the
price per sq. meter. Has B the right to enforce the contract with the corresponding
reduction of the price to P902,000?
3. Same example. The only problem is that S subsequently sold the same property to
C who immediately registered the sale in his name.
a. Who has a better right to the property: B or C?
b. Suppose C did not also register the sale. To whom should the property be
awarded?
4. Same example. C was declared by a court to have a better right. Is S liable to B
for the former’s failure to comply with his warranty against eviction?
5. S sold to B a piano for P10,000. It was agreed that payment shall be made within
10 days. Has B the right to demand delivery even before he has paid?
6. B, through fraud, made S sign a contract of sale of a parcel of land. Here, B’s title
is voidable which may be declared void by the court in an action by S. However,
B was able to sell the property to C. Has B the right to recover the property from
C?
7. B bought a bottle of medicine from a drugstore. Its label says that it provides a
“very effective relief from asthma.” However, B continues to suffer from asthma
attacks. Has B the right to complain for misrepresentation against the drug
manufacturer?
8. S sold to B a parcel of land located in Quezon City under a public instrument
signed by the parties and notarized in Manila. Is B considered already the owner
of the property?
Page | 41
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
CHAPTER 5
Obligations of the Vendee
Article 1582. The vendee is bound to accept delivery and to pay the price of the thing sold
at the time and place stipulated in the contract.
If the time and place should not have been stipulated, the payment must be made at the
time and place of the delivery of the thing sold. (1500a)
NOTES:
•
Principal obligations of vendee:
o To accept delivery; and
o To pay the price of the thing sold
Article 1583. Unless otherwise agreed, the buyer of goods is not bound to accept delivery
thereof by installments.
Where there is a contract of sale of goods to be delivered by stated instalments, which are
to be separately paid for, and the seller makes defective deliveries in respect of one or more
instalments, or the buyer neglects or refuses without just cause to take delivery of or pay
for one or more instalments, it depends in each case on the terms of the contract and the
circumstances of the case, whether the breach of contract is so material as to justify the
injured party in refusing to proceed further and suing for damages for breach of the entire
contract, or whether the breach is severable, giving rise to a claim for compensation but
not to a right to treat the whole contract as broken. (n)
NOTES:
•
•
Generally No Delivery By Installments
o Reason: performance must generally be complete.
o Exception to Rule: express provisions.
Rule in Case of Installment Deliveries
o The second paragraph states the rules for delivery by installments, and
distinguishes whether the breach is severable or not.
Article 1584. Where goods are delivered to the buyer, which he has not previously
examined, he is not deemed to have accepted them unless and until he has had a reasonable
opportunity of examining them for the purpose of ascertaining whether they are in
conformity with the contract if there is no stipulation to the contrary.
Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is
bound, on request, to afford the buyer a reasonable opportunity of examining the goods for
the purpose of ascertaining whether they are in conformity with the contract.
Where goods are delivered to a carrier by the seller, in accordance with an order from or
agreement with the buyer, upon the terms that the goods shall not be delivered by the
carrier to the buyer until he has paid the price, whether such terms are indicated by
marking the goods with the words "collect on delivery," or otherwise, the buyer is not
entitled to examine the goods before the payment of the price, in the absence of agreement
or usage of trade permitting such examination. (n)
Page | 42
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
•
•
Acceptance – asset to become the owner of the specific goods when delivery of them is
offered to the buyer
The right of examination or inspection is thus a condition precedent to the transfer of
ownership unless there is a stipulation to the contrary
When Buyer Has No Right to Examine
o when there is a stipulation to this effect. (Art. 1584, par. 1).
o when the goods are delivered C.O.D. — unless there is an agreement or a usage of
trade PERMITTING such examination. (Art. 1584, par. 2).
Article 1585. The buyer is deemed to have accepted the goods when he intimates to the
seller that he has accepted them, or when the goods have been delivered to him, and he
does any act in relation to them which is inconsistent with the ownership of the seller, or
when, after the lapse of a reasonable time, he retains the goods without intimating to the
seller that he has rejected them. (n)
NOTES:
•
Acceptance may either be:
o Express – takes place when the buyer, after delivery of the goods, intimates to the
seller, verbally or in writing, that he has accepted them.
o Implied, which takes place:
▪ When the buyer, after delivery of goods, does any act inconsistent with the
seller’s ownership, as when he sells or attempts to sell the goods, or he
uses or makes alteration in them in a manner proper only for an owner; or
▪ When the buyer, after the lapse of a reasonable time, retains the goods
without intimating his rejection
Article 1586. In the absence of express or implied agreement of the parties, acceptance of
the goods by the buyer shall not discharge the seller from liability in damages or other legal
remedy for breach of any promise or warranty in the contract of sale. But, if, after
acceptance of the goods, the buyer fails to give notice to the seller of the breach in any
promise of warranty within a reasonable time after the buyer knows, or ought to know of
such breach, the seller shall not be liable therefor. (n)
NOTE:
•
Even if buyer accepts, seller can still be liable
Article 1587. Unless otherwise agreed, where goods are delivered to the buyer, and he
refuses to accept them, having the right so to do, he is not bound to return them to the
seller, but it is sufficient if he notifies the seller that he refuses to accept them. If he
voluntarily constitutes himself a depositary thereof, he shall be liable as such. (n)
NOTES:
•
Effect if Buyer Justifiably Refuses to Accept the Delivery:
o buyer has no duty to return the goods to the seller
o mere notification to seller of refusal will suffice
o but buyer may make himself a voluntary depositary –– in which case he must
safely take care of them in the meantime
Article 1588. If there is no stipulation as specified in the first paragraph of article 1523,
when the buyer's refusal to accept the goods is without just cause, the title thereto passes to
him from the moment they are placed at his disposal. (n)
Page | 43
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
Effect if Buyer Unjustifiably Refuses to Accept the Delivery
o Generally, the buyer becomes the owner.
o Exception — when there is a contrary stipulation or when the seller reserves the
ownership as a sort of security for the payment of the price. (See Arts. 1523 and
1503, Civil Code).
Article 1589. The vendee shall owe interest for the period between the delivery of the thing
and the payment of the price, in the following three cases:
(1) Should it have been so stipulated;
(2) Should the thing sold and delivered produce fruits or income;
(3) Should he be in default, from the time of judicial or extrajudicial demand for the
payment of the price. (1501a)
NOTES:
•
The Three Cases Contemplated
o In No. (1), no demand is needed.
o In No. (2), the reason for the law is that the fruits or income is sufficient to
warrant the payment of interest.
o In No. (3), “default” is mora, called “in delay” under the provisions of the Civil
Code.
Article 1590. Should the vendee be disturbed in the possession or ownership of the thing
acquired, or should he have reasonable grounds to fear such disturbance, by a vindicatory
action or a foreclosure of mortgage, he may suspend the payment of the price until the
vendor has caused the disturbance or danger to cease, unless the latter gives security for
the return of the price in a proper case, or it has been stipulated that, notwithstanding any
such contingency, the vendee shall be bound to make the payment. A mere act of trespass
shall not authorize the suspension of the payment of the price. (1502a)
NOTES:
•
•
The buyer may SUSPEND the payment of the price if:
o There is a well-grounded fear (fundado temor).
o The fear is because of:
▪ a vindicatory action or action to recover, or
▪ a foreclosure of mortgage.
[NOTE: The fear must not be the result of any other ground, like the vendor’s insanity.
A mere act of trespass is made by one claiming no legal right whatsoever. Here, the buyer
is not authorized to suspend the payment of the price.]
Article 1591. Should the vendor have reasonable grounds to fear the loss of immovable
property sold and its price, he may immediately sue for the rescission of the sale.
Should such ground not exist, the provisions of article 1191 shall be observed. (1503)
NOTES:
•
When Seller May Immediately Sue for the Rescission of the Sale
o The seller must have reasonable grounds to fear:
▪ LOSS of the immovable property sold, and
Page | 44
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
•
▪ LOSS of the price.
o So, if the buyer is squandering his money, but the immovable property remains
untouched, this article cannot apply.
Rule if Neither Ground Exists
o If neither ground exists, Art. 1191 applies. Art. 1191 provides:
“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 fi xing 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.”
Article 1592. In the sale of immovable property, even though it may have been stipulated
that upon failure to pay the price at the time agreed upon the rescission of the contract
shall of right take place, the vendee may pay, even after the expiration of the period, as
long as no demand for rescission of the contract has been made upon him either judicially
or by a notarial act. After the demand, the court may not grant him a new term. (1504a)
NOTES:
•
•
•
•
•
•
Rescission of Sale of Real Property
o This is only applicable to a sale of real property, not to a contract TO SELL real
property or to a promise TO SELL real property, where title remains with the
vendor until fulfi llment of a positive suspensive condition, such as the full
payment of the price. (Manuel v. Rodriguez, L-13436, Jul. 27, 1960). In the
contract 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 an event that
prevents the obligation of the vendor to convey title from acquiring binding force.
To argue that in case of failure to pay there is only a casual breach is to proceed
from the false assumption that the contract is one of absolute sale, where nonpayment a mere resolutory condition. (Ibid.).
This article applies whether or not there is a stipulation for automatic rescission. The law
says “even though.”
The demand may be:
o judicial
o extrajudicial (this must however be by notarial act).
The demand is not for the payment of the price, but for the RESCISSION of the contract.
(10 Manresa 288). If the demand for such rescission comes only AFTER the offer to pay
the balance (accompanied by a postal money order for the amount due), the automatic
rescission cannot of course legally take place. (Maximo, et al. v. Fabian, et al., L-8015,
Dec. 23, 1955).
