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CHAPTER 1
NATURE OF SALE
DEFINITION OF SALE
Article 1458 of the Civil Code defines “sale” as a contract
whereby one of the contracting parties (Seller) obligates himself
to transfer the ownership, and to deliver the possession, of a
determinate thing; and the other party (Buyer) obligates himself
to pay therefor a price certain in money or its equivalent.1
The Roman Law concept embodied in the old Civil Code2
that treated delivery of tangible property as the sole purpose of
sale has been modified under the present Article 1458, which
applies the common law concept of requiring the obligation to
transfer the ownership of the subject matter of the sale as a
principal obligation of the seller.
1. Nature of Obligations Created in a Sale
The definition of the contract of sale under Article 1458
provides that its perfection brings about the creation of two sets
of obligations:
(a) Two OBLIGATIONS of the SELLER to:
(i) Transfer the Ownership,3 and
1
Alfredo v. Borras, 404 SCRA 145 (2003); Cruz v. Fernando, 477 SCRA 173 (2005);
Roberts v. Papio, 515 SCRA 346 (2007).
2
Art. 1445 of the old Civil Code.
3
Flancia v. Court of Appeals, 457 SCRA 224, 231 (2005), defines “ownership” as
“the independent and general power of a person over a thing for purposes recognized
by law and within the limits established thereby — aside form the jus utendi and the
jus abutendi inherent in the right to enjoy the thing, the right to dispose, or the jus
disponendi, is the power of the owner to alienate, encumber, transform and even destroy
the thing owned.”
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LAW ON SALES
(ii) Deliver the Possession, of the SUBJECT
MATTER;
(b) An OBLIGATION for the BUYER to:
(i) Pay the PRICE.4
Both sets of obligations, are real obligations or obligations
“to give,” as contrasted from personal obligations “to do” and
“not to do,” and can be the proper subject of actions for specific
performance.5 In contrast, obligations to do or not to do, cannot
be enforced through actions for specific performance because
of the public policy against involuntary servitude;6 although the
creditor can have the same executed by another at the cost of
the obligor,7 and the obligor’s refusal to comply can be the basis
for claims for damages.8
To illustrate, Article 1480 of the Civil Code, which crossrefers to Article 1165 thereof, provides that when what is to be
delivered is a determinate thing, the buyer, in addition to the
right to recover damages, may compel the seller to make the
delivery. In other words, a defaulting party in a sale cannot insist
on just paying damages when the non-defaulting party demands
performance.
2. Subject Matter of Sale
Although Article 1458, in defining sale, uses the word
“determinate” to describe the subject matter of the sale, the
present Law on Sales has expanded the coverage to include
generic objects which are at least “determinable.” Article 1460
states that the “requisite that the thing be determinate is satisfied
if at the time the contract is entered into, the thing is capable of
4
Acap v. Court of Appeals, 251 SCRA 30 (1995); Velarde v. Court of Appeals, 361
SCRA 56 (2001).
5
Art. 1165 of the Civil Code: “When what is to be delivered is a determinate thing,
the creditor . . . may compel the debtor to make the delivery. If the thing is indeterminate
or generic, he may ask that the obligation be complied with at the expense of the
debtor.”
6
Sec. 18(2), Art. III, 1987 Constitution.
7
Art. 1167, Civil Code.
8
Art. 1170, Civil Code.
NATURE OF SALE
3
being made determinate without the necessity of a new or further
agreement between the parties,” which includes “determinable”
albeit generic objects as valid subject matters of sale.
Nonetheless, the use of the word “determinate” in the
definition of sale under Article 1458 seems accurate since it
pertains to the performance of the obligations of the seller
to transfer ownership and to deliver possession. This would
require that even if the subject matter of the sale was generic
(determinable), the performance of the seller’s obligation
would require necessarily its physical segregation or particular
designation, making the subject matter determinate at the point
of performance.
The use of the word “determinate” to describe the subject
matter emphasizes more specifically the fact that the obligation
to deliver and transfer ownership can be performed only with
the subject matter becoming specific or determinate, and is not
meant to exclude certain generic things from validly becoming
the proper subject matter of sale, at the point of perfection.
3. Elements of Contract of Sale
Coronel v. Court of Appeals,9 enumerates the essential
elements of a valid contract of sale to consist of the following:
(a) CONSENT, or meeting of the minds to transfer
ownership in exchange for the price;
(b) SUBJECT MATTER; and
(c) PRICE, certain in money or its equivalent.10
263 SCRA 15 (1996).
See also Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 (1997); Quijada
v. Court of Appeals, 299 SCRA 695 (1998); Co v. Court of Appeals, 312 SCRA 528
(1999); Heirs of San Andres v. Rodriguez, 332 SCRA 769 (2000); Roble v. Arbasa, 362
SCRA 69 (2001); Peñalosa v. Santos, 363 SCRA 545 (2001); Polytechnic University of
the Philippines v. Court of Appeals, 368 SCRA 691 (2001); Katipunan v. Katipunan, 375
SCRA 199 (2002); Londres v. Court of Appeals, 394 SCRA 133 (2002); Manongsong
v. Estimo, 404 SCRA 683 (2003); Jimenez, Jr. v. Jordana, 444 SCRA 250 (2004); San
Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005); Yason v. Arciaga, 449
SCRA 458 (2005); Roberts v. Papio, 515 SCRA 346 (2007); Navarra v. Planters Dev.
Bank, 527 SCRA 562 (2007); Republic v. Florendo, 549 SCRA 527 (2008).
9
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LAW ON SALES
When all three elements are present, there being a meeting
of the minds, then a perfected contract of sale arises, and its
validity is not affected by the fact that previously a fictitious deed
of sale was executed by the parties,11 or by the fact of nonperformance of the obligations thereafter.
Unfortunately, the Supreme Court has considered in a
number of decisions that the resulting sale is “void” when some of
the essential requisites are not present.12 To the author, the more
appropriate term to use when an essential element is not present
at meeting of the mind is to declare a “no contract” situation.
To illustrate, Dizon v. Court of Appeals,13 holds that all three
elements of consent, subject matter and consideration must be
present for a valid sale to exist; and that in a situation where
any of the elements is not present, “[t]there was no perfected
contract of sale,”14 and that “the absence of any of these essential
elements negates the existence of a perfected contract of sale,”15
rather than using the technical term “void.” In Manila Container
Corp. v. PNB,16 the Court held that absence of the concurrence
of all the essential elements, the giving of earnest money cannot
establish the existence of a perfected contract of sale.
On the other hand, when all three elements are present, but
there is defect or illegality constituting any of such elements, the
resulting contract is either voidable when the defect constitutes
a vitiation of consent, or void as mandated under Article 1409 of
the Civil Code.
Peñalosa v. Santos, 363 SCRA 545 (2001).
Mapalo v. Mapalo, 17 SCRA 114 (1966) and Rongavilla v. Court of Appeals, 294
SCRA 289 (1998), both consider the contract “void” even when they agreed that there
was no meeting of the minds on the price stated in the underlying instrument of sale.
Bagnas v. Court of Appeals, 176 SCRA 159 (1989), considers a simulated price or a
nominal price to give rise to a “void” contract of sale. Cabotaje v. Pudunan, 436 SCRA 423
(2004), considers the lack of consent by the owner of the property to bring about a “void”
sale.
13
302 SCRA 288 (1999).
14
Ibid, at p. 301.
15
Ibid, at p. 302. Reiterated in Firme v. Bukal Enterprises and Dev. Corp., 414
SCRA 190 (2003).
16
511 SCRA 444 (2006).
11
12
NATURE OF SALE
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4. Stages in the Life of Sale
Strictly speaking, there are only two stages in the “life” of a
contract of sale, i.e., perfection and consummation, since it is only
at perfection that sale as a contract begins to exist in the legal
world. Until sale is perfected, it cannot serve as an independent
source of obligation, nor as a binding juridical relation between
the parties.17 Nevertheless, the Supreme Court18 has considered
the following to be the stages in the life of a sale:
(a) POLICITACION, negotiation, or preparation
stage;
(b) PERFECTION, conception or “birth”; and
(c) CONSUMMATION or “death.”
Policitacion or negotiation covers the period from the time
the prospective contracting parties indicate their interests in the
contract to the time the contract is perfected; perfection takes
place upon the concurrence of the essential elements of the
sale which are the meeting of the minds of the parties as to the
object of the contract and upon the price; and consummation
begins when the parties perform their respective undertaking
under the contract of sale, culminating in the extinguishment
thereof.19
ESSENTIAL CHARACTERISTICS OF SALE
Before dissecting sale as a contract, it would be useful to
look at sale from a general point of view, by analyzing its essential
characteristics.
17
Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160, 164 (1997); Dizon v. Court
of Appeals, 302 SCRA 288 (1999); Platinum Plans Phil., Inc. v. Cucueco, 488 SCRA 156
(2006); Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Roberts v. Papio,
515 SCRA 346 (2007).
18
Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994); Toyota Shaw, Inc. v.
Court of Appeals, 244 SCRA 320 (1995); Limketkai Sons Milling, Inc. v. Court of Appeals,
250 SCRA 523 (1995); Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 (1997);
Province of Cebu v. Heirs of Rufina Morales, 546 SCRA 315 (2008).
19
San Miguel Properties Philippines v. Huang, 336 SCRA 737, 743 (2000).
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LAW ON SALES
1. Nominate and Principal
Sale is a nominate contract since it has been given a
particular name by law;20 more importantly, its nature and
consequences are governed by a set of rules in the Civil Code,
which euphemistically we refer to as the “Law on Sales.”
Sale is a principal contract, as contrasted from accessory
or preparatory contracts, because it can stand on its own, and
does not depend on another contract for its validity or existence;
more importantly, that parties enter into sale to achieve within
its essence the objectives of the transaction, and simply not in
preparation for another contract.
The “nominate and principal” characteristics of sale leads to
the doctrine held by the Supreme Court that in determining the
real character of the contract, the title given to it by the parties is
not as significant as its substance.21
In one case,22 the Court held that in determining the nature
of a contract, the courts look at the intent of the parties and not at
the nomenclature used to describe it, and that pivotal to deciding
such issue is the true aim and purpose of the contracting parties
as shown by the terminology used in the covenant, as well as
“by their conduct, words, actions and deeds prior to, during and
immediately after executing the agreement.”
In another case,23 the Court held that contracts are not
defined by the parties thereto but by the principles of law; and
that in determining the nature of a contract, the courts are not
bound by the name or title given to it by the contracting parties.
The other doctrinal significance of the “nominate and
principal” characteristics of sale is that all other contracts which
have for their objective the transfer of ownership and delivery
of possession of a determinate subject matter for a valuable
consideration, are governed necessarily by the Law on Sales.24
Art. 1458, Civil Code.
Bowe v. Court of Appeals, 220 SCRA 158 (1993); Romero v. Court of Appeals,
250 SCRA 223 (1995); Santos v. Court of Appeals, 337 SCRA 67 (2000).
22
Lao v. Court of Appeals, 275 SCRA 237, 250 (1997).
23
Cavite Dev. Bank v. Lim, 324 SCRA 346 (2000).
24
In-depth discussions of this doctrinal significance are found in Chapter 3.
20
21
NATURE OF SALE
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2. Consensual
Sale is consensual contract (as contrasted from solemn
and real contracts), since it is perfected by mere consent, at the
moment there is a meeting of the minds upon the thing which is
the object of the contract and upon the price.25
Buenaventura v. Court of Appeals,26 held that a sale over a
subject matter is not a real contract, but a consensual contract,
which becomes a valid and binding contract upon the meeting of
the minds as to the price. Once there is a meeting of the minds
as to the price, the sale is valid, despite the manner of its actual
payment, or even when there has been breach thereof. If the
real price is not stated in the contract, then the sale is valid but
subject to reformation; if there is no meeting of the minds as to
the price, because the price stipulated is simulated, then the
contract is void.27
Under Article 1475 of the Civil Code, from the moment of
perfection of the sale, the parties may reciprocally demand
performance, even when the parties have not affixed their
signatures to the written form of such sale,28 but subject to
the provisions of the law governing the form of contracts.29
Consequently, the actual delivery of the subject matter or
payment of the price agreed upon are not necessary components
to establish the existence of a valid sale;30 and their non25
Art. 1475, Civil Code. Balatbat v. Court of Appeals, 261 SCRA 128 (1996); Coronel
v. Court of Appeals, 263 SCRA 15 (1996); Xentrex Automotive, Inc. v. Court of Appeals,
291 SCRA 66 (1998); Laforteza v. Machuca, 333 SCRA 643 (2000); Londres v. Court of
Appeals, 394 SCRA 133 (2002); San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA
99 (2005); Yason v. Arciaga, 449 SCRA 458 (2005); Ainza v. Padua, 462 SCRA 614
(2005); Cruz v. Fernando, 477 SCRA 173 (2005); Marnelgo v. Banco Filipino Savings and
Mortgage Bank, 480 SCRA 399 (2006); MCC Industries Sales Corp. v. Ssanyong Corp.,
536 SCRA 408 (2007); Castillo v. Reyes, 539 SCRA 193 (2007); Roberts v. Papio, 515
SCRA 346 (2007).
26
416 SCRA 263 (2003).
27
Ibid, at p. 271, citing VILLANUEVA, PHILIPPINE LAW ON SALES, p. 54 (1998).
28
Gabelo v. Court of Appeals, 316 SCRA 386 (1999); Province of Cebu v. Heirs of
Rufina Morales, 546 SCRA 315 (2008).
29
Co v. Court of Appeals, 312 SCRA 528 (1999). Also City of Cebu v. Heirs of
Candido Rubi, 306 SCRA 408 (1999); San Lorenzo Dev. Corp. v. Court of Appeals, 449
SCRA 99 (2005).
30
Alcantara-Daus v. de Leon, 404 SCRA 74 (2003); Buenaventura v. Court of
Appeals, 416 SCRA 263 (2003).
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LAW ON SALES
performance do not also invalidate or render “void” a sale that has
began to exist as a valid contract at perfection; non-performance,
merely becomes the legal basis for the remedies of either specific
performance or rescission, with damages in either case.31
The binding effect of a deed of sale on the parties is based
on the principle that the obligations arising therefrom have the
force of law between them.32
In Fule v. Court of Appeals,33 the Court summarized the
doctrines pertaining to sale being a consensual contract, thus:
A contract of sale is perfected at the moment there
is a meeting of the minds upon the thing which is the
object of the contract and upon the price.34 Being
consensual, a contract of sale has the force of law
between the contracting parties and they are expected
to abide in good faith by their respective contractual
commitments. Article 1358 of the Civil Code which
requires the embodiment of certain contracts in a
public instrument, is only for convenience,35 and
registration of the instrument only adversely affects
third parties.36 Formal requirements are, therefore, for
the benefit of third parties. Non-compliance therewith
does not adversely affect the validity of the contract
nor the contractual rights and obligations of the parties
thereunder.37
Since sale is a consensual contract, the party who alleges
it must show its existence by competent proof, as well as of the
31
Gabelo v. Court of Appeals, 316 SCRA 386 (1999); Alcantara-Daus v. de Leon,
404 SCRA 74 (2003); Buenaventura v. Court of Appeals, 416 SCRA 263 (2003), citing this
particular passage in VILLANUEVA, PHILIPPINE LAW ON SALES, p. 54 (1998).
32
Veterans Federation of the Philippines v. Court of Appeals, 345 SCRA 348
(2000).
33
286 SCRA 698 (1998).
34
Citing Art. 1475, Civil Code; Romero v. Court of Appeals, 250 SCRA 223
(1995).
35
Citing Aspi v. Court of Appeals, 236 SCRA 94 (1994).
36
Citing Olegario v. Court of Appeals, 238 SCRA 96 (1994).
37
286 SCRA 698, 712-713 (1998). Reiterated in Quijada v. Court of Appeals, 299
SCRA 695 (1998); Agasen v. Court of Appeals, 325 SCRA 504 (2000).
NATURE OF SALE
9
essential elements thereof.38 However, when all three elements
of a sale are present, there being a meeting of the minds, then
a perfected contract of sale arises, and its validity is not affected
by the fact that previously a fictitious deed of sale was executed
by the parties;39 and at that point the burden is on the other party
to prove the contrary.40
Despite the consensual character of a sale, under Article
1332 of the Civil Code, when one of the parties is unable to read,
or if the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained to
the former.41
a. Modalities That Affect the
Characteristic of Consensuality
The consensual characteristic of sale can be affected by
modalities that by stipulation may be added into the contractual
relationship, such as a suspensive term or condition. Biñan Steel
Corp. v. Court of Appeals,42 reminds us that “even if consensual,
not all contracts of sale become automatically and immediately
effective. . . In sales with assumption of mortgage, the assumption
of mortgage is a condition precedent to the seller’s consent and
therefore, without approval of the mortgagee, the sale is not
perfected.”
On the other hand, National Housing Authority v. Grace
Baptist Church,43 demonstrates clearly that even the delivery and
taking possession of the subject matter by the buyer with the
knowledge or consent of the seller, would not bring about the
perfection and binding effect of the sale, when the meeting of the
minds is incomplete, there being no agreement yet on the final
price.
38
Villanueva v. Court of Appeals, 267 SCRA 89 (1997); Roberts v. Papio, 515
SCRA 346 (2007).
39
Peñalosa v. Santos, 363 SCRA 545 (2001).
40
Heirs of Ernesto Biona v. Court of Appeals, 362 SCRA 29 (2001).
41
Vda. de Ape v. Court of Appeals, 456 SCRA 193 (2005).
42
391 SCRA 90 (2002).
43
424 SCRA 147 (2004).
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LAW ON SALES
3. Bilateral and Reciprocal
Sale is a bilateral contract embodying reciprocal obligations,
as distinguished from a unilateral contract, because it imposes
obligations on both parties to the relationship,44 and whereby the
obligation or promise of each party is the cause or consideration
for the obligation or promise of the other.45
Reciprocal obligations are “those which arise from the same
cause, and in which each party is a debtor and a creditor of the
other, such that the obligation of one is dependent upon the
obligation of the other. They are to be performed simultaneously
such that the performance of one is conditioned upon the
simultaneous fulfillment of the other.”46
The legal effects and consequences of sale being a bilateral
contract composed of reciprocal obligations are as follows:
(a) The power to rescind is implied, and such
power need not be stipulated in the contract
in order for the innocent party to invoke the
remedy;47
(b) Neither party incurs delay if the other party
does not comply, or is not ready to comply
in a proper manner, with what is incumbent
upon him;48 and
(c) From the moment one of the parties fulfills his
obligation, the default by the other begins,49
without the need of prior demand.50
Since both parties in a sale are bound by their respective
obligations which are reciprocal in nature, then a party cannot
Art. 1458, Civil Code; People v. Tan, 338 SCRA 330 (2000).
Art. 1191, Civil Code; see also Vda. De Quirino v. Palarca, 29 SCRA 1 (1969).
46
Agro Conglomerates, Inc. v. Court of Appeals, 348 SCRA 450 (2000). See also
Ong v. Court of Appeals, 310 SCRA 1 (1999); Mortel v. KASSCO, 348 SCRA 391 (2000);
Carrascoso, Jr. v. Court of Appeals, 477 SCRA 666 (2005). See also Vda. De Quirino v.
Palarca, 29 SCRA 1 (1969) as it pertains to an option contract.
47
Art. 1191, Civil Code.
48
Art. 1168, last paragraph, Civil Code; Almocera v. Ong, 546 SCRA 164 (2008).
49
Ibid.
50
Art. 1191, Civil Code.
44
45
NATURE OF SALE
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simply choose not to proceed with the sale by offering also the
other party not to be bound by his own obligation; that each party
has the remedy of specific performance; and that rescission or
resolution cannot be enforced by defaulting party upon the other
party who is ready and willing to proceed with the fulfillment of
his obligation.51
Polytechnic University of the Philippines v. Court of Appeals,52
summed up the reciprocal and nominate nature of sale, thus:
“It is therefore a general requisite for the existence of a valid
and enforceable contract of sale that it be mutually obligatory,
i.e., there should be a concurrence of the promise of the vendor
to sell a determinate thing and the promise of the vendee to
receive and pay for the property so delivered and transferred.”53
Consequently, Carrascoso, Jr. v. Court of Appeals,54 held that
since a sale is constituted of reciprocal obligations, then “[t]he
right of rescission of a party to an obligation under Article 1191 is
predicated on a breach of faith by the other party who violates the
reciprocity between them.”
4. Onerous
Sale is an onerous contract, as distinguished from a
gratuitous contract, because it imposes a valuable consideration
as a prestation, which ideally is a price certain in money or its
equivalent.55
In Gaite v. Fonacier,56 the Court ruled that the stipulation in
a contract of sale on the payment of the balance of the purchase
price must be deemed to cover a suspensive period rather than a
condition since “there can be no question that greater reciprocity
obtains if the buyer’s obligation is deemed to be actually existing,
with only its maturity (due date) postponed or deferred, than if
such obligation were viewed as non-existing or not binding until
Almira v. Court of Appeals, 399 SCRA 351 (2003).
368 SCRA 691 (2001).
53
Ibid, at p. 705.
54
477 SCRA 666, 686 (2005).
55
Art. 1458, Civil Code.
56
2 SCRA 831 (1961).
51
52
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LAW ON SALES
the ore was sold.”57 The Court held that the rules of interpretation
would incline the scales in favor of “the greater reciprocity of
interests,” since sale is essentially an onerous contract.
5. Commutative
Sale is a commutative contract, as distinguished from an
aleatory contract, because a thing of value is exchanged for equal
value, i.e., ideally the value of the subject matter is equivalent
to the price paid. Nevertheless, there is no requirement that the
price be equal to the exact value of the subject matter; all that is
required is for the seller to believe that what was received was of
the commutative value of what he gave.58
Again Gaite held that a sale is “normally commutative
and onerous: not only does each one of the parties assume a
correlative obligation (the seller to deliver and transfer ownership
of the thing sold, and the buyer to pay the price), but each party
anticipates performance by the other from the very start.”59 Gaite
recognized that although in a sale “the obligation of one party
can be lawfully subordinated to an uncertain event, so that the
other understands that he assumes the risk of receiving nothing
for what he gives (as in the case of a sale of hope or expectancy,
emptio spei), it is not in the usual course of business to do so;
hence, the contingent character of the obligation must clearly
appear.”60
Gaite therefore acknowledged that obligations in a sale can
be subordinated to a suspensive condition with the party fully
aware that “he assumes the risk of receiving nothing for what
he gives,” although such stipulation may seem to be contrary
to the commutative nature of a sale. This confirms the view that
although “commutativeness” is an essential characteristic of a
sale, the test for compliance therewith is not objective but rather
subjective; i.e., so long as the party believes in all honesty that he
is receiving good value for what he transferred, then it complies
Ibid, at p. 838.
Buenaventura v. Court of Appeals, 416 SCRA 263 (2003).
59
2 SCRA 831, 837 (1961).
60
Ibid.
57
58
NATURE OF SALE
13
with the commutative character of a sale, and would not be
deemed a donation nor an aleatory contract.
Take the example of a seller, selling his old car for only
5200,000.00, when a more objective review of the prevailing
market price for the particular model shows that its correct selling
value would be 5500,000.00. Under those circumstances, the
contract perfected with the buyer would still be a sale, because
by agreeing to receive a price of only 5200,000.00, the seller
believes honestly that he is receiving appropriate value for the
car he is selling. Likewise, the consequences of negotiations and
bargaining, such as being able to obtain a large discount, do not
destroy the commutative nature of the sale, since in the end the
test would be that the parties to the sale believe that they have
each received the proper and appropriate value for what they
each in turn gave up.
However, the point of discussion pertaining to the subjective
test of the commutative nature of sale cannot, and should not,
be pushed to absurdity. Take a situation, where the same seller,
knowing fully well that the going price for his car is 5200,000.00,
sells it for only 5100.00 to the buyer. Even if the seller, is satisfied
in receiving only 5100.00 for the car, the resulting contract, from
a strictly legal standpoint, is not a sale, but more of a donation,
and the law will presume that the underlying consideration must
have been liberality. Therefore, the tax authorities may insist
that the gift tax be paid on the transaction. This is all academic
discussions, of course, since if no third party complains,
the nature of the contract would never be at issue, and in all
probability the contracting parties themselves would be bound
by their characterization of the contract under the principle of
estoppel.
The subjective test of the commutative nature of sale is
further bolstered by the principle that inadequacy of price does
not affect ordinary sale.61 Inadequacy of price may be a ground
for setting aside an execution sale but is not a sufficient ground
for the cancellation of a voluntary contract of sale otherwise free
61
Arts. 1355 and 1470, Civil Code; Ereñeta v. Bezore, 54 SCRA 13 (1973).
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LAW ON SALES
from invalidating effects.62 Inadequacy of price may show vice
in consent, in which case the sale may be annulled, but such
annulment is not for inadequacy of price, but rather for vitiation
in consent.63
Only recently Buenaventura v. Court of Appeals,64 held that:
“Indeed, there is no requirement that the price be equal to the
exact value of the subject matter of sale; all that sellers believed
was that they received the commutative value of what they gave.
All the respondents believed that they received the commutative
value of what they gave.”65
6. Sale Is Title and Not Mode
The perfection of a sale gives rise to the obligation on the
part of the seller to transfer ownership and deliver possession of
the subject matter; nevertheless, it would be delivery or tradition
that is the mode to transfer ownership and possession to the
buyer. Although in one case the Court defined a “sale” as a
“contract transferring dominion and other real rights in the thing
sold,”66 sale is merely title that creates the obligation on the part
of the seller to transfer ownership and deliver possession, but
on its own sale is not a mode that transfers ownership.67 Thus,
Alcantara-Daus v. de Leon,68 held that while a sale is perfected
by mere consent, ownership of the thing sold is acquired only
upon its delivery to the buyer. Upon the perfection of the sale, the
seller assumes the obligation to transfer ownership and to deliver
the thing sold, but the real right of ownership is transferred only
“by tradition” or delivery thereof to the buyer.
In Acap v. Court of Appeals,69 the Court held that an asserted
right or claim to ownership, or a real right over a thing arising from
Alarcon v. Kasilag, 40 O.G. Supp. 15, p. 203 (1940).
Art. 1470, Civil Code.
64
416 SCRA 263 (2003).
65
Ibid, at p. 272.
66
Titong v. Court of Appeals, 287 SCRA 102 (1998).
67
Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 370 SCRA 56 (2001);
Alcantara-Daus v. de Leon, 404 SCRA 74 (2003).
68
404 SCRA 74 (2003).
69
251 SCRA 30, 38 (1995).
62
63
NATURE OF SALE
15
a juridical act, is not per se sufficient to give rise to ownership over
the thing; that right or title must be completed by fulfilling certain
conditions imposed by law: “Hence, ownership and real rights
are acquired only pursuant to a legal mode or process. While title
(such as sale) is the juridical justification, mode (like delivery) is
the actual process of acquisition or transfer of ownership over a
thing.”
Acap held that the “Declaration of Heirship and Waiver of
Rights” executed by the heirs waiving their inheritance rights in
favor of a non-heir cannot be deemed a proper mode to affect
title to the land involved because waiver of inheritance right can
only be done in favor of another heir; whereas, it could not also
be considered a sale contract because the document did not
provide for the element of price, which is required for a valid sale
under Article 1458 of the Civil Code.
Manongsong v. Estimo,70 emphasized that once a sale has
been duly perfected, its validity “cannot be challenged on the
ground of the non-transfer of ownership of the property sold at
that time of the perfection of the contract, since it is consummated
upon delivery of the property to the vendee. It is through tradition
or delivery that the buyer acquires ownership of the property
sold.” Consequently, the proper remedy was not annulment, but
rescission.
Mode is the legal means by which dominion or ownership
is created, transferred or destroyed (e.g., succession, donation,
discovery, intellectual creation, etc.);71 title only constitutes the
legal basis by which to affect dominion or ownership. Therefore,
sale by itself does not transfer or affect ownership;72 the most
that sale does is to create the obligation to transfer ownership;
it is tradition or delivery, as a consequence of sale, that actually
transfers ownership.73
404 SCRA 683 (2003).
Cited in San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99, 113 (2005).
72
Quoted or used verbatim in San Lorenzo Dev. Corp. v. Court of Appeals, 449
SCRA 99, 113 (2005) without acknowledgment given to the author.
73
Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 370 SCRA 56 (2001). The
passage was quoted or used verbatim in San Lorenzo Dev. Corp. v. Court of Appeals, 449
SCRA 99, 114 (2005) without acknowledgment given to the author.
70
71
16
LAW ON SALES
The Roman Law concept of sale encompassing only the
obligation of the seller to deliver the property is actually consistent
with the treatment of sale as merely a title, and by its perfection
does not affect the ownership nor effect the transfer thereof to
the buyer. Since it is tradition or delivery as the mode by which
ownership over the subject matter is transferred to the buyer,
the Roman Law concept of mandating delivery of possession
of the subject matter as the essence of the sale contract would
be logical. This is in stark contrast to the common law concept
that the perfection of a sale over a determinate subject matter
which is ready for delivery would legally transfer ownership to
the buyer, even when there has been no actual or constructive
delivery thereof by the seller.
SALE DISTINGUISHED FROM OTHER SIMILAR CONTRACTS
The other manner by which to “recognize” a sale is to know
how to differentiate it from other contracts which may happen to
have some characteristics similar to sale. The other contracts by
which clear distinctions had to be made by the Supreme Court
involved basically obligations to transfer ownership and deliver
possession of a subject matter.
In determining the nature or essential characteristic of a
contract purported to be a sale, the Court has held that the
title given to it by the parties is not as much significant as its
substance;74 that courts look at the intent of the parties and
the elements of the contractual relationship and not at the
nomenclature used to describe it.75 Pivotal to deciding this
issue is the true aim and purpose of the contracting parties as
shown by the terminology used in the covenant, as well as “by
their conduct, words, actions and deeds prior to, during and
immediately after executing the agreement.”76
74
Romero v. Court of Appeals, 250 SCRA 223 (1995); Lao v. Court of Appeals,
275 SCRA 237 (1997); Cavite Dev. Bank v. Spouses Cyrus Lim, 324 SCRA 346 (2000);
Santos v. Court of Appeals, 337 SCRA 67 (2000).
75
Santos v. Court of Appeals, 337 SCRA 67 (2000).
76
Lao v. Court of Appeals, 275 SCRA 237 (1997).
NATURE OF SALE
17
In one case,77 the Court held that “[A] contract is what
the law defines it to be, taking into consideration its essential
elements, and not what the contracting parties call it. The transfer
of ownership in exchange for a price paid or promised is the very
essence of a contract of sale.”
1. From Donation
Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another person, who
accepts it.78 Sale is essentially an onerous contract, whereas
donation is a gratuitous contract.79 A sale is perfected by mere
consent,80 whereas donation, being a solemn contract, although
consent is also required, must comply with the formalities
mandated by law for its validity.81
Knowing the distinctions between sale and donation is
important in situations where the consideration for the transfer or
alienation of a subject matter is not certain as to ensure that it is
valuable consideration to constitute a valid sale. As observed in
Manongsong v. Estimo,82 unlike in a donation by the decedent, a
valid sale cannot have the legal effect of depriving the compulsory
heirs of their legitimes: “As opposed to a disposition inter vivos by
lucrative or gratuitous title, a valid sale for valuable consideration
does not diminish the estate of the seller. When the disposition is
for valuable consideration, there is no diminution of the estate but
merely substitution of values, that is, the property sold is replaced
by the equivalent monetary consideration.”83
Santos v. Court of Appeals, 337 SCRA 67 (2000).
Art. 725, Civil Code.
79
Art. 725, Civil Code.
80
Art. 1457, Civil Code.
81
Arts. 745 to 749, Civil Code. For example, in the donation of movable, Article 748
allows an oral donation provided that there is a simultaneous delivery of the thing or of
the document representing the right donated; and if the value of the movable exceeds
55,000.00, then the acceptance must be in writing, otherwise the donation is void.
Under Article 749, the donation of an immovable must be in a public document, and the
acceptance may be in the same instrument or a separate public document, otherwise the
donation is void.
82
404 SCRA 683 (2003).
83
Ibid, at p. 695.
77
78
18
LAW ON SALES
Under Article 1471 of the Civil Code, when the price of a
sale is simulated, the sale itself may be void, “but the act may
be shown to have been in reality a donation or some other act or
contract.” In other words, a contract may be entered into in the
form of a “sale” and may end up being governed by the Law on
Donations, even when there may be a formal price agreed upon,
if it is simulated, and the real intention is that the subject matter
is being donated to the supposed “buyer.” In such a case, the
governing rule on perfection of sale by mere consent does not
resolve whether the real contract is valid, since being a donation,
the formality for donation should also have been complied with
for the transaction to be considered valid.
On the other hand, a purported donation may have
been executed by the parties, but it is not mere liberality that
permeates the contract as the only consideration, because other
consideration or burdens are placed upon the donee. In such a
case, the issue of what is the applicable rule (i.e., Law or Sales
or Law on Donation) becomes critical in determining the validity
and enforceability of the contract.
Under Article 726 of the Civil Code, even when the donor
imposes upon the donee a burden, but which is less than the value
of the thing given, there is still a donation. The legal implication
under said article is clear: when the value of the burden placed
upon the donee is more than the value of the thing given, it
becomes an “onerous” donation, as either a barter or sale, which
are both governed by the Law on Sales.84 In such cases, the
solemnities provided for by the Law on Donations are wholly
irrelevant, even if the contract is called a “donation”; and since
the relationship is governed by the Law on Sales, the perfection
and enforceability of the contract happen upon consent.85
2. From Barter
By barter or exchange, one of the parties binds himself to
give one thing in consideration of the other’s promise to give
Art. 1641, Civil Code.
Application of these principles may be seen in Carloz v. Romil, 20 Phil. 183
(1911), and Manalo v. De Mesa, 20 Phil. 496 (1911).
84
85
NATURE OF SALE
19
another thing;86 whereas, by sale, one of the parties binds himself
to deliver a thing in consideration of the other’s undertaking to
pay the price in money or its equivalent.87
It is interesting to note that in Delpher Trades Corp. v. IAC,88
in somewhat a complete defiance of the doctrine of separate
juridical personality of a corporation from its stockholders, the
Court held that an assignment of property to the corporation by
controlling shareholders in exchange for shares is not a sale
nor barter because the corporation cannot be considered a third
party when it would be controlled by the transferor as part of
estate planning.
a. Rules to Determine Whether Contract
Is Sale or Barter
Article 1468 of the Civil Code provides for the following rules
in cases of dispute whether the contract is a sale or a barter,
especially when the consideration agreed upon is partly in money
and partly in another thing:
(a) Manifest Intention of the Parties – Even if the
acquisition of a thing is paid for by another
object of greater value than the money component, it may still be a sale and not a barter,
when such was the intention of the parties;
(b) When Intention Does Not Appear and
Consideration Consists Partly in Money and
Partly in Another Thing:
(i) It is a barter, where the value of the
thing given as part of the consideration
exceeds the amount of money given or
its equivalent;
(ii) It is a sale, where the value of the thing
given as part of the consideration equals
or is less than the amount of money
given.
Art. 1638, Civil Code.
Art. 1458, Civil Code.
88
157 SCRA 349 (1988).
86
87
20
LAW ON SALES
The distinctions between sale and barter are merely
academic, since aside from two separate rules applicable to
barter, as to all matters not specifically provided for, Article 1641
provides that barter shall be governed by the Law on Sales. The
two rules specifically provided for barter contracts, but which are
similar anyway to the rules on warranty against eviction applicable
to sale, are as follows:
(a) If one of the contracting parties, having
received the thing promised in barter, should
prove that it did not belong to the person
who gave it, he cannot be compelled to
deliver that which he offered in exchange,
but he shall be entitled to damages;89 and
(b) One who loses by eviction the thing received
in barter may recover that which he gave
in exchange with a right to damages, or he
can only make use of the right to recover
the thing which he has delivered while the
same remains in the possession of the other
party, but without prejudice to the rights
acquired in good faith by a third person.90
Nonetheless, there are a few instances when the difference
between the two types of contracts is critical. Firstly, the rules on
the Statute of Frauds,91 which apply to the sale of real property,
and personal property bought at 5500.00 or more, do not apply
to barter. Secondly, the right of legal redemption granted by law
to an adjoining owner of an urban land,92 covers only “resale” and
does not cover exchanges of properties.93
3. From Contract for a Piece-of-Work
By the contract for a piece-of-work, the contractor binds
himself to execute a piece of work for the employer, in consiArt. 1639, Civil Code.
Art. 1640, Civil Code.
91
Art. 1403, Civil Code.
92
Art. 1622, Civil Code.
93
De Santos v. City of Manila, 45 SCRA 409 (1972).
89
90
NATURE OF SALE
21
deration of a certain price or compensation; the contractor may
either employ only his labor or skill, or also furnish the material.94
The similarity between a sale and a contract for a piece of
work has been recognized in Commissioner of Internal Revenue
v. Court of Appeals and Ateneo de Manila University.95 The
Court held that the research output delivered by the Institute of
Philippine Culture of the Ateneo de Manila University pursuant to
an endowment or grant given by sponsors cannot be considered
a sale nor a contract for a piece-of-work, since: “Transfer of title
or an agreement to transfer it for a price paid or promised to be
paid is the essence of sale.96 Ineluctably, whether the contract be
one of sale or one for a piece of work, a transfer of ownership is
involved and a party necessarily walks away with an object.”97
There may be situations where it is difficult to determine
whether the contract in dispute is a sale or a contract for a pieceof-work, because essentially, in both instances, the client or
customer walks away from the transaction bringing with him an
object.98
For example, one may buy a painting from an art gallery,
under a sale, or he may request the artist himself to execute the
painting for a price certain, which is a contract for a piece-of-work.
In both cases, the resulting object and the price or consideration
paid may be the same. The foregoing illustrations are rather easy,
and by their simple facts, one can determine the nature of the
contract involved. More complicated situations have, however,
arisen, and covered by rulings of the Supreme Court.
a. Statutory Rule on Distinguishing Sale
from Contract for a Piece-of-Work
In the early case of Inchausti & Co. v. Cromwell,99 the issue
was whether the seller could be made liable for sales tax on the
Art. 1713, Civil Code.
271 SCRA 605 (1997).
96
Quoting from TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE
PHILIPPINES, Vol. V, pp. 1-2 (1992).
97
271 SCRA 605, 618, citing VILLANUEVA, PHILIPPINE LAW ON SALES, pp. 7-9 (1995).
98
Cited in Commissioner of Internal Revenue v. Court of Appeals and Ateneo de
Manila University, 271 SCRA 605, 618.
99
20 Phil. 345 (1911).
94
95
22
LAW ON SALES
price it received from bailing the hemp that it sold to its customers.
The seller contended that the charge for bailing is to be treated
not as part of the sale but as a charge for the service of bailing
the hemp.
Inchausti & Co. held that the distinction between a sale and
a contract for work, labor, and materials is tested by the inquiry of
whether the thing transferred is one not in existence and which
never would have existed but for the order of the party desiring
to acquire it, or a thing which would have existed and been the
subject of sale to some other person, even if the order had not
been given. In that case, the Court held that the hemp was in
existence in baled form before the agreements of sale were
made, or, at least, would have been in existence even if none
of the individual sales in question had been consummated; and
that it would have been baled, nevertheless, for sale to someone
else, since it was proven customary to sell hemp in bales.
Subsequently, Article 1467 of the Civil Code gave the
statutory rules in distinguishing a sale from a contract for a pieceof-work, employing language similar to the Inchausti & Co. ruling,
thus:
ART. 1467. A contract for the delivery at a certain
price of an article which the vendor in the ordinary
course of his business manufactures or procures for
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)
which gives two tests for distinction:
(a) Manufacturing in the ordinary course of
business to cover sales contracts; and
(b) Manufacturing upon special order of customers,
to cover contracts for piece-of-work.
The jurisprudential doctrine that became the basis of Article
1467 therefore indicated that the term “upon special order” is
NATURE OF SALE
23
really based on the ability of the producer to manufacture the
goods in the condition that they customarily are without having to
wait for specific orders from customers.
In Celestino Co v. Collector of Internal Revenue,100 a duly
registered co-partnership did business under the trade name
“Oriental Sash Factory.” Although in previous years it paid the
higher sales taxes on the gross receipts of its sash, door and
window factory as a manufacturer-seller (i.e., sales tax), in 1952
it began to claim tax liability only to the lower contractor’s tax
(i.e., for a piece-of-work). The company averred and adduced
evidence to show that since it manufactured sash, windows and
doors only for special customers and upon their special orders
and in accordance with the desired specifications and not for the
general public, its contractual relations with its customers was that
of a contract for a piece-of-work. Notice that in Celestino Co the
thrust of the taxpayer position in the implementation of the “upon
special order” test was more of timing, rather than by necessity:
that if the manufacture of goods is made always upon or after the
orders of customers and on the basis of their specifications, the
underlying relationship would be that of a contract for a piece-ofwork.
The Court held that the company could not claim the lower
contractor’s tax, and that it was actually a manufacturer, with its
sales subject to the higher sales tax, taking into consideration the
following:
(a) The Company habitually made sash, windows and doors, as it had represented itself
as manufacturer (factory) in its stationery
and in advertisements to the public;
(b) That the products were made only when
customers placed their orders, did not
alter the nature of the establishment, for
it was obvious that fulfilling the order, only
required the employment of such materialsmoldings, frames, panels as it ordinarily
100
99 Phil. 841 (1956).
24
LAW ON SALES
manufactured or was in a position to
habitually manufacture; and
(c) The nature of the products manufactured
was such that “[a]ny builder or homeowner,
with sufficient money, may order windows or
doors of the kind manufactured,” and it was
not true that it served special customers
only or confined its services to them alone,
and that it was possible for the company to
“easily duplicate or even mass-produce the
same doors – it is mechanically equipped to
do so.”
Celestino Co recognized that the essence of a contract for
a piece-of-work is the “sale of service” unlike in a sale where
the essence is the sale of an object. It also conceded that if the
company “accepts a job that requires the use of extraordinary
or additional equipment, or involves services not generally
performed by it — it thereby contracts for a piece of work —
filling special orders within the meaning of Article 1467.” In that
case, however the Court found that the orders exhibited were
not shown to be special: “They were merely orders for work —
nothing is shown to call them special requiring extraordinary
service of the factory.”101
Celestino Co implies that the test of “special orders” under
Article 1467 of the Civil Code is not one of timing, or habit, but
actually must be drawn from the nature of the work to be performed
and the products to be made: it must be of the nature that the
products are not ordinary products of the manufacturer, and they
would require the use of extraordinary skills or equipment, if to be
performed by a manufacturer.
The principles of Celestino Co were reiterated in the later
decision in Commissioner of Internal Revenue v. Arnoldus
Carpentry Shop, Inc.102
101
102
Ibid, at p. 846.
159 SCRA 199 (1988).
NATURE OF SALE
25
In Commissioner of Internal Revenue v. Engineering
Equipment and Supply Company,103 the Engineering Equipment
and Supply Company (EEI), which was engaged in the design
and installation of central type air-conditioning system, was
assessed the advance sales tax for its importation of parts
and materials as a manufacturer and seller of the central airconditioning system, instead of the compensating tax it paid as
a contractor. In countering the assessment, EEI claimed that
it is not a manufacturer and seller of air-conditioning units and
spare parts or accessories thereof, but a contractor engaged
in the design, supply and installation of the central type of airconditioning system, “which is essentially a tax on the sale of
service or labor of a contractor rather than on the sale of articles
subject.”
In resolving that EEI was a contractor and therefore subject
only to the lower compensating tax, the Court held that “[t]he
distinction between a contract of sale and one for work, labor and
materials is tested by the inquiry whether the thing transferred
is one not in existence and which never would have existed but
for the order of the party desiring to acquire it, or a thing which
would have existed and has been the subject of sale to some
other person even if the order had not been given.”104 It further
explained the test to mean: “If the article ordered by the purchaser
is exactly such as the plaintiff makes and keeps on hand for
sale to anyone, and no change or modification of it is made at
defendant’s request, it is a contract of sale, even though it may
be entirely made after, and in consequence of, the defendants
order for it.”105
By the foregoing test, Engineering Equipment confirms the
abandonment of the timing application of the “upon special order”
test under Article 1467, and that just because the thing came into
existence after, and was motivated to be produced by reason
of, a specific order, does not necessarily qualify the underlying
transaction to be a contract for a piece-of-work.
64 SCRA 590 (1975).
Ibid, at p. 597.
105
Ibid.
103
104
26
LAW ON SALES
The crucial application of the “upon special order” test under
Article 1467 in Engineering Equipment was the “nature of the
object” or “the test of necessity,” when it took into consideration
the nature of execution of each order.
The Court noted that EEI undertook negotiations and
execution of individual contracts for the design, supply and
installation, “taking into consideration in the process such factors
as the area of the space to be air conditioned; the number of
persons occupying or would be occupying the premises; the
purpose for which the various air conditioning areas are to be
used; and the sources of heat gain or cooling load on the plant
such as sun load, lighting, and other electrical appliances which
are or may be in the plan.”106 The Court determined that EEI
“designed and engineered completely each particular plant and
that no two plants were identical but each had to be engineered
separately.” It also found that even if EEI wanted to mass-produce
the central air-conditioning system or to produce them ahead of
any order of a client, it could not do so because of the variable
factors that had to be taken into consideration.
Taken together, both Celestino Co and Engineering
Equipment established the proper application of the “upon special
order” test under Article 1467, as not merely one of timing of the
flow of the transactions, but one that goes into the nature of the
product involved when it was possible for the manufacturer or
producer to be able to produce the product ahead of any special
order given by a customer or client.
In addition, by looking at the other facts in Engineering
Equipment, we are also able to deduce that some of the other
tests, including the statutory ones, to determine whether the
contract is a sale or for a piece-of-work, do not prevail.
Take for example, the habituality test enunciated in Celestino
Co. In that case it was held that when the manufacturer engages
in the same activity in the ordinary course of business, and does
not need to employ extraordinary skills and equipment, that would
classify the underlying transaction as a sale. And yet, if we look
106
Ibid, at p. 598.
NATURE OF SALE
27
at the activity of EEI in Engineering Equipment, the fabrication
of central air-conditioning system, was as a matter-of-course, a
staple undertaking, one which could be considered ordinary and
usual in its operations; and although each time it serviced an
order it had to take various factors into consideration, EEI really
did not need to employ extraordinary skills or equipment each
time it had to execute an order.
The core test in Engineering Equipment was that each
product or system executed by it had, by its nature, to be unique
and always different from other orders it had to service in the
past, and that even if it wanted to, EEI could not stockpile or even
mass-produce the products because of their very nature.107
The large quantity of the products to be delivered do not
also indicate that the underlying contract is one of sale. Thus,
in Diño v. Court of Appeals,108 it was held that in a sale for the
manufacture of 20,000 pieces of vinyl frogs and 20,000 copies
of vinyl mooseheads according to the special samples specified
and approved by the “buyer” and which the “seller” manufactured
not in the ordinary course of its business, the contract executed
was clearly one of piece-of-work.
The consistent theme in the decisions of the Supreme Court
on the matter is that the main distinguishing factor between a
sale and a contract for a piece-of-work is the essence of why the
parties enter into it: if the essence is the object, irrespective of
the party giving or executing it, the contract is sale; if the essence
is the service, knowledge or even reputation of the person who
executes or manufactures the object, the contract is for piece
of work, which is essentially the sale of service or labor. Thus,
Engineering & Machinery Corp. v. Court of Appeals,109 took into
account the position of a learned author:
To Tolentino, the distinction between the two contracts
depends on the intention of the parties. Thus, if the
parties intended that at some future date an object has
107
(1996).
108
109
Reiterated in Engineering & Machinery Corp. v. Court of Appeals, 252 SCRA 156
359 SCRA 91 (2001).
252 SCRA 156 (1996).
28
LAW ON SALES
to be delivered, without considering the work or labor
of the party bound to deliver, the contract is one of sale.
But if one of the parties accepts the undertaking on the
basis of some plan, taking into account the work he
will employ personally or through another, there is a
contract for a piece of work.110
b. Practical Needs for Being Able to Distinguish
From the point of view of warranty of the contractor on the
product, a contract for a piece-of-work is not much different from
a sale. Pursuant to Article 1714, a contract for a piece-of-work
shall be governed “by pertinent provisions on warranty of title and
against hidden defects and the payment of price in a contract of
sale.”111
On a more practical basis, however, apart from the issue of
the tax provisions applicable to the transactions, there are still
key areas where it would be important to determine the proper
characterization of a contract, whether it is a sale or one for a
piece-of-work, because of the different sets of laws governing
each type of contract.
Sale is constituted of real obligations and would be the
proper subject of an action for specific performance. On the
other hand, a contract for a piece-of-work, where the main
subject matter is the service to be rendered (obligation to do),
would not allow an action for specific performance in case the
contractor refuses to comply with his obligation. Instead, Article
1715 provides that “[S]hould the work be not of such quality, the
employer may require that the contractor remove the defect or
execute another work. If the contractor fails or refuses to comply
with this obligation, the employer may have the defect removed
or another work executed at the contractor’s cost.”
In a sale, only when the subject matter is indeterminate
or generic (i.e., determinable) is the buyer granted the remedy
under Article 1165 to have the subject matter done by a third
party with cost chargeable to the seller.
Ibid, at p. 165.
Diño v. Court of Appeals, 359 SCRA 91 (2001).
110
111
NATURE OF SALE
29
Finally a contract for a piece-of-work, unlike a sale, is not
governed by the Statute of Frauds.
4. From Agency to Sell or to Buy
By the contract of agency, a person binds himself to render
some service or to do something in representation or on behalf of
the principal, with the consent or authority of the latter.112
a. Distinguishing Sale and Agency to Sell/Buy
A contract of agency is one that essentially establishes a
representative capacity in the person of the agent on behalf of
the principal, and one characterized as highly fiduciary. Involving
obligations to do (i.e., to represent the principal), contracts
of agency to sell or to buy are essentially different from sales.
Nevertheless, because the object of the agency arrangement is
the purchase or sell of a determinate object, there is a tendency
to confuse one with the other.
From its very nature, sale is not unilaterally revocable;
whereas, a contract of agency to sell, because it covers an
underlying fiduciary relationship, is essentially revocable,113 even
in the presence of an irrevocability clause.
In sale, the buyer himself pays for the price of the object,
which constitutes his main obligation; in an agency to sell, the
agent is not obliged to pay the price, and is merely obliged to
deliver the price which he may receive from the buyer.114
In sale, the buyer, after delivery, becomes the owner of the
subject matter; in an agency to buy, the agent does not become
the owner of the thing subject of the agency, even if the object is
delivered to him.
In sale, the seller warrants; in an agency, the agent who
effects the sale assumes no personal liability as long as he acts
within his authority and in the name of the principal.115 However,
Art. 1868, Civil Code.
Arts. 1919 and 1920, Civil Code.
114
Arts. 1891 and 1897, Civil Code.
115
Art. 1897, Civil Code.
112
113
30
LAW ON SALES
it is legally possible for an agent or a broker to voluntarily bind
himself to the warranties of the seller.116
Finally, because of the fiduciary nature of the relationship,
in an agency to sell, the agent is disqualified from receiving any
personal profit from the transaction covered by the agency, and
any profit received should pertain to the principal.117
b. Statutory Rule
Article 1466 of the Civil Code provides that “[i]n construing
a contract containing provisions characteristic of both the sale
and of the contract of agency to sell, the essential clauses of
the whole instrument shall be considered.” The Supreme Court
has identified what constitute the “essential clauses” to warrant a
conclusion as to the proper nature of the contract in issue.
In Quiroga v. Parsons,118 plaintiff Quiroga granted to
defendant Parsons the right to sell as an “agent” the “Quiroga
beds” in the Visayas. Parsons was obliged under the contract to
pay for the beds within a specified period after delivery even when
not yet sold, at a discount of 25% as commission for the sales.
Quiroga subsequently sought the rescission of the agreement
claiming that Parsons, as agent, had violated its obligation not
to sell the beds at higher prices than those of the invoices;
to open an establishment in Iloilo; to keep the beds on public
exhibition, and to pay for the advertisement expenses incurred;
and to order the beds in dozen and in no other manner. Except
for the ordering the beds in dozens, none of the other obligations
imputed to Parsons were expressly set forth in the contract to
serve as a basis for rescission based on substantial breach.
However, Quiroga insisted that Parsons was his agent, and that
said obligations were implied from the commercial agency or at
least were instructed and disobeyed; in other words, he invoked
the essential revocability of agency as his legal basis to rescind
the agreement.
Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).
Art. 1891, Civil Code.
118
38 Phil. 501 (1918).
116
117
NATURE OF SALE
31
Whether Quiroga could rescind (i.e., revoke) the contract
therefore depended on whether it was one of sale or agency to
sell. The Court found the arrangement to be one of sale since
the essential clause provides that “[p]ayment was to be made
at the end of sixty days, or before, at the plaintiff’s request, or in
cash, if the defendant so preferred, and in these last two cases
an additional discount was to be allowed for prompt payment.”
These conditions to the Court were “precisely the essential
features of a contract of purchase and sale” because there was
the obligation on the part of the plaintiff to supply the beds, and,
on the part of the defendant, to pay their price, thus:
These features exclude the legal conception of an
agency or order to sell whereby the mandatory or agent
received the thing to sell it, and does not pay its price,
but delivers to the principal the price he obtains from
the sale of the thing to a third person, and if he does
not succeed in selling it, he returns it. By virtue of the
contract between the plaintiff and the defendant, the
latter, on receiving the beds, was necessarily obliged to
pay their price within the term fixed, without any other
consideration and regardless as to whether he had or
had not sold the beds.119
The Court also noted that merely because by their contract,
the parties designated the arrangement as an agency did not
mean the characterization to be conclusive, “[b]ut it must be
understood that a contract is what the law defines it to be, and
not what it is called by the contracting parties.”120
In Gonzalo Puyat & Sons, Inc. v. Arco Amusement
Company,121 Arco Amusement Company had engaged the
services of Gonzalo Puyat & Sons to purchase from the Starr
Piano Company in the United States specified sound reproducing
equipment. Later, when Arco found out that Puyat had quoted
to Arco not the net price but the list price, and that Puyat had
received a discount from Starr Piano Company, it sought to
Ibid, at p. 505.
Ibid, at p. 506.
121
72 Phil. 402 (1941).
119
120
32
LAW ON SALES
recover the same under the premise that being only its agent,
any benefit or profit received from the transaction must inure to
Arco, as the principal.122
In construing that the underlying contract between Arco and
Puyat was not an agency to buy, but rather a sale, the Court
looked into the provisions of their contract, and found that the
letters between the parties clearly stipulated for fixed prices on
the equipment ordered, which “admitted no other interpretation
than that the respondent agreed to purchase from the petitioner
the equipment in question at the prices indicated which are fixed
and determinate.”123 The Court held that “whatever unforeseen
events might have taken place unfavorable to the defendant
(petitioner), such as change in prices, mistake in their quotation,
loss of the goods not covered by insurance or failure of the Starr
Piano Company to properly fill the orders as per specifications,
the plaintiff (respondent) might still legally hold the defendant
(petitioner) to the prices fixed.”124
The Court held that such stipulation “is incompatible with
the pretended relation of agency between the petitioner and the
respondent, because in agency, the agent is exempted from all
liability in the discharge of his commission provided he acts in
accordance with the instructions received from his principal.”125
Although under their agreement, Gonzalo Puyat & Sons was
entitled to receive 10% commission, the same did not necessarily
make it an agent, as the provision is only an additional price
which Arco bound itself to pay, and which stipulation was not
incompatible with the contract of purchase and sale.
Being a contract of sale and purchase, the Court also
did not sustain the allegation of fraud by Gonzalo Puyat &
Sons against Arco. Firstly, it held that “the contract is the law
between the parties and should include all the things they are
122
Art. 1891 of the Civil Code provides: “. . . Every agent is bound to render an
account of his transactions and to deliver to the principal whatever he may have received
by virtue of the agency, even though it may not be owing to the principal. Every stipulation
exempting the agent from the obligation to render an account shall be void.”
123
72 Phil. 402, 407 (1941).
124
Ibid.
125
Ibid.
NATURE OF SALE
33
supposed to have agreed upon. What does not appear on the
face of the contract should be regarded merely as ‘dealer’s’ or
‘trader’s talk,’ which can not bind either party.”126 Secondly, it
held that the fact that Gonzalo Puyat & Sons obtained more
or less profit than the respondent calculated before entering
into the arrangement, was no ground for rescinding the contract
or reducing the price agreed upon between them: “Not every
concealment is fraud; and short of fraud, it were better that, within
certain limits, business acumen permit of the loosening of the
sleeves and of the sharpening of the intellect of men and women
in the business world.”127
In Ker & Co., Ltd. v. Lingad,128 the company entered into
a contract with an American company, whereby Ker & Co.,
specifically designated as “Distributor,” would receive products
from the American company by way of consignment, for sale in the
Philippines. It was specifically stipulated in the contract that “all
goods on consignment shall remain the property of the Company
until sold by the Distributor to the purchaser or purchasers, but all
sales made by the Distributor shall be in his name.” It was further
stipulated that the contract “does not constitute the Distributor
the agent or legal representative of the Company for any purpose
whatsoever. Distributor is not granted any right or authority to
assume or to create any obligation or responsibility, express or
implied in behalf of or in the name of the Company, or to bind the
Company in any manner or thing whatsoever.”
The Commissioner of Internal Revenue assessed Ker & Co.
liable as commercial broker under the agreement. In finding for
the Commissioner, the Court held that in spite of the disclaimer
in the agreement, it was still an agent of the American company.
The decisive test for the Court was “the retention of the ownership
of the goods delivered to the possession of the dealer, like herein
petitioner, for resale to customers, the price and terms remaining
subject to the control of the firm consigning such goods.”129 It
also found significant the stipulation in the agreement that
Ibid, at p. 406.
Ibid, at p. 409.
128
38 SCRA 524 (1971).
129
Ibid, at p. 525.
126
127
34
LAW ON SALES
the American company “at its own expense, was to keep the
consigned stock fully insured against loss or damage by fire or
as a result of fire, the policy of such insurance to be payable to it
in the event of loss.” Since insurable interest remained with the
American company, it clearly showed that ownership over the
goods was never transferred to Ker & Co., thus:
The transfer of title or agreement to transfer it for a
price paid or promised is the essence of sale. If such
transfer puts the transferee in the attitude or position of
an owner and makes him liable to the transferor as a
debtor for the agreed price, and not merely as an agent
who must account for the proceeds of a resale, the
transaction is a sale; while the essence of an agency
to sell is the delivery to an agent, not as his property,
but as the property of the principal, who remains the
owner and has the right to control the sale, fix the price,
and terms, demand and receive the proceeds less the
agent’s commission upon sales made.130
Finally, in Victorias Milling Co. v. Court of Appeals,131 the
Court held that one of the factors that most clearly distinguishes
agency from other legal concepts, including sale, “is control; one
person — the agent — agrees to act under the control of direction
of another — the principal.” In that decision, it was held that when
an entity purchases sugar under a Shipping List/Delivery Receipt
from the original owner to the buyer, “for and in our behalf,” in
order to authorize the buyer to withdraw part of the merchandise
from the bailee, such did not establish an agency, since the letter
to the bailee of the original owner used clearly the words “sold
and endorsed” for the document of title, which meant clearly to
cover a sale, not an agency to sell.
c. Other Practical Value of Being Able to Distinguish
Knowing whether the contract is one of sale or an agency to
sell is also important in considering the applicability of the Statute
of Frauds.
130
131
Ibid, at p. 530.
333 SCRA 663, (2000).
NATURE OF SALE
35
Lim v. Court of Appeals,132 held that an agency to sell
on commission basis does not belong to any of the contracts
covered by Articles 1357 and 1358 requiring them to be in a
particular form, and not one enumerated under the Statutes of
Frauds in Article 1403. Hence, unlike a sale contract which must
comply with the Statute of Frauds for enforceability, a contract of
agency to sell is valid and enforceable in whatever form it may
be entered into.
By way of exception, under Article 1874 of the Civil Code,
when the sale of a piece of land or any interest therein is through
an agent, the authority of the latter shall be in writing, otherwise,
the sale shall be void.
5. From Dacion En Pago
Dation in payment is one whereby property is alienated to
the creditor in full satisfaction of a debt in money;133 it constitutes
“the delivery and transmission of a thing by the debtor to the
creditor as an accepted equivalent of the performance of the
obligation.”134 By express provision of law, dation in payment is
governed by the Law on Sales,135 since it essentially involves the
transfer of ownership of a subject matter.
In Vda. De Jayme v. Court of Appeals,136 the Court observed
that in its modern concept, what actually takes place in dacion
en pago is an objective novation of the obligation where the
thing offered as an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale while
the debt is considered as the purchase price; that is why the
elements of sale must be present, including a clear agreement
that the things offered is accepted for the extinguishment of the
debt.137
254 SCRA 170 (1996).
Art. 1245, Civil Code.
134
Philippine Lawin Bus Co. v. Court of Appeals, 374 SCRA 332 (2002); Yuson v.
Viton, 496 SCRA 540 (2007); Social Security System v. Atlantic Gulf and Pacific Co. of
Manila, 553 SCRA 677 (2008).
135
Art. 1245, Civil Code.
136
390 SCRA 380 (2002).
137
Reiterated in Technogas Phils. Mfg. Corp. v. PNB, 551 SCRA 183 (2008); Social
132
133
36
LAW ON SALES
It must be emphasized, however, that dacion en pago
considerations are not in the realm of perfection of contract, but
rather in the stage of consummation, for indeed dacion en pago
is by definition a special mode of payment, whereby the debtor
offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt. Consequently, prior to delivery
of the subject matter to constitute the dation in payment, the
agreement does not necessarily constitute a separate contract,
but only an arrangement by which an existing obligation may be
extinguished.
Lo v. KJS Eco-Formwork System Phil., Inc.,138 holds that in
order that there be a valid dation in payment, there must be:
(a) Performance of the prestation in lieu of
payment (animo solvendi) which may consist
in the delivery of a corporeal thing or a real
right or a credit against the third person;
(b) Some difference between the prestation due
and that which is given in substitution (aliud
pro alio); and
(c) An agreement between the creditor and
debtor that the obligation is immediately
extinguished by reason of the performance
of a presentation different from that due.139
Lo also holds that in dacion en pago “[t]he undertaking really
partakes in one sense of the nature of sale, that is, the creditor
is really buying the thing or property of the debtor, payment for
which is to be charged against the debtor’s debt. As such, the
vendor in good faith shall be responsible, for the existence and
legality of the credit at the time of the sale but not for the solvency
of the debtor, in specified circumstances.”140
The first requisite of actual delivery is demonstrated in
Philippine National Bank v. Pineda,141 which held that dation in
Security System v. Atlantic Gulf and Pacific Co. of Manila, 553 SCRA 677 (2008).
138
413 SCRA 182 (2003).
139
Reiterated in Aquintey v. Tibong, 511 SCRA 414 (2006).
140
413 SCRA 182, 187 (2003).
141
197 SCRA 1 (1991).
NATURE OF SALE
37
payment requires delivery and transmission of ownership of a
thing to the creditor as an accepted equivalent of the performance
of the obligation. When there is no such transfer of ownership in
favor of the creditor, as when re-possession of the subject matter
of a trust receipt is only by way of security, there is no dacion.
The third requisite that there must be an agreement that the
delivery of the property is in lieu of payment is best demonstrated
in Philippine Lawin Bus Co. v. Court of Appeals,142 where the
Court held that a transfer of property between debtor and creditor
does not automatically amount to a dacion en pago, since it is
essential that the transfer must be accompanied by a “meeting of
the minds between the parties on whether the loan ... would be
extinguished by dacion en pago.”143
The legal effects of a dacion en pago come into effect only
when both the debtor and creditor agree to the terms thereof,
for consent to dacion is an essential elements.144 But once the
creditor agrees to a dacion, it ought to know, especially when it
is a bank, and must abide by the legal consequence thereof; that
the pre-existing obligation is thereby extinguished.145
In one case,146 the Court held that the execution by the
borrower-mortgagor of dacion en pago covering the mortgaged
property in favor of the lender-mortgagee effectively constitutes
a waiver by the mortgagor-transferor of the redemption period
normally given a mortgagor.
It must be noted that there is an implication in Social Security
System v. Atlantic Gulf and Pacific Company of Manila, Inc.,147
that would consider the mere agreement to dacion en pago
identifying a particular parcel of land as the means to extinguish
an obligation as already constituting a new contract of sale that is
subject to specific performance. Quoting from the earlier decision
374 SCRA 332 (2002).
See also Filinvest Credit Corp. v. Philippine Acetylene Co., Inc., 111 SCRA 421
(1982); Vda. De Jayme v. Court of Appeals, 390 SCRA 380 (2002).
144
Bank of Philippine Islands v. SEC, 541 SCRA 294 (2007).
145
Estanislao v. East West Banking Corp., 544 SCRA 369 (2008).
146
First Global Realty v. San Agustin, 377 SCRA 341 (2002).
147
553 SCRA 677 (2008).
142
143
38
LAW ON SALES
in Vda. De Jayme v. Court of Appeals,148 Atlantic Gulf which part
held:
... In its modern concept, what actually takes place in
dacion en pago is an objective novation of the obligation
where the thing offered as an accepted equivalent of
the performance of an obligation is considered as the
purchase price. In any case, common consent if an
essential prerequisite, be it sale or novation, to have the
effect of totally extinguishing the debt or obligation.149
The Court in Atlantic Gulf went on to rule that “This
statement unequivocally evinces its consent to the dacion en
pago ... The controversy, instead, lies in the non-implementation
of the approved and agreed dacion en pago on the part of the
SSS. As such, respondents filed a suit to obtain its enforcement
which is, doubtless, a suit for specific performance and one
incapable of pecuniary estimation beyond the competence of
the Commission.”150 It should be noted that Atlantic Gulf did not
categorically rule that a mere agreement to effect a dacion en
pago which has not been implemented can successfully be the
subject of an action for specific performance, since the ruling only
centered around which tribunal had jurisdiction on such cause of
action.
6. From Lease
In a contract of lease, the lessor binds himself to give to
another (the lessee) the enjoyment or use of a thing for a price
certain, and for a period which may be definite or indefinite.151
A conditional sale may be made in the form of a “lease with
option to buy” as a device to circumvent the provisions of the Recto
Law governing the sale of personal property on installments.152 It
may be stipulated in such contract that the lessee has the option
390 SCRA 380 (2002).
553 SCRA 677, at p. 686; underscoring supplied.
150
553 SCRA 677, at pp. 686-687.
151
Art. 1643, Civil Code.
152
Arts. 1484 and 1485, Civil Code.
148
149
NATURE OF SALE
39
to buy the leased property for a small consideration at the end of
the term of the lease, provided that the rent has been duly paid;
or if the rent throughout the term had been paid, title shall vest
in the lessee. Such contract are really conditional sales and are
deemed leases in name only.
Filinvest Credit Corp. v. Court of Appeals,153 holds that when
a “lease” clearly shows that the rentals are meant to be installment
payments to a sale contract, despite the nomenclature given by
the parties, it is a sale by installments.
The importance of distinguishing a true lease from a sale
on installments is considered in Chapter 10 on discussions in the
Recto Law.
—oOo—
153
178 SCRA 188 (1989).
40
LAW ON SALES
CHAPTER 2
PARTIES OF SALE
Discussions on the capacities of the parties to a sale tackle
the essential element of “consent” in contracts of sale. But unlike
discussions of consent as a “meeting of minds” that brings about
the perfection of a sale, the chapter focuses on the “integrity” or
“quality” of the consent of the parties to a sale, and thereby leads
into discussions on vitiation of consent, and the absolute and
relative incapacities of the parties to enter into a contract of sale.
GENERAL RULE ON CAPACITY OF PARTIES
When it comes to the issue as to who can be the proper
parties to a sale, the general rule is that any person who has
“capacity to act,” or “the power to do acts with legal effects,”1 or
more specifically with the power to obligate himself, may enter
into a contract of sale,2 whether as seller or as buyer.
For natural persons or individuals, the age of majority
begins at 18 years,3 upon which age they have the capacity to
act. For juridical persons, such as corporations, partnerships,
associations and cooperatives, a juridical personality separate
and distinct from that of the shareholders, partners or members,
is expressly recognized by law,4 with full “juridical capacity”5 to
obligate themselves and enter into valid contracts.6
Art. 37, Civil Code.
Art. 1489, Civil Code.
3
Art. 234, Family Code, as amended by Rep. Act No. 6809.
4
Art. 44(3), Civil Code.
5
Art. 37, Civil Code, defines “juridical capacity” as “the fitness to be the subject of
legal relations.”
6
Under Art. 46 of the Civil Code, juridical persons may acquire and possess property
of all kinds. Under Sec. 36(6) of the Corporation Code, all corporations are granted the
express power to purchase, receive, take or grant, hold, convey, sell and otherwise deal
with real and personal properties.
1
2
40
PARTIES OF A SALE
41
MINORS, INSANE OR DEMENTED PERSONS, AND DEAF-MUTES
Generally, minors, insane and demented persons, and deafmutes who do not know how to write, have no legal capacity
to contract,7 and therefore are disqualified from being parties
to a sale.8 Nonetheless, contracts entered into by such legally
incapacitated persons are not void, but merely voidable, subject
to annulment or ratification.9 The action for annulment cannot
be instituted by the person who is capacitated since he is
disqualified from alleging the incapacity of the person with whom
he contracts.10
Contracts entered into during lucid intervals by insane or
demented persons are generally valid;11 whereas, those entered
into in a state of drunkenness, or during a hypnotic spell, are
merely voidable.12
When the defect of the contract consists in the incapacity
of one of the parties, the incapacitated person is not obliged to
make any restitution, except insofar as he has been benefited by
the thing or price received by him.13
1. Necessaries
A minor is without legal capacity to give consent to a sale,
and since consent is an essential requisite of every contract, the
absence thereof cannot give rise to a valid sale;14 nonetheless,
the defective consent gives rise to a voidable sale, meaning “valid
until annulled.”
The Title on Sales in the Civil Code specifically provides
that although a minor is not capacitated to validly enter into a
sale, “[w]here necessaries are sold and delivered to a minor or
other person without capacity to act, he must pay a reasonable
Art. 1327, Civil Code.
Labagala v. Santiago, 371 SCRA 360 (2001).
9
Art. 1393, Civil Code.
10
Art. 1397, Civil Code.
11
Art. 1328, Civil Code.
12
Art. 3128, Civil Code, emphasis supplied.
13
Art. 1399, Civil Code.
14
Labagala v. Santiago, 371 SCRA 360 (2001).
7
8
42
LAW ON SALES
price therefore,”15 and the resulting sale is valid, and not merely
voidable.
“Necessaries,” are now defined by Article 194 of the Family
Code to cover “everything indispensable for sustenance, dwelling,
clothing, medical attendance, education and transportation, in
keeping with the financial capacity of the family ... [and education]
include[s] his schooling or training for some profession, trade or
vocation, even beyond the age of majority. Transportation shall
include expenses in going to and from school, or to and from
place of work.” Since sales cover only the obligation to deliver
a thing, the sale of “necessaries” considered valid under Article
1489 can only cover sales pertaining to sustenance, dwelling,
and clothing, and perhaps medicine and educational books and
materials.
In order for the sale of necessaries to minors to be valid,
and not merely voidable, two elements need to be present: (a)
perfection of the sale; and (b) delivery of the subject necessaries.
If there is only perfection at the time the case reaches litigation,
the sale of course is not void, but voidable for vice in consent,
and the rules on voidable contracts apply.
2. Emancipation
The rules on emancipation under Articles 234 to 236 of
the Family Code, have been rendered moot by Rep. Act No.
6809, which has lowered the age of majority to 18 years of age.
Consequently, the issue on the validity of sales entered into by
emancipated minors no longer exists.
Previously, under the Family Code, “emancipation takes
place by the attainment of majority ... [which] commences at
the age of twenty-one years.”16 In addition, it was provided that
emancipation also took place “(1) By marriage of the minor; or (2)
By the voluntarily emancipation by recording in the Civil Register
of an agreement in a public instrument executed by the parent
exercising parental authority and the minor at least eighteen
15
16
Art. 1489, Civil Code.
Art. 234, Family Code.
PARTIES OF A SALE
43
years of age.”17 Emancipation would terminate parental authority
over the person and property of the minor, who shall then be
qualified and responsible for all acts of civil life,18 including validly
entering into contracts of sale.
Under the present Family Code, marriages entered into
below eighteen years of age are void,19 rendering emancipation
by marriage at the age of 18 years inutile, since by merely
reaching 18 years of age, even without marrying, one is already
of legal age. Voluntary emancipation by registration of the public
instrument requires that the minor be at least 18 years old, which
is now legally impossible, because at eighteen years of age there
is no longer a minor who may be voluntarily emancipated.
3. Senility and Serious Illness
The effects of senility and serious illness of the seller
on the validity of a sale was covered in Domingo v. Court of
Appeals,20 where the main issue was whether the proponents
were able to establish the existence and due execution of a
deed of sale with the only evidence adduced being a carbon
copy of the alleged original deed where the signature of the
alleged seller was a thumb mark made while sick on the hospital
bed. Domingo agreed with the trial court’s ruling that sale was
“null and void ab initio” on findings that the “consideration for
the nine (9) parcels of land including the house and bodega is
grossly and shockingly inadequate,” but also on the findings of
the Court that —
... at the time of the execution of the alleged contract,
Paulina Rigonan was already of advanced age and
senile. She died an octogenarian ... barely over a
year when the deed was allegedly executed ..., but
before copies of the deed were entered in the registry
allegedly [much later]. ... The unrebutted testimony ...
shows that at the time of the alleged execution of the
Art. 234, Family Code.
Art. 236, Family Code, which was repealed by Rep. Act No. 6809.
19
Arts. 2 and 5, Family Code.
20
367 SCRA 368 (2001).
17
18
44
LAW ON SALES
deed, Paulina was already incapacitated physically
and mentally... that Paulina played with her waste and
urinated in bed...21
Domingo held that although “[t]he general rule is that a
person is not incompetent to contract merely because of
advanced years or by reason of physical infirmities. However,
when such age or infirmities have impaired the mental faculties
so as to prevent the person from properly, intelligently, and
firmly protecting her property rights then she is undeniably
incapacitated. Given these circumstances, there is in our view
sufficient reason to seriously doubt that she consented to the
sale of and the price for the parcels of land. Moreover, there is
no receipt to show that said price was paid to and received by
her. Thus, we are in agreement with the trial court’s finding and
conclusion on the matter.”22
The author posits that the essence of the Domingo ruling
for declaring the sale void was that the circumstances showed
that there was never any meeting of minds since there was no
real consideration agreed upon, and that the deed was merely
forged. It is unfortunate for Domingo to have declared the sale
“void ab initio” on grounds that legally do not render it so, namely:
(a) Incapacity to give consent (senility,
advanced age, and serious illness), which
constitute only vice in consent, and would
render the contract merely voidable;
(b) That “price was never paid to and received,”
which gives rise only to an action for
rescission or specific performance; and
(c) That the consideration was “grossly and
shockingly inadequate,” which under Article
1470 of the Civil Code “does not affect a
contract of sale, except as it may indicate
a defect in the consent, or that the parties
21
22
Ibid, at p. 380.
Ibid, at p. 380.
PARTIES OF A SALE
45
really intended a donation or some other
act or contract.”
The decision in Paragas v. Heirs of Dominador Balacano,23
which invoked Domingo, again took the unusual step to declare
a sale executed by one who is already of advanced age and
senile to be “null and void,” instead of being merely voidable. In
that case, the alleged seller, shown to have signed the Deed of
Sale on his death bed in the hospital, “was an octogenarian at
the time of the alleged execution of the contract and suffering
from liver cirrhosis at that — circumstances which raise grave
doubts on his physical and mental capacity to freely consent to
the contract.”24
In Paragas, the Court used the protective provisions of
Article 24 of the Civil Code for ruling that the sale was void, i.e.,
“[i]n all contractual, property or other relations, when one of the
parties is at a disadvantage on account of his moral dependence,
ignorance, mental weakness, tender age or other handicap, the
courts must be vigilant for his protection.” It does not seem logical
for the Court to declare the sale void, when annulment of the
contract by reason of vitiated consent, would have been the more
logical remedy to apply.
SALES BY AND BETWEEN SPOUSES
1. Sales With Third Parties
Before the enactment of the Family Code, the provisions of
the Civil Code provided limitations on when the husband or the
wife may deal with conjugal partnership property. For example,
Heirs of Ignacia Aguilar-Reyes v. Mijares,25 recognized that under
the regime of the Civil Code (as contrasted from the rule under
the Family Code), the alienation or encumbrance of a conjugal
real property requires the consent of the wife; that the absence
of such consent rendered the transaction merely voidable and
not void; and that the wife may, during the marriage and within
468 SCRA 717 (2005).
Ibid, at p. 734.
25
410 SCRA 97 (2003).
23
24
46
LAW ON SALES
ten years from the questioned transaction, bring an action for the
annulment of the contract on the entire property, and not just the
one-half portion that pertains to her share.
Under the present Family Code, common provisions apply
equally to both spouses, not only because the default rule is the
“absolute community of property regime,”26 but more so even
when the spouses chose under their marriage settlements to
be governed by the conjugal partnership of gains, the spouses
would still have joint administration of the conjugal properties.27
Under Article 73 of the Family Code, either spouse may
exercise any legitimate profession, occupation, business or
activity without the consent of the other; and the latter may
object only on valid, serious and moral grounds. In cases of
disagreements, the courts shall decide whether or not the
objection is proper, and make rulings on the benefits, depending
on whether the benefits had accrued to the family prior to the
objection or thereafter. The article also provides that if benefits
accrued prior to the objection, the resulting obligation shall be
enforced against the separate property of the spouse who has
not obtained consent; otherwise, the same shall be chargeable
against the community property, without prejudice to the
creditors who acted in good faith.
Under the Law on Sales, therefore, it would seem that a
spouse may, without the consent of the other spouse, enter into
sale transactions in the regular or normal pursuit of his or her
profession, vocation or trade. Nevertheless, under Articles 96
and 124 of the Family Code, the administration and enjoyment
of the community property or the conjugal property, as the case
may be, shall belong to both spouses jointly; and in case of
disagreement, the husband’s decision shall prevail, subject to the
wife seeking remedy from the courts, which must be availed of
within five (5) years from the date of the contract. In addition, the
disposition or encumbrance of community property or conjugal
property, as the case may be, shall be void without authority of
the court or the written consent of the other spouse. In such a
26
27
Art. 75, Family Code.
Art. 124, Family Code.
PARTIES OF A SALE
47
case, the transaction shall be construed as a continuing offer
on the part of the consenting spouse and the third person, and
may be perfected as a binding contract upon the acceptance by
the other spouse or authorization by the court before the offer is
withdrawn by either or both offerors.28
In one case,29 even when the property regime prevailing
was the conjugal partnership of gains, the Court held that the
sale by the husband of a conjugal property without the consent
of the wife to be not merely voidable but void, under Article 124
of the Family Code, since the resulting contract lacked one of the
essential elements of “full consent.”
In another case,30 the Court held that the sale by the
husband of property belonging to the conjugal partnership
without the consent of the wife when there was no showing that
the latter was incapacitated, was held void ab initio because it
was in contravention of the mandatory requirements of Article
166 of the Civil Code. However, it conceded that as an exception,
the husband may dispose of conjugal property without the wife’s
consent if such sale is necessary to answer for conjugal liabilities
mentioned in Articles 161 and 162 of the Civil Code.
2. Sales Between Spouses
Under Article 1490 of the Civil Code, spouses cannot sell
property to each other, except: (a) when a separation of property
was agreed upon in the marriage settlements; or (b) when there
has been a judicial decree for the separation of property.
In addition, Article 1492 provides that the prohibition relating
to spouses selling to one another is applicable even to sales in
legal redemption, compromises and renunciations.
a. Status of Prohibited Sales Between Spouses
Contracts entered into in violation of Articles 1490 and 1492
are not merely voidable, but have been declared by the Supreme
Art. 96, Family Code.
Guiang v. Court of Appeals, 291 SCRA 372 (1998).
30
Abalos v. Macatangay, Jr., 439 SCRA 64 (2004).
28
29
48
LAW ON SALES
Court as being null and void.31 However, not anyone is given
the right to assail the validity of the transaction. For instance,
the spouses themselves, since they are parties to an illegal act,
cannot avail themselves of the illegality of the sale on the ground
of pari delicto;32 the courts will generally leave them as they are.
Also, the creditors who became such only after the transaction,
cannot attack the validity of the sale, for it cannot be said that
they have been prejudiced by the transaction. Practically, the
only persons who can question the sale are the following: the
heirs of either of the spouses who have been prejudiced; prior
creditors;33 and the State when it comes to the payment of the
proper taxes due on the transactions.34
In Medina v. Collector of Internal Revenue,35 deficiency
sales tax were sought to be collected against the sales of lumber
products by the wife to the public, although when the husband
previously sold the lumber products to the wife (of course at a lower
price) he had already paid the sales tax thereon. Considering that
only the first and original sales were taxable under the then Tax
Code, the spouses held that the second and subsequent sales
by the wife to the public could not be subjected to further sales
tax. In addition, the spouses alleged that the sales between them
were valid since they were governed by the complete separation
of property regime pursuant to a pre-nuptial agreement executed
between them.
Aside from the fact that the records of the alleged pre-nuptial
agreement were non-existent, the Court determined that at the
time of their marriage, the spouses had no properties to have
warranted them to execute a pre-nuptial agreement for complete
separation of property. The Court considered the sales between
the spouses as void and non-existent in violation of Article 1490,
and considered the sales by the wife to the public as the first and
original sales subject to the sales tax.
31
(1961).
Uy Sui Pin v. Cantollas, 70 Phil. 55 (1940); Medina v. Collector, 1 SCRA 302
Modina v. Court of Appeals, 317 SCRA 696 (1999).
Ibid.
34
Medina v. Collector of Internal Revenue, 1 SCRA 302 (1961).
35
1 SCRA 302 (1961).
32
33
PARTIES OF A SALE
49
b. Rationale for Prohibition
Medina gave the rationale for the relative incapacity of
spouses to sell properties to one another to be as follows:
(a) To prevent a spouse defrauding his creditors
by transferring his properties to the other
spouse;
(b) To avoid a situation where the dominant
spouse would unduly take advantage of
the weaker spouse, thereby effectively
defrauding the latter; and
(c) To avoid an indirect violation of the prohibition against donations between spouses
under Article 133 of the Civil Code.
Article 133 of the Civil Code, which declares void every
donation between spouses during marriage, seeks to prevent the
first two evils enumerated above.36 Article 133 has been replaced
by Article 87 of the Family Code which added the provision “The
prohibition shall also apply to persons living together as husband
and wife without a valid marriage.”
Therefore, the evils sought to be avoided under Articles 133
and 1490 are the same. But unlike Article 1490 which exempts
from its prohibition sales between spouses governed by the
complete separation of property regime, Article 133, and now
Article 87 of the Family Code, do not make such exception in
case of donations.
One explanation for the difference in this aspect between
Articles 133 and 1490 is that a donation between spouses
governed by the complete separation of property regime, being
a gratuitous contract, would necessarily reduce the estate of the
donor and increase the estate of the donee; while a sale between
such spouses, being an onerous and commutative contract, would
result in the separate estates of the spouses being of the same
value as before the sale and no fraud could result, either to the
36
Matabuena v. Cervantes, 38 SCRA 284 (1971).
50
LAW ON SALES
spouses or to their creditors.37 This position would also explain
the reason why spouses governed by the absolute community of
property regime cannot sell to one another because having the
same estate between themselves, a sale is not possible because
there simply cannot be a purchase of what a party-buyer already
owns. The position however, does not explain why a sale between
spouses of separate or paraphernal properties would not be
allowed as an exception under Article 1490 when the spouses
are governed by the conjugal partnership of gains.
c. Rationale for Exceptions to Prohibition
under Article 1490
If one were to take at face value the two exceptions to
the prohibition of sales between spouses (i.e., sales between
spouses governed by complete separation of property regime),
it would seem that the evils sought to be avoided also pertain to
such situations, and indeed, there is greater danger of undue
influence or fraud in situations where the spouses are governed
by the complete separation of property regime. For in a complete
separation of property regime, where the spouses are bound
only by their separate properties to their separate creditors and
not to the creditors of the other spouses, there would seem to be
greater risk that by allowing spouses to sell to one another, as the
law allows, the separate creditors of the selling spouses could
equally, if not with greater degree, be defrauded.
In addition, just because spouses have a complete
separation of property regime does not necessarily discount that
one spouse cannot exercise undue influence or pressure on the
other spouse. Indeed, the fact that one has a weak personality
and that the other has a dominant personality cannot be erased
or altered by entering into a complete separation of property
regime, or any other regime for that matter. In a complete
separation of property regime, the dominant spouse may unduly
influence the weaker spouse, and with greater impunity, legally
get away with it.
37
Manonsong v. Estimo, 404 SCRA 683 (2003), used this same reasoning in
distinguishing the difference in effect between a sale and donation on the legitimes of
forced heirs.
PARTIES OF A SALE
51
Finally, Article 133 which prohibits donations between
spouses, does not make an exception to spouses governed
by the complete separation of property regime, and therefore
donations between such spouses would be void. By allowing
under Article 1490 spouses governed by complete separation
of property regime to sell to one another, the law would allow
the circumvention of the prohibition against donations between
spouses governed by the complete separation of property regime.
If Article 1490 were meant to be a stop-gap measure to Article
133, why would it leave sales between spouses governed by the
complete separation of property regime, outside its pale?
If the matter is considered more closely, it would seem
that the exception under Article 1490 on the restriction of sales
between spouses, should apply more to spouses governed by
the absolute community of property regime, because the evils
sought to be avoided by the law cannot for practical purposes
happen in such regime, since no matter what undue influence
is exercised by the dominant spouse, or attempt to defraud the
creditor of a spouse, or attempt to circumvent the prohibition
against donation, such attempts would prove futile because of the
continued existence of the common fund on which both spouses
(and their heirs and creditors) can continue to claim. However,
as discussed previously, a sale between spouses governed by
the absolute community of property regime would be legally
meaningless since they have the same estate and represent the
same interest.
The key element, it seems to the author, to the exceptions
provided for the restrictions under Article 1490, lies in the
psychology of the situation. Legally, there are only two ways
by which a complete separation of property regime could exist
between married spouses, namely, by the execution of a prenuptial agreement stipulating such property regime to apply, or
by the spouses going to court to ask for the dissolution of the
prevailing conjugal partnership of gains or absolute community
of property regimes.
In either case, the situation bespeaks clearly of hardness
of heart on the part of the spouses, showing a business-like
52
LAW ON SALES
approach to the relationship, rather than of two lovers falling headover-heels for one another. Whereas, the conjugal partnership of
gains or the absolute community of property regime exemplifies
spouses wishing to share most if not all with one another
confirming their romantic fervor. On the other hand, in a situation
where spouses who before or at the time they say their “I do’s”
would be so cold-hearted and unromantic to pause and stipulate
complete separation of property, or who during marriage would
be cold-blooded as to agree and seek court separation of their
properties, clearly indicates that it would be unlikely that one
spouse would allow the other spouse to influence him or her; or
would allow his or her properties to be involved in a suit covering
the creditors of the other spouse. After all, if a spouse takes time
and effort to insulate his or her properties from the other spouse,
why would he or she later on involve himself or herself in the
fraudulent manipulations of the other spouse, and consequently
open himself or herself (as well as his or her separate properties)
to suits by creditors for fraud and recovery of damages?
But even the foregoing explanation does not adequately
cover a situation where a dominant spouse would insist upon
the complete separation of property regime, either at the time of
the execution of the marriage settlements, or by judicial action
during marriage, precisely to venture upon a future course of
defraudation or being in a position to defraud either his weaker
spouse or his separate creditors. In the end, the absolute
prohibition under Article 133, now Article 87 of the Family Code,
on donations between spouses, should also be made to apply to
sales between spouses, irrespective of their property regime.
3. Applicability of Incapacity to Common Law Spouses
In Matabuena v. Cervantes,38 the Court was asked to decide
the issue of whether the ban in Article 133 of the Civil Code on
a donation between the spouses during a marriage applies to a
common-law relationship. In that case, the sister of the deceased
common-law husband, sought to annul the previous donation by
the deceased during his lifetime to his then common law spouse,
38
38 SCRA 284 (1971).
PARTIES OF A SALE
53
although the two subsequently married thereafter. Today, that
would no longer be an issue because of the all-inclusive coverage
under Article 87 of the Family Code to those living as husband
and wife without the benefit of a valid marriage.
The Court held the donation to be void, although Article
133 of the Civil Code considers as void a “donation between the
spouses during the marriage.” It held that “[i]f the policy of the law
. . . is to ‘prohibit donations in favor of the other consort and his
descendant because of fear of undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient
law . . . then there is every reason to apply the same prohibitive
policy to persons living together as husband and wife without the
benefit of nuptials. For it is not to be doubted that assent to such
irregular connection . . . bespeaks greater influence of one party
over the other, so that the danger that the law seeks to avoid
is correspondingly increased.”39 In addition, the Court held that
“[s]o long as marriage remains the cornerstone of our family law,
reason and morality alike demand that the disabilities attached to
marriage should likewise attach to [common-law relationship].”40
In 1984, in Calimlim-Canullas v. Fortun,41 the Court gave
formal imprimatur to the rationale of Matabuena being applied
to sales by ruling that sales between common-law spouses are
void; that Article 1409 of the Civil Code declares such contracts
void as being contrary to morals and public policy, and not only
because Article 1352 declares them void for having an unlawful
cause, but specifically because Article 1490 prohibits sales
between spouses. The Court gave the following reasoning for its
ruling:
And this is so because if transfers or conveyances
between spouses were allowed during marriage, that
would destroy the system of conjugal partnership,
a basic policy in civil law. It was also designed to
prevent the exercise of undue influence by one spouse
over the other, as well as to protect the institution of
marriage, which is the cornerstone of family law. The
Ibid, at pp. 287-288.
Ibid, at p. 288.
41
129 SCRA 675 (1984).
39
40
54
LAW ON SALES
prohibition apply (sic) to a couple living as husband
and wife without the benefit of marriage, otherwise, “the
condition of those who incurred guilt would turn out to
be better that those in legal union.” Those provisions
are dictated by public interest and their criterion must
be imposed upon the will of the parties.42
Calimlim-Canullas ruling was reiterated in Cruz v. Court of
Appeals,43 but which held that “[a]lthough under Art. 1490 the
husband and wife cannot sell property to one another as a rule
which, for policy consideration and the dictates of morality require
that the prohibition apply to common-law relationship,”44 but that
when registered property has been conveyed subsequently to a
third-party-buyer in good faith and for value, then reconveyance
is no longer available to common-law spouse, since under the
Torrens system every buyer has a right to rely upon the title of his
immediate seller.
SPECIFIC INCAPACITY MANDATED BY LAW
Article 1491 of the Civil Code prohibits the following persons
from entering into contracts of sale under the circumstances
covered therein:
(a) Agent, with respect to the property whose
administration or sale may have been
entrusted to him, unless the consent of the
principal has been given;
(b) Guardian, with respect to the property of
the person who is under his guardianship;
(c) Executor or administrator, with respect to
the property of the estate under his administrations;
(d) Public officers and employees, with respect
to property of the State or any subdivision
thereof, or of any government-owned or
Ibid, at p. 680.
281 SCRA 491 (1997).
44
Ibid, at p. 495.
42
43
PARTIES OF A SALE
55
controlled corporation, or institution, the
administration of which has been entrusted
to them; it includes judges and government
experts who, in any manner whatsoever,
take part in the sale;
(e) Justices, judges, prosecuting attorneys,
clerks of courts, and other officers and
employees connected with the administration of justice, with respect to the
property and rights in litigation or levied
upon an execution before the court within
whose jurisdiction or territory they exercise
their respective functions; and
(f) 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.
The above-enumerated relative incapacities are, under
Article 1492, made to apply to sales in legal redemption,
compromises and renunciations, confirming the policy that what
cannot be done directly, cannot be done by indirection.
1. Legal Status of Contracts Entered Into In
Violation of Articles 1491 and 1942
Based on the wordings of Article 1491, only purchases made
by agents of the property covered by the agency are valid and
binding when made with the express consent of their principals;45
and no such exception is granted in all the other instances covered
by said article.46 That would also mean that, apart from the case
of the agents, in all cases covered under Article 1491, consent or
knowledge by the persons who is sought to be protected by the
law, cannot validate any of the transactions covered.
45
The prohibition against an agent purchasing property in his hands for sale or
management is however, clearly not absolute. When so authorized by the principal, the
agent is not disqualified from purchasing the property he holds under a contract of agency
to sell. Olaguer v. Purungganan Jr., 515 SCRA 460 (2007).
46
See Distajo v. Court of Appeals, 339 SCRA 52 (2000).
56
LAW ON SALES
Article 1491 does not also state the legal consequences
of having entered into contracts in violation of said article,
i.e., it does not state expressly that the resulting contracts are
“void.” In the 1911 case of Wolfson v. Estate of Martinez,47
the Court held that the sale’s “voidability can not be asserted
by one not a party to the transaction or his representative,”48
that “considering the question from the point of view of the
civil law, the view taken by the code, we must limit ourselves
to classifying as void all acts done contrary to the express
prohibition of the statute. Now then as the code does not
recognize such nullity by the mere operation of law, the
nullity of the acts hereinbefore referred to must be asserted
by the person having the necessary legal capacity to do so
and decreed by a competent court.”49 In other words, Wolfson
had classified such contracts as being merely voidable or
annullable, and not void. Later, in Director of Lands v. Abagat,50
covering the purchase by a lawyer of the property of his client
under litigation, the Court cited two precedent cases decided
in Spain holding such a contract as merely “invalid.”
In Rubias v. Batiller,51 the Court discussed why it became
necessary in Philippine jurisdiction to abandon Manresa’s position
and consider such contracts as void, and not merely voidable,
thus:
The reason thus given by Manresa in considering
such prohibited acquisitions under Article 1459 of the
Spanish Civil Code as merely voidable at the instance
and option of the vendor and not void — “that the Code
does not recognize such nullity de pleno derecho” — is
no longer true and applicable to our own Philippine
Civil Code which does recognize the absolute nullity of
contracts “whose cause, object, or purpose is contrary
to laws, morals, good customs, public order or public
policy” or which are “expressly prohibited or declared
20 Phil. 340 (1911).
Citing Manresa Vol. 10, p. 108.
49
Ibid, at p. 343.
50
53 Phil. 147 (1929).
51
51 SCRA 120 (1973).
47
48
PARTIES OF A SALE
57
void by law” and declares such contracts “inexistent
and void from the beginning.”52
In addition, Rubias held that even the Supreme Court of
Spain and modern authors have likewise veered away from
Manresa’s view of the Spanish codal provision itself, holding that
since the provision is based on public policy, that violation of the
prohibition cannot be validated by confirmation or ratification.53 It
adopted Castan’s rationale for his conclusion “that fundamental
considerations of public policy render void and inexistent such
expressly prohibited purchase (e.g., by public officers and
employees of government property intrusted [sic] to them and
by justices, judges, fiscals and lawyers of property and rights
in litigation submitted to or handled by them, under Art. 1492,
paragraphs [4] and [5] of our Civil Code) has been adopted in
a new article of our Civil Code, viz., Art. 1409 declaring such
prohibited contracts as ‘inexistent and void from the beginning.”54
Rubias therefore holds that a purchase by a lawyer of
property of a client in litigation, in which the purchasing lawyer
appeared as counsel of record, “was void and could produce no
legal effect, by virtue of Article 1409(7) of our Civil Code which
provides that contracts ‘expressly prohibited or declared void by
law’ are ‘inexistent and void from the beginning’ and that ‘(t)hese
contracts cannot be ratified. Neither can the right to set up the
defense of illegality be waived.’”55
a. A Different Form of “Ratification”
Rubias, however, sought to declare a difference in the state of
“nullity” between prohibited contracts entered into by guardians,
agents, administrators and executors, from those entered into by
judges, judicial officers, fiscals and lawyers, thus —
In this aspect, the permanent disqualification
of public and judicial officers and lawyers grounded
on public policy differs from the first three cases of
Supra, at p. 133.
Supra, at pp. 133-134.
54
Supra, at p. 135.
55
Supra, at pp. 130-131.
52
53
58
LAW ON SALES
guardians, agents and administrators (Art. 1491, Civil
Code), as to whose transactions, it has been opined
that they may be “ratified” by means of and in “the form
of a new contract, in which case its validity shall be
determined only by the circumstances at the time of
execution of such new contract. The causes of nullity
which have ceased to exist cannot impair the validity
of the new contract. Thus, the object which was illegal
at the time of the first contract, may have already
become lawful at the time of the ratification or second
contract; or the service which was impossible may
have become possible; or the intention which could not
be ascertained may have been clarified by the parties.
The ratification or second contract would then be valid
from its execution; however, it does not retroact to the
date of the first contract.”56
The functional difference between the two groups of
contracts declared void under Article 1491, is that in the first
group after the inhibition has ceased, the only real wrong that
subsists is the private wrong to the ward, principal or estate; and
therefore, if private parties wish to condone the private wrongs
among themselves, the State would not stand in the way. When
it comes to the second group, however, even when the inhibition
has ceased, there exists not only the private wrong, but in fact
a public wrong, which is damage to public service or to the high
esteem that should be accorded to the administration of justice
in our society. Therefore, in the second group, even when the
private parties seek to “ratify” the private wrong by executing a
new contract between themselves when the inhibition no longer
exists, such cannot resurrect and validate a relationship, which
continues to be tainted with a public wrong. As the policy goes,
private parties cannot ratify or compromise among themselves
matters contrary to public interests.
What remains at issue with respect to the “ratification” by
the execution of a “new contract” in the cases of purchases by
the guardian, agent, administrator or executor, is whether such
ratification involves only a new meeting of the minds with respect
56
Ibid., at pp. 135-136.
PARTIES OF A SALE
59
to the same subject matter and the same price, or it would require
in addition the payment of a new price or consideration as part
of the new meeting of the minds when the inhibition no longer
prevails. These are issues yet to be addressed by the Court.
b. Proper Party to Raise Issue of Nullity
Rubias quoted Tolentino in discussing who would be the
proper parties who could raise the nullity of contracts entered into
in violation of Article 1491, stating that “[A]ny person may invoke
the inexistence of the contract whenever juridical effects found
thereon are asserted against him,”57 and that “If the contract
has already been fulfilled, an action is necessary to declare its
inexistence since nobody can take the law into his own hands
and thus the intervention of the competent court is necessary
to declare the absolute nullity of the contract and to decree the
restitution of what has been given under it. If the contract is still
fully executory, no party need bring an action to declare its nullity;
but if any party should bring an action to enforce it, the other
party can simply set up the nullity as defense.”58
c. Fraud or Lesion Not Relevant for Nullity
The existence of fraud or lesion is not a factor at all in the
application of the prohibitions covered by Article 1491, and the
proof that the person disqualified has paid more than an adequate
consideration for the property he purchased is no defense in an
action to declare the sale void.
The rationale for the absolute disqualifications set by
Article 1491, is in line with “the general doctrine that each
of [such relationships] is a trust of the highest order, and the
trustee cannot be allowed to have any inducement to neglect
his ward’s interest;” and therefore to avoid “[t]he temptation
which naturally besets a [person holding such a fiduciary
position] so circumstanced, necessitates the annulment of the
transaction.”59
Supra, at p. 136 quoting from TOLENTINO, Vol. IV, pp. 578-579.
Idem.
59
Philippine Trust Co. v. Roldan, 99 Phil. 392 (1956).
57
58
60
LAW ON SALES
Even in situations where the purchase by a disqualified
person under Article 1491 had received approval by the court
as in the case of probate court approving the purchase by the
administrator or executor, the sale would still be void.60
2. Agents
“Brokers” do not come within the coverage of the prohibition
as their authority consist merely in looking for a buyer or a seller,
and to bring the former and the latter together to consummate the
transaction; therefore, they are not prohibited to buy for themselves.
As held in Schmid & Oberly v. RJL Martinez Fishing Corp.,61 “[a]
broker is generally defined as one who is engaged, for others, on
a commission, negotiating contracts relative to property with the
custody of which he has no concern; the negotiation between other
parties, never acting in his own name but in the name of those who
employed him; he is strictly a middleman and for some purpose
the agent of both parties. ... A broker is one whose occupation it
is to bring parties together to bargain, or to bargain for them, in
matters of trade, commerce or navigation.”62
3. Guardians, Administrators and Executors
Guardians, administrators and executors are necessarily
officers of the courts since they are appointed or confirmed to
such position pursuant to judicial proceedings.
In Philippine Trust Co. v. Roldan,63 the court-appointed
guardian had filed a motion with the trial court for authority to
sell as guardian the parcels of land of the ward for the purpose
of being able to invest the proceeds for a residential house for
the ward. When the court authority was granted, the guardian
60
Modina v. Court of Appeals, 317 SCRA 696, 707 (1999): “This does not constitute
an interference or review of the order of a co-equal court since the probate court has
no jurisdiction over the question of title to subject properties. Consequently, a separate
action may be brought to determine the question of ownership.”
61
166 SCRA 493 (1988).
62
Ibid, at p. 501, quoting from Behn, Meyer and Co., Ltd. v. Nolting and Garcia, 35
Phil. 274, 279-80 (1916).
63
99 Phil. 392 (1956).
PARTIES OF A SALE
61
sold the parcels of land in favor of her brother-in-law in the sum
approved by the court. The guardian subsequently asked for
and was granted judicial confirmation of the sale. Immediately
thereafter, the brother-in-law sold the same parcels of land to the
guardian. The Philippine Trust Co., which became the substitute
guardian, brought an action to annul the contract, on the ground
that the prohibition under the Civil Code prevented the guardian
from purchasing “either in person or through the mediation of
another.”
In the earlier case of Rodriquez v. Mactal,64 the Court held that
the prohibition under the Civil Code cannot be made to apply unless
there was proof that a third-party buyer was a mere intermediary
of the guardian, or that the latter had previously agreed with the
third-party buyer to buy the property for the disqualified guardian.
In Philippine Trust Co., the Court abandoned such doctrine and
held that even without such proof, the sale can be rescinded:
“Remembering the general doctrine that guardianship is a trust
of the highest order, and the trustee cannot be allowed to have
any inducement to neglect his ward’s interest and in line with
the court’s suspicion whenever the guardian acquires the ward’s
property,” the Court held that the re-sale of the parcels of land to
the guardian herself, should be declared void.
Philippine Trust Co. shows that even a court-approved sale
would not stand against the inhibition provided by Article 1491.
There were discussions in the decision of the proof sought
to be shown by the guardian that the transaction benefited the
ward; however, the Court disproved such benefit and showed
that the “minor was on the losing end.” It therefore decreed that
“from both the legal and equitable standpoints these three sales
should not be sustained.”65
These statements of the Court in Philippine Trust Co.
bring up the issue of whether proof of advantage or benefit to
the ward, estate or the principal, would be sufficient basis to
take the transaction out of the prohibition of Article 1491. The
64
65
60 Phil. 13 (1934).
60 Phil. 13 (1934).
62
LAW ON SALES
author believes that any matter relating to advantage or benefit
is wholly irrelevant under Article 1491, which by clear language
imposes an absolute disqualification on the persons stated
therein occupying fiduciary positions. To imply otherwise, would
indeed open the floodgates to abuse, as it would be very easy for
such persons to justify gain or advantage on the part of the ward,
estate or principal whom they represent. Precisely to avoid such
temptation and quibbling, Article 1491 has entirely shut the door
to such persons occupying fiduciary positions, to even desire to
acquire, directly or indirectly, properties of their ward, estate or
principal, as the case may be.
a. Hereditary Rights Not Included in Coverage
Prescinding from the doctrine of Philippine Trust Co., it is
hard to accept the earlier ruling in Naval v. Enriquez,66 which held
that hereditary rights are not included in the prohibition insofar
as the administrator or executor of the estate of the deceased.
Although strictly the legal reasoning of Naval is correct in that
hereditary rights pertain immediately to the heirs upon the death
of the decedent and do not form part of the estate under the
administration of the administrator or executor; nevertheless,
from both the practical and equity points of view, such hereditary
rights derive their value only from the assets that constitute the
estate of the decedent, which is clearly within the fiduciary control
of the administrator or executor.
If an administrator or executor were not disqualified from
purchasing or having interests in the hereditary rights, once he
validly acquires any of such hereditary rights from any of the
heirs, such administrator or executor would already be in clear
conflict-of-interests situation, or that in fact he may even use his
fiduciary position to compel or convince the remaining heirs to
sell or assign their hereditary rights to him.
Besides, the language and spirit of Article 1492 would
embrace within the prohibition under Article 1491 personal
dealings of administrators and executors on the hereditary rights
of the heirs.
66
3 Phil. 669 (1904).
PARTIES OF A SALE
63
4. Judges, Justices and Those Involved
in Administration of Justice
The early case of Gan Tingco v. Pabinguit,67 clarified that
for the prohibition under Article 1491 to apply to judges, it is not
required that some contest or litigation over the property itself
should have been tried by the said judge; such property is in
litigation from the moment that it became subject to the judicial
action of the judge, such as levy on execution.
Macariola v. Asuncion,68 held that the doctrine that prohibition
under Article 1491 is “applicable only during the period of
litigation,” should cover not only lawyers, but judges as well. In
that case, the presiding judge, through a corporation of which he
was a stockholder, acquired pieces of land, which previously had
been part of a partition case finally decided by him. The Court
in exonerating the judge from the provisions of Article 1491 held
that since the particular provision relating to judges covered only
“property and rights in litigation” said that the article applies only
to the sale or assignment of the property under litigation, which
must take place “during the pendency of the litigation involving the
property.”69 Nevertheless, the judge was held liable for violating
the canons of judicial ethics.
5. Attorneys
Valencia v. Cabanting,70 explained the reason for the
disqualification as it applies to lawyers in this wise: “Public
policy prohibits the transactions in view of the fiduciary
relationship involved. It is intended to curtail any undue influence
of the lawyer upon his client. Greed may get the better of the
sentiments of loyalty and disinterestedness. Any violation of this
prohibition would constitute malpractice ... and is a ground for
suspension.”71
35 Phil. 81 (1916).
114 SCRA 77 (1982).
69
Ibid, at p. 92, citing The Director of Lands v. Ababa, 88 SCRA 513, 519 (1979).
See also Rosario Vda. de Laig v. Court of Appeals, 86 SCRA 641, 646 (1978).
70
196 SCRA 302 (1991).
71
Ibid, at p. 307, citing In re Attorney Melchor Ruste, 40 O.G. p. 78; Beltran v.
Fernandez, 70 Phil. 248 (1940).
67
68
64
LAW ON SALES
In Rubias v. Batiller,72 the facts proven showed that the
plaintiff’s claim of ownership over the disputed land was predicated
on his purchase made in 1956 from his father-in-law at a time
when the latter’s application for registration there had already
been dismissed by the land registration court and was pending
appeal in the Court of Appeals. He was therefore disqualified
under Article 1491 from purchasing such property since he was
the counsel of record of the applicant, even though the case was
pending appeal. The Court declared that “The nullity of such
prohibited contracts is definite and permanent and cannot be
cured by ratification. The public interest and public policy remain
paramount and do not permit of compromise or ratification.”73
In Gregorio Araneta, Inc. v. Tuason de Paterno,74 it was held
that the prohibition under Article 1491 applies only to attorneys
when the property they are buying is the subject of litigation, and
does not apply to a sale to attorneys who were not the defendant’s
attorneys in that case. In Del Rosario v. Millado,75 the Court also
held that the prohibition does not apply to a lawyer who acquired
the property prior to the time he intervened as counsel in an
ejectment suit involving such property.
In one case,76 the Court held that the prohibition applies
only to sale to a lawyer who in fact represented the client in the
particular suit involving the object of the sale, and cannot cover
the assignment of the property given in judgment made by a
client to an attorney, who has not taken part in the case wherein
said judgment was rendered, made in payment of professional
services in other cases. In another case,77 it was held that the
prohibition does not apply to the sale of a parcel of land, acquired
by a client to satisfy a judgment in his favor, to his attorney as
long as the property was not the subject of the litigation.
Also, the prohibition applies only during the period the
litigation is pending.78 However, when there is a certiorari
51 SCRA 120 (1973).
Ibid, at p. 135.
74
49 O.G. 45 (1952).
75
26 SCRA 700 (1969).
76
Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).
77
Daroy v. Abecia, 298 SCRA 172 (1998).
78
Director of Lands v. Ababa, 88 SCRA 513 (1979).
72
73
PARTIES OF A SALE
65
proceeding still pending, although the subject property is the
subject of a final judgment, the disqualification still applies,
and the purchase by the lawyer during the pendency of the
certiorari proceedings would constitute malpractice in violation
of Article1491 and the canons of professional ethics.79
a. Contingent Fee Arrangements
Recto v. Harden,80 held that the prohibition under Article
1491 does not apply to a contingent fee based on the value of
property involved in litigation and therefore does not prohibit a
lawyer from acquiring a certain percentage of the value of the
properties in litigation that may be awarded to his client.
Vda. de Laig v. Court of Appeals,81 held that the agreement
on contingent fee based on the value of the property involved is
not prohibited since the payment of said fee is not made during
the pendency of the litigation but only after judgment has been
rendered in the case handled by the lawyer.
Director of Lands v. Ababa,82 recognized that contingent fee
arrangement is recognized under Canon 13 of the Canons of
Professional Ethics, as an exception to Canon 10 thereof which
prohibits a lawyer from purchasing any interest in the subject
matter of the litigation which he is conducting. But it recognized
that a contingent fee contract is always subject to the supervision
of the courts with respect to the stipulated amount and may be
reduced or nullified; so that in the event that there is any undue
influence or fraud in the execution of the contract or that the fee
is excessive, the client is not without remedy because the court
will amply protect him.
In excluding contingent fee arrangement from the coverage
of Article 1491, even when the very terms of the arrangement
would grant to the lawyer an interest in the property subject of
the litigation, Ababa held: “A contract for a contingent fee is not
covered by Article 1491 because the transfer or assignment of
Valencia v. Cabanting, 196 SCRA 302 (1991).
100 Phil. 427 (1956).
81
86 SCRA 641 (1978).
82
88 SCRA 513 (1979).
79
80
66
LAW ON SALES
the property in litigation takes effect only after the finality of a
favorable judgment. In the instant case, the attorney’s fees . . .
consisting of one-half (1/2) of whatever [the client] might recover
from his share in the lots in question, is contingent upon the
success of the appeal. Hence, the payment of the attorney’s fees,
that is, the transfer or assignment of one-half (1/2) of the property
in litigation will take place only if the appeal prospers. Therefore,
the transfer actually takes effect after the finality of a favorable
judgment rendered on appeal and not during the pendency of
the litigation involving the property in question. Consequently, the
contract for a contingent fee is not covered by Article 1491.”
In Fabillo v. Intermediate Appellate Court,83 the Court justified
excluding contingency fee arrangement from the coverage of
Article 1491 “because the payment of said fee is not made during
the pendency of the litigation but only after judgment has been
rendered in the case handled by the lawyer. In fact, under the
1988 Code of Professional Responsibility, a lawyer may have
a lien over funds and property of his client and may apply so
much thereof as may be necessary to satisfy his lawful fees and
disbursements.”84
However, immediately Fabillo drew the following limitations
on contingency fee arrangements: “As long as the lawyer does
not exert undue influence on his client, that no fraud is committed
or imposition applied, or that the compensation is clearly not
excessive as to amount to extortion, a contract for contingent fee
is valid and enforceable.”85 But precisely, these are the burdens
that Article 1491 intends to avoid.
If we pin-down the core of reasoning in Ababa and Fabillo,
it would not justify exclusion contingency fee arrangement from
Article 1491 coverage on the basis of the improbability of the use
of undue influence by the lawyer on the judgment of his client,
but rather on the timing of the effectivity of the obligation to pay
attorney’s fees. In fact, Ababa follows to incongruous end the
“pendency of litigation” doctrine which states that the restriction
195 SCRA 28 (1991).
Ibid, at p. 35.
85
Ibid, at pp. 35-36, citing Ulanday v. Manila Railroad Co., 45 Phil. 540. (1923).
83
84
PARTIES OF A SALE
67
under Article 1491, as it applies to lawyers cover only the period
during which the property is still subject to litigation. Ababa thus
held that since a contingent fee arrangement is demandable
only by its nature after the termination of litigation incident on the
property subject to litigation, then it is not covered “by the during
the pendency of litigation” doctrine.
Precisely, the “pendency of litigation” doctrine is sound mainly
because when litigation has finally been terminated, and the client
legally and practically is no longer at the mercy of his lawyer,
negotiation and bargaining between the lawyer and the client on
the property that was the subject of litigation would be on armslength basis, and no undue influence can be exercised anymore
by the lawyer on the client. A contingency fee arrangement,
although effective and demandable only after litigation, may in
fact be negotiated and bargained for between the lawyer and the
client during the pendency of litigation, a period in which the lawyer
would exercise moral and professional influence over his client,
and therefore would rightly be covered by Article 1491.
After all, a contingency fee arrangement is simply an
obligation subject to a suspensive condition. If it is void and
against public policy for a lawyer to purchase the property
of his client under litigation, does the purchase become less
reprehensible, if not void, just because the purchase is made
subject to the suspensive condition that the client should win the
case and effective only after litigation has ended? It would not
seem so with the positive and clear language of Article 1491.
Why then are contingent fee arrangements that directly
grant to the lawyer a proprietary interest in the property of his
client that is the subject of litigation so sacrosanct that the
Supreme Court would exempt them from what seems to be
unyielding provision of Article 1491? Certainly, not because
contingent fee arrangements are recognized in the Canons of
Professional Ethics, since the canons cannot override a direct
statutory provision. Perhaps, aside from the fact that the Court
is composed of members who necessarily are members of the
legal profession and subconsciously have turfs to protect, a
contingency fee arrangement actually puts two negotiators toe-
68
LAW ON SALES
to-toe who are both handicapped, so that one cannot rightly say
that the other occupies a superior or advantageous position as to
the other: the client is disadvantaged by the fact that he must rely
on the lawyer for the legal assessment of the case and the legal
battle that must be fought; and the lawyer, by the fact that he is
actually taking a risk since by the contingent fee arrangement
he really would get nothing for all his efforts and trouble, by the
loss of the case. It may be a case of two handicapped persons
venturing together into the unknown, or at least the uncertain.
Also the Court is faced with a public policy issue of allowing
pauper litigants to be ably represented before the courts for
their just claims. Without a contingency fee arrangement, even
one that grants to the lawyer a proprietary claim on the subject
matter of litigation, many otherwise meritorious causes of action
would never find competent legal representation. As Ababa held:
“Contracts of this nature are permitted because they redound to
the benefit of the poor client and the lawyer ‘especially in cases
where the client has meritorious cause of action, but no means
with which to pay for legal services unless he can, with the
sanction of law, make a contract for a contingent fee to be paid
out of the proceeds of the litigation.’”86 But even that reasoning
only supports a contingency fee arrangement in general, and
does not justify a particular contingency fee arrangement that
directly grants to the lawyer proprietary interests in the property
subject of litigation. Indeed, the same public policy can still be
achieved by allowing contingency fee arrangement that allows
the lawyer a percentage of the “value” of the property in litigation,
which is essentially still a monetary claim with the property
subject of litigation not being sold or assigned to the lawyer, but
as a measure to determine the value of the attorney’s fee.
In addition, the Court deems itself solicitous when it comes
to contingency fee arrangement, since lawyers are officers of the
courts, whose actuations are always subject to court supervision,
and that contingency fee arrangement are not just contracts, and
are always subject to the courts’ discretionary review to ensure
that clients are protected from over-bearing lawyers. As held
86
Supra, at p. 525.
PARTIES OF A SALE
69
in Fabillo, “the time-honored legal maxim that a lawyer shall at
all times uphold the integrity and dignity of the legal profession
so that his basic ideal becomes one of rendering service and
securing justice, not money-making. For the worst scenario that
can ever happen to a client is to lose the litigated property to his
lawyer in whom all trust and confidence were bestowed at the
very inception of the legal controversy.”87
Perhaps the only true justification is what Ababa held
that: “Finally, a contingent fee contract is always subject to the
supervision of the courts with respect to the stipulated amount and
may be reduced or nullified. So that in the event that there is any
undue influence or fraud in the execution of the contract or that
the fee is excessive, the client is not without remedy because the
court will amply protect him.”88 But even then such a safeguard is
also present with respect to the prohibited contracts entered into
by guardians, administrators or executors, who are also court
officers, and yet jurisprudence does not allow exception to their
contracts.
The final issue to tackle is why a contingency fee
arrangement, which essentially is a contract for service, is to
be governed at all by Article 1491 which covers only contracts
of sale? The resolution of this issue rightfully brings into focus
the ruling of the Supreme Court, discussed in the next chapter,
that the Law on Sales is a “catch-all” provision engulfing within
its operations all onerous contracts which have within their
coverage the transfer of ownership and delivery of possession
of a thing. Although a contingency fee arrangement has for its
main subject matter the service of the lawyer, nevertheless when
the consideration for such service allows the lawyer to obtain
ownership and possession of the client’s property in litigation, the
Court does not hesitate to apply Article 1491 prohibitions to test
the validity of such an arrangement.
—oOo—
87
88
Supra, at p. 37.
Supra, at p. 525.
70
LAW ON SALES
CHAPTER 3
SUBJECT MATTER
REQUISITES OF VALID SUBJECT MATTER
A valid contract of sale would result from the meeting of the
minds of the parties on a subject matter that has at the time of
perfection the following requisites:
(a) It must be existing,1 having potential existence,2 a future thing,3 or even contingent4
or subject to a resolutory condition;5 in other
words, it must be a “POSSIBLE THING;”
(b) It must be LICIT;6 and
(c) It must be DETERMINATE
DETERMINABLE.7
or
at
least
a. Lack of Any Requisite Results in Non-existent Sale
When the subject matter agreed upon fails to meet the
requisites above-enumerated, the situation would either engender
a “no contract” situation, or the resulting contract of sale would
be void under various cases provided under Article 1409 of the
Civil Code.
The issue of whether there is a void contract, is important
in considering the applicability of doctrines that pertain to void
contracts (e.g., no remedy can be maintained, and courts
generally leave the parties where they are), which would have
Art. 1462, Civil Code.
Art. 1461, Civil Code.
3
Art. 1462, Civil Code; also Art. 1347 of the Civil Code.
4
Art. 1462, Civil Code.
5
Art. 1465, Civil Code.
6
Art. 1459, Civil Code.
7
Art. 1460, Civil Code.
1
2
70
SUBJECT MATTER
71
no application in a situation where the subject matter in a sale
does not fulfill a requisite. Consequently, in case of payment of
the agreed price, in a “no contract” situation the buyer can still
recover the amount based on the principle of “unjust enrichment.”
Article 1411 provides that only when the nullity of the contract
proceeds from the illegality of the cause or object of the contract,
and the act consitutes a criminal offense, both parties being in
pari delicto, would the parties have no cause of action against
each other; otherwise, the innocent one may claim what he has
given, and shall not be bound to comply with his promise.
On the other hand, under Article 1412, when the act does
not constitute a criminal offense, the following rules shall apply:
(a) When the fault is on the part of both
contracting parties, neither may recover
what he has given by virtue of the contract,
or demand the performance of the other’s
undertaking;
(b) When only one of the contracting parties
is at fault, he cannot recover what he has
given by reason of the contract or ask, for
the fulfillment of what has been promised
him; but the one, who is not at fault, may
demand the return of what he has given
without any obligation to comply with his
promise.
Finally, Article 1416 provides that when the contract is not
illegal per se but is merely prohibited, and the legal prohibition is
designed for the protection of the plaintiff, he may, if public policy
is thereby enhanced, recover what he has paid or delivered.
There is enough legal basis to posit that even when the first
requisite for a valid subject matter is not present (i.e., must be a
possible thing), there is no inequity to finding the resulting contract
of sale as void (as distinguished from a “no contract” situation),
because the innocent party may still be able to recover under the
72
LAW ON SALES
principle of unjust enrichment. Thus, in one case,8 the Supreme
Court held that when a contract of sale that has been performed
is declared void, then restoration of what has been given is in
order, since the relationship between parties in any contract
even if subsequently voided must always be characterized and
punctuated by good faith and fair dealing.
b. Legal Requisites of Subject Matter Intended to
Govern Underlying Obligations of Seller
In discussing the statutorily-mandated requisites of what
constitutes a “valid” subject matter of sale, the underlying policy
is really to safeguard the realizability and enforceability of the
primary obligations of the seller to transfer the ownership, and
deliver the possession, of the subject matter. For essentially, at
perfection, what a valid sale is able to legally effect is not the
delivery of the subject matter but the constitution of the obligation
of the seller to deliver, coupled with the right of the buyer to
demand specific performance of such obligation.
1. Subject Matter Must Be “Possible Thing”
The first requisite of a valid subject matter provides
that the thing may be existing or non-existing at the time of
perfection of the contract of sale. Article 1461 of the Civil Code
explicitly states that “[t]hings having a potential existence
may be the object of the contract of sale.” In addition, the
second paragraph of Article 1462 provides that “[t]here may
be a contract of sale of goods, whose acquisition by the seller
depends upon a contingency which may or may not happen,”
which clearly shows that a valid contract of sale may exist
even if at the time of its perfection, the seller was not even the
owner of the thing sold.
Considering that the essence of a “requisite” is to set
something apart from the rest, it would then seem that the first
requisite, may not really be a requisite because it practically
covers any and all situations (i.e., existing and non-existing
things). What further complicates the situation is the provision
8
Delos Reyes v. Court of Appeals, 313 SCRA 632 (1999).
SUBJECT MATTER
73
in Article 1409(3) of the Civil Code which holds that contracts
“whose cause or object did not exist at the time of the transaction”
are deemed inexistent and void from the beginning.
The proper consideration of the first requisite, if it is
to have a legal significance, is to consider it not in terms of
physical existence or non-existence or whether the seller had
or did not have ownership thereof at the time of perfection, but
whether the subject matter is of a type and nature, taking into
consideration the state of technology and science at the time the
sale is perfected, that it exists or could be made to exist to allow
the seller reasonable certainty of being able to comply with his
obligations under the contract. For example, if a seller were to
sell a particularly described chair, which at the time of the meeting
of the minds, did not yet exist, the contract of sale is valid and
enforceable, because the nature of the subject matter, is of such
a type and nature that it can be manufactured and could come
into existence.
On the other hand, if the seller were to sell a formula for
a potion which would make the buyer forever young, in spite
of the fact that the seller may be a scientist, the sale would be
considered void, since the subject matter thereof, at least under
current technological and scientific developments, is something
that could not exist.
The concepts perhaps are best embodied in the terms
“possible things” as contrasted from “impossible things.” Thus,
when the existence of a thing is subject to a condition, then it
remains a “possible thing”, for it has the capacity, not certainty,
of coming into existence if subject to a suspensive condition, or
it already exists but may or may cease to exist if it is subject
to a resolutory condition. Thus, Article 1462 of the Civil Code
provides that in the sale of “goods,” the subject matter may either
be 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 (called “future goods”); and
there may even be sale of goods, whose acquisition by the seller
depends upon a contingency which may or may not happen.
Article 1465 provides that the subject matter of a sale may be
subject to a resolutory condition.
74
LAW ON SALES
Under Article 1409(3), contracts are inexistent and void
from the beginning when “the cause or object did not exist at the
time of the transaction.” The literal application of this particular
provision is not warranted in contracts of sale since under Article
1458, as it defines the contract, a sale exists by virtue of the fact
that an obligation “to transfer the ownership of and to deliver a
determinate thing,” is assumed by the seller; thus, whether such
an obligation exists or not, and not the existence of the subject
matter, is the essence of sale, especially since sale is not a real,
but a consensual contract.
Even when the subject matter does not exist at the time
of perfection of the sale, the contract is still valid under Articles
1461 and 1409(3); however, when the subject matter is of such
nature that it cannot come to existence — an impossible thing
— the contract is indeed void. This position is supported also
by other provisions of the Civil Code applicable to contracts in
general. Under Article 1347, all things which are not outside the
commerce of men, “including future things,” may be the object of
a contract.
Requiring that the proper subject of a valid sale is a possible
thing would ensure demandability and enforceability of the
underlying obligation of the seller to deliver. This rationale for
the first requisite is confirmed by the fact that it is not part of
the requisites of a valid subject matter, at the time of perfection,
that the seller be the owner of the subject matter thereof. Under
Article 1459 of the Civil Code, it is only required that the seller
“must have a right to transfer the ownership thereof at the time
[the subject matter] is delivered.” The rule supports the principle
that a sale constitutes merely a title and not a mode, and its
perfection does not per se affect the title or ownership over the
subject matter thereof.
Consequently, when the first requisite does not exists as to
the subject matter (i.e., it is an impossible thing), the resulting
contract of sale would be void and is consistent with the injunction
provided in Article 1409(3) of the Civil Code when it provides for
void contracts: “Those whose cause or object did not exist [i.e.,
impossible things] at the time of the transaction.”
SUBJECT MATTER
75
a. Emptio Rei Speratae
Under Article 1461, things having a potential existence may
be the object of the contract of sale; however, such a sale is
subject to the condition that the thing will come into existence.
Therefore, a sale emptio rei speratae is strictly a contract
covering future things, and subject to a suspensive condition
that the subject matter will come into existence. If the subject
matter does not come into existence, as in the case of conditional
obligations, the contract is deemed extinguished “as soon as
the time expires or if it has become indubitable that the event
will not take place.”9
Necessarily also, an emptio rei speratae covers only
contracts of sale whose subject matter are determinate or
specific, and has no application to determinable generic things
since the condition that they must come into existence is wholly
irrelevant, for generic subject matters are never lost.
In Sibal v. Valdez,10 the Court held that pending crops which
have potential existence may be the valid subject matter of sale,
and may be dealt with separately from the land on which they
grow.
In Pichel v. Alonzo,11 where the issue was whether
the grantee of a public land under the Public Land Act had
violated the statutory prohibition from disposing, assigning or
encumbering the land, the Court held no such violation of the
law, since the subject matter of the contract of sale were fruits
of the coconut trees on the land over specified years, and
the same could be dealt with separately from the land itself,
and even from the coconut trees themselves. The Court also
held that the subject matter was determinate, although with a
potential existence.
In Mananzala v. Court of Appeals,12 the Court held that the
sale of a lot by a seller who is yet to acquire full ownership from
Art. 1184, Civil Code.
50 Phil. 512 (1927).
11
111 SCRA 34 (1981).
12
286 SCRA 722 (1998).
9
10
76
LAW ON SALES
the government agency is a valid sale since it involves the sale of
the a “future thing;” but really it was a sale subject to the condition
that seller will acquire the property.
b. Emptio Spei
Although the second paragraph of Article 1461 states
that “[t]he efficacy of the sale of a mere hope or expectancy is
deemed subject to the condition that the thing will come into
existence,” it should be noted that such condition does not really
refer to emptio spei, but rather to emptio rei speratae. The only
condition for a sale of hope to be a valid contract is provided by
the last paragraph of Article 1461: that the sale of a vain hope or
expectancy is void, affirming the requisite of “possibility” of the
subject matter as contrasted from an impossible subject matter.
An example of emptio spei is the sale of a sweepstakes
ticket, for say 5100.00, where the buyer purchases the ticket
with the hope that upon the draw the ticket would win him, say a
million pesos. The object of the sale is not the prize, but rather
the ticket, or the chance to win; if the ticket does not win, the sale
is still valid, and the buyer has no right to recover the amount
paid for the ticket.
Emptio spei typifies a situation where the commutative nature
of a contract of sale seems not to be complied with; thus, for say
5100.00, by buying a ticket, one may be able to win a million
pesos. Is that not the same consideration when, say for a 5100.00
bet, a player throws a pair of dice in the hope that the resulting
combination would win for him all bets placed on the table?
c. Sale of Things Subject to Resolutory Condition
Under Article 1465 of the Civil Code, things subject to
resolutory condition may be the object of the contract of sale.
However, if the resolutory condition happens to extinguish the
thing, what happens to the contract of sale itself? The rule would
be the same as applied to all obligations subject to a resolutory
condition under Article 1190: “When the conditions have for their
purpose the extinguishment of an obligation to give, the parties,
upon the fulfillment of said conditions, shall return to each what
SUBJECT MATTER
77
they have received.” This default rule will thus preserve the
commutative nature of sale.
In determining how restitution could best be achieved between the parties, Article 1187 provides that “The effect of a conditional obligation to give, once the condition has been fulfilled,
shall retroact to the day of the constitution of the obligation.
Nevertheless, when the obligation imposes reciprocal prestations
upon the parties, the fruits and interest during the pendency of the
condition shall be deemed to have been mutually compensated.”
The ruling in Gaite v. Fonacier,13 should also be considered
where it held that a contract of sale being an onerous and
commutative contract, that the rules of interpretation would incline
the scales in favor of “the greatest reciprocity of interests,” and
unless the stipulation is clear, a clause should be interpreted as
a term rather than as a condition.
Subjecting the object of sale (i.e., the obligation of the
seller to deliver) to either a suspensive or a resolutory condition
does not undermine the commutative nature of a contract of
sale, essentially because the existence of such a condition has
tempered the amount of the consideration or price that could be
demanded from the buyer. In other words, under a free-market
system, sellers and buyers dealing at arms length have their
own methods to properly price things, including an object of sale
subject to a condition.
d. Subject Matter Is Nexus of Sale
From the foregoing discussions it can be deduced that
whether the contract of sale involves a present object (such as
a hope or expectancy in emptio spei) or a future thing subject to
a suspensive condition (emptio rei speratae), or a present object
subject to a resolutory condition, the subject matter must be
existing or must come to existence to be delivered to the buyer;
otherwise, the contract of sale is void, or an existing contract of
sale is extinguished, with the obligation on the part of the seller
to return the price he has received thereby.
13
2 SCRA 830 (1961).
78
LAW ON SALES
This would emphasize that, as distinguished from other
similar contracts, the essence of a contract of sale is the meeting
of minds that bring about the obligation to transfer the ownership,
and deliver the possession, of subject matter. Even other contracts
that are not strictly sales contracts, but essentially constitute the
delivery of the ownership and possession of the subject matter
as an integral undertaking, tend to be governed by the Law on
Sales, like barter (which does not have the element of “price”),
and dacion en pago (which really is a mode of performance of a
pre-existing obligation).
Thus, the Supreme Court in Polytechnic University v. Court
of Appeals,14 held that the Civil Code provisions on sale are in
effect “catch-all” provisions which effectively bring within their
grasp a whole gamut of transfers whereby ownership of a thing
is ceded for a consideration. This echoed the earlier observation
of the Court in Commissioner of Internal Revenue v. Court of
Appeals,15 that “[t]ransfer of title or an agreement to transfer it for
a price paid or promised to be paid is the essence of sale.”
2. Subject Matter Must Be Licit
The subject matter of the contract of sale must be licit.16
A thing is licit and may be the object of a contract when it is
not outside the commerce of men, and all rights which are not
intransmissible.17 When the subject matter is illicit, the resulting
contract of sale is void.18
The sale of animals suffering from contagious diseases,19
and those which are unfit for the use or service for which they are
acquired as stated in the contract,20 is void.
The sale of future inheritance is also void.21 However, a
distinction should be drawn between a sale of future hereditary
368 SCRA 691, 705 (2001).
271 SCRA 605, 617 (1997).
16
Art. 1459, Civil Code.
17
Art. 1347, Civil Code.
18
Art. 1409(1), Civil Code.
19
Art. 1575, Civil Code.
20
Art. 1575, Civil Code.
21
Art. 1347, Civil Code; Tañedo v. Court of Appeals, 252 SCRA 80 (1996).
14
15
SUBJECT MATTER
79
rights and a waiver of an acquired hereditary rights, since the first
presumes the existence of a contract of sale between the parties,
while the second is a mode of extinction of ownership where there
is an abdication or intentional relinquishment of a known right
with knowledge of its existence and intention to relinquish it, in
favor of co-heirs. Therefore, a non-heir cannot conclusively claim
ownership over the property part of the estate of the deceased
person on the sole basis of the waiver document which neither
recites the elements of either a sale or a donation, or any other
derivative mode of acquiring ownership.22
Again, the illegality of the subject matter, even though
it is determinate and existing and capable of actual delivery,
undermines the demandability of the underlying obligation of the
seller to deliver, and renders the sale void.
a. Sales Declared Illegal by Law
There are various special laws that declare certain sales
contracts as illegal and therefore void. Some of them are those
where subject matter is prohibited, e.g., narcotics;23 wild birds
or mammals;24 rare wild plants;25 poisonous plants or fruits;26
dynamited fish;27 gunpowder and explosives;28 firearms and
ammunitions;29 and sale of realty by non-Christians.30
The sale of friar land without the consent of the Secretary of
Agriculture required under Act No. 1120, is null and void.31
Quijada v. Court of Appeals,32 did not consider as void
the sale by the donor of land previously donated to a local
government unit under a resolutory condition as a sale “outside
Acap v. Court of Appeals, 251 SCRA 30, 39 (1995).
Rep. Act No. 6425.
24
Sec. 7, Act No. 2590.
25
Sec. 1, Act No. 3983.
26
Rep. Act No. 1288.
27
Sec. 1, Rep. Act No. 428.
28
Sec. 1, Act No. 2255.
29
Pres. Decree No. 9.
30
Sec. 145, Revised Adm. Code; Rep. Act No. 4252.
31
Alonso v. Cebu Country Club, Inc., 375 SCRA 390 (2002); Liao v. Court of
Appeals, 323 SCRA 430 (2000).
32
299 SCRA 695 (1998).
22
23
80
LAW ON SALES
the commerce of men under Article 1409(4)” of the Civil Code, in
that patrimonial properties of a local government unit, especially
those conditionally owned by said unit, as being outside the
commerce of men. It held that the “objects referred to as outside
the commerce of man are those which cannot be appropriated,
such as the open seas and the heavenly bodies.”33
Frenzel v. Catito,34 discussed the consequence of an alien
who purchased land and placed the deed of sale in the name
of his Filipina lover: such alien would have no standing to seek
legal remedies to either recover the properties or to recover the
purchase price paid. The transactions was void ab initio for being
in violation of the constitutional prohibition against aliens owning
private land, and under the doctrines ex dolo oritur actio and
in pari delicto potior est conditio defendentis, neither a court of
equity nor a court of law will administer a remedy. The provision
of Article 1416 of the Civil Code will also not apply since they
cover only contracts which are merely prohibited in order to
benefit private interests. Consequently, the maxim nemo cum
alterius deter detremento protest (No person should unjustly
enrich himself at the expense of another), cannot apply in this
case, since the action is proscribed by the Constitution or by the
application of the in pari delicto doctrine.
Sales in violation of land reform laws declaring tenants-tillers
as the full owners of the lands they till, are null and void.35
3. Subject Matter Must Be Determinate
or at Least Determinable
a. Determinate Subject Matter
A thing is determinate or specific when it is particularly
designated or physically segregated from all others of the same
class.36
When the subject matter of a sale is determinate, the basis
upon which to enforce seller’s obligation to deliver, as well as
Ibid.
406 SCRA 55 (2003).
35
Siacor v. Gigantana, 380 SCRA 306 (2002).
36
Art. 1460, Civil Code.
33
34
SUBJECT MATTER
81
the basis upon which to demonstrate breach, are certain and
unequivocable. It is also when the subject matter is determinate or
specific that the defense of force majeure is applicable to legally
relieve the seller from the consequences of failure to deliver the
subject matter of the sale.
b. Determinable Subject Matter
On the other hand, a thing is determinable only when two
(2) requisites are present:
(a) If at perfection of the sale, the subject matter
is capable of being made determinate (the
“capacity to segregate” test); and
(b) Without the necessity of a new or further
agreement between the parties (the “no
further agreement” test).37
By its very definition, a determinable subject matter is a
generic object, because it has neither been physically segregated
nor particularly designated at the point of perfection from the rest
of its kind.
In Melliza v. City of Iloilo,38 Melliza sold under a deed several
tracts of land to the then Municipality of Iloilo, including lots 1214C and 1214-D. The instrument of sale did not mention lot 1214-B,
although it was contiguous to the other two lots, but stipulated
that the area being sold shall include the area “needed for the
construction of the city hall site, avenues and parks according to
the Arellano plan.” The Arellano plan had long been in existence
before the execution of the deed.
The Court held that the requirement that a sale must have
for its object a determinate thing is fulfilled as long as, at the
time the contract is entered into, the object of the sale is capable
of being made determinate without the necessity of a new
or further agreement between the parties. The requirement in
Melliza was deemed fulfilled under the contract of sale because
37
38
Art. 1460, Civil Code.
23 SCRA 477 (1968).
82
LAW ON SALES
it specifically referred to such other portions of the lots required
by the “Arellano plan,” which had long been in existence and it
specifically provided for the land areas needed for the city hall
site. Therefore, at the time of the perfection of the contract, the
exact area of the land needed, which was the subject matter of
the sale, could be determined by simply referring to the Arellano
plan, without the parties needing to draw-up a new contract, nor
even to clarify matters or explain their intentions.
In San Andres v. Rodriguez,39 it was held that where the lot is
described to be adjoining the “previously paid lot” on three sides
thereof, the sold lot was deemed capable of being determined
without the need of a new contract and the fact that the exact
area of the adjoining residential lot is subject to the result of a
survey does not detract from the fact that it is determinate or
determinable.
In David v. Tiongson,40 the Court ruled that when the
receipt issued by the seller acknowledging partial payment of
the purchase price describes the subject matter as “this lot is
the portion formerly earmarked for Mrs. Rosita Venture-Muslan
where she already paid the sum of 51,500.00,” the object is
deemed to be “determinable” and sufficient to support a valid
contract of sale; and that any mistake in the designation of the lot
by its tax declaration does not vitiate the consent of the parties or
affect the validity and binding effect of the sale.
In essence, the requisite of being “determinable” is met
when at perfection, the agreement between the parties included
a formula which can be used by the courts to establish the subject
matter upon which the obligation to deliver can be enforced,
without needing to get back to any one or both the parties of the
object of their intention. When the formula requires the court to
have to go back to the parties to determine their confirmation,
then it would undermine the very enforceability and demandability
of the underlying obligation to deliver; it would actually render the
sale void under Article 1409(6) because the original contractual
intention of the parties cannot be determined, and would run
39
40
332 SCRA 769 (2000).
313 SCRA 63 (1999).
SUBJECT MATTER
83
counter to the principle of mutuality or obligatory force of every
valid contract.
c. Test of Determinability Is the Meeting of Minds
of Parties and Not the Covering Deed
In Atilano v. Atilano,41 Eulogio, who had subdivided his land
into five parts, executed a deed of sale in favor of his brother
supposedly covering lot 535-E. His brother thereupon obtained a
transfer of certificate in his name. But even prior to the execution
of the sale, the brother had been in possession of the subject
property and had built his house thereon. Years later, when the
heirs of the brother had his lots resurveyed for subdivision, it was
discovered that the land they were occupying on the strength of
the deed of sale was not lot 535-E, but actually lot 535-A. On the
other hand, the lot which Eulogio was occupying as residence
was actually 535-E. The brother’s heirs filed an action in court
seeking possession of the real lot 535-E, which had a bigger lot
area.
The Court held that the object of the sale was actually lot
535-A, although the deed of sale referred to lot 535-E, because
there was only a mistake in designating the particular lot to be
sold in the instrument, which mistake was deemed pro forma and
did not vitiate the consent of the parties or affect the validity and
binding effect of the sale. The Court reasoned that when one
seeks to sell or buy a real property, one sells or buys the property
as he sees it in its actual setting and by its physical metes and
bounds, and not by the mere lot number assigned to it in the
certificate of title. It was clear that when the brothers entered into
a contract, they were referring to lot 535-A because even before
that, the purchasing brother had been occupying said lot as his
residence.
Atilano emphasizes the point that the true “contract of sale”
is intangible or properly a legal concept. The deed of sale is
merely an evidence of the contract. And when the deed fails to
cover the real contract or the true meeting of the minds of the
parties, then the deed must give way to the real contract of the
41
28 SCRA 231 (1969).
84
LAW ON SALES
parties. The defect in the final deed would not work to invalidate
the contract where all the essential elements for its validity are
present and can be proven.
The doctrine that “one sell or buys real property as he sees
it, in its actual setting and by its physical metes and bounds, and
not by the mere lot number assigned to it in the certificate of title,”
has been reiterated in Londres v. Court of Appeals,42 and presents
a clear contemporary exception to the almost sacrosanct doctrine
under the Torrens system that the public can deal with registered
land exclusively on the basis of the title thereto.
d. When Quantity of Subject Matter Not
Essential for Perfection
The meeting of the minds on the identity, the nature and
quality, of the subject matter is essential for the purpose of
perfection of sale; it is what makes the subject matter determinate
or at least determinable. This is borne by the fact that when the
nature and quantity of the subject matter is agreed upon, the
subject matter, although essentially generic or fungible, has
complied with the characteristic of being determinable, since the
parties know more or less the exact nature of the object or objects
which will become the subject of performance “without need of
further agreement.” Such characteristic prevents the seller from
delivering something not within the contemplation of the buyer
and perhaps much inferior than the price agreed upon; and at the
same time, it prevents the buyer from demanding the delivery of
an object not contemplated by the seller, and perhaps superior
compared to the price agreed upon.
Logically, the actual quantity of goods as subject matter
of sale would also be essential in the meeting of the minds,
since quantity constitutes an essential ingredient to achieve the
requisite of the goods being determinate or determinable. If it
were otherwise, the ability to enforce the obligation of the seller to
deliver would be totally lacking. Without agreement as to quantity,
how much or how many of the described goods could be the object
42
94 SCRA 133 (2002).
SUBJECT MATTER
85
of an action for specific performance? Even granting arguendo
that an action for specific performance is available against such
a seller, then at what price can enforcement be demanded when
no quantity of the goods is present? The meeting of minds on
the quantity of the goods as subject matter is necessary for the
validity of the sale, because such aspect go into the very core of
such contract embodying the essential characteristic of mutuality
or obligatory force.
This position is supported by Article 1349 of the Civil Code
which provides that “every contract must be determinate as to its
kind. The fact that the quantity is not determinate shall not be an
obstacle to the existence of the contract, provided it is possible to
determine the same, without the need of a new contract between
the parties.” Notice that the essential phrase of “without the need
of a new contract between the parties” in Article 1349 is the same
formula used in defining a determinable subject matter in Article
1460.
In National Grains Authority v. Intermediate Appellate
Court,43 where the parties had agreed on specified types of
rice which was to be harvested from the seller’s farmland at
specified prices per cavan, and although the exact quantity
had not been agreed upon, it was provided in the agreement
that the seller was allowed to deliver within a specified quota
of 2,640 cavans. The Court held that there was at the point of
agreement already a perfected and binding contract of sale,
and to which NFA was obliged to comply and pay the purchase
price for the grains actually delivered by the seller-farmer
Soriano, thus —
In the case at bar, Soriano initially offered to sell
palay grains produced in his farmland to NFA. When
the latter accepted the offer by noting in Soriano’s
Farmer’s Information Sheet a quota of 2,640 cavans,
there was already a meeting of the minds between
the parties. The object of the contract, being the palay
grains produced in Soriano’s farmland and the NFA
was to pay the same depending upon its quality. The
43
171 SCRA 131 (1989).
86
LAW ON SALES
fact that the exact number of cavans of palay to be
delivered has not been determined does not affect
the perfection of the contract. Article 1349 of the New
Civil Code provides: “... The fact that the quantity is not
determinate shall not be an obstacle to the existence
of the contract, provided it is possible to determine the
same, without the need of a new contract between the
parties.” In this case, there was no need for NFA and
Soriano to enter into a new contract to determine the
exact number of cavans of palay to be sold. Soriano
can deliver so much of his produce as long as it does
not exceed 2,640 cavans.44
The controlling doctrine in National Grains Authority is that
specific quantity of the subject matter is not important when it is
still possible to determine the quantity “without the need of a new
contract between the parties,” and therefore complies with the
requisite of being determinable.
In Johannes Schuback & Sons Phil. Trading Corp. v. Court
of Appeals,45 the seller had made a formal offer on the following
matters pertaining to engine parts: item number, quantity, part
number, description, unit price. On 24 December 1981, the buyer
confirmed to purchase on the indicated prices and in fact issued
a purchase order which, however, did not contain the quantities
per unit but the buyer merely bound itself to submit the quantities
about a week thereafter, as in fact the quantities were confirmed
latter on 29 December 1981. The Court held that a binding
contract of sale existed between parties upon issuance of the
purchase order, and not upon the confirmation of the buyer of the
quantities covered by the order, thus —
While we agree with the trial court’s conclusion
that indeed a perfection of the contract was reached
between the parties, we differ as to the exact date when
it occurred, for perfection took place, not on December
29, 1981, but rather on December 24, 1981. Although
the quantity to be ordered was made determinate only
on December 29, 1981, quantity is immaterial in the
44
45
Ibid, at p. 136.
227 SCRA 719 (1993).
SUBJECT MATTER
87
perfection of sales contract. What is of importance
is the meeting of the minds as to the object and
cause, which from the facts disclosed, show that as
of December 24, 1981, these essential elements had
already concurred.46
However, nothing in the facts indicated that as of 24
December 1981 the quantity of the objects ordered could be
determined outside of a subsequent agreement by the parties.
The ruling in Johannes Schuback relied upon National Grains
Authority, and yet in the latter case at the time of perfection
of the contract, there was in fact a maximum quantity agreed
upon.
The foregoing rulings in effect support the doctrine that
certain generic objects may be the proper object of a contract
of sale, provided that they fulfill the characteristic of being
“determinable” at the point of perfection. Thus, even when
the exact quantity of the subject matter of the contract of sale
has not been agreed upon, but the parties have in fact come
into an agreement as to the quality thereof and the price, and
terms of payment, there is already a valid and binding contract.
However, the author disagrees with the rulings of the Supreme
Court, that the resulting contract is always a contract of sale,
but rather what is perfected is a preparatory contract to enter
into a contract of sale, or what is called in commercial parlance
a “supply agreement.”
A supply agreement, much like a contract of sale, would
have at the perfection thereof goods whose quality and unit
price would have been agreed upon by the parties, but unlike
a contract of sale, the underlying obligation of the “seller” and
the “buyer” is to enter into one or series of contracts of sale
based thereon when they come to agree upon the quantity. In
other words, at the moment of meeting upon the description,
quality and unit price of the goods, there is indeed a perfected
and valid contract, but it is an agreement to enter into a contract
of sale, which essentially involves obligations “to do” (i.e., to
46
Ibid, at p. 722.
88
LAW ON SALES
enter into actual contracts of sale), rather than real obligations
to deliver and to pay. Such an agreement, like all other valid
contracts, have the characteristic of consensuality, relativity and
obligatory force, and non-compliance would constitute a breach
of contract; however, the remedy of specific performance would
not be available to the non-defaulting parties because the
underlying obligation of the obligor is a personal obligation; at
most the breach of such contract would allow the recovery of
damages.
e. Generic Non-Determinable Objects
Since “determinable” objects may be the valid subject
matter of a sale, then even generic things that fall within said
definition can validly support a contract of sale. Although the sale
of determinable generic thing is valid, the obligation to deliver the
subject matter can only be complied with when the subject matter
has been made determinate, either by physical segregation or
particular designation; before such time, even the risk of loss
over the subject matter does not arise, since by definition generic
object are never lost.
In Yu Tek & Co. v. Gonzales,47 the parties entered into a
written contract whereby Gonzales bound himself to sell and
deliver 600 piculs of first class sugar (given quality) to Yu Tek
& Company, without designating any particular lot of sugar or
the particular source thereof. Gonzales, who received payment,
delivered no part of the sugar promised, and when a suit was
brought against him to recover the amount paid and stipulated
damages for breach of contract, he interposed the defense of
force majeure because he was not able to harvest any sugar in
his plantation due to a storm.
The Court held Gonzales liable for breach of contract (which
meant there was a valid underlying sale) although it held that the
defense of force majeure was unavailing since the contract was
not perfected as to the particular subject matter for determining
loss, until the quantity agreed upon has been selected and is
47
29 Phil. 384 (1915).
SUBJECT MATTER
89
capable of being physically designated or appropriated. The
Court ruled that the buyer does not assume the risk of loss of
a generic subject matter under a valid sale until the object is
made determinate, either by physical segregation or particular
designation.
Article 1246 of the Civil Code provides that “[w]hen the
obligation consists in the delivery of an indeterminate or generic
thing, whose quality and circumstances have not been stated,
the creditor [buyer] cannot demand a thing of superior quality.
Neither can the debtor [seller] deliver a thing of inferior quality. The
purpose of the obligation and other circumstances shall be taken
into consideration.” The courts therefore have power to set the
appropriate quality of the subject matter of a sale when the same
is determinable generic. The article cannot be taken to mean that
even when the subject matter is not determinable, any generic
subject matter would validly support a contract of sale. Under
Article 1409(6) of the Civil Code, a contract is inexistent and void
from the beginning “where the intention of the parties relative
to the principal object of the contract cannot be ascertained.”
As one author has held, Article 1246 covers only “quality” of a
generic subject matter, so that when it is the “kind” and “quantity”
that cannot be determined without need of a new agreement of
the parties, the contract is void.48
f. Status of Sale Not Complying with Third Requisite
When the minds of the parties have met upon a subject
matter which is neither determinate or determinable, the resulting
contract would be void. Again, the impetus of the law declaring
sales covering subject matters which are neither determinate
or determinable is based on the fact that the “enforceability” or
“demandability” of the underlying obligation of the seller to deliver
the subject matter is at grave risk. The situation would then
precisely be the one covered by Article 1409(6) of the Civil Code
which declares such contract as void and inexistent: “Those
where the intention of the parties relative to the principal object
of the contract cannot be ascertained.”
48
PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED, Vol. IV (1994 ed.), at p. 375.
90
LAW ON SALES
g. Sale of Undivided Interest
Under Article 1463 of the Civil Code, the sole owner of thing
may sell an undivided interest therein, and there would result coownership over the subject matter.
h. Sale of Undivided Share in Mass
In the sale 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 purports to buy a definite number, weight,
number 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 the co-owner
to such share of the mass as the number, weight or measure
bought bears to the number, weight or measure of the mass.49
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.50
Gaite v. Fonacier,51 held that when parties to a sale covering
a specific mass had not made any provisions in their contract for
the measuring or weighing of the subject matter sold, and that
the price agreed upon was not based on such measurement,
then “[t]he subject matter of the sale is, therefore, a determinate
object, the mass, and not the actual number of units or tons
contained therein, so that all that [is] required of the seller Gaite
was to deliver in good faith to his buyer all of the ore found in the
mass, notwithstanding that the quantity delivered is less than the
amount estimated.”52
In another case,53 the Court allowed the “sale in mass” at
public auction of even separate known lots or parcels, and held
Art. 1464, Civil Code.
Art. 1464, Civil Code.
51
2 SCRA 831 (1961).
52
Ibid, at p. 840.
53
Republic v. NLRC, 244 SCRA 564 (1995).
49
50
SUBJECT MATTER
91
that such sale would not be set aside unless it is made to appear
that a larger sum could have been realized from a sale in parcels
or that a sale of less than the whole would have been sufficient
to satisfy the debt.
i. Sale of Mortgaged Property
Pineda v. Court of Appeals,54 affirmed the principle that a prior
mortgage of the property does not prevent the mortgagor from
selling the property, since a mortgage is merely encumbrance
on the property and does not extinguish the title of the debtor
who does not lose his principal attribute as owner to dispose of
the property. It also noted that the law even considers void a
stipulation forbidding the owner of the property from alienating
the mortgaged immovable.
4. Seller’s Obligation to Transfer Ownership
Required at Time of Delivery
In general, a perfected contract of sale cannot be challenged
on the ground that seller had no ownership of the thing sold at the
time of perfection.55
Although the seller must be the owner of the thing in
order to transfer ownership to the buyer, he need not be the
owner thereof at the time of perfection; it is sufficient that he be
the owner at the time of the delivery;56 otherwise, he may be
held liable for breach of warranty against eviction. In fact, the
acquisition by the buyer of the subject matter of the sale may
even depend upon contingency and this would not affect the
validity of the sale.57
Article 1505 of the Civil Code provides that when 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
409 SCRA 438 (2003).
Alcantara-Daus v. de Leon, 404 SCRA 74 (2003).
56
Art. 1459, Civil Code; Heirs of Severina San Miguel v. Court of Appeals, 364
SCRA 523 (2001).
57
Art. 1462, Civil Code.
54
55
92
LAW ON SALES
had, unless there is estoppel on the part of the owner;58 but this
pertains only to the consummation stage of the sale and does not
affect the validity of the contract itself.
Hilltop v. Villacorta,59 held that a contract of sale cannot be
declared null and void for failure of the seller to reveal the fact
that it was not the owner of the property sold.
Esguerra v. People,60 held that the sale of copra for future
delivery does not make the seller liable for estafa for failing
to deliver because the contract is still valid and the obligation
becomes civil and not criminal.
Mananzala v. Court of Appeals,61 recognized that the sale of
a lot by a seller who is yet to acquire full ownership thereof from
a government agency was still a valid sale since it involved the
sale of a future thing.
a. Conflicting Rulings
Lately, however, in Nool v. Court of Appeals,62 the Court held
that sale by one who is not the owner of the subject matter is
void, and consequently, the right to repurchase attached to the
sale would also be void. The Court held that although a situation
(where the sellers were no longer owners) does not appear to be
one of the void contracts enumerated in Article 1409 of the Civil
Code, and under Article 1402 the Civil Code itself recognizes a
sale where the goods are to be “acquired x x x by the seller after
the perfection of the contract of sale” clearly implying that a sale
is possible even if the seller was not the owner at the time of sale,
provided he acquires title to the property later on, nevertheless
it held —
In the present case however, it is likewise clear that
the sellers can no longer deliver the object of the sale
to the buyers, as the buyers themselves have already
Art. 1505, Civil Code.
13 CAR 113 (1968).
60
108 Phil. 1078 (1960).
61
286 SCRA 722 (1998).
62
276 SCRA 149 (1997).
58
59
SUBJECT MATTER
93
acquired title and delivery thereof from the rightful
owner, the DBP. Thus, such contract may be deemed
to be inoperative and may thus fall, by analogy, under
item no. 5 of Article 1409 of the Civil Code: “Those which
contemplate an impossible service.” Article 1459 of the
Civil Code provides that “the vendor must have a right
to transfer the ownership thereof [object of the sale] at
the time it is delivered.” Here, delivery of ownership is
no longer possible. It has become impossible.63
In order to achieve justice, it was important in Nool to hold
the contract of sale void, in order to render the attached right to
repurchase also void. The Court found it inequitable for the sellers
to exercise the right to repurchase, when they had not complied
with their obligation to transfer ownership over the subject matter
of the sale, and that the buyer was the one that eventually bought
the property from the foreclosing bank.
The problem with the doctrine proposed by Nool is that in
order to hold the sale void by the holding that the sellers were not
the owners of the subject matter thereof, it equated the primary
obligation to transfer ownership and deliver possession as
“service” and therefore constitutes them as personal obligations
“to do.” That position is not correct since the obligations of the seller
in a contract of sale are real obligations “to give” and which would
make them enforceable by specific performance. Nool would still
have achieved the same equitable end by sticking to the doctrine
that in spite of the fact that the sellers were not the owners of the
subject matter of the sale, the sale was at perfection still valid
and remained valid even when the seller could no longer comply
with their obligations to transfer ownership. The result would be
that the sellers would be liable for breach of contract of a valid
contract of sale, but since the obligations could be performed,
the only remedy left was to rescind the sale, with damages. The
rescission of the sale brings with it the rescission of all ancillary
features, including the right to repurchase.
Another way to have dealt with the situation in Nool was to
recognize that redemption rights are species of extinguishment
63
Ibid. at p. 150.
94
LAW ON SALES
of a valid sale, and essentially only after full consummation
of the obligation of the seller to deliver the subject matter of
sale; that redemption rights do not arise, even when stipulated
at perfection, unless there has been delivery of the subject
matter to the buyer. Therefore, in the case of Nool, the seller
not having complied with his obligation to delivery the subject
matter, his conventional right of redemption or repurchase never
arose.
In fact, the earlier decision in Noel v. Court of Appeals,64
invoked the principle that —
In a contract of sale, it is essential that the seller is
the owner of the property he is selling. The principal
obligation of a seller is “to transfer the ownership of”
the property sold (Civil Code of the Philippines, Art.
1458). This law stems from the principle that nobody
can dispose of that which does not belong to him ...65
NEMO DAT QUOD NON HABET.66
A close reading of Noel, which concerned primarily the
resolution of the issue of prescription, tended to go into the act of
transferring ownership, an aspect of consummation, rather than
as a doctrine that pertains to the status of a sale upon perfection.
Indeed, Noel did not say that the contract of sale is void if the
seller is not the owner at the time of perfection; what it did say
is that a seller cannot “dispose of that which does not belong to
him,” which is consistent with the rule that a seller cannot transfer
by delivery ownership of the thing which at the time of delivery
did not belong to him. The doctrine is consistent with Article 1459
of the Civil Code which states that “the vendor must have a right
to transfer the ownership thereof at the time it is delivered.”
These principles have been summarized in Quijada v. Court
of Appeals,67 thus —
64
65
(1916).
66
67
240 SCRA 78 (1995).
Citing Azcona v. Reyes, 59 Phil. 446 (1934); Coronel v. Ona, 33 Phil. 456
240 SCRA 78, 88.
299 SCRA 695 (1998).
SUBJECT MATTER
95
Sale, being a consensual contract, is perfected by
mere consent, which is manifested the moment there is
a meeting of the minds as to the offer and acceptance
thereof on three (3) elements: subject matter, price and
terms of payment of the price. Ownership by the seller
on the thing sold at the time of perfection of the contract
of sale is not an element for its perfection. What the
law requires is that the seller has the right to transfer
ownership at the time the thing sold is delivered.
Perfection per se does not transfer ownership which
occurs upon the actual or constructive delivery of
the thing sold. A perfected contract of sale cannot be
challenged on the ground of non-ownership on the part
of the seller at the time of its perfection; hence, the sale
is still valid.68
b. Exception: When Seller Must Be Owner
at Time of Sale
The exception to the rule that ownership by the seller is not
essential at the time of perfection would be in the case of judicial
sale.
Cavite Development Bank v. Spouses Cyrus Lim,69 held
that a foreclosure sale, though essentially a “forced sale,” is still
a sale in accordance with Article 1458 of the Civil Code, under
which the mortgagor in default, the forced seller, becomes
obliged to transfer the ownership of the thing sold to the highest
bidder who, in turn, is obliged to pay the bid price in money or
its equivalent. Being a sale, the rule that the seller must be the
owner of the thing sold also applies in a foreclosure sale. This
is the reason why Article 2085 of the Civil Code, in providing for
the essential requisites of the contract of mortgage, requires
among other things, that the mortgagor or pledgor be the
absolute owner of the thing mortgaged, in anticipation of a
possible foreclosure sale should the mortgagor default in the
payment of the loan.
68
69
Ibid, at p. 696.
324 SCRA 346 (2000).
96
LAW ON SALES
c. Subsequent Acquisition of Title by Seller
Article 1434 of the Civil Code provides that when at the
time of perfection, the seller sells a subject matter over which he
is not the owner, the subsequent acquisition of title by a seller
validates the sale and title passes to the buyer by operation of
law, provided there has been previous delivery of the subject
matter by the seller to the buyer. It should be noted that for the
transfer of ownership ipso jure to happen under Article 1434, it is
essential that there not only exist a valid sale, but that previous
physical delivery of the subject matter must have been done.
Quijada v. Court of Appeals,70 recognized that the sale of
a land previously donated by the seller to a local government
unit under a resolutory condition, was a valid sale even though
at the time of sale, ownership in the property was still with the
local government. However, when the resolutory condition did
occur which effectively reverted ownership back to the seller,
under Article 1434 the seller’s “title passes by operation of law to
the buyer.” The Court expresslly recognized that the rule under
Article 1434 applies not only to sale of goods, but also to other
kinds of property, including real property.
—oOo—
70
299 SCRA 695 (1998).
97
CHAPTER 4
PRICE AND OTHER
CONSIDERATION
By definition under Article 1458, the ideal consideration for
a contract of sale would be “price” as a “sum certain in money or
its equivalent.” However, it is possible that a “sale” may still be
valid when it has for its cause or consideration an item other than
price. Consider the Supreme Court’s ruling in Torres v. Court
of Appeals,1 thus: “Consideration, more properly denominated
as cause, can take different forms, such as the prestation or
promise of a thing or service by another. Therefore, it would be
valid for a sale of the subject matter to have as its consideration
the expectation of profits from the subdivision project as part of
the joint venture arrangement between the parties.”2
In other words, the usual or defined consideration for a
sale is price, but that a contract of sale may still validly exist and
thereby be governed by the Law on Sales, when it is supported
by other valuable considerations. This is in line with the principal
doctrine reiterated by the Court in Polytechnic University of the
Philippines v. Court of Appeals,3 that the concept of “contract of
sale” under Article 1458 of the Civil Code is “in effect, a ‘catchall’ provision which effectively brings within its grasp a whole
gamut of transfers whereby ownership of a thing is ceded for a
consideration.”
In essence, paraphrasing Commissioner of Internal Revenue
v. Court of Appeals,4 the existence of the “obligation to pay the
320 SCRA 428 (1999).
Ibid, at p. 428.
3
368 SCRA 691 (2001).
4
271 SCRA 605 (1997).
1
2
97
98
LAW ON SALES
price” does not play a critical role in defining a sale, provided
that valuable consideration is present, because the “obligation to
transfer ownership and deliver possession” of the subject matter
is the more defining element of sale, thus: “Transfer of title or an
agreement to transfer it for a price paid or promised to be paid is
the essence of sale.”5
MEANING OF “PRICE”
“Price” signifies the sum stipulated as the equivalent of the
thing sold and also every incident taken into consideration for the
fixing of the price put to the debit of the buyer and agreed to by
him.6
A seller cannot unilaterally increase the price previously
agreed upon with the buyer, even when the need to adjust the
price of sale is due to increased construction cost;7 otherwise, it
would be a violation of the essential characteristic of “obligatory
force”8 of contracts of sale.
In the same manner, buyer could not unilaterally withdraw
from a valid sale on the ground that the interest rate of 24% set
on the payment of the price on installments was odious.9
REQUISITES FOR VALID PRICE
The price or consideration of a contract of sale must have
the following requisites at the time of the perfection of the sale,
thus:
(a) It must be REAL;10
(b) It must be in MONEY OR ITS EQUIVALENT, (i.e.,
it must be VALUABLE CONSIDERATION);11 and
Ibid, at p. 607.
Inchausti & Co. v. Cromwell, 20 Phil. 345 (1911).
7
Government Service Insurance v. Court of Appeals, 228 SCRA 183 (1993).
8
Art. 1308, Civil Code.
9
Bortikey v. AFP Retirement and Separation Benefits System, 477 SCRA 511
(2005).
10
Art. 1471, Civil Code.
11
Arts.1458 and 1468, Civil Code.
5
6
PRICE AND OTHER CONSIDERATION
99
(c) It must be CERTAIN or ASCERTAINABLE.12
As in the case for subject matter for sales, the requisites
provided by law for a “valid” price to support a valid sale are
intended to preserve the integrity and enforceability of the
underlying obligation of the buyer to pay. It is also essential that
the requisites for the price promote the onerous, commutative
and bilateral-reciprocal characteristics of the contract of sale.
1. Price Must Be Real
Since a contract of sale is an onerous and commutative
contract, it is essential that consideration agreed upon, namely
the price, must be real.
a. When Price Is Real
Price is “real” when at the perfection of the sale, there is
legal intention on the part of the buyer to pay the price, and legal
expectation on the part of the seller to receive such price as the
value of the subject matter he obligates himself to deliver.
Peñalosa v. Santos,13 held that when the parties execute a
Deed of Absolute Sale over a parcel of land with the understanding
that the price indicated therein would be paid from the proceeds
of the loan to be obtained by the buyer from a bank using the
subject property as mortgage collateral, then neither the contract
of sale nor the price can be considered as wholly simulated, for
there was valuable consideration, and the non-payment of the
price because of the refusal of the seller to turn-over the title to
the bank, would not grant the seller the right to rescind the sale
after the buyer has duly consigned the price with the courts.
b. When Price Is Simulated
When the price is simulated because neither party to the
Deed of Sale had any intention whatsoever that the amount will
be paid, the sale is void,14 although the act may be shown to have
Art. 1458, Civil Code.
363 SCRA 545 (2001).
14
Yu Bun Guan v. Ong, 367 SCRA 559 (2001).
12
13
100
LAW ON SALES
been in reality a donation, or some other contract.15 The whole
issue therefore boils down to contractual intent: if there was no
intent by the parties at the time of perfection to pay and to receive
the price stipulated, then it is a wholly simulated price, and the
underlying contract of sale is void for lack of consideration. The
Court has held that “[i]n absolute simulation, there is a colorable
contract but without any substance, because the parties have no
intention to be bound by it. An absolutely simulated contract is
void, and the parties may recover from each other what they may
have given under the ‘contract.’”16 The determination of what was
the intent of the parties at perfection has been drawn by the Court
from the contemporenous and subsequent acts of the parties.
In one case,17 the Court considered it to be the “most
protuberant index of simulation” of the price when there is a
“complete absence of an attempt in any manner on the part of
the buyer to assert his rights of ownership over the land and rice
mill in question. The failure of the buyer to take possession of the
property allegedly sold to him is a clear badge of fraud,”18 and
therefore considered the sale utterly void.
In another case,19 the Court held that the admission by the
buyer that he did not pay any centavo for the property, made the
sale void, especially when evidence showed that the deed of sale
was forged.
As discussed below, the indication in the covering instrument
that the price has been agreed upon and paid, when in fact
there has been no such payment, has been considered to be an
indication of simulation of price.20
When the price is completely simulated, then the principle
of in pari delicto nonovitar actio should apply, which denies all
recovery to the guilty parties inter se. However, such principle
Art. 1471, Civil Code.
Heirs of Spouses Balite v. Lim, 446 SCRA 54, 67 (2004).
17
Suntay v. Court of Appeals, 251 SCRA 430 (1995).
18
Ibid, at p. 432.
19
Labagala v. Santiago, 371 SCRA 360 (2001).
20
Perez & Co. v. Flores, 40 Phil. 921 (1920); Vda. de Catindig v. Heirs of Catalina
Roque, 74 SCRA 83 (1976); Ladanga v. Court of Appeals, 131 SCRA 361 (1984);
Montecillo v. Reynes, 385 SCRA 244 (2002).
15
16
PRICE AND OTHER CONSIDERATION
101
applies to cases where the nullity arises from the illegality of
the consideration or the purpose of the contract,21 but does not
apply to inexistent and void contracts where the price is merely
simulated.22
c. When Price Is False
Price is “false” when there is a real price upon which the
minds of the parties had met, but not declared, and what is stated
in the covering deed is not the one intended to be paid.
If the price indicated in the covering instrument is false, the
contract of sale is valid, but the underyling deed is subject to
reformation to indicate the real price upon which the minds of the
parties have met.23 In one case,24 when the parties intended to
be bound by the contract except that it did not reflect the actual
purchase price of the property, the Court ruled that there was only
a relative simulation of the contract which remained valid and
enforceable, but subject to reformation. In another case,25 the
Court held that “if the parties state a false cause in the contract
to conceal their real agreement, such a contract is relatively
simulated ... the parties’ real agreement binds them.”26
Nevertheless, the parties may be held bound by the false
price indicated in the instrument under estoppel principle, especially when the interest of the Government or third parties would
be adversely affected by the reformation of the instrument.27
d. Meeting of Minds as to Price
In Mapalo v. Mapalo,28 the spouses Mapalo, who were
simple illiterate farmers, were made to sign a deed of sale over
Modina v. Court of Appeals, 317 SCRA 696 (1999).
Yu Bun Guan v. Ong, 367 SCRA 559 (2001).
23
Article 1359 of the Civil Code provides that “When, there having been a meeting
of the minds of the parties to a contract, their true intention is not expressed in the
instrument purporting to embody their agreement . . . one of the parties may ask for the
reformation of the instrument to the end that such true intention may be expressed.”
24
Macapagal v. Remorin, 458 SCRA 652 (2005).
25
Heirs of Spouses Balite v. Lim, 446 SCRA 56 (2004).
26
Ibid, at p. 67.
27
Spouses Doromal, Sr. v. Court of Appeals, 66 SCRA 575 (1975).
28
17 SCRA 114 (1966).
21
22
102
LAW ON SALES
their registered land although they were told that they were
signing a donation for the eastern half of said property in favor of
the brother. Although the deed of sale stated a consideration of
5500.00, no such consideration was paid.
On the issue over the western part of the land which was
never intended to be conveyed by the spouses, the Court
differentiated between a contract that had no consideration from
one which merely contained a false consideration. It ruled that
according to Manresa, what is meant by a contract that states a
false consideration is one that has in effect a real consideration
but the same is not the one stated in the document. In Mapalo,
aside from the false consideration of 5500.00, there was no real
consideration as to the western half of the property; therefore, the
contract was one with no consideration and not one that merely
states a false consideration. It was void, and its inexistence
was permanent and incurable and could not be subject of
prescription.
Similar is the decision in Rongavilla v. Court of Appeals,29
where the Court held that when two aged ladies, not versed
in English, were made to sign a Deed of Absolute Sale on the
representation by the buyer that the document was merely to
evidence their lending of money, the situation constituted more
than just fraud and vitiation of consent to give rise to a voidable
contract, since there was in fact no intention to enter into a sale,
there was no consent at all, and there was no consideration or
price agreed upon, which made the contract void.
e. Effect of Non-Payment of Price
If the price is fixed but is later on remitted or condoned,
this is perfectly all right, for then the price would not be fictitious.
The failure to pay the price does not cancel a sale for lack of
consideration, for there is still consideration. The failure to
pay a real price goes not into perfection of the sale but into its
consummation.30 The failure to pay the price or the balance
thereof does not render the sale inexistent or invalid, but merely
29
30
294 SCRA 289 (1998).
Peñalosa v. Santos, 363 SCRA 545 (2001).
PRICE AND OTHER CONSIDERATION
103
gives rise to a right in favor of the seller to either demand specific
performance or rescission of the contract of sale.31
Vda. de Catindig. v. Heirs of Catalina Roque,32 held that a
contract of sale is void and produces no effect whatsoever where
the price, which appears thereon as paid, has in fact never been
paid by the purchaser to the vendor.33 Although the first part of
the ruling is correct that a contract of sale is void if the price
stipulated is simulated, the second portion is hard to accept per
se, where it says that a sale is void where “the purchase price
which appears thereon as paid has in fact never been paid by the
purchaser to the vendor.”34
It is not the fact of payment of the price that determines the
validity of a contract of sale, since sale is not a “real contract.”
Sale is a consensual contract, and it becomes a binding and
valid contract upon the meeting of the minds on the price. If the
minds of the parties never meet as to the price, because the price
stipulated is known by both parties as simulated, the contract is
undoubtedly void.35 On the other hand, if the minds of the parties
have met as to the price, the contract of sale is valid, irrespective
of the manner of payment they agreed upon, or even by the
breach of that manner of payment agreed upon.36
Therefore, in a contract of sale where the price agreed upon
was a real price, although the parties showed on the face of the
covering deed that the price had been paid, when in fact it has
not yet been paid (e.g., a separate promissory note is executed
to cover the payment of the purchase price), the contract of sale
is still valid, although the non-payment of the price is a cause
either for specific performance or for rescission.
This position has been confirmed in Balatbat v. Court of
Appeals,37 which held: “A contract of sale being consensual, it is
perfected by the mere consent of the parties. Delivery of the thing
Province of Cebu v. Heirs of Rufina Morales, 546 SCRA 315 (2008).
74 SCRA 83 (1976).
33
Reiterated in Montecillo v. Reynes, 385 SCRA 244 (2002).
34
74 SCRA 83, 88 (1976).
35
Ladanga v. Court of Appeals, 131 SCRA 361 (1984).
36
Ibid.
37
261 SCRA 128 (1996).
31
32
104
LAW ON SALES
bought or payment of the price is not necessary for the perfection
of the contract; and failure of the vendee to pay the price after
the execution of the contract does not make the sale null and
void for lack of consideration but results at most in default on the
part of the vendee, for which the vendor may exercise his legal
remedies.”38
Heirs of Pedro Escanlar v. Court of Appeals,39 also held: “In
a contract of sale, the non-payment of the price is a resolutory
condition which extinguishes the transaction that, for a time,
existed and discharges the obligations created thereunder. The
remedy of an unpaid seller in a contract of sale is to seek either
specific performance or rescission.”40
It is unfortunate that the Court often states that the nonpayment of the price in a contract of sale “is a resolutory condition
which extinguishes the transactions.”41 First, a clause becomes
a condition only when the terms of the agreement clearly make
it so. Second, the happening of a resolutory condition ipso jure
extinguishes the obligation or the contract which it modifies
without need of further action on the part of the obligee. Generally,
the non-payment of the price constitutes a mere breach of
contract that allows the seller, at his option, either to seek specific
performance or for rescission.
Lately, in Montecillo v. Reynes,42 the Court held —
. . . Failure to pay the consideration is different
from lack of consideration. The former results in
a right to demand the fulfillment or cancellation of
the obligation under an existing valid contract while
the latter prevents the existence of a valid contract.
Where the deed of sale states that the purchase
price has been paid but in fact has never been paid,
Ibid, at p. 140. Reiterated in Bravo-Guerrero v. Bravo, 465 SCRA 244 (2005).
281 SCRA 176 (1997).
40
Ibid, at p. 188. Reiterated in Soliva v. The Intestate Estate of Marcelo M. Villalba,
417 SCRA 277 (2003).
41
Gil v. Court of Appeals, 411 SCRA 18 (2003); Soliva v. The Intestate Estate
of Marcelo M. Villalba, 417 SCRA 277 (2003); Blas v. Angeles-Hutalla, 439 SCRA 273
(2004); Carrascoso, Jr. v. Court of Appeals, 477 SCRA 666 (2005).
42
385 SCRA 244 (2002); also Peñalosa v. Santos, 363 SCRA 545 (2001).
38
39
PRICE AND OTHER CONSIDERATION
105
the deed of sale is null and void ab initio for lack of
consideration. . .43
The ruling of the Court would mean that when the deed of
sale declares that the price has been paid, when in fact it has
never been paid, that would be considered a “badge of simulation”
and would render the contract void.
f. Accommodation Does Not Make Sale
Void for Lack of Price
Yu Bun Guan v. Ong,44 held that when the Deed of Sale was
executed merely to facilitate the transfer of the property to the
buyer pursuant to an agreement to enable the buyer to construct
a commercial building and to sell the property to the children, but
that in truth the agreement was a mere subterfuge on the part of
the buyer, the agreement cannot be taken as a consideration for
the sale which the Court held to be void.
The ruling in Yu Bun Guan is in stark contrast to the Court’s
earlier decision in Mate v. Court of Appeals,45 which sustained the
validity of the arrangement even when fraud may have been the
intention of the party accommodated, more so when fraud has not
been considered an efficient cause to render a contract void, but
rather voidable by reason of vice in the consent of the party-victim.
In Mate, the Court held that where the registered owner
of land (Mate), in order to accommodate a relative (Josefina)
who was threatened to be criminally sued by a creditor (Tan)
for issuance of bouncing checks, executed a Deed of Absolute
Sale with a right of repurchase in favor of said creditor, and for
which the registered owner received post-dated checks from the
kin to cover the amount necessary for him to repurchase the
property, plus interests income for the accommodation, the fact
that the checks bounced did not render the sale void for having
a fictitious consideration. The Court, quoting from the decision of
the respondent court, held —
Ibid, at p. 256.
367 SCRA 559 (2001).
45
290 SCRA 463 (1998).
43
44
106
LAW ON SALES
“In preparing and executing the deed of sale with
right of repurchase and in delivering to Tan the land
titles, appellant actually accommodated Josefina so
she would not be charged criminally by Tan. To ensure
that he could repurchase his lots, appellant got a check
of 51,400,000.00 from her. Also, by allowing his titles
to be in possession of Tan for a period of six months,
appellant secured her another check for 5420,000.00.
With this arrangement, appellant was convinced he
had a good bargain. Unfortunately his expectation
crumbled. . .
xxx
xxx
xxx
“It is plain that consideration existed at the time of the
execution of the deed of sale with right of repurchase.
It is not only appellant’s kindness to Josefina, being his
cousin, but also his receipt of 5420,000.00 from her
which impelled him to execute such contract.”46
Mate is a prime example to show that even when undoubtedly
the price stipulated in the covering instrument is simulated (i.e.,
false) the underlying sale would still be valid and enforceable
provided there is another consideration (apart from the false
price) to support the sale.
g. Simulation of Price Affects Delivery of Subject Matter
When a contract of sale is fictitious, and therefore void and
inexistent, as there was no consideration for the same, no title
over the subject matter of the sale can be conveyed. Nemo potest
nisi quod de jure potest — no man can do anything except what
he can do lawfully.47
Delivery of the subject matter made pursuant to a sale
that is void for lack of consideration therefore does not transfer
ownership to the buyer. But care should be made to distinguish
between a simulated price that affects delivery, on one hand, and
the failure to pay the price, on the other hand, which does not
affect the efficacy of delivery of the subject matter.
46
47
Ibid, at pp. 467-468.
Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997).
PRICE AND OTHER CONSIDERATION
107
Early on, Perez & Co. v. Flores,48 held that a sale is null
and void and produces no effect whatsoever where the same is
without cause or consideration in that the purchase price which
appears thereon as paid has in fact never been paid by the
purchaser to the vendor.49 The essence of the ruling is that there
was never any real price agreed upon, and the failure to delivery
the price was one of the indications to show its simulation.
2. Price Must Be in Money or Its Equivalent:
“Valuable Consideration”
Article 1458 of the Civil Code, in defining the obligation of
the buyer, provides that he must pay the price certain in money
or its equivalent. It had been proposed, though not resolved, in
Bagnas v. Court of Appeals,50 that Article 1458 “requires that
‘equivalent’ be something representative of money, e.g., a check
or draft, citing Manresa,51 to the effect that services are not the
equivalent of money insofar as said requirement is concerned
and that a contract is not a true sale where the price consists of
services or prestations.”52
Nevertheless, even Article 1468 of the Civil Code recognizes
that if the consideration of the contract consists partly in money,
and partly in another thing, the transaction can still be considered
a contract of sale when this is the manifest intention of the parties.
This shows that the consideration for a valid contract of sale can
be the price and other additional consideration.
In Republic v. Phil. Resources Development,53 Apostol,
allegedly acting for the Philippine Resources Development Corp.
(PRDC), contracted with the Bureau of Prison for the purchase
of 100 tons of designated logs, but only a small payment of the
purchase price was made. In lieu of the balance of the purchase
price, he caused to be delivered goods of the PRDC to the
40 Phil. 921 (1920).
Ibid, at pp. 941-942, but quoted from syllabus at p. 921.
50
176 SCRA 159 (1989).
51
Vol. 8, 3rd ed., pp. 59-60.
52
176 SCRA 159, 166 (1989).
53
102 Phil. 960 (1958).
48
49
108
LAW ON SALES
Bureau of Prison as payment for the outstanding price. One of the
issues resolved in the case was whether PRDC had the right to
intervene in the sales transaction executed between Apostol and
the Bureau of Prisons and in the suit brought by the Government
to enforce such sale.
The Government asserted that the subject matter of its litigation with Apostol was a sum of money allegedly due to the Bureau
of Prison from Apostol and not the goods reportedly turned over
by Apostol in payment of his private debt to the Bureau of Prison
and the recovery of which was sought by PRDC; and for this
reason, PRDC had no legal interest in the very subject matter in
litigation as to entitle it to intervene. The Government argued that
the goods which belonged to PRDC were not connected with the
sale because “Price ... is always paid in terms of money and the
supposed payment being in kind, it is no payment at all.”54
The Court held that the Government’s contentions were
untenable, ruling that Article 1458 provides that the purchaser
may pay “a price certain in money or its equivalent,” which means
payment of the price need not be in money. Whether the goods
claimed by PRDC belong to it and delivered to the Bureau of
Prison by Apostol in payment of his account is sufficient payment
therefor, is for the court to pass upon and decide after hearing
all the parties in the case. PRDC therefore had a positive right to
intervene in the case because should the trial court credit Apostol
with the value price of the materials delivered by him, certainly
PRDC would be affected adversely if its claim of ownership to
such goods were upheld.
Republic is not at all authority to say that under Article 1458,
as it defines a contract of sale, the term “equivalent” of price
can cover other than money or other media of exchange, since
Republic covers not the perfection stage of a contract of sale,
but rather the consummation stage where the price agreed upon
(which ideally should be in money or its equivalent) can be paid
under the mutual arrangements agreed upon by the parties to
the contract of sale, even by dation in payment, as was the case
in Republic.
54
Ibid, at p. 965.
PRICE AND OTHER CONSIDERATION
109
Torres v. Court of Appeals,55 held that when the covering
contract for the sale of a parcel of land clearly provides that the
consideration for the sale was the expectation of profits from the
subdivision project, it constituted valid cause or consideration to
validate the sale and delivery of the land.
In Polytechnic University of the Philippines v. Court of
Appeals,56 it was held that the cancellation of liabilities of the
seller constitute valid consideration for sale.
In all, the requisite that the price must be in money or
its equivalent is one that has not been held steadfast by the
Supreme Court as determinative of the validity of a sale. This
shows the essence of sale is the existence of the obligation of
the seller to transfer ownership and delivery possession of the
subject matter, whereas the price, although an essential element
of a valid contract, being essentially a generic obligation, may be
subject to variations.
The significance of the use of the term “price to be in money
or its equivalent” is for the law to demonstrate the ideal example
of the onerous nature of sales, that it must be supported by a
“valuable consideration.” Money being the highest form or
representation of commercial value in society, removes any doubt
that of what is “valuable consideration” and functions merely
as the model of prestation, cause or consideration that would
promote the onerous nature of the contract of sale. There is little
doubt, therefore that other forms of cause or consideration which
are “valuable” would support a valid contract of sale.
a. Adequacy of Price to Make It “Real”; Concept
of “Valuable Consideration”
Ong v. Ong,57 considered the validity of a sale of real
property where the consideration stated in the deed was “One
Peso (51.00) and the other valuable considerations.”
The Court held that since no evidence was adduced to show
that the consideration stated in the deed was not paid or was
320 SCRA 428 (1999).
368 SCRA 691 (2001).
57
139 SCRA 133 (1985).
55
56
110
LAW ON SALES
simulated, it is presumed to exist under Article 1354 of the Civil
Code.58 It held that the statement in the deed of the consideration
of 51.00 is not unusual in “deeds of conveyance adhering to
the Anglo-Saxon practice of stating a nominal consideration,
although the actual consideration may have been much more.
Moreover, even assuming that said consideration of 51.00 was
suspicious, such circumstance alone, does not necessarily justify
the inference [that the buyers] were not purchasers in good faith
or for value.” In any event, the Court held “that the apparent
inadequacy is of no moment since it is the usual practice in
deeds of conveyance to place a nominal amount although there
is a more valuable consideration given.”59
The essence of the Ong ruling is that in our jurisdiction, it is
possible for parties to a sale to agree on an adequate consideration,
and though they will state a false or nominal consideration in their
covering deed, it would not affect the validity of the contract of sale,
provided that valuable consideration was in fact agreed upon. In
effect through Ong, Philippine jurisprudence has not accepted
the Anglo-Saxon concept that “any” consideration is enough to
support a contract; and what prevails in Philippine jurisdiction is
that for consideration to support an onerous contract, such as
a contract of sale, it would have to be “valuable consideration”
under the Roman Law concept.
The ruling was affirmed in Bagnas v. Court of Appeals,60
which covered a sale of real property where the consideration
stated in the covering deed was “the sum of ONE PESO (51.00),
Philippine Currency, and services rendered, being rendered and
to be rendered for my [seller’s] benefit.” In that case, the Court
noted that the gross disproportion between the consideration
stipulated and the value of the property, would show that the price
stated was “a false and fictitious consideration, and no other true
and lawful cause having been shown, the Court finds both said
deeds, insofar as they purport to be sales, not merely voidable,
58
Article 1354 provides: “Although the cause is not stated in the contract, it is
presumed that it exists and is lawful, unless the debtor proves the contrary.”
59
Ibid, at p. 136.
60
176 SCRA 159 (1989).
PRICE AND OTHER CONSIDERATION
111
but void ab initio.”61 Therefore, even though a consideration is
real in the sense that it was agreed upon and there is every
intention of the parties to pay and receive such price, it would
still be considered fictious and render the sale void if it is a mere
nominal price.
Bagnas should not be interpreted to mean that although
the parties agreed that services was agreed upon to be part of
the consideration, the fact that no service was rendered would
make the contract “void,” since the non-performance of the
service agreed upon does not go into the validity of the contract
but actually grants to the seller or his successors-in-interests the
right to rescind the contract for breach thereof. The essence of
the ruling in Bagnas was that evidence was adduced to indicate
that there was no real intention to pay any indicated valuable
consideration.
In Arimas v. Arimas,62 the controversy was on the real
terms of the sale of a hacienda. Two documentary evidence
were adduced: one was the deed of sale and another document
purporting to be a supplement which contained part of the
consideration to which the seller consented to sell his hacienda.
The seller averred that when buyer first came to him with the first
document, he refused to sign it at first because the consideration
was too small. The seller finally signed it when they agreed on
further considerations which were embodied in the supplement
(the second document).
The Court held that the consideration appearing in the
supplement must have been part of the consideration for the sale
of the hacienda, since both the original deed and the supplement
were signed by the parties. It is not normal human behavior for
parties to a contract of sale to execute a deed of sale without a
settled consideration and later agree on a further consideration.
The consideration is generally agreed upon as a whole even if
it consists of several parts, and even if it is contained in one or
more instruments; otherwise there would be no price certain.
61
62
Ibid, at pp. 166-167.
55 O.G. 8682 (1959).
112
LAW ON SALES
There would be no meeting of minds as to the consideration; and
the contract of sale could not be perfected.
3. Price Must Be Certain or Ascertainable at Perfection
Price is certain when it has been expressed and agreed
in terms of specific pesos and/or centavos. This affirms the
proposition that money represents the best model of valuable
consideration.
Under Article 1469 of the Civil Code, in order that the price
may be considered ascertainable, it shall be sufficient that it be so
with reference to another thing certain, or that the determination
thereof be left to the judgment of a specified person or persons.
a. Price Fixed by Third Party
The designation of a third party to fix the price is valid,
and such designation by itself makes the price ascertainable
as to give rise to a valid contract of sale. The fixing of the price
cannot be validly left to the discretion of one of the contracting
parties;63 for to consider a contract of sale already existing when
the price has yet to be fixed by one of the parties would render
the contract to be without the characteristics of “mutuality” or
“obligatory force.”
Even before the fixing of the price by the designated third
party, a contract of sale is deemed to be perfected and existing,
albeit conditional. To illustrate, in Barretto v. Santa Marina,64 it was
held that in order to perfect a sale it is only that the parties agree
upon the thing sold and that the price is fixed, it being sufficient
for the latter purpose that the price is left to the judgment of a
specified person. In that case, even before the designated thirdparty had fixed a price there was already an existing contract of
sale, as to prevent one party from unilaterally withdrawing from
the contract; however, such contract was a contract subject to a
suspensive condition, i.e., that the price will be fixed by the thirdparty designated by the parties.
63
64
Art. 1473, Civil Code.
26 Phil. 200 (1913).
PRICE AND OTHER CONSIDERATION
113
Under Article 1469, if the designated third party fixes the
price in bad faith or by mistake, those are the only two instances
where the parties to the contract can seek court remedy to fix
the price. When the designated third party is either unable or
unwilling to fix the price, the parties do not have a cause of action
to seek from the court the fixing of the price because, in a manner
of speaking, the condition imposed on the contract of sale has not
happened, and its non-happening extinguished the underlying
contract; consequently, there is no longer a contract upon which
the courts have any jurisdiction to fix the price. In such a case,
the law declares the contract of sale “inefficacious.”65
When the third party designated is prevented from fixing the
price by fault of either the seller or the buyer, the party not at fault
may have such remedies against the party in fault as are allowed
the seller or the buyer, as the case may be.66 That means that
the party may demand from the the courts for the fixing of the
reasonable price, under the principle that when a party prevents a
condition from happening, that condition can be deemed fulfilled
by the other party.67
b. Fixing of Subject Matter by Third Party
Although under Article 1469 of the Civil Code, the designation by the parties of a third party to fix the price gives rise to
a valid (albeit conditional) contract of sale, such formula is not
allowed for the determination of the subject matter of the sale.
In the unlikely event that the parties have agreed on the price
and the terms of payment but cannot agree as to an array of
similar subjects available for the contract, the designation of a
third party to choose among the subject matter is not allowed,
and when adopted would not give rise to a binding and valid sale,
and would in fact authorize any of the purported party to withdraw
from the arrangement.
The designation of a third party to fix the subject matter is
not provided by law. In order that a contract of sale can exist,
Art. 1474, Civil Code.
Art. 1469, Civil Code.
67
Art. 1186, Civil Code: “The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.”
65
66
114
LAW ON SALES
the parties must have agreed on a subject matter which is
determinate or determinable.68 The test of whether the subject
matter is determinate is one of fact: whether the subject matter
has been physically segregated or particularly designated. The
test of being determinable covers a of test of capacity: based
on the formula agreed by the parties at the time of perfection,
could the subject matter be physically segregated or particularly
designated by the courts without further agreement between the
contracting parties.69
The difference in rules between subject matter and price
on designation of third party springs from the essence of the
obligations they pertain to: the obligation to pay the price is
essentially a fungible obligation, any money can be used to pay
the price; the price which is the subject of the obligation of the
buyer is essentially generic, and generally cannot be extinguished
by fortuitous event.70 Therefore, the designation of a third party to
set the price is allowed.
On the other hand, the obligation to deliver the subject matter
and the title thereto can only be complied with at the point when
the thing is either physically segregated or particularly designated,
and it is not a generic obligation, but rather a “species” obligation,
and therefore its designation cannot be left to the will of a third
party who may choose a subject matter beyond the capacity of
the seller to comply with his obligations to deliver the same.
c. Price Ascertainable in Reference to
Other Things Certain
The price of securities, grain, liquids, and other things shall
also be considered certain, when the price fixed is that which the
thing 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.71
Arts. 1458 and 1460, Civil Code.
Art. 1460, Civil Code.
70
Lawyer’s Cooperative v. Tabora, 13 SCRA 762 (1965).
71
Art. 1472, Civil Code.
68
69
115
The price of a thing is certain at the point of perfection by
reference to another thing certain, such as to certain invoices
then in existence and clearly identified by the agreement;72 or
known factors or stipulated formula.73
d. Effect of Unascertainability
Where the price cannot be determined in accordance with
any of the preceding rules, or in any other manner, the contract
of sale is inefficacious.74
Note that the law does not use the term “void,” because of
the implied acknowledgment that the existence of the formula
allowed by law at the point of perfection has actually rendered a
contract valid albeit conditional, which cannot be rendered void
by what happens after perfection.
4. Manner of Payment of Price Must Be Agreed Upon
Although the Civil Code provisions governing the contract
of sale do not explicitly require that a meeting of the minds of the
parties must include the terms or manner of payment of the price,
the same is deemed to be an essential ingredient before a valid
and binding contract of sale can be said to exist, since it is part of
the prestation of the contract,75 and without which there can be no
valid sale,76 nor can an action for specific performance be made
against the alleged seller.77 Manner of payment of the price goes
into the essence of what makes price certain or ascertainable.
Even from an economist’s point of view, the manner and
terms of payment of the price is an integral part of the concept of
“price” because of the time value of money. A seller may be willing
to accept a comparative lower price for the object of the sale if it
McCullough v. Aenlle, 3 Phil. 285 (1904).
Mitsui v. Manila, 39 Phil. 624 (1919).
74
Art. 1474, Civil Code.
75
Development Bank of the Philippines v. Court of Appeals, 344 SCRA 492
(2000).
76
Edrada v. Ramos, 468 SCRA 597 (2005); Cruz v. Fernando, Sr., 477 SCRA 173
(2005); Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Navarra v. Planters
Dev. Bank, 527 SCRA 562 (2007).
77
Marnelego v. Banco Filipino Savings and Mortgage Bank, 480 SCRA 399 (2006).
72
73
116
LAW ON SALES
is payable within a short period of time as to allow him to make
investments or apply the proceeds to earn more profits; and yet
would be demanding a higher price if the purchase price were
to be paid over a long stretch of time. Thus, in Bortikey v. AFP
Retirement and Separation Benefits System,78 the Court pointed
out that the buyer “was free to decide on the manner of payment
[of the purchase price], either in cash or installment. Since he
opted to purchase the land on installment basis, he consented to
the imposition of interest [24% per annum] on the contract price.
He cannot now unilaterally withdraw from it by disavowing the
obligation created by the stipulation in the contract.”79 The Court
further held —
The rationale behind having to pay a higher sum on
the installment is to compensate the vendor for waiting
a number of years before receiving the total amount
due. The amount of the stated contract price paid in
full today is worth much more that a series of small
payments totaling the same amount. Respondent
vendor, had it received the full cash price, could have
deposited the same in a bank, for instance, and earned
interest income therefrom. To assert that mere prompt
payment of the monthly installments should obviate
imposition of the stipulated interest is to ignore an
economic fact and negate one of the most important
principles on which commerce operates.”80
Navarro v. Sugar Producer’s Corp.,81 held that when the
manner of payment of the purchase price is discussed after
“acceptance,” then such “acceptance” did not produce a binding
and enforceable contract of sale; there was therefore no complete
meeting of the minds and there is no basis to sue on a “contract”
that does not exist.
Velasco v. Court of Appeals,82 where the parties had agreed
on the determinate subject matter (a parcel of land), and the total
477 SCRA 511 (2005).
Ibid, at p. 514.
80
Ibid, at p. 515.
81
1 SCRA 1180 (1961).
82
51 SCRA 439 (1973).
78
79
PRICE AND OTHER CONSIDERATION
117
purchase price, but not on the manner of payment of the agreed
price, held that although a downpayment had already been made
by the buyer and received by the seller, there was still no valid
sale. The Court held that although part of the downpayment has
been paid, a definite agreement on the manner of payment of the
purchase price was an essential element in the formation of a
binding and enforceable contract of sale.83
In Leabres v. Court of Appeals,84 the main cause of action
was based on a receipt issued for an alleged sale of the subject
property. However, the receipt was merely an acknowledgment
of the sum of 51,000.00, without any indication therein of the
total purchase price of the land or of the monthly installments to
be paid. The Court held that the receipt cannot be the basis of a
valid sale.
In San Miguel Properties Philippines, Inc. v. Huang,85
although the parties had agreed on the real properties purchased
and the price, there was still no valid sale since the evidence
showed that they failed to arrive at mutually acceptable terms
of payment scheme, despite the 45-day extension given by the
seller.
The point being made is this: that the “terms of payment,”
being an integral part of the price, would have the same requisites
that the law imposes on price to support a valid contract of salecertain or at least ascertainable. If a price, unknown to both
parties, can support a valid and binding contract of sale, such
as when the fixing of the price is left to a third party, then also,
if the terms of payment are provided for in a formula or process
that does not require the agreement of the parties for the formula
to work, then the terms of payment are deemed to have been
agreed upon and the sale would be valid, but subject to the same
condition affixed to the price.
83
Reiterated in Limketkai Sons Milling, Inc. v. Court of Appeals, 255 SCRA 626
(1996); Uraca v. Court of Appeals, 278 SCRA 720 (1997); Co v. Court of Appeals, 286
SCRA 76 (1998).
84
146 SCRA 158 (1986).
85
336 SCRA 737 (2000).
118
LAW ON SALES
On the other hand, Cruz v. Fernando, Sr.,86 held that the
absence of any stipulation on the manner of payment of the
purchase price would support the position that the agreement
between the parties was really a contract to sell, under the
species “an agreement to agree to enter into a contract of sale,”
which essentially constitutes obligations to do and not subject to
an action for specific performance.
a. Proper Understanding of Doctrine on
Agreement on Terms of Payment of Price
The imperative need for the meeting of the minds of the
parties on the terms of payment of the price should be qualified
by the proper understanding that terms of payment do not always
have to be expressly agreed, when the law supplies by default
such terms.
A close reading of the rulings in Navarro, Velasco, and
Leabres indicates clearly that in each of the cases, the parties
were to have a mode of payment of the price other than immediate
payment. In each of those cases therefore, there could not have
been a final meeting of the minds of the parties as to the price
because both parties in each case knew and expected that certain
negotiations still had to be made with respect to the manner of
payment of the price.
In all other cases, price is deem to be demandable at once.
Under Article 1179 of the Civil Code, “[e]very obligation whose
performance does not depend upon a future or uncertain event,
or upon a past event unknown to the parties, is demandable at
once.” Therefore, in the absence of any stipulation or agreement
or actuation indicating that a different term of payment would be
applicable and for which a meeting of the minds must be achieved,
the price is deemed to be by operation of law immediately
demandable upon the perfection of the contract.
In Development Bank of the Philippines v. Court of Appeals,87
it was held that where there is no other basis for the payment
86
87
477 SCRA 173 (2005).
344 SCRA 492 (2000).
PRICE AND OTHER CONSIDERATION
119
of the subsequent amortization in a Deed of Conditional Sale
the reasonable conclusion one can reach is that the subsequent
payments shall be made in the same amount as the first
payment.
5. When There Is Sale Even When No Price
Has Been Agreed Upon
Article 1474 of the Civil Code provides: “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 therefore. What
is reasonable price is a question of fact dependent on the
circumstances of each particular case.” Note that in such a case,
the courts have authority to fix the reasonable price for the subject
matter appropriated by the buyer.88 Article 1474 seems to present
the only exception where there would still be a valid sale even
when there has been no meeting of the minds as to the price or
any other consideration.
Therefore, the author has looked critically at that portion of
the decision in Raet v. Court of Appeals,89 where the Court refused
to make effective the contracts of sale in spite of the fact that the
buyers were already in possession of the housing units, delivered
by the seller itself, on the ground that the evidence “shows that
the price was merely an estimate.” Under the authority in Article
1474, the Court could then have directed the trial court to fix the
reasonable prices for the housing units already appropriated by
the buyers.
The same ruling was reached in National Housing Authority
v. Grace Baptist Church,90 involving the sale of parcels of land by
the NHA, where possession had been turned over to the buyer
which had introduced improvements thereon, when it was still
clear that the final price had yet to be agreed upon.
Art. 1474, Civil Code.
295 SCRA 677 (1998).
90
424 SCRA 147 (2004).
88
89
120
LAW ON SALES
a. What Does Article 1474 Mean by
“Preceding Articles”?
When Article 1474 states that where the price cannot be
determined “in accordance with the preceding articles,” or in any
other manner, the contract is inefficacious, to which does the
phrase “preceding articles” refer to? It is posited that the phrase
“preceding articles” should start with Article 1469 which provides
ascertainable of price with reference to another thing certain, or
a specified formula, etc., up to Article 1473, which prohibits the
fixing of the price by any of the parties.
Notice that within the coverage of the “preceding articles”
is Article 1471 which covers the situation when the price is
completely simulated and therefore gives rise to a void contract
of sale, although it may still be saved as a donation where the
consideration is shown to be pure liberility. It also covers Article
1473 where the formula for the fixing of the price is left to the
discretion of a party, which makes the contract entirely void.
Under such scenario, the proposition of ejusdem generis to
qualify Article 1474 only to situations where the price is certain or
ascertainable would be totally inapplicable.
To posit that the phrase “preceding articles” in Article 1474
can be interpreted to cover only Article 1469 (price is fixed
in reference to another thing certain or left to a third-party’s
determination) and Article 1472 (price of securities, grain, liquids
based on a trading price), which is the basis to apply the principle
of ejusdem generis, would have no logical or legal basis, especially
when: (a) Articles 1469 and 1472 are not even consecutive
articles and the non-joinder of the articles in-between is wholly
arbitrary; and (b) The position does not seem to be supported
by the immediately subsequent term “or in any other manner”
by which price cannot be ascertained, which clearly implies the
non-exclusivity of the provision only to sales of contract which
are valid but rendered inefficacious.
In other words, the phrase “preceding articles” in Article 1474
should be construed to refer to all articles preceding, namely
Articles 1469 to 1473.
PRICE AND OTHER CONSIDERATION
121
b. What Does Article 1474 Mean by “Inefficacious”?
Article 1474 uses the word “inefficacious” rather than “void,”
because within the coverage of “preceding articles” are Articles
1469 and 1472, which provide for sales which are not void
because the price, though not certain, is ascertainable.
The standard dictionary definition of “inefficacious” means
“the inability to produce the effect wanted; inability to get things
done.” The use of the word “inefficacious” does not exclude void
sale contracts when the price is neither certain or ascertainable. In
other words, the use of the term “inefficacious” was not meant to
exclude void sales, but more to be able to include valid conditional
contracts of sale (which have become inefficacious) in the same
group as void contracts, from the focal point of price.
c. Concept of “Appropriation”; Summation
The proper way to evaluate Article 1474 is to determine its
rationale or underlying policy. Obviously, Article 1474 is not an old
provision of the Spanish Civil Code by the use of the term “(n)” at
the end thereof, and its essence is truly Philippine development,
but with common law origin.
The case-law basis91 of Article 1474 is attributed to Robles
v. Lizarraga Hermanos,92 which established the appropriation
doctrine under Article 1474 founded on the principles of unjust
enrichment and estoppel, thus:
... As the defendant partially frustrated the appraisal,
it violated a term of the contract and made itself liable
for the true value of the things contracted about, as
such value may be established in the usual course of
proof. Furthermore, it must occur to any one, as the
trial judge pointed out, that an unjust enrichment of
the defendant [buyer] would result from allowing it to
appropriate the movables without compensating the
plaintiff therefor.93
BAVIERA, SALES, published by U.P. Law Center (1981 ed.), at p. 50.
50 Phil. 387 (1927).
93
Ibid, at pp. 397-398.
91
92
122
LAW ON SALES
The ponente of Robles was Justice Street, and the doctrine
enunciated is common-law in nature. Thus, Tolentino has the
following discussions on Article 1474, citing American case-law:
If the terms of a sale are complete except for an
agreement with reference to the price, the law implies
a price equivalent to the reasonable value of the goods
in cases where the buyer has appropriated the things
sold. And where the buyer accepts delivery knowing
the price claimed by the seller, he cannot thereafter
refuse to pay for it at that price, even if there is no
agreement as to price. Hence, where goods used by
the buyer who knows the seller’s price for such goods,
he is liable for that price, and not for the reasonable
value of the goods.94
There are two important points that can be drawn from the
foregoing, thus:
(a) The doctrine is based on the principle of
unjust enrichment directed against the buyer
who is not allowed to retain the subject
matter of the sale without being liable to pay
the price even when no such agreement on
the price was previously made; and
(b) The doctrine applies even when there
is a “no contract” situation because of
no meeting of the minds as to the price,
although there was a meeting of the minds
as to the subject matter, and may also apply
to void sale contract situation where the
defect is as to the price.