The demand is not for the payment of the price BUT for the RESCISSION of the
contract. (Manresa, Vol. 10, p. 288).
Example of this Article
o On Jul. 1, A sold B a piece of land, payment and delivery to be made on Jul. 15. It
was stipulated that should payment not be made on Jul. 15, the contract would
automatically be rescinded. On Jul. 20, can B still pay?
Page | 45
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
▪
ANS.: Yes, as long as there has been no judicial or notarial demand for the
rescission of the contract. But if, for example on Jul. 18, A had made a
notarial demand for such a rescission then B will not be allowed to pay
anymore, and the court may not grant him a new term.
Article 1593. With respect to movable property, the rescission of the sale shall of right take
place in the interest of the vendor, if the vendee, upon the expiration of the period fixed for
the delivery of the thing, should not have appeared to receive it, or, having appeared, he
should not have tendered the price at the same time, unless a longer period has been
stipulated for its payment. (1505)
NOTES:
•
•
•
Rescission of Sale of Personal Property
o This article should apply only if the object sold has not been delivered to the
buyer.
o If there has already been delivery, other articles, like Art. 1191 would be
applicable. In this case automatic rescission is not allowed. An affirmative action
is necessary (Guevarra v. Pascual, 12 Phil. 311), the action being one to rescind
judicially, if the buyer refuses to come to amicable settlement. (Escueta v. Pando,
42 O.G., No. 11, p. 2759).
Example of the Article:
o The seller and the buyer agreed that payment and delivery would be made on Jul.
15, at the buyer’s house. If the buyer does not appear on said day, or having
appeared, he should not have tendered the price at the same time, then the sale can
be considered as automatica lly rescinded.
Right, Not Obligation, to Rescind
o If in a contract the seller is authorized to rescind the sale in case of breach, this
does not necessarily mean that he is obliged to do so. (Ramirez v. Court of
Appeals & Muller Nease, L-6536, Jan. 25, 1956, 52 O.G. 779).
MODULE ACTIVITIES
I.
Key Terms. Define or give the meaning of the following:
1. Acceptance of goods
2. Wrongful refusal of buyer to accept.
II.
Discussion. Discuss the following:
1. When is there implied acceptance by the vendee of the goods sold?
2. Give the cases when the vendee is given the right to suspend payment of the
purchase price.
Problems. Explain or state briefly the rule or reason for your answer.
1. S sold to B a parcel of land with the stipulation that upon failure of B to pay the
price within 30 days the sale shall be deemed automatically canceled.
a. May S refuse to accept payment from B after 30 days on the ground that
the sale is already rescinded?
b. Suppose the property sold is movable. Will your answer be the same?
2. S sold a 3-door apartment to B who paid the purchase price only after one (1) year
from the date agreed upon. Is B liable to pay S interest which was not stipulated
by them?
III.
Page | 46
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
CHAPTER 6
Actions for Breach of Contract of Sale of Goods
Article 1594. Actions for breach of the contract of sale of goods shall be governed
particularly by the provisions of this Chapter, and as to matters not specifically provided
for herein, by other applicable provisions of this Title. (n)
NOTES:
•
•
Goods – all chattels personal but not things in action or money of legal tender in the
Philippines
Actions available:
o Action by the seller for payment of the price
o Action by the seller for damages for non-acceptance of the goods
o Action by the seller for rescission of the contract
o Action by the buyer for specific performance
o Action by the buyer for rescission or damages for breach of warranty
Article 1595. Where, under a contract of sale, the ownership of the goods has passed to the
buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of
the contract of sale, the seller may maintain an action against him for the price of the
goods.
Where, under a contract of sale, the price is payable on a certain day, irrespective of
delivery or of transfer of title and the buyer wrongfully neglects or refuses to pay such
price, the seller may maintain an action for the price although the ownership in the goods
has not passed. But it shall be a defense to such an action that the seller at any time before
the judgment in such action has manifested an inability to perform the contract of sale on
his part or an intention not to perform it.
Although the ownership in the goods has not passed, if they cannot readily be resold for a
reasonable price, and if the provisions of article 1596, fourth paragraph, are not applicable,
the seller may offer to deliver the goods to the buyer, and, if the buyer refuses to receive
them, may notify the buyer that the goods are thereafter held by the seller as bailee for the
buyer. Thereafter the seller may treat the goods as the buyer's and may maintain an action
for the price. (n)
NOTES:
•
The above article provides three cases hen an action for the price of goods under a
contract of sale can be maintained by the seller:
o When the ownership of the goods has passed to the buyer and he wrongfully
neglects or refuses to pay for the price;
o When the price is payable on a certain day and the buyer wrongfully neglects or
refuses to pay such price, irrespective of delivery or of transfer of title; and
o When the goods cannot readily be resold for a reasonable price and the buyer
wrongfully refuses to accept them even before ownership in the goods has passed,
if the provisions of Art. 1596, 4th paragraph are not applicable
Article 1596. Where the buyer wrongfully neglects or refuses to accept and pay for the
goods, the seller may maintain an action against him for damages for nonacceptance.
The measure of damages is the estimated loss directly and naturally resulting in the
ordinary course of events from the buyer's breach of contract.
Where there is an available market for the goods in question, the measure of damages is, in
the absence of special circumstances showing proximate damage of a different amount, the
Page | 47
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
difference between the contract price and the market or current price at the time or times
when the goods ought to have been accepted, or, if no time was fixed for acceptance, then at
the time of the refusal to accept.
If, while labor or expense of material amount is necessary on the part of the seller to enable
him to fulfill his obligations under the contract of sale, the buyer repudiates the contract or
notifies the seller to proceed no further therewith, the buyer shall be liable to the seller for
labor performed or expenses made before receiving notice of the buyer's repudiation or
countermand. The profit the seller would have made if the contract or the sale had been
fully performed shall be considered in awarding the damages. (n)
NOTES:
•
•
Example of paragraph 1: S sold B a piano. If B wrongfully refuses to accept and pay for
the goods, S may bring an action against him for damages for non-acceptance.
What action or actions are available to the seller of the goods in case the buyer
wrongfully refuses to accept the goods sold?
ANS.:
o (a) Maintain an action for damages because of the non- acceptance. (Art. 1596).
o (b) Hold the goods as bailee for the buyer and bring an action for the price. (See
Art. 1595, 3rd paragraph).
o (c) Ask for the resolution of the contract for failure of the buyer to fulfill his
obligations.
Article 1597. Where the goods have not been delivered to the buyer, and the buyer has
repudiated the contract of sale, or has manifested his inability to perform his obligations
thereunder, or has committed a breach thereof, the seller may totally rescind the contract
of sale by giving notice of his election so to do to the buyer. (n)
NOTES:
•
When Seller May Totally Rescind the Contract of Sale
o (a) This Article which deals with the instances when the seller may totally rescind
the contract of sale, applies only if the goods have not yet been delivered.
o (b) The automatic rescission here requires notice thereof to the buyer.
Article 1598. Where the seller has broken a contract to deliver specific or ascertained
goods, a court may, on the application of the buyer, direct that the contract shall be
performed specifically, without giving the seller the option of retaining the goods on
payment of damages. The judgment or decree may be unconditional, or upon such terms
and conditions as to damages, payment of the price and otherwise, as the court may deem
just. (n)
NOTES:
•
•
•
•
Observe that here the seller is guilty; hence, there is no right of retention on his part even
if said seller is willing to pay damages.
Note that there must be an order from the court for the specific performance.
Note further that the court may make the order on the application of the buyer.
This article applies only where the goods to be delivered are specific or ascertained.
Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his
election:
Page | 48
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
(1) Accept or keep the goods and set up against the seller, the breach of warranty by
way of recoupment in diminution or extinction of the price;
(2) Accept or keep the goods and maintain an action against the seller for damages
for the breach of warranty;
(3) Refuse to accept the goods, and maintain an action against the seller for damages
for the breach of warranty;
(4) Rescind the contract of sale and refuse to receive the goods or if the goods have
already been received, return them or offer to return them to the seller and recover
the price or any part thereof which has been paid.
When the buyer has claimed and been granted a remedy in anyone of these ways, no
other remedy can thereafter be granted, without prejudice to the provisions of the
second paragraph of article 1191.
Where the goods have been delivered to the buyer, he cannot rescind the sale if he
knew of the breach of warranty when he accepted the goods without protest, or if he
fails to notify the seller within a reasonable time of the election to rescind, or if he
fails to return or to offer to return the goods to the seller in substantially as good
condition as they were in at the time the ownership was transferred to the buyer.
But if deterioration or injury of the goods is due to the breach or warranty, such
deterioration or injury shall not prevent the buyer from returning or offering to
return the goods to the seller and rescinding the sale.
Where the buyer is entitled to rescind the sale and elects to do so, he shall cease to
be liable for the price upon returning or offering to return the goods. If the price or
any part thereof has already been paid, the seller shall be liable to repay so much
thereof as has been paid, concurrently with the return of the goods, or immediately
after an offer to return the goods in exchange for repayment of the price.
Where the buyer is entitled to rescind the sale and elects to do so, if the seller refuses
to accept an offer of the buyer to return the goods, the buyer shall thereafter be
deemed to hold the goods as bailee for the seller, but subject to a lien to secure the
payment of any portion of the price which has been paid, and with the remedies for
the enforcement of such lien allowed to an unpaid seller by article 1526.