The other important conclusion to be drawn from the
background material on Article 1474 is that it is actually meant to
cover all sale contract situations where there must have been at
least a meeting of the minds or an agreement to buy and sell the
94
TOLENTINO, CIVIL CODE OF THE PHILIPPINE (1959 ed.) Vol. V, at pp. 13-14, citing Standard
Coal Co. v. Stewart, 269 Pac. 1014; Caskey v. William, 227 Ky. 73, 11 S.W. (2nd) 991;
Ross-Meehan Foundaries v. Nashville Bridge Co., 149 Tenn. 693, 261 S.W. 674.
PRICE AND OTHER CONSIDERATION
123
subject matter, which is coupled with tradition; and that it is meant
to be a remedy clause in favor of the seller who has delivered the
subject matter in accordance with an agreement (though it may
not be a full contract yet) with the buyer who has received it and
appropriated it.
But supposing the seller does not wish to take advantage of
the remedy, and seeks to recover the subject matter? That seems
not possible if the subject matter has already been appropriated,
especially when the buyer had already incurred expenses, and
also because it would violate the essential characteristic of
“binding effect” of every contract, including a contract of sale.
When Article 1474 uses the twin concepts of “delivery”
and “appropriation” it seems to say that it would not apply to a
situation where there has only been delivery but no appropriation,
because the undoing of the contract and the return of the subject
matter to the seller would not present unjust enrichment to either
party. Does “appropriation” mean to partly consume or transform
the subject matter in such a manner that it cannot be returned
in its original manner to the seller, and requiring its return would
therefore be unfair to the seller?
If one looks at the dictionary definition of “appropriate” (“to set
apart for some special use; to take for oneself; take possession
of; use as one’s own”) it seems that the use of such word under
Article 1474 is meant to cover the situation of “acceptance” by
the buyer as the counterpart of delivery on the part of the seller,
and having treated thereafter the subject matter as his own,
even when it does not involve transformation. At that point a
valid contract of sale is deemed to have come into being, and
consequently, the “binding effect” of the contract is deemed to
have kicked-in; and even if the subject matter has remained the
same, the return is not “legally possible,” as it would amount to
unilateral withdrawal from the binding effect of the contract. (Of
course, if both buyer and seller agree to the return, that would be
valid since it would constitute “mutual withdrawal” which is one of
the modes of extinguishing a valid contract.)
The gravamen of Article 1474 would mean that in spite of the
lack of an agreement as to price or defect in the agreement as to
124
LAW ON SALES
price, there would nevertheless be a valid contract of sale upon
which an action for specific performance would prosper for the
recovery of the price when the following elements are present:
(a) There was a meeting of the minds of the
parties of sale and purchase as to the
subject matter;
(b) There was an agreement that price would
be paid which fails to meet the criteria of
being certain or ascertainable; and
(c) There was delivery by the seller and
appropriation by the buyer, of the subject
matter of the sale.
Taking our cue from the rulings of the Supreme Court in Raet
and NHA discussed above, the concept of “appropriation” under
Article 1474 is not applicable to real estate and that the rights
of the parties to a purported sale would be under the principles
applicable to builders in good faith. It may also be an indication
that “appropriation” under Article 1474, even when applied only
to movables, would necessarily entail a “transformation” of the
subject matter of sale such that it can no longer be returned to
its original state, as to warrant the fixing of reasonable price to
prevent unjust enrichment.
RULINGS ON RECEIPTS AND OTHER DOCUMENTS EMBODYING PRICE
The Supreme Court has followed a particular set of rulings
when it comes to situations where a receipt or some other written
agreement has been entered into by the parties on the issue of
whether there is a valid and binding contract of sale between the
parties.
We begin with the decision in El Oro Engravers v. Court
of Appeals,95 where the Court held that sales invoices are not
evidence of payment since they are only evidence of the receipt
of the goods; and that the best evidence to prove payment of the
price is the official receipt issued by the seller.
95
546 SCRA 42 (2008).
PRICE AND OTHER CONSIDERATION
125
In the case of Leabres v. Court of Appeals,96 where the
buyer sought to enforce his purchase of a parcel of land based
primarily on a receipt signed by the seller acknowledging the sum
of 51,000.00. Basing its ruling on the language of the receipt, the
Court held —
An examination of the receipt reveals that the same
can neither be regarded as a contract of sale or a
promise to sell. There was merely an acknowledgment
of the sum of One Thousand Pesos (51,000.00).
There was no agreement as to the total purchase price
of the land nor to the monthly installment to be paid
by the [buyer]. The requisites of a valid Contract of
Sale namely 1) consent or meeting of the minds of the
parties; 2) determinate subject matter; 3) price certain
in money or its equivalent—are lacking in said receipt
and therfore the “sale” is not valid nor enforceable.97
Although not particularly referring to it, it can be presumed
that the Court had the Statute of Frauds in mind when it held
that the contract was unenforceable because the memorandum
allegedly evidencing the sale did not contain all the requisites of
price. However, the facts of the case indicate that not only was
there partial payment of the price, but likewise the alleged buyer
was given actual possession of the land, which are considerations
that would exclude the contract from the coverage of the Statute
of Frauds, which covers only executory contracts. The receipt
itself was evidence of partial execution of the sale.
In Toyota Shaw, Inc. v. Court of Appeals,98 a written agreement
was entered into between a prospective buyer of a vehicle and
the sales representative of the car dealer, which provided and
acknowledged a downpayment of 5100,000.00 on a Toyota pickup, with an understanding on a separate subsequent instrument
that the balance would be financed through a financing company.
The Court held that there was never any perfected contract
between the parties under the agreement that only provided for
146 SCRA 158 (1986).
Ibid, at p. 165.
98
244 SCRA 320 (1995).
96
97
126
LAW ON SALES
a downpayment of 5100,000.00, but did not indicate the total
purchase price nor the manner by which the balance shall be
paid: “It is not a contract of sale. No obligation on the part of
Toyota to transfer ownership of a determinate thing to Sosa
and no correlative obligation on the part of the latter to pay
therefore a price certain appears therein. The provision on the
downpayment of 5100,000.00 made no specific reference to a
sale of a vehicle.”99 Such was the ruling of the Court even when
the evidence showed that the balance of the purchase price was
subsequently agreed upon.
In Limson v. Court of Appeals,100 it was held that when there
is nothing in the receipt to indicate that the 520,000.00 “earnest
money” was part of the purchase price, much less was there
showing of a perfected sale between the parties nor any indication
that the buyer was bound to pay any balance of purchase price,
then the only conclusion that could be made was that there was
no sale.
In Coronel v. Court of Appeals,101 the seller executed a
“Receipt of Down Payment” in favor of the buyer acknowledging
the receipt therein of the downpayment as purchase price of
the property described therein, and indicating the balance of
the purchase price, with specific obligation to transfer the title
upon full payment of the balance. The Court held that there was
a perfected contract of sale, there being no reservation of any
title until full payment of the purchase price. The Coronel ruling
is consistent with the doctrine that sale being governed by the
Statute of Frauds, requires that the memorandum that would
evidence the contract should contain all the essential requisites
of the subject matter and price.
In contrast, in Cheng v. Genato,102 the receipt signed by the
seller acknowledging receipt of the sum of 550,000.00 as “partial
payment” for the real property described by titles in the receipt,
did not provide further stipulations as to the full contract price
Ibid, at p. 328.
357 SCRA 209 (2001).
101
263 SCRA 15 (1996).
102
300 SCRA 722 (1998).
99
100
PRICE AND OTHER CONSIDERATION
127
or the manner of payment thereof. The Court ruled that there
was neither a valid nor enforceable “sale” since the requisites
of a valid contract of sale are lacking in said receipt. Cheng
contrasted the receipt from that was issued in Coronel thus:
In Coronel, this Court found that the petitioners
therein clearly intended to transfer title to the buyer
which petitioner themselves admitted in their pleading.
The agreement of the parties therein was definitely
outlined in the “Receipt of Down Payment” both as to
property, the purchase price, the delivery of the seller
of the property and the manner of the transfer of title to
the specific conditiont upon the transfer in their names
of the subject property the Coronels will execute the
deed of absolute sale.103
Again, a reading of the decision in Cheng nevertheless
indicates that evidence was adduced to support the other terms
of the contract to sell, but the Court determined the binding effect
of the sale based on the receipt that was issued.
If one were to consider that a sale is a consensual contract
and if upon the meeting of the minds of the parties all the essential
requisites are present, then generally it does not matter if the
written evidence issued pursuant thereto (be it an agreement or
a receipt) does contain all of the requisites, then a valid contract
of sale should nevertheless exist and the only issue would be
its enforceability under the Statute of Frauds. The fact of having
received part of the purchase price would therefore have placed
the contract outside of the coverage of the Statute of Frauds
as partially executed contract and therefore parol evidence
presented to prove the other elements of the contract of sale
would have been the order of the day.
This is the same reasoning adopted in Xentrex Automotive,
Inc. v. Court of Appeals,104 where the Court held that a contract of
sale is perfected at the moment there is a meeting of the minds
upon the thing which is the object of the contract and upon the
103
104
Ibid, at p. 738.
291 SCRA 66 (1998).
128
LAW ON SALES
price. When the dealer of motor vehicles accepts a deposit of
550,0000.00 and by pulling out a unit from the assembler, it
obliged itself to sell to the buyer a determinate thing for a price
certain in money, and it was in breach of its contract, to have sold
the car subsequently to another buyer.
Likewise, in David v. Tiongson,105 the Court clarified that
the sale of real property on installments even when the receipt
or memorandum evidencing the same does not provide for the
stated installments, when there has already been partial payment,
the Statute of Frauds is not applicable because it only applies to
executory and not to completed, executed, or partially executed
contracts.
In Tigno v. Aquino,106 the Court held that the absence of receipts
or any proof of consideration, in itself, would not be conclusive of
the inexistence of a sale since consideration is always presumed.
When it therefore comes to treating the legal consequences
of receipts embodying the price or the portion thereof, the rulings
of the Court have not followed a consistent doctrine. We can
only quote what the Court held in Lagon v. Hooven Comalco
Industries, Inc.,107 to remind us of the commercial importance of
receipts and invoices, thus:
We are not unaware of the slipshod manner of
preparing receipts, order slips and invoices, which
unfortunately has become a common business practice
of traders and businessmen. In most cases, these
commercial forms are not always fully accomplished
to contain all the necessary information describing the
whole business transaction. The sales clerks merely
indicate a description and the price of each item sold
without bothering to fill up all the available spaces in the
particular receipt or invoice, and without proper regard
for any legal repercussion for such neglect. Certainly,
it would not hurt if businessmen and traders would
strive to make the receipts and invoices they issue
complete, as far as practicable, in material particulars.
313 SCRA 63 (1999).
444 SCRA 61 (2003).
107
349 SCRA 363 (2001).
105
106
PRICE AND OTHER CONSIDERATION
129
These documents are not mere scraps of paper bereft
of probative value but vital pieces of evidence of
commercial transactions. They are written memorials
of the details of the consummation of contracts.108
INADEQUACY OF PRICE
Under Article 1355 of the Civil Code, which governs
contracts in general, and except in cases specified by law, it is
provided that lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue influence.
Specifically, Article 1470 on contracts of sale, provides that “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.”109
In one case,110 the Court held that there is gross inadequacy
in price if a reasonable man will not agree to dispose of his
property at that amount.
Alarcon v. Kasilag,111 held that “the hardness of the bargain
or the inadequacy of the price is not sufficient ground for the
cancellation of a contract otherwise free from invalidating
defects.” Recently, Bautista v. Court of Appeals,112 reiterated that
the mere inadequacy of the price does not affect the validity of the
sale when both parties are in a position to form an independent
judgment concerning the transaction, unless fraud, mistake, or
undue influence indicative of a defect in consent is present.
Although sale is an onerous and commutative contract,
there is no requirement that the price given should be exactly
the value of the subject matter delivered. Requiring a one-to-one
correspondence between the value of the subject property and
the price is difficult, and would leave no room for bargaining and
discounts. As was discussed previously, the characteristic that
the contract of sale is onerous is met whenever the consideration
Ibid, at p. 379.
See also Ereñeta v. Bezore, 54 SCRA 13 (1973).
110
Dorado Vda. De Delfin v. Dollota, 542 SCRA 397 (2008).
111
40 O.G. Supp. 15, p. 203 (1940).
112
436 SCRA 141 (2004).
108
109
130
LAW ON SALES
is “valuable consideration;” and the test for its “commutativeness”
is met when parties believe honestly that they received good
value for what they have given up in exchange.
These principles are reflected in the classic language used
by the Court in Vales v. Villa,113 where it held —
The fact that one may be worsted by another, of
itself, furnishes no cause of complaint. One man cannot
complain because another is more able, or better trained,
or has better sense of judgment than he has; and when
the two meet on a fair field the inferior cannot murmur if the
battle goes against him. The law furnishes no protection
to the inferior simply because he is inferior, any more
than it protects the strong because he is strong. Courts
cannot constitute themselves guardians of persons who
are not legally incompetent. Courts operate not because
one person has been defeated or overcome by another,
but because he has been defeated or overcome illegally.
Men may do foolish things, make ridiculous contracts,
use miserable judgment, and lose money by them —
indeed, all they have in the world; but not for that alone
can the law intervene and restore. There must be, in
addition, a violation of law, the commission of what the
law knows as an actionable wrong, before the courts are
authorized to lay hold of the situation and remedy it.114
As held in Tayengco v. Court of Appeals,115 inadequacy of
price may be a ground for setting aside an execution sale, but it
is not sufficient ground for the cancellation of a voluntary contract
of sale which is otherwise free from invalidating defects such as
vitiated consent, even if shocking to the conscience.
Contracts are valid even though one of the parties entered
into it against his own wish and desire, or even against his better
judgment.116
35 Phil. 769 (1916).
Ibid, at pp. 787-788.
115
15 SCRA 306 (1965).
116
Lagunzad v. Soto Vda. De Gonzales, 92 SCRA 476 (1979); Clarin v. Rulona,
127 SCRA 512 (1984).
113
114
PRICE AND OTHER CONSIDERATION
131
Even a threat of eminent domain proceedings by the
government cannot be legally classified as the kind of imminent,
serious and wrongful injury to a contracting party as to vitiate
his consent. Private landowners ought to realize, and eventually
accept, that property rights must yield to the valid exercise by the
state of its all-important power of eminent domain.117
1. Distinguished from Simulated Price
Bravo-Guerrero v. Bravo,118 has held that “simulation of
contract” and “gross inadequacy of price” are distinct legal
concepts, with different effects, and that the concept of a simulated
sale is incompatible with inadequacy of price, thus: “When the
parties to an alleged contract do not really intend to be bound
by it, the contract is simulated and void. A simulated or fictitious
contract has no legal effect whatsoever because there is no real
agreement between the parties. . . . Gross inadequacy of price
by itself will not result in a void contract, and it does not even
affect the validity of a contract of sale, unless it signifies a defect
in the consent or that the parties actually intended a donation or
some other contract.”119
2. Rescissible Contracts of Sale
Inadequacy of price is a ground for rescission of conventional
sale in case of rescissible contracts covered under Article 1381
of the Civil Code, namely:
(a) Those entered into by guardians whenever
the ward whom they represent suffer lesion
by more than one-fourth (1/4) of the value
of the object of the sale; and
(b) Those agreed upon in representation of
absentees, if the latter should suffer lesion
by more than one-fourth (1/4) of the value
of the object of the sale.
Babasa v. Court of Appeals, 290 SCRA 532 (1998).
465 SCRA 244 (2005).
119
Ibid at p. 261. See also Loyola v. Court of Appeals, 326 SCRA 285 (2000).
117
118
132
LAW ON SALES
3. Judicial Sale
Gross inadequacy of price may avoid judicial sale of real
property. The difference in ruling for judicial sale is because the
contract of sale is not the result of negotiations and bargaining; in
fact, the property of the supposed seller would be sold at public
auction without his intervention. In such a case, the courts must
be allowed to come in to protect the supposed seller from a bad
bargain that is really not of his own doing.
However, for a judicial sale to be set aside on the ground
of inadequacy of price, the inadequacy must be such as to be
shocking to the conscience of man.120 In addition, there must
be showing that, in the event of a resale, a better price can be
obtained.121 But even if the foregoing requisites are shown, a
judicial sale will not be set aside by the court when there is a
right of redemption, since the more inadequate the winning bid
at public sale, the more easily it is for the owner to redeem the
property.122 In this case, the proper remedy is not rescission, but
to exercise the right of redemption.
4. Sales with Right to Repurchase
In a conventional sale with a right to repurchase feature,
the gross inadequacy of price raises a presumption of equitable
mortgage.123 The proper remedy of the alleged seller, who is
actually an equitable mortgagor, is not to rescind the contract of
sale, but to have it reformed or declared a mortgage contract, and
to pay off the indebtedness which is secured. On the other hand,
the remedy of the alleged buyer would not be to appropriate the
subject matter as a buyer for that would be pactum commissorium,
but to foreclose on the quitable mortgage.124
120
Pascua v. Simeon, 161 SCRA 1 (1988). Reiterated in Cometa v. Court of
Appeals, 351 SCRA 294 (2001); Acabal v. Acabal, 454 SCRA 555 (2005).
121
Cu Bie v. Court of Appeals, 15 SCRA 307 (1965); Tayengco v. Court of Appeals,
15 SCRA 306 (1965).
122
De Leon v. Salvador, 36 SCRA 567 (1970); Vda. de Gordon v. Court of Appeals,
109 SCRA 388 (1981).
123
Art. 1602, Civil Code.
124
Briones-Vasquez v. Court of Appeals, 450 SCRA 644 (2005).
PRICE AND OTHER CONSIDERATION
133
WHEN MOTIVE NULLIFIES SALE
In a contract of sale, consideration is, as a rule, different
from the motive of the parties, and when the primary motive is
illegal, such as when the sale was executed over a parcel of land
to illegally frustrate a person’s right to inheritance and to avoid
payment of estate tax, the sale is void because illegal motive
predetermined the purpose of the contract.125
Uy v. Court of Appeals,126 distinguished “cause” which is
the essential reason which moves the contracting parties to
enter into it, and “is the immediate, direct and proximate reason
which justifies the creation of an obligation through the will of the
contracting parties,” from motive, which is the particular reason
of a contracting party which does not affect the other party.
In Uy, which covered a contract of sale of a piece of land,
the Court obseved that the cause of the vendor in entering into
the contract is to obtain the price, while that for the vendee is
the acquisition of the land. The motive of the vendor (NHA), on
the other hand, is to use said lands for housing. The Court ruled:
“Ordinarily, a party’s motive for entering into the contract do not
affect the contract. However, when the motive predetermines
the cause, the motive may be regarded as the cause.127 x x x
The realization of the mistake as regards the quality of the land
resulted in the negation of the motive/cause thus rendering
the contract inexistent,”128 under Article 1318 of the Civil Code
defining the essential requisite of contracts.
In Heirs of Spouses Balite v. Lim,129 where the parties to
a sale agreed to a consideration, but the amount reflected in
the final Deed of Sale was lower, their motivation being to pay
lower taxes on the transaction, the Court ruled that the contract
of sale remained valid and enforceable upon the terms of the real
consideration, thus: “The motives of the contracting parties for the
lowering of price of the sale — in the present case, the reduction
Olegario v. Court of Appeals, 238 SCRA 96 (1994).
314 SCRA 69, 81 (1999).
127
Ibid, at p. 83.
128
Ibid, at p. 85.
129
446 SCRA 54 (2004).
125
126
134
LAW ON SALES
of the capital gains tax liability — should not be confused with the
consideration. Although illegal, the motives neither determine nor
take the place of the consideration.”130
—oOo—
130
Ibid, at pp. 68-69.
135
CHAPTER 5
FORMATION OF SALE
STAGES IN THE LIFE OF SALE
The phases that a contract of sale goes through have been
summarized by the Supreme Court to be as follows:
(a) POLICITACION, negotiation, preparation, conception or generation stage, which is the period of negotiation and bargaining, ending at
the moment of perfection;
(b) PERFECTION or “birth” of the contract, which is
the point in time when the parties come to
agree on the terms of the sale; and
(c) CONSUMMATION or “death” of the contract,
which is process of fulfillment or performance
of the terms agreed upon in the contract.1
The negotiation stage “covers the period from the time the
prospective contracting parties indicate interest in the contract
to the time the contract is concluded (perfected). The perfection
stage of the contract takes place upon the concurrence of the
essential elements thereof. ... The stage of consummation begins
when the parties perform their respective undertakings under the
contract culminating in the extinguishment thereof.”2
POLICITACION STAGE
Policitacion or negotiation stage actually deals with legal
matters arising prior to the perfection of sale, dealing with the
1
Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA 320 (1995); Limketkai Sons
Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995); Jovan Land, Inc. v. Court of
Appeals, 268 SCRA 160 (1997).
2
Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994).
135
136
LAW ON SALES
concepts of invitation to make offer, offer, acceptance, right of
first refusal, option contract, supply agreement, mutual promises
to buy and sell or contracts to sell, and even agency to sell or
agency to buy.
Normally, negotiation is formally initiated by an offer, which,
however, must be certain;3 an imperfect promise (policitacion)
is merely an offer4 by an offeror to an offeree. Policitacion,
or unaccepted unilateral promise to buy or to sell, prior to
acceptance, does not give rise to any obligation or right,5 and
creates no privity between the purported seller (offeror) and buyer
(offerees). These relations, until a contract is perfected, are not
considered binding commitments; and at any time prior to the
perfection of the contract, either negotiating party may stop the
negotiation,6 and walk away from the situation, generally without
adverse legal consequences.
It is important to consider that at policitation stage, there
is “freedom to contract,” which signifies the right to choose with
whom to contract and what to contract, thus: “In the Law on Sales,
an owner of property is free to offer the subject property for sale
to any interested person, and is not duty bound to sell the same
to the occupant thereof, absent any prior agreement vesting the
occupants the right of first priority to buy.”7
In essence, the policitacion stage is populated of legal
creatures which are not contracts of sale as defined under Article
1458 of the Civil Code, but each of them has, as the main object
of their existence, the fervent hope of becoming or effecting into
realization, a valid and binding sale. Since none of the legal
creatures within the policitacion stage constitute a sale, it would
be proper to quote the warning of Justice Vitug in his dissenting
opinion in Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.,8
thus: “It would be perilous a journey, first of all, to try to seek out
a common path for such juridical relations as contracts, options,
3
Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Navarra v. Planters
Dev. Bank, 527 SCRA 562 (2007).
4
Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602, 613 (1994).
5
Raroque v. Marquez, 37 O.G. 1911.
6
Ibid. Also Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
7
Gabelo v. Court of Appeals, 316 SCRA 386 (1999).
8
264 SCRA 483 (1996).
FORMATION OF SALE
137
and rights of first refusal since they differ, substantially enough, in
their concepts, consequences and legal implication.”9
1. Advertisements and Invitations
Article 1325 of the Civil Code provides that “unless it
appears otherwise,” business advertisements of things for sale
are not definite offers, but “mere invitations to make an offer.”10
Likewise, advertisements for bidders are simply invitations to
make proposals, and the advertiser is not bound to accept the
highest or lowest bidder, unless the contrary appears.11
The general rule for advertisements is that they are less
than offers, and constitute merely invitations to make an offer, or
mere proposals; the direct acceptance of such advertisements
thereof do not give rise to a valid and binding sale. The exception
to this general rule is when “it appears otherwise,” in which case
such advertisements would constitute offers, and if certain and
accepted directly, would give rise to a valid and binding sale.
By way of exception to the general rule, it has been viewed
that when the advertisement specifies a determinate subject
matter, the price and terms of payment, as to be equivalent to
an offer certain, then it constitute an offer covered by the phrase
“unless it appears otherwise,” and not a mere invitation to make
an offer, and once absolutely accepted would give rise to a valid
and binding contract to sell. But if this view were accepted, it
would mean that the general rule (which treats advertisements
as mere invitations to make offers), would never apply to a
situation when it covers a determinate subject matter, price
certain or ascertainable, with the manner of payment thereof
provided, because such a situation would always be covered by
the exception.
If that be the case, the general rule would be meaningless,
since always lacking any of the three (3) requisites to constitute
a certain offer, it could never be accepted to give rise to a valid
Ibid, at p. 530.
Art. 1325, Civil Code.
11
Art. 1326, Civil Code.
9
10
138
LAW ON SALES
and binding sale. In other words, even without the general rule
provided under Article 1325, the situation would be exactly the
same, since such an advertisement (lacking at least one of
the three requisites) would always not constitute a valid offer.
Such view would make Article 1325 a surplusage, with no useful
purpose to serve.
The better view to the author is that even when the
advertisement contains a certain offer, it remains legally a mere
invitation so long as it is addressed to the public at large, and the
exception comes in whenever it expressly provides that the first
absolute acceptance shall be binding, or when it is addressed to
a particular offeree.
2. Offers
An offer, prior to its acceptance, is subject to the complete
will of the offeror;12 it may be withdrawn or destroyed by the offeror
prior to its acceptance;13 and it is not even necessary that the
offeree learns of the withdrawal.14 If the offer is given for a period,
the expiration of the period without further act or its withdrawal
prior to acceptance would destroy the offer.15
The offeror has the right to attach to an offer any term or
condition he desires, and may fix the time, place and manner
of acceptance;16 and the offeree has no authority to treat it as
consisting of separate and distinct parts, since he must accept
and comply with all the requirements provided in the offer.17 The
offeree has only the choice to accept or reject the offer in its
entirety; he has no choice to reject that portion of the offer which
is disadvantageous and accept only that which is beneficial. Such
12
Art. 1320 of Civil Code provides that “The person making the offer may fix the
time, place and manner of acceptance, all of which must be complied with.”
13
Art. 1323 of the Civil Code provides that “the offer may be withdrawn at any time
before acceptance by communication such withdrawal.” See also Manila Metal Container
Corp. v. PNB, 511 SCRA 444 (2006).
14
Laudico v. Arias, 43 Phil. 270 (1922).
15
Art. 1324, Civil Code; Beaumont v. Prieto, 41 Phil. 671 (1916); Villegas v. Court
of Appeals, 499 SCRA 276 (2006).
16
Art. 1321, Civil Code.
17
Ibid.
FORMATION OF SALE
139
an offer will be extinguished by the happening of the resolutory
condition, or the certainty that the suspensive condition will not
happen, or after the lapse of the period; and in all cases, without
need of further action on the part of the offeror.
The offeree has the choice to indicate further negotiations
by making a counter-offer, which would then replace and repeal
the original offer. A counter-offer is always considered in law a
rejection of the original offer,18 and has the effect of extinguishing
the original offer.
An offer which has not been accepted absolutely would
thereby be extinguished and cannot be further accepted;
whereas, the conditional acceptance will constitute a counteroffer which must be accepted absolutely in order to give rise to
a valid sale.19
Finally, an offer becomes ineffective upon the death, civil
interdiction, insanity, or insolvency of either offeror or offeree,
before the acceptance is conveyed and received by the offeror.20
3. Option Contracts
a. Determining the “Location” of Options
The second paragraph of Article 1479 of the Civil Code
governing options, provides that “An accepted unilateral promise
to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration
distinct from the price.”21
In connection therewith, Article 1324 of the Civil Code, which
covers offers and acceptance in general, provides that: “When
the offeror has allowed the offeree a certain period to accept,
the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is
founded upon a consideration, as something paid or promised.”
18
Logan v. Philippine Acetylene Co., 33 Phil. 173, 183 (1916); Manila Metal
Container Corp. v. PNB, 511 SCRA 444 (2006).
19
Art. 1319, Civil Code.
20
Art. 1323, Civil Code.
21
Emphasis supplied.
140
LAW ON SALES
The exception would mean the opposite of what the previous
phrase provides for, which should properly mean: When the
option is founded upon a proper consideration, then the offer
may not be withdrawn at any time during the option period; it
has essentially become a “contracted offer,” bounded by the
principles of mutuality and obligatory force.
b. Definition and Essence of Option Contract
Earlier, Enriquez de la Cavada v. Diaz,22 defined an option
contract as a privilege existing in one person, for which he had
paid a consideration and which gives him the right to buy certain
merchandise or certain specified property, from another person,
if he chooses, at any time within the agreed period at a fixed
price.23
Adelfa Properties, Inc. v. Court of Appeals,24 held that
an option is a continuing offer or contract by which the owner
stipulates with another that the latter shall have the right to buy
the property at a fixed price within a certain time, or under, or in
compliance with, certain terms and conditions, or which gives to
the owner of the property the right to sell or demand a sale. It is
also sometimes called an “unaccepted offer.”25 Adelfa Properties
emphasized that an option is not of itself a purchase, but merely
secures the privilege to buy; it is not a sale of property, but a sale
of the right to purchase, thus —
It is simply a contract by which the owner of property
agrees with another person that he shall have the right
to buy his property at a fixed price within a certain time.
He does not sell his land; he does not then agree to
sell it; but he does sell something, that is, the right or
privilege to buy at the election or option of the other
party. Its distinguishing characteristic is that it imposes
no binding obligation on the person holding the
option, aside from the consideration for the offer. Until
22
(1991).
37 Phil. 982 (1918); see also Villamor v. Court of Appeals, 202 SCRA 607
23
Also Laforteza v. Machuca, 333 SCRA 643 (2000); Buot v. Court of Appeals, 357
SCRA 846 (2001).
24
240 SCRA 565 (1995).
25
See also Abalos v. Macatangay, Jr., 439 SCRA 649 (2004).
FORMATION OF SALE
141
acceptance, it is not, properly speaking, a contract and
does not vest, transfer, or agree to transfer, any title
to, or any interest or right in the subject matter, but is
merely a contract by which the owner of property gives
the optionee the right or privilege of accepting the offer
and buying the property on certain terms.26
Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.,27 held
that an option contract is one “necessarily involving the choice
granted to another for a distinct and separate consideration as to
whether or not to purchase a determinate thing at a predetermined
fixed price.28 . . . The rule so early established in this jurisdiction
is that the deed of option or the option clause in a contract, in
order to be valid and enforceable, must, among other things,
indicate the definite price at which the person granting the option,
is willing to sell.29 . . . An option is a contract granting a privilege
to buy or sell within an agreed time and at a determined price.
It is a separate and distinct contract from that which the parties
may enter into upon the consummation of the option. It must be
supported by consideration.”30
Carceller v. Court of Appeals,31 enunciated the binding effects
of options, which seems to be a more comprehensive definition
of an option, thus —
An option is a preparatory contract in which one
party grants to the other, for a fixed period and under
specified conditions, the power to decide, whether or
not to enter into a principal contract. It binds the party
who has given the option, not to enter into the principal
contract with any other person during the period
designated, and, within that period, to enter into such
contract with the one to whom the option was granted,
if the latter should decide to use the option. It is a
26
Ibid, at p. 579; emphasis supplied. Reiterated in Tayag v. Lacons, 426 SCRA
282 (2004).
27
264 SCRA 483 (1996).
28
Ibid, at p. 500, citing Beaumont v. Prieto, 41 Phil. 670 (1916).
29
Ibid, at p. 502.
30
Ibid, at p. 505. Reiterated in Limson v. Court of Appeals, 375 SCRA 209 (2001).
31
302 SCRA 718 (1999).
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LAW ON SALES
separate agreement distinct from the contract which
the parties may enter into upon the consummation of
the option.32
c. Characteristics and Obligations Constituted in
an Option Contract; Compared with Sale
When compared to a sale, an option contract is an onerous
contract like sale, for it must have a separate consideration
from the purchase price, to be valid. An option without separate
consideration from the offered purchase price is void as a
contract.33 Consideration in an option contract may be anything
of value, unlike in sale where it must be the price certain in money
or its equivalent, or essentially a “valuable consideration.”34
An option contract is also a consensual contract, since the
meeting of the minds as to the subject matter and the price
would also give rise to the option contract, even when the
separate consideration for the option itself has not been paid.
This is clear from the wordings of Article 1324 which describes
the separate consideration of an option as “something paid or
promised.”
Although a separate consideration must exist for an option
contract to be valid, unlike a sale, it is essentially a unilateral
contract, since only the optioner is obliged under an option
contract, even when the optionee has not paid the separate
consideration. It is true that the optionee is obliged to pay a
separate consideration for the option right, but his exercise of the
option does not necessarily depend upon his ability to pay the
separate consideration, since Article 1324 describes the separate
consideration of an option as “something paid or promised.” More
importantly, there can be a valid option contract even when no
separate consideration is paid by the optionee, as in the case
when the option if included within another valid contract, such a
lease or a mortgage.
32
Ibid, at p. 724. See also Cavite Development Bank v. Spouses Syrus Lim, 324
SCRA 346 (2000); Limson v. Court of Appeals, 357 SCRA 209 (2001).
33
Nool v. Court of Appeals, 276 SCRA 149 (1997).
34
San Miguel Properties Philippines, Inc. v. Huang, 336 SCRA 737 (2000).
FORMATION OF SALE
143
The most important distinction with sale, is that the subject
matter of an option contract is actually not the subject matter of
the sought sale, but rather the option to purchase such subject
matter, essentially an intangible subject matter or a right. More
pointedly, the subject matter of an option contract is the accepted
promise to sell or accepted promise to buy. Consequently, unlike
in a sale, the main issue on the subject matter of a valid option
contract is whether the option or right secured is on an obligation
“to do” (i.e., unaccepted promise “to sell” or unaccepted promise
“to buy”), or an obligation “to give” (i.e., unaccepted obligation
to transfer ownership and delivery possession of the subject
matter).
Thus, Adelfa Properties held that “[t]he distinction between
an ‘option’ and a contract of sale is that an option is an unaccepted
offer: It states the terms and conditions on which the owner is
willing to sell his land, if the holder elects to accept them within
the time limited. If the holder does so elect, he must give notice
to the other party, and the accepted offer thereupon becomes a
valid and binding contract. If an acceptance is not made within
the time fixed, the owner is no longer bound by his offer, and the
option is at an end. A contract of sale, on the other hand, fixes
definitely the relative rights and obligations of both parties at the
time of its execution, and leaves no choice to either party whether
to withdraw or to proceed with the contract. The offer and the
acceptance are concurrent, since the minds of the contracting
parties meet in the terms of the agreement.”35 Again, a valid
option is in essence a “contracted certain offer.”
Although a valid option contract has for its subject matter an
option in favor of the offeree, it is also constituted of the following
obligations on the part of the offeror:
(a) personal obligation not to offer to any third
party the sale of the object of the option
during the option period;36
(b) personal obligation not to withdraw the offer
or option during option period; and
35
36
240 SCRA 565, 580 (1995); emphasis supplied.
Vazquez v. Ayala Corp., 443 SCRA 231, 255 (2004).
144
LAW ON SALES
(c) obligation to hold the subject matter for
sale to the offeree in the event that offeree
exercises his option during the option
period.37
Although the first two obligations in a valid option contract
are personal obligations “to do” and “not to do,” the third obligation
may either be a personal obligation “to enter into a contract of
sale,” or may already constitute an “offer to transfer ownership
and deliver possession of the subject matter on a price certain”
conditioned only upon the exercise by the offeree of the option
within the option period.
Since an option contract, prior to its valid exercise, is not
a species of the genus sale, it is not covered by the Statute of
Frauds, and therefore can be proved by parol evidence. This
leaves very little comfort, since with the exercise of an oral option,
the resulting sale contract itself would be subject to the Statute of
Frauds and cannot be proved by oral evidence,38 except if there
has been partial execution of the underlying sale.
d. Elements of Valid Option Contract
The elements of a valid option contract are therefore as
follows:
(a) CONSENT or the meeting of the minds upon:
(b) SUBJECT MATTER: an option right to an
unaccepted unilateral offer to sell/accepted
promise to sell, or unaccepted unilateral
offer to buy/accepted promise to buy:
(i) a determinate or determinable object;
(ii) for a price certain, including the manner
of payment thereof;
(c) PRESTATION: A consideration separate and
distinct from the purchase price for the
option given.
37
38
Ibid.
See Montilla v. Court of Appeals, 161 SCRA 167, 173 (1988).
FORMATION OF SALE
145
It is imperative therefore, that the option must have all the
requisites required for subject matter (i.e., possible thing, licit,
determinate or determinable) and the price (i.e., real, valuable,
certain or ascertainable, with terms of payment stipulated).39
Otherwise, when any of the requisites is missing, even when
the option is supported by a separate consideration, it is void as
an option contract, and its exercise would not result into a valid
sale. This emphasizes the point that a valid option contract is
nothing more than a “contracted certain offer,” and therefore its
consequences are very similar to a certain offer floated in the
legal world.
Salame v. Court of Appeals,40 ruled that in an option, in
order that such a promise may be binding upon the promissor,
it must contain a price certain. Kilosbayan, Inc. v. Morato,41 held
that although an option to buy is not a contract of purchase and
sale, but like a contract of sale, an option contract by its statutory
definition can only arise when the minds of the parties have met
as to the specific object thereof, the price and the manner of
payment thereof.42
e. Meaning of “Separate Consideration”
Unlike in a sale where the price refers to cash or its equivalent
(“valuable consideration”), in an option contract the consideration
may be anything or undertaking of value.43 The more controlling
concept is the “separateness” of such consideration from the
purchase price agreed upon.44
In Villamor v. Court of Appeals,45 the buyers previously
bought one-half of the parcel of land from the sellers at an
agreed price of 570.00 per square meter. Subsequently, a
deed of option was executed between the same parties over
39
Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 264 SCRA 483 (1996);
Limson v. Court of Appeals, 375 SCRA 209 (2001).
40
239 SCRA 356 (1994).
41
246 SCRA 540 (1995).
42
See also Art. 1479, Civil Code; San Miguel Properties Philippines v. Huang, 336
SCRA 737 (2000).
43
San Miguel Properties Philippines v. Huang, 336 SCRA 737 (2000).
44
Salame v. Court of Appeals, 239 SCRA 356 (1995).
45
202 SCRA 607 (1991).
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LAW ON SALES
the other half with an express provision therein that the only
reason why the buyers earlier agreed to purchase the first half
at that high price was because of the undertaking of the sellers
to sell the other half later also at the same price. When the deed
of option was sought to be exercised thirteen years later, it was
interposed by the sellers-offerors that the option was void for
lack of consideration separate and distinct from the purchase
price stipulated.
Villamor held that the consideration of the deed of option is
“the why of the contracts, the essential reason which moves the
contracting parties to enter into the contract.”46 It held that the
cause or the impelling reason on the part of the buyers-offerees
in executing the deed of option as appearing in the deed itself was
the sellers-offerors’ having agreed to buy the original half of the
land at 570.00 per square meter “which was greatly higher than
the actual reasonable prevailing price,”47 and that such cause or
consideration is clear from the deed itself. Note that the separate
consideration under the option was in fact an integral part of the
higher price they paid originally for the first parcel of land bought,
which the Court considered to be fine, so long as it was not part
of the price to be paid for the other parcel of land.
Vda. de Quirino v. Palarca,48 held that an option to buy the
leased premises at a stipulated price in the lease contract is not
without a separate consideration for in reciprocal contracts, like
lease, the obligation or promise of each party is the consideration
for that of the other.
Dijamco v. Court of Appeals,49 held that the condition that
the spouses-borrowers will pay monthly interest during the oneyear option period granted to them by the bank after the spouses
had failed to exercise their original legal right of redemption
on the foreclosed property, was considered to be the separate
consideration to hold the resulting option contract valid.
Ibid, at p. 615.
Ibid.
48
29 SCRA 1 (1969).
49
440 SCRA 190 (2004).
46
47
FORMATION OF SALE
147
Earlier in Soriano v. Bautista,50 an option to buy attached
to a real estate mortgage was deemed to be valid stipulation,
and “the mortgagor’s promise to sell is supported by the same
consideration as that of the mortgage itself, which is distinct from
that which would support the sale, an additional amount having
been agreed upon to make up the entire price of 53,900.00 should
the option be exercised.”51 The ruling in Soriano is significant
considering that a real estate mortgage itself, being merely an
accessory contract, does not have its own consideration and is
supported by the same consideration that pertains to the principal
contract of mutuum. That shows clearly the wide range of “cause
or consideration” that can validly support an option contract.
In any event, the Court had ruled in the 1947 decision in
Montinola v. Cojuangco,52 that although no consideration is
expressly mentioned in an option contract, it is presumed that
it exists and may be proved, and once proven, the contract is
binding. This is in stark contrast to the 1972 pronouncement
in Sanchez v. Rigos (discussed hereunder) which refused to
apply the presumption of existence of consideration for option
contracts.
f. When Option Is Without Separate Consideration
Sanchez v. Rigos,53 held that without a consideration
separate from the purchase price, an option contract would be
void, as a contract, but would still constitute a valid offer; so that
if the option is exercised prior to its withdrawal, that is equivalent
to an offer being accepted prior to withdrawal and would give rise
to a valid and binding sale, thus —
In an accepted unilateral promise to sell, since
there may be no valid contract without a cause or
consideration, the promissor is not bound by his promise
and may, accordingly, withdraw it. Pending notice of its
withdrawal, his accepted promise partakes, however, of
6 SCRA 946 (1962).
Ibid, at p. 949.
52
78 Phil. 481 (1947).
53
45 SCRA 368 (1972).
50
51
148
LAW ON SALES
the nature of an offer to sell which, if accepted, results
in a perfected contract of sale.54
Sanchez also held that the burden of proof to show that the
option contract was supported by a separate consideration is with
the party seeking to show it. No reliance can be placed upon the
provisions of Article 1354 of the Civil Code which presumes the
existence of a consideration in every contract, since in the case
of an option contract, Article 1479 being the specific provision,
requires such separate consideration for an option to be valid.
The Sanchez doctrine expressly affirmed the earlier ruling
in Atkins, Kroll & Co., Inc. v. Cua,55 which treated an accepted
promise to sell, although not binding as a contract for lack of
separate consideration, nevertheless having capacity to generate
a bilateral contract of sale upon acceptance. It also conformed
with the earlier ruling in Beaumont v. Prieto,56 which held that —
... there is in fact practically no difference between
a contract of option to purchase land and an offer or
promise to sell it. In both cases, the purchaser has the
right to decide whether he will buy the land, and that
right becomes a contract when it is exercised, or, what
amounts to the same thing, when use is made of the
option, or when the offer or promise to sell the property
is accepted in conformity with the terms and conditions
specified in such option, offer, or promise.57
Moreover, the Sanchez doctrine expressly overturned the
rulings in Southwestern Sugar Molasses Co. v. Atlantic Gulf &
Pacific Co.,58 and Mendoza v. Comple,59 which held that when
an option is not supported by a separate consideration it is void
and can be withdrawn notwithstanding the acceptance made
previously by the offeree. However, lately it seems that, without
expressly overturning nor modifying the Sanchez doctrine, there
Ibid, at p. 376.
102 Phil. 948 (1958).
56
41 Phil. 670 (1916).
57
Ibid, at p. 688.
58
97 Phil. 249 (1955).
59
15 SCRA 162 (1965).
54
55
FORMATION OF SALE
149
has been a movement back towards the previously discarded
Southwestern Sugar ruling.
Thus, in Montilla v. Court of Appeals,60 despite allegations
of having accepted and demanded the option, ruled that the oral
promise to sell was not binding upon the offeror in view of the
absence of any consideration distinct from the stipulated price,
quoting Article 1479. No reference was made to Sanchez, nor
was there any attempt to show that the withdrawal of the option
was made prior to acceptance or exercise thereof.
Natino v. Intermediate Appellate Court,61 held that a
commitment by a bank to resell a property to the owner within
a specified period, although accepted by the offeree, was
considered an option not supported by consideration separate
and distinct from the price, and therefore, not binding upon the
bank relying upon the Southwestern Sugar ruling. Natino did not
refer to Sanchez at all, nor did it seek to distinguish whether there
was acceptance before the bank withdrew its commitment.
In Yao Ka Sin Trading v. Court of Appeals,62 and Diamante
v. Court of Appeals,63 both involving options without separate
considerations, then Justice Davide declared rather boldly that
“even if the promise is accepted, private respondent was not
bound thereby in the absence of a distinct consideration,” without
even reference to Sanchez or at least stating that its doctrine
has been set aside. Indeed, the rulings were made as though
oblivious of the Sanchez doctrine, while the Diamante statement
referred only to the Montilla decision.
g. Acceptance of Offer to Create Option Necessary to
Apply Sanchez Doctrine
Vazquez v. Court of Appeals,64 not only reiterated the
Sanchez ruling that in an option contract, the offeree has the
burden of proving that the option is supported by a separate
161 SCRA 167 (1988).
197 SCRA 323 (1991).
62
209 SCRA 763 (1991).
63
206 SCRA 52 (1992).
64
199 SCRA 102 (1991).
60
61
150
LAW ON SALES
consideration, it also held that the Sanchez doctrine (i.e., that
the option contract not supported by a separate consideration;
is void as a contract, but valid as an offer), can only apply if the
option has been accepted and such acceptance is communicated
to the offeror. It held that not even the annotation of the option
contract on the title to the property can be considered a proper
acceptance of the option.
h. Option Not Deem Part of Renewal of Lease
An option to purchase attached to a contract of lease when
not exercised within the original period is extinguished and cannot
be deemed to have been included in the implied renewal of the
lease even under the principle of tacita reconduccion.65
i. Period of Exercise of Option
Villamor v. Court of Appeals,66 held that when the option
contract does not contain a period when the option can be
exercised, it cannot be presumed that the exercise thereof can
be made indefinitely, and even render uncertain the status of the
subject matter. Under Article 1144(1) of the Civil Code, actions
upon written contract must be brought within ten (10) years, and
thereafter, the right of option would prescribe.
In an earlier case,67 the Court held that the lessee loses his
right to buy the leased property for a stipulated price per square
meters upon his failure to make the purchase within the time
specified.
Even when an option is exercised within the option period by
the proper tender of the amount due, nevertheless the action for
specific performance to enforce the option to purchase must be
filed within ten (10) year after the accrual of the cause of action
as provided under Article 1144 of the New Civil Code.68
Dizon v. Court of Court of Appeals, 302 SCRA 288 (1999).
202 SCRA 607 (1991).
67
Tuason, Jr. v. de Asis, 107 Phil. 131 (1960).
68
Dizon v. Court of Appeals, Ibid.
65
66
FORMATION OF SALE
151
j. Proper Exercise of Option
Nietes v. Court of Appeals,69 held that in an option to buy,
the party in whose favor the option contract exist may validly
and effectively exercise his right by merely advising the offeror
of the decision to buy and expressing his readiness to pay the
stipulated price, provided that the same is available and actually
delivered to the offeror upon execution and delivery by him of the
corresponding deed of sale. In other words, notice of the exercise
of the option need not be coupled with actual payment of the
price, so long as this is delivered to the owner of the property
upon performance of his part of the agreement.
Carceller v. Court of Appeals,70 discussed “substantial”
compliance with the exercise of an option, and may even be
viewed as an instance when the Court allowed the exercise of
the option beyond the original option period.
In Carceller, a Lease Agreement with option to purchase was
executed which granted lessee the option to purchase the leased
property “within the lease period, the leased premises therefor
for the aggregate amount of 51,800,000.00 x x x. The option
shall be exercised by a written notice to the LESSOR at anytime
within the option period and the document of sale over the aforedescribed properties has to be consummated within the month
immediately following the month when the LESSEE exercised
his option under this contract.”71 Within fifteen days prior to the
expiration of the lease period, the lessee sent a written notice
requesting for a six-month extension of the lease contract to give
him ample time to raise sufficient funds in order to exercise the
option. When the request was denied after the expiration of the
lease period, the lessee sent a written notice exercising his option
to purchase. The lessor refused the exercise on the ground that it
was made beyond the option period.
The Court held that since the facts showed clearly that
there was every intention on the part of the lessor to dispose the
46 SCRA 654 (1972).
302 SCRA 718 (1999).
71
Ibid, at p. 721.
69
70
152
LAW ON SALES
leased premises under the option, and the lessee had intended
to purchase the leased premises, and having invested very
substantial amount to introduce improvements therein, then the
exercise of the option within a reasonable period after the end of
the lease, immediately after the lessee was informed of the denial
of the request for the extension of the lease, should be considered
still a valid exercise of the option that would give grounds for an
action for specific performance against the lessor to execute the
necessary sale contract in favor of the lessee. The delay of 18
days was considered neither “substantial” nor “fundamental” that
would defeat the intention of the parties when they executed the
lease contract with option to purchase. However, the purchase
price would have to be the fair market value of the property at the
time the option was exercised, with legal interests thereon.
In essence, Carceller sort-of recognized that notice within the
option period of clear intention to purchase the property pursuant
to such option, with request for leeway within which to be able to
raise the funds to close the deal is a valid or at least substantial
exercise of the option. In other words, the acceptance or exercise
of the option must still be made within the option period to give
rise to a valid and binding sale, and it is only then that the principle
of substantial compliance would have relevance.
Also significant in Carceller was the ruling of the Court that
in a valid option contract, the refusal of the offeror to comply with
the demand by the offeree to comply with the exercise of his
option may be enforced by an action for specific performance
which seems contrary to the earlier ruling in Ang Yu Asuncion
discussed hereunder.
k. Effects of Exercise of Option
In Heirs of Luis Bacus v. Court of Appeals,72 the Court
held that once an option is exercised: “The [o]bligations under
an option to buy are reciprocal obligations. The performance of
one obligation is conditional on the simultaneous fulfillment of
the other obligation ... when private respondent opted to buy the
72
371 SCRA 295 (2001).
FORMATION OF SALE
153
property, their obligation was to advise petitions of their decision
and their readiness to pay the price. They were not obliged to
make actual payment. Only upon petitioners’ actual execution
and delivery of the deed of sale were they required to pay.”73 The
Court was actually describing the principles that apply to a sale
that had arisen by the proper exercise of the option. In essence,
it held that when an option is properly exercised, then there is
already a sale contract existing, and the laws applicable to sales
shall then apply.
Limson v. Court of Appeals,74 held that when there is an
option contract, then the “timely, affirmatively and clearly
accept[ance of] the offer,” would convert the option contract
“into a bilateral promise to sell and to buy where both [parties]
were then reciprocally bound to comply with their respective
undertakings.”75
l. Summary Rules When Period Is
Granted to Promisee
Ang Yu Asuncion v. Court of Appeals,76 summarized the
applicable rules where a period is given to the offeree within
which to accept the offer, i.e., the option, thus:
(a) If the period itself is not founded upon or
supported by a separate consideration,
the offeror is still free and has the right to
withdraw the offer before its acceptance,
or, if an acceptance has been made, before
the offeror’s coming to know of such fact,
by communicating that withdrawal to the
offeree. (This is in accordance with the
Sanchez doctrine.)
(b) The right to withdraw, however, must not be
exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim
Ibid, at p. 301.
357 SCRA 209 (2001).
75
Ibid, at p. 218.
76
238 SCRA 602 (1994).
73
74
154
LAW ON SALES
under Article 19 of the Civil Code which
ordains that “every person must, in the exercise of his right and in the performance of
his duties, act with justice, give everyone his
due, and observe honesty and good faith.”
(c) If the period has a separate consideration,
a contract of “option” is deemed perfected,
and it would be a breach of that contract to
withdraw the offer during the agreed period.
(d) The option, however, is an independent
contract by itself, and it is to be distinguished
from the projected main agreement which is
obviously yet to be concluded. If, in fact, the
optioner-offeror withdraws the offer before
its acceptance by the optionee-offeree, the
latter may not sue for specific performance
on the proposed contract since it has failed
to reach its own stage of perfection. The
optioner-offeror, however, renders himself
liable for damages for breach of the option.
(e) In these cases, care should be taken of the
real nature of the consideration given, for
if in fact, it has been intended to be part
of the consideration for the main contract
with a right of withdrawal on the part of
the optionee, the main contract could be
deemed perfected; a similar instance would
be an “earnest money” in sale that can
evidence its perfection.
Ang Yu Asuncion would hold therefore that in an option
contract, the granting of a consideration separate and distinct
from the purchase price of the intended sale, does not guarantee
to the optionee that he has the absolute right to exercise
the option, anytime during the option period. The separate
consideration merely guarantees that within the option period,
before the optioner breaches his obligation and withdraws the
offer, an acceptance by the optionee would give rise to a valid
FORMATION OF SALE
155
and binding sale; and that an acceptance within the option period
after the optioner shall have unlawfully withdrawn the offer would
not give rise to a sale. This rule is clear from Ang Yu Asuncion,
when it held that —
The optionee has the right, but not the obligation, to
buy. Once the option is exercised timely, i.e., the offer
is accepted before a breach of the option, a bilateral
promise to sell and to buy ensures and both parties are
then reciprocally bound to comply with their respective
undertakings.
Such a rule would practically be the same as the Sanchez
doctrine when no separate consideration is given for the option.
That would be contrary to the language of Article 1324 of the Civil
Code that recognizes the right of the offeror to withdraw the offer
only when there is no separate consideration to support the period
given: “When the offeror has allowed, the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance
by communicating such withdrawal, except when the option is
founded upon a consideration, as something paid or promised.”
Under the Ang Yu Asuncion ruling, insofar as the optionee
is concerned, whether or not he gives a separate consideration
for the option, he would be saddled with the same dilemma: if the
optioner withdraws the offer prior to the time he (the optionee) shall
have exercised the option or accepted the offer, his acceptance
could not give rise to a valid and binding sale. To the optioner,
whether he has received consideration or not for the grant of the
option, he could in either case withdraw the offer prior to the time
the optionee shall have exercised the option.
Ang Yu Asuncion does not therefore provide for a
“commercially sound” doctrine because it emasculates the
effectiveness of an option supported by a consideration separate, and removes any motivation for the optionee to give, and
for the optioner to demand for, a separate consideration on the
option. And yet in the subsequent ruling in Carceller v. Court of
Appeals,77 the Court granted the optioner leeway to enforce the
77
302 SCRA 718 (1999).
156
LAW ON SALES
conditional exercise of his option right even after the option period
and after the optioner-offeror-lessor had in fact given clear notice
of the withdrawal of the option; and even granted the remedy of
specific performance requested by the optionee to compel the
optioner to execute the covering Deed of Absolute Sale.
The Ang Yu Asuncion treatment of the option contract is also
not consistent with the doctrine it adopted for a “lesser form” of
option called the “right of first refusal.” The author therefore dares
to predict that in the future the Supreme Court would “adjust” the
prevailing doctrine to conform to the essence of its rulings on
rights of first refusal, discussed hereunder.
3. Rights of First Refusal
One of the early cases that covered the situation of a right
of first refusal (i.e., a promise on the part of the owner that if he
decides to sell the property in the future, he would first negotiate
its sale to the promissee), would be the case of Guerrero v.
Yñigo,78 where the promise was part of the undertaking of the
mortgagor to the mortgagee, thus —
The registration of the three instruments created a
real right in favor of the mortgagee. But the fact that in
the instrument the mortgagor undertook, bound and
promised to sell the parcel of land to the mortgagee,
such undertaking, obligation or promise to sell the parcel of land to the mortgagee does not bind the land. It
is just a personal obligation of the mortgagor. So that
when [mortgagor] sold one-half of the parcel of land (the
western part) ... the sale was legal and valid. If there
should be any action accruing to [mortgagee] it would
be a personal action for damages against [mortgagor].
If [the buyer] contributed to the breach of the contract by
[mortgagor], the former together with the latter may also
be liable for damages. If [the buyer] was guilty of fraud
which would be a ground for rescission of the contract of
sale in his favor, [mortgagor] and not [mortgagee] would
be the party entitled to bring the action for annulment.79
78
79
96 Phil. 37 (1954).
Ibid, at p. 42.
FORMATION OF SALE
157
Note that in Guerrero, under a right of first refusal situation,
the Court would not allow an action for specific performance or a
rescission of the sale to a third party which constitute the breach
of the promise, even when the third-party buyer was entering
into the purchase of the subject property in bad faith.80 The only
remedy afforded to the promissee was an action to recover
damages.
The Court effectively reversed itself in 1992 in Guzman,
Bocaling & Co. v. Bonnevie,81 where the right of first refusal was
included in a contract of lease, but lessor subsequently sold the
property to another entity, holding that “[t]he respondent court
correctly held that the Contract of Sale was not voidable but
rescissible. Under Articles 1380 to 1381(3) of the Civil Code,
a contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. The
status of creditors could be validly accorded the [lessees] for they
had substantial interest that were prejudiced by the sale of the
subject property to the petitioner without recognizing their right of
first priority under the Contract of Lease.”82
Guzman, Bocaling & Co. also held that it was incorrect to
say that there was no consideration in an agreement of right of
first refusal, since in reciprocal contracts, such as a lease, the
obligation or promise of each party is the consideration for that of
the other. It also recognized that a buyer of a real property who is
aware of the existing lease agreement over it cannot claim good
faith nor lack of awareness of the right of first priority provided
therein, for it is its duty to inquire into the terms of the lease
contract, and failing to do so, it has only itself to blame.
Ang Yu Asuncion had the opportunity to revisit rights of first
refusal. In giving judicial recognition to the “right of first refusal”
pertaining to transactions covering specific property, the Court
distinguished it from either a sale or an option contract. While
the Court classified the “right of first refusal” to be “an innovative
This was the same position of Justice Romero in her concurring and dissenting
opinion in Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 264 SCRA 483, 526-527
(1996).
81
206 SCRA 668, 675-676 (1992).
82
Ibid, at p. 675.
80
158
LAW ON SALES
juridical relation,” it pointed out that it cannot be deemed a
perfected sale under Article 1458 of the Civil Code, nor an option
contract under either Articles 1319 and 1479 thereof, because
it merely pertains to a specific property without containing an
agreement as to the price or the terms of payment in case of
exercise of the right of first refusal, thus —
An option or an offer would require, among other
things, a clear certainty on both the object and the
cause or consideration of the envisioned contract. In
a right of first refusal, while the object might be made
determinate, the exercise of the right, however, would
be dependent not only on the grantor’s eventual
intention to enter into a binding juridical relation with
another but also on terms, including the price, that
obviously are yet to be later firmed up. Prior thereto,
it can at best be so described as merely belonging
to a class of preparatory juridical relations governed
not by contracts (since the essential elements to
establish the vinculum juris would still be indefinite
and inconclusive) but by, among other laws of general
application, the pertinent scattered provisions of the
Civil Code on human [relations].83
Consequently, Ang Yu Asuncion held that if only a right of
first refusal is constituted over a subject parcel of land, even if that
right is supported by a separate consideration, its breach cannot
justify correspondingly an issuance of a writ of execution under
judgment recognizing the mere existence of such right of first
refusal, nor would it sanction an action for specific performance
without thereby negating the indispensable consensual element
in the perfection of contracts. At most, it would authorize the
grantee to sue for recovery of damages under Article 19 of the
Civil Code on abuse of right.
Subsequently, the Court in Equatorial Realty Dev., Inc. v.
Mayfair Theater, Inc.,84 modified the principle pertaining to the
right of first refusal, where it held that in a contract of lease which
gave the lessee a 30-day exclusive option to purchase the leased
83
84
238 SCRA 602, 614-615 (1994).
264 SCRA 483 (1996).
FORMATION OF SALE
159
property in the event the lessor should desire to sell the same,
such contractual stipulation which does not provide for a price
certain nor the terms of payment, actually grants a right for first
refusal and is not an option clause or an option contract, thus —
As early as 1916, in the case of Beaumont vs.
Prieto,85 unequivocal was our characterization of
an option contract as one necessarily involving the
choice granted to another for a distinct and separate
consideration as to whether or not to purchase a
determinate thing at pre-determined fixed price. ...
There was, therefore, a meeting of minds on the part
of the one and the other, with regard to the stipulations
made in the said document. But it is not shown that there
was any cause or consideration for that agreement,
and this omission is a bar which precluded our holding
that the stipulations contained . . . is a contract of
option, for . . . there can be no contract without the
requisite, among others, of the cause for the obligation
to be established. . .
The rule so early established in this jurisdiction
is that the deed of option or the option clause in a
contract, in order to be valid and enforceable, must,
among other things, indicate the definite price at which
the person granting the option, is willing to sell. As
such, the requirement of a separate consideration for
the option, has no applicability.86
In spite of the Ang Yu Asuncion ruling that found that right
of first refusal provisions are not governed by Article 1324 of the
Civil Code on withdrawal of offer, or Article 1479 on promises to
buy and sell, Equatorial Realty held that such ruling would render ineffectual or inutile the provisions on right of first refusal so
commonly inserted in contracts such as lease contracts. It held
that there need not be a separate consideration in a right of first
refusal since such stipulation is part and parcel of the entire contract of lease to which it may be attached to; the consideration for
the lease includes the consideration for the right of first refusal.
85
86
41 Phil. 670 (1916).
Ibid, pp. 500-502.
160
LAW ON SALES
The Court decreed in Equatorial Realty that in a situation
where the right of first refusal clause found in a valid lease
contract was violated and the property was sold to a buyer who
was aware of the existence of such right, the resulting contract is
rescissible by the person in whose favor the right of first refusal
was given, and although no particular price was stated in the
covenant granting the right of first refusal, the same price by
which the third-party buyer bought the property shall be deemed
to be the price by which the right of first refusal shall therefore be
exercisable, thus —
Under the Ang Yu Asuncion vs. Court of Appeals
decision, the Court stated that there was nothing to
execute because a contract over the right of first refusal
belongs to a class of preparatory/juridical relations
governed not by law on contracts but by the codal
provisions on human relations. This may apply here if
the contract is limited to the buying and selling of the
real property. However, the obligation of [lessor] to first
offer the property to [lessee] is embodied in a contract.
It is Paragraph 8 on the right of first refusal which
created the obligation. It should be enforced according
to the law on contracts instead of the panoramic and
indefinite rule on human relations. The latter remedy
encourages multiplicity of suits. There is something
to execute and that is of [lessor] to comply with its
obligation to the property under the right of first refusal
according to the terms at which they should have been
offered then to [lessee], at the price when that offer
should have been made. Also, [lessee] has to accept
the offer. This juridical relation is not amorphous nor is
it merely preparatory. Paragraph 8 of the two leases
can be executed according to their terms.
In essence, the Equatorial Realty ruling pins the enforceability of a right of first refusal on the obligatory force of the main
contract of lease to which it is attached to, and thereby confirms
the Ang Yu Asuncion doctrine that on its own, a right of first refusal clause or contract cannot be the subject of an action for
specific performance because of lack of an agreement on the
price.
FORMATION OF SALE
161
a. Limited Application of Equatorial Realty Ruling
It is clear from the decision in Equatorial Realty that the
ruling applies only to rights of first refusal attached to a valid
principal contract, like a contract of lease; that the ruling has no
application, and that the Ang Yu Asuncion ruling would still apply,
to rights of first refusal constituted as separate contracts, which
anyway would be considered under the doctrines applicable to
option contracts.
The principle was affirmed in Sen Po Ek Marketing Corp. v.
Martinez,87 which held that the right of first refusal may be provided
for in a lease contract; however, when such right is not stipulated
in the lease contract, it cannot be exercised, and verbal grants
of such right cannot be enforceable since the right of first refusal
must be clearly embodied in a written contract.
Parañaque Kings Enterprises, Inc. v. Court of Appeals,88
held that in order to have full compliance with the contractual right
granting a lessee the first option to purchase the property leased,
the price for which it was sold to a third party should have likewise
been first offered to the party entitled to the option, thus —
Therefore, if the exercise of the option was offered
at 55 Million which was refused, but subsequently the
property was sold at sale of the property 59 Million
to a third party, it became necessary for the seller to
have gone back to the party with the right of first option
at that higher price. Only if the person with such right
of first option fails to exercise his right of first priority
could the seller thereafter lawfully sell the subject
property to others, and only under the same terms and
conditions previously offered to the party with the right
of first option, even when nothing of such requirement
is provided for in their agreement.
Parañaque Kings reiterated the rule that the third-party who
bought the property from the seller who violated the right of first
refusal granted to the lessee of the property cannot claim to be a
87
88
325 SCRA 210 (2000).
268 SCRA 727, 741 (1997).
162
LAW ON SALES
stranger to the arrangement and not a proper party in the action
for rescission since such buyer actually steps into the shoes of
the owner-lessor of the property by virtue of his purchase and
assumed all the obligations of the lessor under the lease contract,
especially when the complaint prayed for the annulment of the
sale of the property to him.
Riviera Filipina, Inc. v. Court of Appeals,89 held that “a lease
with a proviso granting the lessee the right of first priority ‘all
things and conditions being equal,’ meant that there should be
identity of the terms and conditions to be offered to the lessee
and all other prospective buyers, with the lessee to enjoy the
right of first priority.”90 In addition, Riviera seems to mandate the
“written notice” rule applicable for the rescission and cancellation
of contracts of sale.
Lately, Villegas v. Court of Appeals,91 held that a “right of
first refusal is a contractual grant not of the sale of a property,
but of the first privity to buy the property in the event that the
owner sells the same” in a situation where the right of first refusal
was contained in a contract of lease. It recognized that when a
lease contains right of first refusal the lessor has the legal duty to
the lessee not to sell the lease property to any one at any price
until after the lessor has made an offer to sell the property to the
lessee and the lessee has failed to accept it.
The ordinary language of a right of first refusal clause
simply means that should the lessor-promissor decide to sell the
leased property during the term of the lease, such sale should
first be offered to the lessee; and the series of negotiations that
transpire between the lessor and the lessee on the basis of such
preference is deemed a compliance of such clause even when
no final purchase agreement is perfected between the parties.
The lessor would then be at liberty to offer the sale to a third
party who paid a higher price, and there is no violation of the right
of the lessee, especially, as in the case of Riviera, if previous to
the sale to the third party, a written notice was sent by the lessor
380 SCRA 245 (2002).
Ibid, at p. 259.
91
499 SCRA 276 (2006).
89
90
FORMATION OF SALE
163
to the lessee confirming that the latter has lost his right of first
refusal.
The prevailing doctrine therefore is that a sale entered into
in violation of a right of first refusal of another person found in a
valid principal contract is rescissible.92 The basis of the right of
first refusal must be the current offer of the seller to sell or the
offer to purchase of a prospective buyer. Only after the lessee
grantee fails to exercise its rights under the same terms and
within the period contemplated can the owner validly offer to sell
the property to a third person, again under the same terms as
offered to the grantee.93
b. Various Rulings On Rights of First Refusal
Contained in Lease Agreement
(1) Rentals Deemed to Be Consideration to
Support Right
Lucrative Realty and Dev. Corp. v. Bernabe, Jr.,94 held that
“[I]t is not correct to say that there is no consideration for the
grant of the right of first refusal if such grant is embodied in the
same contract of lease. Since the stipulation forms part of the
entire lease contract, the consideration for the lease includes
the consideration for the grant of the right of first refusal.”95 The
reasoning of the Court is rather strange considering that by its
previous rulings, an enforceable right of first refusal does not
need consideration for its validity and effectivity, since it is merely
a stipulation in a valid principal contract.
(2) Sublessee May Not Take Advantage of
Right of First Refusal of Sublessor
A right of first refusal granted in the contract of lease in favor
of the lessee cannot be availed of by the sublessee because such
92
Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668 (1992); Rosencor
Development Corp. v. Inquing, 354 SCRA 119 (2001); Conculada v. Court of Appeals,
367 SCRA 164 (2001).
93
Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668 (1992); Polytechnic
University of the Philippines v. Court of Appeals, 368 SCRA 691 (2001).
94
392 SCRA 679 (2002).
95
Ibid, at p. 685.
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LAW ON SALES
sublessee is a stranger to the lessor who is bound to respect
the right of first refusal in favor of the lessee only; and had the
contract of lease granted the lessee the right to assign the lease,
then the assignee would be entitled to exercise such right as he
steps into the shoes of the assignor-lessee.96
(3) Right Does Not Extend with the Extension
of the Lease
A provision entitling the lessee the option to purchase the
leased premises is not deemed incorporated in the impliedly
renewed contract because it is alien to the possession of the
lessee.97 The right to exercise the option to purchase expired with
the termination of the original contract of lease.98
4. Proposed Doctrine on Option Contracts Vis-à-Vis
Right of First Refusal Rulings
a. Alternative Doctrine of Enforceability of
Rights of First Refusal
In both his main decision in Ang Yu Asuncion and in his
dissenting opinion in Equatorial Realty Dev. Inc., Justice Vitug
posited that “a right of first refusal cannot have the effect of a
contract because, by its very essence, certain basic terms would
have yet to be determined and fixed,”99 for lacking in any meeting
of the minds as to the certain price for the determinate subject
matter, the eminent justice rightfully asked the question, if there
could be a “breach of contract” of the right of first refusal, then
at what price or consideration would be the basis of specific
performance?100 And to which his answer in Ang Yu Asuncion
was —
In the law on sales, the so-called “right of first refusal”
is an innovative juridical relation. Needless to point out,
it cannot be deemed a perfected contract of sale under
Article 1458 of the Civil Code. Neither can the right of
Sadhwani v. Court of Appeals, 281 SCRA 75 (1997).
Dizon v. Court of Appeals, 396 SCRA 152 (2003).
98
Ibid.
99
264 SCRA 483, 531.
100
Ibid.
96
97
FORMATION OF SALE
165
first refusal, understood in its normal concept, per se
be brought within the purview of an option under . . .
Article 1479 . . . or possibly an offer under Article 1319
of the same Code . . . [as both of them] require, among
other things, a clear certainly on both the object and
the cause or consideration of the envisioned contract.
In a right of first refusal, while the object might be
made determinate the exercise of the right, however,
would be depended not only on the grantor’s eventual
intention to enter into a binding juridical relation with
another but also on terms, including the price, that
obviously are yet to be later firmed up. Prior thereto,
it can at best be so described as merely belonging to
class of preparatory juridical relations governed not by
contracts (since the essential elements to establish the
vinculum juris would still be indefinite and inconclusive)
but by, among other laws of general application, the
pertinent scattered provisions of the Civil Code on
human conduct.101
Outside of being a stipulation in a valid contract, like a
contract of lease, may an agreement between promissor and
promissee granting the latter a right of first refusal over a
determinate subject matter, and when supported by a separate
consideration, not rise to the level of becoming a binding
contractual commitment? The author believes that such an
agreement would be a valid contractual relation, within the
coverage of the innominate contract do ut facias, “I give that you
may do.” In other words, the separate consideration is given by
the promissee to support a contractual commitment on the part
of the promissor that if the promissory ever decides to sell the
determinate subject matter, then he will negotiate in good faith
with the promissee for the possibility of entering into a sale.
Binding oneself to enter into negotiations for a contract to sell or
a contract of sale is essentially an personal obligation “to do.”
Under such a premise, the “Agreement on Right of First
Refusal,” would be a binding contract between the promissor
and the promissee, when supported by a separate consideration,
101
238 SCRA 602, 614-615.
166
LAW ON SALES
like much in the case of a valid option contract under Articles
1319 and 1479 of the Civil Code, and a “mutual promises to
negotiate a possible contract of sale over a determinate subject
matter” would be akin to the mutual promise to buy and sell
under said Article 1479. The obligation is not to enter into a sale,
but rather to negotiate in good faith for the possibility of entering
into a sale; and when the promissor has in fact negotiated in
good faith, but the parties’ minds could not meet on the price
and the terms of payment, then promissor has complied with his
obligation. However, since the underlying obligation in a “right
of first refusal contract” is a personal obligation to do, its breach
can never be remedied by an action for specific performance,
because of the underlying public policy against involuntary
servitude.
The result would not be the same as that posited by
Justice Vitug, for the “right of first refusal contract” being valid
and binding, the remedy of specific performance is unavailable
by reason of the nature of the underlying obligation, but that the
remedy of rescission for breach of contract would be available
which would allow recovery of damages under Contract Law,
rather than the difficult cause of action for recovery of damages
based on “abuse of right” under Article 19 of the Civil Code on
Human Relations.
b. Enforceability of Option Rights Should Be at Par With,
If Not at a Higher Level Than, Rights of First Refusal
Vazquez v. Ayala Corp.,102 distinguished an option from a
right of first refusal, thus: “An option is a preparatory contract
in which one party grants to another, for a fixed period and at a
determined price, the privilege to buy or sell, or to decide whether
or not to enter into a principal contract. ... In a right of first refusal,
. . . while the object might be made determinate, the exercise of
the right would be dependent not only on the grantor’s eventual
intention to enter into a binding juridical relation with another
but also on terms, including the price, that are yet to be firmed
102
443 SCRA 231 (2004).
FORMATION OF SALE
167
up.103 ... Consequently, the ‘offer’ may be withdrawn anytime by
communicating the withdrawal to the other party.”104
Vazquez therefore emphasizes the rather obvious point:
if an option, constituted of determinate subject matter, certain
price, with separate consideration, can be withdrawn within the
option period to remove any hope of an action to enforce a sale,
then more so can the offeror withdraw a right of first refusal and
destroy any chance of there ever coming into being a sale upon
which an action for specific performance could be achieved.
The rulings of the Court in Equatorial Realty and Parañaque
Kings would have the legal effect of placing rights of first refusal
attached to principal contracts like lease, of having greater legal
enforceability than option contracts which are supported by
separate consideration. The Court should therefore revisit its
ruling in Ang Yu Asuncion on option contracts.
The better rule would be that in case an option is supported
by a separate consideration, the optionee shall have the right
to exercise the option or accept the offer at anytime during the
option period and the same would give rise to a valid and binding
contract of sale. In the same manner, if separate consideration
has been received by the optioner for the grant of the option,
he cannot withdraw the offer during the option period, and any
attempt to so withdraw the offer during the option period shall be
void. This position seems to be affirmed in the recent ruling in
Carceller, and would validate the rationale of Article 1324 of the
Civil Code on why a separate consideration is required for a valid
option contract.
It may happen that the optioner does not only withdraw
the offer during the option period but also sells the property to a
third party during that period. Such a situation does not affect the
above proposed rule since the acceptance of the offer (i.e., the
exercise of the option) by the optionee during the option period
would still give rise to a valid sale over the subject property, but
that the rules on third party buyer in good faith should prevail. If the
103
104
Ibid, at p. 255.
Ibid, at p. 256.
168
LAW ON SALES
third party buyer bought the property from the optioner knowing
of the existence of the option in favor of the optionee, he would
be a proper party to the action for specific performance that the
optionee can bring against the optioner once he has exercised
his option. On the other hand, if the third party buyer bought the
property in good faith and for value, then he is protected by law,
and the remedy of the optionee (who has become the buyer in a
valid and binding sale) is to sue the optioner (who has become
the seller) for recovery of damages for breach of contract of sale,
rather than to sue for damages for breach of the option contract
as held in Ang Yu Asuncion.
In any event the ruling in Ang Yu Asuncion would suggest
that the best scheme for a prospective buyer to take if he
is interested in a specific property, but wants to maintain an
option to be able to get out of it later on, would be the earnest
money scheme, whereby a sale is perfect upon the granting of
the earnest money, with clear option on the part of the buyer to
withdraw from the contract by forfeiting the earnest money. This
arrangement is recognized in one case105 by the Supreme Court.
5. Mutual Promises to Buy and Sell
The promise to sell a determinate thing coupled with a
correlative promise to buy at a specified price is binding as an
executory agreement.106 Even in this case the certainty of the
price must also exist, otherwise, there is no valid and enforceable
contract to sell.107 Such an arrangement would be the “true”
contract to sell, which embodies the main obligation of the seller
to enter into a contract of sale upon full compliance with the
condition of the buyer fully paying the purchase price, wherein
the main obligation is a person obligation “to do.” Such contracts
to sell are really within the policitacion stage for they do not
represent a species of a sale defined under Article 1458 of the
Civil Code.
Spouses Doromal, Sr. v. Court of Appeals, 66 SCRA 575 (1975).
Art. 1479, Civil Code.
107
Tan Tiah v. Yu Jose, 67 Phil. 739 (1939).
105
106
FORMATION OF SALE
169
On the other hand, Ang Yu Asuncion held that “[a]n
unconditional mutual promise to buy and sell, as long as the object
is made determinate and the price is fixed, can be obligatory
on the parties, and compliance therewith may accordingly be
exacted,”108 which means that an action for specific performance
is available. The ruling covers a form of “contract to sell” that
are within the perfection stage of sales defined by Article 1458
for they embody the main obligation of the seller “to transfer
ownership and delivery possession” of the subject matter upon
fulfillment of the condition that buyer pays the purchase price.
In the same manner, Villamor v. Court of Appeals,109 held that
acceptance of the option offered, is equivalent to an acceptance
of an offer to sell for a price certain and creates a bilateral
contract to sell and buy and upon acceptance, the offeree, ipso
facto assumes obligations of a buyer. This doctrine is in stark
contrast to another line of decisions that hold that a contract to
sell merely contains obligations “to agree” to enter into contracts
of sale, and being personal obligations may not be enforced by
specific performance.
The Court of Appeals in Gan v. Reforma,110 held that in an
agreement to buy and sell, which is an executory contract, title to
the property does not pass to the promissee and the contracting
parties are merely given the right to demand fulfillment of the
contract in the proper cases, or damages for breach thereof
where it is not possible to carry out its terms.
This doctrine which looks at the contract to sell or mutual
promises to buy and sell as constituting merely personal obligation
to enter into a sale, and breach of which does not authorize
an action for specific performance but recovery of damages
seems to have been affirmed by the Court in Coronel v. Court
of Appeals,111 where it held that: “In a contract to sell, upon the
fulfillment of the suspensive condition which is the full payment
108
Supra, citing Art. 1459 and Atkins, Kroll and Co., Inc. v. Cua Hian Tek, 102 Phil.
948 (1958).
109
202 SCRA 607 (1991).
110
11 CAR 57 (1967).
111
263 SCRA 15 (1996).
170
LAW ON SALES
of the purchase price, ownership will not automatically transfer
to the buyer although the property may have been previously
delivered to him. The prospective seller still has to convey title
to the prospective buyer by entering into a contract of absolute
sale.”
The various issues on the matter are discussed in greater
details in Chapter 11.
PERFECTION STAGE: OFFER AND ACCEPTANCE
A contract of sale is “born” from the moment there is a
meeting of minds upon the thing which is the object of the contract
and upon the price and the manner of its payment. This meeting
of the minds speaks of the intent of the parties entering into the
contract respecting the subject matter and the consideration
thereof.112
In succinct language, the Court held that a “sale is at once
perfected when a person (the seller) obligates himself for a price
certain, to deliver and to transfer ownership of a specified thing or
right to another (the buyer) over which the latter agrees.”113
Consent may be vitiated by any of the following: mistake,
violence, intimidation, undue influence and fraud, but they do
not make the contract void ab initio but only voidable, and the
contract is binding upon the parties unless annulled by proper
court action, which when obtained would restore the parties to
the status quo ante insofar as legally and equitably possible.114
Until a sale is perfected, it cannot be an independent source
of obligation, nor serve as a binding juridical relation. In sales
particularly, the contract is perfected when the seller obligates
himself, for a price certain, to deliver and to transfer ownership
of a thing or right to the buyer, over which the latter agrees and
obligates himself to pay the price.115
112
Santos v. Heirs of Jose P. Mariano, 344 SCRA 284 (2000); Katipunan v.
Katipunan, 375 SCRA 199 (2002).
113
Valdez v. Court of Appeals, 439 SCRA 55 (2004). Also Blas v. Angeles-Hutalla,
439 SCRA 273 (2004).
114
Katipunan v. Katipunan, 375 SCRA 199 (2002).
115
Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994).
FORMATION OF SALE
171
In one case,116 the Court held that even when there is a
duly executed written document purporting to be a sale, the
same cannot be considered valid when the evidence presented
shows that there had been no meeting of the minds between the
supposed seller and the corresponding buyer.
1. Consent that Perfects a Sale
Being a consensual contract, Article 1475 of the Civil
Code provides that the 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.117 Article 1319 defines “consent” or
“meeting of minds” as “manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are to
constitute the contract.” It stresses that the offer must be certain,
and the acceptance absolute — it must be plain, unequivocal,
unconditional and without variance of any sort from the proposal;118 and that a qualified acceptance constitutes merely a
counter-offer which must in turn be absolutely accepted to give
rise to a valid and binding contract.
Gomez v. Court of Appeals,119 held that “[F]or a contract,
like a contract to sell, involves a meeting of minds between two
persons whereby one binds himself, with respect to the other, to
give something or to render some service. Contracts, in general,
are perfected by mere consent, which is manifested by the
meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be
certain and the acceptance absolute.”120
2. Offer Must Be “Certain”
For the perfection of a valid sale, there must be a “meeting
of minds,” which means that an “offer certain” is met by an
Santos v. Heirs of Jose P. Mariano, 344 SCRA 284 (2000).
National Grains Authority v. Intermediate Appellate Court, 171 SCRA 131 (1989);
C & C Commercial Corp. v. Philippine National Bank, 175 SCRA 1 (1989); Villamor v.
Court of Appeals, 202 SCRA 607 (1991).
118
Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Navarra v. Planters
Dev. Bank, 527 SCRA 562 (2007).
119
340 SCRA 720 (2000).
120
Ibid, at p. 728.
116
117
172
LAW ON SALES
“absolute acceptance;” any other offer which is not certain, no
matter how absolutely it is accepted, can never give rise to a
valid sale.
In the Law on Sales, what makes an offer “certain” is when
it is floated by the offeror having within its terms the description
of the subject matter that has all three requisites of “possible
thing,” licit, and determinate or at least determinable; and with a
price that has the requisites of being real, money or its equivalent
(i.e., constitute valuable consideration), and must be certain or at
least ascertainable, including on the terms of payment thereof.
In other words, an offer is “certain” only where there is an offer
to sell or an offer to buy a subject matter and for a price having
all the seven essential requisites mandated by law for subject
matter and price. The absence of even just one of the essential
requisites pertaining to either subject matter or price in the terms
of the offer, makes such offer “not certain,” and cannot give rise
to a valid sale, even when such offer is absolutely accepted by
the offeree.
3. Acceptance Must Be “Absolute”
Zayco v. Serra,121 held that in order for an acceptance to have
the effect of converting an offer to sell into a perfected contract, it
must be plain and unconditional, and it will not be so, if it involves
any new proposition, for in that case, it will not be in conformity
with the offer, which is what gives rise to the birth of the contract.
Clarifying the extent by which acceptance must be absolute,
Beaumont v. Prieto,122 held that promises are binding when and
so long as they are accepted in the exact terms in which they
are made, and that it would not be legally proper to modify the
conditions imposed by the offeror without his consent. In order
that the acceptance of a proposition or offer may be efficacious,
perfect and binding upon the parties thereto, it is necessary that
such acceptance should be unequivocal and unconditional and
the acceptance and proposition shall be without any variation
121
122
44 Phil. 326 (1923).
41 Phil. 670 (1916).
FORMATION OF SALE
173
whatsoever. Any modification or deviation from the terms of the
offer annuls the latter and frees the offeror.
In Yuvienco v. Dacuycuy,123 the use of the term “to negotiate”
in the acceptance letter given by the buyer was held to indicate
that there was as yet no absolute acceptance of the offer made,
since the term is practically the opposite of the idea that an
agreement has been reached.
In DBP v. Ong,124 the Court held that placing the word
“Noted” and signing such note at the bottom of the written offer
cannot be considered an acceptance that would give rise to a
valid sale: “By no stretch of imagination, however, can the mere
‘NOTING’ of such an offer be taken to mean an approval of the
supposed sale. Quite the contrary, the very circumstance that the
offer to purchase was merely ‘NOTED’ by the branch manager
and not ‘approved,’ is a clear indication that there is no perfected
contract of sale to speak of.”125
In Limketkai Sons Milling, Inc. v. Court of Appeals,126 the Bank
of the Philippine Islands (BPI), represented by a duly authorized
officer, came to an agreement with a buyer over a parcel of land
at an agreed price of 51,000.00 per square meters to be paid in
cash. Notwithstanding the final agreement, the buyer inquired if it
was possible to pay on credit terms the purchase price. The BPI
representative stated that there was no harm in trying to ask for
payment on terms because in previous transactions, the same
had been allowed by the BPI board. A couple of days later, BPI
informed the buyer that the lot was no longer for sale. The buyer
brought an action for specific performance against BPI which
claimed that with the offer to pay the purchase price in credit
terms, there was no perfected sale.
The Court held that there was a perfected contract between
BPI and the buyer there having been mutual consent between
the parties, the subject matter was definite; and the consideration
was determined. The Court cited Villonco doctrine in upholding
104 SCRA 668 (1981).
460 SCRA 170 (2005).
125
Ibid, at p. 183.
126
250 SCRA 523 (1995).
123
124
174
LAW ON SALES
the resolution and held: “It is true that an acceptance may contain
a request for certain changes in the terms of the offer and yet be
a binding acceptance. ‘So long as it is clear that the meaning of
the acceptance is positively and unequivocally to accept the offer,
whether such request is granted or not, a contract is formed.’”
The Court also held that the fact that the deed of sale still
had to be signed and notarized did not mean that no contract had
already been perfected since a sale of land is valid regardless of
the form it may have been entered into. The requisite form under
Article 1358 of the Civil Code requiring the deed to be in a public
instrument was held merely for greater efficacy or convenience
and the failure to comply therewith did not affect the validity and
binding effect of the act between the parties.
On motion for reconsideration, in Limketkai Sons Milling,
Inc. v. Court of Appeals,127 the Court reversed it earlier resolution,
holding that the acceptance of the offer was not unqualified and
absolute because it was not identical in all respects with that of
the offer so as to produce consent, thus —
This was not the case herein considering that
petitioner’s acceptance of the offer was qualified, which
amounts to a rejection of the original offer. And contrary
to the petitioner’s assertion that its offer was accepted
by BPI, there was no showing that petitioner complied
with the terms and conditions explicitly laid down by
BPI for prospective buyers. Neither was petitioner
able to prove that its offer to buy the subject property
was formally approved by the beneficial owner of the
property and the Trust Committee of the Bank, an
essential requirement for the acceptance of the offer
which was clearly specified in BPI’s documents.
The Court had an opportunity in 1997 to re-visit its original
ruling in Limketkai in its decision in Uraca v. Court of Appeals,128
where it held that from the moment a party accepts without
qualification another party’s offer to sell within the period stipulated
therein, a sale is perfected. And although subsequently, the seller
127
128
255 SCRA 626 (1996).
278 SCRA 702 (1997).
FORMATION OF SALE
175
required a much higher price than the original offer, and the buyer
negotiated on the matter but no final agreement was reached, the
first sale remained valid and binding and is not deemed novated
by the fact of negotiation thereafter done on the price.
In Uraca the sellers-lessors offered in writing to the
buyers-lessees the sale of the premises they were renting for
51,050,000.00, which offer was accepted unconditionally in
writing by the buyers. When sellers saw the buyers, the sellers
required a higher price of 51,400,000.00 in cash or manager’s
check and not the 51,050,000.00 as erroneously stated in their
letter-offer. After some haggling, the buyers agreed to the price of
51,400,000.00 but counter-proposed that it be paid in installments
with a down payment of 51,000,000.00, and the balance of
5400,000.00 to be paid in 30 days. The seller did not accept
the counter-offer, and subsequently sold the property to another
party. The Court held that the original sale at 51,050,000.00
remained valid and binding and enforceable against the sellers
and the second-buyer. From the moment of acceptance of the
original offer of the sellers by the buyers, there arose a valid
and binding sale since undisputedly the contractual elements
of consent, object certain and cause occurred. The subsequent
bargaining for an increase price did not result into a novation
since there was no final agreement nor was there a resulting new
contract: “Since the parties failed to enter into a new contract
that could have extinguished their previously perfected contract
of sale, there can be novation of the latter.”129
On the other hand, in Toyota Shaw, Inc. v. Court of
Appeals,130 the Court held that a document cannot constitute a
sale even when it provides for a downpayment “since the provision
on the downpayment made no specific reference to a sale of
a vehicle. Definiteness as to the price is an essential element
of a binding agreement to sell personal property.” The problem
with Toyota Shaw ruling is that, outside of Statute of Frauds
consideration, it considered that a “contract” of sale is only what is
embodied in the document, when the evidence showed that other
elements necessary to constitute a valid contract were agreed
129
130
Ibid, at p. 711.
244 SCRA 320 (1995).
176
LAW ON SALES
upon albeit not included in the document. The better ruling in
Toyota Shaw would have been that the suspensive condition did
not materialize (i.e., not granting of the financing by the indicated
finance company) as to render the contract inefficacious.
a. When “Deviation” Allowed
Villonco v. Bormaheco,131 illustrates how certain deviations
may be made in the acceptance and the same would still convert
the offer into a valid and binding sale.
In that case, Bormaheco sent a written offer to Villonco Realty
providing for the following terms for the sale of its Buendia lots:
5400 per square meters, with earnest money of 5100,000.00,
which will be returned if the sale is not consummated; sale would
be subject to the purchase by Bormaheco of Sta. Ana lots; and
that the deed of sale would be executed in 45 days. Villonco
Realty gave a written reply confirming the terms, with the deviation
that if the sale is not consummated it will earn interest of 10%,
accompanied by a check for the 5100,000.00 earnest money.
Bormaheco encashed the check, and sent a written response
to Villonco Realty stating that: the lots in the Sta. Ana were
particularly described as those belonging to National Shipping
Company; and that the interest of 10% would be computed on a
per annum basis.
Even when Bormaheco was able to purchase the Sta. Ana
lots, it refused to proceed with the sale of the Buendia lots to
Villonco Realty, returned the amount of 5100,000.00, stating that
since Villonco Realty, had given merely a counter-offer to the
original offer made by Bormaheco, and that in turn Bormaheco
had certain amendments to the reply received from Villonco
Realty, no sale had been perfected, there was only a standing
counter-offer which has not been accepted, and that Bormaheco
had a right to withdraw from the offer.
The Court held that there was a perfected sale that arose
from the exchange of correspondences, even if literally, there
was a correction or modification contained in the acceptance,
131
65 SCRA 352 (1975).
FORMATION OF SALE
177
the changes were not substantial, but merely clarificatory. Such
is corroborated also by the fact, that upon receipt of the check
covering the earnest money, Bormaheco had encashed the
same.
b. Acceptance May Be Express or Implied
Acceptance may be evidenced by some act, or conduct,
communicated to the offeror, either in a formal or an informal
manner, that clearly manifest the intention or determination to
accept the offer to buy or sell.
In Gomez v. Court of Appeals,132 the acceptance on the part
of the buyer was manifested through a plethora of acts, such as
payment of the purchase price, declaration of the property for
taxation purposes, and payment of real estate taxes thereon, and
similar acts showing buyer’s assent to the contract.
In Oesmer v. Paraiso Dev. Corp.,133 acceptance of the
terms of the sale of co-ownership rights through an agent was
expressed by the co-owners signing as witnesses to the covering
deed of sale.
c. Acceptance by Letter or Telegram
Acceptance made by letter or telegram does not bind
the offeror except from the time it came to his knowledge.134
Therefore, even if an acceptance has been mailed or sent to the
offeror, the offeror may still withdraw his offer anytime before he
has knowledge of the acceptance.
d. Acceptance Subject to Suspensive Condition
Even when there is a meeting of minds as to the subject
matter and the price, there is deemed to be no perfected sale, if
the sale is subject to suspensive condition.135
340 SCRA 720 (2000).
514 SCRA 228 (2007).
134
Art. 1319, Civil Code.
135
Gan, Sr. v. Reforma, 11 CAR 57 (1967).
132
133
178
LAW ON SALES
People’s Homesite & Housing Corp. v. Court of Appeals,136
held that there can be no perfected sale of a subdivision lot
where the award thereof was expressly made subject to approval
by higher authorities and there eventually was no acceptance
manifested by the supposed awardee.
To the author, the more appropriate doctrine should be that
when a sale is made subject to a suspensive condition, there
is already a contract upon the meeting of the minds, since the
principles of mutuality and obligatory force come into play, but
because the condition has not happened, the contract itself and
its underlying obligations are not yet demandable; and in case of
non-happening of the condition, then the contract is extinguished
as though the contract has never been entered into, as the
consequence of the retroactive effect of the non-happening of a
suspensive condition.137
e. Acceptance in Auction Sales
A sale by auction is perfected when the auctioneer
announces its perfection by the fall of the hammer, or in other
customary manner.138 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.139
Where the goods are put up for sale by auction in lots, each
lot is the subject of a separate contract of sale.140
A right to bid may be reserved expressly by or on behalf
of the seller. Where notice has not been given that the sale by
auction is subject to a right to bid on behalf of the seller, it shall
be unlawful for the seller to bid himself or to employ or induce any
person to bid at such sale on his behalf. Also, it shall be unlawful
for the auctioneer to employ or induce any person to bid at such
133 SCRA 777 (1984).
Art. 1187, Civil Code.
138
Province of Cebu v. Heirs of Rufina Morales, 546 SCRA 315 (2008).
139
Art. 1476, Civil Code.
140
Ibid.
136
137
FORMATION OF SALE
179
sale on his behalf or the seller, or knowingly to take any bid from
the seller or any person employed by him.141
The owner of the property sold at auction may provide the
terms under which the auction will proceed and the same are
binding upon all bidders, whether they knew of such conditions
or not.142
4. Earnest Money
a. Function of Earnest Money
Under Article 1482 of the Civil Code, whenever earnest
money is given in a sale, it shall be considered as part of the
price and as proof of the perfection of the contract. 143 The rule is
“no more than a disputable presumption” and prevails only “in the
absence of contrary or rebuttal evidence.”144
Also, the presumption is founded upon the fact that there must
first be a valid sale. Thus, in San Miguel Properties Philippines
v. Huang,145 it was held that it is not the giving of earnest money,
but the proof of the concurrence of all the essential elements of
the sale which establishes the existence of a perfected sale.146
In Serrano v. Caguiat,147 it was held that the presumption under
Article 1482 does not apply when earnest money is given in a
contract to sell.
Villonco v. Bormaheco,148 held that even when the sale is
subject to a condition, the acceptance of the earnest money
would prove that the sale is conditionally consummated or partly
executed subject to the fulfillment of the condition, the nonfulfillment of which would be a negative resolutory condition.
On the other hand, in Philippine National Bank v. Court of
Appeals,149 the receipt of “earnest money” could not lead to the
Ibid.
Leoquinco v. Postal Savings Bank, 47 Phil. 772 (1925).
143
Escueta v. Lim, 512 SCRA 411 (2007).
144
Philippine National Bank v. Court of Appeals, 262 SCRA 464, 484 (1996).
145
336 SCRA 732 (2000).
146
Reiterated in Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
147
517 SCRA 57 (2007).
148
65 SCRA 352 (1975).
149
262 SCRA 464 (1996).
141
142
180
LAW ON SALES
conclusion that there was a valid and binding sale because of
documentary evidence showing that the parties entered into a
contract to sell, which is akin to a conditional sale where the
efficacy or obligatory force of the vendor’s obligation to transfer
title is subordinated to the happening of a future and uncertain
event, so that if the suspensive condition does not take place,
the parties would stand as if the conditional obligation had never
existed. The Court treated the initial deposit given by the buyer to
the sell in Philippine National Bank “not strictly as earnest money,
but as part of the consideration to [seller’s] promise to reserve
the subject property for the [buyer].”
b. Varying Treatments of Earnest Money
The concept of “earnest money” given under Article 1482
of the Civil Code, is the preferred concept under the law, but
nothing prevents the parties to the sale to treat earnest money
differently. For example, in Spouses Doromal, Sr. v. Court of
Appeals,150 the amount given as earnest money by the buyer,
was acknowledged by the sellers to have been received
under the concept of the old Civil Code, as a guarantee that
the buyer would not back out, and that if they should do so
they would forfeit the amount paid. Spouses Doromal took into
consideration that even with the payment of the earnest money,
that would not by itself give rise to a valid and binding sale,
considering that it is not clear that there was already a definite
agreement as to the price.
When the amount is given only as a guarantee that the
buyer would not back out of the sale, then what was given is not
earnest money as defined under Article 1482 of the Civil Code,
especially when at the time the amount is given, the final terms
of the purchase had not been agreed upon.151 The same is also
true when earnest money is given under the terms of a contract
to sell, in which case the provisions of Article 1482 would also be
inapplicable.152
66 SCRA 575 (1975).
San Miguel Properties Philippines v. Huang, 336 SCRA 737 (2000).
152
Chua v. Court of Appeals, 401 SCRA 54 (2003).
150
151
FORMATION OF SALE
181
c. Distinguishing Earnest Money and Option Money
Adelfa Properties, Inc. v. Court of Appeals,153 enumerates
the distinctions between earnest money and option money,
viz.:
(a) Earnest money is part of the purchase
price, while option money is the money
given as a distinct consideration for an
option contract;
(b) Earnest money is given only where there is
already a sale, while option money applies
to a sale not yet perfected; and
(c) When earnest money is given, the buyer
is bound to pay the balance, while when
the would-be buyer gives option money,
he is not required to buy, but may even
forfeit it depending on the terms of the
option.154
d. Effect of Rescission on Earnest Money Received
In the absence of a specific stipulation, the seller of real
estate cannot keep the earnest money received to answer for the
damages sustained in the event the sale fails due to the fault of
the prospective buyer.155
Under Article 1482 of the Civil Code, whenever earnest
money is given in a sale, it shall be considered as part of the
purchase price and as proof of the perfection of the contract;
consequently, amounts received as part of the downpayment and
to be credited to the payment of the total purchase price could
not be forfeited when the buyer should fail to pay the balance
of the price, especially in the absence of a clear and express
agreement thereon.156 When the seller seeks to rescind the sale,
240 SCRA 565, 580 (1995).
Reiterated in Limson v. Court of Appeals, 375 SCRA 209 (2001); Oesmer v.
Paraiso Dev. Corp., 514 SCRA 228 (2007).
155
Goldenrod, Inc. v. Court of Appeals, 299 SCRA 141 (1998).
156
Ibid.
153
154
182
LAW ON SALES
under Article 1385 of the Civil Code, such rescission creates
the obligation to return the things which were the object of the
contract together with their fruits and interest.157
5. Place of Perfection
Generally, the sale’s place of perfection is where there is a
meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract.158 In case of acceptance
through letter or telegram, it is presumed that the contract was
entered into in the place where the offer was made.159
6. Expenses of Execution and Registration
In general, the expenses for the execution and registration of
the sale shall be borne by the seller, unless there is a stipulation
to the contrary.160 In the case of goods, unless otherwise agreed,
the expenses of, and incidental to, putting the goods into a
deliverable state must be borne by the seller.161
The duty to withhold taxes due on the sale is imposed on
the seller.162
7. Performance Should Not Affect Perfection
Since sale is a consensual contract, then the ability of the
parties to perform the contract (after perfection) does not affect
the perfection of the contract, which occurs when the minds of
the parties have met as to the subject matter, price and terms of
payment.
In Johannes Schuback & Sons Phil. Trading Corp. v.
Court of Appeals,163 where the seller quoted to the buyer the
157
Ibid. Its seems from the decision that the requirement for restitution prohibits the
rescinding seller from recovering part of the damages caused by reason of failure of the
buyer to proceed with the sale.
158
Art. 1319, Civil Code.
159
Ibid.
160
Art. 1487, Civil Code.
161
Art. 1521, Civil Code.
162
Equitable Realty Dev., Inc. v. Mayfair Theater, Inc., 332 SCRA 139 (2000).
163
227 SCRA 719 (1993).
FORMATION OF SALE
183
items offered for sale, by item number, quantity, part number,
description and unit price and total price, and the buyer had sent
in reply a purchase order, there was already a perfected sale,
even when the required letter of credit had not been opened by
the buyer, thus —
This omission, however, does not prevent the
perfection of the contract between the parties, for the
opening of a letter of credit is not to be deemed a
suspensive condition. The facts herein do not show that
the petitioner reserved title to the goods until private
respondent had opened a letter of credit. Petitioner, in
the course of its dealings with private respondent, did
not incorporate any provision declaring their contract
of sale without effect until after the fulfillment of the
act of opening a letter of credit. The opening of a
letter of credit in favor of a vendor is only a mode of
payment. It is not among the essential requirements
of a contract of sale enumerated in Article[s] 1305 and
1474 of the Civil Code, the absence of any of which
will prevent the perfection of the contract from taking
place.164
In Balatbat v. Court of Appeals,165 the Court reiterated the
rule that the non-payment of the price does not render void nor
reverse the effects of the perfection of the contract of sale, thus
—
. . . Devoid of any stipulation that “ownership in
the thing shall not pass to the purchaser until he has
fully paid the price” [citing Art. 1478, New Civil Code],
ownership in the thing shall pass from the vendor to
the vendee upon actual or constructive delivery of the
thing sold even if the purchase price has not yet been
fully paid. The failure of the buyer to make good the
price does not, in law, cause the ownership to revest
to the seller unless the bilateral contract of sale is first
rescinded or resolved pursuant to Article 1191 of the
New Civil Code. Non-payment only creates a right to
164
165
Ibid, at p. 722.
261 SCRA 128 (1996).
184
LAW ON SALES
demand the fulfillment of the obligation or to rescind
the contract.166
However, the Court on other occasions has taken the
position that when the seller is no longer the owner of the land
sold at the time of sale, the contract is void,167 in spite of the fact
that Articles 1402 and 1459 of the Civil Code recognize that a
sale is valid even the subject matter is not owned by the seller at
the time of perfection, provided the seller has a right to transfer
ownership at the time of delivery.
In Nool v. Court of Appeals,168 the Court, held that although
Articles 1402 and 1459 of the Civil Code recognize that the
seller need not be the owner of the subject matter at the time of
perfection, it nevertheless considered a situation where the seller
is not the owner both at the time of perfection and delivery of the
subject matter as to be similar to item number 5 of Article 1409 of
the Civil Code as to “contemplate an impossible service,” which
prevents the seller from complying with his obligation under
Art. 1459 to transfer ownership, and therefore would render
the contract “inoperative — and by the same analogy, void.”
As stated by the author elsewhere in this book, the comparison
to “impossible service” is misplaced because the obligations
created under a valid sale are real obligations “to give” and not
personal obligations or service.
FORM OF SALES
By way of introduction, it should be noted that the discussions
in this section point out that rules on forms, and of validity and
enforceability of contracts of sale, are strictly kept within the
contractual relationship of the seller and buyer pursuant to the
characteristic of relativity of every contract, and do not necessarily
apply to third parties whose rights may be affected adversely
by the terms of a sale. In addition, except for Statute of Frauds
which govern enforceability (i.e., performance), rules relating to
Ibid, at p. 140.
Dignos v. Court of Appeals, 158 SCRA 375 (1988).
168
276 SCRA 149 (1997).
166
167
FORMATION OF SALE
185
form and validity pertain more to the perfection stage of a sale,
and would not necessarily be binding doctrines when it comes to
the performance stage of a sale.
1. Form Not Generally Important for Validity of Sale
Article 1483 provides that, subject to the provisions of the
Statute of Frauds, “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.” In
other words, Article 1483 stresses that sale being a consensual
contract, no form is really required for its validity.
Thus, Gallar v. Husain,169 held that the sale of land under
private instrument is valid, and that the sale would be consummated and title transferred upon delivery of the land to the buyer.170
Universal Robina Sugar Milling Corp. v. Heirs of Angel
Teves,171 likewise held that the sale over land was not
registered does not affect its validity, being consensual in
nature, it is binding between the parties, thus: “Formalities
intended for greater efficacy or convenience or to bind third
persons, if not done, would not adversely affect the validity or
enforceability of the contract between the contracting parties
themselves.”
a. Requirement for Public Instrument for
Immovables under Article 1358
In contrast, Article 1358 of the Civil Code provides that
“[a]cts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights
over immovable property” must appear in a public document;
however, it specifically provides that “sales of real property or
an interest therein are governed by Articles 1403, No. 2, and
1405.” The same article also provides that all other contracts
not enumerated therein where the amount involved exceeds
20 SCRA 186 (1967).
Also F. Irureta Goyena v. Tambunting, 1 Phil. 490 (1902).
171
389 SCRA 316 (2002).
169
170
186
LAW ON SALES
5500.00 must appear in writing, even a private one, “[b]ut sales
of goods, chattels or things in action are governed by Articles
1403, No. 2 and 1405.”
Despite the seemingly mandatory provisions of Article
1358, Dalion v. Court of Appeals,172 held that the provisions
thereof on the necessity of public document are for purposes
of convenience, not for validity or enforceability.173 Thus, even
documents enumerated under Article 1358 which are not found
in a public instrument are still valid and enforceable, and that
the article merely grants a cause of action to the party to the
contract in a suit to sue to compel the other party to have the
document covering the contract, acknowledged before a notary
public.174 Both Articles 1357 and 1406 of the Civil Code refer to
Article 1358, and provide that when a contract is enforceable
under the Statute of Frauds, and a public document is necessary
for its registration in the Registry of Deeds, the parties may
avail themselves of the right and remedy to compel the other
party to observe such form, and such remedy may be exercised
simultaneously with the action upon the contract.175
Limketkai Sons Milling, Inc. v. Court of Appeals,176 held that
the fact that the deed of sale still has to be signed and notarized
did not mean that no contract has already been perfected — the
requisite form under Article 1358 is merely for greater efficacy or
convenience and the failure to comply therewith does not affect
the validity and binding effect of the act between the parties.
But when it comes to third parties, Talusan v. Tayag,177
held that an unregistered deed of sale of a condominium unit
has no binding effect with respect to third persons who have no
knowledge of it. Likewise, Santos v. Manalili,178 held that a sale of
182 SCRA 872 (1990).
Reiterated in Agasen v. Court of Appeals, 325 SCRA 504 (2000); Martinez v.
Court of Appeals, 353 SCRA 714 (2001).
174
Reiterated in Heirs of Ernesto Biona v. Court of Appeals, 362 SCRA 29 (2001).
175
Reiterated in Caoili v. Court of Appeals, 314 SCRA 345 (1999); Agasen v. Court
of Appeals, 325 SCRA 504 (2000); Martinez v. Court of Appeals, 358 SCRA 38 (2001).
176
250 SCRA 523 (1995).
177
356 SCRA 263 (2001).
178
476 SCRA 679 (2005).
172
173
FORMATION OF SALE
187
a piece of land appearing in a private deed cannot be considered
binding on third persons if it is not embodied in a public instrument
and recorded in the Registry of Deeds.
b. Function of Deed of Sale
The deed of sale operates as a formal or symbolic delivery
of the property sold and authorizes the buyer to use the document
as proof of ownership.179 The ability to cover all forms of sale,
whether the subject matter is tangible or intangible, makes
the execution of a public document one of the highest form of
constructive delivery in the Law on Sales.
To make it a public document, a deed of sale must be properly
subscribed and acknowledged before a notary public; and when
so acknowledged, a deed of sale enjoys the presumption of
regularity and due execution.180
Consequently, a “Deed of Absolute Sale” that is a public
document has in its favor the presumption of regularity, and
to contradict the same, there must be evidence that is clear,
convincing and more than merely preponderant; otherwise, the
document should be upheld.181 In addition, a notarized Deed of
Absolute Sale carries the evidentiary weight conferred upon it with
respect to its execution.182 Likewise, between bare allegations
and the notarized deed of absolute sale, the latter, which is a
public documents, prevails for being prima facie evidence.
Salonga v. Concepcion,183 summarized the principles involved when it held that notarization of the document does not
guarantee its validity nor those of its contents,184 because it is
not the function of the notary public to validate an instrument
that was never intended by the parties to have any binding
legal effect, and neither is the notarization of a document
179
Manuel R. Dulay Enterprises, Inc. v. Court of Appeals, 257 SCRA 174 (1996);
Power Commercial and Industrial Corporation v. Court of Appeals, 274 SCRA 597 (1997);
Garcia v. Court of Appeals, 312 SCRA 180 (1999).
180
Bravo-Guerrero v. Bravo, 465 SCRA 244 (2005).
181
Ladignon v. Court of Appeals, 336 SCRA 42 (2000).
182
Yason v. Arciaga, 449 SCRA 458 (2005).
183
470 SCRA 291 (2005).
184
Also Nazareno v. Court of Appeals, 343 SCRA 637 (2000).
188
LAW ON SALES
conclusive of the nature of the transaction conferred by the
said document, nor is it conclusive of the true agreement of
the parties thereto.
The execution and notarization of a deed of sale, though
a form of constructive delivery, is not conclusive presumption
of delivery of possession.185 On the other hand, the buyer’s
immediate taking of possession and occupation of the property
subject matter of the contract corroborates the truthfulness
and authenticity of the deed of sale;186 conversely, the seller’s
continued possession of the property makes dubious the sale
between the parties.187
On the other hand, when a deed of sale is merely subscribed
and sworn to by way of jurat (as contrasted from a notarial
acknowledgment), it would not be a public document because
it was invalidly notarized; it remains a private document, subject
to the requirements of proof under Section 20, Rule 132 of the
Rules of Court, as to its due execution and authenticity.188
R.F. Navarro & Co. v. Vailoces,189 held that even if the Deeds
of Sale were notarized by one who was not a notary public, it
did not affect the validity thereof nor the contents therein,190 and
merely converted them into private documents, which remained
valid contracts of sale between the parties, since sale is a
consensual contract and is perfected by mere consent.
In Dalumpines v. Court of Appeals,191 where the signature
of the sellers were not affixed on their names but actually were
found in the acknowledgment of the notarized Deed of Absolute
Sale, the Court held that the deed was not entitled to full faith
and credit considering that the notary public who is designated
by law to certify to the due execution of deeds, i.e., instruments
affecting title to real property, did not observe utmost care in the
Santos v. Santos, 366 SCRA 395 (2001).
Alcos v. IAC, 162 SCRA 823, 837 (1988).
187
Santos v. Santos, 366 SCRA 395 (2001); Domingo v. Court of Appeals, 367
SCRA 368 (2001).
188
Tigno v. Aquino, 444 SCRA 61 (2003).
189
361 SCRA 139 (2001).
190
Also Tigno v. Aquino, 444 SCRA 61 (2003).
191
336 SCRA 538 (2000).
185
186
FORMATION OF SALE
189
performance of his duty and took for granted the solemn duties
appertaining to his office, contrary to the requirements under
Section 1 of Public Act No. 2103 which requires that the notary
public shall certify that the person acknowledging the instrument
or document is known to him and that he is the same person
who executed it, and acknowledged that the same is his free act
and deed. In this case, the notary public cannot acknowledge an
inexistent contract for want of the signatures of the contracting
parties.
In Gomez v. Court of Appeals,192 the Court upheld the
Contract to Sell, which explicitly provided for additional terms and
conditions upon which the lot awardees are bound: “Although
unsigned, the Contract to Sell . . . constitutes the law between the
contracting parties. After all, under the law there exists a binding
contract between the parties whose minds have met on a certain
matter notwithstanding that they did not affix their signatures to
its written form.”
On the other hand, in Lumbres v. Tablada, Jr.,193 the Court
held that substantial variance in the terms between the Contract
to Sell and the concomitant Deed of Absolute Sale, did not
void the transaction between the parties “for it is truism that the
execution of the Deed of Absolute Sale effectively rendered the
previous Contract to Sell ineffective and cancelled,” through the
process of novation.
2. When Form of Sale Affects Its Validity
The general rule therefore is that form is not important for
the validity of a sale, except in the following instances:
(a) The power to sell a piece of land or interest
therein must be in writing, otherwise, the
sale thereof by the agent (even when the
sale itself is in writing) would be void;194
192
340 SCRA 720 (2000), citing People’s Industrial and Commercial Corporation v.
Court of Appeals, 281 SCRA 207 (1997).
193
516 SCRA 575 (2007).
194
Art. 1874, Civil Code.
190
LAW ON SALES
(b) Sale of large cattle must be in writing,
otherwise the sale would be void; and no
sale of large cattle shall be valid unless
the sale is registered with the municipal
treasurer who shall issue a certificate of
transfer;195 and
(c) Sale of land by “non-muslim hill tribe cultural
minorities all throughout the Philippines”
is void if not approved by the National Commission on Indigenous Peoples (NCIP),196
which took over the previous requisite of
approval by the Provincial Governor under
Section 145 of Administrative Code of
Mindanao and Sulu.197
Cosmic Lumber Corp. v. Court of Appeals,198 held that the
authority of an agent to execute a contract for the sale of real
estate must be conferred in writing and must give him specific
authority; and that the express mandate required by law to
enable an appointee of an agency couched in general terms to
sell must be one that expressly mentions a sale or that includes
a sale as a necessary ingredient of the act mentioned; and that
the power granted to an agent to institute a suit and to appear at
Art. 1581, Civil Code; Sec. 529, Revised Adm. Code.
Rep. Act No. 8371. Briefly, under Sec. 120 of Comm. Act 141 (The Public Land
Act), provided that conveyances and encumbrances made by non-Christians shall not
be valid unless duly approved by the Commission on National Integration (CNI), which
power to approve was transferred to the Commission of Mindanao and Sulu under Rep.
Act No. 4252, and the provincial governor, under Rep. Act No. 3872. Pres. Decree 690
(amended by PD 719), replaced the CNI with the Southern Philippines Development
Authority (SPDA) for Regions IX to XII and transferred CNI’s power to the SPDA with
respect to Muslims, while the power over “non-muslim, hill tribe cultural minorities all
throughout the Philippines,” was transferred to the Presidential Assistant on National
Minorities (PANAMIN) under the Office of the President. PANAMIN was succeeded by the
Office of Muslim Affairs and Cultural Communities under Executive Order No. 122 (1987),
which in turn was succeeded by the Office of the Northern Cultural Communities under
Executive Order No. 122-B (1987), which in turn was succeeded in 1997 by the National
Commission on Indigenous Peoples (NCIP) under Rep. Act No. 8371.
197
Tac-an v. Court of Appeals, 129 SCRA 319 (1984). Section 145 of the Revised
Administrative Code of Mindanao and Sulu, which provides that any transaction involving
real property with non-Christian tribes shall bear the approval of the governor, has been
repealed by Rep. Act No. 4252 (19 June 1965).
198
265 SCRA 168 (1996).
195
196
FORMATION OF SALE
191
pre-trial and enter into any stipulation of facts and/or compromise
agreement does not include the authority to sell the land by way
of compromise, and any sale effected under such authority is
void.
Raet v. Court of Appeals,199 held that Article 1874 of the Civil
Code requires for the validity of a sale involving land that the
agent should have an authorization in writing, without which the
resulting sale entered into in behalf of the principle would be void.
Delos Reyes v. Court of Appeals,200 held that when a son
enters into an oral sale covering a real property registered in the
name of his father, such sale would be void under Article 1874
of the Civil Code, which requires that when the sale of a piece
of land or any interest therein is through an agent, the authority
of the latter shall be in writing; otherwise, the sale shall be void.
City-Lite Realty Corp. v. Court of Appeals201 held that when
the sale by a corporation involves a piece of land, the authority
of the individual acting as agent must be in writing, otherwise,
the sale is void and cannot be saved under principles of estoppel
and apparent authority.202 Even the receipt by the supposed
agent of part of the purchase price does not validate the void
sale.203
It should also be noted that just because the authority of
the agent to sell a parcel of land is in writing, does not mean that
the actual sale would therefore be exempt from the requirements
of the Statute of Frauds. Thus, the Court held in Torcuator v.
Bernabe,204 that a special power of attorney authorizing the agent
to execute a sale in their favor is not the memorandum required
under Article 1403 of the Civil Code to take the sale out of the
provisions of the Statute of Frauds because it does not contain
the essential elements of the purported contract, and more tell295 SCRA 677 (1998).
313 SCRA 632 (1999).
201
325 SCRA 385 (2000).
202
Pineda v. Court of Appeals, 376 SCRA 222 (2002).
203
Dizon v. Court of Appeals, 396 SCRA 154 (2003); Firme v. Bukal Enterprises and
Dev. Corp., 414 SCRA 190 (2003).
204
459 SCRA 439 (2005).
199
200
192
LAW ON SALES
ingly, does not even refer to any agreement for the sale of the
property.
In Oesmer v. Paraiso Dev. Corp.,205 it was held that when
the Contract to Sell was signed by the co-owners themselves as
witnesses, then the written authority mandated under Article 1874
was no longer required because their signature was equivalent to
the co-owner-principals selling the property directly and in their
own right.
3. STATUTE OF FRAUDS: WHEN FORM IS IMPORTANT FOR
ENFORCEABILITY
a. Nature and Purpose of Statute of Frauds
The Statute was introduced in the Philippines by Section
335 of Act No. 190 (Code of Civil Procedure) and subsequently
found in Section 21, Rule 123 of the old Rules of Court.206 It is
now contained in Article 1403(2) of the Civil Code. Torcuator v.
Bernabe,207 well described the Statute in the following manner:
The term “Statute of Frauds” is descriptive of the
statutes which require certain classes of contracts,
such as agreements for the sale of real property, to
be in writing, the purpose being to prevent fraud and
perjury in the enforcement of obligations depending
for their evidence on the unassisted memory of
witnesses by requiring certain enumerated contracts
and transactions to be evidenced by a writing signed
by the party to be charged. The written note or
memorandum, as contemplated by Article 1403 of
the Civil Code, should embody the essentials of the
contract.
The purpose of the Statute is to prevent fraud and perjury in
the enforcement of obligations depending for their evidence upon
the unassisted memory of witnesses.208
514 SCRA 228 (2007).
Barcelona v. Barcelona, 53 O.G. 373.
207
459 SCRA 439 (2005).
208
Shoemaker v. La Tondeña, 68 Phil. 24 (1939).
205
206
FORMATION OF SALE
193
Since the rules under the Statute of Frauds pertain not to
perfection, but to enforceability and proof, then they operate only
when there is an underlying contract that is validly perfected.
Firme v. Bukal Enterprises and Dev. Corp.,209 held that “[t]he
application of the Statute of Frauds presupposes the existence of
a perfected contract.”
b. Sales Coverage in Statute of Frauds
Insofar as applicable to sales, Article 1403(2) of the
Civil Code provides that the following agreements shall be
unenforceable by action, “unless the same, or some note or
memorandum thereof, be in writing, and subscribed by the party
charged, or by his agent:”
(a) A sale agreement which by its terms is not to
be performed within a year from the making
thereof;
(b) An agreement for the sale of goods, chattels
or things in action, at a price not less than
5500.00; and
(c) A sale of real property or of an interest
therein.
In any of the above transactions, evidence of the agreement
cannot be received without the writing, or a secondary evidence
of its contents.210
c. Exceptions to Coverage of
Statute in Sales Contracts
Although a sale transaction may fall under any of the
foregoing covered transactions under the Statute of Frauds,
the following sales would still not be covered and would be
enforceable:
(a) When there is a note or memorandum
thereof in writing, and subscribed by the
party charged or his agent;211
414 SCRA 190, (2003).
Art. 1403, Civil Code.
211
Art. 1403, Civil Code.
209
210
194
LAW ON SALES
(b) When there has been partial consummation
of the sale;212
(c) When there has been a failure to object to
the presentation of evidence aliunde as to
the existence of a contract;213 and
(d) When sales are effected through electronic
commerce.214
d. Nature of Memorandum
Article 1403 of the Civil Code clearly states the nature of the
memorandum that would take the transaction out of the coverage
of the Statute of Frauds against proof by oral evidence: it must be
in writing and subscribed by the party charged. The party charged
of course would either be the seller or buyer against whom the
sale is sought to be enforced.
Berg v. Magdalena Estate, Inc.,215 held that the sufficient
memorandum may be contained in two or more documents. In
First Philippine International Bank v. Court of Appeals,216 it was
held that various correspondences when taken together would
constitute sufficient memorandum — since they include the
names of the parties, the terms and conditions of the contract,
the price and a description of the property as the object of the
contract.217 In addition, Paredes v. Espino,218 held that for the
memorandum to take the sale transaction out of the coverage of
the Statute of Frauds, it must contain “all the essential terms of
the contract” of sale.
Yuvienco v. Dacuycuy,219 makes it clear that it is not enough
that “the total price or consideration is mentioned in some
Ibid.
Barretto v. Manila Railroad Co., 46 Phil. 964 (1924); Limketkai Sons Milling, Inc.
v. Court of Appeals, 250 SCRA 523 (1995); Lacanilao v. Court of Appeals, 262 SCRA 486
(1996).
214
The Electronic Commerce Act, Republic Act 8792.
215
92 Phil. 110, 115 (1952).
216
252 SCRA 259 (1996).
217
Reiterated in City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999).
218
22 SCRA 1000 (1968).
219
104 SCRA 668 (1981).
212
213
FORMATION OF SALE
195
note or memorandum and there is no need of any indication of
the manner in which such total price is to be paid;”220 that the
manner by which the price is to be paid has to be found in the or
memorandum, thus —
... In the reality of the economic world and the
exacting demands of business interest monetary
in character, payment or installments or staggered
payment of the total price is entirely a different matter
from cash payment, considering the unpredictable
trends in the sudden fluctuation of the rate of interest.
In other words, it is indisputable that the value of money
varies from day to day, hence the indispensability of
providing in any sale of the terms of payment when not
expressly or impliedly intended to be in cash.221
Yuvienco thus held that “in any sale of real property
on installment, the Statute of Frauds read together with the
perfection requirements of Article 1475 of the Civil Code must be
understood and applied in the sense that the idea of payment on
installments must be in the requisite of a note or memorandum
therein contemplated.”222
In spite of the Yuvienco ruling, the Court held in David v.
Tiongson,223 that the sale of real property on installments even
when the receipt or memorandum evidencing the same does not
provide for the stated installments, when there has already been
partial payment, the Statute of Frauds is not applicable because
it only applies to executory and not to completed, executed, or
partially executed contracts.
In Limketkai Sons Milling, Inc. v. Court of Appeals,224 the
Court agreed with the reasoning of the Court of Appeals that
when in the series of exhibits there is a patent absence of any
deed of sale categorically conveying the subject property and
was not subscribed by the party charged, it did not constitute the
memoranda required by law, thus —
Ibid, at p. 680.
Ibid.
222
Ibid, at pp. 680-681.
223
313 SCRA 63 (1999).
224
255 SCRA 626 (1996).
220
221
196
LAW ON SALES
To consider them sufficient compliance with the
Statute of Frauds is to betray the avowed purpose of
the law to prevent fraud and perjury in the enforcement
of the obligations. ... In adherence to the provisions of
the Statute of Frauds, the examination and evaluation
of the notes or memoranda adduced by the petitioner
was confined and limited to within the four corners
of the documents. To go beyond what appears on
the face of the documents constituting the notes or
memoranda, stretching their import beyond what is
written in black and white, would certainly be uncalled
for, if not violative of the Statute of Frauds and opening
the doors to fraud, the very evil sought to be avoided
by the statute. In fine, considering that the documents
adduced by the petitioner do not embody the essentials
of the contract of sale aside from not having been
subscribed by the party charged or its agent, the
transaction involved definitely falls within the ambit of
the Statute of Frauds.
In addition, the Court found that the exhibits failed to
establish the perfection of the sale, and therefore oral testimony
could not take their place without violating the parol evidence
rule. It held that it was irregular for the trial court to have admitted
in evidence testimony to prove the existence of a sale of a real
property between the parties despite the persistent objection
made by alleged seller’s counsel as early as the first scheduled
hearing.225
e. Partial Performance
Partial performance of the sale would take the same
outside the coverage of the Statute of Frauds. When it comes
to sale of goods, chattels, or things in action, Article 1403 of the
Civil Code specifically states that the Statute of Frauds shall not
apply when “the buyer accept[s] and receive[s] a part of such
goods and chattels, or the evidence, or some of them, of such
things in action, or pay at the time some part of the purchase
money.”
225
Ibid, at p. 641.
FORMATION OF SALE
197
Although Article 1403 does not state the same principle
applicable to sale of real property or interest therein, the doctrine
of partial performance should also apply to such contracts,
especially when Article 1405 specifically states that contracts
covered by the Statute of Frauds “are ratified . . . by acceptance
of benefits under them.”
Earlier on Baretto v. Manila Railroad Co.,226 held that delivery
of the deed to the agent of the buyer, with no intention to part with
the title until the purchase price is paid, does not constitute partial
performance and does not take the case out of the Statute of
Frauds.
Vda. de Jomoc v. Court of Appeals,227 held that the partial
execution of a sale over real property takes the transaction out
of the provisions of the Statute of Frauds, and consequently
even when not complete in form, so long as the essential
requisites of consent of the contracting parties, object
and cause of the obligation concur and they were clearly
established to be present (even by parol evidence), the sale is
valid and binding.
In Alfredo v. Borras,228 the Court reiterated the principle
that the Statute of Frauds applies only to executory contracts
and not to contracts either partially or totally performed.229 It
held that where one party has performed his obligation, oral
evidence will be admitted to prove the agreement; and that in
addition, a contract that violates the Statute of Frauds is ratified
by the acceptance of benefits under the contract, such as the
acceptance of the purchase price and using the proceeds to pay
outstanding loans.
In Soliva v. The Intestate Estate of Marcelo M. Villalba,230
the Court held that “the admission by the petitioner that she had
accepted payments under the oral contract of sale took the case
46 Phil. 964 (1924).
200 SCRA 74 (1991).
228
404 SCRA 145 (2003).
229
Reiterated in Ainza v. Padua, 462 SCRA 614 (2005); Arrogante v. Deliarte, 528
SCRA 63 (2007).
230
417 SCRA 277 (2003).
226
227
198
LAW ON SALES
out of the scope of the Statute of Frauds . . . [rendering] it valid
and enforceable.”231
f. Effect of Partial Execution on Third Parties
The doctrine of partial execution when covering sale of real
properties cannot be applied to third parties, who are granted
legal remedies against the contract. The earliest pronouncement
on this point was in Gorospe v. Ilayat,232 where the Court held that
since the enactment of the Statute of Frauds —
. . . a contract of sale of realty cannot be proven by
means of witnesses, but must necessarily be evidenced
by a written instrument, duly subscribed by the party
charged, or by his agent, or by secondary evidence
of the contents of such document. No other evidence,
therefore, can be received except the documentary
evidence referred to, in so far as regards such contracts,
and these are valueless as evidence unless they are
drawn up in writing in the manner aforesaid.233
and this was especially so when the claimants-alleged-buyers
were not even in possession of the subject realty.
Fule v. Court of Appeals,234 in explaining the nature of a
sale as a consensual contract, noted that “[f]ormal requirements
are, therefore, for the benefit of third parties,” but as to the
immediate parties to the sale, “[n]on-compliance therewith does
not adversely affect the validity of the contract nor the contractual
rights and obligations of the parties thereunder.”235
Claudel v. Court of Appeals,236 reiterated the rule that a sale
of land once consummated, is valid regardless of the form it may
have been entered into; for nowhere does the law or jurisprudence
prescribe that the sale be put in writing before such contract can
validly cede or transmit rights over a certain real property between
Ibid at pp. 284-285.
29 Phil. 21 (1914).
233
Ibid, at p. 23.
234
286 SCRA 698 (1998).
235
Ibid, at p.713.
236
199 SCRA 113 (1991).
231
232
FORMATION OF SALE
199
the parties themselves. The Court however held that in the event
that a third party disputes the ownership of the property, the person
against whom that claim is brought cannot present any proof of
such sale and hence has no means to enforce the contract. Thus,
the Statute of Frauds was precisely devised to protect the parties
in a sale of real property so that no such contract is enforceable
unless certain requisites, for purpose of proof, are met.237
The Court in Claudel, after premising that the “rule of thumb
is that a sale of land, once consummated, is valid regardless of
the form it may have been entered into,” held that “in the event
that a third party, as in this case, disputes the ownership of the
property, the person against whom that claim is brought can
not present any proof of such sale and hence has no means to
enforce the contract.”238 In reaching such conclusion, the Court
quoted directly Article 1403, which provides that only a note
or memorandum can take the sale of real property out of the
provisions of the Statute of Frauds. It will be recalled that nothing
in the subparagraph pertaining to the sale of real property contains
any provisions on partial performance, unlike the subparagraph
pertaining to sale of movables.
This confirms the variance in principles involving movables
and immovables, and seemingly recognized under Article 1403
which treats partial execution as applicable only to goods.
Under Article 559 of the Civil Code “possession of movable
property acquired in good faith is equivalent to a title.” No
similar provisions apply to immovables. Consequently, when
an alleged buyer has been given possession of a movables,
even third parties would be bound to recognized and expect
that he must be the proper owner of the movable. In the case
of immovables, specially under the Torrens system, recording
of the sale or its being evidenced by a written instrument are
usually the accepted means of informing the public of the sale
or disposition of the immovable.
237
See also Diama v. Macalibo, 74 Phil. 70 (1942); Zaide v. Court of Appeals, 163
SCRA 713 (1988).
238
Ibid, at pp. 119-120.
200
LAW ON SALES
In Alba Vda. De Rax v. Court of Appeals,239 the Court held
that reliance on testimony of witnesses as secondary evidence
to prove a sale, will not prosper against counter-evidence
disputing such sale, because a sale must necessarily be
evidenced by a written instrument when it involves third parties.
Recently, in Londres v. Court of Appeals,240 the Court
summarized the prevailing rulings on the matter —
A contract of sale is perfected at the moment
there is a meeting of the minds upon the thing
which is the object of the contract and upon the
price. Being consensual, a contract of sale has the
force of law between the contracting parties and
they are expected to abide in good faith with their
respective contractual commitments. Article 1358
of the Civil Code, which requires certain contracts
to be embodied in a public instrument, is only for
convenience, and registration of the instrument is
needed only to adversely affect third parties. Formal
requirements are, therefore, for the purpose of
binding or informing third parties. Non-compliance
with formal requirements does not adversely affect
the validity of the contract or the contractual rights
and obligations of the parties. Consequently, the
wrong designation of the lot in the Deed of Absolute
Sale even when notarized will not diminish the right
of the buyer to the title and possession of the actual
subject matter of their meeting of minds with the
seller.
However, under the Torrens system, the execution of a
public instrument on dealings with registered land is not even
sufficient by itself to bind third parties, since registration is
the operative act. The more pertinent, and thereby prevailing,
doctrine is what the Court held in Secuya v. Vda. De Selma:241
that while the sale of land appearing in a private deed is binding
between the parties, it cannot be considered binding on a third
314 SCRA 36, 54-55 (1999).
394 SCRA 133 (2002).
241
326 SCRA 244 (2000).
239
240
FORMATION OF SALE
201
persons, if it is not embodied in a public instrument and recorded
in the Registry of Deeds.
g. Nature and Coverage of Partial Performance
In Ortega v. Leonardo,242 the plaintiff and defendant,
who had a conflicting claim on a parcel of land, came to an
agreement that the defendant would desist from pressing her
claim under an agreement that once the plaintiff obtains a title
thereto, the latter would sell a specified portion thereof to the
former at a stipulated price. Once the plaintiff had obtained title
to the land, he refused to comply with the agreement, despite
the fact that the defendant had already caused a survey and
segregation of the portion of the land they agreed upon, and in
fact extended a portion of the son’s house into the segregated
portion. Plaintiff had even refused tender of the purchase price
by the defendant.
The Court held that it is not only partial payment of the
purchase price that is the only manner of partial performance to
take the contract out of the coverage of the Statute of Frauds.
It recognized other modes which constitute partial performance,
such as possession, the making of improvements, rendition of
services, payment of taxes, relinquishment of rights, etc. It also
held that although tender of payment by itself would not be
considered partial performance, but accompanied by other acts,
such as building of improvements, the same may be considered
as partial performance.
Partial performance to constitute as an exception to the
Statute of Frauds must by itself pertain to the subject matter or
to the price of the purported sale, and must involve an act or
“complicity” on the party sought to be changed. These requisites
are essential because partial performance must amount to
estoppel against the party sought to be charged. This is in
accordance with the provision of Article 1405 which states that
contracts covered by the Statute of Frauds “are ratified . . . by
the acceptance of benefits under them.”
242
103 Phil. 870 (1958).
202
LAW ON SALES
h. Waiver of Provisions of Statute of Frauds
The third ground by which a covered sale contract would be
enforceable in spite of the fact that it is not contained in a deed,
or a note or memorandum, is when the party against whom such
oral contract is sought to be proved, fails to object during trial to
the presentation of oral evidence to prove the contract. This is
embodied in Article 1405 of the Civil Code.
The early case of Barretto v. Manila Railroad Co.,243 held
that where timely objections are made to the introduction of parol
evidence to prove a sale of real property and due exceptions are
taken to the adverse rulings, such evidence must be disregarded
by the courts and the contract cannot be enforced.
The Statute of Frauds will not apply by reason of the failure
of party to object to oral testimony proving such party’s counteroffer; hence, by such utter failure to object, the party is deemed
to have waived any defects on the contract under the Statute of
Frauds, pursuant to Article 1405 of the Civil Code.244 Likewise,
the cross-examination on the contract is deemed a waiver of the
defense of the Statute of Frauds.245
i. Value of Business Forms to Prove Sale
Business forms, e.g., order slip, delivery charge invoice and
the like, which are issued by the seller in the ordinary course
of the business are not always fully accomplished to contain all
the necessary information describing in detail the whole business
transaction — more often than not they are accomplished
perfunctorily without proper regard to any legal repercussion for
such neglect such that despite their being often incomplete, said
business forms are commonly recognized in ordinary commercial
transactions as valid between the parties and at the very least
they serve as an acknowledgment that a business transaction
has in fact transpired.246
46 Phil. 964 (1924).
First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
245
Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995); Lacanilao
v. Court of Appeals, 262 SCRA 486 (1996).
246
Donato C. Cruz Trading Corp. v. Court of Appeals, 347 SCRA 13 (2000).
243
244
FORMATION OF SALE
203
By themselves, order slip and charge invoice may be
inadequate to establish the case for the vendor but their probative
weight must be evaluated not in isolation but in conjunction with
the other evidence adduced such as testimony of a witness and
the demand letter.247
4. Sales Effected as Electronic Commerce
a. Legal Recognition of Electronic Data Message
Under Section 6 of the Electronic Commerce Act, information shall not be denied validity or enforceability solely on the
ground that it is in the form of an electronic data message purporting to give rise to such legal effect, or that it is merely incorporated by reference in that electronic data message.
The Act defines an “electronic document” as that referring
to information or the representation of information, data, figures,
symbols or other modes of written expression, described or
however represented, by which a fact may be proved or affirmed,
which is received, recorded, transmitted, stored, processed,
retrieved or produced electronically.248
It defines an “electronic signature” as that referring to any
distinctive mark, characteristic and/or sound in electronic form,
representing the identity of a person and attached to or logically
associated with the electronic data message or electronic
document or any methodology or procedures employed or
adopted by a person and executed or adopted by such person
with the intention of authenticating or approving an electronic
data message or electronic document.249
b. Legal Recognition of Electronic Documents
Under Section 7 of the Act, electronic documents shall have
the legal effect, validity or enforceability as any other document
or legal writing, and —
Donato C. Cruz Trading Corp. v. Court of Appeals, 347 SCRA 13 (2000).
Sec. 5(f), Electronic Commerce Act.
249
Sec. 5(e), Electronic Commerce Act.
247
248
204
LAW ON SALES
(a) Where the law requires a document to be
in writing, that requirement is met by an
electronic document if the said electronic
document maintains its integrity and
reliability and can be authenticated so as
to be usable for subsequent reference, in
that —
(i) The electronic document has remained
complete and unaltered, apart from
the addition of any endorsement and
any authorized change, or any change
which arises in the normal course of
communication, storage and display;
and
(ii) The electronic document is reliable in
the light of the purpose for which it was
generated and in the light of all relevant
circumstances.
(b) Paragraph (a) applies whether the requirement therein is in the form of an obligation
or whether the law simply provides consequences for the document not being presented or retained in its original form.
(c) Where the law requires that a document be
presented or retained in its original form,
that requirement is met by an electronic
document if —
(i) There exists a reliable assurance as to
the integrity of the document from the
time when it was first generated in its
final form; and
(ii) That document is capable of being
displayed to the person to whom it is to
be presented.
It is expressly provided, that no provision of the Act shall
apply to vary any and all requirements of existing laws on formalities required in the execution of documents for their validity.
FORMATION OF SALE
205
For evidentiary purposes, an electronic document shall be
the functional equivalent of a written document under existing
laws.250
The Act does not modify any statutory rule relating to
the admissibility of electronic data messages or electronic
documents, except the rules relating to authentication and best
evidence.251
Under Section 12 of the Act, in any legal proceedings,
nothing in the application of the rules on evidence shall deny
the admissibility of an electronic data message or electronic
document in evidence —
(a) On the sole ground that it is in electronic
form; or
(b) On the ground that it is not in the standard written form, and the electronic data
message or electronic document meeting,
and complying with the requirements under Section 6 or 7 hereof shall be the best
evidence of the agreement and transaction
contained therein.
In assessing the evidential weight of an electronic data
message or electronic document, the reliability of the manner in
which it was generated, stored or communicated, the reliability
of the manner in which its originator was identified, and other
relevant factors shall be given due regard.252
Under Section 16(1) of the Act, except as otherwise agreed
by the parties, an offer, the acceptance of an offer and such
other elements required under existing laws for the formation
of contracts may be expressed in, demonstrated and proved by
means of electronic data messages or electronic documents and
no contract shall be denied validity or enforceability on the sole
ground that it is in the form of an electronic data message or
Sec. 7, ibid.
Sec. 7, ibid.
252
Sec. 12, ibid.
250
251
206
LAW ON SALES
electronic documents, or that any or all of the elements required
under existing laws for the formation of the contracts is expressed,
demonstrated and proved by means of electronic data messages
or electronic documents.
c. Legal Recognition of Electronic Signatures
Under Section 8 of the Act, an electronic signature on the
electronic document shall be equivalent to the signature of a
person on a written document if the signature is an electronic
signature and proved by showing that a prescribed procedure,
not alterable by the parties interested in the electronic document,
existed under which —
(a) A method is used to identify the party
sought to be bound and to indicate said
party’s access to the electronic document
necessary for his consent or approval
through the electronic signature;
(b) Said method is reliable and appropriate
for the purpose for which the electronic
document was generated or communicated,
in the light of all circumstances, including
any relevant agreement;
(c) It is necessary for the party sought to be
bound, in order to proceed further with the
transaction, to have executed or provided
the electronic signature; and
(d) The other party is authorized and enabled to
verify the electronic signature and to make
the decision to proceed with the transaction
authenticated by the same.
d. Presumption Relating to Electronic Signatures
Section 9 of the Act specifically provides that in any
proceedings involving an electronic signature, it shall be presumed
that:
FORMATION OF SALE
207
(a) The electronic signature is the signature of
the person to whom it correlates; and
(b) The electronic signature was affixed by
that person with the intention of signing or
approving the electronic document unless
the person relying on the electronically
signed electronic document knows or has
notice of defects in or unreliability of the
signature or reliance on the electronic
signature is not reasonable under the
circumstances.
e. Consummation of Electronic Transactions
Under Section 16(2) of the Act, electronic transactions
made through networking among banks, or linkages thereof
with other entities or networks, and vice versa, shall be deemed
consummated upon the actual dispensing of cash or the debit of
one account and the corresponding credit to another, whether
such transaction is initiated by the depositor or by an authorized
collecting party: Provided, That the obligation of one bank, entity,
or person similarly situated to another arising therefrom shall be
considered absolute and shall not be subjected to the process of
preference of credits.
f. Electronic Commerce in Carriage of Goods
The Electronic Commerce Acts is expressly applicable to
any action in connection with, or in pursuance of, a contract of
carriage of goods, including but not limited to:
(a) Furnishing the marks, number, quantity or
weight of goods; stating or declaring the
nature or value of goods; issuing a receipt
for goods; and confirming that goods have
been loaded;
(b) Notifying a person of terms and conditions
of the contract; and giving instructions to a
carrier;
208
LAW ON SALES
(c) Claiming delivery of goods; authorizing
release of goods; and giving notice of loss
of, or damage to goods;
(d) Giving any other notice or statement in
connection with the performance of the
contract;
(e) Undertaking to deliver goods to a named
person or a person authorized to claim
delivery;
(f) Granting acquiring, renouncing, surrendering, transferring or negotiating rights in
goods;
(g) Acquiring or transferring rights and obligations under the contract.253
g. Rule on Transport Documents254
The Act provides for the following rules when it covers the
transport documents for carriage of goods effected through
electronic commerce, thus:
(a) Subject to paragraph (c) below, where the
law requires that any action referred be
carried out in writing or by using a paper
document, that requirement is met if the
action is carried out by using one or more
electronic data messages or electronic
documents.
(b) Paragraph (a) above applies whether
the requirement therein is in the form of
an obligation or whether the law simply
provides consequences for failing either to
carry out the action in writing or to use a
paper document.
253
254
Sec. 25, ibid.
Sec. 26, ibid.
FORMATION OF SALE
209
(c) If a right is to be granted to, or an obligation
is to be acquired by, one person and no
other person, and if the law requires that,
in order to effect this, the right or obligation
must be conveyed to that person by the
transfer, or use of, a paper document, that
requirement is met if the right or obligation
is conveyed by using one or more electronic
data messages or electronic documents:
Provided, That a reliable method is used to
render such electronic data messages or
electronic document unique.
For the purposes of paragraph (c) immediately above, the
standard of reliability required shall be assessed in the light
of the purpose for which the right or obligation was conveyed
and in the light of all the circumstances, including any relevant
agreement.
Where one or more electronic data messages or electronic
documents are used to effect any action, no paper document
used to effect any such action is valid unless the use of electronic
data message or electronic document has been terminated and
replaced by the use of paper documents.255 A paper document
issued in these circumstances shall contain a statement of such
termination. The replacement of electronic data messages or
electronic documents by paper documents shall not affect the
rights or obligations of the parties involved.256
If a rule of law is compulsorily applicable to a contract
of carriage of goods which is in, or is evidenced by, a paper
document, that rule shall not be inapplicable to such a contract of
carriage of goods which is evidenced by one or more electronic
data messages or electronic documents by reason of the fact
that the contract is evidenced by such electronic data message
or electronic documents instead of by a paper document.257
Sec. 26(5), ibid.
Sec. 26(5), ibid.
257
Sec. 26(6), ibid.
255
256
210
LAW ON SALES
5. Form in Equitable Mortgage Claims
In Cuyugan v. Santos,258 relying upon precedents in the
United States, the Supreme Court held that the Statute of Frauds
does not stand in the way of treating an absolute deed as a
mortgage, when such was the intention of the parties, although
the agreement for redemption or defeasance rests wholly in
parol, or is proved by parol evidence: “The courts will not be used
as a shield for fraud, or as a means for perpetrating fraud.”259
Lapat v. Rosario,260 held that a contract should be construed
as a mortgage or a loan instead of a pacto de retro sale when
its terms are ambiguous or the circumstances surrounding its
execution or its performance are incompatible or inconsistent
with a sale. Even when a document appears on its face to be
a sale with pacto de retro, the owner of the property may prove
that the contract is really a loan with mortgage by raising as an
issue the fact that the document does not express the true intent
and agreement of the parties. In such case, parol evidence then
becomes competent and admissible to prove that the instrument
was in truth given merely as a security for the repayment of a
loan.
Equitable mortgages occupy such a hallowed position
in Philippine jurisprudence such that Rosales v. Suba,261 held
that an equitable mortgage is not different from a real estate
mortgage, and the lien created thereby ought not to be defeated
by requiring compliance with the formalities necessary to the
validity of a voluntary real estate mortgage.
6. Form in “Sales on Return or Approval”
Industrial Textile Manufacturing Company of the Philippines, Inc. v. LPJ Enterprises, Inc.,262 held that the conditions
under Article 1502 of the Civil Code which govern the sales on
return or on approval, would have no application, unless such
34 Phil. 100 (1916).
Ibid, at p. 108.
260
312 SCRA 539 (1999).
261
408 SCRA 664 (2003).
262
217 SCRA 322 (1993).
258
259
FORMATION OF SALE
211
conditions to such effect have been distinctly provided for in the
contract between the parties to the sale.
The Supreme Court held that “[T]he provisions of the
Uniform Sales Act and the Uniform Commercial Code from
which Article 1502 was taken, clearly requires an express
written agreement to make a sale contract either a ‘sale on
return’ or a ‘sale on approval’. Parol or extrinsic testimony could
be not be admitted for the purpose of showing that an invoice
or bill of sale that was complete in every aspect and purporting
to embody a sale without condition or restriction constituted a
contract of sale or return. If the purchaser desired to incorporate
a stipulation securing to him the right of return, he should have
done so at the time the contract was made. On the other hand,
the buyer cannot accept part and reject the rest of the goods
since this falls outside the normal intent of the parties in the ‘on
approval’ situation.”263
7. Right of First Refusal Must Be Contained
in Written Contract
Sen Po Ek Marketing Corp. v. Martinez,264 ruled that when
the right of first refusal is not stipulated in the lease contract,
it cannot be exercised, and verbal grants of such right cannot
be enforceable since the right of first refusal must be clearly
embodied in a written contract. The ruling therefore constituted
in effect an addition to the contracts covered by the Statute of
Frauds.
WHEN SALE COMPLETELY SIMULATED
When a sale is absolutely simulated, then it is completely
void and non-existent.265
Rosario v. Court of Appeals,266 held that when the parties
enter into a sale to which they did not intend to be legally bound,
Ibid, at p. 327, quoting from 67 AM. JUR. 2d, pp. 733-748.
325 SCRA 210 (2000).
265
Art. 1409(2), Civil Code; Yu Bun Guan v. Ong, 367 SCRA 559 (2001); Manila
Banking Corp. v. Silverio, 466 SCRA 438 (2005).
266
310 SCRA 464, 481 (1999).
263
264
212
LAW ON SALES
such is void and is not susceptible of ratification, produces no
legal effects, and does not convey property rights nor in any way
alter the juridical situation of the parties.
Santiago v. Court of Appeals,267 held that the failure of the
alleged buyers to take exclusive possession of the property sold
to them, or in the alternative, to collect rentals from the alleged
vendee is contrary to the principle of ownership and a clear
badge of simulation that renders the whole transaction void and
without force and effect.
In Villaflor v. Court of Appeals,268 although the agreement
to sell did not absolutely transfer ownership of the land to the
buyer, the Court held that it did not show that the agreement
was simulated. The delivery of the certificate of ownership
and execution of the deed of absolute sale were suspensive
conditions, which gave rise to the corresponding obligation on the
part of the buyer to pay the last installments of the consideration.
Such conditions did not affect the perfection of the contract or
prove simulation.
Loyola v. Court of Appeals,269 defined “simulation” as “the
declaration of a fictitious will, deliberately made by the agreement
of the parties, in order to produce, for the purposes of deception,
the appearances of a juridical act which does not exist or is
different with that which was really executed. ... Characteristic
of simulation is that the apparent contract is not really desired or
intended to produce legal effect or in any way alter the juridical
situation of the parties. ... Also in a simulated contract, the parties
have no intention to be bound by the contract.”270
The requisites for simulation are:
(a) An outward declaration of will different from
the will of the parties;
(b) The false appearance must have been
intended by mutual agreement; and
278 SCRA 98 (1997).
280 SCRA 297 (1997).
269
326 SCRA 285 (2000).
270
Also Mendezona v. Ozamiz, 376 SCRA 482 (2002).
267
268
FORMATION OF SALE
213
(c) The purpose is to deceive third persons.271
However, R.F. Navarro & Co. v. Vailoces,272 warned that the
bare assertion, without evidence presented to bolster the clause
that the signature appearing on the Deeds of Sale is a forgery
is not enough, since forgery is never presumed, and must be
proven by clear, positive and convincing evidence.
When a sale is void, the right to set up its nullity or nonexistence is available to third persons whose interests are
directly affected thereby; and the action for the declaration of
the contract’s nullity is imprescriptible.273 Likewise, the remedy
of accion pauliana is available when the subject matter is a
conveyance, otherwise valid, undertaken in fraud of creditors.274
—oOo—
271
Loyola v. Court of Appeals, 326 SCRA 285 (2000). See also Cruz v. Bancom
Finance Corp., 379 SCRA 490 (2002).
272
361 SCRA 139 (2001).
273
Fil-Estate Golf and Dev., Inc. v. Navarro, 526 SCRA 51 (2007).
274
Manila Banking Corp. v. Silverio, 466 SCRA 438 (2005).
214
LAW ON SALES
CHAPTER 6
PERFORMANCE OR
CONSUMMATION OF SALE
OBLIGATIONS OF SELLER
1. To Preserve the Subject Matter
Article 1163 of the Civil Code lays down a rule applicable
to obligations and contracts in general, that “[E]very person
obliged to give a determinate thing is also obliged to take
care of it with the proper diligence of a good father of a family,
unless the law or the stipulation of the parties requires another
standard of care.”
When a sale covers a specific or determinate object, upon
perfection and even prior to delivery, and although the seller still
owns the subject matter, he is already obliged to take care of
the subject matter with the diligence of a good father of a family;
otherwise, he becomes liable to the buyer for breach of such
obligation, as when the thing deteriorates or is lost through
seller’s fault.
The ancillary obligation to preserve the subject matter of
the sale involves a personal obligation “to do,” rather than a real
obligation “to give,” and arises as a necessary legal assurance
to the buyer that the seller would be able to comply fully with the
main obligation to deliver the object of sale.
2. To Deliver the Subject Matter
Under Article 1495 of the Civil Code, the seller is bound: (a)
to transfer the ownership of, and (b) to deliver the thing, which
is the object of the sale to the buyer. Even in the definition of
sale under Article 1458, it covers the twin-obligations of the seller
214
PERFORMANCE OR CONSUMMATION OF SALE
215
“to transfer the ownership of and to deliver a determinate thing.”
Although the wordings of both Articles 1458 and 1495 seem to
separate “delivery” of the subject matter from the “transfer of
ownership,” nonetheless, the means by which the seller can
transfer the ownership of the subject matter is by the mode of
tradition or delivery, whether actual or constructive.
As early as in Kuenzle & Streiff v. Watson & Co.,1 the Supreme
Court held that where there is no express provision that the title
shall not pass until payment of the price, and the thing sold has
been delivered, title passes from the moment the thing sold is
placed in the possession and control of the buyer. In spite of the
reciprocal nature of a sale, it is not the prior payment of price that
determines the effects of delivery of the subject matter.
Ocejo, Perez & Co. v. International Banking Corp.,2 also
held that delivery produces its natural effects in law, the principal
and most important of which being the conveyance of ownership,
without prejudice to the right of the seller to claim payment of the
price. Normally therefore, as a consequence of a valid sale, the
delivery of the subject matter ipso jure transfers its ownership to
the buyer.
3. To Deliver the Fruits and Accessories
Under Article 1164 of the Civil Code, which applies only to
an obligation to deliver a determinate thing, the transferee has a
right to the fruits of the thing from the time the obligation to deliver
it arises; however, he shall acquire no real right over them until
the same has been delivered to him.
Every obligation to deliver a determinate thing is coupled with
a specific provision under Article 1537, that the seller 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,
and all the fruits shall pertain to the buyer from the day on which
the contract was perfected.
13 Phil. 26 (1909).
37 Phil. 631 (1918).
1
2
216
LAW ON SALES
Unlike in the principle of res perit domino where it is the
owner of the thing who bears the risk of loss and benefits from the
fruits of the thing owned, in a sale involving a determinate subject
matter, even prior to delivery and transfer of ownership thereof
to the buyer, the buyer already has certain rights enforceable
against the seller, pertaining to the subject matter. This is in
accordance with the principle that the accessories always
follow the principal; and since the subject matter is intended for
delivery to the buyer from the point of perfection of the sale, then
necessarily the accessories and fruits must from then on be held
for the account of the buyer.
4. To Warrant the Subject Matter
Under Article 1495 of the Civil Code, with the fulfillment of
the primary obligation to deliver the subject matter, the seller is
then obliged to “warrant the thing which is the object of the sale.”
The warranties of the seller are discussed in details in Chapter
12.
TRADITION AS A CONSEQUENCE OF A VALID SALE
1. Essence of Tradition
Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.,3 had
explained quite vividly the mode of tradition when it held that
“ownership of the thing sold is a real right, which the buyer acquires
only upon delivery of the thing to him in any of the ways specified
in Articles 1497 to 1501 of the Civil Code, or in any other manner
signifying an agreement that the possession is transferred from
the vendor to the vendee. This right is transferred, not merely by
contract, but also by tradition or delivery. Non nudis pactis sed
traditione dominia rerum transferantur. And there is said to be
delivery if and when the thing sold ‘is placed in the control and
possession of the vendee.’”4 The Court held further that delivery
is a composite act, in which both parties must join and the minds
of both parties concur; it is an act by which one party parts with
3
4
370 SCRA 56 (2001).
Ibid, at p. 70.
PERFORMANCE OR CONSUMMATION OF SALE
217
the title to and the possession of the property, and the other
acquires the right to and the possession of the same.5
Santos v. Santos,6 held that “the critical factor in the different
modes of effecting delivery, which gives legal effect to the act is
the actual intention of the vendor to deliver, and its acceptance
by the vendee. Without that intention, there is no tradition.”7 This
is quite an inelegant way to put forth the principle on tradition
based on two factors:
(a) Acceptance, although an obligation on the
part of the buyer, is not essential for delivery
by the seller to achieve its legal effects;
and
(b) An express intention on the matter by the
parties to a sale, at the point of delivery is
not essential for tradition to produce its legal
consequences.
The legal effects of the parties’ intention must be gauged at
the point of perfection by which the obligation to deliver the subject
matter is created: was there mutual intention and agreement to
transfer the ownership of the subject matter; if in the affirmative,
there is a valid sale; if in the negative, we have a simulated sale
which is void ab initio. Besides, the rule has always been that
tradition that is effected by reason of a valid sale would produce
its legal consequences, without the parties having to say so, or
particularly intend it at the point of delivery.8
The essence of the Equatorial Realty and Santos rulings is
that tradition produces its legal consequences from the fact that
delivery is effected pursuant to a valid sale. Consequently, in one
case,9 it was held that there is no transfer of ownership by the
370 SCRA 56 (2001).
366 SCRA 395 (2001).
7
Ibid, at p. 405, citing Norkis Distributors, Inc. v. Court of Appeals, 193 SCRA 694,
698-699 (1991), and Abuan v. Garcia, 14 SCRA 759 (1965).
8
Kuenzle & Streiff v. Watson & Co., 13 Phil. 26 (1909); Ocejo, Perez & Co. v.
International Banking Corp., 37 Phil. 631 (1918); Froilan v. Pan Oriental Shipping Co., 12
SCRA 276 (1964); Balatbat v. Court of Appeals, 261 SCRA 128 (1996).
9
Union Motor Corp. v. Court of Appeals, 361 SCRA 506 (2001).
5
6
218
LAW ON SALES
execution of a deed of sale merely intended to accommodate the
buyer to enable him to generate funds for his business venture,
simply because there was no valid sale behind the purported act
of constructive delivery.
In another case,10 it was held that when the auction sale of
the subject properties to the bank was void, no valid title passed
in its favor; consequently, the subsequent sale and delivery of
the properties thereof by the bank was also nullity (i.e., title held
by the bank’s buyer was void) under the elementary principle of
nemo dat quod non habet, one cannot give what one does not
have.
a. Types of Delivery
The Law on Sales under the Civil Code recognizes two
general types of delivery that will effectively transfer ownership of
the subject matter to the buyer and would constitute compliance
by the seller of his obligations under a valid contract of sale: (a)
actual or physical delivery; and (b) constructive delivery.
Froilan v. Pan Oriental Shipping Co.,11 held that in the
absence of stipulation to the contrary, the ownership of the thing
sold passes to the buyer upon the actual or constructive delivery
thereof.
Alfredo v. Borras,12 held that it is not necessary that the
seller himself delivers title of the property to the buyer because
the thing sold is understood as delivered when it is placed in the
control and possession of the buyer. In that decision, the seller
himself introduced the tenant to the buyers as the new owners of
the land, and from that time on the buyers acted as landlord, and
thereby there was deem to have been delivery.
1. Actual Delivery
Under Article 1497 of the Civil Code, there is actual or
physical delivery when the thing sold is placed in the control and
Tsai v. Court of Appeals, 366 SCRA 324 (2001).
12 SCRA 276 (1964).
12
404 SCRA 145 (2003).
10
11
PERFORMANCE OR CONSUMMATION OF SALE
219
possession of the buyer.13 Although possession is the best gauge
when there is control, nonetheless control can take other forms
other than actual physical possession.
Thus, Power Commercial and Industrial Corp. v. Court of
Appeals,14 held that for both actual or constructive delivery “[t]he
key word is control, not possession,”15 in determining the legal
effect of tradition. Power Commercial considered that the lot sold
had been placed under the control of the buyer, as evidenced
by the subsequent filing by the buyer of an ejectment suit, which
signified that the buyer was the new owner which intended
to obtain for itself, and to terminate said occupants’ actual
possession thereof.
2. Constructive Delivery
Under Article 1496 of the Civil Code, constructive delivery
can take several forms, and may be any “manner signifying an
agreement that the possession is transferred from the vendor
to the vendee.” The essence of most forms of constructive
delivery is the existence of an agreement between the seller
and the buyer, and that the latter is understood to have control
of the subject matter of sale.
The discussions on the execution of a public instrument as
a form of constructive delivery should be considered as setting
the same basic premise or principles as to all other forms of
constructive delivery. The importance of using the “execution of a
public instrument pursuant to a valid sale,” as the prime example
to highlight the doctrines to cover all types of constructive delivery
comes from its applicability to all types of subject matter, whether
movable or immovable, tangible or intangible.
a. Execution of Public Instrument
Under Article 1498 of the Civil Code, in the case of both
movables and immovables, when the sale is made through a
public instrument, the execution thereof shall be equivalent to
People v. Tan, 338 SCRA 330 (2000).
274 SCRA 597 (1997).
15
Ibid, at p. 610.
13
14
220
LAW ON SALES
the delivery of the subject matter of sale, if from the deed the
contrary does not appear or cannot clearly be inferred.16 In
several cases,17 the Court held that the notarized deed of sale
has two functions:
(a) It operates as a formal or symbolic delivery
of the property sold; and
(b) It authorizes the buyer to use the document
as proof of ownership.
Therefore, the general rule is that the execution of a public
instrument has the same legal effects as actual or physical
delivery, i.e., it transfers the ownership of the subject matter to
the buyer, and constitutes valid compliance by the seller of his
primary obligations under the sale.18
Of course, the foregoing rules apply only to a public instrument
that evidences a valid sale. Thus, Torcuator v. Bernabe,19 held
that a special power of attorney authorizing the agents to execute
a deed of sale over the property can by no means be interpreted
as delivery or conveyance of ownership over said property, thus:
“Taken by itself, in fact, the special power of attorney can be
interpreted as tied up with any number of property arrangements,
such as a contract of lease or a joint venture.”20
(1) Constructive Delivery Has the Same Legal Effect
as Actual or Physical Delivery
Municipality of Victorias v. Court of Appeals,21 held that the
legal effects and consequences of actual or physical delivery,
also apply equally to constructive delivery: “Similarly, when the
sale is made through a public instrument, the execution thereof
16
Florendo v. Foz, 20 Phil. 388 (1911). Also Roman v. Grimalt, 6 Phil. 96 (1906),
citing Art. 1462 of the old Civil Code, which held that “When the sale is made by means
of a public instrument the execution thereof shall be equivalent to the delivery of the thing
which is the object of the contract.” (at p. 99).
17
Manuel R. Dulay Enterprises, Inc. v. Court of Appeals, 225 SCRA 678 (1993);
Power Commercial and Industrial Corp. v. Court of Appeals, 274 SCRA 597 (1997);
Garcia v. Court of Appeals, 312 SCRA 180 (1999).
18
Velarde v. Court of Appeals, 361 SCRA 56 (2001).
19
459 SCRA 439 (2005).
20
Ibid, at p. 451.
21
149 SCRA 31 (1987).
PERFORMANCE OR CONSUMMATION OF SALE
221
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 be clearly inferred.”22
The concept has been aptly summed-up in Sabio v.
International Corporate Bank,23 where the Court held —
Under Article 1498 ... the mere execution of the deed
of conveyance in a public instrument is equivalent to
the delivery of the property. ... prior physical delivery or
possession is not legally required. It is well-established
that ownership and possession are two entirely
different legal concepts. Just as possession is not a
definite proof of ownership, neither is non-possession
inconsistent with ownership. Thus, it is of no legal
consequence that respondents were never in actual
possession or occupation of the subject property. They,
nevertheless, perfected and completed ownership
and title to the subject property. Notwithstanding the
presence of illegal occupants on the subject property,
transfer of ownership by symbolic delivery under Article
1498 can still be effected through the execution of the
deed of conveyance.24
The author therefore takes exception to the ruling in Ten
Forty Realty and Dev. Corp. v. Cruz,25 where the Supreme
Court held that “[N]owhere in the Civil Code is it provided that
the execution of a Deed of Sale is a conclusive presumption of
delivery of possession of a piece of real estate. This Court has
held that the execution of a public instrument gives rise only
to a prima facie presumption of delivery. Such presumption is
destroyed when the delivery is not effected because of legal
impediment ... negated by the failure of the vendee to take
actual possession of the land sold.” The Ten Forty Realty ruling
confuses between the twin functions of a public instrument,
22
(2006).
23
24
(1993).
25
Ibid, at p. 43. Reiterated in Caoibes, Jr. v. Caoibes-Pantoja, 496 SCRA 273
364 SCRA 385 (2001).
See also Manuel R. Dulay Enterprises, Inc. v. Court of Appeals, 225 SCRA 678
410 SCRA 484 (2003).
222
LAW ON SALES
first being merely an evidence of a sale, and second, a public
instrument being the main, but not the only ingredient, in what
constitutes constructive delivery. By itself a deed of sale is
merely a species of evidence, and it becomes an integral part
of tradition when coupled with other requirements mandated by
jurisprudence, namely, control over the subject matter at the time
of execution and the passage of reasonable time for the control
to remain.
(2) When Execution of Public Instrument
Does Not Produce Effects of Delivery
There are cases when the execution of public instruments
covering valid sales do not produce the effects of tradition.
First, when in the execution of a public instrument, there is
a stipulation to the contrary.26 Phil. Suburban Dev. v. Auditor,27
held that such express reservation or contrary inference would
be present when:
(a) A certain date is fixed for the purchaser to
take possession of the property subject of
the conveyance;
(b) In case of sale by installments, it is stipulated
that until the last installment is made, the
title to the property should remain with the
seller;
(c) When the seller reserves the right to use
and enjoy the property until the gathering of
the pending crops; or
(d) Where the seller has no control over the
thing sold at the moment of the sale, and,
therefore, its material delivery could not
have been made.
Phil. Suburban held that since the execution of the public
instrument was preceded by actual delivery of the subject real
26
27
Art. 1498, Civil Code.
63 SCRA 397 (1975).
PERFORMANCE OR CONSUMMATION OF SALE
223
estate, then tradition was effected in spite of the condition stated
in the instrument that the seller should first register the deed of
sale and secure a new title in the name of the buyer before the
latter shall pay the balance of the purchase price, which did not
preclude the transmission of ownership, thus: “In the absence
of an express stipulation to the contrary, the payment of the
purchase price of the goods is not a condition precedent to the
transfer of title to the buyer, but title passes by the delivery.”28
This well-established rule is contrary to what was said in
Heirs of Severina San Miguel v. Court of Appeals,29 that “[i]n a
contract of sale, title only passes to the vendee upon full payment
of the stipulated consideration, or upon delivery of the thing
sold.” In fact, Balatbat v. Court of Appeals,30 held that “[D]evoid
of stipulation that ‘ownership in the thing shall not pass to the
purchaser until he has fully paid the price’ [Art. 1478], ownership
in the thing shall pass from the seller to the buyer upon actual or
constructive delivery of the thing sold even if the purchase price
has not yet been fully paid. Failure of the buyer to make good the
price does not, in law, cause the ownership to revest to the seller
unless the bilateral contract of sale is first rescinded or resolved
pursuant to Art. 1191.”31
In Fortune Tobacco Corp. v. NLRC,32 where the resolution of
the issues boiled down to whether there was an actual sale of the
employer’s plant and facilities, the Court held that the execution
of the deed of conditional sale with provision that the final deed of
sale was to be executed only upon full payment, did not transfer
ownership of the subject matter by the delivery thereof. It also
held that “even accepting that the plant and its facilities have been
sold on a conditional basis, there can be no actual sale thereof
[i.e., transfer of ownership] unless the plant and its facilities are
unconditionally conveyed ... by virtue of a ‘final or absolute deed
of sale’ in accordance with the terms and conditions stated in the
agreement between the parties.”33
Ibid, at p. 406.
364 SCRA 523 (2001).
30
261 SCRA 128 (1996).
31
Ibid, at pp. 138-139.
32
200 SCRA 766 (1991).
33
Ibid, at p. 772.
28
29
224
LAW ON SALES
Secondly, when at the time of the execution of the public
instrument, the subject matter was not subject to the control of
the seller, then the legal effects of delivery would not happen.
Addison v. Felix,34 held earlier that it is the duty of the
seller to deliver the thing sold, and that symbolic delivery by the
execution of a public instrument is equivalent to actual delivery
only when the thing sold is subject to the control of the seller, so
that “at the moment of sale, its material delivery could have been
made,”35 which talks of capacity rather than an actual physical
delivery. The “moment of sale” referred to was of course the
consummation stage, thus —
The Code imposes upon the vendor the obligation
to deliver the thing sold. The thing is considered to be
delivered when it is placed “in the hands and possession
of the vendee.” ... It is true that the same article declares
that the execution of a public instrument is equivalent
to the delivery of the thing which is the object of the
contract, but, in order that this symbolic delivery may
produce the effect of tradition, it is necessary that the
vendor shall have such control over the thing sold that,
at the moment of the sale, its material delivery could
have been made. It is not enough to confer upon the
purchaser the ownership and the right of possession.
The thing sold must be placed in his control. When
there is no impediment whatsoever to prevent the thing
sold from passing into the tenancy of the purchaser by
the sole will of the vendor, symbolic delivery through
the execution of a public instrument is sufficient. But
if, notwithstanding the execution of the instrument, the
purchaser cannot have the enjoyment and material
tenancy of the thing and make use of it himself or
through another in his name, because such tenancy
and enjoyment are opposed by the interposition of
another will, then fiction yields to reality — the delivery
has not been effected.36
38 Phil. 404 (1918).
Ibid, at p. 408.
36
Ibid, at p. 408; emphasis supplied.
34
35
PERFORMANCE OR CONSUMMATION OF SALE
225
Addison however recognized that “if the sale had been made
under the express agreement of imposing upon the purchaser
the obligation to take the necessary steps to obtain the material
possession of the thing sold, and it were proven that she knew
that the thing was in the possession of a third person claiming to
have property rights therein, such agreement would perfectly be
valid,”37 and there would have been full compliance by the seller
of his obligations under the sale, by the mere execution of the
public instrument.
In effect, Addison does not intend to place constructive
delivery at a lower category than that of actual delivery, and
there is no implication in the ruling that for constructive delivery
to produce the effects of tradition, it has to be coupled by
subsequent actual delivery or by the actual taking of physical
possession by the buyer. Otherwise, if constructive delivery
cannot do the job without actual delivery being made later on,
then constructive delivery would not in reality be a separate
form of tradition.
The Addison doctrine was reiterated in Power Commercial
and Industrial Corp. v. Court of Appeals,38 where the Court
emphasized that the operative word in the doctrine is not
“possession” but “control.” In Power Commercial, the buyer was
fully aware of the existence of squatters on the property at the
time of the transactions and even undertook the job of evicting
them. The Court held that the buyer cannot contend later on
that the execution of the deed of sale in a public document did
not operate as a symbolic delivery to transfer possession to the
buyer due to the presence of occupants on the lot sold, thus:
Although most authorities consider transfer of
ownership as the primary purpose of sale, delivery
remains an indispensable requisite as our law does
not admit the doctrine of transfer of property by mere
consent.39 The Civil Code provides that delivery can either
Ibid, at p. 409.
274 SCRA 597 (1997).
39
Articles 1477 and 1495, Civil Code; Fidelity & Deposit Co. v. Wilson, 8 Phil. 51,
56-57 (1907); Tan Leonco v. Go Inqui, 8 Phil. 531 (1907); Kuenzle & Streiff v. Macke &
Chandler, 14 Phil. 610, 611-612 (1909).
37
38
226
LAW ON SALES
be (1) ACTUAL (Article 1497) or (2) CONSTRUCTIVE
(Articles 1498-1501). Symbolic delivery (Article 1498),
as a species of constructive delivery, effects the
transfer of ownership through the execution of a public
document. Its efficacy can, however, be prevented if
the vendor does not possess control over the thing
sold,40 in which case this legal fiction must yield to
reality. The key word is control, not possession, of the
land ... Considering that the deed of sale between the
parties did not stipulate or infer otherwise, delivery was
effected through the execution of said deed.41
Nevertheless, the statement in Power Commercial that
“our law does not admit the doctrine of transfer of property by
mere consent,” is not accurate, since under Article 1496 of the
Civil Code, the ownership of the thing sold is acquired by the
buyer from the moment it is delivered to him in any of the ways
specified by law, “or in any other manner signifying an agreement
that the possession is transferred from the vendor to the vendee.”
As discussed hereunder, traditio longa manu and other forms of
symbolic delivery involve a mere agreement that buyer is now
the owner and possessor of the subject matter.
Thirdly, from the decision in Pasagui v. Villablanca,42 we
can infer an additional element into the Addison doctrine, that
in order that the execution of public instrument to produce the
effect of tradition, not only must the seller have actual control
of the object of the sale at the execution of the instrument, but
that such control or ability to transfer physical possession and
enjoyment must subsist for a reasonable length of time after the
instrument’s execution.
We can only “infer” the ruling from the decision because
Pasagui actually covered the main issue of whether the proper
action that should have been filed was one of forcible entry, which
required plaintiff’s prior possession; it was therefore a decision,
40
Addison v. Felix, 38 Phil. 404, 408 (1918); Vda. De Sarmiento v. Lesaca, 108
Phil. 900, 902-03 (1960); and Danguilan v. Intermediate Appellate Court, 168 SCRA 22,
32 (1988).
41
Reiterated in Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).
42
68 SCRA 18 (1975).
PERFORMANCE OR CONSUMMATION OF SALE
227
not on sale, but on jurisdiction and proper remedy. It held that
although a public instrument had been executed to cover the sale,
and despite the facts showing that the third-party claimants of the
subject parcel of land came into possession after the instrument
was executed, there was no delivery ever made by the seller
even by constructive delivery as to conclude that the buyer ever
had title, possession or control of the subject real estate.
The implied Pasagui ruling of control for a reasonable
period after execution of the instrument is an important ingredient
for constructive delivery; otherwise, the execution of a public
instrument, as a mode of delivery, would create undue burden on
the part of the buyer, who would be compelled to literally “jump”
into the possession of the subject matter soon after signing the
instrument, for he would then obtain no remedy from the seller.
The rationale for such inferred ruling should apply equally to all
forms of constructive delivery, since tradition being an obligation
on the part of the seller, the burden must continue to be with the
seller to grant the buyer reasonable period to take possession of
the subject matter. The ruling has since obtained doctrinal status
when it was reiterated in Danguilan v. Intermediate Appellate
Court,43 and Vda. de Sarmiento v. Lesaca.44
It is clear therefore, that without the other requisites mandated
by jurisprudence (i.e., control at time of delivery and passage
of reasonable time), the mere execution of a public instrument
does not create a conclusive presumption of delivery, which
presumption can be rebutted by clear and convincing evidence,
such as when the buyer failed to take actual possession or there
was continued enjoyment by the seller of possession.45
(3) Special Variation to Addison Doctrine
The Addison doctrine seemed to have been strained in the
case of Dy, Jr. v. Court of Appeals,46 where a brother bought
through a deed of absolute sale a tractor from his brother168 SCRA 22 (1988).
108 Phil. 900 (1960).
45
Santos v. Santos, 366 SCRA 395 (2001). Reiterated in Engreso v. De la Cruz,
401 SCRA 217 (2003); Ten Forty Realty and Dev. Corp. v. Cruz, 410 SCRA 484 (2003).
46
198 SCRA 826 (1991).
43
44
228
LAW ON SALES
seller, which at the time of the execution of the instrument, was
mortgaged to and in the possession of the mortgagee. The
purchase was with the knowledge of the mortgagee who insisted
that delivery to the buyer shall be made only upon the clearing of
the check payment on the mortgage debt. In the meantime, the
tractor was executed upon by a judgment creditor of the brotherseller while still in the possession of the mortgagee.
The issue before the Court was whether the execution
effected upon the tractor to enforce the brother-seller’s judgment
debt was still valid, since the tractor was already sold to the
brother-buyer. The judgment creditor insisted that at the time of
the execution of the deed of sale, no constructive delivery was
effected since the consummation of the sale was dependent upon
the clearance and encashment of the check which was issued in
payment of the tractor.
In ruling for the brother-buyer, Justice Gutierrez held in
Dy, Jr., that “[T]he mortgagor who gave the property as security
under a chattel mortgage did not part with the ownership over the
same. He had a right to sell it although he was under obligation
to secure the written consent of the mortgagor.”47 He held that
in addition to Article 1498 of the Civil Code which recognized
the execution of public instrument as constructive delivery, under
Article 1499, it is provided that 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 sale, or if the latter
already had it in his possession for any other reason.
Nevertheless, Justice Gutierrez recognized that “[I]n the
instant case, actual delivery of the subject tractor could not be
made. However, there was constructive delivery already upon
the execution of the public instrument pursuant to Art. 1498 and
upon the consent or agreement of the parties when the thing
sold cannot be immediately transferred to the possession of the
vendee. (Art. 1499).”48 With the acknowledgment that actual
47
48
Ibid, at p. 830.
Ibid, at p. 831.
PERFORMANCE OR CONSUMMATION OF SALE
229
delivery could not be effected, because possession of the tractor
was with the mortgagee, under the Addison doctrine, constructive
delivery through the execution of the public instrument could not
produce the effects of tradition, as to have made the brotherbuyer the owner of the subject matter.
In addressing this particular point raised by the respondent
Court of Appeals in its appealed decision, Justice Gutierrez held
that “[W]hile it is true that [the seller] was not in actual possession
and control of the subject tractor, his right of ownership was not
divested from him upon his default. Neither could it be said that
[the mortgagee] was the owner of the subject tractor because the
mortgagee can not become the owner of or convert and appropriate to himself the property mortgaged. (Art. 2088, Civil Code)
Said property continues to belong to the mortgagor.”49 The only
proper way to treat the Dy, Jr. ruling is to consider that when it
comes to a third-party and the issue centers on the title or ownership of the subject matter of a sale, then constructive delivery by
the execution of the public instrument would produce the effect
of tradition, but only insofar as title is concerned, provided that at
the time of the execution there was no legal impediment on the
part of the seller to transfer title to the buyer, even if at the time
of sale, control or possession of the subject matter was not in the
hands of the seller.
In any event, the variation in Dy, Jr. is not really that crucial,
since Addison itself recognized that “if the sale had been made
under the express agreement of imposing upon the purchaser
the obligation to take the necessary steps to obtain the material
possession of the thing sold, and it were proven that she knew
that the thing was in the possession of a third person claiming
to have property rights therein, such agreement would perfectly
be valid,”50 and therefore execution of the public document by
itself would produce the legal effects of tradition and effectively
transfer ownership to the buyer, even when the subject matter is
in the hands of a third party.
49
50
Ibid, at pp. 831-832.
Ibid, at p. 409.
230
LAW ON SALES
b. Symbolic Delivery
As to movables, constructive delivery may also be made
by the delivery of the keys of the place or depository where the
movable is stored or kept.51
Symbolic delivery must involve or cover the subject matter,
and cannot take a form relating to the payment of the purchase
price. Thus, Lorenzo Dev. Corp. v. Court of Appeals,52 held that
the issuance of an acknowledgment receipt of the partial payment
for the property bought cannot be taken to mean a transfer of
ownership thereof to the buyer because “no constructive delivery
of the real property could have been effected by virtue thereof.”
c. Constitutum Possessorium
This mode of constructive delivery takes effect when at the
time of the perfection of the sale, the seller held possession of
the subject matter in the concept of owner, and pursuant to the
contract, the seller continues to hold physical possession thereof
no longer in the concept of an owner, but as a lessee or any other
form of possession other than in the concept of owner.53
d. Traditio Brevi Manu
This mode of delivery is opposite that of constitutum
possessorium, where before the sale, the would-be buyer was
already in possession of the would-be subject matter of the
sale, say as a lessee, and pursuant to sale, he would now hold
possession in the concept of an owner.
Heirs of Pedro Escanlar v. Court of Appeals,54 illustrates
the application of traditio brevi manu. In that case, prior to
the sale, would-be buyers were in possession of the subject
property as lessees. Upon sale to them of the rights, interests
and participation as to the one-half (½) portion pro indiviso, they
remained in possession, not in the concept of lessees anymore
Art. 1498, Civil Code.
449 SCRA 99 (2005).
53
Art. 1500; Amigo v. Teves, 96 Phil. 252 (1954).
54
281 SCRA 176 (1997).
51
52
PERFORMANCE OR CONSUMMATION OF SALE
231
but as owners now through symbolic delivery known as traditio
brevi manu.
e. Traditio Longa Manu
This is delivery of a thing merely by agreement, such as when
the seller points the property subject matter of the sale by way of
delivery without need of actually delivering physical possession
thereof. Thus, under Article 1499 of the Civil Code, the delivery of
movable property may be made by the mere consent or agreement
of the contracting parties, if the thing sold cannot be transferred to
the possession of the buyer at the time of the sale.
f. Delivery of Incorporeal Property
An incorporeal property having no physical existence, its
delivery can only be effected by constructive delivery. Article
1501 of the Civil Code recognizes three (3) types of constructive
delivery specifically applicable to incorporeal property, thus:
(a) 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;
(b) By the placing of the titles of ownership in
the possession of the buyer; or
(c) The use and enjoyment by the buyer of the
rights pertaining to the incorporeal property,
with the seller’s consent.
g. Delivery by Negotiable Document of Title
A person to whom a negotiable document of title has been
duly negotiated acquires thereby such title to the goods as
transferor had or had ability to convey to a purchaser in good
faith for value, and also the title of the persons to whom the
documents was originally.55 Therefore, the buyer of the goods
55
Art. 1513, Civil Code.
232
LAW ON SALES
can by the process of negotiation of the covering document have
a title better than that of his immediate seller.
On other hand, the buyer to whom a document of title has
been transferred by assignment, acquires only his transferor’s title
to the goods, and always subject to the terms of any agreement
with the transferor.56
Since an invoice is not a negotiable document of title, the
issuance thereof would not constitute constructive delivery.57
h. Delivery Through Carrier
Delivery through a carrier as a form of constructive delivery
necessarily pertains only to a sale of goods. The general rule,
and in the absence of stipulation or circumstances to the contrary,
delivery to carrier is deemed delivery to the buyer, the premise
being that the carrier acts as an agent of the buyer.
This default rule is best illustrated by Article 1523 of the Civil
Code, where, if in pursuance of a 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, 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 omits to do so, and
the goods are lost or damaged in the course of the transit, the
buyer may decline to treat the delivery to the carrier as delivery to
himself, or may hold the seller responsible for damages.58
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
Art. 1514, Civil Code.
Norkis Distributors v. Court of Appeals, 193 SCRA 694 (1991); P.T. Cerna Corp.
v. Court of Appeals, 221 SCRA 19 (1993).
58
Art. 1523, Civil Code.
56
57
PERFORMANCE OR CONSUMMATION OF SALE
233
transit, and if the seller fails to do so, the goods shall be deemed
to be at his risk during such transit.59
(1) F.A.S. Sales
Under such arrangement, “the seller pays all charges and is
subject to risk until the goods are placed alongside the vessel.”60
In other words, delivery of the goods alongside the vessel
completes the effect of tradition.
(2) F.O.B. Sales
In mercantile contracts of American origin, “f.o.b.” stands
for the words “free on board,” and under such arrangement
the seller shall bear all expenses until the goods are delivered,
depending on whether the goods are to be delivered “f.o.b.” at
the point of shipment or at the point of destination.61 Under an
“f.o.b., shipping point” arrangement, delivery of the goods to the
carrier is equivalent to delivery to the buyer, and at that point the
risk of loss pertains to the buyer.
Under an “f.o.b., destination” arrangement, only when the
vessel has arrived at the point of destination would there be
delivery to the buyer and prior to that point in time, the risk of loss
over the subject matter of the sale will be borne by the seller.
(3) C.I.F. Sales
The letters “c.i.f.” found in British contracts stand for costs,
insurance, and freight; they signify that the price fixed covers
not only the costs of the goods, but the expense of freight and
insurance to be paid by the seller.62 Under that arrangement, the
amount quoted by the seller and agreed to by the buyer, covers
not only the cost of the merchandise (i.e., the price), but also the
cost of insurance and freight. There are two schools of thought
on the effect of delivery under c.i.f. sales.
Art. 1523, Civil Code.
A. Soriano Y Cia. v. Collector, 97 Phil. 505 (1955).
61
Behn Meyer & Co. v. Yangco, 38 Phil. 602, 606 (1918).
62
Behn Meyer & Co. v. Yangco, 38 Phil. 602, 606 (1918).
59
60
234
LAW ON SALES
Under the first school of thought, since in a c.i.f. arrangement,
the costs of insurance and freight are ultimately to be borne by the
buyer, as part of the price he has obligated himself to pay, then
it would mean that the carrier acts as an agent of the buyer who
pays the freight, and therefore delivery to the carrier is delivery
to the buyer. In addition, since the insurance over the goods
shipped is for the account of the buyer, then clearly the buyer has
obtained ownership over the goods during the shipment period
since this is required under the insurance law for the buyer to
have insurable interest.
The other school of thought provides that in quoting a c.i.f.
price, that means that both parties agree that the seller takes on
the responsibility of insuring the goods and providing for their
shipment to the buyer, and for which responsibility he gets a
package price. Under such circumstances, delivery by the seller
of the goods to the carrier is not equivalent to delivery to the
buyer, and the seller must continue to bear the risk of loss during
the shipment period since this is an integral part of his obligation
under the agreed terms of the sale.
In the early case of Behn, Meyer & Co. v. Yangco,63 where
the shipping terms were “c.i.f., Manila” on goods coming from
New York, the Court held that “[I]f the contract be silent as to
the person or mode by which the goods are to be sent, delivery
by the vendor to a common carrier, in the usual and ordinary
course of business, transfers the property to the vendee.”64 The
implication is clear therefore in Behn Meyer & Co. that a “c.i.f.”
arrangement “signifies that the price fixed covers not only the
costs of the goods, but the expense of freight and insurance
to be paid by the seller,” and therefore seller bears the risk of
loss during shipment. It held that “[A] specification in a contract
relative to the payment of freight can be taken to indicate the
intention of the parties in regard to the place of delivery. If the
buyer is to pay the freight, it is reasonable to suppose that he
does so because the goods become his at the point of shipment.
On the other hand, if the seller is to pay the freight, the inference
63
64
38 Phil. 602 (1918).
Ibid, at p. 605.
PERFORMANCE OR CONSUMMATION OF SALE
235
is equally strong that the duty of the seller is to have the goods
transported to their ultimate destination and that title to property
does not pass until the goods have reached their destination.”65
Nevertheless, Behn, Meyer & Co. upheld the principle
that “both of the terms ‘c.i.f.’ and ‘f.o.b.’ merely make rules of
presumption which yield to proof of contrary intention.”66 The Court
then held that since in the instant case the “c.i.f.” arrangement
was accompanied with the word “Manila” which was the point of
destination, then this must be taken to mean “that the contract
price, covering costs, insurance, and freight, signifies that the
delivery was to be made at Manila.”67
In Pacific Vegetable Oil Corp. v. Singzon,68 the Court held
that under an arrangement “c.i.f. Pacific Coast” (the point of
destination), “the vendor is to pay not only the cost of the goods,
but also the freight and insurance expenses, and, as it was
judicially interpreted, this is taken to indicate that the delivery is
to be made at the port of destination.”
Behn, Meyer & Co. and Pacific Vegetable agree with the
second school of thought that since c.i.f. includes both insurance
and freight expenses to be paid by the seller, ordinarily therefore,
in a c.i.f. arrangement, the risk of loss for the account of the buyer
arises only when the vessel arrives at the point of destination.
On the other hand General Foods v. NACOCO,69 upholds
the first school of thought that “[t]here is no question that under
an ordinary C.I.F. agreement, delivery to the buyer is complete
upon delivery of the goods to the carrier and tender of the
shipping and other documents required by the contract and the
insurance policy taken in the buyer’s behalf.”70 General Foods
therefore holds that although it is the seller who may make the
arrangement for the insurance coverage and freightage of the
goods, he does this for the account and benefit of the buyer, who
has agreed to pay for such amounts.
Ibid, at pp. 605-606.
Ibid, at p. 606.
67
Ibid, at pp. 606-607.
68
G.R. No. L-7917, Supreme Court Advance Decisions, 29 April 1955.
69
100 Phil. 637 (1956).
70
Ibid, at p. 341.
65
66
236
LAW ON SALES
In General Foods, the price was quoted “CIF New York”
(the point of destination), and although the Court did not place
significance on the indication of “New York” it held that “[t]here is
equally no question that the parties may, by express stipulation
or impliedly (by making the buyer’s obligation depend on arrival
and inspection of the goods), modify a CIF contract and throw
the risk upon the seller until arrival in the port of destination.”71
The Court took into consideration that the price agreed upon was
to be based on “net landed weights” and it held that delivery by
the seller to the carrier in Manila of the goods covered was not
delivery to the buyer, and the risk of loss of the goods during the
voyage was to be borne by the seller.
The lesson learned from all of these is that the shipping
arrangements in a sale create, by commercial usage, certain
presumptive effects; however, such presumptive effects must
give away, rather easily, to any stipulation or even intimation
to the contrary. The courts have therefore tended to look at
other stipulations or indications in the agreement to find the
true intentions of the parties as to the transfer of the risk of
loss before they would apply the presumptive effects of such
acronyms.
EFFECTS AND COMPLETENESS OF DELIVERY
For tradition to produce the twin legal consequences of
transferring ownership to the buyer and effecting the fulfillment
of the primary obligations of the seller, two principles must apply,
namely:
(a) Delivery must be made pursuant to a valid
sale; and
(b) Delivery must be effected when seller has
ownership over the subject matter of sale
so delivered.
71
Ibid, at p. 341.
PERFORMANCE OR CONSUMMATION OF SALE
237
a. Delivery Must Be Made Pursuant to a Valid Sale
Since tradition takes effect in the consummation stage of
sale, it presupposes that there has been a valid passage through
perfection stage that has given rise to a valid and binding sale
that is capable of performance. Consequently, delivery would
produce the effect of transferring ownership to the buyer only
when it is made pursuant to a valid sale.
When a sale is fictitious, and therefore void and inexistent,
as there was no consideration for the same, no title over the
subject matter of the sale can be conveyed. Nemo potest nisi
quod de jure potest — No man can do anything except what he
can do lawfully.72
b. Delivery Must Be Made By Seller Who Has
Ownership over the Subject Matter
Likewise, delivery would produce the effect of transferring
ownership only if at the time of delivery the seller still had
ownership over the subject matter. This stems from the principle
that no man can dispose of that which does not belong to him.
(Nemo dat quod non habet.)73
c. To Whom Delivery Must Be Made
Lagoon v. Hooven Comalco Industries, Inc.,74 held that
where it is stipulated that deliveries must be made to the buyer
or his duly authorized representative named in the contracts, the
seller is bound to deliver in such manner only, unless the buyer
specifically designated someone to receive delivery.
72
Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997); Cadungog v. Yap,
469 SCRA 561 (2005); Naval v. Court of Appeals, 483 SCRA 102 (2006).
73
Noel v. Court of Appeals, 240 SCRA 789 (1995); Nool v. Court of Appeals, 276
SCRA 149 (1997); Tangalin v. Court of Appeals, 371 SCRA 49 (2001); Naval v. Court of
Appeals, 483 SCRA 102 (2006).
Although tax declaration is not evidence of title, nevertheless when at the time of
delivery there is no proof that the seller had ownership and as in fact the tax declaration
to the subject property was in the name of another person, though tax declaration do
not prove ownership of the property of the declarant, tax declarations and receipts can
be strong evidence of ownership of land when accompanied by possession for a period
sufficient for prescription. Heirs of Severina San Miguel v. Court of Appeals, 364 SCRA
523 (2001).
74
349 SCRA 363 (2001).
238
LAW ON SALES
d. When Buyer Refuses to Accept
Since delivery of the subject matter of the sale is an
obligation on the part of the seller, the acceptance thereof by
the buyer is not a condition for the completeness of delivery.75
Even with such refusal of acceptance, delivery, whether actual
or constructive, will produce its legal effects, as, for example,
transferring the risk of loss of the subject matter to the buyer who
has become the owner thereof.
Under Article 1588 of the Civil Code, 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.
However, even under such circumstances, the seller is still
legally obliged to take certain steps as not to be held liable for
consequent loss or damage to the goods.
1. Rules on Effects of Delivery for Movables
Article 1522 of the Civil Code provides the rules on the
delivery of goods —
(a) Where the seller delivers to the buyer
a quantity of goods less than what 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;
(b) 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;
(c) Where the seller delivers to the buyer
a quantity of goods larger than what he
contracted to sell, the buyer may accept the
75
La Fuerza v. Court of Appeals, 23 SCRA 1217 (1968).
PERFORMANCE OR CONSUMMATION OF SALE
239
goods covered 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; if the subject matter is
indivisible, the buyer may reject the whole
of the goods; or
(d) Where the seller delivers to the buyer the
goods contracted but mixed with goods of a
different description, the buyer may accept
the contracted goods and reject the rest; if
the subject matter is indivisible, the buyer
may reject the goods entirely.
a. When Goods Held by Third Party
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.76
b. Reservation of Ownership
Despite delivery, ownership will not transfer to the buyer in
case of express reservation, such as when the parties stipulate
that ownership will not transfer until the purchase price is fully
paid,77 or until certain conditions are fulfilled.78
Article 1503 of the Civil Code gives the following instances
when there is an implied reservation of ownership:
(a) Where goods are shipped, and by the bill of
lading the goods are deliverable to the seller
or his agent, the seller thereby reserves the
ownership in the goods.
But, if except from the form of the bill of
lading, ownership would have passed to the
buyer on shipment of the goods, the seller’s
Art. 1521, Civil Code.
Art. 1478, Civil Code.
78
Art. 1503, Civil Code.
76
77
240
LAW ON SALES
property in the goods shall be deemed to be
only for purpose of securing performance of
the buyer’s obligations, in which case the
buyer bears the risk of loss;
(b) Where goods are shipped, and by the bill of
lading the goods are deliverable to the 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, and ownership is still transferred
to the buyer;
(c) 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.
In the last case, however, if the bill of lading provides
that the goods are deliverable to the buyer or to the order of
the person 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 endorsed by the consignee named
therein, or of the goods, without notice of the facts making the
transfer wrongful.79
c. Obligation as to Accessories and Accessions
In the sale of movables, in addition to the obligation of the
seller to deliver the accessories and accessions in the condition
in which they were upon the perfection of the contract,80 the seller
79
80
Art. 1503, Civil Code.
Art. 1537, Civil Code.
PERFORMANCE OR CONSUMMATION OF SALE
241
must deliver to the buyer a quantity of goods that should not be
less than what he contracted to sell, otherwise the buyer may
reject them.81
d. Sale in Mass of Movables
The sale of movables under Article 1522 of the NCC,
should be distinguished from the sale of specific mass under
Article 1480 which provides for the “sale of fungible things, made
independently and for a single price, or without consideration of
their weight, number, or measure.”
In Gaite v. Fonacier,82 which involved the sale of iron ore,
it was held that if there is no provision in the contract for the
measuring or weighing of the fungible movables sold in order to
complete or perfect the sale, nor is the price agreed upon by the
parties to be based upon such measurement, then the “subject
matter of the sale is, therefore, a determinate object, the mass,
and not the actual number of units or tons contained therein, so
that all that was required of the seller Gaite was to deliver in good
faith to his buyer all of the ore found in the mass, notwithstanding
that the quantity delivered is less than the amount estimated by
them.”83
e. Sale by Description and/or Sample
In a sale of goods by description or sample, the sale may
be rescinded if the bulk of the goods delivered do not correspond
with the description or the sample, and if the contract be by
sample as well as by description, it is not sufficient that the bulk of
goods correspond with the sample if they do not also correspond
with the description.84 By their very nature, sales of goods by
sample and/or description, should allow the buyer a reasonable
opportunity of inspection or of comparing the bulk with the sample
or the description before accepting their delivery.85
Art. 1522, Civil Code.
2 SCRA 830 (1961).
83
Ibid, at p. 840; emphasis supplied.
84
Art. 1481, Civil Code.
85
Last paragraph of Art. 1481, Civil Code.
81
82
242
LAW ON SALES
Mendoza v. David,86 held that there is “sale by sample” when
a small quantity is exhibited by the seller as a fair specimen of the
bulk, which is not present and there is no opportunity to inspect
or examine the same, thus: “To constitute a sale by sample, it
must appear that the parties treated the sample as the standard
of quality and that they contracted with reference to the sample
with the understanding that the product to be delivered would
correspond with the sample.”87
Mendoza described a “sale of goods by description” as one
where “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; or as otherwise stated, where the
buyer has not seen the article sold and relies on the description
given to him by the seller, or has seen the goods, but the want of
identity is not apparent on inspection.”88
The Court in Mendoza also held that the term “sale by
sample” does not include an agreement to manufacture goods
to correspond with the pattern, especially where in that case
the three sets of furniture were manufactured according to the
specifications provided by the buyer, and not in accordance with
the replicas displayed in the seller’s shop.
Engel v. Mariano Velasco & Co.,89 held that even in sales
by description and/or sample, the purchaser will not be released
from his obligation to accept and pay for the goods by deviations
on the part of the seller from the exact terms of the contract, if
the purchaser had acquiesced to such deviations after due notice
thereof.
Pacific Commercial Co. v. Ermita Market & Cold Stores,90
held that when the machine delivered by the seller is in accordance
with the description stated in the sales contract, the buyer cannot
refuse to pay the balance of the purchase price and the cost of
installation even if it proves that the machine cannot be used
441 SCRA 172 (2004).
Ibid, at p. 184.
88
Ibid, at pp. 184-185.
89
47 Phil. 115 (1924).
90
56 Phil. 617 (1932).
86
87
PERFORMANCE OR CONSUMMATION OF SALE
243
satisfactorily for the purposes for which he bought it when such
purpose was not made known to the seller.
f. “On Sale or Return”
Under Article 1502 of the NCC, 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.
g. “Sale on Approval, Trial, Satisfaction, or Acceptance”
On the other hand, Article 1502 provides that 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 only: (a) when he signifies his approval or acceptance to
the seller or does any other act adopting the transaction; or (b)
if the buyer does not signify his approval or acceptance, 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.
Vallarta v. Court of Appeals,91 held that when the sale of a
movable is “sale on acceptance,” no ownership could have been
transferred to the buyer although he took possession thereof,
because “[d]elivery, or tradition, as a mode of acquiring ownership
must be in consequence of a contract ..., e.g., sale,”92 and in that
case there was as yet no contract when delivery was effected.
h. Form of Such Special Sales
Industrial Textile Manufacturing Co. v. LPJ Enterprises,
Inc.,93 held that for a sale to be considered and construed as a
“sale or return” or a “sale on approval,” there must be a clear
150 SCRA 336 (1987).
Ibid, at p. 342.
93
217 SCRA 322 (1993).
91
92
244
LAW ON SALES
agreement to either of such effect, otherwise, the provisions of
Article 1502 of the Civil Code governing such sales cannot be
invoked by either party to the contract, and therefore must be in
writing, and cannot be proved by parol evidence:
... The provision in the Uniform Sales Act and the
Uniform Commercial Code from which Article 1502 was
taken, clearly requires an express written agreement
to make a sales contract either a “sale or return” or a
“sale on approval.” Parol or extrinsic testimony could
not be admitted for the purpose of showing that an
invoice or bill of sale that was complete in every aspect
and purporting to embody a sale without condition or
restriction constituted a contract of sale or return. If the
purchaser desired to incorporate a stipulation securing
to him the right to return, he should have done so at
the time the contract was made. On the other hand,
the buyer cannot accept part and reject the rest of the
goods since this falls outside the normal intent of the
parties in the “on approval” situation.94
i. Written Proof of Delivery
Lao v. Court of Appeals,95 confirmed that in case of goods,
delivery is generally evidenced by a written acknowledgment of a
person that he has actually received the thing or the goods, as in
delivery receipts, under the following rules:
(a) A bill of lading cannot substitute for a
delivery receipt, because it is a written
acknowledgment of receipt of the goods by
the carrier and an agreement to transport
and deliver them at a specific place to a
person named or upon his order; it does
not evidence receipt of the goods by the
consignee or the person named in the bill of
lading; and
94
95
Ibid, at p. 327, citing 67 AM JUR 2D, pp. 733-748.
325 SCRA 694 (2000).
PERFORMANCE OR CONSUMMATION OF SALE
245
(b) A factory consignment invoice is not
evidence of actual delivery of the goods
since in the invoice nothing more than a
detailed statement of the nature, quantity
and cost of the thing sold, and it not proof
that the thing or goods were actually
delivered to the buyer or the consignee.
j. Time and Place of Delivery
Whether it is for the buyer to take possession of the goods
or for 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 such contract, express or implied, or usage
of trade to the contrary, the place of delivery is seller’s place of
business, if he has one, and if not, his residence.96 In case of a
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.97
Where by a 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.98
Demand or tender of delivery may be treated as ineffectual
unless made at a reasonable hour; and what may be a reasonable
hour is a question of fact.99
k. Seller Shall Pay Expenses of Delivery
Unless otherwise agreed, the expenses in putting the goods
into a deliverable state must be borne by the seller.100
2. Rules on Effects of Delivery for Immovables
The following rules to determine completeness of delivery
shall apply when the subject matter of the sale is an immovable:
Art. 1521, Civil Code.
Art. 1521, Civil Code.
98
Art. 1521, Civil Code.
99
Art. 1521, Civil Code.
100
Art. 1521, Civil Code.
96
97
246
LAW ON SALES
a. Where Immovables Sold Per Unit or Number
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 seller is obliged to deliver to the buyer, if the latter
should demand it, all that may have been stated in the contract.
If this should not be possible, the buyer may choose between
a proportional reduction of the price, or the rescission of the
contract when in the latter case, the lack of area be not less than
one-tenth (1/10) of that stated.101
In Rudolf Lietz, Inc. v. Court of Appeals,102 it was held that
the statement of the area of the immovable is not conclusive and
the price may be reduced or increased depending on the area
actually delivered.
The rule applies, even when the area is the same, if any part
of the immovable is not of the quality specified in the contract;
provided that rescission may take place when the inferior value
of the thing sold exceeds one-tenth (1/10) of the price agreed
upon.103
Even when the smaller area or inferiority of quality does
not conform to the minimum amount or value provided by law
to allow rescission on the part of the buyer, nevertheless, if the
buyer would not have bought the immovable had he known of its
smaller area or inferior quality, he may rescind the sale.104
On the other hand, if there is a greater area or number in
the immovable than that stated in the contract, the buyer 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.105
The foregoing rules also apply to judicial sales.106
Art. 1539, Civil Code.
478 SCRA 451 (2005).
103
Art. 1539, Civil Code.
104
Art. 1539, Civil Code.
105
Art. 1540, Civil Code.
106
Art. 1541, Civil Code.
101
102
PERFORMANCE OR CONSUMMATION OF SALE
247
b. Where Immovables Sold for a Lump Sum
In the sale of real estate made for a lump sum and not at
the rate of a certain sum for a unit of measure or number, there
shall be no increase or decrease of the price, although there
be a greater or lesser area or number than that stated in the
contract,107 especially with the use of qualifying words of “more
or less” in describing the area.108
The same rule applies when two or more immovables are
sold for a single price; but if, besides mentioning the boundaries
which is indispensable in every conveyance of real estate,
its area or number should be designated in the contract, the
vendor shall be bound to deliver all that is included within said
boundaries, even when it exceeds the area or number specified
in the contract; and, should he not be able to do so, he shall
suffer a reduction in the price, in proportion to what is lacking in
the area or number, unless the contract is rescinded because
the buyer does not accede to the failure to deliver what has been
stipulated.109
Nevertheless, in both Asiain v. Jalandoni,110 and Roble v.
Arbasa,111 the Court held that although under Article 1542, in
the sale of real estate by lump sum, there shall be no increase
or decrease of the price although there be a greater or lesser
area or number than that stated in the contract, the rule admits
of exception because the sale of land under description “more
or less” or similar words in designating quantity covers “only a
reasonable excess or deficiency.”112 In Roble, the Court held that
a deficiency or excess of “644 square meters” is not reasonable.
The exception to this rule is when expressly the buyer assumes
the risk on the actual area of the land bought.113
Art. 1542, Civil Code.
Esguerra v. Trinidad, 518 SCRA 186 (2007).
109
Art. 1542, Civil Code. See also Azarraga v. Gay, 52 Phil. 599 (1928), and Teran
v. Villanueva, 56 Phil. 677 (1932).
110
45 Phil 296 (1923).
111
362 SCRA 69 (2001).
112
Reiterated in Rudolf Lietz, Inc. v. Court of Appeals, 478 SCRA 451 (2005).
113
Garcia v. Velasco, 72 Phil. 248 (1941).
107
108
248
LAW ON SALES
c. Lump Sum Sale versus Sale by Unit
of Measure or Number
Santa Ana v. Hernandez,114 clarified the governing rule in
the sale of real property, whether to treat it as a lump-sum sale
or a sale per unit of measure or number. In that case, the sellersspouses sold to the buyer two separate portions of a much
bigger land indicating in the instrument the total purchase price
and the areas of each of the sold portions totaling 17,000 square
meters, plus an indication of the boundaries. Subsequently, the
buyer refused to vacate the areas occupied by her which were
in excess of 17,000 square meters but which she alleged where
within the boundaries described in the instrument.
In affirming that the contract between the parties was a
lump-sum sale, and therefore the buyer was entitled to occupy
all portions within the boundaries stated in the instrument,
even if they exceed 17,000 square meters, the Court held that
“the sale made was of a definite and identified tract, a corpus
certum, that obligated the vendors to deliver to the buyer all the
land within the boundaries, irrespective of whether its real area
should be greater or smaller than what is recited in the deed. ...
To hold the buyer to no more than the area recited on the deed,
it must be made clear therein that the sale was made by unit of
measure at a definite price for each unit.”115
The Court also held that “[i]f the defendant intended to
buy by the meters he should have so stated in the contract.”
Also, based on the ruling of the Supreme Court of Spain, in
construing Article 1471 of the Spanish Civil Code, which was
copied verbatim in Article 1542 of our Civil Code, the Court
held that it “is highly persuasive that as between the absence
of a recital of a given price per unit of measurement, and the
specification of the total area sold, the former must prevail and
determines the applicability of the norms concerning sales for
a lump sum.116 In short, Santa Ana provides that if the price per
unit of measure or number is not expressly provided for in the
18 SCRA 973 (1966).
Ibid, at p. 979.
116
Ibid, at p. 980, citing Goyena v. Tambunting, 1 Phil. 490 (1902).
114
115
PERFORMANCE OR CONSUMMATION OF SALE
249
contract, the rules of lump sum sale shall prevail in the sale of
real property.