(5) In the case of breach of warranty of quality, such loss, in the absence of special
circumstances showing proximate damage of a greater amount, is the difference
between the value of the goods at the time of delivery to the buyer and the value
they would have had if they had answered to the warranty. (n)
NOTES:
•
•
Remedies of the Buyer if Seller Commits a Breach of Warranty
o The first paragraph of the Article enumerates the FOUR REMEDIES of
the buyer.
If the buyer has selected any of the remedies, and has been GRANTED the same,
no other remedy can be given. However, the second paragraph of Art. 1191 will
still apply.
o Article 1191 provides:
“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.
Page | 49
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
“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.”
MODULE ACTIVITIES
I.
Key Terms. Define or give the meaning of the following:
1. Goods
2. Recoupment
II. Discussions. Discuss the following:
1. In general, what actions are available to the buyer in case of breach of warranty be the
seller of goods?
2. When is the buyer not given the right to rescind although the seller committed a
breach of warranty?
3. Give three (3) situations where the seller is given the right to bring an action for
damages against the buyer.
4. Give two (2) situations where the seller of specific goods is given the right to be paid
notwithstanding that delivery to the buyer has not been effected.
III. Problems. Explain or state briefly the rule or reason for your answer.
1. S agreed to sell and delivery to B specific goods. B refused to accept the goods on the
date designated. S was so infuriated that he was hospitalized for a mild stroke. May S
hold B liable for his hospitalization expense? Why or why not?
2. Same example. The goods are not of the quality warranted by S. S informed B to
delivery the goods at a reduced price. B communicated his acceptance. May B rescind
the sale and require S to just pay damages?
PRESIDENTIAL DECREE No. 957 July 12, 1976
REGULATING THE SALE OF SUBDIVISION LOTS AND CONDOMINIUMS,
PROVIDING PENALTIES FOR VIOLATIONS THEREOF
WHEREAS, it is the policy of the State to afford its inhabitants the requirements of decent
human settlement and to provide them with ample opportunities for improving their quality of
life;
WHEREAS, numerous reports reveal that many real estate subdivision owners, developers,
operators, and/or sellers have reneged on their representations and obligations to provide and
maintain properly subdivision roads, drainage, sewerage, water systems, lighting systems, and
other similar basic requirements, thus endangering the health and safety of home and lot buyers;
WHEREAS, reports of alarming magnitude also show cases of swindling and fraudulent
manipulations perpetrated by unscrupulous subdivision and condominium sellers and operators,
such as failure to deliver titles to the buyers or titles free from liens and encumbrances, and to
pay real estate taxes, and fraudulent sales of the same subdivision lots to different innocent
purchasers for value;
Page | 50
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
WHEREAS, these acts not only undermine the land and housing program of the government but
also defeat the objectives of the New Society, particularly the promotion of peace and order and
the enhancement of the economic, social and moral condition of the Filipino people;
WHEREAS, this state of affairs has rendered it imperative that the real estate subdivision and
condominium businesses be closely supervised and regulated, and that penalties be imposed on
fraudulent practices and manipulations committed in connection therewith.
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of
the powers vested in me by the Constitution, do hereby decree and order:
Title I
TITLE AND DEFINITIONS
Section 1. Title. This Decree shall be known as THE SUBDIVISION AND CONDOMINIUM
BUYERS' PROTECTIVE DECREE.
Section 2. Definition of Terms When used in this Decree, the following terms shall, unless the
context otherwise indicates, have the following respective meanings:
(a) Person. "Person" shall mean a natural or a juridical person. A juridical person refers to
a business firm whether a corporation, partnership, cooperative or associations or a single
proprietorship.
(b) Sale or sell. "Sale" or "sell" shall include every disposition, or attempt to dispose, for
a valuable consideration, of a subdivision lot, including the building and other
improvements thereof, if any, in a subdivision project or a condominium unit in a
condominium project. "Sale" and "sell" shall also include a contract to sell, a contract of
purchase and sale, an exchange, an attempt to sell, an option of sale or purchase, a
solicitation of a sale, or an offer to sell, directly or by an agent, or by a circular, letter,
advertisement or otherwise.
A privilege given to a member of a cooperative, corporation, partnership, or any
association and/or the issuance of a certificate or receipt evidencing or giving the right of
participation in, or right to, any land in consideration of payment of the membership fee
or dues, shall be deemed a sale within the meaning of this definition.
(c) Buy and purchase. The "buy" and "purchase" shall include any contract to buy,
purchase, or otherwise acquire for a valuable consideration a subdivision lot, including
the building and other improvements, if any, in a subdivision project or a condominium
unit in a condominium project.
(d) Subdivision project. "Subdivision project" shall mean a tract or a parcel of land
registered under Act No. 496 which is partitioned primarily for residential purposes into
individual lots with or without improvements thereon, and offered to the public for sale,
in cash or in installment terms. It shall include all residential, commercial, industrial and
recreational areas as well as open spaces and other community and public areas in the
project.
(e) Subdivision lot. "Subdivision lot" shall mean any of the lots, whether residential,
commercial, industrial, or recreational, in a subdivision project.
(f) Complex subdivision plan. "Complex subdivision plan" shall mean a subdivision plan
of a registered land wherein a street, passageway or open space is delineated on the plan.
Page | 51
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
(g) Condominium project. "Condominium project" shall mean the entire parcel of real
property divided or to be divided primarily for residential purposes into condominium
units, including all structures thereon.
(h) Condominium unit. "Condominium unit" shall mean a part of the condominium
project intended for any type of independent use or ownership, including one or more
rooms or spaces located in one or more floors (or part of parts of floors) in a building or
buildings and such accessories as may be appended thereto.
(i) Owner. "Owner" shall refer to the registered owner of the land subject of a subdivision
or a condominium project.
(j) Developer. "Developer" shall mean the person who develops or improves the
subdivision project or condominium project for and in behalf of the owner thereof.
(k) Dealer. "Dealer" shall mean any person directly engaged as principal in the business
of buying, selling or exchanging real estate whether on a full-time or part-time basis.
(l) Broker. "Broker" shall mean any person who, for commission or other compensation,
undertakes to sell or negotiate the sale of a real estate belonging to another.
(m) Salesman. "Salesman" shall refer to the person regularly employed by a broker to
perform, for and in his behalf, any or all functions of a real estate broker.
(n) Authority. "Authority" shall mean the National Housing Authority.
Title II
REGISTRATION AND LICENSE TO SELL
Section 3. National Housing Authority The National Housing Authority shall have exclusive
jurisdiction to regulate the real estate trade and business in accordance with the provisions of
this Decree.
Section 4. Registration of Projects The registered owner of a parcel of land who wishes to
convert the same into a subdivision project shall submit his subdivision plan to the Authority
which shall act upon and approve the same, upon a finding that the plan complies with the
Subdivision Standards' and Regulations enforceable at the time the plan is submitted. The same
procedure shall be followed in the case of a plan for a condominium project except that, in
addition, said Authority shall act upon and approve the plan with respect to the building or
buildings included in the condominium project in accordance with the National Building Code
(R.A. No. 6541).
The subdivision plan, as so approved, shall then be submitted to the Director of Lands for
approval in accordance with the procedure prescribed in Section 44 of the Land Registration Act
(Act No. 496, as amended by R.A. No. 440): Provided, that it case of complex subdivision plans,
court approval shall no longer be required. The condominium plan as likewise so approved, shall
be submitted to the Register of Deeds of the province or city in which the property lies and the
same shall be acted upon subject to the conditions and in accordance with the procedure
prescribed in Section 4 of the Condominium Act (R.A. No. 4726).
The owner or the real estate dealer interested in the sale of lots or units, respectively, in such
subdivision project or condominium project shall register the project with the Authority by filing
therewith a sworn registration statement containing the following information:
(a) Name of the owner;
Page | 52
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
(b) The location of the owner's principal business office, and if the owner is a nonresident Filipino, the name and address of his agent or representative in the Philippines is
authorized to receive notice;
(c) The names and addresses of all the directors and officers of the business firm, if the
owner be a corporation, association, trust, or other entity, and of all the partners, if it be a
partnership;
(d) The general character of the business actually transacted or to be transacted by the
owner; and
(e) A statement of the capitalization of the owner, including the authorized and
outstanding amounts of its capital stock and the proportion thereof which is paid-up.
The following documents shall be attached to the registration statement:
(a) A copy of the subdivision plan or condominium plan as approved in accordance with
the first and second paragraphs of this section.
(b) A copy of any circular, prospectus, brochure, advertisement, letter, or communication
to be used for the public offering of the subdivision lots or condominium units;
(c) In case of a business firm, a balance sheet showing the amount and general character
of its assets and liabilities and a copy of its articles of incorporation or articles of
partnership or association, as the case may be, with all the amendments thereof and
existing by-laws or instruments corresponding thereto.
(d) A title to the property which is free from all liens and encumbrances: Provided,
however, that in case any subdivision lot or condominium unit is mortgaged, it is
sufficient if the instrument of mortgage contains a stipulation that the mortgagee shall
release the mortgage on any subdivision lot or condominium unit as soon as the full
purchase price for the same is paid by the buyer.
The person filing the registration statement shall pay the registration fees prescribed therefor by
the Authority.
Thereupon, the Authority shall immediately cause to be published a notice of the filing of the
registration statement at the expense of the applicant-owner or dealer, in two newspapers general
circulation, one published in English and another in Pilipino, once a week for two consecutive
weeks, reciting that a registration statement for the sale of subdivision lots or condominium units
has been filed in the National Housing Authority; that the aforesaid registration statement, as
well as the papers attached thereto, are open to inspection during business hours by interested
parties, under such regulations as the Authority may impose; and that copies thereof shall be
furnished to any party upon payment of the proper fees.