Balantakbo v. Court of Appeals,117 reiterated that the rule is
quite well-settled that what really defines a piece of land is not
the area calculated with more or less certainty mentioned in the
description but the boundaries therein laid down as enclosing the
land and indicating its limits: where the land is sold for a lump sum
and not so much per unit of measure or number, the boundaries
of the land stated in the contract determine the effects and scope
of the sale not the area thereof.118
In Esguerra v. Trinidad,119 the Court held —
Under Article 1542, what is controlling is the entire
land included within the boundaries, regardless of
whether the real area should be greater or smaller than
that recited in the deed. This is particularly true since
the are of the land ... was described in the deed as
“humigit kumulang,” that is, more or less. A caveat is
in order, however, the use of “more or less” or similar
words in designating quantify covers only a reasonable
excess or deficiency. A vendee of land sold in gross
or with the description “more or less” with reference
to its area does not thereby ipso facto take all risks of
quantity in the land. Numerical data are not of course
the sole gauge of unreasonableness of the excess
of deficiency in area. Courts must consider a host of
other factors, in one case (Roble v. Arbas, 362 SCRA
69 [2001]), the Court found substantial discrepancy in
area due to contemporaneous circumstance. Citing
change in the physical nature of the property, it was
therein established that the excess area at the southern
portion was a product of reclamation, which explained
why the land’s technical description in the deed of
sale indicated the seashore as its southern boundary,
hence the inclusion of the reclaimed area was declared
unreasonable.” The increase by a fourth of a fraction
249 SCRA 323 (1995).
Reiterated in Rudolf Lietz, Inc. v. Court of Appeals, 478 SCRA 451 (2005).
119
518 SCRA 186 (2007).
117
118
250
LAW ON SALES
of the area indicated in the deed of sale cannot be
considered an unreasonable excess.120
d. Where Immovables Sold in Mass
A judicial sale in mass of separate known lots or parcels will
not be set aside, unless it is made to appear that a larger sum
could have been realized from a sale in parcels or that a sale
of less than the whole would have been sufficient to satisfy the
debt.121
e. Expenses of Delivery and Registration
on Real Estate
As discussed in greater details in the appropriate chapters,
the rules pertaining to, and the effects of, tradition, whether actual
or constructive, vary greatly when the subject matter of a valid
sale is real property, especially so when it is registered land. This
is because of the rather peremptory effect of “registration in good
faith as the operative act” principle under the Torrens system
embodied in the Property Registration Decree,122 and the priority
of registration in good faith to determine ownership preference in
double sales rules in Article 1544 of the Civil Code.
The Supreme Court held in 2003 in Chua v. Court of
Appeals,123 that registration of the title of the buyer over the
purchased real estate is not an ingredient necessary for tradition
to have full effect, thus —
The obligation of the seller is to transfer to the buyer
ownership of the thing sold. In the sale of real property,
the seller is not obligated to transfer in the name of the
buyer a new certificate of title, but rather to transfer
ownership of the real property. There is a difference
between transfer of the certificate of title in the name of
the buyer, and the transfer of ownership to the buyer. The
buyer may become the owner of the real property even
if the certificate of title is still registered in the name of
Ibid, at pp. 198-199.
Republic v. NLRC, 244 SCRA 564 (1995).
122
Pres. Decree 1529.
123
401 SCRA 54 (2003).
120
121
PERFORMANCE OR CONSUMMATION OF SALE
251
the seller. As between the seller and buyer, ownership
is transferred not by issuance of a new certificate of
title in the name of the buyer but by the execution of the
instrument of sale in a public document.124 x x x. The
recording of the sale with the proper Registry of Deeds
and the transfer of the certificate of title in the name of
the buyer are necessary only to bind third parties to
the transfer of ownership. As between the seller and
the buyer, the transfer of ownership takes effect upon
the execution of a public instrument conveying the real
estate. Registration of the sale with the Registry of
Deeds, or the issuance of a new certificate of title, does
not confer ownership on the buyer. Such registration
or issuance of a new certificate of title is not one of the
modes of acquiring ownership.
Chua also held that although the buyer of a parcel of land
has more interest in having the capital gains tax paid immediately
since this is a pre-requisite to the issuance of a new Torrens title
in his name, nevertheless, as far as the government is concerned,
the capital gains tax remains a liability of the seller since it is a
tax on the seller’s gain from the sale of the real estate. The Court
also emphasized that the payment of the capital gains tax is not
a pre-requisite to the transfer of ownership to the buyer, and
that the transfer of ownership took effect upon the signing and
notarization of the deed of absolute sale.
Earlier, Jose Clavano, Inc. v. HLURB,125 held that a judgment
on a sale that decrees the obligations of the seller to execute and
deliver the deed of absolute sale and the certificate of title, does
not necessarily include within its terms the obligation on the part
of the seller to pay for the expenses in notarizing the deed of sale
and in obtaining new certificate of title.
The ruling in Jose Clavano, Inc. is contrary to the Court’s
subsequent ruling in Chua where the Court decreed the
obligations of the seller to deliver the documents necessary to
allow the buyer to be able to effect registration of his purchase.
124
125
Ibid, at p. 70.
378 SCRA 172 (2002).
252
LAW ON SALES
In fact, Vive Eagle Land, Inc. v. Court of Appeals,126
subsequently held that under Article 1487 of the Civil Code, the
expenses for the registration of the sale should be shouldered
by the seller unless there is a stipulation to the contrary; and that
under Article 1495, the seller is obliged to transfer title over the
property and deliver the same to the vendee. The ruling in Vive
Eagle Land is again in stark contrast to the Court’s earlier ruling in
Chua that registration of the title of the buyer over the purchased
real estate is not an ingredient necessary for tradition to have full
effect, and therefore “the seller is not obligated to transfer in the
name of the buyer a new certificate of title, but rather to transfer
ownership of the real property. There is a difference between
transfer of the certificate of title in the name of the buyer, and the
transfer of ownership to the buyer.”
DOUBLE SALES
1. Rules on Double Sales Must Be Considered
as Rules on Tradition 127
The various rules on double sales, including those provided
under Article 1544 of the Civil Code, are rules that pertain to the
consummation stage in the life of a sale; they cover the effects
and consequences of tradition in a particular situation where the
same seller has sold the same subject property to two or more
buyers who do not represent the same interests. Consequently,
the various rules on double sales usually can only operate under
the same premise that tradition, whether actual or constructive,
can be made operative, that is:
(a) The conflicting sales are all valid and demandable sales, pursuant to which tradition
was or could be effected; and
(b) The seller who effected multiple sales
to various buyers over the same subject
matter actually had ownership to convey.128
444 SCRA 445 (2004).
The rules on double sales under Article 1544 of the Civil Code find no relevance
in an ordinary donation. Hemedes v. Court of Appeals, 316 SCRA 347 (1999).
128
Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of Appeals, 448 SCRA
347 (2005).
126
127
PERFORMANCE OR CONSUMMATION OF SALE
253
Nevertheless, the rules on double sales, although
essentially applicable within the stage of consummation, have a
way of dictating or pre-empting the principles of perfection. This
will be discussed at the appropriate points below.
The substantive discussions are better introduced with
the following proposition that may be obvious to many readers
already, thus: although Article 1544 may provide for the rules
on double sales for all types of movables and immovables,
nonetheless, the rules therein are not the only existing and
prevailing rules on double sales; that in fact, Article 1544 is
merely reflective and implementative of civil law principles in
Property Law, as well as special laws on registration of land and
other real estates.
2. Article 1544 as the Platform for Discussion
Article 1544 of the Civil Code provides that if the same thing
should have been sold to different buyers, the ownership shall
be given:
(a) When subject matter is movable, to the
buyer:
•
Who may have first taken possession
thereof in good faith;
(b) When subject matter is immovable, to the
buyer:
•
“Who in good faith first recorded [the
sale] in the Registry of Property;”
•
“Should there be no inscription, ... to the
person who in good faith was first in the
possession” of the subject matter;
•
“[I]n the absence thereof, to the person
who presents the oldest title, provided
there is good faith.”
The best way to appreciate Article 1544 is perhaps to
consider that it is more reflective of the doctrinal values on what
254
LAW ON SALES
Philippine society considers to be the best gauge of determining
who between disputing claimants would be preferred.
When it comes to movable properties, our society has
determined that one who possesses in good faith should be
preferred against another who merely interposes a claim even
though he be also in good faith. In other words, possession and
enjoyment of movable property are considered to be the public’s
best gauge of who owns a movable. This principle is expressed in
Article 559 of the Civil Code, which provides that the “possession
of movable property acquired in good faith is equivalent to title,”
which may be good even against the real owner of such movable.
When it comes to immovable properties, their importance
in civil society would require that they be governed by a system
of registration upon which the public may be able to clearly
determine who owns a particular property and what claims
and liens pertain thereto. This is the reason why in many of
it decisions, the Supreme Court holds that the execution of a
private document or the transfer of physical possession over real
property binds only the parties thereto, but that there must be
compliance with “[f]ormal requirements ... for the benefit of third
parties;”129 that although the “rule of thumb is that a sale of land,
once consummated, is valid regardless of the form it may have
been entered into,” this only applies to the contracting parties and
“in the event that a third party ... disputes the ownership of the
property, the person against whom that claim is brought can not
present any proof of such sale and hence has no means to enforce
the contract;”130 and that other than a proper memorandum of the
sale, but more importantly, the registration of that sale with the
Registry of Deeds is what binds registered land.131
Thus, under Article 1544, the buyer in good faith who is able
to effect registration of his purchase is preferred.
If we continue through the hierarchy of values when it comes
to double sales over immovables reflected in Article 1544, we find
Fule v. Court of Appeals, 286 SCRA 698 (1998).
Claudel v. Court of Appeals, 199 SCRA 113 (1991); also Alba Vda. De Rax v.
Court of Appeals, 314 SCRA 36 (1999).
131
Secuya v. Vda. De Selma, 326 SCRA 244 (2000).
129
130
PERFORMANCE OR CONSUMMATION OF SALE
255
that the second rule that grants preference to a buyer who first
takes possession of the immovable in good faith, is consistent
with the essence of the principle that the sale, even when it is
valid and enforceable, is merely a “title” or the legal justification
to acquire ownership, but it is tradition that is the “mode” by which
ownership is transferred to a buyer. Consequently, outside the
applicability of the primary rule on registration, the buyer who first
obtains possession of the subject matter in good faith is preferred
against another claiming buyer, under the inversely phrased
principle of Nemo dat quod non habet, that “No man can receive
from his seller what the latter no longer has.”
Finally, in the absence of first inscription or first possession,
both in good faith, Article 1544 reflects in the third rule applicable
to double sales of immovable the principle of prius tempore,
potior jure, which means that the first buyer, having the oldest
title in good faith, should be preferred.
3. Two Divergent Systems When It Comes to Land
Although registration of a sale occupies the highest preference for determining who owns land and other real estate, it has
assumed two divergent paths in Philippine jurisdiction, between
“registered land” (which is covered by the Torrens system) and
“unregistered land” (not covered by the Torrens system).
Registration under the Torrens system was previously governed by Act No. 496 (The Public Land Act), but now governed
by Pres. Decree No. 1529 (The Property Registration Decree).
Annotation or registration of transactions over unregistered land
was governed by Act No. 3344, but is now also provided for in
Pres. Decree No. 1529. The doctrinal difference between the two
sets of registration systems for real estate is quite stark.
a. The Case for Registered Land
Section 51 of Pres. Decree No. 1529 embodies the
“registration in good faith as the operative act” doctrine, thus —
Sec. 51. Conveyance and other dealings by
registered owners. — An owner of registered land may
256
LAW ON SALES
convey, mortgage, lease, charge or otherwise deal with
the same in accordance with existing laws ... But no
deed, mortgage, lease, or other voluntary instrument,
except a will, purporting to convey or affect registered
land shall take effect as a conveyance or bind the land,
but shall operate only as a contract between the parties
and as evidence of authority to the Register of Deeds
to make registration.
The act of registration shall be the operative act to
convey or affect the land insofar as third persons are
concerned, and in all cases under this Decree, the
registration shall be made in the office of the Register
of Deeds for the province or city where the land lies.
Abrigo v. De Vera,132 affirms that the rule in double sales
under Article 1544, whereby the buyer who is able to first register
the purchase in good faith “is in full accord with Section 51 of
PD 1529 which provides that no deed, mortgage, lease, or other
voluntary instrument — except a will purporting to convey or
affect registered land, shall take effect as a conveyance or bind
the land until its registration.”133
(1) Article 1544 Does Not Overcome the Priority
Rules Under P.D. No. 1529.
It should be emphasized that a clear distinction should be
drawn between the term “registration” which is the judicial or
administrative process by which a parcel of land is placed for
the first time within the coverage of the Torrens system, from
the term “registration” which is intended to cover the annotation
or inscription of a contract, transaction or legal process in the
Register of Deeds covering a property, which may or may not
be registered land. Only the second meaning of “registration” is
meant to be covered by the rules on double sales under Article
1544. More importantly, since the legal effect of registration
under Article 1544 pertains only to double sales, the coverage
432 SCRA 544 (2004).
Ibid, at p. 551. Also Carumba v. Court of Appeals, 31 SCRA 558 (1970);
Radiowealth Finance Co. v. Palileo, 197 SCRA 245 (1991).
132
133
PERFORMANCE OR CONSUMMATION OF SALE
257
and the effects of registration under Section 51 of Pres. Decree
No. 1459 cover not only sales contracts, but all other forms of
annotated voluntary contracts and transactions, like lease,
mortgage, options, agency designation, contracts to sell, etc. In
other words, the registration principle under Pres. Decree No.
1459 has a wider scope, and thereby a more pre-emptive effect,
than the narrow double sales application of Article 1544 of the
Civil Code.
A reading of the various decisions of the Supreme Court on
the matter clearly indicates that the rules of double sales under
Article 1544 do not overcome nor pre-empt the specific rules
under the Torrens system for registered land, which provide that
registration is the “operative act” by which dealings on registered
land, whether they be voluntary or involuntary, shall be recognized
as existing and binding upon third parties.
For example, Liao v. Court of Appeals,134 held that when two
certificates of title are issued to different persons covering the
same land in whole or in part, the rules on double sales under
Article 1544 cannot formally be applied, and instead the particular
doctrine under the Torrens System would apply, i.e., the person
holding title which was issued of an earlier date must prevail;
and, in case of successive registrations, where more than one
certificate is issued over the same land, the person holding a prior
certificate is entitled to the land as against a person who relies
on a subsequent certificate. Liao applied the principle under the
Torrens system that a certificate is not conclusive evidence of title
if the same land had been registered and an earlier certificate for
the same is in existence.
Another example is the decision in Naawan Community
Rural Bank, Inc. v. Court of Appeals,135 where the Court held
that invoking the rules on double sales and “priority in time”
would be misplaced by a first buyer who bought the land not
within the Torrens system but under Act No. 3344, as against the
second buyer who bought the same property when it was already
134
135
323 SCRA 430 (2000).
395 SCRA 43 (2003).
258
LAW ON SALES
registered under the Torrens System, thus: “It is a well-known
rule in this jurisdiction that persons dealing with registered land
have the legal right to rely on the fact of the Torrens Certificate
of Title and to dispense with the need to inquire further, except
when the party concerned has actual knowledge of facts and
circumstances that would impel a reasonably cautious man to
make such inquiry.”136 In addition, Naawan Community Rural
Bank held that the formal registration proceedings undertaken on
the property and the subsequent issuance of a title over the land
under the Torrens system had the legal effect of cleansing title
on the property of all liens and claims which were not annotated
therein.
The ruling in Naawan Community Rural Bank was reiterated
in Abrigo v. De Vera,137 where the Court emphasized that the
legal priority of registration of sale under Pres. Decree No. 1529
cannot be overcome by an earlier registration under Act No. 3344
which is not effective form of registration under Article 1544 of the
Civil Code.
b. The Case for Unregistered Land
If we consider that Act No. 3344 embodied the principle
that “registration is without prejudice to a third party with a better
right,” and that Sec. 113 of Pres. Decree No. 1529, now provides
that —
Sec. 113. Recording of instruments relating to
unregistered lands — No deed, conveyance, mortgage,
lease, or other voluntary instruments affecting land not
registered under the Torrens system shall be valid,
except as between the parties thereto, unless such
instrument shall have been recorded in the manner
prescribed in the office of the Register of Deeds x x
x. ... It shall be understood that any recording made
under this section shall be without prejudice to a third
party with a better right. x x x.
136
137
Ibid, at p. 50.
432 SCRA 544 (2004).
PERFORMANCE OR CONSUMMATION OF SALE
259
then we would must come to the conclusion that the “first to
register in good faith” rule under Article 1544 would be wholly
inapplicable to unregistered land. This is the main reason why in
many leading decisions, the Supreme Court has declared that the
rules on double sales under Article 1544 of the Civil Code have
no application to unregistered land.138 This sweeping statement
has led to much confusion on the applicable rule when it comes
to double sales of unregistered land.
The author posits that the better way to construe the principle
“without prejudice to a third party with a better right” under Act
No. 3344, and now Section. 113 of Pres. Decree No. 1459, is
to say that it implements the primary doctrine of Prius tempore,
potior jure, and thereby always favors the first buyer.
Firstly, if we accept that the two other rules found in Article
1544, namely, “first to possess in good faith” and the “person
with the oldest title in good faith,” are consistent with the principle
under Act No. 3344 of protecting the “third party with a better
right,” then such rules on double sales as found in Article 1544
would be applicable to unregistered land. Secondly, how would
you consider the other line of decisions of the Supreme Court
which have applied Article 1544 in situations where there has
been double sales of unregistered land? 139
A reading (and re-reading) of the leading and relevant
decisions of the Supreme Court covering double sales situations
over unregistered land would lead to one clear conclusion: That
the rules on double sales for immovables under Article 1544
are applicable to unregistered land, but only insofar as they do
not undermine specific rules and legislations that have a higher
hierarchical enforcement value, such as the “without prejudice
to a better right” provision under Act No. 3344, now Section 113
of the Property Registration Decree. Who therefore is the “third
138
Dagupan Trading Co. v. Macam, 14 SCRA 179 (1965); Carumba v. Court of
Appeals, 31 SCRA 558 (1970); Radiowealth Finance Co. v. Palileo, 197 SCRA 245
(1991); Naawan Community Rural Bank, Inc. v. Court of Appeals, 395 SCRA 43 (2003);
Abrigo v. De Vera, 432 SCRA 544 (2004); Naval v. Court of Appeals, 483 SCRA 102
(2006).
139
Lichauco v. Berenguer, 39 Phil. 643 (1919); Hanopol v. Pilapil, 7 SCRA 452
(1963); Dischoso v. Roxas, 5 SCRA 781 (1962); Espiritu v. Valerio, 9 SCRA 761 (1963).
260
LAW ON SALES
party with a better right” for unregistered land? Is it always the
first buyer under the concept of “oldest title in good faith” under
Article 1544?
In both Lichauco v. Berenguer,140 and Hanopol v. Pilapil,141
the Court defined the buyer with a “better right” as more than just
having in his favor an earlier deed of sale, but rather a mode by
which ownership is directly affected, like acquisitive prescription
or when one who has taken possession of the property bought
either by actual or constructive delivery (i.e., first to take
possession in good faith). The Court thus held in Hanopol —
It thus appears that the “better right” referred to in
Act No. 3344 is much more than the mere prior deed of
sale in favor of the first vendee. In the Lichauco case
just mentioned, it was the prescriptive right that had
supervened. Or, as also suggested in that case, other
facts and circumstances exist which, in addition to his
deed of sale, the first vendee can be said to have better
right than the second purchaser.
In the case at bar, there appears to be no clear
evidence of Hanopol’s possession of the land in
controversy. In fact, in his complaint against the
vendors, Hanopol alleged that the Siapos took
possession of the same land under claim of ownership
in 1945 and continued and were in such possession at
the time of the filing of the complaint against them in
1948. Consequently, since the Siapos were in actual
occupancy of the property under claim of ownership,
when they sold the said land to ... appellee Pilapil ...,
such possession was transmitted to the latter, at least
constructively, with the execution of the notarial deed
of sale, if not actually and physically. ... Thus, even
on this score, Hanopol cannot have a better right than
appellee Pilapil who, according to the trial court, “was
not shown to be a purchaser in bad faith.”142
39 Phil. 643 (1919).
7 SCRA 452 (1963).
142
Ibid, at pp. 456-457.
140
141
PERFORMANCE OR CONSUMMATION OF SALE
261
The consistent ruling of the Court that although registration
under Act No. 3344 of his sale by the second buyer cannot of
itself overcome the sale to the first buyer, and yet registration
by the first buyer under Act No. 3344 can have the effect of
constructive notice to the second buyer that can defeat his right
as a buyer in good faith.143 In other words, registration under
Act No. 3344, now under Section 113 of Pres. Decree No.
1459, would have legal effect only when it is consistent with the
principle of protecting “a third party with a better right,” which
essentially refers to the first buyer in a double sales situation
involving unregistered land.
Another situation covers the sale of unregistered land under
a public auction sale, where rules under Article 1544 cannot
overcome the particular provisions of the Rules of Court. For
example, Carumba v. Court of Appeals,144 had distinguished the
applicability of Article 1544 depending on whether the land is
registered under the Torrens system or is unregistered land. In
Carumba, the first buyer had a private deed of sale which was
never registered, but he took possession of the land; whereas,
the second buyer was the highest bidder in the public auction of
the same land, and the sale to him was registered under Act No.
3344.
Carumba ruled that the provisions of Article 1544 granting
priority to the buyer who registers in good faith over the other
buyer who takes possession in good faith are inapplicable to
unregistered land because “the purchaser of unregistered land
at a sheriff’s execution sale only steps into the shoes of the
judgment debtor, and merely acquires the latter’s interest in the
property sold as of the time the property was levied upon,” as
expressly provided for in then Section 35, Rule 39 of the Revised
Rules of Court on execution sale (now Section 33, Rule 39, 1997
Rules of Civil Procedure). In other words, the essence of the
Carumba ruling is not that Article 1544 is wholly inapplicable to
unregistered land, but that the specific provision of now Section
143
Bautista v. Fule, 85 Phil. 391 (1950); Bayoca v. Nogales, 340 SCRA 154 (2000);
Naval v. Court of Appeals, 483 SCRA 102 (2006).
144
31 SCRA 558 (1970).
262
LAW ON SALES
33, Rule 39 of the 1997 Rules of Civil Procedure providing that the
purchaser at public auction “shall be substituted to and acquire
all the rights, title, interest and claim of the judgment obligor to
the property as of the time of the levy,” overrides the provision of
Article 1544 when it involves unregistered land since under Act
No. 3344 registration of instruments affecting unregistered lands
is “without prejudice to a third party with a better right.”
In contrast, in Radiowealth Finance Co. v. Palileo,145 citing
Carumba, the Court noted that under the Torrens system, it is the
act of registration that operates to convey and affect registered
land, and that therefore a bona fide purchaser of a registered
land at an execution sale (in spite of the merely “stepping into
the shoes of the judgment debtor” rule for public auctions done
pursuant to the Rules of Court) acquires a good title as against a
prior transferee, if such transfer was unrecorded, thus:
... There is no ambiguity regarding the application
of the law with respect to lands registered under the
Torrens System. Section 51 of Presidential Decree
No. 1529 (amending Section 50 of Act No. 496) clearly
provides that the act of registration is the operative
act to convey or affect registered lands insofar as
third person are concerned. Thus, a person dealing
with registered land is not required to go behind the
register to determine the condition of the property.
He is only charged with notice of the burdens on the
property which are noted on the face of the register or
certificate of title. Following this principle, this Court
has time and again held that a purchaser in good
faith of registered land (covered by a Torrens Title)
acquires a good title as against all the transferees
thereof whose right is not recorded in the registry of
deed at the time of sale.146
Radiowealth Finance confirms the proposition that even
in the purchase of registered land under levy on execution,
the provisions of Section 33, Rule 39 of the 1997 Rules of Civil
145
146
197 SCRA 245 (1991).
Ibid, at pp. 246-247.
PERFORMANCE OR CONSUMMATION OF SALE
263
Procedure cannot overturn the specific provisions of Pres.
Decree No. 1529, which provide that it is registration that is the
operative act to convey or affect registered lands; and therefore,
the earlier unregistered sale, although coupled with possession,
cannot overturn the effect of the registration in good faith of the
second judicial sale.
But since Radiowealth Finance involved the issue of whether
the rules in Article 1544 are applicable to an unregistered land
purchased at a judicial sale recorded under Act No. 3344, which
was earlier sold by the judgment debtor in a conventional sale,
but unrecorded, the Court again upheld the principle in Carumba.
Although Radiowealth Finance declared that “Article 1544 of the
Civil Code has no application to land not registered under Act No.
496,” nevertheless the subsequent discussions in the decision
meant to cover only the situation where the subject unregistered
land was first sold by conventional sale, and subsequently sold by
public auction, in which case again the provision of now Section
33, Rule 39 of the 1997 Rules of Civil Procedure would be made
to apply, since “the purchaser of unregistered land at a sheriff’s
execution sale only steps into the shoes of the judgment debtor,
and merely acquires the latter’s interest in the property sold as of
the time the property was levied upon.”
Although an obiter, Espiritu v. Valerio,147 held that where
the owner sold his a parcel of unregistered land to two different
parties — assuming that both sales are valid — the buyer whose
deed of sale was first registered under the provisions of Act No.
3344 would have a better right. Thus —
... If both are valid, appellants’ contention that they
have a better right than that claimed by appellee would
seem to be meritorious in the light of the facts of the
case and the provisions of Article 1544 of the New Civil
Code, it not being disputed that the Deed of Sale in favor
of the appellee was registered under the provisions of
Act 3344 on June 16, 1955, while Exhibits 1 and 2 were
similarly registered eleven days before.148
147
148
9 SCRA 761 (1963).
Ibid, at p. 763; emphasis supplied.
264
LAW ON SALES
In Dischoso v. Roxas,149 the substantive discussions in the
decision presumed that Article 1544 would have been applicable
to the double sales of an unregistered coconut land, except for
the fact that the first sale involved the land itself, while the second
sale involved the right to repurchase the said land.
4. Global Rules on Double Sales
In a global set of rules on double sales, where Article 1544
is only a component, registration in good faith under the Torrens
system (i.e., Pres. Decree No. 1529), is considered to be of the
highest order, providing for absolute first priority to the buyer who
has it in his favor. This particular rule, for obvious reasons, cannot
apply to unregistered land.
Under that same global set of rules on double sales, the
principle embodied in the Rules of Court as to the risk being taken
by the highest bidder, occupy the second highest priority rule,
which would overcome the rules provided for in Article 1544. But
because registration for registered land has the highest priority,
this second rule can pertain only to cases involving unregistered
land.
Oddly enough, this rule was demonstrated in Dagupan
Trading Co. v. Macam,150 which held that where one of the two
conflicting sales of a piece of land was executed before the land
was registered, while the other was an execution sale in favor of
the judgment creditor of the owner made after the same property
had been registered and issued a title “free from all liens and
encumbrances,” Article 1544 should not apply, and what should
determine the rights of the second buyer would be the then
Section 35, Rule 39 of the Revised Rules of Court on execution
sale. Such a position of the Court meant that since the land
was previously sold to the first buyer, the second buyer at the
execution sale actually bought nothing since the judgment debtor
no longer had rights to the property previously sold.
Dagupan Trading admitted that “[i]f the property covered
by the conflicting sales were unregistered land [then the first
149
150
5 SCRA 781 (1962).
14 SCRA 179 (1965).
PERFORMANCE OR CONSUMMATION OF SALE
265
buyer] would undoubtedly have the better right in view of the
fact that his claim is based on a prior sale;” whereas, were the
land involved in the conflicting transaction was a duly registered
land, the second buyer at public auction would prevail since
“the registration of the deed of sale is the operative act that
gives validity to the transfer.” Nevertheless, the Court held that
the case did not fall in either cases, and therefore the provisions
of then Section 35, Rule 39 of the Rules of Court were applied
in direct conflict with the provisions of the Torrens system that
guaranteed the title to the land. The Court considered the
subsequent registration of the land as a technicality that could
not cancel and render ineffective the previous unregistered
sale and conveyance of title and ownership in favor of the first
buyer, especially when the first buyer “took possession of the
land conveyed as owner thereof, and introduced considerable
improvements thereon.”
The Dagupan Trading ruling found application in Naval v.
Court of Appeals,151 where both buyers bought the same parcel
of land from the same seller when it was still unregistered land,
with the first buyer having registered his purchase under Act
No. 3344, and the second buyer subsequently being able to
obtain a title by having the land registered under the Torrens
system. The Court held in Naval, that Article 1544 had no
application to double sales which both covered the same
unregistered land at the time of both sales, and held that the
registration contemplated under this provision has been held to
refer to registration under the Torrens system, which considers
the act of registration as the operative act that binds the land.
What the Court held applicable was the rules on double sales
of unregistered land under Act No. 3344, which provides for
the registration of all instruments on land neither covered by
the Spanish Mortgage Law or the Torrens system. Under that
law, registration by the first buyer is constructive notice to
the second buyer that can defeat his right as such buyer in
good faith, and that the registration of an instrument involving
unregistered land in the Registry of Deeds creates constructive
151
483 SCRA 102 (2006).
266
LAW ON SALES
notice and binds third person who may subsequently deal with
the same property.152
In Naval, although the second buyer was able to register
the land under the Torrens system, the Court held that it cannot
detract from the fact that she acquired the land as unregistered
land, and her act of registration under the Torrens system cannot
cleanse her title of defect that it carried under the provisions of
Act No. 3344. The Court clarified that the issue of good faith
or bad faith of the buyer under Article 1544 or that under the
Property Registration Decree is relevant only where the subject
of the sale is registered land and the purchaser is buying the
same from the registered owner of whose title to the land is
clean. In Naval, the second buyer did not buy the land from a
registered owner thereof, but in fact she was the one who had
the land subsequently registered, with constructive knowledge
of the previous sale which was deemed to have placed her in
bad faith.
The rulings in Dagupan Trading and Naval cover unusual
cases, constituting equitable exception to the basic tenets laid
down in Carumba and Radiowealth Finance. More importantly,
the rulings in Dagupan Trading and Naval are diametrically
opposed to the rulings in Naawan Community Rural Bank and
Abrigo discussed above.
Under a global set of rules pertaining to double sales, the
particular rules provided under Article 1544 take only third rung,
with registration under the Torrens system and the rule on public
auction sales under the Rules of Court, coming in first and second,
respectively. If this were the case, what does the first rule under
Article 1544 on “first to register in good faith” still cover? This
is where things become truly confusing based on the conflicting
decisions of the Court.
There is a line of decisions that says that the “first to register
in good faith” rule in Article 1544 covers precisely the “absolutely
first” rule of registration being the operative fact under the Torrens
152
See also Bautista v. Fule, 85 Phil. 391 (1950), cited in Naawayan Community
Rural Bank, Inc. v. Court of Appeals, 395 SCRA 43 (2003).
PERFORMANCE OR CONSUMMATION OF SALE
267
system, and has no application to unregistered land; and yet
the Court has applied the “first to register in good faith” rule for
double sales involving unregistered land,153 albeit in favor of first
buyer. The other position holds that the rules embodied in Article
1544 of the Civil Code presume that the issues to be resolved do
not fall within the priority rules of the Torrens system under Pres.
Decree No. 1546, nor of the specific rules on auction sale under
the Rules of Court.
The author offers no clear solution to these issues. For
whatever it is worth, it must be observed that the principle of
“registration in good faith as the operative act,” under Pres.
Decree No. 1459, although of utmost priority application, goes
beyond contracts of sale, but includes priority rules covering
other forms of transactions, like liens, encumbrances, involuntary
dealings with registered land, like attachment and executions. In
addition, the priority rule under Pres. Decree No. 1459 covers
even contracts to sell and other processes within the policitacion
stage and will even protect the title of a purchaser in good faith
and for value who derives his title from one who had void title (i.e.,
“chain of title” theory). Whereas, the rules on double sales under
Article 1544 of the Civil Code are strictly applicable to double
sales only when they are valid and demandable and the issues
arise only at the consummation stage.
In his concurring opinion in Carbonell v. Court of Appeals,154
then Justice Teehankee had explained that Article 1544 is not
the only rule pertaining to double sales, as in fact the main rule
is essentially a principle not embodied directly in a statutory
provision, which is “First in time, priority in right.” The peculiarity
of it all, however, is that the main rule is not the primary rule,
since the provisions of Article 1544, although not the main rule,
constitute nevertheless the primary rule, i.e., one has to go
through the tests provided in Article 1544 before one may apply
the main rule of prius tempore, potior jure. As pointed out earlier,
the “first in time, priority in right,” is embodied within the “oldest
153
Bautista v. Fule, 85 Phil. 391 (1950); Bayoca v. Nogales, 340 SCRA 154 (2000);
Naval v. Court of Appeals, 483 SCRA 102 (2006).
154
69 SCRA 99 (1976).
268
LAW ON SALES
title in good faith” provided in Article 1544, which is a concept
developed hereunder. Nonetheless, in a global rule of double
sales, the rule “first in time, priority in right,” would occupy the
bottom rung.
5. Essential Elements for Applicability of Article 1544
Whether the subject matter of double sales be movable or
immovable, jurisprudence has confirmed that for the provisions
of Article 1544 to apply, the following requisites must concur:
(a) The two (or more) sales transactions must
constitute valid sales;
(b) The two (or more) sales transactions
must pertain to exactly the same subject
matter;
(c) The two (or more) buyers at odds over the
rightful ownership of the subject matter
must each represent conflicting interests;
and
(d) The two (or more) buyers at odds over the
rightful ownership of the subject matter
must each have bought from the very same
seller.
The foregoing requisites of “double sales” were quoted
directly by the Court in Cheng v. Genato,155 without giving due
acknowledgment to the author.
a. Nature of Two Sales Involved
For Article 1544 test to even apply, both sales involved in
the dispute must be valid, or at least be voidable, sales. This
is a critical requirement because the rules under Article 1544
being applications of rules of delivery at consummation stage,
can operate only from the premise that tradition was effected “as
a consequence of a valid sale.” Thus, in a case where one of the
155
300 SCRA 722 (1998).
PERFORMANCE OR CONSUMMATION OF SALE
269
sales was void for having forged the signature of the seller, the
provisions of Article 1544 were held to be inapplicable.156
We therefore look with rabid curiosity at the pronouncement
in Caram, Jr. v. Laureta,157 where in a double sales situation it held
that that “the second contract of sale, having been registered in
bad faith, is null and void. Article 1410 of the Civil Code of the
Philippines provides that any action or defense for the declaration
of the inexistence of a contract does not prescribe.” In effect,
Caram, Jr. considered the failure of the second buyer to comply
with the registration requirement under Article 1544 in good faith
to make his sale void, thus —
The fact that the second contract is not considered
void under Article 1409 and that Article 1544 does not
declare void a deed of sale registered in bad faith does
not mean that said contract is not void. Article 1544
specifically provides who shall be the owner in case
of a double sale (sic) of an immovable property. To
give full effect to this provision, the status of the two
contracts must be declared valid so that one vendee
may contract must be declared void to cut off all rights
which may arise from said contract. Otherwise, Article
1544 will be meaningless.158
Since Article 1544 provides for rules on tradition, it must
operate under the premise that the contracts upon which the
rules are to operate would have to be valid contracts; otherwise,
tradition pursuant to a void contract would not create any legal
effect. Registration, much less delivery of the subject matter, are
matters that go into consummation and cannot legally affect the
status of a sale valid at perfection.
The proper doctrine in Caram, Jr. is that the attempt to
deliver the subject matter pursuant to a second valid sale would
not produce the legal effects of delivery (i.e., the attempt to
transfer ownership in the person of the second buyer would
156
Espiritu v. Valerio, 9 SCRA 761 (1963). Also San Lorenzo Dev. Corp. v. Court of
Appeals, 449 SCRA 99 (2005); Fudot v. Cattleya Land, Inc., 533 SCRA 350 (2007).
157
103 SCRA 7 (1981).
158
Ibid, at p. 19.
270
LAW ON SALES
produce no legal consequences); but the second contract itself
would remain a valid contract, and can be rescinded for breach
of the obligation to deliver. The lack of ownership on the part of
the seller does not affect the validity of an otherwise valid sale;
and the failure of the seller to effect proper delivery does not
render the contract void, but merely constitutes a breach as the
basis for rescission.
b. Applicability of Rules on Double Sales to
Contracts to Sell and Adverse Claims
Since the rules on double sales are rules pertaining to
tradition at consummation stage, they have no application when
the covered valid contracts are not yet demandable sales, such
as when one or both the contracts in dispute are contracts to
sell.159
In the early case of Mendoza v. Kalaw,160 what were involved
were the sales by the owner of the same parcel of land to two
buyers: the first buyer under a conditional sale, and the second
buyer, under a deed of absolute sale. The second buyer paid the
purchase price and obtained possession of the property. In any
event, the first buyer obtained an “anotacion preventiva” (now
equivalent to an adverse claim).
Mendoza held that the rules on double sales under the
then Article 1473 of the old Civil Code were not applicable on
the ground that there was no double sales situation since the
first sale was a conditional sale: “[A] conditional sale, before the
performance of the condition, can hardly be said to be a sale of
property, especially where the condition has not been performed
or complied with.”161 The Court also held that the registration
of the adverse claim, which was good only for 30-days, did not
grant to the first buyer any advantage because “[a] preventive
precautionary notice only protects the interests and rights of the
person who secures it against those who acquire an interest in
the property subsequent thereto, and then, only for a period of
Torrecampo v. Alindogon, Sr., 517 SCRA 84 (2007).
42 Phil. 236 (1921).
161
Ibid, at p. 238.
159
160
PERFORMANCE OR CONSUMMATION OF SALE
271
thirty days. It cannot affect the rights or interest of persons who
acquired an interest in property theretofore.”162
The pronouncements in Mendoza on the non-effect of an
adverse claim have of course been clarified by the ruling in
Carbonell v. Court of Appeals,163 where the annotation of the
adverse claim by the first buyer was deemed to be equivalent
to the registration required under Article 1544. Likewise, the
ruling that a conditional sale does not constitute a sale for the
application of the rules on double sales under Article 1544 has
likewise been abrogated in Andalin v. Court of Appeals,164 where
the first sale was under a “Deed of Conditional Sale,” while the
second sale was under “Deeds of Sale of Registered Land.”
In Adalin, the Court had to resolve the issue of whether the
first unconsummated conditional sale, which required the seller
to eject the existing lessees on the property sold, could prevail
over the subsequent consummated absolute contracts of sale
effected in favor of the lessees who have refused to vacate the
premises. The Court held that the non-compliance by the seller
of the undertaking to eject the lessees cannot be considered a
legal justification for him to renege on the first sale, otherwise it
would be equivalent to sanctioning the performance by the seller
of his obligations under the deed subject to his own will and
caprices; and that seller cannot employ his own failure to comply
with his undertaking to justify his obligation under the conditional
sale. More importantly, the Court applied the provisions of Article
1544 on double sales and held that the subsequent buyers were
already aware of the first conditional sale and therefore they were
in bad faith, and their knowledge of the first sale gave preference
to the first sale.
In contrast, Coronel v. Court of Appeals,165 earlier held that
Article 1544 on double sales does not apply where the earlier
sale is a contract to sell. The Court ruled that it is essential to
distinguish a contract to sell and a conditional contract of sale,
Ibid, at p. 239.
69 SCRA 99 (1976).
164
280 SCRA 536 (1997).
165
263 SCRA 15 (1996).
162
163
272
LAW ON SALES
especially in cases where the subject property is sold by the
owner not to the party the seller contracted with, but to a third
person, thus:
In a contract to sell, there being no previous sale of
the property, a third person buying such property despite
the fulfillment of the suspensive condition such as the
full payment of the purchase price, for instance, cannot
be deemed a buyer in bad faith and the prospective
[first] buyer cannot seek the relief of reconveyance of
the property. There is no double sale in such case. Title
to the property will transfer to the buyer after registration
because there is no defect in the owner-seller’s title per
se, but the latter, of course, may be sued for damages
by the intending [first] buyer.166
It seems therefore, that when one of the sales is a contract
to sell, as distinguished from a conditional contract of sale, the
rules of Article 1544 on double sales do not apply, and the buyer
under the contract of sale albeit conditional is always preferred,167
as being effectively “the first in time.”
It is interesting to note, however, that the distinction has
further been blurred by the Court in Cheng v. Genato.168 In
that case, the Court held that the rules on double sales under
Article 1544 are not applicable to a contract to sell because of
the circumstances that must concur in order for the provisions
to Article 1544 on double sales to apply, namely that there must
be valid sales transactions, and buyers must be at odds over
the rightful ownership of the subject matter who must have
bought from the very same seller, are lacking in a contract to
sell —
... for neither a transfer of ownership nor a sales
transaction has been consummated. The contract to
be binding upon the obligee or the vendor depends
upon the fulfillment or non-fulfillment of an event.
Ibid, at p. 28.
San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005).
168
300 SCRA 722 (1998).
166
167
PERFORMANCE OR CONSUMMATION OF SALE
273
Notwithstanding this contrary finding [that it is a
contract to sell] we are of the view that the governing
principle of Article 1544, Civil Code, should apply
in this situation. Jurisprudence teaches us that the
governing principle of PRIMUS TEMPORE, PORTIOR
JURE (first in time, stronger in right). For not only
was the contract between herein respondents first in
time; it was also registered long before petitioner’s
intrusion as second buyer. This principle only applies
when the special rules provided in the aforecited
article of the Civil Code do not apply or fit the specific
circumstances mandated under said law or by
jurisprudence interpreting the article.169
The Cheng ruling can only be interpreted to mean that
the contract to sell whereby the suspensive conditions are first
fulfilled, would be considered as “first in time.”
c. There Must Be “Sameness” of Subject Matter
In a case where one buyer bought the parcel of land, and
the other buyer bought the right to redeem the same parcel of
land, Article 1544 was deemed to be inapplicable, because the
subject of the second sale is not the land itself, but the right to
redeem.170
d. There Must Involve the Same Seller
In a case where Buyer 1 bought the thing from Mr. X, who in
turn bought it from Mr. Seller, and the contending Buyer 2 bought
the same subject matter from Mr. Seller, the issue between Buyer
1 and Buyer 2 cannot be resolved by using the provisions of
Article 1544 since they do not have the same immediate seller.171
As will be noted, successors and predecessors-in-interest theories are not applicable to be able to obtain application of the provisions of Article 1544.
Ibid, at p. 740.
Dischoso v. Roxas, 5 SCRA 781, 789-790 (1962).
171
Cruzado v. Bustos, 34 Phil. 17 (1916). Reiterated in Ong v. Olasiman, 485 SCRA
464 (2006); Solera v. Rodaje, 530 SCRA 432 (2007).
169
170
274
LAW ON SALES
Although a number of decisions have been rendered by the
Court applying Article 1544 principles even in case of successive
sales from the same original seller, this requisite has been
reiterated lately in Consolidated Rural Bank (Cagayan Valley),
Inc. v. Court of Appeals,172 where the Court held —
[The provisions of Article 1544 of the Civil Code]
contemplate a case of double or multiple sales by a
single vendor. More specifically, it covers a situation
where a single vendor sold one and the same
immovable property to two or more buyers. ... it is
necessary that the conveyance must have been made
by a party who has an existing right in the thing and
the power to dispose of it. It cannot be invoked where
the two different contracts of sale are made by two
different persons, one of them not being the owner of
the property sold. And even if the sale was made by
the same person, if the second sale was made when
such person was no longer the owner of the property,
because it had been acquired by the first purchaser
in full dominion, the second purchaser cannot acquire
any right.173
e. Article 1544 Is Not a Contest Between
Two Protagonists Running the Same Race
When one reads the language of Article 1544 one may be
led to believe that the rules govern, in a manner of speaking,
a contest between two buyers, who race against each other to
comply with the hierarchical modes provided for in said article
to have preferential right over the subject matter. This is not so,
as explained in Carbonell v. Court of Appeals.174
In Carbonell, the Seller sold under a private instrument a
registered parcel of land to Buyer 1, who in addition to paying
cash to the Seller also updated the mortgage lien on said land
with the mortgagee bank. A week later, the Seller sold the same
172
448 SCRA 347 (2005). Reiterated in Sigaya v. Mayuga, 467 SCRA 341 (2005);
Ong v. Olasiman, 485 SCRA 464 (2006).
173
Ibid, at p. 360. Reiterated in Solera v. Rodaje, 530 SCRA 432 (2007).
174
69 SCRA 99 (1976), citing C. VILLANUEVA, PHILIPPINE LAW ON SALES, 100 (1995).
PERFORMANCE OR CONSUMMATION OF SALE
275
parcel of land to Buyer 2, who took possession thereof. When
the Buyer 1 learned of the sale to Buyer 2, he registered an
adverse claim on the title of the land with the Registry of Deeds.
Subsequently, Buyer 2 registered his sale.
In ruling for Buyer 1, the Court in the main decision held that
when Buyer 1 bought the lot from the Seller, she was the only
buyer thereof and the title of Seller was still in his name solely
encumbered by a bank mortgage duly annotated thereon. Buyer
1 was not aware — and she could not have been aware — of
any sale to Buyer 2 as there was no such sale to Buyer 2 then.
Hence, Buyer 1’s prior purchase of the land was made in good
faith. Buyer 1’s good faith subsisted and continued to exist when
she recorded her adverse claim prior to the registration of Buyer
2’s deed of sale. Nor did Buyer 1’s good faith cease when she
found out earlier of the subsequent sale to Buyer 2. Buyer 1’s
recording of the adverse claim should be deemed to have been
done in good faith and should emphasize Buyer 2’s bad faith
when she registered her deed of sale thereafter.
As culled from the reasoning in the main decision of
Carbonell, the Buyer 1 under Article 1544 does not start from
the same level as the subsequent buyers of the same subject
matter. Being the first buyer, Buyer 1 necessarily is in good
faith compared to the second or subsequent buyer. But the
good faith of Buyer 1 remains and subsists throughout, despite
his subsequent acquisition of knowledge of the second or
subsequent sale. Whereas, Buyer 2 who may have entered
into the sale in good faith, would become a buyer in bad faith
by his subsequent acquisition of knowledge of the first sale. In
other words, Buyer 1 always has priority rights over subsequent
buyers of the same property.
Such a state of affairs does not clearly come across from a
reading of the Carbonell main decision, especially when the main
decision imputed bad faith on the part of Buyer 2 even at the time
she entered into the second sale over the property. The principle
comes out more clearly by reading the separate opinion of then
Justice Teehankee, who starts his reasoning from the premise
that both Buyer 1 and Buyer 2 were purchasers in good faith at
276
LAW ON SALES
the respective dates of their purchases, but posits the main rule
prius tempore, potior jure, thus:
The governing principle here is prius tempore, potior
jure (first in time, stronger in right). Knowledge gained
by the first buyer of the second sale cannot defeat the
first buyer’s rights except only as provided by the Civil
Code and that is where the second buyer first registers
in good faith the second sale ahead of the first. Such
knowledge of the first buyer does not bar her from
availing of her rights under the law, among them, to
register first her purchase as against the second buyer.
But in converso knowledge gained by the second buyer
of the first sale defeats his rights even if he is first to
register the second sale, since such knowledge taints
his prior registration with bad faith.
This is the price exacted by Article 1544 of the Civil
Code for the second buyer being able to displace the first
buyer: that before the second buyer can obtain priority
over the first, he must show that he acted in good faith
throughout (i.e., in ignorance of the first sale and of the
first buyer’s rights) — from the time of acquisition until
the title is transferred to him by registration or failing
registration, by delivery of possession. The second
buyer must show continuing good faith and innocence
or lack of knowledge of the first sale until his contract
ripens into full ownership through prior registration as
provided by law.175
In essence, then Justice Teehankee indicated that the
positive steps provided under Article 1544 are directed to Buyer
2, if he wishes to obtain preference of title to the subject matter,
but not to Buyer 1 because he is already by the rule of “first in
time priority in rights” the preferred buyer.
The Carbonell principle in applying Article 1544 can be
likened to a race where it is only Buyer 2 who must run the track
and achieve certain goals in order to dislodge Buyer 1 who already
175
Ibid, at pp. 122-123. Reiterated in Ulep v. Court of Appeals, 472 SCRA 241
(2005); Tanglao v. Parungao, 535 SCRA 123 (2007).
PERFORMANCE OR CONSUMMATION OF SALE
277
stands at the winner’s box. Somehow, Buyer 2, without knowing
that there is already a winner, Buyer 1, must run the race in a
prescribed manner to win, i.e., he must register his sale without
knowing of the first sale and before the first sale is registered; or
take possession of the property without knowing of the first sale
and before Buyer 1 takes possession thereof. And yet, even as
Buyer 2 runs the race (without actually knowing that he is in a
race with the first buyer), Buyer 1 can knowingly or unknowingly
finish the race in his favor by simply registering his sale. That is
why the specification of “good faith” in Article 1544 is addressed
only to the second or subsequent buyer.
If Buyer 1 registers his sale now aware of Buyer 2, that
practically ends the race, for there is no way that legally Buyer
2 can topple Buyer 1 from the winner’s box. On the other
hand, even if Buyer 1 learns of the second buyer, so long
as Buyer 2 has not registered his sale, Buyer 1 can end the
race by registering his sale, because his good faith remains
throughout. Buyer 1 is basically the winner of the race without
doing anything, by the fact that he is the first buyer. The only
manner by which Buyer 1 by doing nothing could possibly lose
is for Buyer 2 to register his sale before the second buyer learns
of the first buyer. Practically, the only way by which Buyer 2 can
win the race at the prescribed manner under Article 1544 is not
to know during the race that he is in a race against Buyer 1 who
merely sits or stands on the winner’s box without registering his
own sale.
In further refinement of the Carbonell doctrine on the main
rule of priority in time, the decision in Caram, Jr. v. Laureta,176
and subsequent rulings,177 seem to point out that Buyer 1 never
even has to leave the winner’s box in order to end the race by
having to register his sale; Buyer 1 just need to draw the attention
of the second buyer as to his (Buyer 1’s) existence. In those
cases it was ruled that the knowledge of the first unregistered
sale by Buyer 2 ends the race altogether either because (a) the
103 SCRA 7 (1981).
Cruz v. Cabana, 129 SCRA 656 (1984); Gatmaitan v. Court of Appeals, 200
SCRA 37 (1991); Vda. de Jomoc v. Court of Appeals, 200 SCRA 74 (1991).
176
177
278
LAW ON SALES
knowledge by Buyer 2 of the first sale is equivalent to registration
in favor of Buyer 1; or (b) knowledge of the first sale makes Buyer
2 one in bad faith, and only a good faith second buyer is qualified
to run the race.
On the other hand, knowledge of the second unregistered
sale by Buyer 1 is not equivalent to registration in favor of Buyer
2 because the act required of the second buyer under Article
1544 seems to be a positive act of registration or taking of
possession, as the case may be, before he learns of the first
sale.178 As summarized by Justice Melo in Coronel v. Court of
Appeals:179
The ... provision on double sale (sic) presumes
title or ownership to pass to the first buyer, the
exception being: (a) when the second buyer, in good
faith, registers the sale ahead of the first buyer, and
(b) should there be no inscription by either of the two
buyers, when the second buyer, in good faith, acquires
possession of the property ahead of the first buyer.
Unless, the second buyer satisfies these requirements,
title or ownership will not transfer to him to the prejudice
of the first buyer.180
Uraca v. Court of Appeals,181 summarized it succinctly,
when it held that “before the second buyer can obtain priority
over the first, he must show that he acted in good faith throughout
(i.e., ignorance of the first sale and of the first buyer’s rights) —
from the time of acquisition until the title is transferred to him by
registration or failing registration, by delivery of possession.”182
Bayoca v. Nogales,183 held that “to merit protection under
Article 1544 ... the second buyer must act in good faith in regis178
Carbonell v. Court of Appeals, 69 SCRA 99 (1976); but see dissenting opinion
of Justice Muñoz-Palma.
179
263 SCRA 15 (1996).
180
Ibid, at p. 37.
181
278 SCRA 702 (1997). See also Martinez v. Court of Appeals, 358 SCRA 38
(2001); Gabriel v. Spouses Mabanta, 399 SCRA 573 (2003).
182
Ibid, at p. 712, quoting from Cruz v. Caban, 129 SCRA 656, 663 (1984).
183
340 SCRA 154 (2000).
PERFORMANCE OR CONSUMMATION OF SALE
279
tering the deed. Thus, it has been held that in cases of double
sale[s] of immovables, what finds relevance and materiality is not
whether or not the second buyer was a buyer in good faith but
whether or not said second buyer registers such second sale in
good faith, that is, without knowledge of any defect, in the title of
the property sold.”184
In Escueta v. Lim,185 it was held that by applying Article
1544, a second buyer of the property who may have had actual or
constructive knowledge of such defect in the seller’s title cannot
be a registrant in good faith; such second buyer cannot defeat
the first buyer’s title, and if title has been issued to the second
buyer, the first buyer may seek reconveyance of the property
subject of the sale.
f. Peculiar Developments
The rather well-established Carbonell doctrine seems to be
undergoing indirect erosions by the obiter ruling in San Lorenzo
Dev. Corp. v. Court of Appeals,186 where the Court held that the
provisions of Article 1544 presented an actual race between the
two buyers in equal level, thus: “When the thing sold twice is an
immovable, the one who acquires it and first records it in the
Registry of Property, both made in good faith, shall be deemed
the owner. Verily, the act of registration must be coupled with
good faith — that is, the registrant must have no knowledge of
the defect or lack of title of his vendor or must not have been
aware of facts which should have put him upon such inquiry and
investigation as might be necessary to acquaint him with the
defects in the title of his vendor.”187 The Court thereby decreed
the annotation of lis pendens by the first buyer as ineffective to
overcome the previous possession acquired in good faith by the
second buyer, because the annotation was done at the time when
first buyer already knew of the second sale. Impliedly included in
the ruling is that the annotation of lis pendens by the first buyer
Ibid, at p. 166.
512 SCRA 411 (2007).
186
449 SCRA 99 (2005).
187
Ibid, at pp. 115-116.
184
185
280
LAW ON SALES
cannot qualify to be equivalent to the requisite of registration
under Article 1544.
This particular obiter ruling in San Lorenzo Dev. Corp. is
contrary to the established principle that by the annotation of the
lis pendens the second buyer is deemed to have learned of the
first sale, which is equivalent to registration in favor of the first
buyer.
g. Who Is Purchaser in Good Faith?
Since the tests provided for in Article 1544 are really
addressed to the second or subsequent buyers, it would be
important to note that each of the tests that have to be hurdled by
the second or subsequent buyer must be done in “good faith.”188
As the Court said in Occeña v. Esponilla,189 “[i]n all cases [of
double sales], good faith is essential. It is the basic premise of
the preferential rights granted to the one claiming ownership over
an immovable. What is material is whether the second buyer first
registers the second sale in good faith, i.e., without knowledge
of any defect in the title of the property sold. The defense of
indefeasibility of a Torrens title does not extend to a transferee
who takes the certificate of title in bad faith, with notice of a
flaw.”190
This seems to be in conformity with the principle in the Law
on Property that the law will protect an innocent purchaser, i.e.,
a buyer in good faith and for value, often even against the owner
of the property who had acted with negligence.
(1) Burden of Proof
Mathay v. Court of Appeals,191 held that as a rule, he who
asserts the status of a purchaser in good faith and for value, has
the burden of proving such assertion. This onus probandi cannot
188
(2003).
Gabriel v. Mabanta, 399 SCRA 573 (2003); Alfredo v. Borras, 404 SCRA 145
431 SCRA 116 (2004).
Ibid, at pp. 123-124. Reiterated in Consolidated Rural Bank (Cagayan Valley),
Inc. v. Court of Appeals, 448 SCRA 347 (2005); San Lorenzo Dev. Corp. v. Court of
Appeals, 449 SCRA 99 (2005); Portic v. Cristobal, 546 SCRA 577 (2005).
191
295 SCRA 556 (1998).
189
190
PERFORMANCE OR CONSUMMATION OF SALE
281
be discharged by mere invocation of the legal presumption
of good faith, i.e., that everyone is presumed to act in good
faith.192
Reference must be made however to the isolated rulings
in Santiago v. Court of Appeals,193 and Ten Forty Realty and
Dev. Corp. v. Cruz,194 where the Court held that it is anxiomatic
that good faith is always presumed in the absence of any direct
evidence of bad faith.
(2) Requisite of Full Payment
Agricultural and Home Extension Dev. Group v. Court of
Appeals,195 defines a “purchaser in good faith” as “one who buys
the property of another without notice that some other person has
a right to or interest in such property and pays a full and fair price
for the same at the time of such purchase or before he has notice
of the claim or interest of some other person in the property.”196 If
we take a close look at the definition given, it actually includes as
an element of good faith that there must be full payment on the
part of the buyer.
The element of having paid in full as part of good faith determination has since been consistently reiterated in subsequent
Supreme Court rulings.197
192
Reiterated in Tsai v. Court Appeals, 366 SCRA 324 (2001); Aguirre v. Court of
Appeals, 421 SCRA 310 (2004); Raymundo v. Bondong, 526 SCRA 514 (2007); Tanglao
v. Parungao, 535 SCRA 123 (2007).
193
247 SCRA 336 (1995).
194
410 SCRA 484 (2003).
195
213 SCRA 563 (1992).
196
Ibid, at pp. 565-565, quoting from Co v. Court of Appeals, 196 SCRA 705 (1996).
Reiterated in Diaz-Duarte v. Ong, 298 SCRA 388 (1998); Millena v. Court of Appeals, 324
SCRA 126 (2000); Tanongon v. Samson, 382 SCRA 130 (2002); Universal Robina Sugar
Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002); Heirs of Aguilar-Reyes v.
Spouses Mijares, 410 SCRA 97 (2003); San Roque Realty and Dev. Corp. v. Republic,
532 SCRA 493 (2007).
197
Veloso v. Court of Appeals, 260 SCRA 593 (1996); Balatbat v. Court of Appeals,
261 SCRA 128 (1996); Mathay v. Court of Appeals, 295 SCRA 556 (1998); Diaz-Duarte
v. Ong, 298 SCRA 388 (1998); Tanongon v. Samson, 382 SCRA 130 (2002); Heirs of
Aguilar-Reyes v. Spouses Mijares, 410 SCRA 97 (2003); Portic v. Cristobal, 546 SCRA
577 (2005); Galvez v. Court of Appeals, 485 SCRA 346 (2006).
282
LAW ON SALES
This concept of good faith including the requisite of the buyer
having paid in full the purchase price may seem contrary to wellestablished principle that the effects of tradition over the subject
matter are unhindered by the fact that the buyer has not paid
the purchase price. Nevertheless, since the operative doctrine
under Article 1544 is that the second or subsequent buyer is
being granted an opportunity to take the subject matter from the
clutches of the first buyer by positive act, he may do so only when
he acts with equity, which is that he is an innocent purchaser for
value and in good faith.
The doctrine is also consistent with the bilateral-reciprocal
nature of contracts of sale: that a party to a sale cannot demand
fulfillment from the other when he himself is in default or not ready
to comply with his own obligation.
(3) Obligation to Investigate Known Facts
Mathay v. Court of Appeals,198 also discussed the principle
that actual lack of knowledge of the flaw in title by one’s transferor
is not enough to constitute a buyer to be in good faith, thus:
... Although it is a recognized principle that a person
dealing on a registered land need not go beyond its
certificate of title, it is also a firmly settled rule that
where there are circumstances which would put a party
on guard and prompt him to investigate or inspect the
property being sold to him, such as the presence of
occupants/tenants thereon, it is, of course, expected
from the purchaser of a valued piece of land to inquire
first into the status or nature of possession of the
occupants, i.e., whether or not the occupants possess
the land en concepto dueño, in the concept of owner.
As is the common practice in the real estate industry,
an ocular inspection of the premises involved is a
safeguard a cautious and prudent purchaser usually
takes. Should he find out that the land he intends to buy
is occupied by anybody else other than the seller who,
as in this case, is not in actual possession, it would
198
(1999).
295 SCRA 556 (1998). Also Modina v. Court of Appeals, 317 SCRA 696
PERFORMANCE OR CONSUMMATION OF SALE
283
then be incumbent upon the purchaser to verify the
extent of the occupant’s possessory rights. The failure
of a prospective buyer to take such precautionary steps
would mean negligence on his part and would thereby
preclude him from claiming or invoking the rights of a
“purchaser in good faith.”199
As held in Aguirre v. Court of Appeals,200 a purchaser cannot
close his eyes to facts which should put a reasonable man upon
his guard, and then claim that he acted in good faith under the
belief that there was no defect in the title of the vendor.201
(4) Special Rule on Real Estate Market Players
Expresscredit Financing Corp. v. Velasco,202 expressed
the special rule that applies to persons or entities who regularly
engage in dealing with real estate. They cannot simply rely upon
the title, but are obliged to enter upon an investigation of the
actual condition and occupants of the subject property.
In Expresscredit Financing a mortgage was constituted on
a parcel of land which had previously been sold to the first buyer
who took possession and enjoyment thereof without having
registered his purchase. The mortgagee who eventually ended
buying the property at the public auction held for the foreclosure
of the mortgage, was deemed not eligible to claim to be a buyer
in good faith when his business was in the constructing and
selling townhouses and extending credit to the public, including
real estate loans. The Court held that in such an instance, the
mortgagee is charged with greater diligence that ordinary buyers
or encumbrances for value, because it would be standard in his
business, as a matter of due diligence required of banks and
financing companies, to ascertain whether the property being
offered as security for the debt has already been sold to another
to prevent injury to prior innocent buyers.
199
Ibid, at pp. 575-576. Reiterated in Tanglao v. Parungao, 535 SCRA 123 (2007);
Bermudez v. Court of Appeals, 533 SCRA 451 (2007).
200
421 SCRA 310 (2004).
201
Reiterated in Tanongon v. Samson, 382 SCRA 130 (2002); Heirs of AguilarReyes v. Spouses Mijares, 410 SCRA 97 (2003); Escueta v. Lim, 512 SCRA 411 (2007).
202
473 SCRA 570 (2005).
284
LAW ON SALES
(5) Land in Adverse Possession
In Martinez v. Court of Appeals,203 it was held that a purchaser
who is aware of facts which should put a reasonable man upon
his guard cannot turn a blind eye and later claim that he acted
in good faith; and the fact that there were already occupants on
the property should put a buyer on inquiry as to the nature of the
occupant’s right over the property.204
Heirs of Trinidad de Leon Vda. De Roxas v. Court of
Appeals,205 held that where the land sold is in the possession of
a person other than the vendor, the purchaser must go beyond
the certificate of title and make inquiries concerning the rights of
the actual possessor.206
The rule is settled that a buyer of real property which is in
the possession of persons other than the seller must be wary and
should investigate the rights of those in possession, otherwise
without such inquiry, the buyer can hardly be regarded as a buyer
in good faith.207
(6) Existence of Lis Pendens
Agricultural and Home Extension Dev. Group also pointed
out that even the annotation of lis pendens on the title to the
property by third parties does not place the buyer thereof in bad
faith since “these did not have the effect of establishing a lien
or encumbrance on the property affected. Their only purpose
was to give notice to third persons and to the whole world that
any interest they might acquire in the property pending litigation
would be subject to the result of the suit.”208 The ruling seems
reasonable when it is a third party who annotates a lis pendens;
358 SCRA 38 (2001).
Reiterated in Heirs of Severa P. Gregorio v. Court of Appeals, 30 SCRA 565
(1998); Heirs of Celestial v. Heirs of Celestial, 408 SCRA 291 (2003); Consolidated Rural
Bank (Cagayan Valley), Inc. v. Court of Appeals, 448 SCRA 347 (2005); Raymundo v.
Bondong, 526 SCRA 514 (2007).
205
422 SCRA 101 (2004).
206
Reiterated in Occeña v. Esponilla, 431 SCRA 116 (2004).
207
Republic v. De Guzman, 326 SCRA 267 (2000); Heirs of Ramos Durano, Sr. v.
Uy, 344 SCRA 238 (2000); Tanglao v. Parungao, 535 SCRA 123 (2007).
208
Ibid, at p. 566.
203
204
PERFORMANCE OR CONSUMMATION OF SALE
285
but would not be good law if it is one of the disputing buyers
who annotates the lien, because such annotation is equivalent
to registration or at least affects the good faith situation of the
second buyer.
A contrary ruling was issued in Limketkai Sons Milling, Inc.
v. Court of Appeals,209 where the Court held that a buyer could
not be considered an innocent purchaser where it ignored the
notice of lis pendens on the title when it bought the lot. The rule
has been reiterated in Po Lam v. Court of Appeals.210
In any event, the ruling in Agricultural and Home Extension
Dev. Group should be considered absurd (see discussions
below) in that in the case of adverse claim (which has a lower
binding category than lis pendens) its annotation is equivalent to
registration and would place a subsequent buyer in bad faith.211
(7) Annotation of Adverse Claim
In Balatbat v. Court of Appeals,212 it was held that in the
realm of double sales, the registration of an adverse claim places
any subsequent buyer of the registered parcel of land in bad faith,
for —
[S]he should have known that there was a pending
case and an annotation of adverse claim was made in
the title of the property before the Register of Deeds and
she could have discovered that the subject property was
already sold. ... It is incumbent upon the vendee of the
property to ask for the delivery of the owner’s duplicate
copy of the title from the vendor. A purchaser of a value
piece of property cannot just close his eyes to facts
which should put a reasonable man upon his guard
and then claim that he acted in good faith and under
the belief that there was no defect or lack of title of the
vendor. One who purchases real estate with knowledge
of a defect or lack of title in his vendor cannot claim that
250 SCRA 523 (1995).
316 SCRA 721 (1999).
211
Carbonell v. Court of Appeals, 69 SCRA 99 (1976).
212
261 SCRA 128 (1996).
209
210
286
LAW ON SALES
he has acquired title thereto in good faith as against the
true owner of the land or of an interest therein; and the
same rule must be applied to one who has knowledge
of facts which should have put him upon such inquiry
and investigation as might be necessary to acquaint him
with the defects in the title of his vendor. Good faith, or
the want of it is not a visible, tangible fact that can be
seen or touched, but rather a state or condition of mind
which can only be judged of by actual or fancied tokens
or signs.213
The principle providing that the prior annotation of adverse
claim places subsequent buyers in bad faith has been reiterated
in Alfredo v. Borras.214
If the annotation of an adverse claim, which was good for
30-days only is sufficient to place a subsequent buyer in bad
faith, then logically, the annotation of a lis pendens should have
the same legal effect, as was the ruling in Limketkai Sons Milling,
Inc. v. Court of Appeals.215
(8) Existence of Relationship
In Pilapil v. Court of Appeals,216 the Court held that the sale
to one’s daughter and sons will give rise to the conclusion that
the buyers, not being really third parties, knew of the previous
sales and cannot be considered in good faith, since the buyers
“are deemed to have constructive knowledge by virtue of their
relationship” to their sellers.
In Aguirre v. Court of Appeals,217 the Court refused
to recognize good faith in the person of a buyer who lived in
the same area and was familiar to the members of the family
of the seller, since “he deliberately chose to close his eyes to
said facts and despite his personal knowledge to the contrary,
he purchased the disputed property from [seller] on the basis of
Ibid, at pp. 142-143.
404 SCRA 145 (2003).
215
250 SCRA 523 (1995).
216
250 SCRA 560, 566 (1995).
217
421 SCRA 310 (2004).
213
214
PERFORMANCE OR CONSUMMATION OF SALE
287
the misrepresentation of the latter in his Affidavit of Transfer that
he is the sole surviving heir of [the decedent]”218 who was the
registered owner of the land.
(9) Stipulations in Deed Showing Bad Faith
In Limketkai Sons Milling, Inc. v. Court of Appeals,219 the
Court held that a stipulation in the deed of sale providing that
any losses which the buyer may incur in the event the title turns
out to be vested in another person are to be borne by the buyer
alone, showed that the buyer did not purchase the subject
matter in good faith without notice of any defect in the title of
the seller.
(10) When Dealing With Non-Registered Owner
In R.R. Paredes v. Caliling,220 the Court held that while
one who buys from the registered owner does not need to look
behind the certificate of title, one who buys from one who is
not the registered owner is expected to examine not only the
certificate of title but all factual circumstances necessary for him
to determine if there are any flaws in the title of the transferor, or
in his capacity to transfer the land. 221
h. Requisites of Prior Registration
“Registration” means any entry made in the books of the
registry, including both registration in its ordinary and strict
sense, and cancellation, annotation, and even marginal notes.
It is the entry made in the registry which records solemnly and
permanently the right of ownership and other real rights.222
Annotation of an adverse claim or lis pendens have been
held to produce the same effect as formal registration.223 Curiously
Ibid, at p. 321.
250 SCRA 523, 543 (1995).
220
517 SCRA 369 (2007).
221
Reiterated in Chua v. Soriano, 521 SCRA 68 (2007).
222
Cheng v. Genato, 300 SCRA 722 (1998). Also Ulep v. Court of Appeals, 472
SCRA 241 (2005).
223
Carbonell v. Court of Appeals, 69 SCRA 99 (1976); Balatbat v. Court of Appeals,
261 SCRA 128 (1996).
218
219
288
LAW ON SALES
though, in San Lorenzo Dev. Corp. v. Court of Appeals,224 the
Court did not consider the subsequent registration of lis pendens
to be equivalent to the registration required under Article 1544 as
to have greater effect on the prior possession in good faith by the
second buyer.
In several other cases,225 the Court held that in the case of
unregistered land, not sold under public auction sale, registration
by the first buyer under Act No. 3344 can have the effect of
constructive notice to the second buyer that can defeat his right
as such buyer, but not vice versa.
On the other hand, the Court held that the registration of
the Extrajudicial Partition which merely mentions the sale is not
the registration covered under Article 1544 on double sales and
cannot prevail over the registration of the pacto de retro sale.226
In another case,227 it was held that the declaration of purchase for
taxation purpose does not comply with the required registration,
and the fact alone does not even itself constitute evidence of
ownership.
(1) Prior Registration By the Second Buyer
Must Always Be in Good Faith
Uraca v. Court of Appeals,228 held that the prior registration
of the disputed property by the second buyer does not by itself
confer ownership or a better right over the property, and that
Article 1544 requires that such registration must be coupled with
good faith, thus —
Jurisprudence teaches us that “(t)he governing
principle is primus tempore, potior jure (first in time,
stronger in rights). Knowledge gained by the first buyer
of the second sale cannot defeat the first buyer’s rights
449 SCRA 99 (2005).
Bautista v. Fule, 85 Phil. 391 (1950); Bayoca v. Nogales, 340 SCRA 154 (2000);
Naval v. Court of Appeals, 483 SCRA 102 (2006).
226
Vda. de Alcantara v. Court of Appeals, 252 SCRA 457 (1996).
227
Santiago v. Court of Appeals, 247 SCRA 336 (1995); Bayoca v. Nogales, 340
SCRA 154 (2000).
228
278 SCRA 702 (1997).
224
225
PERFORMANCE OR CONSUMMATION OF SALE
289
except where the second buyer registers in good faith
the second sale ahead of the first, as provided by the
Civil Code. Such knowledge of the first buyer does
not bar her from availing of her rights under the law,
among them, to register first her purchase as against
the second buyer. But in converso, knowledge gained
by the second buyer of the first sale defeats his rights
even if he is first to register the second sale, since such
knowledge taints his prior registration with bad faith.
This is the priced exacted by Article 1544 of the Civil
Code for the second buyer being able to displace the first
buyer; that before the second buyer can obtain priority
over the first, he must show that he acted in good faith
throughout (i.e., in ignorance of the first sale and of the
first buyer’s right) — from the time of acquisition until
the title is transferred to him by registration or failing
registration, by delivery of possession.”229
Esquivias v. Court of Appeals,230 held that while the deed of
sale of a second buyer was registered ahead of the deed of sale
of the first buyer, the prior registration cannot prevail over the
deed of sale in favor of the first buyer because the second buyer
at that time already knew of the prior sale to the first buyer, and
such knowledge tainted his registration with bad faith. To merit
protection under Article 1544, the second buyer must act in good
faith in registering his deed.
(2) The Need for Second Buyer to Do Positive Act
under Article 1544
The Carbonell doctrine that Article 1544 is addressed
particularly to the second buyer to do a positive act, was reiterated
in Fudot v. Cattleya Land Inc.,231 where the Court held —
Knowledge gained by the first buyer of the second
sale cannot defeat the first buyer’s rights, except where
229
Ibid, at p. 712, quoting from Cruz v. Cabana, 129 SCRA 656, 663 (1984).
Reiterated in Bautista v. Court of Appeals, 322 SCRA 294 (2000); Limson v. Court of
Appeals, 357 SCRA 209 (2001).
230
272 SCRA 803 (1997).
231
533 SCRA 350 (2007).
290
LAW ON SALES
the second buyer registers in good faith the second
sale ahead of the first as provided by the aforequoted
provision of the Civil Code. Such knowledge of the first
buyer does not bar him from availing of his rights under
the law, among them to register first his purchase as
against the second buyer. However, knowledge gained
by the second buyer of the first sake defeats his rights
even if he is first to registered the second sale, since
such knowledge taints his prior registration with bad
faith it is thus essential, to merit the protection of Art.
1544, second paragraph, that the second realty buyer
must act in good faith in registering his deed of sale.232
i. First to Possess in Good Faith
Ten Forty Realty and Dev. Corp. v. Cruz,233 held that in the
absence of inscription in double sales, the law gives preferential
right to the buyer who in good faith is first in possession, under
the following jurisprudential parameters:
(a) Possession mentioned in Article 1544
includes not only material but also symbolic
possession;
(b) Possessors in good faith are those who are
not aware of any flaw in their title or mode
of acquisition;
(c) Buyers of real property that is in the
possession of persons other than the seller
must be wary — they must investigate the
rights of the possessors; and
(d) Good faith is always presumed, upon those
who allege bad faith on the part of the
possessors rests the burden of proof.
The “juridical parameters” summarized by Ten Forty Realty,
do not all conform to the previous rulings rendered by the Court
under Article 1544. In particular, the Court had ruled consistently
232
233
Ibid, at p. 362. Also Tanglao v. Parungao, 535 SCRA 123, 131-132 (2007).
410 SCRA 484 (2003).
PERFORMANCE OR CONSUMMATION OF SALE
291
in the past, that under double sales, presumption of good faith
cannot apply, and the buyer has the burden of showing that he
was the first to register or possess in good faith.234
The rule of “first to possess in good faith,” is consistent
with the provision under then Act No. 3344, now Sec. 113 of
Pres. Decree No. 1459, that registration of a transaction over
unregistered land shall be without prejudice to a “third party with
a better right.” Hanopol v. Pilapil,235 held that the “better right”
that cannot be prejudiced by the registration of a second sale of
a parcel of unregistered land, referred to in Act No. 3344, was
considered to mean “more than a mere prior deed of sale in favor
of the first buyer. It involves facts and circumstances — in addition
to a deed of sale — which, combined, would make it clear that
the first buyer has a better right than the second purchaser,” such
as acquisition of possession by the second buyer either by actual
delivery or through the execution of a public instrument.236
(1) Registration in Good Faith Always
Pre-empts Possession in Good Faith
Santiago v. Court of Appeals,237 held that in double sales of
real property, the buyer who has in possession the Torrens title
and had the deed of sale registered must prevail.
Tañedo v. Court of Appeals,238 emphasized the rule that
buyer-registrant in good faith always has preference to the
buyer-possessor in good faith, even when in point in time, the
possession in good faith happened ahead of the registration in
good faith. In that case the Court held that under Article 1544, in
case of double sales of an immovable —
... Ownership shall belong to the buyer who in good
faith registers it first in the registry of property. Although
the deed of sale in favor of private respondents was
Mathay v. Court of Appeals, 295 SCRA 556 (1998); Tsai v. Court Appeals, 366
SCRA 324 (2001); Aguirre v. Court of Appeals, 421 SCRA 310 (2004).
235
7 SCRA 452 (1963).
236
Ibid, at p. 456, citing Lichauco v. Berenguer, 39 Phil. 643 (1918).
237
247 SCRA 336 (1995). Also Liao v. Court of Appeals, 323 SCRA 430 (2000).
238
252 SCRA 80 (1996).
234
292
LAW ON SALES
later than the one in favor of petitioner, ownership
would vest in the former because of the undisputed fact
of registration. On the other hand, petitioners have not
registered the sale to them at all. Petitioners contend
that they were in possession of the property and that
private respondents never took possession thereof. As
between two purchasers, the one who registered the
sale in his favor has a preferred right over the other
who has not registered his title, even if the latter is in
actual possession of the immovable property.239
In Balatbat v. Court of Appeals,240 the seller sold his proindiviso share in a registered land co-owned with his children.
Subsequently, the same entire lot was sold again by the same
seller and his children, represented by the Clerk of Court under
the Rules of Court, pursuant to a final judgment. The Court held
that undoubtedly this was a case of double sales of immovable
property covered by Article 1544, and hence ownership shall
vests in the person acquiring it who in good faith first recorded
it in the Registry of Property. The first buyer had caused the
annotation of an adverse claim on the title of the subject property,
which is deemed sufficient compliance as mandated by law and
serves notice to the whole world, and is preferred to the notice of
lis pendens annotated by the second buyer subsequently.
In addition, Balatbat held that although the second buyer
was in possession of the subject property by virtue of the writ
of possession issued by the court, the writ was conditioned as
follows “subject to the valid rights and interest of third persons
over the same portion thereof, other than vendor or any other
person or persons privy to or claiming any right to interest under
it.”241 The Court held that “[a]s between two purchasers, the one
who has registered the sale in his favor, has a preferred right
over the other who has not registered his title even if the latter is
in actual possession of the immovable property.”242
Ibid, at p. 88.
261 SCRA 128 (1996).
241
Ibid, at p. 134.
242
Ibid, at p. 142.
239
240
PERFORMANCE OR CONSUMMATION OF SALE
293
And yet, in its obiter ruling on the particular issue raised in
San Lorenzo Dev. Corp., to wit, “Did the registration of the sale
after the annotation of the notice of lis pendens obliterate the
effects of delivery and possession in good faith which admittedly
had occurred prior to [Second Buyer] SLDC’s knowledge of the
transaction in favor of [First Buyer] Babasanta?” the Court ruled
—
We do not hold so.243
x x x.
A purchaser in good faith is one who buys property
of another without notice that some other person has a
right to, or interest in, such property and pays a full and
fair price for the same at the time of such purchase, or
before he has notice of the claim or interest of some
other person in the property. Following the foregoing
definition, we rule that SLDC qualifies as a buyer in
good faith ... At the time of the sale of the property to
SLDC, the vendors were still the registered owners
of the property and were in fact in possession of the
lands. Time and again, this Court has ruled that a
person dealing with the owner of registered land is
not bound to go beyond the certificate of title as he is
charged with notice of burdens on the property which
are noted on the face of the register or on the certificate
of title. ... Babasanta apparently relies on the principle
of constructive notice incorporated in Section 52 of
the Property Registration Decree (P.D. No. 1529)244 ...
However, the constructive notice operates as such by
the express wording of Section 52 from the time of the
registration of the notice of lis pendens which in this
case was effected only on 2 June 1989, at which time
the sale in favor of SLDC had long been consummated
[with the] . ... transfer ownership over the property to
SLDC is concerned.
More fundamentally, given the superiority of the
right of SLDC to the claim of Babasanta the annotation
243
244
449 SCRA 99, 116.
Ibid, at p. 117.
294
LAW ON SALES
of the notice of lis pendens cannot help Babasanta’s
position a bit and it is irrelevant to the good or bad faith
characterization of SLDC as a purchaser. 245
The San Lorenzo obiter ruling above-quoted is disturbing
on two points: (a) it equates the annotation of a lis pendens only
to qualifying the state of minds of the buyers (whether they be in
good faith or bad faith) and does not equate it to be a species of
registration under the Torrens system; and (b) it holds that prior
possession by the second buyer in good faith has “superiority” to
a subsequent registration by the first buyer who has knowledge
of the second sale.
San Lorenzo cites Abarquez v. Court of Appeals,246 to say
that “this Court had the occasion to rule that if a vendee in a
double sale registers the sale after he has acquired knowledge of
a previous sale, the registration constitutes a registration in bad
faith and does not confer upon him any right. If the registration
is done in bad faith, it is as if there is no registration at all, and
the buyer who has taken possession first of the property in good
faith shall be preferred.”247 Yet a reading of Abarquez would show
that the ruling was addressed to the second buyer, that his prior
registration cannot overcome the earlier possession by the first
buyer, which was registered in bad faith.
(2) Possession Under Article 1544 Refers to
Material and Symbolic Possession
In Navera v. Court of Appeals,248 where both deeds of sale
over the same registered parcel of land were not registered
with the Registry of Deeds, the buyer of the first deed of sale
executed in a public instrument had a better right, although the
subsequent buyer took material possession thereof. It was ruled
that since the sale to the first buyer was in a public instrument
it was clearly tantamount to a delivery of the land, resulting in
the material and symbolic possession thereof being transferred
Ibid, at p. 118.
213 SCRA 415 (1992).
247
Ibid, at p. 119.
248
184 SCRA 584 (1990).
245
246
PERFORMANCE OR CONSUMMATION OF SALE
295
to the latter. So that when subsequently the second buyer took
material possession of the same land, he did so merely as a
detainer. Navera held that the possession mentioned in Article
1544 for determining who has better right when the same piece
of land has been sold several times by the same seller includes
not only the material but also the symbolic possession thereof.
Navera reiterated the doctrine laid down earlier under the
old Civil Code provision on double sales (then Article 1473) in the
cases of Quimson v. Rosete,249 and Sanchez v. Ramos.250
(3) Possession Acquired in Good Faith Is Stable Status
When the second buyer who takes possession of the subject
matter in good faith, must he remain in good faith subsequently
thereafter in order to claim priority based on possession under
Article 1544 of the Civil Code? San Lorenzo Dev. Corp. v. Court of
Appeals,251 answered this particular issue in favor of the second
buyer when it held:
Did the registration of the sale after the annotation of
the notice of lis pendens obliterate the effects of delivery and possession in good faith which admittedly had
occurred prior to SLDC’s knowledge of the transaction
in favor of Babasanta?
We do not hold so.252
... At the time both deeds were executed, SLDC
had no knowledge of the prior transaction of the
Spouses Lu with Babasanta. Simply stated, from the
time of execution of the first deed up to the moment
of transfer and delivery of possession of the lands to
SLDC, it had acted in good faith and the subsequent
annotation of lis pendens has no effect at all on the
consummated sale between SLDC and the Spouses
Lu.253
87 Phil. 159 (1950).
40 Phil. 614 (1919).
251
449 SCRA 99 (2005).
252
Ibid, at p. 116.
253
Ibid, at pp. 116-117.
249
250
296
LAW ON SALES
j. When Article 1544 Does Not Apply, Priority
in Time Rule Applies
In either of the following situations, thus:
(a) Where not all the requisites necessary to
make Article 1544 applicable are present;
or
(b) Where the requisites to make Article 1544
applicable were present, but that either the
first to register or first to possess rules were
not complied with;
which legal rule should apply to the case? In the first situation,
it would be the general rule of Prius tempore, potior jure, which
is actually the main rule in double sales.254 Article 1544 rules on
double sales provide for special rules and when the transactions
do not fit the specific circumstances mandated under the article
or by jurisprudence interpreting the article, then there is no basis
to apply such rules, and the proper doctrine applicable should be
the main rule of “Priority in time, priority in right.”
In the second situation, Article 1544 provides that ownership
should go “to the person who presents the oldest title, provided
there is good faith.” Is the buyer who has the oldest title in good
faith not necessarily the chronological first buyer under a valid
and demandable sale? If the answer is in the affirmative, then the
“oldest title” rule merely reflects the general rule of “First in time,
priority in right.” That means there is no race to run at all because
the first buyer should always win over subsequent buyers. This
observation is consistent then with the statement in Cheng v.
Genato,255 that the “governing principle” under Article 1544 is
“first in time, priority in rights.”256
Notice that the rule of “first in time, priority in right,” is a
rule that falls back to perfection stage: Who between contending
buyers is “first in time” would be that buyer who chronologically
254
Essentially lifted by Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of
Appeals, 448 SCRA 347 (2005).
255
300 SCRA 722 (1998).
256
Ibid, at p. 740.
PERFORMANCE OR CONSUMMATION OF SALE
297
had the first perfected and valid sale over the same subject
matter with the same seller. The rationale of the rule is that if
none of the contending buyers have validly effected a transfer of
ownership in his favor through any of the modes of tradition, then
the first buyer in point of time should be preferred because his
title (i.e., the legal basis upon which he can claim ownership over
the subject matter), was first in time.
Under a global set of rules pertaining to double sales, the
principle of “First in time, priority in right,” occupies the cellar
position only when special rules do not apply, perhaps because it
is the least representative of the mode of tradition.
OBLIGATIONS OF BUYER
1. Pay the Price
Buyer is obliged to pay for the price at the time and place
stipulated in the contract.257 Mere sending of a letter by the
buyer expressing his intention to pay without the accompanying
payment is not considered a valid tender of payment.258 Unless
the parties have agreed to the payment of the price to any other
party, then its payment to be effective must be made to the seller
in accordance with Art. 1240 of the Civil Code which provides
that “[P]ayment shall be made to the person in whose favor the
obligation has been constituted or his successor in interest, or
any person authorized to receive.”259
Buyer is also obliged to pay interest for the period
between delivery of the subject matter and the payment
of the price when: (a) the same has been stipulated; (b)
should object delivered produce fruits or income; or (c)
in case the buyer is in default, from the time of judicial
or extrajudicial demand.260
Non-payment of the consideration in the sale does not
prove simulation; at most, it gives the seller the right to sue for
Art. 1582, Civil Code.
Torcuator v. Bernabe, 459 SCRA 439 (2005).
259
Montecillo v. Reynes, 385 SCRA 244 (2002).
260
Art. 1589, Civil Code.
257
258
298
LAW ON SALES
collection. Generally in a sale, payment of the price is a “resolutory
condition” and the remedy of the seller is to exact fulfillment or, in
case of a substantial breach, to rescind the contract under Article
1191 of the Civil Code.261
2. Accept Delivery of Thing Bought
The buyer is bound to accept delivery of the thing bought
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.262
In case of goods, 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.263
a. Opportunity to Inspect Goods
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.264
(1) Exception: C.O.D. Sales
Where goods are delivered to a carrier 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 words “collect on delivery,” or otherwise, the buyer
is not entitled to examine the goods before the payment of the
Villaflor v. Court of Appeals, 280 SCRA 297 (1997).
Art. 1582, Civil Code.
263
Art. 1585, Civil Code.
264
Art. 1584, Civil Code.
261
262
PERFORMANCE OR CONSUMMATION OF SALE
299
price, in the absence of agreement or usage of trade permitting
such examination.265
b. Goods Sold Deliverable by Installments
Unless otherwise agreed, the buyer of goods is not bound to
accept delivery thereof by installments.266
Where the sale covers goods to be delivered by stated
installments, which are to be separately paid for, and the
seller makes defective deliveries in respect of one or more
installments, or the buyer neglects or refuses without just
cause to take delivery of or pay for one or more installments,
it depends in each case on the terms of the contract and the
circumstances of the case, whether the breach of contract is
so material as to justify the injured party in refusing to proceed
further and suing for damages for breach of the entire contract,
or whether the breach is severable, giving rise to a claim for
compensation but not to a right to treat the whole contract as
broken.267
c. Effect of Acceptance of Goods on Seller’s Warranty
In the absence of an agreement to the contrary, acceptance
of the goods by the buyer shall not discharge the seller from
liability in damages or other legal remedy for breach of promise
or warranty in the sale.268
However, if after acceptance of the goods, the buyer fails
to give notice to the seller of breach in any promise or warranty
within a reasonable time after the buyer knows, or ought to know,
of such breach, the seller is excused.269
d. Refusal to Accept Goods
Unless otherwise agreed, where goods are delivered to the
buyer, and he refuses to accept them, having the right to do so,
Art. 1584, Civil Code.
Art. 1583, Civil Code.
267
Art. 1583, Civil Code.
268
Art. 1586, Civil Code.
269
Art. 1586, Civil Code.
265
266
300
LAW ON SALES
he is not bound to return them to the seller, and it is sufficient that
he notifies the seller of his refusal.270 If he voluntarily constitutes
himself as a depository, he shall be liable as such.271
On the other hand, in the absence of stipulation, 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.272
—oOo—
Art. 1587, Civil Code.
Art. 1587, Civil Code.
272
Art. 1588, Civil Code.
270
271
301
CHAPTER 7
DOCUMENTS OF TITLE
DEFINITION AND FUNCTION
A “document of title of goods” includes any bill of lading,
dock warrant, quedan, or warehouse receipt or order for the
delivery of goods, or any other document used in the ordinary
course of business in the sale or transfer of goods, as proof of the
possession or control of the goods, or authorizing or purporting to
authorize the possessor of the document to transfer or receive,
either by endorsement or by delivery, goods represented by such
document.1
Documents of title therefore serve two (2) functions:
(a) As evidence of the possession or control of
the goods described therein; and
(b) As the medium of transferring title and possession over the goods described therein,
without having to effect actual delivery
thereof.
In an early case,2 the Supreme Court held that a warehouse
receipt represents the goods, but the entrusting of the receipt is
more than the mere delivery of the goods; it is a representation
that the one to whom the possession of the receipt has been so
entrusted has the title to the goods.
In another case,3 the Court held that the endorsement and
delivery of a negotiable quedan prior to the filing of the petition for
insolvency, operates as the transfer of possession and ownership
of the goods referred to therein, and had the effect of divorcing
the property covered from the estate of the insolvent.
Art. 1636, Civil Code.
Siy Cong Bieng v. Hongkong & Shanghai Bank, 56 Phil. 598 (1932).
3
Philippine Trust Co. v. National Bank, 42 Phil. 413 (1921).
1
2
301
302
LAW ON SALES
Through the document of title, the seller is allowed, by
fiction of law, to deal with the goods described therein as though
he had physically delivered them to the buyer; and the buyer
may take the document of title as though he had actually taken
possession and control over the goods described therein.
Dealings through documents of title represent a species
of constructive delivery, and therefore operate under the same
premise as other forms of delivery, namely, that the delivery
is pursuant to a valid underlying sale, and that the seller had
ownership of the goods described therein to effect proper
delivery. However, when the document of title is negotiable in
character, the public policy behind the State’s protective mantle
on the effects of negotiation, the invalidity of the underlying
sale or the actual lack of ownership of the seller of the goods
described therein, would still effectively transfer ownership to
the buyer who takes the document of title in due course.
a. Warehouse Receipts and
Bonded Warehouse Acts
The provisions of the Civil Code on documents of title, i.e.,
Articles 1507 to 1520, appear as original provisions (“n”), and
have neither been derived nor taken from the old Civil Code.
In addition, they were promulgated part of the the New Civil
Code as of a later date than the provisions of the Warehouse
Receipts Act4 and the Bonded Warehouse Act;5 yet the New
Civil Code includes within the enumerations of what constitute
“documents of title” under Article 1636, quedans and warehouse
receipts. When Articles 1507 to 1520 were being considered as
integral part on the Title on Sales, Legislature was fully aware of
the existing provisions of the Warehouse Receipts Act and the
Bonded Warehouse Act, as in fact many of the key principles
were copied from said statutes.
Consequently, the provisions of the Warehouse Receipts
Act and the Bonded Warehouse Act constitute the primary sets
of rules governing warehouse receipts, and the provisions of
4
5
Act No. 2137, as amended.
Act No. 3893, as amended.
DOCUMENTS OF TITLE
303
Articles 1507 to 1520 of the Civil Code should be treated as
having suppletory effect.
b. Rationale for Documents of Title
Documents of title are not innovations or inventions of law,
but evolved from the commercial practices of merchants and
gained much acceptance under clearly defined commercial
customs.
The developmental imperatives of commercial transactions
required that merchants should be allowed to transact with
goods and merchandise without having to physically carry them
around, and that buyers should be assured that they may deal
with the evidence thereof with the same effect as though “they
could feel the merchandise” themselves. Documents of title have
been recognized by the State as the medium by which such
transactions be promoted by the instruments which evidence the
merchandise covered.
Through the incorporation into our statutes of the commercial
system of documents of title, and expressing in statutory language
the customs and usages which the tests of time have proven to
be efficient and effective in the commercial world, the State has
therefore placed its “seal of approval” and legal guarantee upon
the institution of documents of title, especially those which are
negotiable in character, for their common acceptance by persons
engaged in commerce. Therefore, the provisions on documents
of title are geared towards assuring the public to take, accept, and
deal with transactions over goods and merchandise by means of
the documents of title issued in representation thereof.
TYPES OF DOCUMENTS OF TITLE
1. Negotiable Document of Title
A document of title in which it is stated that the goods referred
to therein are deliverable “to bearer,” or “to order” of any person
named in such document, is a negotiable document of title.6
6
Art. 1507, Civil Code.
304
LAW ON SALES
2. Non-Negotiable Document of Title
Consequently, a document of title which does not state that
the goods referred to therein are deliverable either to bearer or
to the order of any person named therein, is a non-negotiable
document of title.
3. Effects of Errors on Documents of Title
Clerical errors in the words of negotiability, such as the
use of the term “by the order” instead of “to the order” does not
destroy the negotiability of a warehouse receipt.7
The wrongful designation of the subject of the warehouse
receipt indicating the tobacco as “Cagayan tobacco,” when
the evidence clearly showed that it was intended to cover
tobacco coming from Isabela, did not destroy the validity nor
the negotiability of the document of title, nor the effects of the
negotiation thereof.8
4. Effects of Use of “Non-Negotiable” Terms
on Negotiable Documents of Title
If a document of title which contains an undertaking by a
carrier, warehouseman or other bailee to deliver the goods to
bearer, to a specified person or order, to the order of a specified
person, or which contains words of like import, has placed upon
it the words “non negotiable,” “not-negotiable” or the like, such
document may nevertheless be negotiated by the holder and is a
negotiable document of title.9
NEGOTIATION OF NEGOTIABLE DOCUMENTS OF TITLE
1. Who Can Negotiate
A negotiable document of title may be negotiated by:
(a) The owner thereof (i.e., the person to whom
it was originally issued); or
Roman v. Asia Banking Corporation, 46 Phil. 705 (1922).
American Foreign Banking Corp. v. Herridge, 49 Phil. 975 (1924).
9
Art. 1510, Civil Code.
7
8
DOCUMENTS OF TITLE
305
(b) Any person to whom the possession
or custody of the document has been
entrusted by the owner, if, by the terms
thereof the bailee undertakes to deliver the
goods to the order of the person to whom
the possession or custody of the document
has been entrusted, or if at the time of such
entrusting the document is in such form that
it may be negotiated by delivery.10
2. How Negotiation Properly Effected
a. By Delivery Alone
A negotiable document of title may be negotiated by delivery
alone (without need of endorsement) in the following cases:
(a) Where by the terms of the document the
carrier, warehouseman or other bailee
issuing the same undertakes to deliver the
goods “to bearer;” and
(b) Even when originally the document of title
was issued “to the order” of a specified
person, where such person or a subsequent
endorsee of the document has endorsed it
in blank or to the bearer.11
In either of the above-enumerated cases, any holder may
endorse the same to himself or to any specified person, and in
such case the document shall thereafter be negotiated only by
the endorsement of such endorsee.12
b. By Endorsement and Delivery
A negotiable document of title may be negotiated only by
the endorsement of the person to whose order the goods are by
the terms of the document deliverable, coupled with a delivery
thereof.13
Art. 1512, Civil Code.
Art. 1508, Civil Code.
12
Art. 1508, Civil Code.
13
Art. 1509, Civil Code.
10
11
306
LAW ON SALES
Such endorsement may be in blank, to bearer or to a
specified person. If endorsed to a specified person, it may again
be negotiated by the endorsement of such person in blank, to
bearer or to another specified person. Subsequent negotiations
may be made in like manner.14
3. Effects of Proper Negotiation
A person to whom a negotiable document of title has been
duly negotiated acquires thereby:
(a) Such title to the goods as the person
negotiating the document to him had or had
ability to convey to a purchaser in good faith
and for value;
(b) Such title to the goods as the person to
whose order the goods were to be delivered
by the terms of the document had or had
ability to convey to a purchaser in good faith
and for value; and
(c) The direct obligation of the bailee issuing
the document to hold possession of the
goods for him according to the terms of
the document as fully as if such bailee had
contracted directly with him.15
The legal effects of proper negotiation is the assurance to
the buying or negotiating public of the protective mantle that the
law places upon their faith in accepting a negotiable document of
title as a medium to transact on the goods covered thereby. The
result is that by dealing with the negotiable document of title it is
as though the parties to the sale were dealing directly with the
goods covered thereby.
Although the law does not include “one who takes by trespass
or a finder” within the description of those who may negotiate, the
clear import of these provisions is that if the owner of the goods
14
15
Art. 1509, Civil Code.
Art. 1513, Civil Code.
DOCUMENTS OF TITLE
307
permits another to have the possession or custody of negotiable
warehouse receipts running to the order of the latter, or to bearer,
it is a representation of title upon which bona fide purchasers for
value are entitled to rely, despite breaches of trust or violations of
agreement on the part of the apparent owner.16
4. Effects of Merely Transfering/Delivering of
“Order” Negotiable Documents of Title
The following are the legal effects when a negotiable
document of title deliverable to order is not properly negotiated,
thus:
(a) Under Article 1511 of the Civil Code, a
negotiable document of title which is not
in such form that it can be negotiated by
delivery (i.e., not a bearer document), “may
be transferred by the holder by delivery to
a purchaser or donee,” meaning that the
transferee would thereby own the document
of title;
(b) The legal consequence of such transfer
under Article 1514 is that the “person to
whom a document has been transferred,
but not negotiated, acquires thereby as
against the transferor, the title to the goods,
subject to the terms of any agreement with
the transferor,” meaning as between the
transferor and the transferee, the goods are
owned by the transferee, but not as to the
rest of the world, including the bailee;
(c) Under Article 1515, where a negotiable
document of title is transferred for value
by delivery, and the endorsement of the
transferor is essential for negotiation,
the transferee acquires a right against
the transferor to compel him to endorse
16
Siy Cong Bieng v. Hongkong & Shanghai Bank, 56 Phil. 598 (1932).
308
LAW ON SALES
the document unless a contrary intention
appears, meaning that the negotiation
shall take effect as of the time when the
endorsement is actually made.
5. Effects and Consequences of
Unauthorized Negotiation
In spite of the provision in Article 1512 of the Civil Code
that only the owner of the document of title or his assignee can
negotiate the same, nevertheless, under Article 1518, the validity
of the negotiation of a negotiable document of title is not impaired
by the following facts:
(a) That the negotiation was a breach of
duty on the part of the person making the
negotiation;
(b) That the owner of the document was
deprived of the possession of the same by:
• loss
• fraud
• theft
• conversion
• accident • mistake • duress
if the person to whom the document was negotiated paid value
therefor in good faith without notice of the breach of duty, loss,
theft, fraud, accident, mistake, duress or conversion (referred
to hereinafter as “holder in due course”). Since a negotiable
document of title cannot be dealt with apart from the goods that
it covers, necessarily the legal consequences as to the effects of
unauthorized negotiation thereof would also pertain to the goods
that it describes.
Even when the owner loses the negotiable document of title
to a thief, and it is deliverable to bearer, the latter may validly
impart title thereto to a holder in due course, who is essentially a
buyer in good faith and for value.
It is important to note also that although Article 559 of the
Civil Code provides that an owner “who has lost any movable or
has been unlawfully deprived thereof, may recover it from the
person in possession of the same,” the same cannot apply to a
DOCUMENTS OF TITLE
309
holder in due course of a negotiable document of title because
the enumerated instances in Article 1518 includes specifically
“loss, theft, fraud, accident [and] conversion.”
The effects of unauthorized negotiation of a negotiable
document of title are much more liberal and protective of the
holder (i.e., buyer) who takes it in good faith and for value, than
in the case of a holder in due course for negotitable instruments
under the Negotiable Instruments Law. There is practically no
real defense against an assignee or holder of the negotiable
document of title in good faith and for value. The only real defense
that can validly be raised against the holder in due course of a
negotiable document of title (and therefore as to his title to the
goods covered thereby) would be forgery of the endorsement of
the owner when such endorsement is necessary to effect proper
negotiation.
It is in protecting the rights and contractual expectations of
a buyer in good faith that the law encourages the public to accept
by way of negotiations and at face value negotiable documents
of title. The protection to a buyer in good faith and for value also
encourages velocity in commerce as the prospective buyer does
not have to waste time and effort having to assure himself of
the authority of the person so negotiating and the validity of his
title and possession over the goods covered by the document of
title.
In Siy Long Bieng v. Hongkong and Shanghai Banking
Corp.,17 it was held that as between the owner of a negotiable
document of title who endorsed it in blank and entrusted it to
a friend, and the holder of such negotiable document of title to
whom it was negotiated and who received it in good faith and for
value, the latter is preferred, under the principle that as between
two innocent persons, he who made the loss possible should
bear the loss.
The immediately foregoing comments refer to problems
relating to the custody and negotiation of a negotiable document
of title, which rules are different to those applied when the
17
56 Phil. 598 (1932).
310
LAW ON SALES
problem relates to the goods covered by the negotiable document
of title. Such separate rules are discussed below, on the topic
Effects When Owner of the Document of Title Has No Title to the
Goods.
ASSIGNMENT OF NON-NEGOTIABLE DOCUMENTS OF TITLE
1. How Assignment Made
A non-negotiable document cannot be negotiated and
the endorsement of such a document gives the transferee no
additional right.18
A document of title which is not in such form that it can
be negotiated by delivery may be transferred by the holder by
delivery to a purchaser or donee.19
Since a non-negotiable document of title constitutes an
incorporeal right, its sale constitutes actually an assignment
which under Article 1624 is perfected by mere consent, but
which under Article 1625 would require its appearance in a public
instrument, otherwise it “shall produce no effect as against third
persons.”
2. Effects of Transfer by Assignment
A person to whom a non-negotiable document of title has
been duly assigned acquires thereby, as against the transferor:
(a) The title to the goods, subject to the terms
of any agreement with the transferor; and
(b) The right to notify the bailee who issued
the document of the transfer thereof, and
thereby to acquire the direct obligation
of such bailee to hold possession of the
goods for him according to the terms of the
document.20
Art. 1511, Civil Code.