The subdivision project of the condominium project shall be deemed registered upon completion
of the above publication requirement. The fact of such registration shall be evidenced by a
registration certificate to be issued to the applicant-owner or dealer.
Section 5. License to sell. Such owner or dealer to whom has been issued a registration
certificate shall not, however, be authorized to sell any subdivision lot or condominium unit in
the registered project unless he shall have first obtained a license to sell the project within two
weeks from the registration of such project.
The Authority, upon proper application therefor, shall issue to such owner or dealer of a
registered project a license to sell the project if, after an examination of the registration statement
filed by said owner or dealer and all the pertinent documents attached thereto, he is convinced
Page | 53
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
that the owner or dealer is of good repute, that his business is financially stable, and that the
proposed sale of the subdivision lots or condominium units to the public would not be fraudulent.
Section 6. Performance Bond. No license to sell subdivision lots or condominium units shall be
issued by the Authority under Section 5 of this Decree unless the owner or dealer shall have filed
an adequate performance bond approved by said Authority to guarantee the construction and
maintenance of the roads, gutters, drainage, sewerage, water system, lighting systems, and full
development of the subdivision project or the condominium project and the compliance by the
owner or dealer with the applicable laws and rules and regulations.
The performance bond shall be executed in favor of the Republic of the Philippines and shall
authorize the Authority to use the proceeds thereof for the purposes of its undertaking in case of
forfeiture as provided in this Decree.
Section 7. Exempt transactions. A license to sell and performance bond shall not be required in
any of the following transactions:
(a) Sale of a subdivision lot resulting from the partition of land among co-owners and coheirs.
(b) Sale or transfer of a subdivision lot by the original purchaser thereof and any
subsequent sale of the same lot.
(c) Sale of a subdivision lot or a condominium unit by or for the account of a mortgagee
in the ordinary course of business when necessary to liquidate a bona fide debt.
Section 8. Suspension of license to sell. Upon verified complaint by a buyer of a subdivision lot
or a condominium unit in any interested party, the Authority may, in its discretion, immediately
suspend the owner's or dealer's license to sell pending investigation and hearing of the case as
provided in Section 13 hereof.
The Authority may motu proprio suspend the license to sell if, in its opinion, any information in
the registration statement filed by the owner or dealer is or has become misleading, incorrect,
inadequate or incomplete or the sale or offering for a sale of the subdivision or condominium
project may work or tend to work a fraud upon prospective buyers.
The suspension order may be lifted if, after notice and hearing, the Authority is convinced that
the registration statement is accurate or that any deficiency therein has been corrected or
supplemented or that the sale to the public of the subdivision or condominium project will
neither be fraudulent not result in fraud. It shall also be lifted upon dismissal of the complaint for
lack of legal basis.
Until the final entry of an order of suspension, the suspension of the right to sell the project,
though binding upon all persons notified thereof, shall be deemed confidential unless it shall
appear that the order of suspension has in the meantime been violated.
Section 9. Revocation of registration certificate and license to sell. The Authority may, motu
proprio or upon verified complaint filed by a buyer of a subdivision lot or condominium unit,
revoke the registration of any subdivision project or condominium project and the license to sell
any subdivision lot or condominium unit in said project by issuing an order to this effect, with
his findings in respect thereto, if upon examination into the affairs of the owner or dealer during
a hearing as provided for in Section 14 hereof, if shall appear there is satisfactory evidence that
the said owner or dealer:
(a) Is insolvent; or
Page | 54
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
(b) has violated any of the provisions of this Decree or any applicable rule or regulation
of the Authority, or any undertaking of his/its performance bond; or
(c) Has been or is engaged or is about to engage in fraudulent transactions; or
(d) Has made any misrepresentation in any prospectus, brochure, circular or other
literature about the subdivision project or condominium project that has been distributed
to prospective buyers; or
(e) Is of bad business repute; or
(f) Does not conduct his business in accordance with law or sound business principles.
Where the owner or dealer is a partnership or corporation or an unincorporated association, it
shall be sufficient cause for cancellation of its registration certificate and its license to sell, if any
member of such partnership or any officer or director of such corporation or association has been
guilty of any act or omission which would be cause for refusing or revoking the registration of an
individual dealer, broker or salesman as provided in Section 11 hereof.
Section 10. Registers of subdivision lots and condominium units. A record of subdivision lots
and condominium units shall be kept in the Authority wherein shall be entered all orders of the
Authority affecting the condition or status thereof. The registers of subdivision lots and
condominium units shall be open to public inspection subject to such reasonable rules as the
Authority may prescribe.
Title III
DEALERS, BROKERS AND SALESMEN
Section 11. Registration of dealers, brokers and salesmen. No real estate dealer, broker or
salesman shall engage in the business of selling subdivision lots or condominium units unless he
has registered himself with the Authority in accordance with the provisions of this section.
If the Authority shall find that the applicant is of good repute and has complied with the
applicable rules of the Authority, including the payment of the prescribed fee, he shall register
such applicant as a dealer, broker or salesman upon filing a bond, or other security in lieu
thereof, in such sum as may be fixed by the Authority conditioned upon his faithful compliance
with the provisions of this Decree: Provided, that the registration of a salesman shall cease upon
the termination of his employment with a dealer or broker.
Every registration under this section shall expire on the thirty-first day of December of each year.
Renewal of registration for the succeeding year shall be granted upon written application therefor
made not less than thirty nor more than sixty days before the first day of the ensuing year and
upon payment of the prescribed fee, without the necessity of filing further statements or
information, unless specifically required by the Authority. All applications filed beyond said
period shall be treated as original applications.
The names and addresses of all persons registered as dealers, brokers, or salesmen shall be
recorded in a Register of Brokers, Dealers and Salesmen kept in the Authority which shall be
open to public inspection.
Section 12. Revocation of registration as dealers, brokers or salesmen. Registration under the
preceding section may be refused or any registration granted thereunder, revoked by the
Authority if, after reasonable notice and hearing, it shall determine that such applicant or
registrant:
1. Has violated any provision of this Decree or any rule or regulation made hereunder; or
Page | 55
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
2. Has made a material false statement in his application for registration; or
3. Has been guilty of a fraudulent act in connection with any sale of a subdivision lot or
condominium unit; or
4. Has demonstrated his unworthiness to transact the business of dealer, broker, or
salesman, as the case may be.
In case of charges against a salesman, notice thereof shall also be given the broker or dealer
employing such salesman.
Pending hearing of the case, the Authority shall have the power to order the suspension of the
dealer's, broker's, of salesman's registration; provided, that such order shall state the cause for the
suspension.
The suspension or revocation of the registration of a dealer or broker shall carry with it all the
suspension or revocation of the registrations of all his salesmen.
Title IV
PROCEDURE FOR REVOCATION OF REGISTRATION CERTIFICATE
Section 13. Hearing. In the hearing for determining the existence of any ground or grounds for
the suspension and/or revocation of registration certificate and license to sell as provided in
Section 8 and 9 hereof, the following shall be complied with:
(a) Notice. No such hearing shall proceed unless the respondent is furnished with a copy
of the complaint against him or is notified in writing of the purpose of such hearing.
(b) Venue. The hearing may be held before the officer or officers designated by the
Authority on the date and place specified in the notice.
(c) Nature of proceeding. The proceedings shall be non-litigious and summary in nature
without regard to legal technicalities obtaining in courts of law. The Rules of court shall
not apply in said hearing except by analogy or in a suppletory character and whenever
practicable and convenient.
(d) Power incidental to the hearing. For the purpose of the hearing or other proceeding
under this Decree, the officer or officers designated to hear the complaint shall have the
power to administer oaths, subpoena witnesses, conduct ocular inspections, take
depositions, and require the production of any book, paper, correspondence,
memorandum, or other record which are deemed relevant or material to the inquiry.
Section 14. Contempt.
(a) Direct contempt. The officer or officers designated by the Authority to hear the
complaint may summarily adjudge in direct contempt any person guilty of misbehavior in
the presence of or so near the said hearing officials as to obstruct or interrupt the
proceedings before the same or of refusal to be sworn or to answer as a witness or to
subscribe an affidavit or deposition when lawfully required to do so. The person found
guilty of direct contempt under this section shall be punished by a fine not exceeding
Fifty (P50.00) Pesos or imprisonment not exceeding five (5) days, or both.
(b) Indirect contempt. The officer or officers designated to hear the complaint may also
adjudge any person in indirect contempt on grounds and in the manner prescribed in Rule
71 of the Revised Rules of Court.
Page | 56
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Section 15. Decision. The case shall be decided within thirty (30) days from the time the same is
submitted for decision. The Decision may order the revocation of the registration of the
subdivision or condominium project, the suspension, cancellation, or revocation of the license to
sell and/or forfeiture, in whole or in part, of the performance bond mentioned in Section 6
hereof. In case forfeiture of the bond is ordered, the Decision may direct the provincial or city
engineer to undertake or cause the construction of roads and of other requirements for the
subdivision or condominium as stipulated in the bond, chargeable to the amount forfeited. Such
decision shall be immediately executory and shall become final after the lapse of 15 days from
the date of receipt of the Decision.
Section 16. Cease and Desist Order. Whenever it shall appear to the Authority that any person is
engaged or about to engage in any act or practice which constitutes or will constitute a violation
of the provisions of this Decree, or of any rule or regulation thereunder, it may, upon due notice
and hearing as provided in Section 13 hereof, issue a cease and desist order to enjoin such act or
practices.