Art. 1511, Civil Code.
20
Art. 1514, Civil Code.
18
19
DOCUMENTS OF TITLE
311
Unlike in the negotiation of a negotiable document of title
which ipso jure makes the bailee liable to the holder thereof, in
the assignment of a non-negotiable document of title, there is no
legal relationship between the assignee and the bailee until the
latter is informed by the former of the assignment of the covering
document of title. Likewise, the assignee merely steps into the
shoes of his immediate assignor.
WARRANTIES ON NEGOTIATION AND ASSIGNMENT
OF DOCUMENTS OF TITLE
A person who for value negotiates or transfers a document
of title by endorsement or delivery, including one who assigns for
value a claim secured by a document of title, unless a contrary
intention appears, warrants that:
(a) The document is genuine;
(b) He has a legal right to negotiate or transfer
it;
(c) He has no knowledge of any fact which
would impair the validity or worth of the
document;
(d) He has a right to transfer the title to the
goods; and
(e) The goods are merchantable or fit for a particular purpose, whenever such warranties
would have been implied if the contract of
the parties had been to transfer without a
document of title the goods represented
thereby.21
The warranties of one who negotiates a negotiable document
of title, and one who assigns a non-negotiable document of title
are the same.
Unlike under the Negotiable Instruments Law which imposes
warranties on the endorser, Article 1517 of the Civil Code
21
Art. 1516, Civil Code.
312
LAW ON SALES
expressly states that “[t]he indorsement of a document of title
shall not make the indorser liable for any failure on the part of the
bailee who issued the document or previous indorsers thereof to
fulfill their respective obligations.”
Since the assignment of a document of title is covered by
the species “assignment” under Chapter 8 of the Title on Sales
of the Civil Code, under Article 1628 thereof, the seller/assignor
of the document of title also warrants the existence and legality
of the documents of title at the time of sale, unless it has been
sold as doubtful; but that he does not warrant the solvency of the
debtor (i.e., the bailee), unless it has been so expressly stipulated
or unless the insolvency was prior to the sale and of common
knowledge.
EFFECTS WHEN OWNER OF THE DOCUMENT OF TITLE HAS
NO LEGAL TITLE TO THE GOODS
The foregoing discussions on the effects of negotiations
and assignment are premised on the fact that the owner of the
document of title, or the transferor thereof, had valid title to the
goods described therein and deposited with the bailee, and the
defect or illegality pertained only to the custody and negotiation
of the document of title.
What happens in a situation where the legal owner of the
document of title (i.e., the person who deposited the goods with
the bailee), had in fact no valid title to the goods deposited, for
which the document of title has been issued by the bailee, and the
document of title is properly assigned or negotiated to a buyer in
good faith and for value? As between the real owner of the goods
and the buyer in good faith and for value, who is rightfully entitled
to the goods?
1. When Goods Covered by Non-Negotiable Document
Where the goods are covered by a non-negotiable document
of title, and under the premise that the assignee-buyer had
obtained possession of the goods by the proper notification to the
baillee of such purchase, the situation would have to be governed
by the formula provided under Article 559 of the Civil Code.
DOCUMENTS OF TITLE
313
In all situations where the owner had neither lost nor been
unlawfully deprived of the goods, the assignee-buyer’s title
to the goods is preferred even against the owner who can no
longer recover the goods. In such cases, the assignee-buyer’s
ownership to the goods is not derived from the assignor-seller, but
is granted directly under the aegis of Article 559 which states that
“[t]he possession of the movable property acquired in good faith
is equivalent to title.” In such situations, it does not even matter if
the assignor-seller had no ownership at all to the goods he sold
to the assignee-buyer since the latter’s title is not dependent on
the assignor-seller’s title.
On the other hand, if the owner had lost the goods or been
unlawfully deprived thereof, the owner may recover against the
assignee-buyer, even when the latter is in good faith and bought
for value, because Article 559 expressly does not give to the
assignee-buyer any original title; and in such case the assigneebuyer’s title to the goods must be derived from that of the assignorseller’s. If the assignor-seller had no title to the goods sold, the
assignee-buyer receives no title even if the goods are delivered
to him under the principle Nemo dat quod non habet.
2. When Goods Covered by Negotiable Document
In a situation where the goods are covered by a negotiable
document of title properly negotiated to the holder-buyer, the
premise would have to be that by issuing such negotiable
document the bailee has constituted himself as an agent to
possess the goods for the benefit of the holder of the document as
his principal, then it becomes apparent that the same principles
under Article 559 of the Civil Code would have to apply.
If the owner had neither lost nor been unlawfully deprived
of the goods, then the holder-buyer acquires valid ownership of
such goods because his possession in good faith and for value,
which by itself would constitute as an original source of ownership
under Article 559, is clearly evidenced by his being a holder in
due course of the negotiable document of title.
On the other hand, if the owner had lost or been unlawfully
deprived of the goods, the owner may recover against the bailee,
314
LAW ON SALES
and therefore against the holder-buyer, even when the latter is a
holder in due course with respect to the negotiable document of
title, and a possessor in good faith and for value with respect to
the goods, based on the following reasons:
(a) As a holder in due course, under Article
1513 of the Civil Code, the buyer takes
only such title to the goods as “the person
negotiating the document to him had or had
ability to convey,” as well as “such title to
the goods as the person to whose order the
goods were to be delivered by the terms
of the document,” and since both those
predecessors-in-interest had no title, or had
void titles, to the goods, the holder-buyer
also has no title thereto;
(b) As a buyer in good faith and for value, Article
559 does not give him a basis for original title
to the goods (because the owner had lost or
been unlawfully deprived of the goods), and
therefore such buyer derives his source of
ownership from that of his seller’s; but since
the seller had no title to the goods, the buyer
takes none also, under the principle Nemo
dat quod non habet.
The foregoing conclusions are supported by the language
of Article 1519 of the Civil Code, which protects a holder in due
course of a negotiable documents of title against attachments,
garnishments and levies by the creditors of the transferor of
the negotiable document of title, only under the indispensable
premise the “goods are delivered to a bailee by the owner or
by a person whose act in conveying the title to [the goods] to a
purchaser in good faith for value would bind the owner” of such
goods.
In addition, Article 1505 of the Civil Code provides that
“where goods are sold by a person who is not the owner thereof,
and who does not sell them under authority or with the consent of
DOCUMENTS OF TITLE
315
the owner, the buyer requires no better title to the goods than the
seller had.” Article 1505 provides for exception to the principle
of Nemo dat quod non habet that it provides, and the case of
goods covered by a negotiable instrument is not within any of the
exceptions.
Furthermore, Article 1506 provides that “[w]here the seller
of goods has a voidable title thereto, but his title has not been
avoided, at the time of sale, the buyer acquires good title to
the goods, provided he buys them in good faith, for value, and
without notice of the seller’s defect.” The article does require that
the minimum requirements for the buyer to obtain valid title to
goods by reason of delivery is that at least the seller had voidable
title thereto, and the principle under said article cannot extend to
benefit a buyer in good faith and for value who takes delivery of
the goods from a seller who had void title thereto.
Finally, the rules of warranties clearly provide that owner has
“title to the goods” as one of his warranties, and consequently
if it turns out that owner does not have title to the goods, then
it would constitute an actionable breach of warranties, and the
remedy of the buyer-holder is to run after the transferor of the
negotiable document of title.
RULES ON LEVY/GARNISHMENT OF GOODS COVERED
BY DOCUMENTS OF TITLE
1. When Non-Negotiable Document of Title
Under Article 1625 of the Civil Code, when an assignment
of credit or other incorporeal right is made through a public
instrument, it would also bind third persons. Although the
assignment of a non-negotiable document of title would involve
the assignment of incorporeal right, nevertheless the binding
effect of the assignment on the bailee and third persons would
have to follow specific provisions governing documents of
title.
Under Article 1514, a person to whom a non-negotiable
document of title has been transferred, must notify the bailee who
issued the document of the transfer thereof, and only then does
316
LAW ON SALES
the transferee acquire the direct obligation of such bailee to hold
possession of the goods for him according to the terms of the
document. Prior to the notification to such bailee by the transferor
or transferee of a non-negotiable document of title, the title of the
transferee to the goods and the right to acquire the obligation
of such bailee may be defeated by the levy of an attachment of
execution upon the goods by a creditor of the transferor, or by
a notification to such bailee by the transferor or a subsequent
purchaser from the transferor of a subsequent sale of the goods
by the transferor.22
In effect, the assignment or sale by the original owner of the
non-negotiable document of title, even when executed in a public
instrument, does not transfer possession or title over the goods
covered by the document of title, until actual notification is made
to the bailee of the transfer or assignment of the goods, actions
can be taken by the original owner to defeat the transfer of the
title and/or possession of the goods.
Even when by the execution of a public instrument to
assign the non-negotiable document of title, ownership over the
document of title is transferred to the assignee, nevertheless,
the transferor can still exercise possessory lien over the goods
covered by notification thereof to the bailee prior to the time
that the transferee-assignee shall have notified the bailee of the
assignment to him of the document of title.23
In the case of a non-negotiable document of title, possession
and ownership of the document of title (by assignment) does not
necessarily bring with it possession or title over the goods covered
thereby; it is the notification of the bailee of the assignment that
is the operative act that will transfer title and/or possession of the
goods in favor of the transferee-assignee.
2. When Negotiable Document of Title
If goods are delivered to a bailee by the owner or by a person
whose act in conveying the title to them to a purchaser in good
22
23
Art. 1514, Civil Code.
Art. 1532, Civil Code.
DOCUMENTS OF TITLE
317
faith for value would bind the owner and a negotiable document
of title is issued for them, such goods cannot thereafter, while
in possession of such bailee, be attached by garnishment or
otherwise or be levied under an execution unless the document
be first surrendered to the bailee or its negotiation enjoined.24
The bailee shall in no case be compelled to deliver up the actual
possession of the goods until the document is surrendered to him
or impounded by the court.25
The special rules on goods covered by a negotiable document
of title show that in such case ownership and possession of the
document itself is equivalent to the holder having actual ownership
and possession of the goods covered thereby. The goods are
treated to be inseparable from the negotiable document of title
covering them, and vice-versa.
In such case, a creditor whose debtor is the owner of a
negotiable document of title shall be entitled to such aid from
courts of appropriate jurisdiction by injunction and otherwise in
attaching such document or in satisfying the claim by means
thereof as is allowed at law or in equity in regard to property
which cannot readily be attached or levied upon by ordinary legal
process.26
—oOo—
Art. 1519, Civil Code.
Art. 1519, Civil Code.
26
Art. 1520, Civil Code.
24
25
318
LAW ON SALES
CHAPTER 8
SALE BY A NON-OWNER OR BY
ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
Discussions on the legal effects of the sale by a seller who
(a) is not the owner of the subject matter sold, or (b) only has a
voidable title thereto, provide revealing angles in the way one looks
into the nature of the contract of sale, and the stages, as it were,
of its “life.” The discussions hereunder would also demonstrate the
rather loose manner by which the Supreme Court uses the terms
“sale,” “sell,” and “sold” in evolving doctrinal pronouncements on
the nature of sale itself, considering that sale is a progressive
contract, and like the metamorphosis that a larva undergoes, sale
has variant stages as it goes through its legal existence.
The author begs indulgence with the reference to “sale” as
though it were a person or a “being.” This is resorted to only for the
purpose of demonstrating more clearly the essence of its “life.”
PHILOSOPHICAL DISCUSSIONS ON STAGES IN THE LIFE OF SALE
Sale has two stages in its life, the perfection stage and
the performance or consummation stage. The perfection stage,
although it may involve a period of time, is best conceptualized
as that “point in time” when the sale, as a contractual reality,
begins to exist: upon a meeting of minds as to the subject matter
to be delivered and the price to be paid.1
1
Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994); Toyota Shaw, Inc. v.
Court of Appeals, 244 SCRA 320 (1995); Limketkai Sons Milling, Inc. v. Court of Appeals,
250 SCRA 523 (1995); Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 (1997).
318
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
319
On the other hand, the consummation stage covers the
period when the obligations that arise from the legal existence of
the sale are to be performed: delivery of possession and transfer
of ownership of the subject matter by the seller; and the payment
of the price by the buyer.2
The consummation stage presupposes that the perfection
stage has happened; but the perfection stage does not
necessarily, or rather does not inexorably, result into every
aspect of the consummation stage. Perfection goes into the very
essence or birth of the sale; whereas, consummation goes into
the performance, or the manner by which the sale as a contract,
leads out its life.
The point that is being made is this: Perfection is the only stage
in the life of a sale that determines whether the contract exists at
all and the nature of its existence, whether it is a valid, voidable,
unenforceable, rescissible, or void contract; consummation stage
merely is the “living-out” of that kind of life that has been set by
the perfection stage. If the sale is valid at perfection, it remains
valid throughout its life and consummation has no choice but to
lead the life of a valid contract and the consequences thereof;
consummation cannot change the nature of such contract. If the
contract is voidable it is valid until annulled or it can be ratified; if it
is rescissible, it is subject to rescission within the period provided
for by law; if it is unenforceable, although it is valid, it cannot be
enforced in court, unless it falls within the exceptions provided for
by law; and if it is void, no attempt at performance can change
its inexistence.
We next tackle the concepts of “breach” and “rescission” in
relation to sale. In a sale, there is breach when any party does
not comply with what is incumbent upon him under the contract:
delivery of possession and transfer of ownership on the part of
the seller; and payment of the price on the part of the buyer;
and no prior demand is required to establish breach because of
the reciprocal nature of the obligations.3 When there is breach,
the other party not at fault may then rescind or resolve the sale.
The concepts of breach and rescission therefore presuppose the
existence of a valid sale; when a sale is void, it gives rise to no
2
3
Ibid.
Art. 1191, Civil Code.
320
LAW ON SALES
obligations that can be breached, neither does it allow a rescission
of a contract that in the first place has no legal existence.
The point being made is this: Both breach and rescission
are legal concepts that necessarily pertain to the consummation
or performance stage, and they do not attack the very essence
of perfection, as in fact they are premised upon a previous
perfection having taken place.
WHEN SELLER IS NOT OWNER OF THE SUBJECT MATTER
1. At Perfection
Sale is consensual in nature since it is perfected or comes
into legal being by mere consent,4 and not by performance of
an act, such as delivery in real contracts; nor does it require the
payment of price for its validity.5 Consent or perfection of the sale
is manifested by the meeting of the offer and the acceptance
on three items: (a) subject matter; (b) price; and (c) terms of
payment of the price.6
Although a sale ordinarily covers existing things, a valid
sale can cover a subject matter that is not existing or having only
a potential existence at the time of perfection;7 or even a thing
subject to a resolutory condition;8 and ownership of the subject
matter by the seller at the time of perfection is not an essential
requirement for the validity of the sale.9 In other words, a valid
sale exists to bind both seller and buyer even if at the time of
perfection the seller was not the owner thereof since it does not
even exist yet; or even if it existed then but did not belong in
ownership to the seller at that time of perfection.
4
Art. 1475 Civil Code. Also, Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160,
163-164 (1997); Quijada v. Court of Appeals, 299 SCRA 695 (1998); Co v. Court of
Appeals, 312 SCRA 528 (1999).
5
Balatbat v. Court of Appeals, 261 SCRA 128 (1996); Peñalosa v. Santos, 363
SCRA 545 (2001); Soliva v. The Intestate Estate of Marcelo M. Villalba, 417 SCRA 277
(2003).
6
Navarro v. Sugar Producer’s Corp., 1 SCRA 12180 (1961); Leabres v. Court of
Appeals, 146 SCRA 158 (1986); Coronel v. Court of Appeals, 263 SCRA 15 (1996).
7
Art. 1461, Civil Code.
8
Art. 1465, Civil Code.
9
Arts. 1459 and 1475, Civil Code.
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
321
Perfection of a sale merely creates the obligation on the part
of the seller to transfer ownership, but by itself perfection does
not transfer ownership. The law states that “the vendor must
have a right to transfer the ownership thereof at the time it is
delivered,”10 and that ownership of the thing sold is not transferred
by perfection but “shall be transferred to the vendee upon the
actual or constructive delivery thereof.”11
Consummation stage concerns itself with the actual transfer
of ownership of the subject matter and the payment of the price;
perfection stage merely concerns itself with the creation of the
obligations to transfer and to pay. Therefore, it is not critical for
valid perfection of a sale to come about, that the seller at that
time is the owner of the subject matter of the sale, or even that
the subject matter should exist at the time of perfection.
This truism is bolstered by the fact that the law on estoppel
provides that “[w]hen the person who is not the owner of a thing
sells or alienates and delivers it, and later the seller or grantor
acquires title thereto, such title passes by operation of law to the
buyer or grantee.”12 It is obvious that Article 1434 uses the word
“sells” to refer to the perfection stage of a sale since it includes
“and delivers it” as an additional part of its qualification.
2. At Consummation
Article 1505 of the Civil Code provides that “where goods
are sold by a person who is not the owner thereof, and who does
not sell them under authority or with the consent of the owner, the
buyer acquires no better title to the goods than the seller had.”
The article does not say that the sale of goods by a non-owner
renders the contract void; it describes the consequences when
delivery under a sale is effected when the seller is not the owner
of the thing delivered. As the Supreme Court aptly held: “It is a
well-settled principle in law that no one can give what one does
not have — nemo dat quod non habet. Accordingly, one can sell
Art. 1459, Civil Code.
Art. 1477, Civil Code.
12
Art. 1434, Civil Code.
10
11
322
LAW ON SALES
only what one owns or is authorized to sell, and the buyer can
acquire no more than what the seller can transfer legally.”13
In Mindanao Academy, Inc. v. Yap,14 a widow, without the
consent or authority of her co-owners-children, sold school
properties to buyer Yap, who obtained possession of the
properties by virtue of the sale, and took over the operations
of the school. Consequently, the other co-owners brought two
actions against buyer Yap: one for annulment of sale, and the
other for rescission. The two cases having been tried together,
the trial court ruled that the sale was null and void. On appeal, the
Court upheld the decision of the trial court, as follows:
The lower court did not rule categorically on the
question of rescission considering it unnecessary to do
so in view of its conclusion that the contract of sale
is null and void. This conclusion is premised on two
grounds: (a) the contract purported to sell properties of
which the sellers were not the only owners ...; and (b)
the prestation involved in the sale was indivisible, and
therefore incapable of partial annulment, inasmuch as
the buyer Yap, by his own admission, would not have
entered into the transaction except to acquire all of the
properties purchased by him.15
In affirming the “nullity of the sale,” by the fact that the seller
“sold” under the sale properties that she did not own solely, the
Court seemed to have reasoned improperly. Certainly, a seller
may validly “sell” (enter into a valid and binding sale) properties
which he entirely does not own at the time of perfection.
Such contract is valid, and an action to annul such contract
is improper; and it is his failure to comply with his obligation
to transfer ownership over the subject matter that would give
rise to an action for rescission with damages. But really much
depends on what the Court meant to cover by the term “contract
of sale” as being “null and void.”
13
Gonzales v. Heirs of Thomas and Paula Cruz, 314 SCRA 585, 597 (1999). Also
Segura v. Segura, 165 SCRA 368 (1988).
14
13 SCRA 190 (1965).
15
Ibid, at p. 194; emphasis supplied.
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
323
If the sale referred to in Mindanao Academy was considered
as a “contract” defined by law as “a meeting of minds between
two persons whereby one binds himself, with respect to the
other, to give something,”16 such sale was certainly not null and
void even though the seller was not the owner of the thing sold
at the time of perfection. On the other hand, if the sale was being
considered at its consummation stage, that by tradition it has
transferred ownership to the buyer, then indeed such transfer
of ownership was “null and void” for a seller cannot transfer
ownership by delivery of a thing which he does not own, even
as a consequence of a valid sale. Mindanao Academy therefore
indicates to us the difficulties of not distinguishing which stage in
the life of the sale is being referred to: is it the “contract” as an
agreement that gives rise to obligations (perfected contract), or is
it the living contract as a manner of performance (consummated
contract).
In Estoque v. Pajimula,17 Buyer 1 bought a designated 1/3
southeastern portion of a large tract of land (lot 802) from the
seller who was then a pro-indiviso one-third co-owner thereof.
Subsequently, the seller, having obtained the ownership of the
entire property from his co-owners, sold the remaining 2/3 portion
thereof to Buyer 2. Buyer 1 thereupon sought to exercise the
statutory right of redemption,18 as a co-owner of the property as
against Buyer 2 on the basis that since the seller was merely a
co-owner at the time of the sale to her, Buyer 1 merely acquired
one-third pro-indiviso title to the property, making her a co-owner
thereof. In ruling against Buyer 1, the Court held:
... While on the date of the sale to [Buyer 1] said
contract may have been ineffective, for lack of power in
the vendor to sell the specific portion described in the
deed, the transaction was validated and became fully
effective when the next day ... the vendor ... acquired
the entire interest of her remaining co-owners ... and
thereby became the sole owner. ... Article 1434 of the
Civil Code of the Philippines clearly prescribes that —
Art. 1305, Civil Code.
24 SCRA 59 (1968).
18
Art. 1620, Civil Code.
16
17
324
LAW ON SALES
“When a person who is not the owner of a thing
sells or alienates and delivers it, and later the seller
or grantor acquires title thereto, such title passes by
operation of law to the buyer or grantee.”
Pursuant to this rule, [Buyer 1] became the
actual owner of the southeastern third of lot 802 ...
Wherefore, she never acquired an undivided interest
in lot 802 ...19
Again in Estoque we encounter difficulties with the structure
of the ruling which held as “ineffective” a sale upon its execution
(“on the date of the sale”) just because seller lacked the power “to
sell the specific portion described in the deed.” Such lack of power
to transfer ownership does not affect the validity of a sale, since
the subject matter at perfection had all the statutory requisites
to make the sale valid: it was existing, licit and determinate. On
the other hand, the reasoning in Estoque is not bad when taken
in the sense that if we focus on the execution of the deed of
sale, as a public document, equivalent to constructive delivery
to transfer ownership of the subject matter to Buyer 1, then the
Court was correct in saying that such “sale” (i.e., the transfer of
ownership by constructive delivery) was indeed ineffective as of
the date of the execution of the deed, since the seller could not
validly transfer a specific one-third portion which he did not own.
But again, we have to cut and dice in order to get the Court’s
conclusion right, when it would all be so easy to state clear
doctrinal pronouncements by specifying what particular stage is
being referred to.
In Almendra v. Intermediate Appellate Court,20 the Court,
in holding “void” the “sale” of a particular one-half portion of a
conjugal property by the surviving spouse held —
The unquestionability of the due execution of the
deeds of sale notwithstanding, the Court may not put
an imprimatur on the intrinsic validity of all the sales.
The ... sale ... of one-half portion of the conjugal
19
20
Ibid, at p. 63; emphasis supplied.
204 SCRA 142 (1991).
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
325
property ... may only be considered valid as a sale
of Aleja’s one-half interest therein. Aleja could not
have sold the particular hilly portion specified in the
deed of sale in the absence of proof that the conjugal
partnership property had been partitioned after the
death of Santiago. Before such partition, Aleja could
not claim title to any definite portion of the property
for all she had was an ideal or abstract quota or
proportionate share in the entire property.21
The Court in Almendra obviously used the words “sale” and
“sold” to cover the consummated stage of the sale referred to. It
reiterated the principle on the issue of ownership at the time of
consummation in Noel v. Court of Appeals,22 thus —
In a contract of sale, it is essential that the seller
is the owner of the property he is selling. The principal
obligation of a seller is “to transfer the ownership of” the
property sold (Civil Code of the Philippines, Art. 1458).
This law stems from the principle that nobody can
dispose of that which does not belong to him (Azcona
v. Reyes, 59 Phil. 446 [1934]; Coronel v. Ona, 33 Phil.
456 [1916]). NEMO DAT QUOD NON HABET.23
In Development Bank of the Philippines v. Court of Appeals,24
the Court continued to view the sale by a non-owner of the subject
property to be void instead of treating the tradition aspect as
having no effect on transferring ownership to the buyer, thus —
As a general rule, if one buys the land of another,
to which the seller is supposed to have a good title,
and in consequence of facts unknown alike to both
parties, the seller has in fact no title at all, equity will
cancel the sale and cause the purchase money to be
restored to the buyer, putting both parties in status quo.
“This is because the declaration of nullity of a contract
which is void ab initio operates to restore things to the
Ibid, at p. 149.
240 SCRA 78 (1995).
23
Ibid, at p. 88.
24
249 SCRA 331 (1995).
21
22
326
LAW ON SALES
state and condition in which they were found before the
execution thereof.”
Therefore, the purchaser is entitled to recover the money
paid by him where the contract is set aside by reason of the
mutual material mistake of the parties as to the identity or quantity
of the land sold. And where a purchaser recovers the purchase
money from a vendor who fails or refuses to deliver the title, he is
entitled as a general rule to interest on the money paid from the
time of payment.25
Although the Court talks about the effect of declaration of
nullity of a sale, the proper remedy was actually rescission and
the same ends sought to be achieved would have happened,
which was restitution.
In Nool v. Court of Appeals,26 the Court recognized the
principle that the absence of ownership by the seller at the time
of perfection does not render the sale void. Nevertheless, the
Court relied on the concept of “impossible service” as the basis
to hold the sale void, thus:
In the present case, it is clear that the sellers no
longer had any title to the parcels of land at the time of
sale. Since ... the alleged contract of repurchase, was
dependent on the validity of the [main contract of sale],
it is itself void. A void contract cannot give rise to a
valid one. Verily, Article 1422 of the Civil Code provides
that “(a) contract which is the direct result of a previous
illegal contract, is also void and inexistent.”
We should however add that Dignos did not cite its
basis for ruling that a “sale is null and void” where the
sellers “were no longer the owners” of the property.
Such a situation (where the sellers were no longer
owners) does not appear to be one of the void contracts
enumerated in Art. 1409 of the Civil Code. Moreover,
[Article 1462 of] the Civil Code itself recognizes a sale
where the goods are to be “acquired x x x by the seller
25
26
Ibid, at pp. 337-338.
276 SCRA 149 (1997).
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
327
after the perfection of the contract of sale” clearly
implying that a sale is possible even if the seller was
not the owner at the time of sale, provided he acquires
title to the property later on.
In the present case however, it is likewise clear that
the sellers can no longer deliver the object of the sale
to the buyers, as the buyers themselves have already
acquired title and delivery thereof from the rightful
owner, the DBP. Thus, such contract may be deemed to
be inoperative and may thus fall, by analogy, under item
No. 5 of Article 1409 of the Civil Code: “Those which
contemplate an impossible service.” Article 1459 of the
Civil Code provides that “the vendor must have a right
to transfer the ownership thereof [object of the sale] at
the time it is delivered.” Here, delivery of ownership is
no longer possible. It has become impossible.”27
The problem with the foregoing reasoning is that it treats
seller’s obligations as personal obligations “to do” which would
then be covered by paragraph 5 of Article 1409. Fact is that
seller’s obligations are real obligations “to give” and therefore do
not fall within the category of “impossible service;” and if indeed
the obligation to delivery ownership can no longer be complied
with, the remedy is not to declare the sale void, but actually to
rescind the sale for breach of contract.
Recently though, in Cavite Development Bank v. Spouses
Syrus Lim,28 the Court explained the proper application of the
Latin maxim Nemo dat quod non habet, as properly applicable to
the consummation of a sale thus:
Nemo dat quod non habet as an ancient Latin maxim
says, One cannot give what one does not have. In
applying this precept to a contract of sale, a distinction
must be kept in mind between the “perfection” and the
“consummation” stages of the contract.
A contract of sale is perfected at the moment there
is a meeting of minds upon the thing which is the object
27
28
Ibid, at pp. 157-158.
324 SCRA 346 (2000).
328
LAW ON SALES
of the contract and upon the price. It is, therefore, not
required that, at the perfection stage, the seller be
the owner of the thing sold or even that such subject
matter of the sale exists at that point in time. Thus,
under Article 1434 of the Civil Code, when a person
sells or alienates a thing which, at that time, was not
his, but later acquires title thereto, such title passes
by operation of law to the buyer or grantee. This is the
same principle behind the sale of “future goods” under
Art. 1462 of the Civil Code. However, under Art. 1459,
at the time of delivery or consummation stage of the
sale, it is required that the seller be the owner of the
thing sold. Otherwise, he will not be able to comply with
his obligation to transfer ownership to thebuyer. It is at
the consummation stage where the principle of nemo
dat quod non habet applies.29
3. Sale by Co-Owner of the Whole Property
or Definite Portion Thereof
The rule in co-ownership is that none of the co-owners may
claim any right, title or interest to a particular portion of the thing
owned in common. A co-owner has no right to sell a divided part
of the real estate;30 although he is the owner of an undivided half
of a tract of land, he has a right to sell and convey an undivided
half, but he has no right to divide the lot into two parts, and convey
the whole of one part by metes and bounds.31
When a co-owner sells a particular portion of the property
owned in common, the early rule was that the sale is void as it
attempts to sell a particular portion of the property, but is valid
as to the spiritual share of the co-owner-seller. In Lopez v.
Cuaycong,32 where a co-owner sold the particular portion of the
property owned in common when there has been no partition yet,
the Court held: “The fact that the contract of sale made by a coowner purports to sell a concrete portion of the property held in
29
30
(2005).
31
32
Ibid, at pp. 355-356.
Acabal v. Acabal, 454 SCRA 555 (2005); Barcenas v. Tomas, 454 SCRA 593
Lopez v. Ilustre, 5 Phil. 567 (1906).
74 Phil. 601 (1944).
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
329
common, does not render the sale void, for it is a well-established
principle that the binding force of a contract must be recognized
as far as it is legally possible to do so.”33
The rule therefore is when prior to partition a co-owner sells
the entire property owned in common, the sale of the property
itself is void (i.e., the attempt to transfer ownership of the entire
property by virtue of the sale), but valid as to his spiritual share.34
On the other hand, when a co-owner prior to partition sells a
definite portion of the property owned in common, the sale as to
that portion is not valid as to the other co-owners, but valid as
to his spiritual share, if indeed the buyer would have still bought
such spiritual share had he known that the definite portion sold
would not be acquired by him.
Bailon-Casilao v. Court of Appeals,35 outlined the effects of
sale by one co-owner without the consent of all the co-owners,
thus:
The rights of a co-owner of a certain property are
clearly specified in Article 493 of the Civil Code. ...
As early as 1923, this Court has ruled that even if a
co-owner sells the whole property as his, the sale will
affect only his own share but not those of the other
co-owners who did not consent to the sale (Punsalan
v. Boon Liat, 44 Phil. 320 [1923]). This is because
under the aforementioned codal provision, the sale or
other disposition affects only his undivided share and
the transferee gets only what would correspond to his
grantor in the partition of the thing owned in common.
[Ramirez v. Bautista, 14 Phil. 528 [1909])...
From the foregoing, it may be deduced that since
a co-owner is entitled to sell his undivided share, a
sale of the entire property by one co-owner without the
consent of the other co-owners is not null and void.
However, only the rights of the co-owner-seller are
Ibid, at p. 602.
Lopez v. Cuaycong, 74 Phil. 601 (1944). Reiterated in Fernandez v. Fernandez,
363 SCRA 811 (2001); Acabal v. Acabal, 454 SCRA 555 (2005); Panganiban v. Oamil,
542 SCRA 166 (2008).
35
160 SCRA 738 (1988).
33
34
330
LAW ON SALES
transferred, thereby making the buyer a co-owner of
the property.36
The effects of the sale of the entire property by one of the coowners, without the consent of the other co-owners, as affecting
only the seller’s pro-indiviso share, has been revisited lately in
Paulmitan v. Court of Appeals,37 which rightly found that the sale
by a co-owner of the entire property without the consent of the
other co-owners cannot be considered as null and void.38
Tomas Claudio Memorial College, Inc. v. Court of Appeals,39
held that when a co-owner sells the entire property, the sale is
valid as to his spiritual share since “a co-owner is entitled to
sell his individual share” and the proper action to take is not
the nullification of the sale, or for recovery of possession of the
property owned in common from the other co-owners, but for
division or partition of the entire property.40
The foregoing rulings seem to gloss over the commercial fact
that often the meeting of minds between the seller and the buyer
comes about by the commutative nature of the transaction, i.e.,
that the buyer was willing to pay a higher price, if he thought the
seller was obliging himself to sell the entire property or a definite
portion thereof. If it turns out that the seller had no capacity to do
so, because he is in fact merely a co-owner, then it may happen
more often than not that the sale is void under the provisions of
Article 1409(6) “where the intention of the parties relative to the
principal object of the contract cannot be ascertained.” Otherwise,
to compel the buyer to stick by the terms of the contract, would
lead to either or both of two things: (a) you compel the buyer to
accept a subject matter (i.e., spiritual share) to which he never
agreed to buy; and (b) to pay the agreed price for a subject matter
Ibid, at pp. 744-745.
215 SCRA 866 (1992).
38
Reiterated in Aguirre v. Court of Appeals, 421 SCRA 310 (2004); Heirs of the Late
Spouses Aurelio and Esperanza Balite v. Lim, 446 SCRA 54 (2004).
39
316 SCRA 502 (1999). Reiterated in Santos v. Lumbao, 519 SCRA 408 (2007);
Republic v. Heirs of Francisca Dignos-Sorono, 549 SCRA 58 (2008).
40
Reiterated in Heirs of Romana Ingjug-Tiro v. Casals, 363 SCRA 435 (2001),
Fernandez v. Fernandez, 363 SCRA 811 (2001); and Aguirre v. Court of Appeals, 421
SCRA 310 (2004).
36
37
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
331
(spiritual share) which commands a smaller value in the market.
The solutions given by the Court would often lead to unjustment
enrichment on the part of the seller. On the other hand, if the
proferred solution is that the buyer shall be compelled to accept
delivery of the spiritual share in the property intended to be
bought, and mandate that he will be paying a smaller amount as
the price for the spiritual portion, then it really amounts to making
a new contract between them, where the subject matter has
drastically changed, as well as the price.
The proper solution it seems to the author is that, the original
contract terms be upheld as valid (which is so, as discussed
above), but the option is granted to the buyer to either seek for
rescission for breach of seller’s obligation to deliver the object
agreed upon, or to accept partial delivery, i.e., only the spiritual
portion, which appropriate reduction of price, similar to the rules
in sale of real property per unit of measure or number.
4. Exceptions to Rule on Effect of Sale
of Definite Portion by Co-owner
The general rule on the effect of the sale of the entire property
owned in common by one of the co-owners, to be void as a sale
of the whole property or any definite portion thereof (i.e., to validly
effect transfer of ownership), but valid as to the co-owner-seller’s
spiritual share, is subject to a number of exceptions:
Firstly, it does not apply to a situation where the subject
matter is indivisible in nature or by intent. In Mindanao Academy,
Inc. v. Yap,41 where one of the co-owners sold the school and
its properties owned in common with other co-owners, the Court
held that the sale of the entire property owned in common by one
of the co-owners was “void,” and could not even be binding as
to the spiritual share of the seller since the prestation involved
in the sale was indivisible, and therefore incapable of partial
annulment, inasmuch as the buyer would not have entered into
the transaction except to acquire all of the properties purchased
by him.42
13 SCRA 190 (1965).
Ibid, at p. 194.
41
42
332
LAW ON SALES
Secondly, when a sale of a particular portion of the thing
owned in common is with the consent of the other co-owners,
the legal effect is different. In Pamplona v. Moreto,43 the Court
held that when there has been no express partition of the subject
matter owned in common, but the co-owners who sells points out
to his buyers the boundaries of the part he was selling, and the
other co-owners make no objection, there is in effect already a
partial partition, and the sale of the definite portion can no longer
be assailed by the other co-owners.
Thirdly, in Imperial v. Court of Appeals,44 it was held that
a co-owner who sells one of the two lands owned in common
with another co-owner, and does not turn-over one-half of the
proceeds of the sale to the other co-owner, the latter by law
and equity may lay exclusive claim to the remaining parcel of
land.
Fourthly, would be the effect of the ipso jure transfer of
ownership under Article 1434 of the Civil Code. In Pisueña v.
Heirs of Petra Unating,45 the Court held that when co-heirs sell
and deliver the entire lot owned in common with their father who
was still alive at that time, and subsequently the father dies,
then the buyer becomes the owner of the entire property bought
pursuant to the provisons of Article 1434 of the Civil Code which
upholds the validity of a sale by one who previously did not have,
but who subsequently acquired, title to the property sold.
Finally, would be the binding effect of registration under the
Torrens System. Cruz v. Leis,46 held that although a co-owner
may validly sell only her co-ownership interests, and that the
sale of the entire property or of a particular portion thereof is
void, nevertheless, when Torrens title to the conjugal property
indicates that the wife is the only owner thereof being described
as a “widow,” then one who buys such property from the wife in
good faith and for value, will acquire valid title thereto against
the heirs of the deceased spouse: “The rationale for this rule
96 SCRA 775 (1980).
259 SCRA 65 (1996).
45
313 SCRA 384 (1999).
46
327 SCRA 570 (2000).
43
44
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
333
that ‘a person dealing with registered land is not required to go
behind the register to determine the condition of the property. He
is only charged with notice of the burdens on the property which
are noted on the face of the register or the certificate of title. To
require him to do more is to defeat one of the primary objects of
the Torrens system.’”47
EXCEPTIONS TO RULES ON LEGAL EFFECTS
OF SALE BY A NON-OWNER
The discussions that follow immediately hereunder pertain
to applicable rules in consummation stage that pertain to issues
as to preference of ownership between the original owner of the
property who is a third party to a sale between a seller and a
buyer over the same property; essentially, there is only one sale
involved, with the original owner being a stranger to said contract.
The rules should therefore not be confused with the set of rules
governing double sales.
Although Article 1505 provides that where goods are sold
by a person who is not the owner thereof, and who does not sell
them under authority or with the consent of the owner, the buyer
acquires no better title to the goods than the seller had, it also
provides for the following exceptions:
(a) When the owner is, by his conduct, precluded
from denying the seller’s authority to sell;
(b) When the contrary is provided for in
recording laws;
(c) When the sale is made under statutory
power of sale or under the order of a court
of competent jurisdiction; and
(d) When the sale is made in a merchant’s store
in accordance with the Code of Commerce
and special laws.
47
Ibid, at p. 578.
334
LAW ON SALES
Other exceptions to the main principle enunciated under
Article 1505 would be the following:
(e) Under Article 1506, the sale by a seller who
at the time of delivery had voidable title to
the thing delivered;
(f) In case of movables, under Article 559,
acquisition of possession in good faith under
a claim of ownership, where the real owner
has not lost or been unlawfully deprived
of the movable, makes the possessor the
rightful owner of the movable; and
(g) Special rights of an unpaid seller of goods
to resell under Articles 1526 and 1533 of
the Civil Code.
The first two additional exceptions will be discussed in
their proper sections below, while the third item is discussed in
Chapter 10.
1. When Real Owner Estopped
An example when the owner is estopped is Article 1434
of the Civil Code that provides that when a person who is not
the owner of a thing sells or alienates title thereto, such title
passes by operation of law to the buyer or grantee. In Bucton
v. Gabar,48 where the seller sold a parcel of land to the buyer
at the time the seller was not yet the owner of the land sold, the
acquisition after one year by the seller of the ownership of said
land was automatically transferred to the buyer, and the seller
was estopped from questioning the title of his buyer.
2. Recording Laws
Except on the effect of registration of chattel mortgage and
its subsequent foreclosure and sale at public auction, and the
jurisprudential rules that have come to govern the hierarchy of
48
55 SCRA 499 (1974).
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
335
claims on shares of stock of a corporation, there are at present no
other recording laws pertaining to movables that provide the same
principle as “registration as the operative act” principle applicable
to registered land under The Property Registration Decree.
3. Statutory Power; Judicial Sale
Judgments of courts divesting the registered owner of title
and vesting them in the other party are valid although the courts
may not be the owner of the land. Also, the sale by a sheriff of land
levied upon at public auction would validly transfer ownership to
the highest bidder, although the sheriff in executing the certificate
of sale has no ownership over said property.
4. Sale at Merchant Store
The reason for validating the sale and transfer of ownership
to buyers who bought from merchant stores is well summarized
in the syllabus in Sun Brothers & Co. v. Velasco:49
Under paragraph (3) of Article 1505 of the Civil Code,
a person who buys a thing at a merchant’s store after
the same has been put on display thereat, acquires
a valid title to the thing although his predecessors in
interest did not have any right of ownership over it.
This is a case of an imperfect or void title ripening into
a valid one, as a result of some intervening causes.
The policy of the law has always been that where the
rights and interests of a vendor come into clash with
that of an innocent buyer for value, the latter must be
protected. ... protecting innocent third parties who have
made purchases at merchants’ stores in good faith and
for value appears to be a wise and necessary rule
not only to facilitate commercial sales on movables
but to give stability to business transactions. This rule
is necessary in a country such as ours where free
enterprise prevails, for a buyer cannot be reasonably
expected to look behind the title of every article when
he buys at a store. The doctrine of caveat emptor is
49
54 O.G. 5143 (1958).
336
LAW ON SALES
now rarely applied, and if it is ever mentioned it is more
of an exception rather than the general rule.
What constitutes “merchant store” can be culled from City
of Manila v. Bugsuk Lumber Co.,50 when it held that a “store” is
any place where goods are kept for sale; or where goods are
deposited and sold by one engaged in buying and selling them.
It held that “placing of an order for goods and the making of payment thereto at a principal office does not transform said office
into a store, for it is a necessary element that there must also
be goods or wares stored therein or on display, and provided
also that the firm or person maintaining that office is actually
engaged in the business of buying and selling.”51
5. Sale by a Seller Who Has Voidable Title
on the Subject Matter Sold
Under Article 1506, “Where the seller of goods has a voidable
title thereto, but his title has not been avoided at the time of 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.”
When the article states that “title has not been avoided at
the time of sale,” what stage of the sale is referred to as the
cut-off point? It would seem that if the rest of the provisions
of Article 1506 would require that the buyer should have paid
value therefor, it must cover the consummation stage. Article
1506 talks of “title” or ownership to the property which covers
the consummation stage; perfection stage of sale involves the
obligation to transfer ownership, but does not cover nor convey
ownership itself.
It would logically follow then that if the cut-off point under
Article 1506 is the delivery of the subject matter to the buyer
by the seller, if the seller’s voidable title thereto is avoided after
the perfection of the sale but before delivery, the buyer does not
obtain good title to the property.
50
51
101 Phil. 859 (1959).
Ibid, at p. 866.
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
337
The buyer is not in good faith may be determined from the
language of the deed of sale, as held by the Court in one case:52
“The language of the deed of sale may show bad faith on the
part of the buyer. In the deed, instead of the buyer insisting that
the seller guarantee its title to the land and recognize the right
of the buyer to proceed against the seller if the title to the land
turns out to be defective as when the land belongs to another
person, and instead the reverse is found in the deed of sale
providing that any losses which the buyer may incur in the event
the title turns out to be vested in another person are to be borne
by the buyer alone, show that the buyer did not purchase the
subject matter in good faith without notice of any defect in the
title of the seller.”53
6. Applicable Rules to Immovables
Do the rules provided for under Articles 1505 and 1506, except
for the application of the Torrens system, apply to immovables?
For example, if a seller at the time of sale and delivery, has only
voidable title to the subject parcel of land, would the buyer in
good faith and for value take a “better title” to the land (i.e., valid
title) than that of his seller, following the principle under Article
1506?
The answer seems to be in the negative, since the essence
of the coverage of Articles 1505 and 1506 would be “goods,”
which require not only a valid underlying sale, but necessarily
the element of transfer of possession embodied as the primary
test of ownership for movables under Article 559 of the Civil
Code. Consequently, when the seller of a parcel of land has only
voidable or void title to the property, then the buyer, even though
in good faith and for value, and in spite of actual or constructive
delivery, takes only the same title to the land which his seller had.
The only exception to this principle of Nemo dat quod non habet
is the “registration in good faith as the operative act” doctrine
embodied in Sec. 113 of the Property Registration Degree.54 By
Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995).
Ibid, at p. 543.
54
Pres. Decree No. 1529.
52
53
338
LAW ON SALES
way of illustration, we can rely upon the ruling in Heirs of Spouses
Benito Gavino v. Court of Appeals.55
In that decision, the Court held that even when the sale is
void for being based on a fictitious transfer from a previous seller
to the current seller (as the former did not own the property in
its entirety when sold), the general rule that the direct result of a
previous void contract cannot be valid, is inappicable when it will
directly contravene the Torrens system of registration, thus —
... Where innocent third persons, relying on the
correctness of the certificate of title thus issued, acquire
rights over the property, the court cannot disregard such
rights and order the cancellation of the certificate, since
the effect of such outright cancellation will be to impair
public confidence in the certificate of title. The sanctity
of the Torrens system must be preserved; otherwise,
everyone dealing with the property registered under
the system will have to inquire in every instance as
to whether the title had been regularly or irregularly
issued, contrary to the evident purpose of the law.
Every person dealing with the registered land may
safely rely on the correctness of the certificate of title
issued therefor and the law will in no way oblige him to
go behind the certificate to determine the condition of
the property.56
In Cavite Development Bank v. Spouses Cyrus Lim,57 the
Court applied the same principle to a foreclosure sale, though
essentially a “forced sale,” on the ground that it is still a sale in
accordance with Article 1458 of the Civil Code, under which the
mortgagor in default, the forced seller, becomes obliged to transfer
the ownership of the thing sold to the highest bidder who, in turn, is
obliged to pay the bid price in money or its equivalent, thus —
... Being a sale, the rule that the seller must be the
owner of the thing sold also applies in a foreclosure
sale. This is the reason why Article 2085 of the Civil
291 SCRA 495 (1998).
Ibid, at p. 509. Reiterated in Clemente v. Razo, 452 SCRA 769 (2005).
57
324 SCRA 346 (2000).
55
56
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
339
Code, in providing for the essential requisites of the
contract of mortgage, requires among other things,
that the mortgagor or pledgor be the absolute owner
of the thing mortgaged, in anticipation of a possible
foreclosure sale should the mortgagor default in the
payment of the loan.
There is however, a situation where, despite the fact
that the mortgagor is not the owner of the mortgaged
property, his title being fraudulent, the mortgage
contract and any foreclosure sale arising therefrom
are given effect by reason of public policy. This is the
doctrine of “the mortgagee in good faith” based on the
rule that all persons dealing with property covered by
a Torrens Certificate of Title, as buyers or mortgagees,
are not required to go beyond what appears on the
face of the title. The public interest in upholding the
indefeasibility of a certificate of title, as evidence of the
lawful ownership of the land or of any encumbrance
thereof, protects a buyer or mortgagee who, in good
faith, relied upon what appears on the face of the
certificate of title.58
It should be noted that in Tsai v. Court Appeals,59 the
Court held that the defense of indefeasibility of Torrens title is
unavailing to properties and other improvements situated or built
therein, such that the mere fact that the lot where the factory and
disputed properties stand was in the name of the bank did not
automatically mean that everything found on the lot also belonged
to the bank, especially when there was a letter received by the
buyer revealing such fact.
Likewise, the principle is premised on the existence of a
valid sale. Insurance Services and Commercial Traders, Inc.
v. Court of Appeals,60 reiterated that an innocent purchaser for
value is one who purchases a titled land by virtue of a deed
executed by the registered owner himself, and not under a
forged deed.
Ibid, at p. 358.
366 SCRA 324 (2001).
60
341 SCRA 572 (2000).
58
59
340
LAW ON SALES
7. “Title” as to Movable Properties
Article 559 of the Civil Code provides that possession of
movable property acquired in good faith is equivalent to title. In
addition, the article provides that one who has lost any movable
or has been unlawfully deprived thereof, may recover it from the
person in possession of the same. If the possessor of a movable
lost or of which the owner has been unlawfully deprived, has
acquired it in good faith at a public sale, the owner cannot obtain
its return without reimbursing the price paid therefor.
Although it may be settled jurisprudence that the term
“unlawfully deprived,” would cover situations when the original
owner has been “dispossessed without his consent,”61 which
includes not only cases of theft and robbery, but including one
occasioned by swindling or estafa,62 nonetheless the rule under
Article 559 is subject to the following exceptions:
(a) By cross-reference to Article 1505, even if
the owner of a movable has lost it or has
been unlawfully deprived thereof, and
even if he offers to reimburse the buyer, he
cannot recover the movable from the buyer
who bought it at a merchant store; and
(b) By cross-reference to Article 1506, even if
the owner of a movable has lost it or has
been unlawfully deprived thereof, if the
possessor in good faith acquired title from
a seller who at the time of delivery had a
voidable title thereto, then the original owner
cannot recover the movable.
Dizon v. Suntay, 47 SCRA 160, 165 (1972).
Del Rosario v. Lucena, 8 Phil. 535 (1907); Valera v. Finick, 9 Phil. 479 (1908);
Arenas v. Raymundo, 19 Phil. 47 (1911); U.S. v. Sotelo, 28 Phil. 147 (1914); Dizon v.
Suntay, 47 SCRA 160 (1972); Cruz v. Pahati, 98 Phil. 788 (1956).
All the foregoing cases “have one factor in common: Persons not duly authorized to
do so pawned or pledged jewelry in favor of innocent third persons.” Tagatac v. Jimenez,
53 O.G. No. 12 3792, 3796 (30 June 1957).
61
62
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
341
In Tagatac v. Jimenez,63 Tagatac was the owner of a vehicle
she sold to Feist who issued a check to cover the purchase price,
which check bounced. In the meantime, buyer sold the vehicle to
another person, and eventually the vehicle was sold to Jimenez,
who bought it in good faith and for value. Subsequently, Feist
was convicted for estafa. On the issue as to who was the rightful
owner of the vehicle, the Court held that Tagatac cannot be
deemed to have been unlawfully deprived of the vehicle as the
term is used in Article 559 since the failure of Feist to pay the
purchase price of the vehicle or the issuance of a check for its
price without funds to answer therefor did not or could not affect
the validity of the transfer of title of the subsequent buyer who
acquired the car in good faith; at the most it would give Tagatac
a right to rescind the contract, but the title to the thing sold would
not revert to the seller until the sale has been set aside by a
competent court. Until that is done, the rights of stranger in good
faith, acquired before resolution of the contract are entitled to
protection.
In the case of Aznar v. Yapdiangco,64 where the owner had
not yet consented to the sale of the vehicle when it was taken and
driven away by the would-be buyer, the acquisition subsequently
of another person who took it in good faith, would still entitle the
original owner to recover the same since it constituted unlawful
deprivation under Article 559 entitling the owner to recover it
from any possessor thereof. Aznar also held that the provisions
of Article 1506 would not apply to the present possessor since
it was essential that his seller should have a voidable title at
least. In the case of the present possessor his seller did not even
have any title to the property since it was never sold to him nor
delivered to him pursuant to a valid or at least voidable sale.
In EDCA Publishing & Distributing Corp. v. Santos,65 an
impostor identifying himself as a professor obtained delivery
of books from EDCA and for which he issued a check that
subsequently bounced. The impostor sold the books to Santos,
53 O.G. No. 12, 3792 (30 June 1957).
13 SCRA 486 (1965).
65
184 SCRA 614 (1990).
63
64
342
LAW ON SALES
who bought them in good faith and for value. In the resulting suit
over the books between EDCA and Santos, the Court held that
Santos did not have to establish his ownership over the books
since under Article 559 his possession of books acquired in good
faith is equivalent to title. In denying the contention of EDCA that
it had been “unlawfully deprived” of the books, the Court held
non-payment of the purchase price by the impostor, although
amounting to fraud, did not amount to unlawful deprivation under
Article 559, but merely may be considered vitiation of consent as
to make the contract voidable; but that so long as the contract has
not been annulled, it remained valid, and the subsequent sale
and delivery by the impostor of the books to Santos effectively
transferred ownership to Santos.
The implication of the Tagatac and EDCA Publishing rulings
is that Article 1506 represents an operative act which would
constitute a further exception to the provisions of Article 559,
which means that if the owner has been unlawfully deprived by
means of deceit pertaining to the non-payment of the purchase
price, but the one who takes the movable is able to sell and
deliver the movable to another person who takes it in good faith
and for value before the owner is able to rescind the earlier sale,
the buyer obtains good title and the original owner has no cause
of action to recover; and
What is gratifying from a reading of the foregoing three cases
is that the Court incisively distinguished between the perfection
stage and the consummation stage of the sale to arrive at a
proper resolution of the issues.
In Tagatac, the Court ruled that deceit or fraud, which do not
render the contract void but merely voidable (valid until annulled)
resulted into the existence of a sale, so that when delivery was
effected pursuant to such voidable contract, tradition effectively
and legally transferred ownership to the buyer, even though
he was a deceitful person. It also correctly ruled that the nonpayment of the price by the bouncing of the check went into the
performance of the contract and not to its perfection and therefore
non-payment could not reverse the coming into existence of the
sale by the meeting of minds of the parties.
SALE BY A NON-OWNER OR
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
343
In Aznar, the Court held the line that non-delivery of the
vehicle by the seller could not have possibly given any sort of
title to the would-be buyer, and the latter could not in turn convey
any title, valid or voidable, to his own buyer to bring the case
under Article 1506. The Court pointed out that perfection of the
contract does not transfer ownership; and that ownership is not
transferred by contract merely (i.e., perfection of the contract) but
by tradition or delivery.
Finally, in EDCA, the Court with much lucidity said, and by
the succeeding quoted passages, end this chapter, thus:
The contract of sale is consensual and is perfected
once agreement is reached between the parties on the
subject matter and the consideration. According to the
Civil Code:
... ART. 1478. The parties may stipulate that
ownership in the thing shall not pass to the purchaser
until he has fully paid the price.
It is clear from the above provisions, particularly
the last one quoted, that ownership in the thing
sold shall not pass to the buyer until full payment of
the purchase price only if there is stipulation to that
effect. Otherwise, the rule is that such ownership shall
pass from the vendor to the vendee upon the actual
or constructive delivery of the thing sold even if the
purchase price has not yet been paid.
Non-payment only creates a right to demand
payment or to rescind the contract, or to criminal
prosecution in the case of bouncing checks. But
absent the stipulation noted, delivery of the thing sold
will effectively transfer ownership to the buyer who can
in turn transfer it to another.66
—oOo—
66
Ibid, at p. 618.
344
LAW ON SALES
CHAPTER 9
LOSS AND DETERIORATION,
FRUITS AND OTHER BENEFITS
Analysis of the prevailing doctrines in Philippine jurisdiction
on the risk of loss and deterioration, and the benefits flowing from
the fruits and improvements, of the object of sale, offer interesting
study on the convergence of disparate principles in civil law and
common law. The discussions hereunder cover only contracts of
sale where the subject matter is determinate or specific, since a
determinable generic subject matter does not deteriorate nor is
it subject to loss.1
In drafting the Title on Sales of the New Civil Code, the Code
Commission engrafted many provisions of the Uniform Sales Law
of the United States to achieve a common set of rules on sales
on both sides of the Pacific, since the United States was then our
biggest and most important trading partner. Unfortunately, the
grafting together of civil and common law principles in our Law
on Sales has yielded confusing and varying interpretations.
The Roman law principle embodied in the Spanish Civil Code
previously applicable to the Philippines, mandated that from the
moment of perfection of sale, the risk of loss on a determinate
subject matter passes to the buyer without need of delivery,
provided that the sale is unconditional. Although the principles
provided that ownership of the subject matter is transferred to
the buyer only upon delivery thereof by the seller, nonetheless,
after perfection of the sale but before delivery, the consequences
of deterioration of the subject matter without the fault of the seller
1
Art. 1263 of the New Civil Code provides that: “In an obligation to deliver a
generic thing, the loss or destruction of anything of the same kind does not extinguish
the obligation.”
344
LOSS AND DETERIORATION,
FRUITS AND OTHER BENEFITS
345
shall likewise be borne by the buyer, and he must still pay the price
agreed upon even when eventually the subject matter delivered
is no longer in the same condition. Under the same principle, any
improvement or fruits of the subject matter after perfection are for
the benefit of the buyer.
On the other hand, under common law principles, it is the
owner who bears the risk of loss (res perit domino), in the absence
of any stipulation to the contrary. However, in a sale, ownership
of the subject matter is transferred to the buyer from the moment
the contract is entered into and the goods are available to be
delivered to the buyer. When it comes to goods, it is not delivery
under common law that transfers ownership to the buyer, but the
perfection of an unconditional sale with availability of the subject
matter for delivery.
Therefore, even when the legal principles were different, the
legal consequences from the point of perfection were the same
in both legal systems: upon perfection of an unconditional sale
involving specific or determinate subject matter, the risk of loss,
deterioration and the benefits of fruits and improvements, were
for the account of the buyer.
In amending the provisions relating to the risk of loss, the
Code Commission decided to adopt the common law principle
that it should be the owner of the subject matter of the sale that
should bear the risk of loss (res perit domino); but they maintained
the civil law principle that ownership can only be transferred by
delivery. This legal fusion on principles have caused the current
confusion that prevails on the issue of risk of loss.
BEFORE PERFECTION
Before the perfection of a sale, the rules on loss, deterioration,
fruits and improvement of the purported subject matter are
the same: such loss, deterioration, fruits and improvements
shall pertain to the purported seller, since he owns the thing.
Notwithstanding the extent of the negotiations that have taken
place, prior to perfection, the purported subject matter bears no
legal or even equitable relationship to the purported buyer, and
346
LAW ON SALES
therefore no assumption of risk of loss or deterioration can be
ascribed to the latter.
The civil law concept of risk of loss was exemplified by the
early case of Roman v. Grimalt,2 which was decided under the
Spanish Civil Code then in force in the Philippines. The case
involved the negotiations for the sale of a schooner for a total
sum of 51,500.00 payable in three installments, but subject to
the condition that the seller must clear his title to the vessel,
before the buyer would commit to buy at the agreed price. The
seller then went about clearing his title to the schooner and
prepared it for delivery to the buyer. But before delivery to the
buyer could be done, the schooner sunk during a severe storm.
The seller demanded for the payment of the purchase price as
agreed upon.
Roman upheld the principle that “[a] sale shall be considered
perfected and binding as between vendor and vendee when they
have agreed as to the thing which is the object of the contract and
as to the price, even though neither has been actually delivered.”3
The Court held that the facts clearly show that no sale had been
perfected, and therefore “the loss of the vessel must be borne by
its owner and not by a party who only intended to purchase it.”4
Unfortunately, the Court held that “[o]wnership is not considered
transmitted until the property is actually delivered and the
purchaser has taken possession of the same and paid the price
agreed upon, in which case the sale is considered perfected.”5
Although the Court used the word “perfected,” such a statement
of course belied the consensual nature of the contract of sale,
perfected by mere consent without need of delivery.
In any event, finding that no sale had been perfected
between the parties, Grimalt held that the articles of the old Civil
Code relative to the injury or benefit of the thing sold after the
contract has been perfected and those relative to the obligations
to deliver a specified thing and the extinction of such obligation
2
3
Code.
4
5
6 Phil. 96 (1906).
Ibid, at p. 98, citing Art. 1450 of the old Civil Code, now Art. 1475 of the New Civil
Ibid, at p. 99.
Ibid.
LOSS AND DETERIORATION,
FRUITS AND OTHER BENEFITS
347
when the thing is either lost or destroyed, were not applicable to
the case.
From the language of the decision of Grimalt the implication
was clear under the old Civil Code: that had the contract been
perfected, even without the schooner being delivered to the
buyer to transfer ownership, the buyer would have borne the risk
of loss. This was supported by then Article 1452 of the old Civil
Code (now Article 1480 of the New Civil Code) that any injury to or
benefit from the thing sold, after the contract has been perfected,
from the moment of perfection to the time of delivery, shall be to
the account of the buyer.
AT THE TIME OF PERFECTION
Under Article 1493 of the New Civil Code, if at the time the
sale is perfected, the subject matter has been entirely lost, the
contract shall be “without any effect.” But if the thing should have
been lost in part only, the buyer may choose between withdrawing
from the contract and demanding the remaining part, paying its
price in proportion to the total sum agreed upon.
In sale of specific goods, and without the knowledge of
the seller, the goods have perished in part or have wholly or
materially deteriorated in quality as to be substantially changed
in character, the buyer may treat the sale as either avoided, or 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.6
Article 1493 does not hold a sale at “perfection” to be void
when the object thereof is lost; it uses the phrase “without any
effect.” Strictly speaking, the physical existence or non-existence
of the subject matter is not important for perfection of the sale.
However, if the subject matter is lost, there is really no point
is pursuing the contract since the seller is not in a position to
comply with his obligation to deliver the subject matter. Therefore,
the law decrees the same effect as if the sale is void. Tolentino
6
Art. 1494, New Civil Code.
348
LAW ON SALES
holds that “the contract never comes into existence. There can
be no sale without a thing to be sold. In such case, there is no
need of an action to annul the contract, because there can be no
annulment of something that does not exist.”7 Paras also refers
to such a contract as being “void” when at the time of perfection,
the subject matter thereof is lost.8
Nevertheless, the provisions of Articles 1493 and 1494 of
the New Civil Code should be instructive of how to treat loss,
deterioration and benefits after perfection: If the subject matter is
lost at the point of perfection, and the seller bears the loss and
the buyer is relieved of his obligations under the contract, then
the implication is that after perfection the buyer then bears the
risk of loss and deterioration even without prior delivery to him.
AFTER PERFECTION BUT BEFORE DELIVERY
After perfection of the sale, ideally the rules on loss,
deterioration, fruits and improvements should be governed by
the same set of principles. Unfortunately, with the adoption of the
common law rule on the risk of loss in the period from perfection
and before delivery, the rule on loss differ from the rules on
deterioration, fruits and improvements, with respect to the same
object sold.
1. Loss of Subject Matter
The Title on Sales of the New Civil Code has retained the
Roman law rule that ownership is transferred only by delivery,
whether actual or constructive; but has adopted the common
law principle of res perit domino, i.e., it is the owner of the thing
(the seller before delivery) who bears the consequences of its
loss.
On one hand, the civil law principle that ownership of the
thing sold shall be transferred to the buyer only upon actual or
constructive delivery thereof is now clearly expressed in Article
7
8
TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. V (1959 ed.), p. 37, citing 10 MANRESA 119.
PARAS, CIVIL CODE OF THE PHILIPPINES, Vol. V (1990 ed.), p. 89.
LOSS AND DETERIORATION,
FRUITS AND OTHER BENEFITS
349
1477 of the New Civil Code. On the other hand, although the
Supreme Court has held that the general rule under Philippine
jurisdiction is that after perfection but before delivery, the risk of
loss is borne by the seller under the rule of res perit domino,9 the
statutory bases for such doctrine are not clear-cut and sometimes
conflicting.
Firstly, the general principle of res perit domino is now
covered by Article 1504 of the New Civil Code, which provides
that “[u]nless 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 of the goods has
been made or not.” Unfortunately, Article 1504 is worded to cover
only “goods.”10
Secondly, Article 1480 of the New Civil Code (based on
Article 1452 of the old Civil Code), provides that “[a]ny 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.” As applied to the sale, under cross-referred Article 1165,
it is provided that when what is to be delivered is a determinate
thing, the buyer, in addition to the right to recover damages,
may compel the seller to make the delivery. This shows that the
underlying obligation in a sale is a real obligation and therefore
may be subject to the remedy of specific performance. Under
cross-referred Article 1262, as applied to a sale, the obligation to
deliver a determinate thing shall be extinguished if it should be
lost or destroyed without the fault of the seller, and before he has
incurred in delay.
Thirdly, Article 1538 of the New Civil Code provides that “[i]n
case of loss, deterioration or improvement of the thing before its
delivery, the rules in Article 1189 shall be observed, the vendor
9
Union Motor Corp v. Court of Appeals, 361 SCRA 506 (2001); Chrysler Philippines
v. Court of Appeals, 133 SCRA 567 (1984).
10
Under Article 1636(1) of the New Civil Code, “goods” include all chattels personal
but not things in action or money of legal tender in the Philippines, and includes growing
fruits or crops.
350
LAW ON SALES
being considered the debtor.” Article 1538 is a new article not
based on any provision of the old Civil Code. But like Article
1480, Article 1538 is a specific provision in the Title on Sales
invoking provisions of loss applicable to contracts in general in
Article 1189, which embodies civil law principles,
Article 1189, which essentially embodies civil law principles,
and which applies to contracts in general, provides that “the
following rules shall be observed in case of the improvement,
loss or deterioration of the thing:”
(a) If the thing is lost through the fault of the
seller, the seller shall be obliged to pay
damages; and
(b) “If the thing is lost without the fault of the
debtor [seller], the obligation shall be
extinguished;”
which is consistent with Article 1262 which provides that in “[a]n
obligation which consists in the delivery of a determinate thing
shall be extinguished if it should be lost or destroyed without the
fault of the debtor, and before he has incurred in delay.”
Whether it is the seller or the buyer who bears the risk of loss
of the subject matter from perfection but before delivery, depends
on the proper interpretation of the “extinguishment of obligation”
clauses under Articles 1189 and 1262, which is not well-settled
in our jurisdiction.
Paras interprets Articles 1189 and 1262 to mean “that the
obligation of the seller to deliver is extinguished, but the obligation
[of the buyer] to pay is not extinguished”11 as the necessary
consequence even when the underlying contract is reciprocal
because “this happens only when the seller is able to deliver but
does not. In such a case, the buyer is not required to pay, for lack
of reciprocity. It is different if the law excuses the seller, but not
the buyer.”12 Buyer should pay even if he does not receive the
PARAS, CIVIL CODE OF THE PHILIPPINES, Vol. V (1990 ed.), p. 58.
Ibid.
11
12
LOSS AND DETERIORATION,
FRUITS AND OTHER BENEFITS
351
object lost through a fortuitous event, since “there was a cause
or consideration, at the time the contract was perfected, the thing
purchased still existed.”13 Paras cites no authority for his position
on this matter.
Padilla takes the same position as Paras, and states that
when the subject matter of the sale is lost without the fault of the
seller, he is released from his obligation to deliver the thing, while
the buyer’s obligation to pay the price subsists. The legal effect
being that the buyer assumes the risk of loss of the object of the
sale from the time of perfection up to the time of delivery.14
Tolentino, on the other hand, believes that in reciprocal
obligations, the extinguishment of the obligation due to loss of
the thing “affects both debtor and creditor; the entire juridical
relation is extinguished, so that if the creditor has himself an
obligation, this is likewise extinguished. The debtor must return
to the creditor whatever the latter may have already delivered
by reason of the obligation. This is a logical consequence of the
principle of res perit domino recognized in the code.”15 He further
writes:
The rule is that the risk pertains to the debtor,
which means that if an obligation is extinguished by
the loss of the thing or impossibility of performance
through fortuitous events, the counter-prestation is
also extinguished. The debtor is released from liability;
but he cannot demand the prestation which has been
stipulated for his benefit. Thus, if the thing leased is
destroyed by fortuitous event, the lessee is not obliged
to pay the stipulated rental. Or, in a contract of a piece
of work where the contractor furnished both labor
and material, if the thing is lost before delivery, the
contractor cannot recover the agreed compensation.
This is the result of the reciprocal character of the
obligations; he who gives nothing has no reason to
demand anything.16
Ibid, at p. 58.
PADILLA, CIVIL CODE, pp. 840-841.
15
TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV (1991 ed.), p. 337.
16
Ibid, citing 3 COLLIN & CAPITANT 734, DE BUEN, 2 VON TUHR, OBLIGACIONES 110.
13
14
352
LAW ON SALES
Under Tolentino’s interpretation, the rule on loss under
Article 1189, would be different from the rule on deterioration and
improvement: the loss of the thing would be for the account of the
seller, while the deterioration and improvement, would be for the
account of the buyer.
Baviera also affirms such varying rules and says that “Article
1189 embodied the rule in Roman Law regarding sales subject
to a condition precedent, where loss is borne by the vendor, but
deterioration or improvement of the thing is for the account of the
buyer.”17
Jurado, although recognizing and discussing the other views
on the matter, affirmed the view of Tolentino, as being more just
and equitable and being more in conformity with the principle of
res perit domino.18
If we were therefore to take Paras’s stand, the legal effect of
the application of either Article 1480 or Article 1538 is that after
perfection of the sale but before delivery, the risk of loss is to be
borne by the buyer, even when he is not yet the owner of the
subject property. If the thing is lost through a fortuitous event,
the seller is excused from complying with his obligation, but the
buyer is still obliged to pay for the purchase price. As a result, it
is the buyer who bears the risk of loss even if he never became
the owner of the subject matter.
If we were to take Tolentino’s position, the effect of both
Articles 1480 and 1538 would be that the risk of loss is still to be
borne by the seller from the time of perfection up to before delivery
of thing, but he would no longer be liable for damages if the thing
is lost through fortuitous event. Before delivery, if the determinate
subject of the sale is lost through the fault of the seller, the buyer
need not pay the price, but can recover damages for breach of
contract. However, should the determinate subject matter be lost
through fortuitous event, the seller is excused from his obligation
to deliver the thing, and not being in breach of his obligation, he
cannot be held liable for damages by the buyer. The buyer is then
17
18
BAVIERA, SALES (1981 ed.), pp. 82-82.
JURADO, CIVIL LAW REVIEWER (1980 ed.), pp. 658-659.
LOSS AND DETERIORATION,
FRUITS AND OTHER BENEFITS
353
not obliged to pay the price because of the inability of the seller
to comply with his obligation. The net effect of course is that the
buyer ends up not the poorer, whereas, the seller’s estate has
diminished by the value of the thing lost. Consequently, the risk
of loss would have been borne by the seller, and the provisions
of Articles 1480 and 1538 do not contradict the adopted principle
under the new Civil Code of res perit domino.
The position would then make Articles 1480 and 1538
consistent with the provisions of Articles 1504. Under 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 is transferred to the buyer the goods are at
the buyer’s risk whether actual delivery of the goods has been
made or not, except that:
(a) 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;
(b) 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.
Article 1504 is a new provision in the present Civil Code,
without a counter-part in the old Civil Code. Also, by its language,
the rules it establishes on the risk of loss pertain specifically to
“goods,” and it applies the common law principle of res perit
domino. The term “goods” includes all chattels personal and
growing fruits or crops, but not things in action or money of legal
tender.19
19
Art. 1636, New Civil Code.
354
LAW ON SALES
Under the Paras position, Article 1504 contradicts the rule in
Articles 1480 and 1538 where the risk of loss is to be borne by the
buyer from perfection of the sale but before delivery. Therefore,
authors like Jurado, have opined that the general rule on the Law
on Sales is that from perfection but before delivery, the risk of
loss of the subject matter is borne by the buyer, except when the
subject matter is “goods” in which case the risk of loss is borne
by the seller, from perfection up to before delivery of the subject
matter of the sale.
Article 1504 therefore is the clearest evidence that the Civil
Code has adopted the principle of res perit domino in the Law
on Sales. What dilutes full reliance on Article 1504 is that as
worded, it clearly contradicts the rules of deterioration, fruits and
improvements, to which rules all authors are in accord.
2. Deterioration, Fruits and Improvements
Under Article 1504, the goods remain at the seller’s risk
until the ownership therein is transferred to the buyer; but when
the ownership is transferred to the buyer, the goods are at the
buyer’s risk whether actual delivery of the goods has been
made or not. This embodies the common law principle of res
perit domino, but unlike the American principle that ownership
of the goods is transferred by the perfection of an unconditional
sale, the New Civil Code has retained the principle of delivery as
the mode by which ownership is transferred. Thus, Paras states
that Article 1504 contradicts directly Article 1480, and holds that
“under American law, the mere perfection of the contract of sale,
as distinguished from a contract to sell, transfers ownership,
delivery not being essential for such transfer of ownership.”20
If we were to apply the language of Article 1504 therefore,
from the moment of perfection of the sale, the effects of
deterioration of the subject matter should be borne by the
seller, who remains the owner thereof, and strictly speaking the
buyer is not bound to pay the same amount if he receives a
subject matter that is much more inferior than to what it was
20
PARAS, supra, at pp. 111-112.
LOSS AND DETERIORATION,
FRUITS AND OTHER BENEFITS
355
at the time of perfection. To the same extent, since any fruit or
improvement of the subject matter after perfection, but before
delivery, should also pertain to the seller as the owner thereof,
then the buyer is obliged to pay more than the agreed price if
the subject matter is more than what it was at the time of the
perfection of the contract. If such be the construction of Article
1504, not only does it yield absurd results, but it would grant
either party a legal excuse not to proceed with the contract
because of developments that ensued since perfection not
through the fault of the other party.
Under Article 1538 of the New Civil Code, in case of
deterioration or improvement of the thing before its delivery, the
rules in Article 1189 shall be observed, the seller being considered
the debtor. Under Article 1189 of the Civil Code, as it is applicable
to a sale, the following rules shall govern the deterioration of the
thing during the pendency of a condition suspending the efficacy
of the seller’s obligation to deliver the subject matter:
(a) When the thing deteriorates without the
fault of the seller, the impairment is to be
borne by the buyer;
(b) If the thing deteriorates through the fault of
the seller, the buyer may choose between
the rescission of the obligation and its
fulfillment, with indemnity for damages in
either case;
(c) If the thing is improved by its nature, or by
time, the improvements shall inure to the
benefit of the buyer;
(d) If the thing is improved at the expense of
the seller, he shall have no other right than
that granted to the usufructuary.
Under Articles 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. It further
356
LAW ON SALES
provides that this rule shall apply to 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 buyer until they have been
weighed, counted, or measured and delivered, unless the latter
has incurred in delay.
Under Article 1537, the seller 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 buyer from the day on which the contract is
perfected.
The only logical and reasonable conclusion one can derive
from the foregoing discussions is that the rule of res perit domino
provided in Article 1504 on goods, applies only to “loss” and
has no application to issues pertaining to deterioration or fruits
and improvements over the subject matter of the sale. This also
shows that because of the faulty grafting into the Philippine Law
of Sales of common law principle, the rules of risk of loss based
on res perit domino determined by delivery, are different from the
rules pertaining to deterioration, fruits and improvement based
on res perit domino under the common law rule determined by
the perfection of the contract, or the civil law rule based on the
perfection of contract. Again, note that both the common law rule
and the civil law rule had a common point of transfer of the risk of
loss and deterioration and the benefits of fruits and improvement:
perfection of the sale; whereas, the hybrid rule on the risk of
loss under the present Civil Code happens not at the point of
perfection, but at the point of delivery.
AFTER DELIVERY
Under Article 1504, when ownership of the goods has been
transferred to the buyer, the goods shall be at the buyer’s risk.
One of the exceptions provided by the article is when the delivery
of the goods has been made to the buyer 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,
LOSS AND DETERIORATION,
FRUITS AND OTHER BENEFITS
357
although ownership is not yet with the buyer, the goods are still
at the buyer’s risk. The other exception provided is that if actual
delivery had been delayed through the fault of either the buyer or
seller, the goods are at the risk of the party at fault.
In Song Fo & Co. v. Oria,21 the Court held that after the delivery of the vessel by the seller to the buyer, and it was lost, the
buyer was still obliged to pay the balance of the purchase price.
In Lawyer’s Cooperative v. Tabora,22 the ownership of the
books purchased on installment were retained by the seller,
although they have already been delivered to the buyer, under
the condition that ownership thereof will be transferred to the
buyer upon his full payment of the purchase price, it was held that
despite the loss of the books in a fire, the risk of loss would be
borne by the buyer although he was not the owner yet, not only
because such was agreed merely to secure the performance by
the buyer of his obligation, but also because in the very contract
itself, it was agreed that loss or damage to the books after delivery
to the buyer shall be borne by the buyer.23
Lawyer’s Cooperative also disposed of the defense of
the buyer of pleading force majeure in exempting himself from
paying for the books which were lost to fire. The Court held that
although an obligor is relieved from his obligation under the rule
that an obligor should be held exempt from liability when the loss
occurs through a fortuitous event, nevertheless, as applied to the
buyer in a sale, his obligation does not pertain to the delivery of
the subject matter, but to the payment of the purchase price, and
the ability to pay in money or legal tender is never lost through
fortuitous event.
STRUCTURING PROPER DOCTRINE ON LOSS, DETERIORATION, FRUITS
AND IMPROVEMENTS
From all the foregoing, it would seem that the prevailing
doctrine under our jurisdiction on the subject matter of a sale
33 Phil. 3 (1915).
13 SCRA 762 (1965).
23
Also Lawyer’s Coop. v. Narciso, 55 O.G. 3313.
21
22
358
LAW ON SALES
generally depends on the issue of title pursuant to the principle of
res perit domino or beneficial interest to the subject property.
Prior to perfection, both title and beneficial interests pertain to
the seller and therefore he must bear the risk of loss, deterioration,
and benefits from the fruits and improvements. The buyer has no
risk nor participation in any of those aspects since neither title nor
beneficial interest over the subject matter pertains to him, as in
fact there is no legal relationship that exists at that point between
him and the seller on the subject matter of the would-be sale,
even assuming negotiation was in the process.
After delivery which effectively transfers title and beneficial
interest to the buyer, buyer bears both the risk of loss and
deterioration, as well as benefits from the fruits and improvements
of the subject matter of sale. At that point, neither title nor
beneficial interests pertain to the seller and therefore he ceases
to have any legal relation to the subject matter and should not
be affected by anything that may happen to the subject matter
without his fault.
It is only after perfection and before delivery that title and
beneficial interests actually do not pertain to the same person since
title remains with the seller, but beneficial interest actually pertains
to the buyer. This is clear from the provisions of the New Civil Code
which govern the responsibilities of the obligor in an obligation to
deliver a determinate thing, all for the benefit of the obligee:
(a) Every person obliged to give something is
also obliged to take care of it with the proper
diligence of a good father of a family;24
(b) The obligee has a right to the fruits of the
thing from the time the obligation to deliver
it arises;25
(c) When what is to be delivered is a determinate thing, the obligor who incurs fraud,
negligence, or delay, or contravene the
24
25
Art. 1163, New Civil Code.
Art. 1164, New Civil Code.
LOSS AND DETERIORATION,
FRUITS AND OTHER BENEFITS
359
tenor of their agreement, are liable for damages;26
(d) The obligation to give a determinate thing
includes that of delivering all its accessions
and accessories, even though they may not
have been mentioned.27
When title and beneficial interest over the subject matter
of the sale do not pertain to the same person, who should suffer
the loss and deterioration thereof, and benefit from the fruits and
improvements? In American jurisprudence such issue does not
arise during such period because there is a confluence between
perfection and transfer of ownership at perfection when the sale is
unconditional; consequently, from perfection up to delivery, both
title and beneficial interest would be in the same person, the buyer.
However, since under our jurisdiction perfection by itself does not
transfer ownership, during said period, title remains with the seller
and beneficial interest would be with the buyer. Therefore, the
ordinary enforcement of the principle of res perit domino would
not apply since although the seller is the formal owner, the buyer
during that period is actually the beneficial owner.
The proper resolution therefore should be obtained from
the same legal authorities from whence the Code Commission
copied the res perit domino doctrine, the common law system.
Under common law, when the sale is conditional, the perfection
thereof does not serve to transfer title to the buyer. We would
then have the same situation where title has remained with the
seller, but beneficial interest is with the buyer. The resolution
to this issue would be and should be that the person who
should bear the risk of loss should be the party who had greater
stake on the subject matter at the point of loss, deterioration or
improvement. There is enough authority in our laws to support
such a conclusion.
Under Article 1189, even prior to delivery to transfer ownership, but where there is an existing obligation to deliver a deter26
27
Arts. 1165 and 1170, New Civil Code.
Art. 1166, New Civil Code.
360
LAW ON SALES
minate thing, since the accompanying obligations of the obligor
shows that he possesses the goods for the benefit of the buyer,
although the seller has ownership still over the subject matter,
the benefits and improvements over the subject matter are for
the account of the obligee-buyer, and in turn he must bear the
risk of deterioration.
Under Article 1504, although the goods remain at the risk of
the owner thereof, 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. In such case, title did not determine who
bears the risk, because such title was merely nominal, and the
beneficial interest is with the buyer, and therefore he must bear
the risk of loss.
When the seller intends to have control over the goods until
the buyer has complied with certain obligations, such as C.O.D.
sale,28 or where the buyer does not intend to have dominion, use
or control over the goods until certain conditions are met, such
as sale on approval or trial,29 the general rule is that the owner
must bear the risk of loss, which in this case would be the seller.
In such instances, the title that has remained with the seller is
dominical, not merely nominal.
To perhaps oversimplify the unifying doctrine on the risk of
loss, deterioration and improvement, the same shall always be
for the account of the person or party who has both title and
beneficial interest over the property or subject matter of the sale.
When title and beneficial interest do not merge in the same party,
then he who bears the risk of loss or deterioration, and who
benefits from the improvement of the thing, should be the party
who at that point in time is understood to have the beneficial
interest over the subject matter.
—oOo—
28
29
Arts. 1524 and 1584, New Civil Code.
Art. 1502, New Civil Code.
361
CHAPTER 10
REMEDIES OF PARTIES
INTRODUCTION
In the realm of performance, the main rule in Sales was
that of caveat emptor (“Let the buyer beware”), which required
the buyer to be aware of the supposed title of the seller to the
subject matter; and that a buyer who buys without checking the
seller’s title takes all the risks and losses consequent to such
failure.1 Today, the doctrine is not meant to excuse the seller
from his warranties, but is essentially used to determine whether
the buyer, in taking delivery of the subject matter of sale, can
be considered a buyer in good faith;2 or to determine whether
the buyer assumed the risks and contingencies attached to the
subject matter of sale.3
In one case,4 the Supreme Court held that while the buyer
purchases vessels at its own risk, such assumed risk pertained
only to the possibility of the sale being rescinded. Therefore,
in the absence of a formal rescission of the sale, it would be
erroneous to make such buyer liable for the value of the vessels
lost, or to order the return of the vessels without the sale first
being rescinded.
In another case,5 the Court held that the rule of caveat
emptor also applies to execution sales, and consequently, the
sheriff does not warrant the title to the property sold by him and
it is not incumbent on him to place the purchaser in possession
of the property.
1
Salvoro v. Tañega, 87 SCRA 349 (1978); Oro Land Realty Dev. Corp. v. Claunan,
516 SCRA 681 (2007).
2
Caram, Jr. v. Laureta, 103 SCRA 7 (1981).
3
Samson v. Court of Appeals, 238 SCRA 397 (1994).
4
Union Insurance Society of Canton v. Court of Appeals, 260 SCRA 431 (1996).
5
Allure Manufacturing, Inc. v. Court of Appeals, 199 SCRA 285 (1991).
361
362
LAW ON SALES
The principles embodied in our Torrens system present an
exception to the caveat emptor rule, since under such system a
buyer need only rely upon the title of a registered land and has
no obligation to look beyond such title.6 Although, jurisprudence
still supports the rules that one who deals with registered land
must still ensure that he is dealing with the actual registered
owner;7 and that one must conduct in ocular examination of
the land or real estate he is purchasing and cannot just realy
upon the description in the title.8 In addition, the Law on Sales
provides for certain remedies available to the seller and the
buyer in case of breach of contract on the part of the other party.
Finally, note must be taken of what the Court held in Erquiaga
v. Court of Appeals,9 that “A basic premise of the doctrine of
‘Let the buyer beware’ is that there be no false representation
by the seller. The ancient defense of caveat emptor belongs
to a bygone age, and has no place in contemporary business
ethics.”
REMEDIES IN CASES OF MOVABLES
A. ORDINARY REMEDIES OF SELLER
1. Movables in General
In the sale of movables, in case the buyer, 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, the seller may maintain an action
to rescind the sale.10
Heirs of Spouses Gavino v. Court of Appeals, 291 SCRA 495 (1998).
Insurance Services and Commercial Traders, Inc. v. Court of Appeals, 341 SCRA
572 (2000).
8
Heirs fo Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Heirs of Celestial v.
Heirs of Celestial, 408 SCRA 291 (2003); Erasusta, Jr. v. Court of Appeals, 495 SCRA
319 (2006); Dela Ceña v. Briones, 508 SCRA 62 (2006); Oro Land Realty Dev. Corp. v.
Claunan, 516 SCRA 681 (2007).
9
367 SCRA 357 (2001).
10
Art. 1593, Civil Code.
6
7
REMEDIES OF PARTIES
363
2. Sale of Goods
a. Non-Payment of Price by Buyer
Ownership Transferred to Buyer — Where the ownership of
the goods has passed to the buyer who wrongfully neglects or
refuses to pay for them according to the terms of the contract,
the seller may maintain an action against him for the price of the
goods,11 i.e., an action for specific performance.
No Transfer of Ownership to Buyer — When the ownership
in the goods has not passed, if they cannot readily be resold for a
reasonable price, 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.12
When Price Payable on Certain Day — Where 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.13
However, 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 sale on his part or an
intention not to perform it.14
b. When Buyer Wrongfully Neglects/Refuses
to Accept Goods
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 non-acceptance,15 in accordance with the
following rules:
Art. 1595, Civil Code.
Art. 1595, Civil Code.
13
Art. 1595, Civil Code.
14
Art. 1595, Civil Code.
15
Art. 1596, Civil Code.
11
12
364
LAW ON SALES
(a) Damages shall cover the estimated loss
directly and naturally resulting in the
ordinary course of events from the buyer’s
breach of contract;
(b) Where there is an available market for
the goods in question, in the absence of
special circumstances showing proximate
damage of a different amount, the measure
of damages is the difference between the
contract price and 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;
(c) If the buyer repudiates the contract or
notifies the seller to proceed no further,
buyer shall be liable for labor performed or
expenses of material amount is necessary
on the part of the seller to enable him to fulfill
his obligations under the sale made before
receiving notice of the buyer’s repudiation
or countermand; and
(d) The profits the seller would have made
if the contract or the sale had been fully
performed shall be considered in awarding
damages.16
B. SPECIAL REMEDIES OF “UNPAID SELLER” OF GOODS
The provisions of the Civil Code on the remedies of an
unpaid seller demonstrate the intention of the Code Commission
to empower individuals with remedies “to take matters into their
own hands” when the circumstances warrant the same, provided
it does not involve physical intrusion into the person or privacy of
the buyer in default, by being able to achieve legal effects without
need of seeking the intervention of the courts.
16
Art. 1596, Civil Code.
REMEDIES OF PARTIES
365
The remedies of an unpaid seller are similar to the “doctrine
of self-help” embodied in Article 429 of the Civil Code, which
authorizes the owner or lawful possessor of a thing to use force
as may be reasonably necessary to repel or prevent an actual
or threatened unlawful physical invasion or usurpation of his
property. In the case of the remedies of the unpaid seller, the
minimum requirement is that the goods are in the possession
of the seller so as to prevent an actual physical tussle with the
buyer in the exercise of such remedies.
1. Definition of “Unpaid Seller”
Under Article 1525 of the Civil Code, the seller of goods is
deemed to be an “unpaid seller” either:
(a) When the whole of the price has not been
paid or tendered; or
(b) 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.
The term “unpaid seller” includes an agent of the seller to
whom the bill of lading has been indorsed, or 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.17
2. Rights of Unpaid Seller
When a seller is an “unpaid seller” as defined by law,
whether or not ownership over the goods has been transferred
to the buyer, the unpaid seller is entitled to the following rights or
remedies:
(a) Possessory lien;
(b) Stoppage in transitu;
17
Art. 1525, Civil Code.
366
LAW ON SALES
(c) Special right of resale; and
(d) Special right to rescind.
The four (4) remedies of an unpaid seller have a hierarchical
application, as in fact, the special rights to resell and to rescind
can be availed of by the unpaid seller only when either of the
two prior rights of possessory lien or stoppage in transitu have
been exercised by the unpaid seller. The designation “special” is
attached to the rights to resell and to rescind, because they are
rights accorded only to the unpaid seller as technically defined
by law, and are not of the same nature as the right to rescind
accorded under Article 1191 of the Civil Code to reciprocal
contracts.
3. Possessory Lien
The general rule is that when it comes to movables, the
seller is not bound to deliver the thing sold, if the buyer has not
paid him the price, or if no period for the payment has been fixed
in the contract.18 However, in the absence of stipulation to the
contrary, delivery of the goods to the buyer transfers ownership
to the latter, and the non-payment of the price does not prevent
such transfer of ownership as a result of tradition to take effect.
If the seller is an unpaid seller as defined by law, notwithstanding that the ownership in the goods may have passed to
the buyer, the unpaid seller still has a lien on the goods or right
to retain them for the price while he is in possession of them.19
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 co-extensive with his right of
lien.20
The possessory lien of the unpaid seller is exerciseable only
in the following instances:
(a) Where the goods have been sold without
any stipulation as to credit;
Art. 1524, Civil Code.
Art. 1526, Civil Code.
20
Art. 1526, Civil Code.
18
19
REMEDIES OF PARTIES
367
(b) Where the goods have been sold on credit,
but the term of credit has expired;
(c) 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.21
The unpaid seller’s right of lien is not affected by any sale, or
other disposition of the goods which the buyer may have made,
unless the seller assented thereto.22
a. When Negotiable Document of Title Issued
If a negotiable document of title has been issued for goods,
no seller’s lien shall defeat the right of any purchaser for value
and 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.23
b. When Part Delivery Effected
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.24
c. Instances When Possessory Lien Lost
The unpaid seller of goods loses his lien on the goods
whenever:
(a) Seller delivers the goods to a carrier or
other bailee for the purpose of transmission
to buyer without reserving the ownership
in the goods or the right to the possession
thereof;
Art. 1527, Civil Code.
Art. 1535, Civil Code.
23
Art. 1535, Civil Code.
24
Art. 1528, Civil Code.
21
22
368
LAW ON SALES
(b) The buyer or his agent lawfully obtains
possession of the goods;
(c) By waiver thereof.
However, 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.25
As will be noted, the unpaid seller losses his possessory
lien, when he parts with physical possession of the goods, as
when he delivers the goods to the carrier. In that case, he still has
the remedy of stoppage in transitu, but only if the buyer has in the
meantime become insolvent.
4. Stoppage in Transitu
Notwithstanding that the ownership in the goods may have
passed to the buyer, the unpaid seller of goods has, in case of the
insolvency of the buyer, a right of stopping the goods in transitu
after he has parted with the possession of them.26
Under Article 1530 of the Civil Code, 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.
The unpaid seller’s right of stoppage in transitu is not
affected by any sale or other disposition of the goods which the
buyer may have made, unless the seller assented thereto.27
a. When Negotiable Document of Title Issued
If a negotiable document of title has been issued for goods,
no seller’s right to stoppage in transitu shall defeat the right of any
purchaser for value and in good faith to whom such document
Art. 1529, Civil Code.
Art. 1526, Civil Code.
27
Art. 1535, Civil Code.
25
26
REMEDIES OF PARTIES
369
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 right of stoppage
in transitu.28
b. When Buyer Is Deemed “Insolvent”
Under the Law on Sales, a buyer is deemed insolvent who
either has ceased to pay his debts in the ordinary course of
business or cannot pay his debts as they become due, whether
insolvency proceedings have been commenced or not.29
c. When Goods Are Deemed “In Transit”
Goods are in transit to authorize the unpaid seller to exercise
his right of stoppage in transitu:
(a) From the time 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; or
(b) 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.30
d. When Goods Are Deemed No Longer In Transit
Goods are no longer in transit when:
(a) The buyer or his agent obtains delivery
of the goods before their arrival at the
appointed destination;
(b) After the arrival of the goods at the appointed destination, the carrier or other bailee
acknowledges to the buyer or his agent that
Art. 1535, Civil Code.
Art. 1636(2), Civil Code.
30
Art. 1531, Civil Code.
28
29
370
LAW ON SALES
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);
(c) The carrier or other bailee wrongfully
refuses to deliver the goods to the buyer or
his agent.31
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.32
e. When Part Delivery Already Made
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.33
f. How Right Is Exercised
The unpaid seller may exercise his right of stoppage in
transitu either by:
(a) Obtaining actual possession of the goods;
or
(b) Giving notice of his claim to the carrier or
other bailee in whose possession the goods
are.
When notice is given, 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
Art. 1531, Civil Code.
Art. 1531, Civil Code.
33
Art. 1531, Civil Code.
31
32
REMEDIES OF PARTIES
371
the exercise of reasonable diligence, may prevent a delivery to
the buyer.34
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.35
g. When Goods Covered by Negotiable Document
of Title
When a negotiable document of title representing 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 unpaid seller
unless such document is first surrendered for cancellation.36
It is only when the unpaid seller has exercised either his
right of possessory lien or his right of stoppage in transitu, that
he can then proceed with his other special rights of resale or to
rescind.
5. Special Right to Resell Goods
Notwithstanding that the ownership in the goods may have
passed to the buyer, the unpaid seller has a special right of resale,
but only under the conditions provided by law.37
a. When Right Exercisable
The special right of resale can be made only when the unpaid
seller has previously exercised either his right of possessory lien or
stoppage in transitu, and under any of the following conditions:
(a) The goods are of perishable nature;
(b) Where the seller has been expressly
reserved in case the buyer should make
default; or
Art. 1532, Civil Code.
Art. 1532, Civil Code.
36
Art. 1532, Civil Code.
37
Art. 1526, Civil Code.
34
35
372
LAW ON SALES
(c) Where the buyer has been in default in the
payment of the price for an unreasonable
time.38
In Hanlon v. Hausserman,39 even before the formal statutory
adoption of the remedies of an unpaid seller, the Court had already
recognized the right of a seller, when the sale is still executory in
stage, to resell the movables subject matter of the sale, when the
buyer fails to pay the purchase price:
... In the present case the contract between Hanlon
and the mining company was executory as to both
parties, and the obligation of the company to deliver
the shares could not arise until Hanlon should pay or
tender payment of the money. The situation is similar
to that which arises every day in business transactions
in which the purchaser of goods upon an executory
contract fails to take delivery and pay the purchase
price. The vendor in such case is entitled to resell the
goods. If he is obliged to sell for less than the contract
price, he holds the buyer for the difference; if he sells
for as much as or more than the contract price, the
breach of contract by the original buyer is damnum
absque injuria. But it has never been held that there
is any need of an action of rescission to authorize the
vendor, who is still in possession, to dispose of the
property, where the buyer fails to pay the price and
take delivery ...40
Katigbak v. Court of Appeals,41 held that if the buyer fails to
take delivery and pay the purchase price of the subject matter
of the contract, the seller, without need of first rescinding the
contract judicially, is entitled to resell the same, and if he is
obliged to sell it for less than the contract price, the buyer is liable
for the difference.42
Art. 1533, Civil Code.
40 Phil. 796 (1920).
40
Ibid, at pp. 815-816.
41
4 SCRA 243 (1962).
42
Ibid, at p. 245.
38
39
REMEDIES OF PARTIES
373
b. Effect of Having Exercised Right of Resale
When the unpaid seller has exercised his right of resale, he
shall not thereafter be liable to the original buyer upon the 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
sale.43
c. Transfer of Ownership
Where a resale is made by the unpaid seller, the buyer acquires a good title as against the original buyer.44 This is the special feature of the right of the unpaid seller to resell: not only is he
able to destroy or obliterate the ownership over the goods in the
original buyer, he is also able to transfer ownership to the subsequent buyer, even if at the time of tradition, he no longer had ownership over the goods. Ordinarily, the destruction or taking away of
ownership in one person and placing it in another person in such
manner can only be done through court action. But in the case of
an unpaid seller, he can effect these, even without judicial action.
d. Notice to Defaulting Buyer
It is not essential to the validity of a 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 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.45
e. Standard of Care and Disqualification in Resale
The seller is bound to exercise reasonable care and judgment
in making a resale, and subject to this requirement may make
Art. 1533, Civil Code.
Art. 1533, Civil Code.
45
Art. 1533, Civil Code.
43
44
374
LAW ON SALES
a resale either by public or private sale. He cannot, however,
directly or indirectly buy the goods.46
6. Special Right to Rescind
Notwithstanding that the ownership in the goods may have
passed to the buyer, the unpaid seller has a special right to
extrajudicially rescind the sale.47
a. When Right May Be Exercised
An unpaid seller having the right of lien or having stopped
the goods in transitu, may rescind the transfer of title and resume
the ownership in the goods, where:
(a) The seller has expressly reserved the right
to do so in case the buyer should make
default; or
(b) The buyer has been in default in the payment
of the price for an unreasonable time.48
b. Effect of Exercise of Such Right
The seller shall not thereafter be liable to the buyer upon
the sale, but may recover from the buyer damages for any loss
occasioned by the breach of the contract.49
c. Transfer of Title
The transfer of title shall not be held to have been rescinded
by an unpaid seller until he has manifested by notice to the
buyer or by some other overt act an intention to rescind. It is
not necessary that such overt act should be communicated
to the buyer, but the giving or failure to give notice to the
buyer of the intention to rescind shall be relevant in any issue
involving the question whether the buyer had been in default
Art. 1533, Civil Code.
Art. 1526, Civil Code.
48
Art. 1534, Civil Code.
49
Art. 1534, Civil Code.
46
47
REMEDIES OF PARTIES
375
for an unreasonable time before the right of rescission was
asserted.50
C. REMEDIES OF BUYER
1. Failure of Seller to Deliver
Where the seller has broken a contract to deliver specific
or ascertained goods, the buyer may seek action for specific
performance to direct that the contract shall be performed
specifically, without giving the seller the option of retaining the
goods on payment of damages.51
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.52
2. Breach of Seller’s Warranty
Under Article 1599 of the Civil Code, where there is a breach
of warranty by the seller in the sale of goods, the buyer may, at
his election, avail of the following remedies:
(a) 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;
(b) Accept or keep the goods and maintain an
action against the seller for damages for the
breach of warranty;
(c) Refuse to accept the goods, and maintain
an action against the seller for damages for
breach of warranty;
(d) Rescind the sale and refuse to receive the
goods or if the goods have already been
received, return them or offer to return them
Art. 1534, Civil Code.
Art. 1598, Civil Code.
52
Art. 1598, Civil Code.
50
51
376
LAW ON SALES
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
any of these ways, no other remedy can thereafter be granted,
without prejudice to the buyer’s right to rescind, even if previously
he has chosen specific performance when fulfillment has become
impossible.53
3. Suspension of Payments in Anticipation of Breach
Under Article 1590 of the Civil Code, should the buyer
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
seller 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 buyer shall be bound to make the payment.
A mere trespass shall not authorize the suspension of the
payment of the price.
a. Remedy of Buyer for Pending Suit
The pendency of suit over the subject matter of the sale
justifies the buyer in suspending payment of the balance of the
purchase price by reason of aforesaid vindicatory action filed
against it. The assurance made by the seller that the buyer
did not have to worry about the case because it was pure and
simple harassment is not the kind of guaranty contemplated
under the exceptive clause in Article 1590 wherein the buyer
is bound to make payment even with the existence of a
vindicatory action if the seller should give a security for the
return of the price.54
53
54
Art. 1191, second paragraph, Civil Code.
Adelfa Properties, Inc. v. Court of Appeals, 240 SCRA 565, 586 (1995).
REMEDIES OF PARTIES
377
D. RECTO LAW: SALES OF MOVABLES ON INSTALLMENTS
1. Coverage of Law
Article 1484 of the Civil Code provides for the remedies of a
seller in contracts of sale of personal property by installments, and
incorporates the provisions of Act No. 4122 passed by the Philippine Legislature on 9 December 1939, known as the “Installment
Sales Law,” but more popularly referred to as the “Recto Law,”
which then amended Article 1454 of the Civil Code of 1889.55
Under Article 1484 of the New Civil Code, in a sale of
personal property the price of which is payable in installments,
the seller may exercise any of the following remedies:
(a) Exact fulfillment of the obligation, should
the buyer fail to pay any installment;
(b) Rescind the sale, should the buyer’s failure
to pay cover two or more installments;
(c) Foreclose the chattel mortgage on the thing
sold, if one has been constituted, should
the buyer’s failure to pay cover two or more
installments.
The article specifically provides that if the seller should foreclose on the mortgage constituted on the thing sold, he shall have
no further action against the purchaser to recover “any unpaid balance of the price” and any agreement to the contrary shall be void.
The original wordings of the Recto Law which introduced
Article 1454-A in the old Civil Code had used the term “unpaid
balance owing” instead of the present wording limiting it to the
“unpaid balance of the price,” thus —
ART. 1454-A. In a contract for the sale of personal
property payable in installments, failure to pay two or
more installments shall confer upon the vendor the right
to cancel the sale or foreclose the mortgage if one has
been given on the property, without reimbursement to
55
Macondray & Co., Inc. v. Ablaza, 71 Phil. 297 (1941).
378
LAW ON SALES
the purchaser of the installments already paid, if there
be an agreement to this effect.
However, if the vendor has chosen to foreclose
the mortgage he shall have no further action against
the purchaser for the recovery of any unpaid balance
owing by the same, any agreement to the contrary
shall be null and void.
a. Rationale of Recto Law
The passage of the Recto Law was meant to remedy the
abuses committed in connection with the foreclosure of chattel
mortgages and to prevent mortgagees from seizing the mortgaged
property, buying it at foreclosure sale for a low price and then
bringing suit against the mortgagor for a deficiency judgment.
The invariable result of such a procedure was that the mortgagor
found himself minus the property and still owing practically the
full amount of his original indebtedness.56
The Recto Law “aims to correct a social and economic evil,
the inordinate love for luxury of those who, without sufficient
means, purchase personal effects, and the ruinous practice of
some commercial houses of purchasing back the goods sold
for a nominal price besides keeping a part of the price already
paid and collecting the balance, with stipulated interest, cost
and attorney’s fees. ... And although, of course, the purchaser
must suffer the consequences of his imprudence and lack of
foresight, the chastisement must not be to the extent of ruining
him completely and, on the other hand, enriching the vendor in
a manner which shocks the conscience. The object of the law is
highly commendable.”57
b. When Is Sale “on Installments?”