Section 17. Registration. All contracts to sell, deeds of sale and other similar instruments relative
to the sale or conveyance of the subdivision lots and condominium units, whether or not the
purchase price is paid in full, shall be registered by the seller in the Office of the Register of
Deeds of the province or city where the property is situated.
Whenever a subdivision plan duly approved in accordance with Section 4 hereof, together with
the corresponding owner's duplicate certificate of title, is presented to the Register of Deeds for
registration, the Register of Deeds shall register the same in accordance with the provisions of
the Land Registration Act, as amended: Provided, however, that it there is a street, passageway
or required open space delineated on a complex subdivision plan hereafter approved and as
defined in this Decree, the Register of Deeds shall annotate on the new certificate of title
covering the street, passageway or open space, a memorandum to the effect that except by way
of donation in favor of a city or municipality, no portion of any street, passageway, or open space
so delineated on the plan shall be closed or otherwise disposed of by the registered owner
without the requisite approval as provided under Section 22 of this Decree.
Section 18. Mortgages. No mortgage on any unit or lot shall be made by the owner or developer
without prior written approval of the Authority. Such approval shall not be granted unless it is
shown that the proceeds of the mortgage loan shall be used for the development of the
condominium or subdivision project and effective measures have been provided to ensure such
utilization. The loan value of each lot or unit covered by the mortgage shall be determined and
the buyer thereof, if any, shall be notified before the release of the loan. The buyer may, at his
option, pay his installment for the lot or unit directly to the mortgagee who shall apply the
payments to the corresponding mortgage indebtedness secured by the particular lot or unit being
paid for, with a view to enabling said buyer to obtain title over the lot or unit promptly after full
payment thereto;
Section 19. Advertisements. Advertisements that may be made by the owner or developer
through newspaper, radio, television, leaflets, circulars or any other form about the subdivision
or the condominium or its operations or activities must reflect the real facts and must be
presented in such manner that will not tend to mislead or deceive the public.
The owner or developer shall answerable and liable for the facilities, improvements,
infrastructures or other forms of development represented or promised in brochures,
advertisements and other sales propaganda disseminated by the owner or developer or his agents
and the same shall form part of the sales warranties enforceable against said owner or developer,
jointly and severally. Failure to comply with these warranties shall also be punishable in
accordance with the penalties provided for in this Decree.
Section 20. Time of Completion. Every owner or developer shall construct and provide the
facilities, improvements, infrastructures and other forms of development, including water supply
Page | 57
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
and lighting facilities, which are offered and indicated in the approved subdivision or
condominium plans, brochures, prospectus, printed matters, letters or in any form of
advertisement, within one year from the date of the issuance of the license for the subdivision or
condominium project or such other period of time as may be fixed by the Authority.
Section 21. Sales Prior to Decree. In cases of subdivision lots or condominium units sold or
disposed of prior to the effectivity of this Decree, it shall be incumbent upon the owner or
developer of the subdivision or condominium project to complete compliance with his or its
obligations as provided in the preceding section within two years from the date of this Decree
unless otherwise extended by the Authority or unless an adequate performance bond is filed in
accordance with Section 6 hereof.
Failure of the owner or developer to comply with the obligations under this and the preceding
provisions shall constitute a violation punishable under Sections 38 and 39 of this Decree.
Section 22. Alteration of Plans. No owner or developer shall change or alter the roads, open
spaces, infrastructures, facilities for public use and/or other form of subdivision development as
contained in the approved subdivision plan and/or represented in its advertisements, without the
permission of the Authority and the written conformity or consent of the duly organized
homeowners association, or in the absence of the latter, by the majority of the lot buyers in the
subdivision.
Section 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a
subdivision or condominium project for the lot or unit he contracted to buy shall be forfeited in
favor of the owner or developer when the buyer, after due notice to the owner or developer,
desists from further payment due to the failure of the owner or developer to develop the
subdivision or condominium project according to the approved plans and within the time limit
for complying with the same. Such buyer may, at his option, be reimbursed the total amount paid
including amortization interests but excluding delinquency interests, with interest thereon at the
legal rate.
Section 24. Failure to pay installments. The rights of the buyer in the event of this failure to pay
the installments due for reasons other than the failure of the owner or developer to develop the
project shall be governed by Republic Act No. 6552.
Where the transaction or contract was entered into prior to the effectivity of Republic Act No.
6552 on August 26, 1972, the defaulting buyer shall be entitled to the corresponding refund
based on the installments paid after the effectivity of the law in the absence of any provision in
the contract to the contrary.
Section 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to
the buyer upon full payment of the lot or unit. No fee, except those required for the registration
of the deed of sale in the Registry of Deeds, shall be collected for the issuance of such title. In
the event a mortgage over the lot or unit is outstanding at the time of the issuance of the title to
the buyer, the owner or developer shall redeem the mortgage or the corresponding portion
thereof within six months from such issuance in order that the title over any fully paid lot or unit
may be secured and delivered to the buyer in accordance herewith.
Section 26. Realty Tax. Real estate tax and assessment on a lot or unit shall de paid by the owner
or developer without recourse to the buyer for as long as the title has not passed the buyer;
Provided, however, that if the buyer has actually taken possession of and occupied the lot or unit,
he shall be liable to the owner or developer for such tax and assessment effective the year
following such taking of possession and occupancy.
Section 27. Other Charges. No owner or developer shall levy upon any lot or buyer a fee for an
alleged community benefit. Fees to finance services for common comfort, security and sanitation
may be collected only by a properly organized homeowners association and only with the
Page | 58
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
consent of a majority of the lot or unit buyers actually residing in the subdivision or
condominium project.
Section 28. Access to Public Offices in the Subdivisions. No owner or developer shall deny any
person free access to any government office or public establishment located within the
subdivision or which may be reached only by passing through the subdivision.
Section 29. Right of Way to Public Road. The owner or developer of a subdivision without
access to any existing public road or street must secure a right of way to a public road or street
and such right of way must be developed and maintained according to the requirement of the
government and authorities concerned.
Section 30. Organization of Homeowners Association. The owner or developer of a subdivision
project or condominium project shall initiate the organization of a homeowners association
among the buyers and residents of the projects for the purpose of promoting and protecting their
mutual interest and assist in their community development.
Section 31. Donations of roads and open spaces to local government. The registered owner or
developer of the subdivision or condominium project, upon completion of the development of
said project may, at his option, convey by way of donation the roads and open spaces found
within the project to the city or municipality wherein the project is located. Upon acceptance of
the donation by the city or municipality concerned, no portion of the area donated shall thereafter
be converted to any other purpose or purposes unless after hearing, the proposed conversion is
approved by the Authority.
Section 32. Phases of Subdivision. For purposes of complying with the provisions of this Decree,
the owner or developer may divide the development and sale of the subdivision into phases, each
phase to cover not less than ten hectares. The requirement imposed by this Decree on the
subdivision as a whole shall be deemed imposed on each phase.
Section 33. Nullity of waivers. Any condition, stipulation, or provision in contract of sale
whereby any person waives compliance with any provision of this Decree or of any rule or
regulation issued thereunder shall be void.
Section 34. Visitorial powers. This Authority, through its duly authorized representative may, at
any time, make an examination into the business affairs, administration, and condition of any
person, corporation, partnership, cooperative, or association engaged in the business of selling
subdivision lots and condominium units. For this purpose, the official authorized so to do shall
have the authority to examine under oath the directors, officers, stockholders or members of any
corporation, partnership, association, cooperative or other persons associated or connected with
the business and to issue subpoena or subpoena duces tecum in relation to any investigation that
may arise therefrom.
The Authority may also authorize the Provincial, City or Municipal Engineer, as the case may
be, to conduct an ocular inspection of the project to determine whether the development of said
project conforms to the standards and specifications prescribed by the government.
The books, papers, letters, and other documents belonging to the person or entities herein
mentioned shall be open to inspection by the Authority or its duly authorized representative.
Section 35. Take-over Development. The Authority, may take over or cause the development and
completion of the subdivision or condominium project at the expenses of the owner or developer,
jointly and severally, in cases where the owner or developer has refused or failed to develop or
complete the development of the project as provided for in this Decree.
Page | 59
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
The Authority may, after such take-over, demand, collect and receive from the buyers the
installment payments due on the lots, which shall be utilized for the development of the
subdivision.
Section 36. Rules and Regulations. The Authority shall issue the necessary standards, rules and
regulations for the effective implementation of the provisions of this Decree. Such standards,
rules and regulations shall take effect immediately after their publication three times a week for
two consecutive weeks in any newspaper of general circulation.
Section 37. Deputization of law enforcement agencies. The Authority may deputize the
Philippine Constabulary or any law enforcement agency in the execution of its final orders,
rulings or decisions.
Section 38. Administrative Fines. The Authority may prescribe and impose fines not exceeding
ten thousand pesos for violations of the provisions of this Decree or of any rule or regulation
thereunder. Fines shall be payable to the Authority and enforceable through writs of execution in
accordance with the provisions of the Rules of Court.
Section 39. Penalties. Any person who shall violate any of the provisions of this Decree and/or
any rule or regulation that may be issued pursuant to this Decree shall, upon conviction, be
punished by a fine of not more than twenty thousand (P20,000.00) pesos and/or imprisonment of
not more than ten years: Provided, That in the case of corporations, partnership, cooperatives, or
associations, the President, Manager or Administrator or the person who has charge of the
administration of the business shall be criminally responsible for any violation of this Decree
and/or the rules and regulations promulgated pursuant thereto.
Section 40. Liability of controlling persons. Every person who directly or indirectly controls any
person liable under any provision of this Decree or of any rule or regulation issued thereunder
shall be liable jointly and severally with and to the same extent as such controlled person unless
the controlling person acted in good faith and did not directly or indirectly induce the act or acts
constituting the violation or cause of action.
Section 41. Other remedies. The rights and remedies provided in this Decree shall be in addition
to any and all other rights and remedies that may be available under existing laws.
Section 42. Repealing clause. All laws, executive orders, rules and regulations or part thereof
inconsistent with the provisions of this Decree are hereby repealed or modified accordingly.
Section 43. Effectivity. This Decree shall take effect upon its approval.
Done in the City of Manila, this 12th day of July, in the year of Our Lord, nineteen hundred and
seventy-six.
Page | 60
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
LAW ON CREDIT TRANSACTIONS
CHAPTER 1
Provisions Common to Pledge and Mortgage
Article 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of
their property, and in the absence thereof, that they be legally authorized for the
purpose.
Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property. (1857)
Article 2086. The provisions of article 2052 are applicable to a pledge or mortgage. (n)
Article 2087. It is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated for the
payment to the creditor. (1858)
NOTES:
•
•
•
Pledge – a contract by virtue of which the debtor delivers to the creditor or to a third
person a movable, or instrument evidence incorporeal rights for the purpose of securing
the fulfillment of a principal obligation with the understanding that when the obligation is
fulfilled, the thing delivered shall be returned with all its fruits and accessions. (This is
when you make “prenda” your personal property to another person.)
o It is a real contract because it is perfected by the delivery of the thing pledged, by
the debtor who is called the pledgor, to the creditor who is called the pledgee.
o It is an accessory contract because it has no independent existence of its own
o It is a unilateral contract because it created an obligation solely on the part of the
creditor to return the thing subject thereof upon the fulfillment of the principal
obligation
o It may also be said that pledge is a subsidiary contract because the obligation
incurred does not arise until the fulfillment of the principal obligation which is
secured.
Kinds of pledge:
o Voluntary or conventional – one which is created by agreement of the parties
o Legal – one which is created by operation of law
Articles 2085 to 2087 enumerate the essential requisites common to pledge and
mortgage:
o Constituted to secure fulfillment of a principal obligation
o Pledgor or mortgagor must be the absolute owner of the thing pledged/mortgaged
o Pledgor or mortgagor has free disposal of property or has legal authority
o Thing pledged or mortgaged may be alienated
o In addition to the above requisites, the thing pledged must be delivered to the
creditor or a third person by common agreement. Without delivery, there is no
pledge.
Pledge
1. Constituted on movables
Mortgage
1. Constituted on immovables
Page | 61
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
2. Property is delivered to the
pledgee, or by common consent, to
a third person
3. Not valid against a third person
unless a description of the thing
pledged and the date of the pledge
appear on a public instrument
2. Delivery is not necessary
3. Not valid against third persons
unless registered
Article 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a)
NOTES:
•
•
The property given in pledge or mortgage stands merely as security for the fulfillment of
the principal obligation
o If the debtor fails to comply with the obligation at the time it falls due, the
creditor is merely entitled to move for the sale of the thing pledged with the
formalities required by law, in order to collect the amount of his claim from the
proceeds.
o The creditor cannot appropriate to himself the thing held as pledge or under
mortgage, nor can he dispose of the same as owner.
A stipulation whereby the thing pledged or mortgaged shall automatically become the
property of the creditor in the event of non-payment of the debt within the term fixed is
known as pacto comisorio which is forbidden by law and declared null and void. The
stipulation does not affect the contract of pledge or mortgage itself which remains valid;
only the stipulation is void.
o Example: A borrowed from B a sum of money. A offered his house by way of a
mortgage. It was expressly stipulated in the contract that upon non-payment of the
debt on time, the house would belong to B. Is the stipulation valid?
▪ ANS.: No, such a stipulation (pacto comisorio) is null and void. “This
forfeiture clause has traditionally not been allowed because it is contrary
to good morals and public policy.” (Report of the Code Commission, p.
156; See Perez v. Cortez, 35 Phil. 211 and Tan Chun Tic v. West Coast
Life Ins. Co., 54 Phil. 361).
Article 2089. A pledge or mortgage is indivisible, even though the debt may be divided
among the successors in interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditor's heir who received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in
mortgage or pledge, each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage
as the portion of the debt for which each thing is specially answerable is satisfied. (1860)
Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the
debtors are not solidarily liable. (n)
Page | 62
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTES:
•
•
This is the Doctrine of Indivisibility of Pledge or Mortgage
Examples:
(a) A borrowed P1 million from B, secured by a mortgage on A’s land. A died leaving
children X and Y. X paid P50,000 to B. Can X ask for the proportionate extinguishment
of the mortgage?
ANS.: No (Par. 2, Art. 2089), but of course the debt is now only half. Indeed, a
mortgage is indivisible, but the principal obligation may be divisible.
(b) A borrowed P1 million from B, secured by a mortgage on A’s land. B died leaving
two children, R and T. A paid R P500,000. Is R allowed to cancel the mortgage?
ANS.: No. (Par. 3, Art. 2089).
•
Example of the Exception:
A borrowed P1 Million from B, secured by the pledge of a ring for a debt of P200,000;
and by a mortgage on A’s land, for the balance of P800,000. If A pays P200,000, can he
demand the return of the ring?
ANS.: Yes, because in this case the ring guaranteed only P200,000. (Pars. 3 and 4,
Art. 2089).
Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be
they pure or subject to a suspensive or resolutory condition. (1861)
Article 2092. A promise to constitute a pledge or mortgage gives rise only to a personal
action between the contracting parties, without prejudice to the criminal responsibility
incurred by him who defrauds another, by offering in pledge or mortgage as
unencumbered, things which he knew were subject to some burden, or by misrepresenting
himself to be the owner of the same. (1862)
NOTES:
•
A promise to constitute a pledge or mortgage, if accepted, gives rise only to a personal
right binding upon the parties and creates no real right in the property.
MODULE ACTIVITIES
I.
Key Terms. Define or give the meaning of the following:
1. Pledge
2. Pacto comisorio
II.
Discussions. Discuss the following:
1. Distinguish pledge from mortgage.
2. What are the essential requisites of pledge or mortgage?
III.
Problems. Explain or state briefly the rule or reason for your answer.
Page | 63
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
1. D, pledgor/debtor, and C, pledgee/creditor. When D failed to pay, it was agreed
that the thing pledged shall already become the property of C. Is the agreement
valid?
2. Same parties. The amount of the obligation is P25,000 for which D pledged his
wrist watch and a camera the value of which is stated as P15,000 and P10,000
respectively. After paying P12,000, D demands the return of the camera. Has C
the right to reject D’s demand?
CHAPTER 2
Pledge
Article 2093. In addition to the requisites prescribed in article 2085, it is necessary, in order
to constitute the contract of pledge, that the thing pledged be placed in the possession of the
creditor, or of a third person by common agreement. (1863)
NOTES:
•
•
Actual transfer of possession is essential in pledge. A pledge is a real contract which
requires delivery for its perfection.
The delivery of possession referred to in this article as essential to the validity of pledge
means actual possession of the property pledged and mere symbolic delivery may not be
sufficient.
Article 2094. All movables which are within commerce may be pledged, provided they are
susceptible of possession. (1864)
Article 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading,
shares of stock, bonds, warehouse receipts and similar documents may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable,
must be indorsed. (n)
NOTES:
•
•
What May Be Pledged
o Only movables can be pledged (including incorporeal rights — See Art. 2095).
o Real property cannot be pledged. A pledge cannot include a lien on real property.
(Pac. Com. Co. v. Phil. Nat’l. Bank, 49 Phil. 236).
o Certificates of stock or of stock dividends, under the Corporation Code, are quasinegotiable instruments in the sense that they may be given in pledge to secure an
obligation.
Pledge of Incoporeal Rights
o The instrument proving the right pledged must be DELIVERED.
o If negotiable, said instrument must be ENDORSED.
Article 2096. A pledge shall not take effect against third persons if a description of the
thing pledged and the date of the pledge do not appear in a public instrument. (1865a)
NOTES:
•
Effectivity of Pledge Against Third Persons
o A public instrument must be made.
o The instrument must contain the DESCRIPTION of the thing pledged and the
DATE of the pledge.
Page | 64
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
Article 2097. With the consent of the pledgee, the thing pledged may be alienated by the
pledgor or owner, subject to the pledge. The ownership of the thing pledged is transmitted
to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter
shall continue in possession. (n)
NOTES:
•
•
The pledgor retains his ownership of the thing pledged. He may still sell the same
provided the plegdee consents to the sale.
But the pledge would not bind or adversely affect third persons unless Art. 2096 has been
followed.
Article 2098. The contract of pledge gives a right to the creditor to retain the thing in his
possession or in that of a third person to whom it has been delivered, until the debt is paid.
(1866a)
NOTE:
•
The possession of the pledge constitutes his security. Hence, the debtor cannot demand
its return until the debt secured by it is paid.
Article 2099. The creditor shall take care of the thing pledged with the diligence of a good
father of a family; he has a right to the reimbursement of the expenses made for its
preservation, and is liable for its loss or deterioration, in conformity with the provisions of
this Code. (1867)
NOTE:
•
In case of the loss or deterioration of the thing pledged due to fortuitous event, the
pledgee cannot be held responsible but he is liable for loss or deterioration by reason of
fraud, negligence, delay or violation of the terms of the contract.