In Levy Hermanos, Inc. v. Gervacio,58 the seller sold a car
whereby the buyer paid an initial payment, and issued a promissory
56
Bachrach Motor Co. v. Millan, 61 Phil. 409 (1935); Cruz v. Filipinas Investment &
Finance Corp., 23 SCRA 791 (1968); PCI Leasing and Finance, Inc. v. Giraffe-X Creative
Imaging, Inc., 527 SCRA 405 (2007).
57
Manila Trading and Supply Co. v. Reyes, 62 Phil. 461, 463-464, 467 (1935).
58
69 Phil. 52 (1939).
REMEDIES OF PARTIES
379
note for the balance payable on or before a specified date, with
stipulated interest. When the buyer failed to pay the note at its
maturity, the seller foreclosed the mortgage constituted on the
car and sold the same at public auction, which resulted into a
deficiency judgment. When the action was brought to collect on
the deficiency, the buyer sought the application of the provisions
of the then Article 1454-A of the old Civil Code, and held that the
seller could no longer collect on the balance unpaid.
The Court held that the provisions of the Recto Law
cannot apply to a sale where there is an initial payment, and the
balance payable in the future, because the same is not a sale on
installment but actually a “straight sale.” Since such a sale is not
covered by the Recto Law, the barring effects of the law cannot
be made to apply, and the seller may recover the unpaid balance
of the purchase price against the buyer even when the latter shall
have lost by foreclosure the subject matter of the sale.
The Court held that when there is only one payment to be
paid in the future, there is no basis to apply the Recto Law, since
under the language of then Article 1454-A, the buyer needs to
have defaulted in the payment of two or more installments to
allow the seller to rescind or foreclose on the chattel mortgage.
In addition, the Court held that the Recto Law “is aimed at
those sales where the price is payable in several installments,
for, generally, it is in these cases that partial payments consists
in relatively small amounts, constituting thus a great temptation
for improvident purchasers to buy beyond their means. There is
no such temptation where the price is to be paid in cash, or, as
in the instant case, partly in cash and partly in one term, for, in
the latter case, the partial payments are not so small as to place
purchasers off their guard and delude them to a miscalculation of
their ability to pay.”59
c. Loans and Financing Transactions
The provisions of the Recto Law are applicable to financing
transactions derived or arising from sales of movables on
59
Ibid, at p. 54.
380
LAW ON SALES
installments, even if the underlying contract at issue is a loan
because the promissory note had been assigned or negotiated
by the original seller.
In Industrial Finance Corp. v. Ramirez,60 the seller who sold
his car to the buyer payable in eighteen monthly installments,
secured by a chattel mortgage on the car, which mortgaged was
assigned by the seller to a finance company, which brought an
action for specific performance coupled with a prayer for a writ of
replevin to recover the possession of the car and if effected would
proceed with the extrajudicial foreclosure thereof. In discussing
whether the action taken by the finance company amounted to
“virtual foreclosure of the chattel mortgage,” the Court applied the
provisions of Article 1484 of the Civil Code, even when clearly,
as to the finance company, its involvement in the affair was as
assignee of the mortgage contract.
Zayas, Jr. v. Luneta Motor Company,61 affirmed that Article
1484 would apply to a person or entity which has financed the
purchase on installments of a motor vehicle, where the seller
subsequently assigns the loan documents to the financing
person or entity. In that case, the Court held that “the nature of
the transaction as a sale of personal property on installment basis
remains. When, therefore, Escaño Enterprises, assigned its rights
vis-á-vis the sale to respondent Luneta Motor Company, the nature
of the transaction ... did not change at all. As assignee, respondent
Luneta Motor Company had no better rights than assignor Escaño
Enterprises under the same transaction. The transaction would still
be a sale of personal property in installments covered by Article
1484 of the New Civil Code. To rule otherwise would pave the
way for subverting the policy underlying Article 1484 of the New
Civil Code, on the foreclosure of chattel mortgages over personal
property sold on installment basis.”62
In all other cases, where the financing transaction is not
derived from a sale, the provisions of the Recto Law do not
77 SCRA 152 (1977).
117 SCRA 726 (1982). Reiterated in Nonato v. Intermediate Appellate Court, 140
SCRA 255 (1985).
62
Ibid, at pp. 732-733.
60
61
REMEDIES OF PARTIES
381
apply. Thus, in PAMECA Wood Treatment Plant, Inc. v. Court of
Appeals,63 the Court held that a mortgagee-bank is not prevented
from recovering on a deficiency caused by the foreclosure and
sale at public auction of the mortgage movable which security
arose from a loan given to the mortgagor. The provisions of
Article 1484 cannot be applied by analogy or by equity since the
provisions apply to a sale on installments.
d. Contracts to Sell Movables Not Covered
When the contract governing the sale of movables is a
contract to sell, then the rules on rescission and substantial
breach are not applicable, since when the suspensive condition
upon which the contract is based fails to materialize, it would
extinguish the contract, and consequently there is no contract
to rescind.64 Nevertheless, the provisions of Article 1597 would
apply which would grant the seller the right to “rescind” the
contract “by giving notice of his election so to do to the buyer.”65
2. Remedies Provided Under Article 1484
a. Nature of Remedies under Article 1484
Should the buyer of a personal property default in the
payment of two or more of the agreed installments, the vendor or
seller has the option to avail of any of these three remedies:
(a) Exact fulfillment by the purchaser of the
obligation;
(b) Rescind or cancel the sale; or
(c) Foreclose the mortgage on the purchased
personal property, if one was constituted.
The remedies under Article 1484 have been recognized as
alternative, not cumulative, in that the exercise of one would bar
the exercise of the others.66
310 SCRA 281, 289 (1999).
Visayan Sawmill Company, Inc. v. Court of Appeals, 219 SCRA 378 (1993).
65
Ibid.
66
Bachrach Motor Co. v. Millan, 61 Phil. 409 (1935); Manila Trading and Supply
63
64
382
LAW ON SALES
The remedies cannot also be pursued simultaneously, as
when a complaint is filed to exact fulfillment of the obligation,
to seize the property purchased and to foreclose the mortgage
executed thereof.67
In Borbon II v. Servicewide Specialists, Inc.,68 the Court
discussed the alternative nature of the remedies provided under
Article. 1484, thus:
The remedies under Article 1484 of the Civil Code
are not cumulative but alternative and exclusive x
x x.69 In an ordinary alternative obligation, a mere
choice categorically and unequivocally made and then
communicated by the person entitled to exercise the
option concludes the parties. The creditor may not
thereafter exercise any other option, unless the chosen
alternative proves to be ineffectual or unavailing due
to no fault on his part. This rule, in essence, is the
difference between alternative obligations, on the one
hand, and the alternative remedies, upon the other
hand, where in the latter case, the choice generally
becomes conclusive upon the exercise of the remedy.
For instance, in one of the remedies expressed in
Article 1484 of the Civil Code, it is only when there has
been a foreclosure of the chattel mortgage that the
vendee-mortgagor would be permitted to escape from
a deficiency liability. Thus, if the case is one for specific
performance, even when this action is selected after
the vendee has refused to surrender the mortgaged
property to permit an extrajudicial foreclosure, the
property may still be levied on execution and an alias writ
may be issued if the proceeds thereof are insufficient to
satisfy the judgment credit. So, also, a mere demand
Co. v. Reyes, 72 Phil. 461 (1935); Pacific Commercial Co. v. De la Rama, 72 Phil. 380
(1941) Manila Motors, Inc. v. Fernandez, 99 Phil. 782 (1956); Radiowealth v. Lavin, 7
SCRA 804 (1963); Cruz v. Filipinas Investment and Finance Corp., 23 SCRA 791 (1968);
Nonato v. Intermediate Appellate Court, 140 SCRA 255 (1985); Delta Motor Sales Corp.
v. Niu Kim Duan, 213 SCRA 259 (1992); Borbon II v. Servicewide Specialists, Inc., 258
SCRA 634 (1996).
67
Luneta Motor Co. v. Dimagiba, 3 SCRA 884 (1961).
68
258 SCRA 634 (1996).
69
Ibid, at p. 639.
REMEDIES OF PARTIES
383
to surrender the object which is not heeded by the
mortgagor will not amount to a foreclosure, but the
repossession thereof by the vendor-mortgagee would
have the effect of foreclosure.70
b. Two Groups of Barring Effects of Remedies
Article 1484 of the Civil Code actually has two (2) levels of
barring effects: the first level on the choice of remedies (vertical);
and the second level, on the non-recovery of any unpaid balance
when it comes to the remedies of rescission and foreclosure
(horizontal). There can be no mixing of the effects of the remedies
provided in Article 1484.
In Tajanlangit v. Southern Motors, Inc.,71 the Court held
that although the subject matter of the sale on installment was
mortgaged to secure the note issued to the seller for the balance
of the purchase price, where the seller actually chose to collect
on the note and did not seek foreclosure of the mortgage, and
although the execution of the judgment resulted in the levy on
execution and eventual sale at public auction of the very subject
matter of the sale, nevertheless, the barring effect of foreclosure
cannot be applied, and the seller had every right to recover on
the unpaid balance of the purchase price from the buyer. The
Court held: “[The seller] had a right to select among the three
remedies established in Article 1484. In choosing to sue on the
note, it was not thereby limited to the proceeds of the sale, on
execution, of the mortgaged good.”72
In Southern Motors, Inc. v. Moscoso,73 a direct plea was made
to the Court insisting that “considering [the] history of the [Recto]
law, the circumstances leading to its enactment, the evil that the
law was intended to correct and the remedy afforded,” then when
the seller who had in fact obtained a preliminary attachment of the
subject property and sold it at public auction where he became
the only bidder, should not be allowed to recover the balance
Ibid, at pp. 640-641.
101 Phil. 606 (1957).
72
Ibid, at p. 610.
73
2 SCRA 168 (1961).
70
71
384
LAW ON SALES
although his complaint may assert that the remedy of specific
performance was being sought. It was proposed to the Court
that “the matter should be looked at, not by the allegations in
the complaint, but by the very effect and result of the procedural
steps taken and that [seller] tried to camouflage its acts by filing
a complaint purportedly to exact the fulfillment of an obligation,
in an attempt to circumvent the provisions of Article 1484 of the
new Civil Code.”74
The Court refused the view that the substance of the
proceedings should be looked into and that the barring effects of
foreclosure should also be applied to specific performance when
the effect was the same as foreclosure. The Court held: “The
complaint is an ordinary civil action for recovery of the remaining
unpaid balance due on the promissory note. The [seller] had
not adopted the procedure or methods outlined by Sec. 14 of
the Chattel Mortgage Law but those prescribed for ordinary civil
actions, under the Rules of Court.”75 The Court found nothing
unlawful or irregular in seller’s act of attaching the mortgaged
subject matter of the sale itself, since a mortgage creditor may
recover judgment on the mortgage debt and cause an execution
on the mortgaged property and may cause an attachment to
be issued and levied on such property, upon beginning his civil
action.
In his concurring opinion, Justice J.B.L. Reyes wrote that the
argument of the buyer “ignores a substantial difference between
the effect of foregoing the chattel mortgage and attaching the
mortgaged chattel. The variance lies in the ability of the debtor to
retain possession of the property attached by giving a counterbond
and thereby discharging the attachment. This remedy the debtor
does not have in the event of foreclosure.”76
The rule that in installment sales, if the action instituted is for
specific performance and the mortgaged property is subsequently
attached and sold, the sale does not amount to a foreclosure
Ibid, at pp. 170-171.
Ibid, at p. 171.
76
Ibid, at p. 172.
74
75
REMEDIES OF PARTIES
385
of the mortgage, has been upheld in subsequent decisions and
seems now well-established.77
3. Remedy of Specific Performance
The general rule is that when the seller has chosen specific
performance, he can no longer seek for rescission nor foreclosure
of the chattel mortgage constituted on the thing sold. Although
it can be reasoned that even if the seller had chosen specific
performance, but the same has become impossible, he may still
choose rescission pursuant to the provisions of Article 1191 of
the Civil Code, which provides that the non-defaulting party to
a reciprocal obligation “may also seek rescission, even after he
has chosen fulfillment, if the latter should become impossible;”
nonetheless, it is difficult to see how the generic obligation of the
buyer to pay can become impossible.
The seller is deemed to have chosen specific performance
to foreclose the resort to the other two remedies under Article
1484, when he files an action in court for recovery. Generally, the
mere sending of demand letters to the buyer to pay the balance
of the purchase price should not be considered as having barred
the resort to either the remedies of rescission or foreclosure.
A judgment in an action for specific performance may be
executed on all personal and real properties of the buyer which
are not exempt from execution and which are sufficient to satisfy
such judgment, which would include the subject matter of the sale
upon which payment is being sought. It has been held therefore
that the mere fact that the seller secured possession of the
property subject of the sale by installments did not necessarily
mean that the seller would resort to a foreclosure of the mortgage
constituted thereon.78
4. Remedy of Rescission
When a seller chooses the remedy of rescission, then
generally he is under obligation to make restitution, which
77
78
Industrial Finance Corp. v. Ramirez, 77 SCRA 152 (1977).
Palma v. Court of Appeals, 232 SCRA 714 (1994).
386
LAW ON SALES
would include the return of any amount of the purchase price
that the buyer may have paid. However, under the terms of
Article 1486 of the Civil Code which provides that “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.”
A stipulation for the forfeiture of the amounts paid by the
buyer even when the contract is rescinded is not really contrary to
the “mutual restitution” characteristic of the remedy of rescission,
since to a great extent it offers a means of restitution to the
obligee for the loss in value or deterioration of the thing subject
of the sale, or recompense for the lost opportunity suffered by the
seller due to the default of the buyer. In fact, when the remedy of
rescission is chosen, the rescinding party may recover damages
against the party in default, since the recovery of damages is
supposed to make the rescinding party “whole” again to bring
him back to the position he was prior to the entering into the
contract. In the same manner, the stipulation of the forfeiture of
the amounts paid by the buyer in case of rescission can also be
considered a measure of recompense for damages suffered by
the seller, and this is more the rationale since when the forfeiture
becomes unconscionable the courts may reduce the effect of
such stipulation pursuant to the provision of Article 1486 which
provides that such stipulation is valid only “insofar as the same
may not be unconscionable under the circumstances.”
In Delta Motor Sales Corp. v. Niu Kim Duan,79 the Court
recognized that “[a] stipulation in a contract that the installments
paid shall not be returned to the vendee is valid insofar as the
same may not be unconscionable under the circumstances,”80
The Court took pains to show that the treatment of the forfeited
installments as rental is more than justified by the retention and
use of the air-conditioning units by the buyer for 22 months.
However, even if the contract stipulates a forfeiture of the
amounts paid in the event of rescission, the Court in Bricktown
79
80
213 SCRA 259 (1992).
Ibid, at p. 263.
REMEDIES OF PARTIES
387
Development Corp. v. Amor Tierra Dev. Corp.,81 held that “we
have intimated that the relationship between parties in any
contract must always be characterized and punctuated by good
faith and fair dealing.”82 The Court denied forfeiture of the amounts
paid by taking into consideration that prior to rescission, several
negotiations were held between the parties to try to amend the
relationship.
a. When Rescission Deemed Chosen
The general rule is that the seller is deemed to have chosen
the remedy of rescission, and can no longer avail of the other two
(2) remedies under Article 1484, when he has clearly indicated to
end the contract, such as when he sends a notice of rescission,
or takes possession of the subject matter of the sale, or when he
files an action for rescission.
Nonato v. Intermediate Appellate Court,83 held that when
the seller’s assignee, a financing company, is able to take back
possession of the motor vehicle with a condition that the vehicle
could be redeemed by the buyers within fifteen (15) days, then
such taking of possession is clearly with the intent to cancel the
contract.
Earlier in Vda. de Quiambao v. Manila Motor Co., Inc.,84 the
Court held that only the taking back of the property coupled with
“an unequivocal desire on its part to rescind its contract” or “for
the purpose of appropriating the same,” would suffice to bar the
seller from proceeding with specific performance. In that case, it
was not the seller who demanded a return of the subject motor
vehicle, but rather it was the buyer who voluntarily returned the
same to postpone the satisfaction of the enforcement of the
judgment debt obtained by the seller on the unpaid balance of
the purchase price.
239 SCRA 126 (1994).
Ibid.
83
140 SCRA 255 (1985).
84
3 SCRA 445 (1961).
81
82
388
LAW ON SALES
b. Barring Effect of Rescission
The present version of the Recto Law under Article 1484
only provides for a barring on recovery of balance only when it
comes to the remedy of foreclosure. Delta Motor Sales Corp. v.
Niu Kim Duan,85 would assert that “[t]he third option or remedy,
however, is subject to the limitation that the vendor cannot
recover any unpaid balance of the price and any agreement to the
contrary is void,”86 implying no such barring effect to the remedy
of rescission. Nevertheless, it recognized that when the seller
takes possession of the subject property in rescission of the sale,
the seller is barred from recovering the balance of the price.
Although no barring effect is expressly provided for the
remedy of rescission under the present language of Article
1484 of the Civil Code, the same is implicit from the nature
of the remedy of rescission, which requires mutual restitution.
Under Article 1385 of the Civil Code, even a non-defaulting
party cannot seek rescission unless he is in a position to return
what he has received under the contract. In other words, when
the unpaid seller shall have chosen the remedy of rescission,
then generally he cannot seek further action on the purchase
price against the buyer, and in fact, where there is no stipulation
to the contrary, the seller is even obliged to return any portion
of the purchase price he received from the buyer, although he
can recover damages.
In Nonato v. Intermediate Appellate Court,87 Justice Escolin,
in concluding that the seller’s assignee had chosen to rescind the
sale by having taken possession of the subject motor vehicle, held
that since it has “opted to cancel the sale of the vehicle, it is thus
barred from exacting payment from the [buyers] of the balance
of the price of the vehicle which it had already repossessed. It
cannot have its cake and eat it too.”88
Perhaps it was a good judgment to limit the statutory barring
effect of Article 1484 to the remedy of foreclosure and allowed
213 SCRA 259 (1992).
Ibid, at p. 264.
87
140 SCRA 255 (1985).
88
Ibid, at p. 259.
85
86
REMEDIES OF PARTIES
389
the barring effect of rescission to continue to be governed by the
very nature of the remedy itself. Otherwise, a lumping together of
the remedies of rescission and foreclosure into the same barring
effect clause, would have the unintended consequence that any
and all interpretations and constructions of the Court having
to do with the barring effect of foreclosure would be tied to the
barring effect on the remedy of rescission when it comes to sale
of movables on installments. The two remedies are not the same,
and in fact seek to achieve opposite results: rescission seeks to
cancel the contract and to waive further claim on the purchase
price; whereas, foreclosure seeks to pursue and realize on the
purchase price of the sale.
The complete barring effect on the remedy of foreclosure
under the Recto Law which covers any and all further claims
against the buyer, even for attorney’s fees and stipulated
damages and interests,89 is contrary to the nature of the
remedy of rescission that allows the non-defaulting party in a
reciprocal obligation to recover damages, precisely to make
him again whole resulting from the breach of the defaulting
party.
5. Foreclosure of Chattel Mortgage Constituted on
Subject Property
a. When Remedy of Foreclosure Deemed Chosen
When the seller shall have chosen to foreclose on the
mortgage constituted on the subject matter of the sale, he can
seek neither the remedies of specific performance nor rescission.
Note however, that an action for foreclosure seeks the same
objective as an action for specific performance: to recover from
the buyer the price agreed upon in the sale.
Although generally, the filing of an action for foreclosure
should be the point in which the seller is deemed to have chosen
such remedy, and at which time he can no longer resort to either
the remedies of specific performance or rescission, yet the Court
89
Macondray & Co. v. Eustaquio, 64 Phil. 446 (1937).
390
LAW ON SALES
held that the point by which the seller is deemed to have chosen
the remedy of foreclosure is only at the time of actual sale of
the subject property at public auction pursuant to the foreclosure
proceedings commenced.90
Universal Motors Corp. v. Sy Hian Tat,91 held that the filing
by the seller of an action for the issuance of a writ of replevin,
and the actual recovery of possession of the subject property,
would not amount to a foreclosure, even with the attachment of
the mortgage contract on the complaint itself, since no actual
foreclosure pursuant to the relevant provisions of the Rules of
Court have been pursued. The Court held that “the mere fact that
[the seller] has secured possession of the truck in question does
not necessarily mean that it will foreclose its mortgage. Indeed,
there is no showing at all that [the seller] is causing the sale
thereof at public auction or is even preparing to do so. It is quite
possible that [the seller] wanted merely to be sure that the truck
is not lost or rendered valueless, preparatory to having it levied
upon under a writ of attachment.”92
Industrial Finance Corp. v. Ramirez,93 held that even with
the filing of an action denominated as “replevin with damages”
where the allegations of the complaint sought the repossession
of the movable to allow extrajudicial foreclosure and sale of the
same, and in the alternative should the movable not be recovered
sought for the recovery of the unpaid balance of the price, the
filing of such complaint does not amount to having chosen the
remedy of foreclosure.
b. Barring Effect of Foreclosure
It is the foreclosure and actual sale at public action of the
mortgaged chattel that shall bar further recovery by the seller
of any balance on the purchaser’s outstanding obligation not
satisfied by the sale; prior to that point in time, the seller has
90
Manila Trading & Supply Co. v. Reyes, 62 Phil. 461 (1935); Manila Motor Co., Inc.
v. Fernandez, 99 Phil. 782 (1956).
91
28 SCRA 161 (1969).
92
Ibid, at p. 166.
93
77 SCRA 152 (1977).
REMEDIES OF PARTIES
391
every right to receive payments on the unpaid balance of the
price from the buyer.94
In Northern Motors, Inc. v. Sapinoso,95 although the seller
had already filed an action for foreclosure, if prior to the actual
sale of the subject property at public auction, the seller had
received further payments from the buyer, the seller was not
obliged to refund said payments after foreclosure to the buyer.
The Court held that “If the mortgage creditor, before the actual
foreclosure sale, is not precluded from recovering the unpaid
balance of the price although he has filed an action of replevin for
the purpose of extrajudicial foreclosure, or if a mortgage creditor
who has elected to foreclose but who subsequently desist from
proceeding with the auction sale, without gaining any advantage
or benefit, and without causing any disadvantage or harm to
the vendee-mortgagor, is not barred from suing on the unpaid
account ... there is no reason why a mortgage creditor should
be barred from accepting, before a foreclosure sale, payments
made by the buyer.”96
c. Barring Effect on Other Securities Given
for Payment of Price
In Cruz v. Filipinas Investment & Finance Corp.,97 where the
seller had already foreclosed on the chattel mortgage constituted
on the subject property of the sale, it sought to recover the
deficiency judgment by foreclosing on the real estate mortgage
constituted by third-party mortgagors, on the ground that Article
1484 prohibited further action “against the purchaser” only.
In holding that the seller could no longer proceed to
foreclose on the real estate mortgage pursuant to the barring
effect provided under Article 1484 of the Civil Code, the Court
held that “[T]o sustain [seller’s] argument is to overlook the fact
that if the guarantor should be compelled to pay the balance
94
Manila Motor Co., v. Millan, 61 Phil. 409 (1935); Manila Trading & Supply Co. v.
Reyes, 62 Phil. 461 (1935).
95
33 SCRA 356 (1970).
96
Ibid, at pp. 361-362.
97
23 SCRA 791 (1968).
392
LAW ON SALES
of the purchase price, the guarantor will in turn be entitled to
recover what she has paid from the debtor vendee (Art. 2066,
Civil Code); so that ultimately, it will be the buyer who will be
made to bear the payment of the balance of the price, despite the
earlier foreclosure of the chattel mortgage given by him. Thus,
the protection given by Article 1484 would be indirectly subverted,
and public policy overturned.”98
Cruz also held that the further “action” being barred under
Article 1484 is not limited to judicial proceedings, but should
include extrajudicial proceedings by virtue of which the seller
may be enabled to exact recovery of the supposed unsatisfied
balance of the purchase price from the purchaser or his privy.
Pascual v. Universal Motors Corp.,99 reiterated the Cruz
doctrine as it denied the position taken by the seller that
Article 1484 withholds from the seller the right to recover any
deficiency from the purchaser after the foreclosure of the chattel
mortgage and not a recourse to the additional security put up
by a third party to guarantee the purchaser’s performance of his
obligation.
Ridad v. Filipinas Investment and Finance Corp.,100 held that
if under the Cruz doctrine a seller is prohibited from having a
recourse against the additional security put up by a third party
insofar as how the burden would ultimately fall on the buyer
himself is concerned, there is no ground why such seller should
not likewise be precluded from further extrajudicially foreclosing
the additional security put up by the buyer himself.
Previous classroom discussions of Cruz have always lead
to the issue of what would be the effect if instead of proceeding
first on the foreclosure of the chattel mortgage constituted on
the subject matter of the sale, the seller should first proceed to
foreclose on the real estate mortgage constituted by a third-party
mortgagor, and should there be deficiency judgment, only then
should the seller proceed to foreclose on the chattel mortgage.
Ibid, at p. 797.
61 SCRA 121 (1974).
100
120 SCRA 246 (1983).
98
99
REMEDIES OF PARTIES
393
One school of thought held that since it is the actual
foreclosure and sale at public auction of the subject matter of
the sale that creates the barring effect, then by simply reversing
the process followed in Cruz, the seller would be able to effect
the same result sought to be avoided in Cruz. The other school
of thought posited that if we were to take the rationale given in
Cruz, then it would be easy to say that one cannot escape by
indirection the matter prohibited by law. Nevertheless, if indeed
the reverse process is pursued, where the seller first forecloses
on the third-party real estate mortgage, when does the barring
effect actually come in?
If the barring effect comes in after foreclosure on the real
estate mortgage, that would not be in accordance with the
language of Article 1484 and the jurisprudential pronouncements
of the Court itself which held that it is the actual sale at public
action when the barring effect becomes effective.
On the other hand, the barring effect comes by the fact that
the seller seeks to foreclose the real estate mortgage, then it
would be certainly unfair to the seller who at that point has not even
taken any action to recover any amount of the purchase price. In
addition, such a position would render void and ineffective any
real estate mortgage constituted to secure the payment of the
purchase price, in addition to the chattel mortgage constituted
thereon, since by barring the initial foreclosure thereof, it would
be like saying only the foreclosure of the chattel mortgage can be
availed of by the seller.
The issue was finally addressed, albeit by obiter, in Borbon
II v. Servicewide Specialists, Inc.,101 where it held that when the
assignee forecloses on the chattel mortgage, there can be no
further recovery of the deficiency, and the seller-mortgagee is
deemed to have renounced any right thereto. A contrario, the
Court held that in the event the seller-mortgagee first seeks
the enforcement of the additional mortgages, guarantees or
other security arrangement, he must then be held to have lost
by waiver or non-choice his lien on the chattel mortgage of the
101
258 SCRA 634 (1996).
394
LAW ON SALES
personal property sold by and mortgaged back to him, although,
similar to an action for specific performance, he may still levy on
it. The implication is that the remedy of foreclosing the chattel
mortgage is no longer available, but the barring effect as to
prevent recovery of deficiency judgment does not come into
play since the Court confirmed that the seller “may still levy on
it.”102
d. Extent of Barring Effect
Under the original version of the Recto Law, it explicitly stated
that “if the vendor has chosen to foreclose the mortgage he shall
have no further action against the purchaser for the recovery of
any unpaid balance owing by the same, any agreement to the
contrary shall be null and void.” The extent of the barring effect of
foreclosure was then all-encompassing and did not limit itself to
the balance of the purchase price.
Therefore, in Macondray & Co., Inc. v. Eustaquio,103 the
Court held that the words “any unpaid balance” should be
interpreted as having reference to the deficiency judgment to
which the mortgagee may be entitled where, after the mortgaged
chattel is sold at public auction, the proceeds obtained therefrom
are insufficient to cover the full amount of the secured obligation
which in the case at bar as shown by the note and by the
mortgage deed, include interest on the principal, attorney’s fees,
expenses of collection, and the costs. “Were it the intention of
the Legislature to limit its meaning to the unpaid balance of the
principal, it would have so stated.”104
If we were to follow the line in Eustaquio that if it were the
intention of Legislature to limit the barring effect to the unpaid
balance of the price “it would have so stated,” then it follows that
in enacting the present Civil Code, and adopting the present
version of Article 1484 which limits the right of recovery to “any
unpaid balance of the price,” then clearly the Legislature has “so
stated” and therefore the barring effect of the present version
Ibid, at p. 640.
64 Phil. 446 (1937).
104
Ibid, at p. 453.
102
103
REMEDIES OF PARTIES
395
of the Recto Law is only on the purchase price, and cannot
cover stipulations in the contract for damages, interests and
attorney’s fees. Nevertheless, current jurisprudence upholds
the full barring effect on recovery even of the present language
of Article 1484.
e. Perverse Buyer-Mortgagor
By way of exception to the complete barring effect on the
remedy of foreclosure, Filipinas Investment & Finance Corp. v.
Ridad,105 held that when a defaulting buyer-mortgagor refuses
to surrender the chattel to the seller to allow the latter to be able
to proceed with foreclosure, then the seller, even after actual
foreclosure, should be allowed to recover expenses and attorney’s
fees incurred in trying to obtain possession of the chattel. The
Court held —
Where the mortgagor plainly refuses to deliver the
chattel subject of the mortgage upon his failure to pay
two or more installments, or if he conceals the chattel to
place it beyond the reach of the mortgagee, what then is
the mortgagee expected to do? It is part of conventional
wisdom and the rule of law that no man can take the
law into his own hands; so it is not to be supposed that
the Legislature intended that the mortgagee should
wrest or seize the chattel forcibly from the control and
possession of the mortgagor, even to the extent of
using violence which is unwarranted in law. Since the
mortgagee would enforce his rights through the means
and within the limits delineated by law, the next step in
such situations being the filing of an action for replevin
to the end that he may recover immediate possession
of the chattel and, thereafter, enforce his rights in
accordance with the contractual relationship between
him and the mortgagor as embodied in their agreement,
then it logically follows as a matter of common sense,
that the necessary expenses incurred in the prosecution
by the mortgagee of the action for replevin so that he
can regain possession of the chattel, should be borne
by the mortgagor. Recoverable expenses would, in our
105
30 SCRA 564 (1969).
396
LAW ON SALES
view, include expenses properly incurred in effecting
seizure of the chattel and reasonable attorney’s fees in
prosecuting the action for replevin.106
The transaction in Ridad was entered into in 1964, and the
decision itself promulgated in 1969, when the current version of
Article 1484 was effective and which limited the barring effect
only to “any unpaid balance of the price.” And yet the Court in
Ridad applied without reservation the 1937 Eustaquio doctrine
completely barring any recovery by the seller against the buyer
after the former has foreclosed on the chattel subject of the sale.
We may safely presume therefore, that in spite of the limiting
language of the present Article 1484, the Eustaquio doctrine still
applies.
Agustin v. Court of Appeals,107 held that where the mortgagor
plainly refuses to deliver the chattel subject of the mortgage
upon his failure to pay two or more installments, or if he conceals
the chattel to place it beyond the reach of the mortgagee, the
necessary expenses incurred in the prosecution by the mortgagee
of the action for replevin so that he can regain possession of the
chattel should be borned by the mortgagor.
In Borbon II v. Servicewide Specialist, Inc., the Court held:
A mere demand to surrender the object which
is not heeded by the mortgagor will not amount to
a foreclosure, but the repossession thereof by the
vendor-mortgagee would have the effect of foreclosure.
Hence, where the mortgagor unjustifiably refused to
surrender the chattel subject of the mortgage upon
failure of two or more installments, or if he concealed
the chattel to place it beyond the reach of the
mortgagee, that thereby constrained the latter to seek
court relief, the expenses incurred for the prosecution
of the case, such as attorney’s fees, could rightly be
awarded. Furthermore, the interests of justice dictate
that the issue on liquidated damages and attorney’s
fees must be considered and resolved, as long as they
106
107
Ibid, at pp. 572-573; emphasis supplied.
271 SCRA 457 (1997).
REMEDIES OF PARTIES
397
bear relevance and close relation to those specifically
raised, notwithstanding failure to specifically raise
them.108
E. LEASE WITH OPTION TO PURCHASE
Under Article 1485 Civil Code, the provisions of Article 1484
are expressly made applicable 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.” Article 1486 provides that “a stipulation that the rents paid
shall not be returned to the lessee shall be valid insofar as the
same may not be unconscionable under the circumstances.”
The Court has recognized that sellers who do not wish
to enter into conditional contracts of sale have often resorted
to lease with options to purchase, but that nevertheless the
underlying contract would not prevent the transfer of ownership
of the subject matter to the buyer-lessee upon fulfillment of the
condition of the full payment of the “rents,”109 thus:
Sellers desirous of making conditional sales of
their goods, but who do not wish openly to make a
bargain in that form, for one reason or another, have
frequently resorted to the device of making contracts
in the form of leases either with options to the buyer to
purchase for a small consideration at the end of term,
provided the so-called rent has been duly paid, or with
stipulations that if the rent throughout the term is paid,
title shall thereupon vest in the lessee. The so-called
rent must necessarily be regarded as payment of the
price in installments since the due payment of the
agreed amount results, by the terms of the bargain, in
the transfer of title to the lessee.110
Elisco Tool Manufacturing Corp. v. Court of Appeals,111
recognized that “[t]his Court has long been aware of the practice
258 SCRA 634 (1996).
Vda. De Jose v. Barrueco, 67 Phil. 191 (1939).
110
Ibid, at p. 195.
111
307 SCRA 731 (1999).
108
109
398
LAW ON SALES
of vendors of personal property of denominating a sale on
installment as one of lease to prevent the ownership of the object
of the sale from passing to the vendee until and unless the price
is fully paid.”112
The provision of the Recto Law may be to apply to lease
arrangements over moveables which do not expressly provide
for an option on the part of the lessee to purchase. In PCI
Leasing and Finance, Inc. v. Giraffe-X Creative Imaging, Inc.,113
although the Financing Lease Agreement entered into did not
provide an option to purchase in favor of the lessee, nonetheless,
the demand made by the lessor which “fashioned its claim in
the alternative: payment of the full amount of the 58,248,657.47,
representing the unpaid balance, for the entire 36-month lease
period or the surrender of the financed asset and pain of legal
action,114 was interpreted to reveal the real agreement that the
lessee had the option to purchase the property leased, thus —
The demand could only be that the [lessee] need
not return the equipment if it paid the 58,248,657.47
outstanding balance, ineluctably suggest that the
[lessee] can keep possession of the equipment if it
exercise its option to acquire the same by paying
the unpaid balance of the purchase price. Stated
otherwise, if the [lessee] was not minded to exercise
its option of acquiring the equipment by returning them,
then it need not pay the outstanding balance. This is
the logical import of the letter: that the transaction in
this case is a lease only. The so-called monthly rentals
are in truth monthly amortization of the price of the
leased office equipment.115
a. What Is the Barring Effect on Such Contracts?
The issue that arises when it comes to purported contracts
of lease with option to purchase is whether the taking back of
112
Ibid, at p. 741. Also, PCI Leasing and Finance, Inc. v. Giraffe-X Creative Imaging,
Inc., 527 SCRA 405 (2007).
113
527 SCRA 405 (2007).
114
Ibid, at p. 421.
115
Ibid, at pp. 422-423.
REMEDIES OF PARTIES
399
possession or enjoyment of the property leased as treated by
Article 1485 carries the concept of rescission or foreclosure. The
distinction is critical, because if the taking back of possession or
enjoyment of the leased movable is treated as a rescission, then
the barring effect of rescission is applicable, which means that
even after taking back possession or enjoyment, and forfeiting
all rentals previously paid, the lessor-seller will be able to collect
damages as may be warranted by the circumstances. On the
other hand, if the taking back of possession or enjoyment of
the leased movable is equivalent to foreclosure, then although
the seller-lessor may forfeit in his favor all rentals previously
paid, if such has been stipulated, he can no longer collect any
further amounts against the buyer-lessee, whether in the form of
damages, attorney’s fees, or even unpaid but accrued rentals,
and not even the expenses incurred in repairing the movable.
In the early case of Manila Gas Corp. v. Calupita,116 the
Court considered that the only remedies of the seller-lessor
would be specific performance and rescission. In that case, it
was held that when a purported lease contract of personal
property is determined to be a conditional sale, and it has been
shown that the buyer-lessee has not complied with his obligation
to pay the “rentals” due under the contract, the seller-lessor may
elect between compliance with or rescission of the obligation,
with indemnity for damages and interest in either case. Thus, the
barring effect would be equivalent to that of rescission.
In the 1938 case of H.E. Heacock Company v. Buntal
Manufacturing Co.,117 the Court treated the return of the sewing
machine subject of the contract of lease with option to purchase,
as an act of rescission, and for which the seller-lessor could
no longer obtain from the buyer-lessee a reimbursement of the
unpaid rentals. In that case, the fixing of the price of the machine
in the contract of lease was considered as a factor in considering
the contract as of sale payable on installments because the fixing
of a fixed purchase price is not the usual feature of a lease.
66 Phil. 747 (1938).
66 Phil. 245 (1938).
116
117
400
LAW ON SALES
The rulings in both Manila Gas Corporation and H.E.
Heacock Company do not provide us with any useful guide in
resolving the issue posed because they were both decided when
the Recto Law was not yet a feature included in the pertinent
Civil Code provision, and indeed the only remedy available to
the seller-lessor was either specific performance or rescission.
Consequently, the barring effect of “foreclosure” was not a matter
that the Court had to face when the decisions were rendered.
U.S. Commercial Co. v. Halili,118 decided on the proper
coverage of then Article 1454-A (now Article 1484) of the Civil
Code when it came to purported lease contracts of personal
property with option to purchase. In that case, the seller-lessor
had leased eight army vehicles under the stipulation that the value
of the vehicles was divided into twelve equal parts to be made
as monthly and by the end of the period, the vehicles would be
owned by the buyer-lessee. The contract also provided waiver of
the benefits of Article 1454-A of the Civil Code. When the lessee
defaulted in the payment of the rentals, upon demand of the
seller-lessor, the buyer-lessee voluntarily returned the vehicles,
but refused to pay the rentals in arrears. When the action was
brought by the seller-lessor to recover on the rentals, the Court
held that the waiver of the provisions of Art. 1454-A was void
because said article expressly provided that any waiver of its
benefit would be void. The Court also ruled that with the recovery
of the possession of all the vehicles, the seller-lessor was without
further remedy to recover the accrued rentals thereon, thus:
Being leases of personal property with option to
purchase as contemplated in the above-article, the
contracts in question are subject to the provision that
when the lessor in such case “has chosen to deprive
the lessee of the enjoyment of such personal property,”
“he shall have no further action” against the lessee “for
the recovery of any unpaid balance” owing by the latter,
“any agreement to the contrary being null and void.”119
93 Phil. 271 (1953).
Ibid, at p. 274.
118
119
REMEDIES OF PARTIES
401
Note that in its ruling in Halili, the Court uses the language
of then Article 1454-A which refers to the effects of foreclosure.
The case of Filinvest Credit Corp. v. Court of Appeals,120
provides us with a more auspicious setting to resolve the
issue because it was decided based on the current versions of
Articles 1484 and 1485, and there was even an underlying real
estate mortgage constituted on the real property of the buyerlessee. In that case the buyers had inspected and tested a rock
crusher and thereafter sought to have the purchase financed
by Filipinas Credit Corporation, which agreed to finance the
purchase only if the machinery be purchased in the name of the
finance company, but to be leased back with option to purchase
to the buyers; and that the buyers would execute a real estate
mortgage in favor of the finance company to secure the financed
amount.
When the buyers had received delivery of the machinery,
and they found that it did not have the features they desired,
they stopped paying the installment obligations. The finance
company began the process of extra-judicially foreclosing on the
real estate mortgage. The buyers then commenced an action to
enjoin the foreclosure, to rescind the contract of lease with option
to purchase, and to annul the real estate mortgage. The finance
company interposed that it merely financed the purchase and
therefore any defect on the machinery should be addressed to
the real and original seller.
The Court held that in any event, the finance company
obtained ownership of the rock crusher, that is why it was able
to enter into a contract of lease with option to purchase with
the buyer. “The nomenclature of the agreement cannot change
its true essence, i.e., a sale on installments. It is basic that a
contract is what the law defines it and what the parties intend it
to be, not what it is called by the parties. It is apparent here that
the intent of the parties to the subject contract is for the so-called
rentals to be the installment payments. Upon completion of the
payments, then the rock crusher, subject matter of the contract,
120
178 SCRA 188 (1989).
402
LAW ON SALES
would become the property of the [buyers-lessees]. This form of
agreement has been criticized as a lease only in name.”121
The Court explained the rationale of Article 1485 of the Civil
Code:
Indubitably, the device — contract of lease with
option to buy — is at times resorted to as a means
to circumvent Article 1484, particularly paragraph (3)
thereof. Through the set-up, the vendor, by retaining
ownership over the property in the guise of being the
lessor, retains, likewise, the right to repossess the
same, without going through the process of foreclosure,
in the event the vendee-lessee defaults in the payment
of the installments. There arises therefore no need to
constitute a chattel mortgage over the movable sold.
More importantly, the vendor, after repossessing the
property and, in effect, cancelling the contract of sale,
gets to keep all the installments-cum-rentals already
paid.122
The reasoning of the Court as afore-quoted would clearly
imply that the rationale behind the Recto Law found in Article
1484 is meant to cover purported lease of personal property
with option to purchase and are considered a circumvention of
the prohibition under Article 1484 in order to obviate the need to
constitute a chattel mortgage over the movable sold.
However, no definite ruling on the nature barring effect
under Article 1485 was issued, the Court holding therein that the
buyers-lessees have defaulted on their contract with the finance
company, and therefore dismissed the complaint of the buyerslessees.
A reading of the ratiocination in both Halili and Filinvest
Credit Corp. would give the impression that in the case of
purported contracts of lease with option to buy, the taking back
of possession or enjoyment of the leased movable by the sellerlessor would amount to both a foreclosure that bars all other
121
122
Ibid, at pp. 193-194.
Ibid, at p. 195.
REMEDIES OF PARTIES
403
actions of whatever nature, and not rescission that would still
authorize the seller the right to recover damages to make him
whole.
In Elisco Tool Manufacturing Corp. v. Court of Appeals,123
the Court held that under a purported contract of lease with option to purchase which is covered under Articles 1484 and 1485,
the condition that the lessor has deprived the lessee of possession or enjoyment of the thing for the purpose of applying Article
1485 which would be fulfilled by the filing by the lessor of a complaint for replevin to recover possession of movable property and
its enforcement by the sheriff, and barred all action to recover
any amount from the lessee. However, the Court also held that if
the main purpose for seeking recovery of the personal property
under a writ of replevin was merely to ensure enforcement of
the remedy of specific performance under Article 1484(1), there
would be no barring effect by reason of the enforcement of the
writ. Therefore, not every deprivation of possession would result in producing the barring effect under Article 1485 of the Civil
Code.
Lately, in PCI Leasing and Finance, Inc. v. Giraffe-X Creative
Imaging, Inc.,124 the Court held that when the lessor in a lease
with option to purchase, in choosing, through replevin, to deprive
the lessee of possession of the leased equipment, waived its right
to bring an action to recover unpaid rentals, since the remedies
provided for in Article 1484 are alternative, not cumulative — the
exercise of one bar the exercise of the others.
By and large, it seems to be the thinking of the Court that
a sale of movables on installment, when structured as a lease
with option to purchase is equivalent to a security arrangement
whereby the subject movables are mortgaged by the buyer
to the seller. Consequently, when the purported lessor takes
possession of the subject movable, the same is treated legally
as a foreclosure and the barring effect applicable to foreclosure
remedy, not rescission, is given application.
123
124
307 SCRA 731 (1999).
527 SCRA 405 (2007).
404
LAW ON SALES
REMEDIES IN CASES OF IMMOVABLES
A.
REMEDIES OF SELLER
1. Anticipatory Breach
Under Article 1591 of the Civil Code, if the seller has
reasonable grounds to fear the loss of the 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
of the Civil Code on rescission shall be observed, which means
that upon substantial breach by the buyer for failure to comply
with his obligation to pay the price when due, the seller may sue
for rescission of the sale.
2. Failure of Buyer to Pay Price
a. Rescission under Article 1592
The failure of the buyer to pay the price in full within a fixed
period does not, by itself, bar the transfer of the ownership or
possession, much less dissolve the sale.125 On failure of the buyer
to pay the price, the seller has the option under Article 1592 of the
Civil Code to rescind the sale upon judicial or notarial demand.126
Under Article 1592 of the Civil Code, 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 buyer 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.
Although Article 1592 also provides that “[a]fter the demand
[of the seller], the court may not grant [the buyer] a new term,”
nevertheless in cases of residential immovables, the Court has
tended to interpret Article 1592 liberally in favor of the buyer to
125
126
Ocampo v. Court of Appeals, 233 SCRA 551 (1994).
Ibid.
REMEDIES OF PARTIES
405
give him every opportunity to comply with his obligation and
proceed to take the subject immovable.
b. Contracts to Sell Not Covered by Article 1592
In J.M. Tuason & Co., Inc. v. Javier,127 despite the rescission
clause provided for in the contract to sell a residential lot in a
subdivision project, the Court refused to rule on the proper
application of Article 1592 to the case, nor to allow either a
rescission or cancellation on the part of the seller in spite of clear
default on the part of the buyer holding:
Plaintiff maintains that this provision governs
contracts of sale, not contracts to sell, such as the one
entered into by the parties in this case. Regardless,
however, of the propriety of applying said Art. 1592
thereto, We find that plaintiff herein has not been
denied substantial justice, for, according to Art. 1234
of said Code: “If the obligation has been substantially
performed in good faith, the obligor may recover as
though there has been a strict and complete fulfillment,
less damages suffered by the obligee.” ... accordingly,
the trial court sentenced the defendant to pay all such
installments, interests, fees and costs. Thus, plaintiff
will thereby recover everything due thereto, pursuant to
its contract with the defendant, including such damages
as the former may have suffered in consequence of the
latter’s default. Under these circumstances, We feel
that, in the interest of justice and equity, the decision
appeal from may be upheld upon the authority of Art.
1234 of the Civil Code.128
In Luzon Brokerage v. Maritime Bldg.,129 the Court held
that if Article 1592 is applicable to a sale contract, the filing of a
crossclaim in court may be constituted as a judicial demand for
rescission that satisfies the requirement of said article. The Court
also held that in any event Article 1592 of the Civil Code has
no application to a contract to sell; the said article applies only
31 SCRA 829 (1970).
Ibid, at pp. 832-833.
129
43 SCRA 93 (1972).
127
128
406
LAW ON SALES
to ordinary sale transferring ownership simultaneously with the
delivery of the real property sold, but not to one in which the seller
retained ownership of the immovable object of the sale, merely
undertaking to convey it provided the buyer strictly complied with
the terms of the contract.
c. Resort to Equitable Resolutions
In Legarda Hermanos v. Saldana,130 the contract between
the parties covering the purchase of two residential lots clearly
provided that in case of default on the part of the buyer, all
amounts paid in accordance with the agreement together with
the improvements on the premises shall be considered as rents
and as payment for damages suffered by reason of such breach.
Nevertheless, the Court held that the buyer of the two small
residential lots on installment contracts on a ten-year basis who
has faithfully paid for eight continuous years on the principal
alone already more than the value of one lot, besides the larger
stipulated interests on both lots, was entitled to the conveyance
of one fully paid lot of his choice. In upholding such ruling, the
Court held that “the judgment is fair and just and in accordance
with law and equity.”131
B. REMEDIES OF BUYER
1. Suspension of Payment
Under Article 1590 of the Civil Code, should the buyer 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, the buyer
may suspend the payment of the price until the seller has caused
the disturbance or danger to cease, unless the seller gives a
security for the return of the price in a proper case, or it has
been stipulated that, notwithstanding any such contingency, the
buyer shall be bound to make the payment. Again, a mere act of
trespass shall not authorize the suspension of the payment of
the price.
130
131
55 SCRA 324 (1974).
Ibid, at p. 325.
REMEDIES OF PARTIES
407
2. In Case of Subdivision or Condominium Projects
Sections 23 and 24 of Pres. Decree 957, provide that no
installment payments made by the buyer in a subdivision or
condominium project for the lot or unit he contracts 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. The
sections also grant to the buyer the option to be reimbursed the
total amount paid.
In Casa Filipinas Realty Corp. v. Office of the President,132
the Court held that Pres. Decree 957 “was issued in the wake
of numerous reports 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 basic requirements’ for the health and safety of
home and lot buyers. It was designed to stem the tide of ‘fraudulent
manipulations perpetrated by unscrupulous subdivision and
condominium sellers free from liens and encumbrances.’”133
Relucio v. Brillante-Garfin,134 held that the decree vests
upon the buyer the option to demand reimbursement of the total
amount paid, or to wait for further development of the subdivision
or condominium project; and when the latter opts for the latter
alternative by waiting for the proper development of the site, he
may not be ousted from the subdivision.135
Lim v. De los Santos,136 and Consing v. Court of Appeals,137
recognized the right of a buyer in a subdivision land to compel the
seller to complete the roads and other facilities of the subdivision,
241 SCRA 165 (1995).
Ibid, at p. 173.
134
187 SCRA 405 (1990).
135
See also Antipolo Realty Corp. v. National Housing Authority, 153 SCRA 399
(1987).
136
8 SCRA 798 (1963).
137
177 SCRA 14 (1989).
132
133
408
LAW ON SALES
even when nothing to that effect is stipulated in the sale: “A
seller’s duty is to deliver the thing sold in a condition suitable for
its enjoyment by the buyer for the purposes contemplated ... and
a proper access to a residence is essential to its enjoyment.”138
The seller cannot shift to the buyer the burden of providing for
an access to and from the subdivision, and when the seller has
so defaulted in such obligation, the buyer “should be entitled to a
proportionate reduction in her purchase price of the two lots.”139
In Gold Loop Properties, Inc. v. Court of Appeals,140 it was
held that a buyer of a condominium unit is justified in suspending
payment of his monthly amortization where the seller fails to give a
copy of the Contract to Sell despite repeated demands therefore.
The buyer is entitled to a copy of the deed, otherwise, he would
not be informed of the rights and obligations under the contract.
Yet, in Cho Chien v. Sta Lucia Realty & Dev., Inc.,141 it was
held that nothing in P.D. 957 provides for the nullification of a
contract to sell in the event that the seller, at the time the contract
was entered into did not posses a certificate of registration and
a license to sell.
a. Notice Required under Section 23 of P.D. 957
Section 23 of Pres. Decree 957 does not require that a
notice be given first by the buyer to the seller before a demand
for refund can be made as the notice and demand can be made
in the same letter or communication.142
b. Retroactive Application of P.D. 957
In Eugenio v. Drilon,143 the Court held that the failure to
develop a subdivision constitute legal justification for the nonpayment of amortization by the buyer on installment under the
land purchase agreements entered into prior to the enactment
Lim v. Delos Santos, supra, at p. 802.
Consing v. Court of Appeals, supra, at p. 24.
140
350 SCRA 371 (2001).
141
513 SCRA 570 (2007).
142
Casa Filipinas Realty Corp. v. Office of the President, 241 SCRA 165 (1995).
143
252 SCRA 106 (1996).
138
139
REMEDIES OF PARTIES
409
of Pres. Decree 957: “P.D. 957 did not expressly provide for
retroactivity in its entirety, but such can be plainly inferred from
the unmistakable intent of the law. The intent of the law, as
culled from its preamble and from the situation, circumstances
and conditions it sought to remedy, must be enforced.144 x x x It
goes without saying that, as an instrument of social justice, the
law must favor the weak and the disadvantaged, including, in
this instance, small lot buyers and aspiring homeowners. P.D.
957 was enacted with no other end in view than to provide a
protective mantle over helpless citizens who may fall prey to the
manipulations and machinations of ‘unscrupulous subdivisions
and condominium sellers.”145
In Philippine National Bank v. Office of the President,146 the
Court held that a buyer of a property at a foreclosure sale may
not dispossess prior purchasers on installments of individuals
lots therein, nor compel them to pay again for the lots which they
previously brought from the defaulting mortgagor-subdivision
developer, based on the provisions of Pres. Decree 957 which
may even be applied retroactively, thus:
While P.D. 957 did not expressly provide for
retroactivity in its entirety, yet the same can be plainly
inferred from the unmistakable intent of the law to
protect innocent lot buyers from scheming subdivision
developers. As between small lot buyers and the
gigantic financial institution which the developers deal
with, it is obvious that the law — as an instrument of
social justice — must favor the weak. ...147
xxx.
“We cannot over emphasize the fact that the BANK
cannot barefacedly argue that simply because the
title or titles offered as security were clean of any
encumbrance or lien, that it was thereby relieved
of taking any other step to verify the over-reaching
Ibid, at p. 110.
Ibid, at p. 111.
146
252 SCRA 5 (1996). See also Union Bank of the Philippines v. Housing and
Land Use Regulatory Board, 210 SCRA 558 (1992).
147
Ibid, at p. 10.
144
145
410
LAW ON SALES
implications should the subdivision be auctioned on
foreclosure. The BANK could not have closed it eyes
that it was dealing over a subdivision where there
were already houses constructed. Did it not enter the
mind of the responsible officers of the BANK that there
may even be subdivision residents who have almost
completed their installment payments?”148
3. Right to Grace Period Stipulated
When a grace period is provided for in the contract of sale,
it should be construed as a right, not an obligation of the debtor,
and when unconditionally conferred, the grace period is effective
without further need of demand either calling for the payment of
the obligation or for honoring the right.149
C. MACEDA LAW: SALES OF REAL ESTATE ON INSTALLMENTS
Republic Act 6552, entitled the “Realty Installment Buyer
Protection Act” (also the “Maceda Law”), provides for certain
protection to particular buyers of real estate payable on
installments. The law declares as “public policy to protect buyers
of real estate on installment payments against onerous and
oppressive conditions.150
In Luzon Brokerage v. Maritime Bldg.,151 the Court viewed
the enactment of the Maceda Law as a confirmation of its jurisprudential rulings that recognizes the seller’s right of cancellation
of sale on installments of industrial and commercial properties
with full retention of previous payments. The Court held:
... The enactment on September 14, 1972 by
Congress of Republic Act No. 6552 entitled “An Act
to Provide Protection to Buyer of Real Estate on
Installment Payments,” which inter alia compels the
seller of real estate on installments (but excluding
Ibid, at p.15.
Bricktown Dev. Corp. v. Amor Tierra Dev. Corp., 239 SCRA 126 (1995).
150
Sec. 2, Rep. Act No. 6552; OIympia Housing Inc. v. Panasiatic Travel Corp., 395
SCRA 298 (2003).
151
86 SCRA 305 (1978).
148
149
REMEDIES OF PARTIES
411
industrial lots, commercial buildings among others
from the Act’s coverage) to grant one month grace
period for every one year of installments made before
the contract to sell may be cancelled for non-payment
of the installments due forecloses any overturning of
this Court’s long-established jurisprudence. Republic
Act 6552 recognizes in conditional sales of all kinds
of real estate (industrial and commercial as well as
residential) the non-applicability of Article 1592 (1504)
Civil Code to such contracts to sell on installments
and the right of the seller to cancel the contract (in
accordance with the established doctrine of this Court)
upon non-payment “which is simply an event that
prevents the obligation of the vendor to convey title
from acquiring binding force.” (Manuel vs. Rodriguez,
109 Phil. 1, 10, per Reyes, J.B.L.). The Act in modifying
the terms of the application of Art. 1592 Civil Code
reaffirms the vendor’s right to cancel unqualifiedly in
the case of industrial lots and commercial buildings
(as in the case at bar) and requires a grace period in
other cases, particularly residential lots, with a refund
of certain percentages of payments made on account
of the cancelled contract.152
This view was reiterated by Rillo v. Court of Appeals,153 which
held that in the case of a contract to sell land, the applicable law is
the Maceda Law which recognizes in conditional sales of all kinds
of real estate, whether industrial, commercial, or residential, the
right of the seller to cancel the contract upon non-payment of an
installment by the buyer, which is simply an event that prevents
the obligation of the seller to convey title from acquiring binding
force.154
Active Realty & Dev. Corp. v. Daroya,155 gave an allencompassing diatribe on the purpose and objectives of the
Maceda Law, thus: “The Realty Installment Buyer Protection Act,”
Ibid, at pp. 327-328.
274 SCRA 461 (1997).
154
Reiterated in Cordero v. F.S. Management & Dev. Corp., 506 SCRA 451 (2006);
Pagtulungan v. Dela Cruz Vda. De Manzano, 533 SCRA 242 (2008).
155
382 SCRA 152 (2002).
152
153
412
LAW ON SALES
or more popularly known as the Maceda Law, [its] declared policy
is to protect buyers of real estate on installment basis against
onerous and oppressive condition. The law seeks to address the
acute housing shortage problem in our country that has prompted
thousands of middle and lower class buyers of houses, lots and
condominium units to enter into all sorts of contracts with private
housing developers involving installment schemes. Lot buyers,
mostly low income earners eager to acquire a lot upon which to
build their homes, readily affix their signatures on these contracts,
without an opportunity to question the onerous provisions therein
as the contract is offered to them on a “take it or leave it” basis.
Most of these contracts of adhesion, drawn exclusively by the
developers, entrap innocent buyers by requiring cash deposits
for reservation agreements which often time include, in fine print,
onerous default clauses where all the installment payment made
will be forfeited to pay any installment due even if the buyers had
made payments for several years. Real estate developers thus
enjoy an unnecessary advantage over lot buyers who they often
exploit with iniquitous results. They get to forfeit all the installment
payments of defaulting buyers and resell the same lot to another
buyer with the same exigent conditions. To help especially the low
income lot buyers, the legislature enacted R.A. 6552 delineating
the rights and remedies of lot buyers and protect them from one
sided and pernicious contract stipulations.”156
a. “Role” of Maceda Law
It would seem that more than just providing for a substantial
and procedural setting for the rescission and cancellation of
contracts covered therein, the Maceda Law in whole is relied
upon and used by the courts, including the Supreme Court, as “a
policy statement” of the State in protecting the interests of buyers
of residential real estate on installments. Thus, in the McLaughlin
v. Court of Appeals157 the Court took the Law “as an expression
of public policy to protect buyers of real estate on installments
against onerous and oppressive conditions (Sec. 2 of Republic
156
157
Ibid, at p. 158.
144 SCRA 693 (1986).
REMEDIES OF PARTIES
413
Act No. 6552).”158 If that be the case, then the value of the Maceda
Law goes beyond its language and can be interpreted to further a
policy that may not even be found within its language.
Take for example the case of Palay, Inc. v. Clave,159 which
involved a contract to sell entered into by the parties in 1965 (the
Maceda Law took effect in 1972), which provided for automatic
extrajudicial rescission upon default in payment of any monthly
installment after the lapse of 90 days from the expiration of the
grace period of one month, without need of notice and with forfeiture of all installments paid. Although the Maceda Law was inapplicable, the Court took into consideration Section 3 of the Law
which provided for the indispensability of notice of cancellation to
the buyer and declared “it is a matter of public policy to protect
buyers of real estate on installment payments against onerous
and oppressive conditions. Waiver of notice is one such onerous
and oppressive condition to buyers of real estate on installment
payments.”160
b. Retroactive Application of Law
In Siska Dev. Corp. v. Office of the President,161 the Court
extended the formal requirements of rescission under the Maceda
Law to apply even to contracts entered into prior to the effectivity
of the Maceda Law.
However, in one case, the Court refused to apply retroactively
the terms of the Maceda Law, thus: “As with Presidential Decrees
Nos. 9576 and 1344, Republic Act No. 6552 does not expressly
provide for its retroactive application and, therefore, it could not
have encompass(ed) the cancellation of the contracts to sell
pursuant to an automatic cancellation clause which had become
operational long before the approval of the law.”162
Ibid, at p. 700.
12 SCRA 639 (1983).
160
Ibid, at pp. 66-67.
161
231 SCRA 674 (1994).
162
People’s Industrial and Commercial Corp. v. Court of Appeals, 281 SCRA 206
(1997).
158
159
414
LAW ON SALES
1. Transactions Covered
It should be noted that the Maceda Law does not cover all
sales of realty on installments, but primarily residential real estate.
But unlike the Recto Law on movables, the Maceda Law covers not
only “sales” on installments of real estate, but also “financing” of
such acquisitions. It expressly covers “all transactions or contracts
involving the sale or financing of real estate on installment
payments, including residential condominium apartments.”163
Unlike Article 1592 of the Civil Code, which the Court has
interpreted not to be applicable to contracts to sell, the Maceda
Law clearly includes in its provisions both contracts of sale and
contracts to sell. This conclusion is clear from the use by the
Law of the twin terms of “notice of cancellation or the demand for
rescission” of the contract.
On the other hand, we would adopt for the Maceda Law the
same definition of “sale by installments” held by Levy Hermanos,
Inc. for sales of movables by installments, which should involve
at least two (2) installments to be paid in the future at the time of
the perfection of the contract. The rationale of Levy Hermanos,
Inc. as to sales of movables, equally should apply to sale of real
estate in installments, thus: “the law is aimed at those sales where
the price is payable in several installments, for, generally, it is
in these cases that partial payments consists in relatively small
amounts, constituting thus a great temptation for improvident
purchasers to buy beyond their means.”164
In any event, the public policy behind the Maceda Law is
so all-encompassing with respect to residential real estate and
condominium units, that it would cover even sales or financing
transactions which may not fit into the “installment” concept.
a. Maceda Law Covers Contracts to Sell
The employment of the term “cancellation” under the Maceda
Law clearly indicates that it covers contracts to sell residential
real estate on installments.
163
164
Sec. 3, Rep. Act 6552.
Ibid, at p. 54.
REMEDIES OF PARTIES
415
For that reason, the author finds quite surprising the ruling in
Mortel v. KASSCO, Inc.,165 which held that when a contract to sell
is constituted over a condominium unit subject to the suspensive
condition which is the acquisition of individual condominium
certificates of title (CCT) over the building which seller undertook
to accomplish within one year from the date of execution, then the
non-fulfillment of the condition extinguished the contract meant
that “the contract to sell did not take into effect. Consequently,
the [Maceda Law] invoked by [buyer] ... find no application to the
present case because said laws presuppose the existence of a
valid and effective contract to sell a condominium.”166
The reasoning in Mortel is defective for the following
reasons: First, there is no doubt under the provisions of the
Maceda Law that it covers both contracts of sale and contracts
to sell on installments condominium units, and the coverage is
based on the nature of the contract and subject matter at the time
of perfection, and not what happens at consummation. Secondly,
precisely when the conditions attaching to the contract to sell
(such as non-payment of the installments) is not fulfilled which
have the effect of “extinguishing” the contract, the Maceda Law
governs the effective remedies and consequences available to
the parties (i.e., notarial rescission and return of cash surrender
value, etc.). Therefore, the non-fulfillment of condition under a
contract to sell does not take it out of the Maceda Law.
2. Transactions Excluded from Coverage
The following transactions, although involving sales on
installments, are expressly excluded from the coverage of the
Law, thus:
(a) Sales covering industrial lots;
(b) Sales covering commercial buildings (and
commercial lots by implication); and
(c) Sales to tenants under agrarian reform laws.
165
166
348 SCRA 391 (2000).
Ibid, at p. 398.
416
LAW ON SALES
The enumeration of the transactions not covered by the
Maceda Law is not exclusive, since other transactions over
immovables, although not within the enumerated exclusions are
to be considered as excluded because they are not within the
clearly expressed coverage. An example would be the sale on
installment of commercial or office condominium units.
In one case, the Court held that the Maceda Law normally
applies to the sale or financing of real estate on installments
payments, and excludes “industrial lots, commercial buildings,
and sales to tenants under R.A. No. 3844. It has no application
to a sale on installment of a commercial building.167
a. Maceda Law Cannot Be Invoked by Highest
Bidder in Foreclosure Proceedings
The Court has ruled that the terms of the Maceda Law cannot
be invoked by a person or entity who acquired the subdivision lots
in a foreclosure sale on the mortgaged constituted thereon by the
developer. Such person or entity, although binding itself to the
terms of the contracts of sale, is not the real party to the original
installment sales, and more importantly, does not have any rights
promoted under the Maceda Law which contains provisions for
the benefits of real estate buyers on installments.168
3. Rights Granted
The rights granted to a buyer of real estate in a sale or
financing covered by the Maceda Law, depend on whether or not
he has paid less than or more than two (2) years of installments.
a. At Least Two (2) Years Installments Paid
Where the buyer has paid at least two (2) years of installments, he is entitled to the following rights in case he defaults in
the payments of succeeding installments:
(a) To pay, without additional interest, the unpaid
installments due within the total grace period
167
168
Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997).
Lagandao v. Court of Appeals, 290 SCRA 330 (1998).
REMEDIES OF PARTIES
417
earned by him, which is fixed at the rate of
one (1) month grace period for every one
(1) year of installment payments;
(b) If the contract is cancelled, the seller shall
refund to the buyer the cash surrender value
of the payments on the property equivalent
to 50% of the total payments made and, after
five (5) years of installments, an additional
5% every year but not to exceed 90% of the
total payments made.
(1) Exercise of Grace Period
The right to make use of the grace period can be exercised
by the buyer only once in every five (5) years of the life of the
contract and its extensions, if any.
Down payments, deposits or options on the contract shall
be included in the computation of the total number of installments
made.
(2) How Cancellation of Contract Can Be Effected
The actual cancellation of the contract shall take place after
thirty (30) days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act
and upon full payment of the cash surrender value to the buyer.
In one case,169 it was held that a decision rendered is an
ejectment case operated as the required notice of cancellation,
pursuant to Section 3(b) of the Maceda Law. In an earlier case,170
the Court dispensed with the additional formality of a demand on
the seller’s part for recission superfluous since the action filled
was one for “annulment of contract, which is kindred concept of
rescission by notarial act.”
In another case,171 it was held that the letter notice given
by the seller’s counsel which merely made formal demand upon
Layug v. Intermediate Appellate Court, 167 SCRA 627 (1988).
Leaño v. Court of Appeals, 369 SCRA 36 (2001).
171
Pagtulungan v. Dela Cruz Vda. De Manzano, 533 SCRA 242 (2008).
169
170
418
LAW ON SALES
the buyer to vacate the premises in question did not serve the
same requirement as that of notice of cancellation or demand
for recission “by a notarial act” as required under the Maceda
Law. It was also reitereated that a case for unlawful detainer
does not exempt the seller from complying with the notarial act
required under the law.
b. Less Than Two (2) Years Installments Paid
In case where less than two (2) years of installments were
paid, the buyer shall still be entitled to a grace period of sixty (60)
days from the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract
after thirty (30) days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a
notarial act.
c. Compensation Rule on Amortization Payments
The Court’s ruling in Leaño v. Court of Appeals,172 recognizes
the principle of compensation to be applicable to remedies under
the Maceda Law.
Leaño held that although the contract to sell allows
a total of 10 years within which to pay the purchase price,
nevertheless, the buyer cannot ignore the stipulation on the
monthly amortization payments required under the contract by
claiming that the ten-year period within which to pay has not
elapsed. When the buyer fails to pay any monthly amortization,
he is under Article 1169 already in default and liable for the
damages stipulated in the contract. Nevertheless, the Court
agreed with the trial court that the default committed by the
buyer in respect of the obligation could be compensated by
the interest and surcharges imposed upon the buyer under the
contract.
172
369 SCRA 36 (2001).
REMEDIES OF PARTIES
419
d. Formula to Compute the Installment Mode
In Jestra Dev. and Mgt. Corp. v. Pacifico,173 the Court clarified that the proper formula to apply in determining how many
installments have been made is to include any payment made
as downpayment or reservation fee as part of the installments
made, and then to divide them by the stipulated mode of payment, i.e., whether it is monthly, quarterly, semi-annual or annual.
Thus, in Jestra, where the Contract to Sell provided for a
total Purchase Price of 52,500,000 with 30% thereof or 5750,000
was to a downpayment payable in six montly installments, and
the balance of 51,750,000 was to be paid in 10 years of equal
payment of 534,983 the Court used the stipulated divisor of
5121,666.66 for the period covering the downpayment, and
refused to apply the monthly amortization of 534,983 as the
divisor to all payments made by the buyer. The result was quite
substantial in that the Court found the buyer to have paid less
than 2 years of installments, and therefore not entitled to receive
any cash surrender value to complete the effect of the notice of
cancellation of the Contract to Sell.
4. Interpretation of Grace Period and
Mode of Cancellation
Although a formal reading of the provisions of the Maceda
Law would imply that once a buyer fails to avail of the grace
period granted to him, then either rescission or cancellation of
the contract becomes a matter of right on the part of the seller,
provided he complies with the procedure provided for in the Law,
the Court has interpreted it otherwise.
In McLaughlin v. Court of Appeals,174 the parties had
entered into a contract of conditional sale of real property, with
the stipulated purchase price payable on installments. When the
buyer defaulted in the payment of the installments, a complaint
was filed by the seller in court for the rescission of the deed of
conditional sale, which suit was eventually compromised, with
173
174
513 SCRA 413 (2007).
144 SCRA 693 (1986).
420
LAW ON SALES
the buyer agreeing on a scheduled payment of the balance of
the purchase price. The compromise agreement approved by the
court also provided that in case of failure of the buyer to comply
with the terms of payment, all payments previously made shall be
forfeited in favor of the seller as liquidated damages.
When the buyer failed to pay on the dates provided for in the
compromise agreement, the seller subsequently refused to accept
further payment and eventually filed a motion with the trial court for
the issuance of a writ of execution to declare the rescission of the
contract of conditional sale, and the forfeiture of all payments of the
buyer previously made. The buyer filed a motion for reconsideration
on the order granting the writ of execution, and tendered with the
trial court the balance due to the seller on the sale.
On appeal, the Court upheld the right of the buyer to prevent
the rescission of the contract by his tender of the balance of the
purchase price, based on the provisions of the Maceda Law.
Although there was no doubt that the buyer was no longer
entitled to the benefits of the grace period under the Maceda
Law, the court held that if the motion for the issuance of the writ
of execution is considered as the notice of cancellation under
the Law, the seller could cancel the contract only thirty (30) days
after the receipt of such notice, and then concluded that since the
tender of payment of the balance of the purchase price was made
within said thirty (30) day period, this prevented the cancellation
of the contract of conditional sale.
McLaughlin ruling therefore clearly provides for two basic
doctrines applicable to the Maceda Law. First, although the Law
seem to require rescission and cancellation to be both by notarial
act, McLaughlin would hold notarial act as merely applicable
to rescission, whereas “notice of cancellation” need not be by
notarial act. Second, McLaughlin would hold that even after the
expiration of the grace period provided by the Law, the buyer still
can prevent rescission or cancellation of the contract within the
30-day period when rescission or cancellation is to take effect.
In other words, McLaughlin would provide for two grace
periods: the first grace period is the one provided for expressly
REMEDIES OF PARTIES
421
by the Law, which is a minimum of 60 days; and the other would
be the period before rescission or cancellation actually takes
effect. Perhaps, the distinction between the two types of grace
period, is that in the statutory grace period, availment of the
right to update the installment payments is without interest
and penalties, even when these are stipulated in the contract;
whereas, in the period prior to the effectivity of the rescission or
cancellation of the contract, the buyer would be liable for and
would have to include in his payments the stipulated interests
and penalties incurred.
The McLaughlin ruling would therefore encourage buyers
of real estate on installments covered by the Maceda Law not
to take advantage of the statutory grace period, because even
with its expiration, they have a jurisprudential grace period which
allows them to prevent the rescission or cancellation of their
contracts even after they have received the demand for rescission
or notice of cancellation, by paying-up the unpaid balance prior to
the expiration of the 30-day period provided in the Maceda Law
for effectivity of the notice of rescission or cancellation.
In Leaño v. Court of Appeals,175 the Court held that in cases
falling under the Maceda Law, the issues as to rescission or
cancellation, breach of contract, tender and consignation must all
give way to the explicit provisions of the Maceda Law that grants
to the buyer a minimum 60-day grace period and the requirement
that notarial notice of cancellation or rescission shall be effective
only after 30-days from service thereof.176
Leaño affirmed the principle that even when the requisite
notice of cancellation is given but the buyer has not been given
the cash surrender value of the payments made, these was still
no actual cancellation of the conditional sale, and the buyer may
still reinstate the contract by updating the account. This is true
even when a decision has been rendered in an ejectment case
which would operate as the required notice of cancellation.
175
369 SCRA 36, Pagtulungan v. Dela Cruz Vda. de Manzano, 533 SCRA 242
(2008)(2001).
176
Reiterated in Villadar v. Zaballa, 545 SCRA 325 (2008); Pagtulungan v. Dela
Cruz Vda. de Manzano, 553 SCRA 292 (2008).
422
LAW ON SALES
The principle was reiterated in Active Realty & Dev. Corp.
v. Daroya,177 which held that the refund of the cash surrender
value is one of the mandatory twin requriements for a valid and
effective cancellation under the Maceda Law, and absence of
which would mean that the contract remains valid and subsisting.
However, in that case, since the lot had already been sold to
an innocent second buyer, the seller was ordered to refund to
the first buyer the actual market value of the lot sold with 12%
interest per annum or to deliver a substitute lot, at the option of
the first buyer.
Olympia Housing v. Panasiatic Travel Corp.,178 held that
the Maceda law recognizes the right of the seller to cancel the
contract but any such cancellation must be done in conformity
with the requirements therein prescribed. The Court held that In
addition to the notarial act of rescission, the seller is required to
refund to the buyer the cash surrender value of the payments
on the property; and that the actual cancellation of the contract
can only be deemed to take place upon the expiration of a 30day period following the receipt by the buyer of the notice of
cancellation or demand for rescission by a notarial act and the
full payment of the cash surrender value.
5. Other Rights Granted to Buyer
In addition, the Maceda Law provides for the following rights
to the buyer:
(a) To sell his rights or assign the same to
another person or to reinstate the contract
by updating the account during the grace
period and before actual cancellation of the
contract. The deed of sale assignment shall
be done by notarial act.179
(b) To pay in advance any installment or the
full unpaid balance of the purchase price
382 SCRA 152 (2002).
395 SCRA 298 (2003).
179
Sec. 5, Rep. Act 6552.
177
178
REMEDIES OF PARTIES
423
any time without interest and to have such
full payment of the purchase price annotated in the certificate of title covering the
property.180
Notice that the provisions of Section 6 of the Maceda Law
render nugatory all provisions in loan agreements covering the
financing of residential real estate and condominium units “pretermination penalty clauses” whereby any payment ahead to
the scheduled amortization was met with a penalty clause to
compensate the bank or financial institution for the inability of
such pre-payment to earn interest income on the loan.
6. Effect of Contrary Stipulations
Under Section 7 of the Maceda Law, any stipulation in any
contract entered into contrary to the provisions of the Law, shall
be null and void.
7. Maceda Law Cannot Be Availed of by Developer
In Lagandaon v. Court of Appeals,181 the Court held that
the Maceda Law has no application to protect the developer
or one who succeeds the developer, since “the policy of that
law, as embodied in its title, is ‘to provide protection to buyers
of real estate on installment payments.’ As clearly specified in
Section 3, the declared public policy espoused by Republic
Act No. 6552 is ‘to protect buyers of real estate on installment
payments against onerous and oppressive conditions.’”182
Therefore, one who buys the property from the developer and
who steps into the shoes of the seller under the Contract to
Sell cannot claim any right or protection under the Law. If the
Maceda Law has any relevance at all, it is to protect the buyer,
not the developer-seller or his successor-in-interest. The Court
further held that “Section 3(b) of the same law does not grant
petitioner [developer] any legal ground to cancel the contracts
Sec. 6, Rep. Act 6552.
290 SCRA 330 (1998).
182
Ibid, at p. 345.
180
181
424
LAW ON SALES
to sell; rather, it prescribes the responsibility of the seller in case
the ‘contract[s are] cancelled.’”183
CANCELLATION OF JUDICIAL SALE
Where a judicial sale is voided without fault of the purchaser,
the latter is entitled to reimbursement of the purchase money
paid by him. A judicial sale can only be set aside upon the return
to the buyer of the purchase price with simple interest, together
with all sums paid out by him in improvements introduced on the
property, taxes, and other expenses by him.184
—oOo—
Ibid.
Seven Brothers Shipping Corp. v. Court of Appeals, 246 SCRA 33 (1995).
183
184
425
CHAPTER 11
REMEDIES OF RESCISSION AND
CANCELLATION FOR SALES OF
IMMOVABLES:
CONTRACT OF SALE VERSUS CONTRACT
TO SELL
Previously, the differences between the remedy of rescission
as it pertained to contracts of sale, and the effects of cancellation
or extinguishment due to non-fulfillment of a suspensive condition
in contracts to sell, seemed well-defined. With the passage of the
Maceda Law which had lumped together both remedies of rescission and cancellation into a uniform procedural straight-jacket
when it comes to sale and financing contracts involving residential
real estates, even the Supreme Court has began to blur what used
to be different remedies, and, in the process, has almost made
indistinguishable the substantive differences between a contract
of sale and a contract to sell involving immovables.
In addition, the study of the remedies of rescission and
cancellation would also place in focus the issue of whether
contracts to sell are within the definition of “sale” under Article
1458 of the Civil Code.
REMEDY OF RESCISSION OR RESOLUTION
1. Remedy of “Rescission” Not Covered
This chapter does not cover the remedy of “rescission” when
it pertains to rescissible contracts defined under Articles 1381 et
seq. of the Civil Code, where economic damage or lesion is the
main basis for allowing the rescission of what otherwise is a valid
425
426
LAW ON SALES
contract. Such remedy in rescissible contracts is subsidiary in
nature and cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the
damage sustained.1 Such characterization has no application to
the remedy of “rescission” under Article 1191 of the Civil Code,
which remedy is principal in nature and the legal premise of which
is substantial breach of contract.
On the other hand, the principles that rescission of
rescissible contracts creates the obligation to return the things
which were the object of the contract, together with the fruits, and
the price with its interest, and that consequently, such rescission
can be carried out only when he who demands rescission can
return whatever he may be obliged to restore,2 apply equally to
rescission covered by Article 1191.
The point being made is this: Before a party employs in legal
argument a principle of rescission to bolster his case, he has
to be sure which of the remedies of rescission he is invoking.
Justice J.B.L. Reyes had pointed out the distinctions between
the two types of rescissions in his concurring opinion in Universal
Food Corp. v. Court of Appeals,3 thus —
The rescission on account of breach of stipulations
is not predicated on injury to economic interests of the
party plaintiff but on the breach of faith by the defendant,
that violates the reciprocity between the parties. It is not
a subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the
culpable breach of his obligation by the defendant. This
rescission is a principal action retaliatory in character,
it being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in
the old Latin aphorism: “Non servanti fidem, non est
fides servanda.” Hence, the reparation of damages for
the breach is purely secondary.4
Art. 1382, Civil Code.
Art. 1385, Civil Code.
3
33 SCRA 22 (1970).
4
Ibid, at pp. 22-23. Reiterated in Iringan v. Court of Appeals, 366 SCRA 41 (2001).
1
2
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
427
He also distinguished rescission under Article 1191 from
the remedy of rescission for rescissible contracts, thus: “On
the contrary, in the rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence
of that prejudice, because it is the raison d’ etre as well as the
measure of the right to rescind. Hence, where the defendant
makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383
and 1384. But the operation of these two articles is limited to the
cases of rescission for lesion enumerated in Article 1381 of the
Civil Code of the Philippines, and does not apply to cases under
Article 1191.”5
The eminent jurist explained the apparent confusion between
the two types of remedies: “It is probable that the petitioner’s
confusion arose from the defective technique of the new Code
that terms both instances as ‘rescission’ without distinctions
between them; unlike the previous Spanish Civil Code of 1889,
that differentiated ‘resolution’ for breach of stipulations from
‘rescission’ by reason of lesion or damage. But the terminological
vagueness does not justify confusing one case with the other,
considering that patent difference in causes and results of either
action.”6
In another case,7 the Court has held that the prescriptive
period applicable to rescission or resolution under Article 1191
and 1592 is found in Article 1144 which provides that the action
upon a written contract should be brought within ten (10) years
from the rights of action accrue, and not the four (4) year period
provided for rescissible contracts.8
a. When Principles of Rescission for Rescissible
Contract Applied to Resolution of Sale
On the basis of the clear distinctions between the two
remedies of rescission and resolution, the author takes exceptions
Ibid, at p. 23.
Ibid, at p. 23. Difference between remedies of resolution and rescission reiterated
in Ong v. Court of Appeals, 310 SCRA 1 (1999).
7
Iringan v. Court of Appeals, 366 SCRA 41 (2001).
8
Art. 1389, Civil Code.
5
6
428
LAW ON SALES
to the ruling in Suria v. Intermediate Appellate Court,9 which
involved a “Deed of Sale with Mortgage,” where the mortgage
was constituted to secure the payment of the purchase price.
The sellers sought to rescind the contract of sale (instead of
foreclosing) by reason of the failure of the buyer to pay the
balance of the purchase price secured by the mortgage contract.
In ruling that the sellers could not avail of the remedy of
rescission under Article 1191, Suria held that since a contract
of sale obligates the seller to transfer the ownership of and to
deliver a determinate thing to the buyer, and the buyer in turn is
obligated to pay a price certain in money or its equivalent, then
by the execution of the deed of mortgage, the buyer was deemed
to have fulfilled his end of the bargain: “The payments on an
installment basis secured by the execution of a mortgage took
the place of a cash payment. In other words, the relationship
between the parties is no longer one of buyer and seller because
the contract of sale has been perfected and consummated. It
is already one of a mortgagor and a mortgagee.”10 The ruling,
although taking note of Justice J.B.L. Reyes’ reasoning in
Universal Food Corp., went on to conclude that the situation is
“different” and held that the remedy of rescission under Article
1384 of the Civil Code is merely subsidiary in the absence of
legal remedies available to the seller, such as foreclosure.
The reasoning fails to take into consideration that the
mortgage contract was merely a subsidiary contract, and
could not exist without principal contractual obligation (i.e., the
obligation to pay the price), which was part and parcel of the
contract of sale entered into between the parties. The mortgage
contract therefore was only meant to secure, not to replace, the
obligation of the buyer to pay the purchase price.
b. When Rescission Should Have Been Applied
The decision in Uy v. Court of Appeals,11 demonstrates an
instance when the remedy of rescission or resolution was not
151 SCRA 661 (1987).
Ibid, at p. 667.
11
314 SCRA 69 (1999).
9
10
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
429
applied by the Court, when it seemed the more appropriate
solution to the issues raised.
In Uy, a contract of sale covered the purchase of eight (8)
residential lots, and it was determined that three (3) of the lots
delivered were subject to landslide and could not be used for the
construction of residential building. The trial court held that the
rescission effected by the buyer was not the appropriate remedy
since in such a case the seller had delivered and did not commit
any breach of his obligation, and the buyer-NHA did not suffer
any injury by the performance thereof. The Court held —
The cancellation, therefore, was not a rescission
under Article 1191. Rather, the cancellation was based
on the negation of the cause arising from the realization
that the lands, which were the object of the sale, were
not suitable for housing.
Cause is the essential reason which moves the
contracting parties to enter into it. In other words,
the cause is the immediate, direct and proximate
reason which justifies the creation of an obligation
through the will of the contracting parties. Cause,
which is the essential reason for the contract, should
be distinguished from motive, which is the particular
reason of a contracting party which does not affect the
other party. x x x.
Ordinarily, a party’s motive for entering into the
contract do not affect the contract. However, when the
motive predetermines the cause, the motive may be
regarded as the cause ... x x x.
Accordingly, we hold that the NHA was justified
in canceling the contract. The realization of the
mistake as regards the quality of the land resulted in
the negation of the motive/cause thus rendering the
contract inexistent ... [under] Article 1318 of the Civil
Code [defining the essential requisite of contracts].12
Perhaps the better solution would have been to allow
rescission on the ground that it violated the warranty on the
12
Ibid, at pp. 82-85.
430
LAW ON SALES
indicated use of the subject matter. The facts did indicate that
“NHA would not have entered into the contract were the lands
not suitable for housing. In other words, the quality of the land
was an implied condition for the NHA to enter into the contract.”
Under Article 1545 of the Civil Code, where the obligation of the
party to a contract of sale is subject to any condition which is
not performed, the other party may refuse to proceed with the
contract or he may waive performance of the condition; if the
other party promised that the condition should happen or be
performed, the other party may also treat the non-performance
of the condition as a breach of warranty, which would entitle the
other party to rescind. Rescission may have also been justified
for breach of warranty against hidden defects.
2. Remedy of “Rescission” Covered
The remedy of rescission covered by this chapter is that
referred to in Article 1191 of the Civil Code, thus:
ART. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the
rights of third persons who have acquired the thing,
in accordance with Articles 1385 and 1388 and the
Mortgage Law.
In the sales of immovables on installments, a specific
remedy of rescission is provided for under Article 1592 of the
Civil Code, thus —
ART. 1592. In the sale of immovable property, even
though it may have been stipulated that upon failure to
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
431
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.
Article 1592 has been construed to apply to all sales of
immovables even when there is no stipulation on automatic
rescission, because of the use of the phrase “even though.”13
Two other laws have varied the power to rescind covered in
Article 1191 when it comes to immovables, namely, the Maceda
Law and Section 23 of Pres. Decree No. 957, which have been
covered in more details in the previous chapter.
a. Nature of the Remedy of Rescission or Resolution
The Supreme Court has ruled in one case,14 that “to rescind”
is to declare a contract void at its inception and to put on end to it
as though it never was; it is not merely to terminate the contract
and release the parties from further obligations to each other,
but to abrogate it from the beginning and to restore the parties to
their relative positions as if no contract had been made.
In another case,15 the Court held that the right of rescission
of a party to an obligation under Article 1191 is predicated on
a breach of faith by the other party that violates the reciprocity
between them.16 In yet another case,17 it held that the breach
contemplated in Article 1191 is the obligor’s failure to comply
with an obligation already extant, and does not cover the failure
of a condition to render binding that obligation. Ironically, in one
case,18 the Court characterized the failure of a party to comply
Jacinto v. Kaparaz, 209 SCRA 246 (1992).
Laforteza v. Machuca, 333 SCRA 643 (2000), citing Ocampo v. Court of Appeals,
233 SCRA 551 (1994).
15
Romero v. Court of Appeals, 250 SCRA 223 (1995).
16
Uy v. Court of Appeals, 314 SCRA 69 (1999); Velarde v. Court of Appeals, 361
SCRA 56 (2001).
17
Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253, 260 (1997).
18
Gil v. Court of Appeals, 411 SCRA 18 (2003).
13
14
432
LAW ON SALES
with his obligation in reciprocal contracts as the happening of “a
resolutory condition for which the remedy is either rescission or
specific performance under Article 1191 of the New Civil Code.” It
had been generally understood that the happening of a resolutory
condition ipso facto extinguishes the contract without need of the
exercise of any remedy of rescission.19
b. Rescission Must Be Based on Substantial Breach
The power to rescind under Article 1191 is based only on
substantial breach, pursuant to the principle laid down in Article
1234 which states that “[I]f the obligation has been substantially
performed in good faith, the obligor may recover as though there
has been a strict and complete fulfillment, less damages suffered
by the obligee.”
Even when there is substantial breach as to allow the
rightful party to rescind, and in fact he does rescind the contract,
it is within the power of the courts to fix a period to allow the
defaulting party an opportunity to comply with his obligation. This
is especially so when the breach constitutes mere negligence
(culpa) as distinguished from fraud or malice (dolo) which is
defined as a “conscious and intentional design to evade the
normal fulfillment of existing obligations.”20
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc.,21
held that when the buyer in not paying the balance of the
purchase price had acted in bad faith, such buyer would not be
entitled to ask the courts to give it further time to make payment
and thereby erase the default or breach that it had deliberately
incurred: “To do otherwise would be to sanction a deliberate and
reiterated infringement of the contractual obligations incurred
... an attitude repugnant to the stability and obligatory force of
contracts.”22
19
This ruling would perhaps find basis under Article 1545 which provides that
“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.”
20
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93 (1972).
21
43 SCRA 93 (1972).
22
Ibid, at p. 101.
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
433
c. Restitution as Consequence of Rescission
The last paragraph in Article 1191 cross-refers to Articles
1385 and 1388 which apply to rescissible contracts. Under Article
1385, the employment of the remedy of rescission “creates
the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interests;
consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore.”23
The same article also provides that rescission shall not take
place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad
faith and that indemnity for damages may be demanded from the
person causing the loss.24 On the other hand, under Article 1388,
whoever acquires in bad faith the things alienated in fraud of
creditors, shall indemnify the latter for damages suffered by them
on account of the alienation, whenever it should be impossible
for him to return them.
Consequently, the primary consequence of an effective
exercise of the remedy of rescission or resolution would be
mutual restitution.
d. When Forfeiture of Payments Allowed in Rescission
The effect of restitution in the remedy of rescission may be
stipulated against, and such stipulation would be enforceable to
the extent that it is reasonable.
Early on in The Manila Racing Club v. The Manila Jockey
Club,25 the Court held that a provision in the contract providing for
forfeiture of the amounts paid in a contract of sale is valid being
in the nature of a penal clause (now governed by Article 1226)
and within the ambit of the freedom of the parties to stipulate
See also Supercars Management & Dev. Corp. v. Flores, 446 SCRA 34 (2004).
“Under Article 1385 of the Civil Code, rescission creates the obligation to return
the things which were the object of the contract but such rescission can only be carried out
when the one who demands rescission can return whatever he may be obliged to restore.
This principal has been applied to rescission of reciprocal obligations under Article 1191
of the Civil Code.” Co v. Court of Appeals, 312 SCRA 528 (1999).
25
69 Phil. 55 (1939).
23
24
434
LAW ON SALES
in a contract (now governed by Article 1306), since “[i]n its
double purpose of insuring compliance with the contract and of
otherwise measuring beforehand the damages which may result
from non-compliance, it is not contrary to law, morals or public
order because it was voluntarily and knowingly agreed upon.”26
Parenthetically, Article 1486 now provides that in the sale
of personal property on installments, “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.”
Thus, Pangilinan v. Court of Appeals,27 held: “The seller’s right
in a contract to sell with reserved title to extrajudicially cancel the
sale upon failure of the buyer to pay the stipulated installments and
retain the sums and installments already received has long been
recognized by the well-established doctrine of 39 years standing.”
Nevertheless, it should be noted that the Court may still allow,
as in its decision in Gomez v. Court of Appeals,28 such forfeiture
even in the absence of a forfeiture clause, as a reasonable
compensation for the use of the subject matter of the contract.
e. Who May Demand Rescission
Since rescission is predicated on a breach of faith by the
other party that violates the reciprocity between them, Uy v. Court
of Appeals,29 held that the power to rescind, therefore, is given
only to the injured party.
In addition, Laforteza v. Machuca,30 held that when rescission
of a contract of sale is based on Article 1191, mutual restitution is
required to bring back the parties to their original situation prior
to the inception of the contract; and that consequently, rescission
can be carried out only when the one who demands rescission
can return whatever he may be obliged to restore.31
Ibid, at p. 57.
279 SCRA 590 (1997).
28
340 SCRA 720 (2000).
29
314 SCRA 69 (1999).
30
333 SCRA 643 (2000).
31
Ibid, citing Co v. Court of Appeals, 312 SCRA 528 (1999). Also Supercars
Management & Dev. Corp. v. Flores, 446 SCRA 34 (2004).
26
27
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
435
f. Rescission Generally Judicial in Nature
In a true contract of sale, a provision granting the nondefaulting party a right to rescind would be superfluous because
such remedy is inherent in a contract of sale under Article 1191;
consequently, the specification in the contract that in case of
breach, the other party has a right to rescind does not generally
confer any additional right. Nonetheless, whether express or
implied, the remedy of rescission is inherently judicial in nature,32
in accordance with the general principle that “No man may, even
one with a valid and lawful cause of action, take the law into his
own hands and must resort to the aid of the courts to enforce his
rights.”33
The remedy of rescission in reciprocal contracts is not
absolute, since the third paragraph of Article 1191 which provides
that the courts “shall decree the rescission claimed, unless there
be just cause authorizing the fixing of the period,” has been the
statutory basis by which the Court has held that the injured party
himself cannot resolve the obligation,34 and requires confirmation
of such remedy by the courts.35 In the case of immovables, the
general provisions of Article 1191 should give way to the particular
provisions of Article 1592 which provides that when there has
been a demand made on the buyer for rescission either judicially
or by a notarial act, “the court may not grant him a new term.”36
g. When Extrajudicial Rescission Allowed
To the general principle that rescission must be exercised
judicially, the Court has recognized the validity and effectivity of
an express stipulation by the parties to a reciprocal contract that
rescission in case of default by one party, may be resorted to by
the other party extrajudicially.
32
Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631 (1918); Republic
v. Hospital de San Juan de Dios, 84 Phil. 820 (1949); De la Rama Steamship Co. v. Tan,
G.R. No. 8784, May 21, 1956, 99 Phil. 1034 Unrep. (1956).
33
See Arts. 433 and 539, Civil Code.
34
TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES,
Vol. IV, p. 171 (1973). Angeles v. Calasanz, 135 SCRA 323 (1985).
35
Gaboya v. Cui, 38 SCRA 85 (1971); Luzon Brokerage Co., Inc. v. Maritime
Building Co., Inc., 43 SCRA 95 (1972).
36
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305 (1978).
436
LAW ON SALES
Earlier, Froilan v. Pan Oriental Shipping Co.,37 held that
“there is nothing in the law that prohibits the parties from entering
into an agreement that violation of the terms of the contract would
cause cancellation thereof, even without court intervention.”38
Curiously enough though, the contract in Froilan did not expressly
give to the mortgagee the right to cancel the agreement, and
the only relevant provision granted the mortgagee the power to
rescind the contract “as it may see fit in case of breach of the
terms thereof by the mortgagor,” which ordinarily would still mean
seeking remedy of rescission through court action.
Since Article 1191 makes available to the injured either of
the alternative remedies to rescind or to enforce fulfillment of
the contract, with damages in either case, if the obligor does
not comply with what is incumbent upon him, then Pangilinan v.
Court of Appeals,39 has held that —
... There is nothing in this law which prohibits the
parties from entering into an agreement that a violation
of the terms of the contract would cause its cancellation
even without court intervention. The rationale for the
foregoing is that in contracts providing for automatic
revocation, judicial intervention is necessary not for
purposes of obtaining a judicial declaration rescinding
a contract already deemed rescinded by virtue of an
agreement providing for rescission without judicial
intervention, but in order to determine whether or
not the rescission was proper. Where such propriety
is sustained, the decision of the court will be merely
declaratory of the revocation, but it is not in itself the
revocatory act. ...40
In contrast, Iringan v. Court of Appeals,41 provides for the
legal consequences when there is no contractual clause allowing
extrajudicial rescission. In that decision, the Court held that a
12 SCRA 276 (1964).
Ibid, at p. 286.
39
279 SCRA 590 (1997).
40
Ibid, at pp. 597-598. Reiterated in Gomez v. Court of Appeals, 340 SCRA 720
(2000).
41
366 SCRA 41 (2001).
37
38
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
437
stipulation in a sale allowing rescission under Article 1191 is valid,
but it does not grant “automatic rescission,” since rescission must
be invoked judicially, and the courts are granted power to deny
rescission should there be grounds which justify the allowance of
a term for the performance of the obligation, thus —
Consequently, even if the right to rescind is made
available to the injured party, the obligation is not ipso
facto erased by the failure of the other party to comply
with what is incumbent upon him. The party entitled
to rescind should apply to the court for a decree of
rescission. The right cannot be exercised solely on a
party’s own judgment that the other committed a breach
of the obligation. The operative act which produces the
resolution of the contract is the decree of the court
and not the mere act of the vendor. Since a judicial or
notarial act is required by law for a valid rescission to
take place, the letter written by respondent declaring
his intention to rescind did not operate to validly rescind
the contract.42
The essence of the doctrine has been reiterated in Spouses
Benito v. Saquitan-Ruiz,43 where the Court held that a seller cannot unilaterally and extrajudicially rescind a sale where there is
no express stipulation authorizing it; and that unilateral rescission will not be judicially favored or allowed if the breach is not
substantial and fundamental to the fulfillment of the obligation.44
h. Rescission Requires Positive Act
Rescission is a remedy that would have no automatic
application, even when the factual basis therefor (substantial
breach) be present in the situation. Being primarily a remedy,
rescission requires a positive act on the part of the injured party,
since it is legally possible that he may waive rescission and
proceed with specific performance. This principle is affirmed
in the language of Article 1592 that does not allow automatic
Ibid, at p. 48.
394 SCRA 250 (2002).
44
Reiterated in Heirs of Jesus M. Mascuñana v. Court of Appeals, 461 SCRA 186
(2005).
42
43
438
LAW ON SALES
rescission to take place even by stipulation, and mandates
a positive act of notarial or judicial demand on the part of the
unpaid seller.
In City of Cebu v. Heirs of Candido Rubi,45 involving a sale
of real property, when the buyer failed to pay the stipulated
purchase price in accordance with the terms of the contract, but
the seller did not give a notice of rescission, and the only notice
given to the buyer was a demand to vacate the premises, the
Court held that such written demand did not amount to a demand
for rescission under Article 1592.
Co v. Court of Appeals,46 ruled that although the failure
of the buyer to pay the balance of the purchase price was
a breach of her obligation under Article 1191, nevertheless,
since the seller did not sue for either specific performance nor
rescission, then the seller would have no right, without any
express provision to that effect, to forfeit the payments already
made by the buyer.
On the other hand, rescission to resolve a contract of
sale should be distinguished from, and cannot be deemed
necessarily included in, an action for reconveyance filed to
recover possession of the subject matter of the sale. Thus,
Olympia Housing v. Panasiatic Travel Corp.,47 held that in the
sale of real property, the seller is not precluded from going to
the courts to demand judicial rescission in lieu of a notarial act
of rescission; however, such action would be different from
an action for reconveyance of possession; and that although
judicial resolution of a contract would in turn give rise to mutual
restitution, it would not necessarily arise when the action filed
was for reconveyance. In addition, the Court held that in an
action for rescission, unlike in an action for reconveyance
predicated on an extrajudicial rescission (rescission by notarial
act), the court, instead of decreeing rescission, may authorize
for a just cause the fixing of a period.48
306 SCRA 408 (1999).
312 SCRA 528 (1999).
47
395 SCRA 298 (2003).
48
Reiterated in Ramos v. Heruela, 473 SCRA 79 (2005).
45
46
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
439
CONTRACT OF SALE VERSUS CONTRACT TO SELL
Since this chapter will employ the differences between a
contract of sale and a contract to sell to evaluate the evolving
characterization of the remedies of rescission or resolution
and cancellation, it would be worthwhile to discuss briefly what
clearly were the agreed differences between the two types of
sale contracts.
1. Importance of Proper Characterization
of Contract to Sell
It is the author’s position that both a contract of sale and a
contract to sell may be governed by the genus “sale” as defined
by Article 1458 of the Civil Code, as a contract where “one of the
contracting parties obligates himself to transfer the ownership of
and to deliver a determinate thing, and the other to pay therefor
a price certain in money or its equivalent;” especially when the
article also provides that “[a] contract of sale may be absolute
or conditional.” In addition, under Article 1479, a provision in the
Title on Sale, it is expressly recognized that “[a] promise to buy
and sell a determinate thing for a price certain is reciprocally
demandable,” which obviously covers a contract to sell.
The importance of characterizing contracts to sell as species
of the genus “sale” under Article 1458 is to determine the set
of laws that govern such contracts, including the appropriate
remedies available to the contracting parties. Consequently, if
contracts to sell fall within the same genus as contracts of sale,
then the rules and principles applicable to contracts of sale would
also apply to contracts to sell, except as modified by the fact that
contracts to sell are primarily subject to suspensive conditions,
and therefore must be governed by the doctrines pertaining to
conditional contracts. For example, in the application of the rules
on double sales, it has been generally held that they have no
applications to contracts to sell.49
49
Mendoza v. Kalaw, 42 Phil. 236 (1921); Lim v. Court of Appeals, 162 SCRA 564
(1990); Cheng v. Genato, 300 SCRA 722 (1998); San Lorenzo Dev. Corp. v. Court of
Appeals, 449 SCRA 99 (2005).
440
LAW ON SALES
It cannot be denied, however, that there is a class of
“contracts to sell” that do not fall within the genus sale as defined
under Article 1458, when the underlying primary obligation is not
an obligation “to give” (i.e., to transfer ownership and delivery
possession of the subject matter), but rather an obligation “to
do,” which constitutes essentially of an obligation “to enter into
a contract of sale.” Such contracts to sell can also fall within the
definition of “mutual promise to buy and sale” under Article 1479
of the Civil Code.
As discussed hereunder, the Supreme Court itself has not
definitively decided on the proper classification of contracts to sell,
which has led to conflicting rulings on important issues related to
such contracts, mainly on the appropriate remedies available to
parties in cases of “breach.”
2. Recent Rulings that Consider Contracts to Sell
Not Covered by the Genus Sale
To jumpstart the discussions on the matter, it may be
appropriate to look at recent pronouncements of the Court that
indicate that it has not yet clearly pinned down the essence of
contracts to sell.
In Coronel v. Court of Appeals,50 the Court, through Justice
Melo, held that a contract to sell “may not be considered a
contract of sale because the first essential element is lacking,”
which is consent or meeting of the minds, “that is, consent to
transfer ownership in exchange for the price,”51 thus —
... In a contract to sell, the prospective seller
explicitly reserves the transfer of title to the prospective
buyer, meaning, the prospective seller does not as yet
agree or consent to transfer ownership of the property
subject of the contract to sell until the happening of
an event, which for present purposes we shall take
as the full payment of the purchase price. What the
seller agrees or obliges himself to do is to fulfill his
50
51
263 SCRA 15 (1996).
Ibid, at p. 26.
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promise to sell the subject property when the entire
amount of the purchase price is delivered to him. In
other words, the full payment of the purchase price
partakes of a suspensive condition, the non-fulfillment
of which prevents the obligation to sell from arising and
thus, ownership is retained by the prospective seller
without further remedies by the prospective buyer...