Article 2100. The pledgee cannot deposit the thing pledged with a third person, unless there
is a stipulation authorizing him to do so.
The pledgee is responsible for the acts of his agents or employees with respect to the thing
pledged. (n)
Article 2101. The pledgor has the same responsibility as a bailor in commodatum in the
case under article 1951. (n)
Article 2102. If the pledge earns or produces fruits, income, dividends, or interests, the
creditor shall compensate what he receives with those which are owing him; but if none are
owing him, or insofar as the amount may exceed that which is due, he shall apply it to the
principal. Unless there is a stipulation to the contrary, the pledge shall extend to the
interest and earnings of the right pledged.
In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of
animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary.
(1868a)
NOTE:
•
The pledgee has no right to use the thing pledged or to appropriate the fruits thereof
without the authority of the owner. But the pledgee can apply the fruits, income,
Page | 65
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
dividends, or interest earned or produced by the thing pledged to the payment of interest,
if owing, and thereafter to the principal of his credit.
Article 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner
thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner of the thing
pledged in order to recover it from, or defend it against a third person. (1869)
Article 2104. The creditor cannot use the thing pledged, without the authority of the owner,
and if he should do so, or should misuse the thing in any other way, the owner may ask that
it be judicially or extrajudicially deposited. When the preservation of the thing pledged
requires its use, it must be used by the creditor but only for that purpose. (1870a)
NOTES:
•
•
The pledgee who is in possession of the thing pledge has no right to make use of it
without permission from the owner.
In the following cases, the owner may ask that the thing pledged be deposited judicially
or extrajudicially:
o If the creditor uses the thing without authority
o If he misuses the thing in any other way, or
o If the thing is in danger of being lost or impaired because of the negligence or
willful act of the pledgee.
Article 2105. The debtor cannot ask for the return of the thing pledged against the will of
the creditor, unless and until he has paid the debt and its interest, with expenses in a
proper case. (1871)
Article 2106. If through the negligence or wilful act of the pledgee, the thing pledged is in
danger of being lost or impaired, the pledgor may require that it be deposited with a third
person. (n)
Article 2107. If there are reasonable grounds to fear the destruction or impairment of the
thing pledged, without the fault of the pledgee, the pledgor may demand the return of the
thing, upon offering another thing in pledge, provided the latter is of the same kind as the
former and not of inferior quality, and without prejudice to the right of the pledgee under
the provisions of the following article.
The pledgee is bound to advise the pledgor, without delay, of any danger to the thing
pledged. (n)
NOTES:
•
The following are the requisites for the application of Article 2107:
1. The pledgor has reasonable grounds to fear the destruction or impairment of the
thing pledged;
2. There is no fault on the part of the pledgee;
3. The pledgor is offering in place of the thing another thing in pledge which is of
the same kind and quality as the former; and
4. The pledgee does not choose to exercise his right to cause the thing pledged to be
sold at public auction
Article 2108. If, without the fault of the pledgee, there is danger of destruction,
impairment, or diminution in value of the thing pledged, he may cause the same to be sold
at a public sale. The proceeds of the auction shall be a security for the principal obligation
in the same manner as the thing originally pledged. (n)
Page | 66
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
NOTE:
•
•
The pledgee’s right to have the thing pledged sold at public sale granted under the above
article is superior to that given to the pledgor to substitute the thing pledged under Article
2107.
Note that there must be a public sale.
Article 2109. If the creditor is deceived on the substance or quality of the thing pledged, he
may either claim another thing in its stead, or demand immediate payment of the principal
obligation. (n)
NOTE:
•
This article grants two remedies to the pledgee, in case he is deceived as to the substance
or quality of the thing pledged.
Article 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the
pledge is extinguished. Any stipulation to the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or
owner, there is a prima facie presumption that the same has been returned by the pledgee.
This same presumption exists if the thing pledged is in the possession of a third person who
has received it from the pledgor or owner after the constitution of the pledge. (n)
NOTES:
•
•
The pledge is extinguished if the object is returned by the pledgee, and this is true
notwithstanding any stipulation that the pledge would continue although the pledgee is no
longer in possession.
The possession of the thing pledged by the debtor or owner subsequent to the perfection
of the pledge gives rise to a prima facie presumption that the thing has been returned and,
therefore, the pledge has been extinguished.
Article 2111. A statement in writing by the pledgee that he renounces or abandons the
pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the
pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a
depositary. (n)
NOTES:
•
•
The principal debt, however, is not affected by the waiver of the pledge. But the waiver
of that principal obligation carries with it that of the pledge.
Other causes of extinguishment of pledge are prescription, loss of the thing, merger,
compensation, novation, etc. (see Art. 1231)
Article 2112. The creditor to whom the credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a
public auction, and with notification to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public sale is to be held. If at the first auction
the thing is not sold, a second one with the same formalities shall be held; and if at the
second auction there is no sale either, the creditor may appropriate the thing pledged. In
this case he shall be obliged to give an acquittance for his entire claim. (1872a)
NOTES:
•
The formalities required for such sale under the above article are as follows:
Page | 67
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
•
1. The debt is due and unpaid;
2. The sale must be at a public auction;
3. There must be notice to the pledgor and owner, stating the amount due; and
4. The sale must be made with the intervention of a notary public.
The pledgee may appropriate the thing pledged if after the first and second auctions, the
thing is not sold. Note that if the creditor appropriates the thing, it shall be considered as
full payment for his entire claim.
Article 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. (n)
Article 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 been received the purchase price,
as far as the pledgor or owner is concerned. (n)
NOTE:
•
All bids, including that of the pledgor, must be for cash. If the pledgee accepts a bid other
than for cash, the pledgor or owner has the right to consider that the pledgee has received
the purchase price in cash.
Article 2115. The sale of the thing pledged shall extinguish the principal obligation,
whether or not the proceeds of the sale are equal to the amount of the principal obligation,
interest and expenses in a proper case. If the price of the sale is more than said amount, the
debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the
sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding
any stipulation to the contrary. (n)
NOTES:
•
The sale of the thing pledged extinguishes the principal obligation whether the price of
the sale is more or less than the amount due.
o If the price of the sale is more than the amount due, the debtor is not entitled to
the excess unless the contrary is provided.
o In the same way, if the price of the sale is less, neither is the creditor entitled to
recover the deficiency. A contrary stipulation is void.
Article 2116. After the public auction, the pledgee shall promptly advise the pledgor or
owner of the result thereof. (n)
Article 2117. Any third person who has any right in or to the thing pledged may satisfy the
principal obligation as soon as the latter becomes due and demandable. (n)
Article 2118. If a credit which has been pledged becomes due before it is redeemed, the
pledgee may collect and receive the amount due. He shall apply the same to the payment of
his claim, and deliver the surplus, should there be any, to the pledgor. (n)
NOTE:
•
In this article, it is a credit which is pledged. In such a case, the pledgee may collect the
same if the credit matures before it is redeemed, and he shall apply the same to the
payment of his claim, with the surplus inuring to the pledgor.
Page | 68
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
•
Example:
o A has a P200,000 receivable from C. A borrows P100,000 from B, and as a
security for the loan, A pledges his credit of P200,000 from C. If, before he
redeems his pledge, the receivable from C matures, B may collect the P200,000
from C. B shall then apply P100,000 of the proceeds to A’s loan, and the
P100,000 excess shall be returned to A.
Article 2119. If two or more things are pledged, the pledgee may choose which he will cause
to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as
many of the things as are necessary for the payment of the debt. (n)
ARTICLE 2120. If a third party secures an obligation by pledging his own movable
property under the provisions of article 2085 he shall have the same rights as a guarantor
under articles 2066 to 2070, and articles 2077 to 2081. He is not prejudiced by any waiver
of defense by the principal obligor. (n)
Article 2121. Pledges created by operation of law, such as those referred to in articles 546,
1731, and 1994, are governed by the foregoing articles on the possession, care and sale of
the thing as well as on the termination of the pledge. However, after payment of the debt
and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n)
Article 2122. A thing under a pledge by operation of law may be sold only after demand of
the amount for which the thing is retained. The public auction shall take place within one
month after such demand. If, without just grounds, the creditor does not cause the public
sale to be held within such period, the debtor may require the return of the thing. (n)
NOTE:
•
In legal pledge, the remainder of the price of the sale after payment of the debt and
expenses, shall be delivered to the debtor.
Article 2123. With regard to pawnshops and other establishments, which are engaged in
making loans secured by pledges, the special laws and regulations concerning them shall be
observed, and subsidiarily, the provisions of this Title. (1873a)
MODULE ACTIVITIES
I.
Discussions. Discuss the following:
1. What are the formalities or requisites required before a pledgee may cause the
sale of the thing pledged?
2. Mention four (4) obligations of the pledgee.
3. Mention at least four (4) rights of the pledgor.
II.
Problems. Explain or state briefly the rule or reason for your answer.
1. D, pledgor/debtor, and C, pledgee/creditor. The contract of pledge of jewelry was
put in writing signed by them. Subsequently, D sold to T the jewelry now in the
possession of C. The jewelry was previously offered for sale to T before the
pledge. May T recover the jewelry from C?
2. Same parties. C caused the sale at public auction of the jewelry for only P20,000.
The indebtedness of D is P25,000. Their agreement is that C may recover the
difference. Is D still liable for P5,000?
Page | 69
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
3. Same parties. The jewelry is later found in D’s possession. D claims that C
returned the jewelry after he paid. His obligation and, therefore, both his
obligation and the pledge are extinguished. C disputes D’s allegations. Decide.
CHAPTER 3
Mortgage3
Article 2124. Only the following property may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon immovables.
Nevertheless, movables may be the object of a chattel mortgage. (1874a)
NOTES:
•
•
•
Mortgage (a.k.a. real estate mortgage or real mortgage) – a contract whereby the debtor
secures to the creditor the fulfillment of a principal obligation, especially subjecting to
such security, immovable property or real rights over immovable property in case the
principal obligation is not complied with at the time stipulated.
Kinds of mortgage:
o Voluntary – one which is agreed to between the parties or constituted by the will
of the owner of the property on which it is created.
o Legal – one required by law to be executed in favor of certain persons
o Equitable – one which, although it lacks the proper formalities of a mortgage,
shows the intention of the parties to make the property as a security for a debt
The objects of a contract of mortgage are immovables and alienable real rights imposed
upon immovables. In contrast, the object of pledge and chattel mortgages are movables.
Article 2125. In addition to the requisites stated in article 2085, it is indispensable, in order
that a mortgage may be validly constituted, that the document in which it appears be
recorded in the Registry of Property. If the instrument is not recorded, the mortgage is
nevertheless binding between the parties.
The persons in whose favor the law establishes a mortgage have no other right than to
demand the execution and the recording of the document in which the mortgage is
formalized. (1875a)
NOTE:
•
In addition to the requisites stated as common to Pledge and mortgage, it is indispensable
in order that a mortgage may be validly constituted that it appears in a public document
duly recorded in the Registry of Property.
Article 2126. The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose
security it was constituted. (1876)
NOTES:
•
3
Effect of mortgage:
This chapter refers to REAL MORTGAGE. Chattel mortgages are governed by different provisions of law.
Page | 70
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
o Creates a real right – a mortgage creates what is called a real right which is
enforceable against the whole world. It follows the property wherever it goes.
Therefore, if the mortgagor sells the mortgaged property, the property remains
subject to the fulfillment of the obligation secured by it.
o Created merely an encumbrance – the mortgage, however, is merely an
encumbrance upon the property and does not extinguish the title of the debtor
who does not lose his principal attribute as owner, that is, the right to dispose.
Article 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation becomes due,
and to the amount of the indemnity granted or owing to the proprietor from the insurers of
the property mortgaged, or in virtue of expropriation for public use, with the declarations,
amplifications and limitations established by law, whether the estate remains in the
possession of the mortgagor, or it passes into the hands of a third person. (1877)
NOTES:
•
Therefore, all objects permanently attached to a mortgaged land or building, although
they may have been placed there after the execution of the mortgage are also included.
Article 2128. The mortgage credit may be alienated or assigned to a third person, in whole
or in part, with the formalities required by law. (1878)
Article 2129. The creditor may claim from a third person in possession of the mortgaged
property, the payment of the part of the credit secured by the property which said third
person possesses, in the terms and with the formalities which the law establishes. (1879)
NOTE:
•
The mortgage credit being a real right which follows the property, the creditor may
demand from any possessor the payment only of the part of the credit secured by said
property. It is necessary, however, that prior demand for payment must have been made
on the debtor and the latter failed to pay.
Article 2130. A stipulation forbidding the owner from alienating the immovable mortgaged
shall be void. (n)
Article 2131. The form, extent and consequences of a mortgage, both as to its constitution,
modification and extinguishment, and as to other matters not included in this Chapter,
shall be governed by the provisions of the Mortgage Law and of the Land Registration
Law. (1880a)
NOTES:
• Foreclosure – the remedy available to the mortgagee by which he subjects the mortgaged
property to the satisfaction of the obligation to secure which the mortgage was given
through the sale of the property at public auction and the application of the proceeds
thereof to the payment of his claim.
• Kinds of foreclosure:
o Judicial foreclosure- a mortgage may be foreclosed judicially by bringing an
action for the purpose in the Regional Trial Court of the province or city where
the real property or any part thereof lies. If there be a balance due to the
mortgagee after applying the proceeds of the sale ordered by the court, the
mortgagee is entitled to recover the deficiency and if this is embodied in a
judgment, it is referred to as deficiency judgment.
o Extrajudicial foreclosure – a mortgage may be closed extrajudicially where there
is inserted in the contract, a clause giving the mortgagee the power, upon the
Page | 71
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
•
default of the debtor, to foreclose the mortgage by an extrajudicial sale of the
mortgaged property.
Redemption – a transaction by which the mortgagor-owner of the mortgaged property
reacquires or buys back the property within a certain period and for a certain amount after
his default or after the foreclosure sale of the property for the satisfaction of the
mortgaged debt.
o Kinds of redemption:
▪ Equity of redemption – the right of the mortgagor to redeem the
mortgaged property after his default in the performance of the conditions
of the mortgage but before the sale of the mortgaged property.
▪ Right of redemption – right of the mortgagor to redeem the mortgaged
property within a certain period after it was sold for the satisfaction of the
mortgage debt. In all cases of extra-judicial sale, the mortgagor may
redeem the property at any time within the term of one year from and after
the date of the registration of the sale.
MODULE ACTIVITIES
I.
Key Terms. Define or give the meaning of the following:
1. Mortgage
2. Foreclosure
II.
Discussions. Discuss the following:
1. What may be the object or subject matter of a contract of mortgage?
2. Distinguish equity of redemption and right of redemption.
III.
Problems. Explain or state briefly the rule or reason for your answer.
1. D, debtor mortgagor/debtor, and C, mortgagee/creditor. The subject matter of the
mortgage is a parcel of land with a market value of P180,000 to secure a debt of
P200,000. D sold the property to T for P160,000. Subsequently, C foreclosed the
mortgage. The land was sold for P180,000 at the foreclosure sale. Is T liable to C
for the deficiency of P20,000?
2. Same example. There was a stipulation between C and D against sale of the
property by D. Is the sale to T valid?
CHAPTER 5
Chattel Mortgage
Article 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage
Register as a security for the performance of an obligation. If the movable, instead of being
recorded, is delivered to the creditor or a third person, the contract is a pledge and not a
chattel mortgage. (n)
Article 2141. The provisions of this Code on pledge, insofar as they are not in conflict with
the Chattel Mortgage Law shall be applicable to chattel mortgages. (n)
NOTES:
•
Chattel mortgage is that contract by virtue of which personal property is recorded in the
Chattel Mortgage Register as a security for the performance of an obligation. (e.g. when
you purchase an appliance from an appliance center on installment, you are actually made
to sign a Chattel Mortgage contract on the appliance which you purchased. This
appliance will then be a security for the payment of your monthly installments. If you
cannot pay the monthly installments, your chattel mortgage will be foreclosed and your
appliance will be taken back by the appliance center.)
Page | 72
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
1.
2.
3.
4.
•
•
•
Chattel mortgage
The delivery of the personal
property to the mortgage is not
necessary.
The registration of the same in the
Chattel Mortgage Register is
required by law
If the property is foreclosed, the
excess over the amount due goes to
the debtor
If the property is foreclosed and
there is a deficiency, the creditor is
entitled to recover the deficiency
from the debtor, except if the chattel
mortgage is a security for the
purchase of personal property in
installments.
1.
2.
3.
4.
Pledge
Delivery is necessary
Registration in the registry of
property is not necessary
If the property is sold, the debtor is
not entitled to the excess unless it is
otherwise agreed
If the property is sold, and there is a
deficiency, the creditor is not
entitled to recover the deficiency
notwithstanding any stipulation to
the contrary.
The subject matter of chattel mortgage must always be personal or movable property.
The law as it now stands provides for only one way for executing a valid chattel
mortgage i.e. the registration of the personal property in the Chattel Mortgage Register as
security for the performance of an obligation.
The Chattel Mortgage Law, in describing what shall be deemed sufficient to constitute a
good chattel mortgage, includes the requirement of an affidavit of good faith appended to
the mortgage and recorded therewith. But the absence of the affidavit vitiates a mortgage
only as against third persons without notice like creditors and subsequent encumbrancers.
o The affidavit of good faith is an oath in a contract of chattel mortgage wherein the
parties “severally swear that the mortgage is made for the purpose of securing the
obligations specified in the conditions thereof and for no other purposes and that
the same is a just and valid obligation and one not entered into for the purpose of
fraud.
MODULE ACTIVITIES
I.
Key Terms. Define or give the meaning of the following:
1. Chattel mortgage;
2. Affidavit of good faith.
II.
Discussions. Discuss the following:
1. Give at least four (4) distinctions between chattel mortgage and pledge.
2. Give at least five (5) similarities between chattel mortgage and pledge.
3. In the event the chattel mortgage is foreclosed, how shall the proceeds of the sale
be applied?
4. A contract of chattel mortgage does not include an affidavit of good faith
appended to it as required by law. Is the mortgage valid?
Page | 73
Downloaded by Sean Austin (asean7858@gmail.com)
lOMoARcPSD|7481831
References:
•
•
•
De Leon, H. S., & De Leon, H. M. (2010). The Law on Sales, Agency, and Credit
Transactions. Quezon City: Rex Book Store.
Paras Edgardo Lardizábal. (2008). Civil Code of the Philippines annotated. Manila,
Philippines: Rex Book Store.
Sundiang, J. R. & Aquino, T. B. (2019). Reviewer on commercial law. Manila,
Philippines: Rex Book Store.
Page | 74
Downloaded by Sean Austin (asean7858@gmail.com)