Stated positively, upon the fulfillment of the suspensive
condition which is the full payment of the purchase
price, the prospective seller’s obligation to sell the
subject property by entering into a contract of sale
with the prospective buyer becomes demandable as
provided in Article 1479 of the Civil Code...52
Coronel therefore defined a “contract to sell” as “a bilateral
contract whereby the prospective seller, while expressly
reserving the ownership of the subject property despite delivery
thereof to the prospective buyer, binds himself to sell the said
property exclusively to the prospective buyer upon fulfillment of
the condition agreed upon, that is, full payment of the purchase
price.”53 Under such ruling, even upon the fulfillment of the
suspensive condition (i.e., the full payment of the purchase
price), ownership will not automatically transfer to the buyer
although the property may have been previously delivered to
the buyer, since the prospective seller still has to convey title
to the prospective buyer by entering into a contract of sale.54
Accordingly, the happening of the suspensive condition does not
give rise to an executory contract of sale subject to an action
for specific performance, since the obligation of the “seller” is to
enter into a contract of sale, merely a personal obligation “to do”
which cannot be the subject of an action for specific performance.
Ironically, only a few days before the Coronel decision, the
Court in Philippine National Bank v. Court of Appeals,55 held
that —
Ibid, at pp. 26-27; emphasis supplied.
Ibid, at p. 27. Reiterated in Edrada v. Ramos, 468 SCRA 597 (2005).
54
Ibid, at p. 28. Reiterated in Hulst v. PR Builders, Inc., 532 SCRA 74 (2007);
Castillo v. Reyes, 539 SCRA 193 (2007).
55
262 SCRA 464 (1996).
52
53
442
LAW ON SALES
A contract to sell is akin to a conditional sale where
the efficacy or obligatory force of the vendor’s obligation to transfer title is subordinated to the happening of
a future and uncertain event so that if the suspensive
condition does not take place, the parties would stand
as if the conditional obligation had never existed. ...
If it were not full payment of the purchase price upon
which depends the passing of title from the vendor to
the vendee, it may be some other condition or conditions that have been stipulated and must be fulfilled before the contract is converted from a contract to sell or
at the most an executory sale into an executed one.56
More telling is the ruling in David v. Tiongson,57 where the
Court, in spite of the finding that underlying agreement was a
contract to sell (i.e., brought about by the stipulation that the
deed of sale and corresponding title would be issued only after
full payment), held explicitly that there was a perfected contract,
and granted the remedy of specific performance. To a great
extent, David denies the characterization under Coronel that
upon fulfillment of the suspensive condition, there is no contract
of sale upon which an action for specific performance may be
interposed.
In Gomez v. Court of Appeals,58 the Court clearly treated a
contract to sell as within the same genus as a contract of sale,
when it held that —
To be sure, a contract of sale may either be absolute or conditional. One form of conditional sales is
what is now popularly termed as “Contract to Sell,”
where ownership or title is retained until the fulfillment of a positive suspensive condition normally the
payment of the purchase price in the manner agreed
upon. x x x.59
Ibid, at pp. 477-478. Reiterated in Almocera v. Ong, 546 SCRA 164 (2008).
313 SCRA 63 (1999).
58
340 SCRA 720 (2000).
59
Reiterated in Demafelis v. Court of Appeals, 538 SCRA 305 (2007); Villador, Jr.
v. Zaballa, 545 SCRA 325 (2008).
56
57
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For a contract, like a contract to sell, involves a
meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something or to render some service. Contracts, in general,
are perfected by mere consent, which is manifested
by the meeting of the offer and the acceptance upon
the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. x x x.60
Leaño v. Court of Appeals,61 held that in a contract to sell real
property on installments, the full payment of the purchase price is
a positive condition, and that “[t]he transfer of ownership and title
would occur after full payment of the price.”62 In Carrascoso, Jr. v.
Court of Appeals,63 the Court held that if the suspensive condition
is fulfilled, the contract of sale is thereby perfected, such that if
there had already been previous delivery of the property subject
of the sale to the buyer, ownership thereto automatically transfers
to the buyer by operation of law, without any further at having to
be performed by the seller.
The foregoing rulings all point to one thing: that the Supreme
Court uses the same term “contract to sell” to identify two different
types of conditional contracts — one where the underlying
contract embodies bilateral-reciprocal real obligations to give,
but that the contract’s efficacy is subjected to a suspensive
condition; and the other, where the primary obligations created
is an obligation to do, i.e., to enter into a contract of sale,
subject to fulfillment of the obligation of the buyer to fully pay
the purchase price. The confusing, use of terms has thereby
undermined the jurisprudential rules pertaining to the remedies
available to the parties.
60
Ibid, at pp. 727-729,citing Galang v. Court of Appeals, 225 SCRA 37 (1993). Also
Villamaria, Jr. v. Court of Appeals, 487 SCRA 571 (2006).
61
369 SCRA 36 (2001).
62
Ibid, at p. 44.
63
477 SCRA 666 (2005).
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LAW ON SALES
3. Rulings Characterizing Contracts to Sell
a. Rationale for Parties Entering into Contracts to Sell
Coronel v. Court of Appeals,64 explains the rationale on why
parties would opt to enter into a contract to sell instead of a contract of sale, in that “a contract to sell ... is most commonly entered into so as to protect the seller against a buyer who intends
to buy the property in installment by withholding ownership over
the property until the buyer effects full payment therefor.”65
It should be noted, nonetheless, that even in a true contract
of sale or a conditional contract of sale, transfer of ownership
to the buyer may be expressly withheld even when delivery is
effected by the seller. Although the principle is that what the seller
decides to do at consummation stage should not change the
essential characterization of the contract at the point of perfection,
the Court has often employed the actuations of the parties during
consummation to characterize what the contract essentially was
at the point of perfection.
b. “On Where” the Suspensive Condition Is
Pinned Determines Nature of a Sale
The main ingredient of a contract to sell, which it shares
with a conditional contract of sale, is that it contains clearly a
stipulation that must amount to a suspensive condition, for not
every modality introduced in a sale contract would necessarily
be a condition.
For example, Heirs of San Andres v. Rodriguez,66 held
that a sale, even when denominated as a “Deed of Conditional
Sale,” should still be construed to be an absolute sale where the
contract is devoid of any proviso that title is reserved or the right
to unilaterally rescind until or unless the price is paid. The Court
held that the stipulation that the “payment of full consideration
based on a survey shall be due and payable in five (5) years from
64
65
(1999).
66
263 SCRA 15, 30 (1996).
Ibid, at pp. 30-31. Reiterated in Cebu v. Heirs of Candido Rubi, 306 SCRA 408
332 SCRA 769 (2000).
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the execution of a formal deed of sale,” was not a condition which
affected the efficacy of the contract of sale; it merely provided the
manner by which the full consideration is to be computed and the
time when it is to be paid.
On the other hand, Gonzales v. Heirs of Thomas and
Paula Cruz,67 held that the provision in the contract that the
lessee-buyer shall be obliged to purchase the property only if
the lessor-seller is able to obtain separate title to the property in
his name, was a conditional obligation to purchase the land and
governed by Article 1181 of the Civil Code, which provides that
“In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition.”
The Court held that the underlying contract was a contract to sell,
and consequently “[t]he obligatory force of a conditional obligation
is subordinated to the happening of a future and uncertain event,
so that if that event does not take place, the parties would stand
as if the conditional obligation had never existed.”68
Therefore, both a conditional contract of sale and a contract
to sell are subject to a suspensive condition, which usually takes
the form of the full payment of the purchase price by the buyer.
According to a line of decisions, the main ingredient in a contract
to sell is the existence of a stipulation or agreement imposing
a suspensive condition on the effectivity or demandability of
the contract itself, and not just on the obligation of the seller to
transfer and deliver the subject matter, for in the latter case, it
would amount to a conditional contract of sale.
Thus, in Romero v. Court of Appeals,69 the Court held that
a perfected contract of sale (as distinguished from a contract to
sell) may either be absolute or conditional depending on whether
the agreement is devoid of, or subject to, any condition on the
passing of title of the thing to be conveyed or on the obligation of
a party thereto. It held that the term “condition” in the context of
314 SCRA 585, 597 (1999).
Ibid, at p. 601, citing Rose Packing Company, Inc. v. Court of Appeals, 167 SCRA
309 (1988) per Paras, J.; Gaite v. Fonacier, 2 SCRA 831 (1961).
69
250 SCRA 223 (1995).
67
68
446
LAW ON SALES
a perfected contract of sale pertains in reality to the compliance by
one party of an undertaking the fulfillment of which would beckon
in turn the demandability of the reciprocal prestation of the other
party. It also held that where the so-called “potestative condition” is
imposed not on the birth of the obligation but on its fulfillment, only
the condition is avoided leaving unaffected the obligation itself.
In Romero the parties entered into a “Deed of Conditional
Sale” with the provision that should the seller fail to eject the
squatters from the property within 60 days from the contract date,
the downpayment shall be returned to the buyer. An ejectment
case was brought by seller, but judgment was rendered after the
60-day period had lapsed. The seller then offered to return to the
buyer the downpayment contending that there is no contract to
enforce with the non-fulfillment of the condition imposed under
the contract.
The Court held that the seller could neither seek rescission
of the contract of sale, nor could he challenge the agreement as
not being duly perfected contract. It distinguished between one
situation where the condition is imposed on an obligation of a party
which is not complied with, the other party may either refuse to
proceed or waive said condition;70 from the other situation where
the condition is imposed upon the perfection of the contract itself,
the failure of such condition would prevent the juridical relation
itself from coming into existence. Since under the agreement, the
seller was obliged to evict the squatters on the property, therefore
the ejectment of the squatters was a condition, the operative act
of which sets into motion the period of the payment of the balance
of the purchase price. The seller’s failure to remove the squatters
from the property within the stipulated period gave the buyer the
right to either refuse to proceed with the agreement or waive that
condition in consonance with Article 1545 of the Civil Code.71
In Heirs of Pedro Escanlar v. Court of Appeals,72 where the
sale contract contained the stipulation “this Contract of Sale of
Art. 1545, Civil Code.
Reiterated in Lim v. Court of Appeals, 263 SCRA 569 (1996); Babasa v. Court of
Appeals, 309 SCRA 532 (1998); and Caoili v. Court of Appeals, 314 SCRA 345 (1999).
72
281 SCRA 176 (1997).
70
71
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rights, interests and participations shall become effective only
upon the approval by the Honorable Court,” it was held that the
non-happening of the condition did not affect the validity of the
contract itself, thus —
There has arisen here a confusion in the concepts of
validity and the efficacy of a contract. Under Art. 1318
of the Civil Code, the essential requisites of a contract
are: consent of the contracting parties; object certain
which is the subject matter of the contract and cause
of the obligation which is established. Absent one of
the above, no contract can arise. Conversely, where
all are present, the result is a valid contract. However,
some parties introduce various kinds of restrictions or
modalities, the lack of which will not, however, affect
the validity of the contract.
In the instant case, the Deed of Sale, complying
as it does with the essential requisites, is a valid one.
However, it did not bear the stamp of approval of the
court. This notwithstanding, the contract’s validity was
not affected. ... In other words, only the effectivity and
not the validity of the contract is affected.73
Heirs of Pedro Escanlar distinguishes between the
demandability or efficacy of a sale from the requisites by which it
is constituted as a valid contract; that a contract to sell constitutes
a “valid contract,” but it may not be wholly demandable until the
suspensive condition upon which it based is fulfilled. To a great
extent, it denies the “lack of consent” characterization of Coronel
for contracts to sell.
Coronel itself recognized the distinction between a contract
to sell and a conditional contract of sale along these lines, thus —
A contract to sell ... may not even be considered
as a conditional contract of sale where the seller may
likewise reserve title to the property subject of the sale
until the fulfillment of a suspensive condition, because
in a conditional contract of sale, the first element of
73
Ibid, at p. 190.
448
LAW ON SALES
consent is present, although it is conditioned upon the
happening of a contingent event which may or may not
occur. If the suspensive condition is not fulfilled, the
perfection of the contract of sale is completely abated.
... However, if the suspensive condition is fulfilled, the
contract of sale is thereby perfected, such that if there
had already been previous delivery of the property
subject of the sale to the buyer, ownership thereto
automatically transfers to the buyer by operation of law
without any further act having to be performed by the
seller.
In a contract to sell, upon the fulfillment of the
suspensive condition which is the full payment of
the purchase price, ownership will not automatically
transfer to the buyer although the property may have
been previously delivered to him. The prospective
seller still has to convey title to the prospective buyer
by entering into a contract of absolute sale.74
The usual form of such an agreement is making the fulfillment
of the buyer’s obligation to pay in full the purchase price as the
condition upon which:
(a) Only then shall arise a demandable sale
contract;
(b) The obligation of the seller “to sell” the
subject matter of the shall only then arise;
or
(c) The obligation of the seller to transfer the
ownership of the subject matter sold shall
then arise.
It would seem from Coronel, that from the standpoint of
perfection it is not the existence of a clause “reserving ownership
with the seller even when there would be delivery of the subject
74
Ibid, at pp. 27-28, citing Homesite and Housing Corp. v. Court of Appeals, 133
SCRA 777 (1984). See also Santos v. Court of Appeals, 337 SCRA 67 (2000); Abesamis
v. Court of Appeals, 361 SCRA 328 (2001); Almira v. Court of Appeals, 399 SCRA 351
(2003); Vidal, Jr. v. Tayamen, 531 SCRA 147 (2007); Hulst v. PR Builders, Inc., 532
SCRA 74 (2007).
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449
matter to the buyer” that determines whether there is a contract
to sell, but to where the suspensive condition (i.e., full payment
of the purchase) is pinned to: the first two above-enumerated
conditions would give rise to a contract to sell, while the third type
of condition would give rise to a conditional contract of sale.
c. Requisite Stipulations for Contracts to Sell
There is another line of decisions, that seems to be the
main school of thought, which holds that what determines
whether a sale contract is a “contract to sell” is that there must
exist an agreement, whether express or implied, at the time of
perfection of the sale contract, that the obligation of the seller to
transfer ownership to the buyer pursuant to a sale (even when
physical possession may have been effected) is conditioned
upon the full payment by the buyer of the purchase price. The
existence of such agreement as an integral component of a
contract to sell, lies in locating the existence of two (2) clauses,
namely:
(a) Reservation of the ownership of the subject
matter with the seller, even if there should
be delivery thereof to the buyer; and
(b) Reservation of the right of the seller to
rescind the contract extrajudicially in the
event the suspensive condition (usually the
full payment of the purchase price) does not
happen.
The prevailing doctrine therefore is that absent any
stipulation in the deed or in the meeting of minds reserving title
over the property to the seller until full payment of the purchase
price and giving the seller the right to unilaterally rescind the
contract is case of non-payment, makes the contract one of sale
rather than a contract to sell.75
75
Tugaba v. Vda. De Leon, 132 SCRA 722 (1984); Dignos v. Court of Appeals, 158
SCRA 375 (1988); Topacio v. Court of Appeals, 211 SCRA 291 (1992); Almira v. Court of
Appeals, 399 SCRA 351 (2003); Vda. De Mistica v. Naguiat, 418 SCRA 73 (2003); Valdez
v. Court of Appeals, 439 SCRA 55 (2004); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004);
Portic v. Cristobal, 456 SCRA 577 (2005).
450
LAW ON SALES
(1) Reservation of Ownership by Seller
The existence or non-existence of the “reservation of
ownership with seller” clause, has been a critical consideration for
the Court in determining the nature of a sale contract because it
considers that the essence of a true contract of sale under Article
1458 is the “passing of ownership of the subject matter.” Thus,
the Court has often ruled that in a contract of sale, ownership over
the subject matter generally passes to the buyer as a result of the
tradition thereof; whereas, in a contract to sell, the delivery of the
subject matter does not pass ownership to the buyer even though
he possesses the same, under the stipulation that ownership
shall pass only upon full payment of the purchase price;76 and
that the remedies available to the seller would depend on this
particular point.
Thus, Manuel v. Rodriguez,77 held that in a contract of sale,
delivery will effectively transfer ownership of the subject matter
to the buyer, and the seller cannot recover ownership by the
fact of non-payment of the price without rescinding the contract
through judicial action. On the other hand, in a contract to sell,
since delivery does not transfer ownership to the buyer, the nonpayment of the purchase price prevents the obligation to sell
from arising and thus ownership is retained by the seller without
further remedies.78
In Padilla v. Spouses Paredes,79 where the contract between
the parties provided that: (a) the sellers agree not to alienate,
encumber, or in any manner to modify the right of title to said
property; (b) the sellers shall pay real estate taxes thereon until
it has been transferred to the buyer; (c) that on the full payment
of the purchase price of the property, the sellers will execute
and deliver a deed conveying to the buyer the title in fee simple
free from all liens and encumbrances; the Court held that said
76
Valarao v. Court of Appeals, 304 SCRA 155 (1999); Universal Robina Sugar
Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002); Chua v. Court of Appeals,
401 SCRA 54 (2003); Demafelis v. Court of Appeals, 538 SCRA 305 (2007); Castillo v.
Reyes, 539 SCRA 193 (2007); Villador, Jr. v. Zaballa, 545 SCRA 325 (2008).
77
109 Phil. 1 (1960).
78
Ong v. Court of Appeals, 310 SCRA 1 (1999).
79
328 SCRA 434 (2000).
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451
provisions signify that the title to the property remains in the
sellers until the buyer should have fully paid the purchase price,
which is a typical characteristic of a contract to sell.
In other cases,80 even in the absence of such express
stipulation, when it is clearly evidenced that the seller did not
intend to transfer title to the buyer until full payment of the
purchase price, the contract was still deemed to be a contract
to sell.
It must be noted, however, that in the natural course of
things, a positive agreement or stipulation to such effect must
accompany the perfection of a sale, since delivery or tradition
by itself (pursuant to a valid sale) would transfer ownership
without need of express stipulation to that effect. To illustrate,
in City of Cebu v. Heirs of Candido Rubi,81 the Court held that
the agreement between the buyer and seller that the offer
and acceptance was for a bid price to be paid in cash, not in
staggered payments, taken together with the fact that there was
no expressed or apparent intent to reserve ownership over the lot
until full payment was made, lead to no other conclusion that the
parties entered into a contract of sale and not a contract to sell.
Nevertheless, the Supreme Court has also ruled otherwise,
in the sense that by the subsequent acts or omissions of the
parties and not by an express reservation clause, it is possible
to derive such situation to determine that the contract between
them is a contract to sell.
In Adelfa Properties, Inc. v. Court of Appeals,82 two features
convinced the Court that the parties never intended to transfer
ownership to petitioner except upon full payment of the purchase
price: “Firstly, the exclusive option to purchase, although it provided for automatic rescission of the contract and partial forfeiture of the amount already paid in case of default, does not mention that petitioner is obliged to return possession or ownership
City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999); Santos v. Court of
Appeals, 337 SCRA 67 (2000).
81
306 SCRA 408 (1999).
82
240 SCRA 575 (1995). See also Ong v. Court of Appeals, 240 SCRA 565, 576577 (1995).
80
452
LAW ON SALES
of the property as a consequence of non-payment. There is no
stipulation anent reversion or reconveyance of the property to
herein private respondents in the event that the petitioner does
not comply with its obligation. With the absence of such a stipulation, although there is a provision on the remedies available to
the parties in case of breach, it may legally be inferred that the
parties never intended to transfer ownership to the petitioner prior to completion of payment of the purchase price.”83 The Court
further held that “[I]n effect, there was an implied agreement that
ownership shall not pass to the purchaser until he had fully paid
the price. Article 1478 of the Civil Code does not require that
such a stipulation be expressly made. Consequently, an implied
stipulation to that effect is considered valid and therefore, binding and enforceable between the parties. It should be noted that
under the law and jurisprudence, a contract which contains this
kind of stipulation is considered a contract to sell.”84
On the other hand, Babasa v. Court of Appeals,85 ruled that
a “Conditional Sale of Registered Lands,” which required the
final payment of the balance of the purchase price only when
the seller is able to obtain clean titles to the properties sold
within twenty (20) months from the date of the sale, was still an
absolute sale, and not a contract to sell, because “In the instant
case, ownership over [the subject properties] passed to [Vendee]
both by constructive and actual delivery. Constructive delivery
was accomplished upon the execution of the contract ... without
reservation of title on the part of the [Vendor] while actual delivery
was made when [Vendee] took unconditional possession of the
lots and leased them to its associate company.”86
The Court has equated stipulations (which are looked into
at the perfection stage of the contract) with actual transfer of
ownership, which dwells into the performance of the obligations
under a contract. What should determine the nature of the contract,
and therefore the available remedies in case of breach, should
240 SCRA 575, 577.
Ibid, at p. 577.
85
290 SCRA 532 (1998).
86
Ibid, at p. 540. Also Buot v. Court of Appeals, 357 SCRA 846 (2001).
83
84
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be the existence or non-existence of the requisite stipulations at
the time of perfection, and not by what the parties do or fail to do
during performance stage.
To illustrate, in Santos v. Court of Appeals,87 in characterizing
the contract, the Court held that “Article 1458 ... expressly obliges
the vendor to transfer ownership of the thing sold as an essential
element of a contract of sale. This is because the transfer
of ownership in exchange for a price paid or promised is the
very essence of a contract of sale. ... When the circumstances
categorically and clearly show that no valid transfer of ownership
was made by the vendors to the vendee, their agreement cannot
be deemed a contract of sale, but merely a contract to sell, where
ownership is reserved by the vendor and is not to pass until full
payment of the purchase price, which constitutes a positive
suspensive condition.”88
The test employed by the Court seems to be an after-thefact (i.e., after perfection) determination of whether the seller has
by tradition transferred ownership to the buyer. Tradition does
not determine the nature of the contract, but is pursued only as
a consequence of the contract. If seller refuses to deliver in spite
of a clear obligation to do so, that would be a breach that should
entitle the buyer to rescind the contract. On the other hand,
when there is an express stipulation that seller will not transfer
ownership until buyer shall have fully paid the purchase price, the
refusal of the seller to effect tradition until the buyer shall have
complied with his own obligation, would not authorize the buyer
to rescind the contract for then there would be no breach.
(2) Agreement as to Deed of Absolute Sale
In a number of decisions, the Supreme Court has considered
as an important factor whether there is a stipulation or promise
that the seller shall execute a deed of absolute sale upon
completion of payment of the purchase price by the buyer, or
whether the agreement between the parties is embodied in a
private document. In other words, such situations are treated as
87
88
337 SCRA 67 (2000).
Ibid, at pp. 75-76.
454
LAW ON SALES
equivalent to reservation of title in the name of the seller until the
buyer shall have completed the payment of the price.
Thus, in Chua v. Court of Appeals,89 the Court held that “[t]he
absence of a formal deed of conveyance is a strong indication
that the parties did not intend immediate transfer of ownership,
but only a transfer after full payment of the purchase price,”90
especially when the seller retained possession of the certificate
of title and all other documents relative to the sale until there was
full payment of the purchase price.
The present rule therefore is the absence of a formal deed of
conveyance is taken as a strong consideration that the underlying
agreement is a contract to sell, since there is a strong indication
that the parties did not intend to immediately transfer title, but
only a transfer after full payment of the price.91
However, there are also cases where the Court did not
consider such factor as determinative. For example, in Dignos v.
Court of Appeals,92 where there was an express stipulation that
the sellers would execute a final deed of absolute sale in favor
of the buyer upon payment of the balance of the purchase price,
the contract was still construed not to be a contract to sell, since
nowhere in the contract in question was there a stipulation to the
effect that title to the property sold is reserved in the seller until
full payment of the purchase price, nor was there a stipulation
giving the seller the right to unilaterally rescind the contract the
moment the buyer fails to pay within a fixed period.93
Closely connected with the lack of a formal deed of sale to
evidence the sale is when only a receipt is issued by the seller to
the buyer, for partial payment of the price. Thus, in Chua v. Court
of Appeals,94 the Court held that when the meeting of the minds
401 SCRA 54 (2003).
Ibid, at p. 67.
91
Manuel v. Rodriguez, 109 Phil. 1 (1960); Roque v. Lapuz, 96 SCRA 741 (1980);
Alfonso v. Court of Appeals, 186 SCRA 400 (1990); Lacanilao v. Court of Appeals, 262
SCRA 486 (1996); David v. Tiongson, 313 SCRA 63 (1999); Rayos v. Court of Appeals,
434 SCRA 365 (2004); Cruz v. Fernando, 477 SCRA 173 (2005).
92
158 SCRA 375 (1988).
93
Same ruling in Jacinto v. Kaparaz, 209 SCRA 246 (1992).
94
401 SCRA 54 (2003).
89
90
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455
of the parties is evidenced merely by a receipt which provided
that the earnest money shall be forfeited in case the buyer fails
to pay the balance of the purchase price on the stipulated sale,
that would indicate that the agreement between the parties was
a contract to sell: “This is in the nature of a stipulation reserving
ownership in the seller until full payment of the purchase price.
This is also similar to giving the seller the right to rescind
unilaterally the contract the moment the buyer fails to pay within
a fixed period.”95
(3) Reservation of Right to Extrajudicially Rescind in
Event of Non-Fulfillment of Condition
Although it seems established in our jurisdiction that in
order to find a sale contract to be a true “contract to sale,” it must
contain a clause which reserves to the seller the right to rescind
the contract without need of court action in the event the buyer
fails to pay the purchase price as agreed upon, such a doctrinal
requirement appears incongruent to the nature of a contract to
sell, as one where the contract itself is subject to a suspensive
condition.
In a contract to sell, where the suspensive condition has
not been fulfilled, no further remedy is necessary since ipso
jure the contract would have already been extinguished by nonhappening of the condition. However, if there has been previous
delivery of the subject matter to the buyer, although seller has
by reservation retained ownership over the subject matter, since
the seller still cannot take the law into his own hands, the seller
would still have to seek court action to recover possession from
the buyer if the latter refuses to voluntarily return the subject
matter. However, such action is not for rescission but actually
merely a recovery of possession. Article 539 of the Civil Code
provides that “[e]very possessor has a right to be respected in
his possession; and should he be disturbed therein he shall be
protected in or restored to said possession by means established
by the laws and the Rules of Court.” In turn, Article 433 provides
that “[a]ctual possession under a claim of ownership raises a
95
Ibid, at p. 67.
456
LAW ON SALES
disputable presumption of ownership [and] [t]he true owners
must resort to judicial process for the recovery of the property.”
On the other hand, in a contract of sale, the non-fulfillment
of the condition would authorize the seller to rescind the contract
or to waive the condition and seek enforcement of the contract, in
accordance with Article 1545 of the Civil Code. Thus, in Babasa
v. Court of Appeals,96 the Court held that when the obligation
of the buyer to fully pay the purchase price was made subject
to the condition that the seller first delivers the clean title over
the parcel bought within twenty (20) months from the signing
of the contract, such condition was imposed merely on the
performance of the obligation, as distinguished from a condition
imposed on the perfection of the contract. The non-happening
of the condition merely granted the buyer the right to rescind
the contract or even to waive it and enforce performance on the
part of the seller, all in consonance with Art. 1545 which provides
that “[w]here 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 non-performance of the condition as a breach of
warranty.”
Dignos v. Court of Appeals,97 which involved a “Deed of
Conditional Sale” over a parcel of land, what was executed was a
private instrument, which among others provided, that the sellers
would execute a final deed of absolute sale in favor of the buyer
upon payment of the balance of the purchase price. In holding
that the contract was not a contract to sell, but a contract of sale,
the Court held that “a deed of sale is absolute in nature although
denominated as a ‘Deed of Conditional Sale,’ where nowhere in
the contract in question is a proviso or stipulation to the effect
that title to the property sold is reserved in the vendor until full
payment of the purchase price, nor is there a stipulation giving the
vendor the right to unilaterally rescind the contract the moment
96
97
290 SCRA 532 (1998).
158 SCRA 375 (1988).
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
457
the vendees fails to pay within a fixed period.98 Somehow, the
logic of such ruling sounds unconvincing when taken from the
essence of a true contract to sell.
A contract to sell, precisely because it constitutes a contract
subject to a suspensive condition, does not require a specific
stipulation that the seller (who is the obligee) has the right to
“rescind” or more properly to terminate the contract when the
condition does not happen, since such effect is ipso jure, and
any express stipulation granting such right is superfluous. It is
in fact in a contract of sale that such a stipulation must appear,
otherwise, the seller cannot extrajudicially rescind the contract
and has to go to court for such remedy. In other words, contrary
to the ratiocination in Dignos, the absence of such provision
granting the seller the right to rescind extrajudicially should be
interpreted to mean that the contract is a contract to sell, and the
presence of that provision would indicate that it is a contract of
sale.
In Topacio v. Court of Appeals,99 the Court, in determining
whether the contract is one of sale or a contract to sell, held
that “[n]owhere in the transaction is it indicated that BPI [seller]
reserved its title on the property nor did it provide for any
automatic rescission in case of default. So when petitioner failed
to pay the balance of 5875,000.00 despite several extensions
given by private respondent, the latter could not validly rescind
the contract without complying with the provision of Article 1592
or Article 1191 on notarial or judicial rescission respectively.”100
The author would agree with Topacio in that if there is no
provision reserving title with the seller, it would be construed as
a contract of sale, because without such reservation, and the
subject property is delivered to the buyer, it would produce the
effect of tradition and there is no suspensive condition to talk
about. What seems enigmatic in Topacio are the discussions of
the Court on the effect of earnest money in determining whether
the contract is one of sale or contract to sell, thus —
98
Ibid, at p. 382; emphasis supplied; citing Luzon Brokerage Co., Inc. v. Maritime
Building Co., Inc., 86 SCRA 305 (1978); Tabuga v. Vda. de Leon, 132 SCRA 722 (1984).
99
211 SCRA 291 (1992).
100
Ibid, at p. 295.
458
LAW ON SALES
The payment by the petitioner of 5375,000.00 on
November 28, 1991 which respondent accepted, and
for which an official receipt was issued x x x was the
operative act that gave rise to a perfected contract of
sale between the parties. Article 1482 of the Civil Code
provides: x x x…
Earnest money is something of value to show that
the buyer was really in earnest, and given to the seller to
bind the bargain. Under the Civil Code, earnest money
is considered part of the purchase price and as proof of
the perfection of the contract. The 5375,000.00 given
by petitioner representing 30% of the purchase price is
earnest money...
Based on the aforecited article the parties have
agreed on the object of the contract which is the house
and lot ... and even before November 27, 1985 (the
date petitioner sent his letter together with the 30%
downpayment), the parties have agreed on the price
which is 51,250,000.00.101
The impression one gets from the afore-quoted discussions
in Topacio is the implication that a contract of sale is one that
is perfected because the parties have agreed on the three (3)
elements to constitute a valid sale: subject matter and the price
and its mode of payment; whereas, a contract to sell is not a
perfected contract. Such implication is misleading, for both a
contract of sale and a contract to sell are perfected contracts;
although the first is binding and demandable, the latter is binding
but with obligations subject to suspensive conditions. And just
because earnest money has been given, does not determine
whether it is a contract of sale or a contract to sell, for indeed
even in a contract to sell a substantial portion of the purchase
price may have been paid, but that alone does not convert it into
a contract of sale.
Therefore, in the subsequent decision in Philippine National
Bank v. Court of Appeals,102 the Court held that provision of
101
102
Ibid, at pp. 294-295.
262 SCRA 464, 482-483 (1996).
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
459
Article 1482 on earnest money gives no more than a disputable
presumption, and when the letter agreements between the
parties do not contain the substantial condition precedents,
do not lead to the conclusion that there was a contract to sell
at all.
In any event, as previously discussed above, the failure to
find a provision in a sale contract reserving power on the part of
the seller to extrajudicially rescind the contract in the event the
buyer fails to pay the purchase price would not qualify arrangement to be one of contract to sell.
4. Substantial Breach Issue Relevant Only
in Contracts of Sale
In a contract of sale, rescission can be availed of only in
case there has been substantial breach; whereas, in a contract
to sell, the doctrine of substantial breach has no application,
since the non-happening of the condition by whatever means or
reason, substantial or not, ipso jure prevents the obligation to sell
from arising.
Thus, in Heirs of Pedro Escanlar v. Court of Appeals,103 the
Court held that in a sale of real property on installments, when
the buyer has defaulted and the seller, instead of rescinding,
accepted late payments beyond the deadline stipulated, the
seller in effect waived and was estopped from exercising their
right to rescind under Article 1592 of the Civil Code.
This is in stark contrast to the ruling of the Court under the
same situation pertaining to contracts to sell, in Santos v. Court
of Appeals,104 where it held that “[f]ailure to pay the price agreed
upon in a contract to sell is not a mere breach, casual or serious,
but a situation that prevents the obligation of the vendor to convey
title from acquiring an obligatory force. This is entirely different
from the situation in a contract of sale, where non-payment of the
price is a negative resolutory condition.”105
281 SCRA 176, 193-194 (1997).
337 SCRA 67 (2000).
105
Ibid, at p. 77.
103
104
460
LAW ON SALES
In Padilla v. Spouses Paredes,106 the Court held that in a
contract to sell, the acceptance of partial payment cannot be
deemed a waiver of the right to cancel the contract; at best, it can
only be considered as an act of tolerance on the part of the seller
that could not modify the contract, absent any written agreement
to the effect signed by the parties.
In Buot v. Court of Appeals,107 the Court held that pursuant
to the second paragraph of Article 1188 of the Civil Code, in a
contract to sell, even if the buyers did not mistakenly make partial
payments, inasmuch as the suspensive condition was not fulfilled,
it is only fair and just that the buyers be allowed to recover what
they had paid in expectancy that the condition would happen;
otherwise, there would be unjust enrichment on the part of the
seller.
It should be noted however, that the non-fulfillment of the
condition, which would bring about breach of a contract of sale or
cancellation of the contract to sell, should be distinguished from
the “pendency” of the happening of the condition. For example,
in Adalin v. Court of Appeals,108 the Court held liable the seller
who re-sold the subject matter during the time when the condition
had not yet been fulfilled, holding that nothing in the law justifies
the seller to undertake a radical change of posture to justify
the re-selling of the property previously sold under a Contract
of Conditional Sale, to hold that pending the happening of the
condition, that the contract “was dependent on the sellers not
changing their minds about selling the property.”109
5. Crux of the Distinction
In a rather simplistic manner of considering the issue, and
apart from a contract to sell which embodies only the primary
obligation of the seller to “enter into a contract of sale,” the author
would dare say that a contract of sale and a contract to sell are
the opposite ways of approaching the very same sale transaction
328 SCRA 434 (2000).
357 SCRA 846 (2001).
108
280 SCRA 536 (1997).
109
Ibid, at p. 554.
106
107
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
461
at the executory stage, with respect to the obligation to transfer
ownership of the subject matter.
The contract of sale is basically one where the reciprocal
obligations created are deemed to be subject to one another as
each being the resolutory condition for the other. That is why
Article 1191 provides that the “power to rescind” is implied in
reciprocal obligations. As Tolentino aptly observed:
This article recognizes an implied or tacit resolutory condition in reciprocal obligations. It is a condition
imposed exclusively by law, even if there is no corresponding agreement between the parties.110
On the other hand, a contract to sell is one where the
reciprocal obligations created are deemed to be subject to the
full payment of the purchase price as constituting the normal
suspensive condition for the obligation of the seller to deliver
possession and/or transfer ownership; although it is possible
that the suspensive condition may take other form rather than its
reference to the full payment of the purchase price.
Therefore, the manner and effect of extinguishment of
obligations subject to conditions should make both the contract
of sale and the contract to sell basically the same since in an
obligation subject to a suspensive condition, the non-happening
thereof prevents the obligation from arising, whereas in an
obligation subject to a resolutory condition, the happening thereof
extinguishes in almost like manner the obligation as if it never
arose. However, such seeming similarity between the two types
of sale contracts is clear only when both are compared in their
perfection stages, when no obligation has been performed.
When, however, performance stage is reached (i.e., when
the subject matter of the sale has been delivered by the seller to
the buyer), a contract of sale assumes different consequences
from a contract to sell. In a contract of sale, delivery would
transfer ownership to the buyer, and therefore rescission must
COMMENTARIES
170 (1973).
110
AND
JURISPRUDENCE
ON THE
CIVIL CODE
OF THE
PHILIPPINES, Vol. IV, p.
462
LAW ON SALES
necessarily be done judicially since only the courts can grant the
remedy of recalling ownership that has passed to the buyer and
reverting it to the seller. On the other hand, in a contract to sell,
by express agreement, delivery of the subject matter does not
transfer ownership to the buyer, and therefore when the condition
is not fulfilled (i.e., non-payment of the purchase price) no court
intervention is needed to “rescind” the contract since ownership
has remained with the seller. If court intervention is necessary,
it is not for the rescission of the contract, but for the recovery of
the possession from the buyer who is not entitled thereto, and
refuses to voluntarily return the subject matter of the sale.
In their executory stages (i.e., the subject matter of sale has
not been delivered to the buyer), there is no practical difference in
remedies available to the innocent party in both a contract of sale
and a contract to sell for purposes of rescission, since both can be
done extrajudicially: in a contract of sale, by mere notarial notice
of rescission under Article 1592 the contract may be rescinded; in
a contract to sell, mere notice of cancellation would be sufficient
under Supreme Court rulings.111 When performance stage has
been reached, generally, court action is necessary to rescind a
contract of sale; whereas, no such court action is necessary to
rescind a contract to sell.
GOVERNING PROVISIONS AND PRINCIPLES FOR REMEDIES
OF RESCISSION AND CANCELLATION
1. Pre-Maceda Law Period
Prior to the passage of the Maceda Law, the legal provisions
governing the remedies of parties covering sales of immovables
were Articles 1191, 1591 and 1592 of the Civil Code.
Although Article 1191 provides for the power of rescission in
reciprocal contracts in general, it is Articles 1591 and 1592 which
specifically govern the power to rescind contracts of sale covering
immovables. Article 1591 states that “[s]hould the vendor have
reasonable grounds to fear the loss of immovable property sold
111
University of the Philippines v. De los Angeles, 35 SCRA 103 (1970); Palay, Inc.
v. Clave, 124 SCRA 638 (1983); Cheng v. Genato, 300 SCRA 722 (1998).
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
463
and its price, he may immediately sue for the rescission of the
sale;” otherwise, if no such grounds exist, the provisions of Article
1191 must be observed.
As discussed above, Article 1592 provides that even when
automatic rescission may have been expressly stipulated,
nonetheless, the buyer may still remove the default by payment
of what is due as long as no demand for rescission of the contract
has been made upon him either judicially or by notarial act.
Therefore, Article 1592 contains the principle that the remedy of
rescission requires the taking of a positive act on the part of the
non-defaulting party.
Although Article 1592 provides that “[a]fter the demand, the
court may not grant him a new term,” the Supreme Court has, in a
few instances and on grounds of equity, given the buyer reprieve,
even after the seller had given notarial demand for rescission.
In one case,112 the Court held that Article 1592 allows the
buyer of an immovable property to pay as long as no demand
for rescission has been made, and the consignation, of the
balance of the purchase price before the trial court operated as
full payment, which resulted in the extinguishment of the buyer’s
obligation under the contract of sale.
a. Remedy of Rescission under Articles 1191 and 1592
Have No Application to Contracts to Sell
Articles 1191 and 1592, which require rescission either by
judicial action, or notarial act, do not apply to contracts to sell.113
Likewise, the remedy of rescission under Articles 1380 et seq.
have no application to a contract to sell, not being included within
the enumerated contracts therein, nor is lesion or damage the
basis upon which remedy can be sought under a contract to
sell.114
Province of Cebu v. Heirs of Rufina Morales, 546 SCRA 315 (2008).
Pangilinan v. Court of Appeals, 279 SCRA 590 (1997); Valarao v. Court of
Appeals, 304 SCRA 155 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000);
Gomez v. Court of Appeals, 340 SCRA 720 (2000).
114
Ong v. Court of Appeals, 310 SCRA 1 (1999).
112
113
464
LAW ON SALES
In the early cases of Caridad Estates, Inc. v. Santero,115 and
Manuel v. Rodriguez,116 the Court had held that then Article 1504
(now Article 1592) applied only to a contract of sale of immovable,
and had no application to a contract to sell. In making such ruling,
Manuel held that the contention of the buyer that the seller —
... had no right to cancel the contract as there was
only a “casual breach” is likewise untenable. In contracts
to sell, where ownership is retained by the seller and
is not to pass until the full payment of the price, such
payment, as we said, is a positive suspensive condition,
the failure of which is not a breach, casual or serious,
but simply an event that prevented the obligation of
the vendor to convey title from acquiring binding force
in accordance with Article 1117 of the Old Civil Code
[now Article 1184]. To argue that there was only a casual
breach is to proceed from the assumption that the
contract is one of absolute sale, where non-payment is
a resolutory condition, which is not the case [here].117
The reasoning in Manuel is to the effect that since a contract
to sell is constituted by a suspensive condition on the full payment
of the price, the non-payment of the price would automatically,
even without the need of further action nor of the remedy of
rescission, extinguish the contract.
Under the New Civil Code, Ong v. Court of Appeals,118
discussed the rationale on why the remedy of rescission cannot
apply to a contract to sell, thus:
“In a contract of sale, the title to the property passes
to the vendee upon the delivery of the thing sold;
while in a contract to sell, ownership is, by agreement,
71 Phil. 114 (1940).
109 Phil. 1 (1960).
117
Ibid, at p. 10.
118
310 SCRA 1 (1999). The application of the Maceda Law never figured in the
resolution of the case perhaps because it was never invoked by the buyers. Also, the
subject matter of the purchase constituted of residential areas, piggery and a ricemill.
Likewise, the facts did indicate that formal demands were made upon buyers and
eventually a case to recover possession where the grace period provided by the Maceda
Law was never invoked.
115
116
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
465
reserved in the vendor and is not to pass to the vendee
until full payment of the purchase price. In a contract
to sell, the payment of the purchase price is a positive
suspensive condition, the failure of which is not a
breach, casual or serious, but a situation that prevents
the obligation of the vendor to convey title from
acquiring an obligatory force. ... The non-fulfillment of
the condition of full payment rendered the contract to
sell ineffective and without force and effect.119 It must
be stressed that the breach contemplated in Article
1191 of the New Civil Code is the obligor’s failure to
comply with an obligation already extant, not a failure
of a condition to render binding that obligation. Failure
to pay, in this instance, is not even a breach but merely
an event which prevents the vendor’s obligation to
convey title from acquiring biding force.”120
b. Equity Resolution for Contracts to Sell
Prior to the applicability of the Maceda Law, although the
principle of substantial breach and the remedies of rescission
found in Articles 1191 and 1592 have no application to contracts
to sell involving immovable, the Supreme Court has on occasion
applied them, under the principle of equity.
In J.M. Tuazon Co., Inc. v. Javier,121 where the buyer had
religiously been paying his monthly installments for eight years,
with interests, but even after default he was willing and had
offered to pay all the arrears, the Court granted additional period
of 60 days from receipt of judgment for the buyer to make all
installment payments in arrears plus interests, although demand
for rescission had already been made.
In Legarda Hermanos v. Saldana,122 although the buyer
clearly defaulted in the payment of his installments on a contract
Also Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997).
Ibid, at p. 10. Same ruling as in Luzon Brokerage Co., Inc. v. Maritime Building
Co., Inc., 46 SCRA 381 (1972); Rillo v. Court of Appeals, 274 SCRA 461 (1997); Cheng
v. Genato, 300 SCRA 722 (1998); Gonzales v. Heirs of Thomas and Paula Cruz, 314
SCRA 585 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000); Santos v. Court of
Appeals, 337 SCRA 67 (2000).
121
31 SCRA 829 (1970).
122
55 SCRA 324 (1974).
119
120
466
LAW ON SALES
to sell covering two parcels of land, the Court nevertheless
awarded ownership over one of the two (2) lots jointly purchased
by the buyer, when it found that the total amount of installments
paid, although not enough to cover the purchase price of the two
lots, were enough to cover fully the purchase price of one lot. The
Court deemed that there was substantial performance insofar as
one of the lots concerned as to prevent rescission thereof.
In both J.M. Tuazon Co. and Legarda Hermanos, the Court
acknowledged the “impropriety” of applying Article 1592, but that
there would be denial of “substantial justice” for the leeway given
to the buyers pursuant to Article 1234 of the Civil Code which
provides that “[i]f the obligation has been substantially performed
in good faith, the obligor may recover as though there had been
a strict and complete fulfillment, less damages suffered by the
oblige.” Reliance upon Article 1234 was misplaced for it embodies
the concept of “casual breach” (which would not authorized the
exercise of the remedy of rescission) from “substantial breach,”
both concepts of which are inapplicable to a contract to sell, for
the non-happening of the condition, whether casual or substantial,
is not a breach but prevents the obligations from arising, or more
accurately, extinguishes the underlying contract as though it
never existed.
In spite of previous decisions applying equity reasoning for
treating a contract to sell as a contract of sale when the subject
matters involve residential real estate, sometimes the Court still
adhered to the strict rule that substantial compliance will not be
a basis to save a buyer who has failed to pay the contract price
in a contract to sell.
In Lacanilao v. Court of Appeals,123 which involved a verbal
contract to sell a residential lot, the Court found the transaction
to be a contract to sell “where ownership is retained by the seller
until payment of the price in full, such payment is a positive
suspensive condition, failure of which is not really a breach but an
event that prevents the obligation of the vendor to convey title in
accordance with Article 1184 of the Civil Code.”124 The Court also
123
124
262 SCRA 486 (1996).
Ibid, at p. 490.
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
467
referred to Article 1545 which provides that “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.”125
To the author, the application of the principle of equity was
inappropriate in Lacanilao because not a single centavo had
been paid by the buyers pursuant to the alleged verbal sale.
The Court took into account the fact that the buyers have been
occupying the lot as lessees for almost three (3) decades, for
which they could have obtained a right of first refusal or could have
consigned the purchase price in court when the seller allegedly
refused to execute the deed of sale in their favor. However, it held
that: “This Court, while aware of its equity jurisdiction, is first and
foremost a court of law. Hence, while equity might tilt on the side
of the [buyers], the same cannot be enforced so as to overrule a
positive provision of law in favor of the [seller].”126
In Rillo v. Court of Appeals,127 the Court recognized that
since the contract between the parties was a contract to sell
covering non-residential immovables, it ruled that in such case
the applicable law is the Maceda Law which recognizes in
conditional sales of all kinds of real estate (industrial, commercial,
residential) the right of the seller to cancel the contract upon
non-payment of an installment by the buyer, which is simply an
event that prevents the obligation of the seller to convey title from
acquiring binding force. It also provides the buyer on installments
in case he defaults in the payment of succeeding installments.
This was the same ruling in Odyssey Park, Inc. v. Court of
Appeals,128 which covered a contract to sell commercial lots.
The foregoing rulings show the accommodating attitude
of the Supreme Court to buyers of residential real estate who
have exhibited a measure of good faith in complying with their
obligation to pay the purchase price even under a contract to
sell, as to go beyond form and accompanying rules on the effects
Ibid, at pp. 490-491.
Ibid, at p. 491.
127
274 SCRA 461 (1997).
128
280 SCRA 253 (1997).
125
126
468
LAW ON SALES
of non-happening of the suspensive condition to achieve equity
based on the circumstances present in a case; whereas, in the
case where the subject matter is commercial or industrial real
estate, the Court has maintained a stern adherence to the form
chosen by the parties for their contract, i.e., a contract to sell, and
implement the accompanying legal effects concomitant with such
form of sale.
c. Formal Notice Required to Cancel Contracts to Sell
Although legal provisions requiring notarial rescission, such
as Article 1592, have no application to contracts to sell involving
real property, nevertheless, the Court has required as a minimum
procedural rule for the “rescission” (i.e., cancellation) of a contract
to sell that at least notice be given by the seller to the buyer.
University of the Philippines v. De los Angeles,129 mentions
such requirement for the “rescission” of a contract to sell to be
“effective,” thus —
Of course, it must be understood that the act of a
party in treating a contract as cancelled or resolved
on account of infractions by the other contracting
party must be made known to the other and is always
provisional, being ever subject to scrutiny and review
by the proper court. If the other party denies the
rescission is justified, it is free to resort to judicial
action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that
the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract
violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it
proceeds at its own risk. For it is only the final judgment
of the corresponding court that will conclusively and
finally settle whether the action taken was or was not
129
35 SCRA 103 (1970).
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
469
correct in law. But the law definitely does not require
that the contracting party who believes itself injured
must first file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. Otherwise,
the party injured by the other’s breach will have to
passively sit and watch its damages accumulate during
the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that
he should exercise due diligence to minimize its own
damages...”130
University of the Philippines therefore did not question the
validity of the power to rescind a contract of sale extrajudicially
when stipulated, or the power to cancel or resolve a contract to
sell when the condition of payment of the purchase price is not
fulfilled. What it did stress was that the factual bases for either
rescission or cancellation may not be present to warrant the
exercise of either such remedies, and the same is always subject
to the final determination of a court of law. It further held that
the fears expressed that a stipulation providing for a unilateral
rescission in case of breach of contract may render nugatory the
general rule requiring judicial action and lead to abuse, is met
by the fact that “in case of abuse or error by the rescinder, the
other party is not barred from questioning in court such abuse
or error, the practical effect of the stipulation being merely to
transfer to the defaulter the initiative of instituting suit, instead of
the rescinder.”131
However, no amount of reading of University of the Philippines
explains the basis of why it held that in the cancellation of a
contract to sell, “the act of a party treating a contract as canceled
or resolved ... must be made known to the other.” The only
pronouncement that University of the Philippines explained was
that every act of rescission or cancellation would be provisional
unless the courts decree the existence of a factual basis for such
extrajudicial act. But nowhere did the decision explain why notice
to the other party was essential, other than perhaps the implied
130
131
Ibid, at p. 107; emphasis supplied.
Ibid, at p. 108; emphasis supplied.
470
LAW ON SALES
fairness to allow the other party the right to question in court the
propriety of the act of the seller. Nevertheless, whether there was
notice or not, if the factual basis for an extrajudicial rescission or
cancellation is present, the courts should decree the cancellation
to have become effective.
Indeed, in a contract to sell, as the Court itself held in a later
case of Torralba v. De los Angeles,132 on the contention of the
buyer that the seller should have resorted to a judicial decree
rescinding the contract to sell before awarding the lot to another
buyer —
This contention is untenable. The contract executed
by the petitioner and the PHHC expressly provided that
the contract shall be deemed annulled and cancelled
and the PHHC shall be at liberty to take possession
of said property and dispose the same to any other
person upon default of the petitioner to pay the installments due. Hence, there was no contract to rescind
in court because from the moment the petitioner defaulted in the timely payment of the installments, the
contract between the parties was deemed ipso facto
rescinded.133
Torralba thus correctly expressed the principle that the nonfulfillment of the condition ipso facto cancels or resolves a contract
to sell so that there is legally nothing else to do at that point.134 So
that notice to the defaulting party cannot be the operative act to
make the cancellation or resolution of a contract to sell valid and
effective. However, the facts of Torralba still show that despite
its pronouncements notice was given by the seller to the buyer
before “rescinding” the contract to sell.
One cannot say that Torralba decided as it did because essentially even possession of the subject property, although the
covering contract was a contract to sell, had not been transferred
to the buyer; and that had possession been transferred to the
96 SCRA 69 (1980).
Ibid, at p. 76; emphasis supplied.
134
Reiterated in AFP Mutual Benefit Asso. v. Court of Appeals, 364 SCRA 768
(2001).
132
133
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AND CANCELLATION FOR IMMOVABLES
471
buyer, even in a contract to sell, judicial action is necessary to recover the property from the buyer. But even then, the court action
is not one really to rescind, but for recovery of possession, and
certainly notice is not required to have such a cause of action.
Lim v. Court of Appeals,135 expressly applied the University
of the Philippines ruling as allowing the seller “to consider the
contract to sell between them terminated for non-payment of the
stipulated consideration,”136 and the only risk involved is that the
courts may not affirm the factual basis upon which to base the
non-happening of the suspensive condition.
In Palay, Inc. v. Clave,137 a “Contract to Sell” a piece of
land expressly provided that the contract shall be automatically
rescinded upon default in payment of any monthly installment
after the lapse of 90 days from the expiration of the grace period
of one month, without need of notice and with forfeiture of all
installments paid. For failure of the buyer to pay installments due,
the seller treated the contract as canceled without notice to the
buyer. In ruling that the cancellation was void because of lack of
notice, the Court held —
Well settled is the rule, as held in previous
jurisprudence, that judicial action for rescission of a
contract is not necessary where the contract provides
that it may be revoked and cancelled for violation of
any of its terms and condition. However, even in the
cited cases, there was at least a written notice sent
to the defaulter informing him of the rescission. As
stressed in University of the Philippines vs. Walfrido de
los Angeles the act of a party in treating a contract as
cancelled should be made known to the other.138
The reasoning of Palay, Inc. on why notice of cancellation
of a contract to sell by virtue of non-fulfillment of the suspensive
condition must be given to the other party seems to be either of
two things as aforequoted: first, it has always been the practice;
182 SCRA 564 (1990).
Ibid, at p. 572.
137
124 SCRA 638 (1983).
138
Ibid, at p. 644.
135
136
472
LAW ON SALES
and second, it was so decreed in University of the Philippines.
The first reasoning is unacceptable because a usage or practice
without legal or logical basis should be abandoned. The second
is unsupported by any reasoning found in University of the
Philippines.
The other legal basis of Palay, Inc. in mandating notice to
the other party is that even under the Maceda Law, notice of
cancellation is required to be given to the buyer by notarial act.
But then, as discussed below, the Maceda Law, is an aberration of
what otherwise would be established principles of cancellation in
contracts to sell. For cases covered by Maceda Law, such notice
to the other party is required simply and peculiarly because such
special law requires it. However, for cases not covered by the
Maceda Law, and especially on the general principles governing
the effects of non-fulfillment of the suspensive condition in
a contract to sell, why should the provisions of a special and
peculiar law govern?
The contract to sell in Palay, Inc. expressly waived notice on
the part of the buyer in case the seller should seek to rescind or
cancel the contract. In disallowing such waiver, the Court held —
The contention that private respondent had waived
his right to be notified under paragraph 6 of the
contract is neither (sic) meritorious because it was
a contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom
to stipulate. A waiver must be certain and unequivocal,
and intelligently made; such waiver follows only where
liberty of choice has been fully accorded. Moreover,
it is a matter of public policy to protect buyers of real
estate on installment payments against onerous and
oppressive conditions. Waiver of notice is one such
onerous and oppressive condition to buyers of real
estate on installment payments.139
In one swoop, Palay, Inc. had decreed that a waiver of notice
in a contract of adhesion is void; and even when not contained in
139
Ibid, at pp. 646-647; emphasis supplied.
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AND CANCELLATION FOR IMMOVABLES
473
a contract of adhesion, such waiver is invalid for being contrary to
public policy when it covers real estate sold on installment basis.
Cheng v. Genato,140 reiterated the ruling that —
Even assuming in gratia argumenti that ... [there
was] default ... in their Contract to Sell, the execution by
[seller] of the affidavit to annul the contract is not even
called for. For with or without the aforesaid affidavit
their non-payment to complete the full downpayment
of the purchase price ipso facto avoids their contract to
sell, it being subjected to a suspensive condition. When
a contract is subject to a suspensive condition, its birth
or effectivity can take place only if and when the even
which constitutes the condition happens or is fulfilled.
If the suspensive condition does not take place, the
parties would stand as if the condition obligation had
never existed.
Nevertheless, [seller] is not relieved from the giving
of a notice, verbal or written, to the [buyers] for his
decision to rescind their contract. In many cases,
even though we upheld the validity of a stipulation in
a contract to sell authorizing automatic rescission for
a violation of its terms and condition, at least a written
notice must be sent to the defaulter informing him of
the same. The act of a party in treating a contract as
cancelled should be made known to the other. For such
act is always provisional. It is always subject to the
scrutiny and review by the courts in case the alleged
defaulter brings the matter to the proper courts. ...
This rule validates, both in equity and justice,
contracts such as the one at bar, in order to avoid and
prevent the defaulting party from assuming the offer
as still in effect due to the obligee’s tolerance for such
non-fulfillment. Resultantly, litigations of this sort shall
be prevented and the relations among would-be parties
may be preserved ...141
300 SCRA 722 (1998).
Ibid, at pp. 735-737; emphasis supplied. The application of the doctrine of prior
notice of cancellation of contracts to sell has been applied to movables in Visayan Sawmill
Co., Inc. v. Court of Appeals, 219 SCRA 378 (1993).
140
141
474
LAW ON SALES
So, there we have it (for now, at least): notice of extrajudicial
rescission of a contract of sale and even cancellation of a
contract to sell even when the suspensive condition has not
been fulfilled, require at the very least to be effective or operative,
notice to the defaulting buyer. This doctrine has since then been
consistently adhered to in cases subsequent cases for all types
of immovables.142
What form of notice is required for the declaration of
cancellation of a contract to sell? We take our cue from what
the Court held in Dignos v. Court of Appeals,143 that such notice
should be in a public instrument pursuant to the provision of Article
1358 of the Civil Code which requires “that acts and contracts
which have for their object the extinguishment of real rights over
immovable property must appear in a public document.”144
d. Rescission Principles Applied to Contracts to Sell
By the nature of a contract to sell, the remedy of rescission
is irrelevant to contracts to sell because the non-fulfillment of
the suspensive condition of full payment of the purchase price
prevents a contract of sale from even materializing, and therefore
there is really nothing to resolve or rescind. And certainly, any
stipulation authorizing the seller to “rescind” the contract to sell in
the event the buyer fails to fully pay the purchase price is a mere
surplusage.
To illustrate, in Luzon Brokerage Co., Inc. v. Maritime
Building Co., Inc.,145 the “Deed of Conditional Sale,” ruled to be a
contract to sell, provided only —
(d) ... that should the Vendee fail to pay any of the
monthly installments, when due, or otherwise fail to
comply with any of the terms and conditions herein
stipulated, then this Deed of Conditional Sale shall
automatically and without any further formality, become
142
See Jison v. Court of Appeals, 164 SCRA 339 (1988); Ocampo v. Court of
Appeals, 233 SCRA 551, 561-562 (1994).
143
158 SCRA 375 (1988).
144
Ibid, at p. 384.
145
43 SCRA 95 (1972).
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
475
null and void, and all sums so paid by the Vendee by
reason thereof, shall be considered as rentals and the
Vendor shall then and there be free to enter into the
premises, take possession thereof or sell the properties
to any other party.146
Strictly speaking the afore-quoted provision did not create a
right of automatic rescission because even without such clause,
the non-payment of the installments would ipso jure result in the
obligation to sell not arising at all. The only additional right that
the provision did create was the right of forfeiture of payments
previously made. On the insistence by the buyer that the seller
could not extrajudicially rescind or resolve the contract but must
first seek recourse to the courts, Luzon Brokerage held that —
The distinction between contracts of sale and
contracts to sell with reserved title has been recognized
by this Court in repeated decisions upholding the
power of the promissor under contracts to sell in case
of failure of the other party to complete payment, to
extrajudicially terminate the operation of the contract,
refuse conveyance and retain the sums or installments
already received, where such rights are expressly
provided for, as in the case at bar.147
A reading of the afore-quoted reasoning would imply that
even the right to “rescind” a contract to sell where ownership has
been retained by the seller, would have to be expressly reserved
in the deed in order to be binding. Such a conclusion does not
correspond with the nature of a contract to sell. In the resolution
denying the first motion for reconsideration, the Court ruled that
“in a contract to sell, the full payment of the price through the
punctual performance of the monthly payments is a condition
precedent to the execution of the final sale and to the transfer of
the property from the owner to the proposed buyer; so that there
will be no actual sale until and unless full payment is made.”148
The emphasized quotation imply therefore that upon full payment
Ibid, at p. 98.
Ibid, at pp. 104-105; emphasis supplied.
148
46 SCRA 381, 387 (1972).
146
147
476
LAW ON SALES
of the price, there automatically arises a contract of sale which
may be enforced by an action for specific performance.
Roque v. Lapuz,149 reiterated the Luzon Brokerage ruling
that “in a contract to sell, the full payment of the price through
the punctual performance of the monthly payments is a condition
precedent to the execution of the final sale and to the transfer of
the property from the owner to the proposed buyer; so that there
will be no actual sale until and unless full payment is made.”150 The
contract having been construed as a contract to sell, Roque held
that the provisions of Article 1592 had no application. Amazingly
however, the Court held that “Art. 1191 of the New Civil Code is
the applicable provision where the obligee ... elects to rescind or
cancel his obligation to delivery the ownership.” However, since
the Court found that only 4 out of 116 monthly installments were
ever paid, and since the buyer has long been in default, it refused
to grant the buyer the benefit of the period under Article 1191.
Roque therefore has brought us to a critical junction:
substantial compliance or whether there has been good faith or
bad faith on the part of the buyer in defaulting in the payment of the
purchase price is and should be irrelevant when the agreement
on hand is one of contract to sell, thus —
... We hold that the contract between the petitioner
and the respondent was a contract to sell where the
ownership or title is retained by the seller and is not to
pass until the full payment of the price, such payment
being a positive suspensive condition and failure of
which is not a breach, casual or serious, but simply
an event that prevented the obligation of the vendor to
convey title from acquiring binding force.151
Under such premise, it seemed wrong for Roque to thereafter
hold that “We agree with the respondent Court of Appeals that
Article 1191 of the New Civil Code is the applicable provision
where the obligee, like petitioner herein, elects to rescind or
96 SCRA 741 (1980).
Ibid, at p. 755.
151
Ibid, at p. 757; emphasis supplied.
149
150
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
477
cancel his obligation to deliver the ownership of the two lots in
question for failure of the respondent to pay in full the purchase
price,” and then implied that had the buyer substantially paid the
purchase price, the Court would have upheld the new 90 day
period granted by the Court of Appeals.152
In addition, Roque ruled out the granting of new period
pursuant to Article 1191 on the basis that the buyer has introduced
substantial improvements on the lots since “to grant the same
would place the vendor at the mercy of the buyer who can easily
construct substantial improvement on the land but beyond the
capacity of the vendor to reimburse in case he elects to rescind
the contract by reason of the vendee’s default or deliberate refusal
to pay or continue paying the purchase price of the land.”153
The “mixing-up” of doctrinal pronouncements was glaringly
displayed subsequently in Angeles v. Calasanz,154 which also
involved a contract to sell a parcel of land, where the issue was
the validity of the provision providing for automatic cancellation on
failure of the buyer to comply with the installments terms thereof.
The buyer insisted that the provision insofar as it provided that
in case of specified breaches of its terms, the sellers have the
right to declare the contract canceled and of no effect, to be void,
because it granted the sellers an absolute and automatic right
of rescission. Clearly, the reference to the remedy of rescission
was not relevant at all to the contract to sell, but nevertheless,
the Court plunged deep into the doctrinal pronouncements on
rescission, and despite the fact that the contract at issue was a
contract to sell, held that the breach of the contract adverted to
by the seller —
... is so slight and casual when we consider that apart
from the initial downpayment of 5392.00 the plaintiffsappellee had already paid the monthly installments
for a period of almost nine (9) years. In other words,
in only a short time, the entire obligation would have
152
This particular ruling in Roque was reiterated in Alfonso v. Court of Appeals, 186
SCRA 400 (1990).
153
Ibid, at p. 760.
154
135 SCRA 323 (1985).
478
LAW ON SALES
been paid x x x to sanction the rescission made by the
defendants-appellants will work injustice to (sic) the
plaintiffs-appellees.155
In effect, justice and equity had been the bases to erode
the fundamental nature of a contract to sell, and make doctrinal
pronouncements pertaining to contracts of sale applicable to
it. The remedy of rescission and all its accompanying doctrinal
baggages have been expressly made applicable to contracts to
sell. It was downhill from that time on.156
On the other hand, Gimenez v. Court of Appeals,157 refused
to grant any further reprieve to a buyer who had not paid the
balance of the purchase price of the house and lot he bought
under a contract to sell, in spite of several extension granted
to him in the past by the seller when he had failed to meet the
deadlines, thus —
Requiring the sellers to execute a deed of absolute
sale in favor of Mercado would penalize the former
for their magnanimity in granting the latter extensions
of time to complete payment of the price of the sale
(which he never did), and reward his defaults and
contractual breaches, while continuing to enjoy the
petitioner’s property.158
Jacinto v. Kaparaz,159 in determining whether the seller had
a right to rescind an agreement involving the sale of a parcel of
land, held —
Vital to the resolution of the controversy is the
determination of the true nature of the questioned
agreement. Is it a contract of sale or a contract to sell?
The two are not, of course, the same. In the latter
case, ownership is retained by the seller and is not to
pass until full payment of the price. Such payment is
Ibid, at p. 331.
Joseph & Sons Enterprises, Inc. v. Court of Appeals, 143 SCRA 663 (1986);
Dignos v. Court of Appeals, 158 SCRA 375 (1988).
157
195 SCRA 205 (1991).
158
Ibid, at p. 210.
159
209 SCRA 246 (1992).
155
156
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
479
a positive suspensive condition the failure of which is
not a breach, casual or serious, but simply an event
that prevents the obligation of the vendor to convey
title from acquiring binding force. In such a situation, to
argue that there was only a casual breach is to proceed
from the assumption that the contract is one of absolute
sale, where non-payment is a resolution question.
Otherwise stated, as capsulized in Luzon Brokerage
Co., Inc. vs. Maritime Building Co., Inc., “there can
be no rescission or resolution of an obligation as yet
non-existent, because the suspensive condition did not
happen.’”...160
So once in a while, the Court recognizes the fundamental
difference between a contract of sale and a contract to sell, and
doctrinal pronouncements having to do with rescission are not
made to apply to the latter. But where is one to put one’s self, in
this confusion of Supreme Court pronouncements?
What ruined it for Jacinto is the fact that it took the same
position of Dignos that the absence in the contract of a reservation
on the part of the seller the right to unilaterally rescind the contract
the moment the vendee fails to pay within the fixed period,
indicated that it is a contract of sale and not a contract to sell,
leading to what the author considers an erroneous conclusion
that express reservation of the power to rescind is essential in a
contract to sell arrangement.
But then Jacinto went on to say that even if it were a contract
to sell and resolution would have been the proper remedy,
according to the Court, the buyer would still have been validly
granted an opportunity to pay the accrued installments because
of the third paragraph of Article 1191 which provides that “The
Court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.” The paragraph talks
of rescission, and legally, when the suspensive condition has
not been fulfilled, not even the courts can make the obligation
effective.
160
Ibid, at pp. 254-255.
480
LAW ON SALES
2. Maceda Law Period161
The Maceda Law has further blurred the basic distinction
between a contract of sale and a contract to sell, at least in the
specific types of residential real estate and condominium units
covered by said law. By legislative injunctions, the Maceda Law
has decreed that whether it be a contract of sale or a contract
to sell, the actual rescission or cancellation thereof shall take
place “thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a
notarial act.”
In Siska Dev’t. Corp. v. Office of the President of the Phils.,162
on the contention that the application of the Maceda Law to a
contract to sell that had been entered into prior its enactment
would constitute a violation of the non-impairment clause of the
Constitution, the Court held that the “[i]mpairment is anything that
diminishes the efficacy of the contract. There is an impairment if
a subsequent law changes the terms of a contract between the
parties, imposes new conditions, dispenses with those agreed
upon or withdraws remedies for the enforcement of the rights of
the parties.”163
a. Maceda Law Does Not Overcome Other
Applicable Rules to Contracts to Sell
More importantly, Siska Dev’t Corp. provided for the proper
application of the provisions of the Maceda Law with respect to
the other rules pertaining to contracts of sale, when it held that
“[t]he requirement of notice of the rescission under the Maceda
Law does not change the time or mode of performance or impose
new conditions or dispense with the stipulations regarding the
binding effect of the contract. Neither does it withdraw the
remedy for its enforcement. At most, it merely provides for a
procedure in aid of the remedy of rescission.”164
161
The discussions on the operative aspects of the Maceda Law are found in the
previous Chapter 10.
162
231 SCRA 674 (1994).
163
Ibid, at p. 680.
164
Ibid, emphasis supplied.
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
481
For example, Boston Bank of the Philippines v. Manalo,165
held that the protective mantle of the Maceda Law to buyers of
residential real estate would not serve to validate a contract to
sell which is void for failure of the parties to agree on the manner
of payment of the purchase price, thus: “Republic Act No. 6552
applies only to a perfected contract to sell and not to a contract
with no binding and enforceable effect.”166
Another example would be the case of Lim v. Court of
Appeals,167 where the issue was who between two “buyers” of
the same property had preference of the same subject matter,
the Court ruled against the first buyer under a contract to sell, and
in favor of the second buyer under a contract of sale under the
well-established doctrine that the rules on double sale have no
application to favor a buyer under a contract to sell. The decision
was arrived at even when the facts showed that there was never
any notarial cancellation of the first sale as mandated under the
Maceda Law, and in fact without reference to the Maceda Law.
This shows that the rules under the Maceda Law are applicable
only to issues of rescission between the seller and the buyer, and
do not overcome prevailing rules when it involves a controversy,
say between two buyers as to the same property bought.
The other issue that pertains to the application of the Maceda
Law when it comes to contract to sell involving residential real
estate and condominium units is whether the Supreme Court
would apply the “substantial breach” doctrine under Article 1191,
and would grant the buyer an opportunity to cure the defect even
when notarial notice of cancellation has been effected and the
30-day requisite period has expired.
In Siska Dev’t. Corp., the Court not only reaffirmed the
necessity of notice of cancellation in contracts to sell, but also the
applicability of the doctrine that prohibits “rescission” for casual
or slight breaches even involving contracts to sell.168
482 SCRA 108 (2006).
Ibid, at p. 140.
167
182 SCRA 564 (1990).
168
Reiterated in Liu v. Loy, Jr., 405 SCRA 316 (2003).
165
166
482
LAW ON SALES
In Rillo v. Court of Appeals,169 which involved a contract
to sell a residential condominium unit, where the buyer had
defaulted on the payment of the amortization payments despite
several chances given to him by the seller, the Court re-affirmed
its protective mode only for a buyer who in good faith has sought
to fulfill his obligation to pay the price. Particularly, on the issue
on whether the seller could rescind the contract to sell when the
buyer had not committed substantial breach under Article 1191,
the Court held that the applicable law in resolving the issue would
be the Maceda Law, and since the buyer has paid less than two
years of installment, he could only have availed of the 60-day
grace period, and having failed in that, the seller had a right to
cancel the contract, which it did by the filing of the judicial action
for rescission.
RECAP OF THE RULINGS
An outline survey of Supreme Court decisions covering the
bases of determining whether a sale is one of contract of sale or a
contract to sell would often show contradictory pronouncements
on the matter, thus:
A.
AT PERFECTION:
1. Requisite Contractual Stipulations — In a contract to
sell, there must be a stipulation that:
(a) Full payment of the purchase price by the buyer
constitutes a suspensive condition on the obligation
of the seller to sell and transfer ownership of the
subject matter;170
(b) Accompanied by stipulations or agreements that:
•
169
170
ownership of the subject matter shall
remain with the seller until full payment
of the price; and
274 SCRA 461 (1997).
Heirs of San Andres v. Rodriguez, 332 SCRA 769 (2000).
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
•
483
specific right is granted to the seller
to extrajudicially rescind or cancel the
contract in case of default.171
The lack of stipulation expressly reserving title to the seller
in spite delivery of the subject matter to the buyer would not
constitute the transaction into a contract to sell.172
The lack of a stipulation allowing the seller to rescind the
contract in the event the buyer fails to comply with his obligation
to pay the purchase price clearly prevents the contract from being
classified as a contract to sell. 173
Contra to (a): What really defines a contract to sell is the
express stipulation that the effectivity or demandability of the
contract is subject to the happening of a suspensive condition
(usually full payment of the price), as distinguished from a situation where the suspensive condition modifies not the contract
itself but rather only the obligation of the seller to sell and deliver
the subject matter, in which case it is a conditional contract of
sale.174
Contra to (b): The Court has also ruled that even in
the absence of such stipulations, the contract would still be
considered a contract to sell, because of the absence of deeds
of conveyance covering registered land where the operative act
of sale is registration of the deed of sale.175
171
Vda. De Mistica v. Naguiat, 418 SCRA 73 (2003); Valdez v. Court of Appeals,
439 SCRA 55 (2004); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004).
172
Coronel v. Court of Appeals, 263 SCRA 15 (1996); David v. Tiongson, 313 SCRA
63 (1999); Gomez v. Court of Appeals, 340 SCRA 720 (2000); Villanueva, Jr. v. Court of
Appeals, 487 SCRA 571 (2006); Demafelis v. Court of Appeals, 538 SCRA 305 (2007);
Villador, Jr. v. Zaballa, 545 SCRA 325 (2008).
173
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 95 (1972);
Jacinto v. Kaparaz, 209 SCRA 246 (1992); Topacio v. Court of Appeals, 211 SCRA 219
(1992); Adelfa Properties, Inc. v. Court of Appeals, 240 SCRA 575 (1995); Ong v. Court
of Appeals, 240 SCRA 565 (1995); Babasa v. Court of Appeals, 290 SCRA 532 (1998);
Almira v. Court of Appeals, 399 SCRA 351 (2003).
174
Romero v. Court of Appeals, 250 SCRA 223 (1995); Coronel v. Court of Appeals,
263 SCRA 15, 27 (1996); Heirs of Pedro Escanlar v. Court of Appeals, 281 SCRA 176
(1997); Almocera v. Ong, 546 SCRA 164 (2008).
175
Roque v. Lapuz, 96 SCRA 741 (1980).
484
LAW ON SALES
➣ But See Contra Rulings in Dignos v. Court of
Appeals;176 and in Portic v. Cristobal,177 which held
that registration does not vest title, but when the
contract to sell expressly reserves title with the
seller until full payment of the purchase price.
2. Stipulation on Execution of Deed of Absolute Sale
— When there is a stipulation or promise that the seller
shall execute a deed of absolute sale upon completion
of payment of the purchase price by the buyer, the
agreement is a contract to sell, because it would be
equivalent to reservation of title clause.178
Contra: Where there is an express stipulation that
the sellers would execute a final deed of absolute sale
in favor of the buyer upon payment of the balance of the
purchase price, the contract would still not be a contract
to sell, where nowhere in the contract in question is a
proviso or stipulation to the effect that title to the property
sold is reserved in the seller until full payment of the
purchase price, nor is there a stipulation giving the seller
the right to unilaterally rescind the contract the moment
the buyer fails to pay within a fixed period.179
3. Stipulation on the Payment of Price — In contract
to sell, payment of the price is a suspensive condition,
failure of which is not a breach, casual or serious, but an
event that prevents the obligation of the seller to convey
title from acquiring obligatory force.180
158 SCRA 375 (1988).
456 SCRA 659 (2005).
178
Roque v. Lapuz, 96 SCRA 741 (1980); Lacanilao v. Court of Appeals, 262
SCRA 486 (1996); Padilla v. Spouses Paredes, 328 SCRA 434 (2000); Rayos v. Court of
Appeals, 434 SCRA 365 (2004); Cruz v. Fernando, 477 SCRA 173 (2005).
179
Dignos v. Court of Appeals, 158 SCRA 375 (1988).
180
Salazar v. Court of Appeals, 258 SCRA 325 (1996); Lacanilao v. Court of Appeals,
262 SCRA 486 (1996); Rillo v. Court of Appeals, 274 SCRA 461 (1997); Odyssey Park,
Inc. v. Court of Appeals, 280 SCRA 253 (1997); Ong v. Court of Appeals, 310 SCRA 1
(1999); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004); Cruz v. Fernando, 477 SCRA 173
(2005).
176
177
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
485
Contra: If there has been substantial compliance
with the obligation to pay the price, then cancellation
cannot be effected, for unilateral rescission will not
be judicially favored or allowed if the breach is not
substantial and fundamental to the fulfillment of the
obligation.181
B. DURING CONSUMMATION STAGE
1. Legal Effect of Delivery Made — In contract of sale,
the title to the property passes to the buyer upon the
delivery of the thing sold; whereas, in a contract to sell,
ownership is, by agreement, reserved in the seller and is
not to pass to the buyer until full payment of the purchase
price.182
2. Legal Effect of Full Payment of Price — In a contract to
sell, full payment of the price constitutes the happening
of the condition which would convert it into an executory
contract of sale,183 thus:
(a) If delivery of the subject matter had previously been
made, then ownership is transferred ipso jure to the
buyer.184
(b) If delivery of the subject matter has not been made,
then it allows the buyer to demand for specific
performance.185
Contra: There is still no perfected or executory
contract of sale; it merely gives rise to an action to
enforce the obligation of the seller to enter into a contract
of sale; there is no transfer of ownership to buyer even
181
Spouses Benito v. Saquitan-Ruiz, 394 SCRA 250 (2002); Heirs of Jesus M.
Mascuñana v. Court of Appeals, 461 SCRA 186 (2005).
182
Salazar v. Court of Appeals, 258 SCRA 325 (1996); Universal Robina Sugar
Milling Corp. v. Heirs of Angel Teves, 389 SCRA 3167 (2002); Chua v. Court of Appeals,
401 SCRA 54 (2002); Vidal, Sr. v. Tayamen, 531 SCRA 147 (2007); Hulst v. PR Builders,
Inc., 532 SCRA 74 (2007); Castillo v. Reyes, 539 SCRA 193 (2007).
183
Philippine National Bank v. Court of Appeals, 262 SCRA 464 (1996).
184
Leaño v. Court of Appeals, 369 SCRA 36 (2001); Carrascoso, Jr. v. Court of
Appeals, 477 SCRA 666 (2005).
185
David v. Tiongson, 313 SCRA 63 (1999).
486
LAW ON SALES
when delivery was previously made; and much less can
there be demand to deliver the subject matter when no
contract of sale has been executed.186
3. Legal Effect of Non-Payment of Price —
(a) In contract of sale, the non-payment of the purchase
price is a breach, and when substantial in nature,
would allow the seller to rescind the sale.
(b) In contract to sell, where ownership is retained by
the seller until payment of the price in full, such
payment is a positive suspensive condition, failure
of which is not really a breach but an event that
prevents the obligation of the vendor to convey title
in accordance with Article 1184 of the Civil Code.”187
Contra to (b):
(i) Even when the basis for the breach of the
condition is present, a notice of “rescission” or
cancellation must be made on buyer to effect
the extinguishment of the contract to sell.188
➢ But see contra ruling in Torralba v. De los
Angeles.189
(ii) In residential real estate, when the non-payment
of the purchase price constitute merely a casual
breach, it would not extinguish the contract to
sell, and the courts may extend equity rights to
the buyer.
186
Coronel v. Court of Appeals, 263 SCRA 15, 27 (1996); Abesamis v. Court of
Appeals, 361 SCRA 328 (2001); Hulst v. PR Builders, Inc., 532 SCRA 74 (2007).
187
Lacanilao v. Court of Appeals, 262 SCRA 486 (1996); Odyssey Park, Inc. v.
Court of Appeals, 280 SCRA 253 (1997); Vidal, Sr. v. Tayamen, 531 SCRA 147 (2007);
Hulst v. PR Builders, Inc., 532 SCRA 74 (2007).
188
University of the Philippines v. De los Angeles, 35 SCRA 103 (1970); Palay,
Inc. v. Clave, 124 SCRA 638 (1983); Jison v. Court of Appeals, 164 SCRA 339 (1988);
Siska Development Corp. v. Office of the President, 231 SCRA 674 (1994); Ocampo v.
Court of Appeals, 233 SCRA 551 (1994); Spouses Benito v. Saquitan-Ruiz, 394 SCRA
250 (2002).
189
96 SCRA 69 (1980).
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
487
C. REMEDIES AVAILABLE:
1. When Condition on Price Payment Not Fulfilled:
(a) In contract of sale, if seller had delivered the subject
matter previously without reserving title, it would
mean that ownership has been transferred to the
buyer, and seller cannot recover ownership until
and unless the contract is resolved or rescinded by
court action.
Whereas in contract to sell, since ownership was
retained by the seller by express reservation
until full payment of the price, and the contract is
extinguished, then no action is necessary other
than recovery of possession in case buyer refuses
to voluntarily deliver.190
(b) In conditional contract of sale, the non-happening
of the condition may be waived by the obligee who
may still seek specific performance.
Whereas, in contract to sell, the non-happening of
the condition prevents the contract from coming into
existence (i.e., extinguishes the contract) and consequently neither rescission or specific performance
may be pursued.191
(c) In conditional contract of sale, the basis of rescission
must be substantial breach.
Whereas, in a contract to sell, the issue of breach is
completely irrelevant.192
(d) In contract of sale and conditional contract of sale,
rescission may be pursued with forfeiture of the
190
The Caridad Estates, Inc. v. Santero, 71 Phil. 114 (1940); Manuel v. Rodriguez,
109 Phil. 1 (1960); Salazar v. Court of Appeals, 258 SCRA 325 (1996); Pangilinan v. Court
of Appeals, 279 SCRA 590 (1997); Vidal, Sr. v. Tayamen, 531 SCRA 147 (2007); Hulst v.
PR Builders, Inc., 532 SCRA 74 (2007).
191
Romero v. Court of Appeals, 250 SCRA 223 (1995); Lim v. Court of Appeals, 263
SCRA 569 (1996).
192
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93 (1972).
488
LAW ON SALES
amounts paid when that has been expressly provided for.
Whereas, in contract to sell, it becomes imperative
that the amounts paid must be returned and there
would be no basis upon which to retain them since
there was no breach upon which a claim of damage
may be interposed.193
Contra to (d): Based on equity principles, the
doctrine of substantial breach to allow rescission and
court discretion under Article 1191 have been made
to apply to contracts to sell involving residential immovables.194
➣ But see contrary ruling in Lacanilao v. Court
of Appeals.195
Even when the suspensive condition has not
happened, which would extinguish thereby
the contract to sell, nevertheless, such
extinguishment can only have legal effect if
notice of cancellation is given to the buyer.196
➣ But see contrary ruling in Torralba v. De los
Angeles.197
2. Laws Applicable – In contract of sale, the applicable
rules are found in Articles 1191 and 1592 providing
for the remedy of rescission, but when there is a
suspensive condition, Article 1545 allows the seller to
choose between rescission or waiving the condition;
whereas, in contract to sell, the remedies of rescission
The Manila Racing Club v. The Manila Jockey Club, 69 Phil. 55 (1939).
J.M. Tuazon Co., Inc. v. Javier, 31 SCRA 829 (1970); Legarda Hermanos v.
Saldana, 55 SCRA 3246 (1974); Siska Dev. Corp. v. Office of the President, 231 SCRA
674 (1994).
195
262 SCRA 486 (1996).
196
University of the Philippines v. De los Angeles, 35 SCRA 103 (1970); Palay, Inc.
v. Clave, 124 SCRA 638 (1983); Siska Dev. Corp. v. Office of the President, 231 SCRA
674 (1994).
197
96 SCRA 69 (1980).
193
194
REMEDIES OF RESCISSION
AND CANCELLATION FOR IMMOVABLES
489
being incompatible thereto,198 the applicable rules are
found in Articles 1184 and 1545.199 The issue of whether
the breach was casual or serious under Article 1191 is
completely irrelevant in a contract to sell.200
Contra: There have been several instances when Article
1191 was made to apply to a contract to sell involving
residential real estate, with application of the doctrine of
substantial breach.201
But: The requirements of the Maceda Law on grace
period, cash surrender value and prescribed
manner of notarial rescission or cancellation must
always apply, whether it is a contract of sale or contract
to sell, involving installment sales of residential real
estate and residential condominium unit.202
—oOo—
198
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 46 SCRA 381 (1972);
Rillo v. Court of Appeals, 274 SCRA 461 (1997); Pangilinan v. Court of Appeals, 279
SCRA 590 (1997); Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997); Valarao
v. Court of Appeals, 304 SCRA 155 (1999); Gonzales v. Heirs of Thomas and Paula Cruz,
314 SCRA 585 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000);
199
Topacio v. Court of Appeals, 211 SCRA 219 (1992); Lacanilao v. Court of
Appeals, 262 SCRA 486 (1996); Rillo v. Court of Appeals, 274 SCRA 461 (1997);
Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997).
200
Luzon Brokerage Co., v. Maritime Building Co., Inc., 86 SCRA 305 (1978);
Santos v. Court of Appeals, 337 SCRA 67 (2000).
201
Caridad Estates, Inc. v. Santero, 71 Phil. 114 (1940); Albea v. Inquimboy, 86
Phil. 477 (1950); Manuel v. Rodriguez, 109 Phil. 1 (1960); Luzon Brokerage v. Martime
Building, Inc., 86 SCRA 305 (1978); Roque v. Lapuz, 96 SCRA 741, 759 (1980); Angeles
v. Calasanz, 135 SCRA 323 (1985); Joseph & Sons Enterprises, Inc. v. Court of Appeals,
143 SCRA 663 (1986); Lim v. Court of Appeals, 182 SCRA 564 (1990); Jacinto v. Kaparaz,
209 SCRA 246 (1992).
202
Rillo v. Court of Appeals, 274 SCRA 461 (1997).
490
LAW ON SALES
CHAPTER 12
CONDITIONS AND WARRANTIES
CONDITIONS
Article 1545 of the Civil Code grants two alternative remedies
to a party where the obligation of the other party to a contract of
sale is subject to any condition which is not performed, in that
such first party may either: (a) refuse to proceed with the contract,
or (b) he may waive performance of the condition.
Romero v. Court of Appeals,1 emphasized the distinction
between a condition imposed on the perfection of the contract
and a condition imposed on the performance of an obligation:
The failure to comply with the first condition results in the failure
of the contract, while the failure to comply with the second
condition only gives the other party the option to either refuse
to proceed with the sale or to waive the condition as mandated
under Article 1545; and that the choice is not with the obligor but
with the injured party.2
In Heirs of Pedro Escanlar v. Court of Appeals,3 where the
sale contract contained the stipulation that “this Contract of Sale
of rights, interests and participations shall become effective only
upon the approval by the Honorable Court,” it was held that the
non-happening of the condition did not affect the validity of the
contract itself, thus —
There has arisen here a confusion in the concepts of
validity and the efficacy of a contract. Under Art. 1318
of the Civil Code, the essential requisites of a contract
are: consent of the contracting parties; object certain
250 SCRA 223 (1995).
Reiterated in Lim v. Court of Appeals, 263 SCRA 569 (1996); Laforteza v. Machuca,
333 SCRA 643 (2000); Republic v. Florendo, 549 SCRA 527 (2008).
3
281 SCRA 176 (1997).
1
2
490
CONDITIONS AND WARRANTIES
491
which is the subject matter of the contract and cause
of the obligation which is established. Absent one of
the above, no contract can arise. Conversely, where
all are present, the result is a valid contract. However,
some parties introduce various kinds of restrictions or
modalities, the lack of which will not, however, affect
the validity of the contract.
In the instant case, the Deed of Sale, complying
as it does with the essential requisites, is a valid one.
However, it did not bear the stamp of approval of the
court. This notwithstanding, the contract’s validity was
not affected. ... In other words, only the effectivity and
not the validity of the contract is affected.4
David v. Tiongson,5 citing Escanlar, held that a stipulation
that the deed of sale and corresponding certificate of title would
be issued after full payment, did not prevent the perfection of a
contract, which would then be a contract to sell.
On the other hand, Ramos v. Court of Appeals,6 held
that under a “Sale with Assumption of Mortgage,” the formal
assumption of mortgage was a condition to the seller’s consent,
so that without approval by the mortgagee, no sale was perfected;
and that where the mortgagee has not approved the assumption
of mortgage by the buyer, the seller remained the owner and
mortgagor of the property and retained the right to redeem
the foreclosed property. The gravamen of Ramos was not the
perfection of the valid contract of sale, but rather the effect of
transfer of ownership, which goes into consummation stage.
DISTINCTIONS BETWEEN CONDITIONS AND WARRANTIES
Unlike in the non-fulfillment of a warranty which would
constitute a breach of the contract, the non-happening of the
condition, although it may extinguish the obligation upon which it
is based, generally does not amount to a breach of the contract
of sale.
Ibid, at p. 190.
313 SCRA 63 (1999).
6
279 SCRA 118 (1997).
4
5
492
LAW ON SALES
Under Article 1545 of the Civil Code, where the ownership
in the things 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.
On the other hand, if the party has promised that the condition should happen or be performed, the other party may also
treat the non-performance of the condition as a breach of warranty.7 Such stipulation would elevate the condition to a warranty,
and the non-happening of the condition would itself constitute a
breach of such warranty, and would entitle the other party to sue
for damages.
In addition to the foregoing differences in the legal effects
of the non-happening of the condition and non-fulfillment of the
warranty, the following difference also apply:
(a) Condition generally goes into the root of
the existence of the obligation, whereas a
warranty goes into the performance of such
obligation, and in fact may constitute an
obligation in itself;
(b) Condition must be stipulated by the parties
in order to form part of an obligation, while
a warranty may form part of the obligation
or contract by provision of law, without the
parties having expressly agreed thereto;
and
(c) Condition may attach itself either to the
obligations of the seller or of the buyer;
whereas, warranty, whether express or
implied, relates to the subject matter itself
or to the obligations of the seller as to the
subject matter of the sale.
7
Art. 1545, Civil Code.
CONDITIONS AND WARRANTIES
493
Power Commercial and Industrial Corp. v. Court of Appeals,8
demonstrates the difference in the legal effect between a condition
and a warranty:
The alleged “failure” of [sellers] to eject the lessees
from the lot in question and to deliver actual and
physical possession thereof cannot be considered
a substantial breach of a condition for two reasons:
first, such “failure” was not stipulated as a condition
— whether resolutory or suspensive — in the contract;
and second, its effects and consequences were not
specified either.
xxx.
If the parties intended to impose on the [sellers]
the obligation to eject the tenants from the lot sold,
it should have included in the contract a provision
similar to that referred to in Romero vs. Court of
Appeals, where the ejectment of the occupants
of the lot sold ... was the operative act which set
into motion the period of [buyer’s] compliance with
his own obligation, i.e., to pay the balance of the
purchase price. Failure to remove the squatters
within the stipulated period gave the other party the
right to either refuse to proceed with the agreement
or to waive that condition of ejectment in consonance
with Article 1545 of the Civil Code ...
xxx.
As stated, the provision adverted to in the contract
pertains to the usual warranty against eviction, and
not to a condition that was not met. The terms of the
contract are so clear as to leave no room for any other
interpretation.9
EXPRESS WARRANTIES
Since the breach of an express warranty makes the seller
liable for damages, it is important to note that the following
8
9
274 SCRA 597 (1997).
Ibid, at pp. 607-608.
494
LAW ON SALES
requisites must be present in order that there be an express
warranty in a contract of sale:
(a) It must be an affirmation of fact or any
promise by the seller relating to the subject
matter of the sale;
(b) The natural tendency of such affirmation or
promise is to induce the buyer to purchase
the thing; and
(c) The buyer purchases the thing relying on
such affirmation or promise thereon.10
In Goodyear Philippines, Inc. v. Sy,11 the Court held that a
warranty is an affirmation of fact or any promise made by a seller
in relation to the thing sold, and that the decisive test is whether
the seller assumes to assert a fact of which the buyer is ignorant
of.
An affirmation of the value of the thing, or any statement
purporting to be a statement of the seller’s opinion only, shall
not be construed as a warranty, unless the seller made such
affirmation or statement as an expert and it was relied upon by
the buyer.12 In this connection, Article 1341 of the Civil Code
provides that “[A] mere expression of an opinion does not signify
fraud, unless made by an expert and the other party has relied on
the former’s special knowledge.”
In Azarraga v. Gay,13 the Court recognized that the law
allows considerable latitude to seller’s statements, or dealer’s
talk; and experience teaches that it is exceedingly risky
to accept it at its face value. The Court held that assertions
concerning the property which is the subject of a contract of
sale, or in regard to its qualities and characteristics, are the
usual and ordinary means used by sellers to obtain a high price
10
(2005).
Art. 1546, Civil Code. Also Carrascoso, Jr. v. Court of Appeals, 477 SCRA 666
474 SCRA 427 (2005).
Art. 1546, Civil Code.
13
52 Phil. 599 (1928).
11
12
CONDITIONS AND WARRANTIES
495
and are always understood as affording to buyers no ground
for omitting to make inquiries, thus: “A man who relies upon
such an affirmation made by a person whose interest might so
readily prompt him to exaggerate the value of his property does
so at his peril, and must take the consequences of his own
imprudence.”14
To illustrate further, Investments & Development, Inc. v.
Court of Appeals,15 which involved the sale of agricultural land,
distinguished between the legal effects of an express warranty
which provided that the subject land was “free from all liens and
encumbrances,” and another express warranty that the subject
land was “free from all liens, adverse claims, encumbrances,
claims of any tenant and/or agricultural workers, either arising
as compensation for disturbance or from improvements.” It
held that the actual existence of a tenancy relationship on the
subject land did not breach the first general express warranty,
since the existence of tenancy relationship thereon cannot be
considered a lien or encumbrance that the seller warranted did
not exist at the time of sale, since “[I]t is a relationship which any
buyer of agricultural land should reasonably expect to be present
and which it is its duty to specifically look into and provide for.”16
Whereas, the second more specific express warranty by its very
wordings did take such tenancy relationship into consideration as
a part of the express warranty.
IMPLIED WARRANTIES
Implied warranties are those which by law constitute part of
every contract of sale, whether or not the parties were aware of
them, and whether or not the parties intended them.
Although only a seller is bound by the implied warranties of
law, nevertheless, by express contractual stipulation, an agent of
the seller may bind himself to such warranties.17
Ibid, at p. 603.
162 SCRA 636 (1988).
16
Ibid, at pp. 641-642.
17
Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).
14
15
496
LAW ON SALES
1. Warranty That Seller Has Right to Sell
In a contract of sale, unless a contrary intention appears,
there is 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.18
Since warranty goes into the issue of performance of obligation,
the warranty of the seller “that he has a right to sell” refers only
to the transfer of ownership at the point of consummation, and
not to any representation as to ownership and the capacity to
transfer the same at the point of perfection.
The foregoing warranty shall not be applicable 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.19
Although Article 1547 uses the phrase “unless a contrary
intention appears,” there can be no legal waiver of such warranty
without changing the basic nature of the relationship, for the
warranty on the part of the seller that he has the capacity to sell,
i.e., to transfer ownership of the subject matter pursuant to the
sale, is the essence of sale; unless, it amounts to clear assumption
of risk on the part of the buyer, as when the obligation of the seller
is subject to a condition.
2. Warranty Against Eviction
In a contract of sale, unless a contrary intention appears,
there is an implied warranty on the part of the seller that when
the ownership is to pass, the buyer shall from that time have
and enjoy the legal and peaceful possession of the thing.20 The
vendor shall answer for the eviction even though nothing has
been said in the contract on the subject.21
Art. 1547, Civil Code.
Art. 1547, Civil Code.
20
Art. 1547, Civil Code.
21
Art. 1548, Civil Code.
18
19
CONDITIONS AND WARRANTIES
497
a. When There Is Breach of Warranty Against Eviction
The seller’s implied warranty against eviction only applies
(i.e., there has been a breach of warranty) when the following
conditions are present:
(a) Purchaser has been deprived of, or evicted
from, the whole or part of the thing sold;
(b) Eviction is by a final judgment;
(c) Basis thereof is by virtue of a right prior to
the sale made by the seller; and
(d) Seller has been summoned and made
co-defendant in the suit for eviction at the
instance of the buyer.22
The warranty cannot be enforced until a final judgment has
been rendered, whereby the buyer loses the thing acquired or a
part thereof.23 The buyer need not appeal from the decision in
order that the seller may become liable for eviction.24 There is no
need for the buyer to resist to the fullest the action for eviction
taken against him, since the warranty is a covenant on the part
of the seller, and by having given the seller proper notice of the
eviction, (i.e., by making him a party to the case) the buyer is
deemed to have complied with what is incumbent upon him, and
the seller, being a party to the case, must then take the lead to
resist the claim of the third party on the subject matter of the sale.
Power Commercial and Industrial Corp. v. Court of Appeals,25
held that there can be no action for breach of the said warranty
when the buyer was well aware of the presence of the tenants at
the time the buyer entered into the sale transaction, and it even
undertook the job of ejecting the squatters which in fact filed suit
to eject the occupants.
22
Canizares Tiana v. Torrejos, 21 Phil. 127 (1911); Escaler v. Court of Appeals, 138
SCRA 1 (1985); Power Commercial and Industrial Corporation v. Court of Appeals, 274
SCRA 597 (1997).
23
Art. 1557, Civil Code.
24
Art. 1549, Civil Code.
25
274 SCRA 597 (1997).
498
LAW ON SALES
Jovellano v. Lualhati,26 held that “[N]o discussion, therefore,
should be made here as to whether or not the vendor had means
of defense. All of this counts very little. There is only one condition
to be complied with by the vendee, and that is to give notice of
the complaint. Once this is proven, his right to the warranty is
perfect, and the vendor cannot set up anything against it.”27
Escaler v. Court of Appeals,28 held that the breach of
warranty against eviction cannot be enforced against the seller
when the only thing that the buyer did was to furnish the seller,
by registered mail, with a copy of the opposition the buyer filed in
the eviction suit, without going through formally summoning the
seller to be a party to the case. The Court held that —
This is not the kind of notice prescribed by the
aforequoted Articles 1558 and 1559 of the New Civil
Code ... the respondents as vendor/s should be
made parties to the suit at the instance of petitionersvendees, either by way of asking that the former be
made a co-defendant or by the filing of a third-party
complaint against said vendors.29
b. Eviction in Part
Should the buyer 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 than those which it had when
he acquired it.30 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, when it clearly appears that the buyer would not
have purchased one without the other.31
47 Phil. 371 (1925).
Ibid, quoting MANRESA in COMENTARIOS AL CODIGO CIVIL ESPAÑOL, TOMO X, p. 212.
28
138 SCRA 1 (1985).
29
Ibid, at p. 7.
30
Art. 1556, Civil Code.
31
Art. 1556, Civil Code.
26
27
CONDITIONS AND WARRANTIES
499
c. Particular Causes Given by Law
When adverse possession had been commenced before the
sale but the prescriptive period is completed after the transfer, the
seller shall not be liable for breach of warranty against eviction.32
If the property is sold for nonpayment of taxes due and not
made known to the buyer before the sale, the seller is liable for
the eviction.33
d. Applicability to Judicial Sales
The judgment debtor is also responsible for eviction in
judicial sales, unless it is otherwise decreed in the judgment.34
Nevertheless, Santiago Land Dev. Corp. v. Court of Appeals,35
held that although in voluntary sales, the vendor can be expected
to defend his title because of his warranty to the vendees, no
such obligation is owed by the owner whose land is sold at
execution sale, and that “[i]n fact the buyer at such sales takes
the property subject to the superior right of other parties,”36 as
provided expressly under the Rules of Court.
In another case,37 the Court ruled that in execution sales,
the rule of caveat emptor applies; the sheriff does not warrant
the title to the property sold by him, and it is not incumbent on
him to place the purchaser in possession of the property.
e. Amounts for Which Seller Is Liable
in Case of Eviction
Under Article 1555 of the Civil Code, when the warranty has
been agreed upon or nothing has been stipulated on this point,
in case eviction occurs, the buyer shall have the right to demand
of the seller:
Art. 1550, Civil Code.
Art. 1551, Civil Code.
34
Art. 1552, Civil Code.
35
276 SCRA 674 (1997).
36
Ibid, at p. 677.
37
Allure Manufacturing, Inc. v. Court of Appeals, 199 SCRA 285 (1991).
32
33
500
LAW ON SALES
(a) Return of the value which the thing sold had
at the time of the eviction, be it greater or
lesser than the price of the sale;
(b) Income or fruits, if buyer has been ordered
to deliver them to the party who won the suit
against him;
(c) Costs of the suit which caused the eviction,
and, in a proper case, those of the suit
brought against the seller for the warranty;
(d) Expenses of the contract, if the buyer has
paid them; and
(e) Damages and interests and ornamental expenses, if the sale was made in bad faith.
f. Waiver of Warranty and Effects Thereof
Although Article 1548 of the Civil Code provides that the
contracting parties to a contract of sale “may increase, diminish,
or suppress” the implied warranty against eviction, nonetheless,
the effect of waiver depends on the nature of such waiver, whether
it is general or specific waiver, and whether done in good faith or
bad faith on the part of the seller.
Under Article 1553, if the seller acted in bad faith then any
stipulation exempting the seller from the obligation to answer for
eviction shall be void.
On the other hand, if the buyer merely renounces the
warranty in general terms, without knowledge of a particular
risk, and eviction should take place, the seller shall only pay the
value which the thing sold had at the time of the eviction. In other
words, a general waiver of the warranty does not create the effect
of waiver but merely limits the liability of the seller to the value of
the thing sold at the time of eviction.
Should the buyer have made the waiver with knowledge of
the risks of eviction and assumed its consequences, the seller
shall not be liable.38 When the waiver is of a specific case of
38
Art. 1554, Civil Code.
CONDITIONS AND WARRANTIES
501
expected eviction, the waiver has the effect of wiping out the
warranty as to that specific risk, but not as to eviction caused by
other reasons not covered in the waiver.
J.M. Tuazon v. Court of Appeals,39 has, however, held that
even when there is no specific waiver, a buyer cannot take refuge
on the warranty against eviction when he purchases the land fully
aware of a claim by a third party on the title to the land and who
was in actual possession thereof; when the buyer cannot show
that he is a buyer in good faith, it is not entitled to the warranty
against eviction.
3. Warranty Against Non-Apparent Servitudes
Under Article 1560 of the Civil Code, the warranty shall apply
only when the following conditions are present:
(a) The immovable sold is encumbered with
any non-apparent burden or servitude, not
mentioned in the agreement; and
(b) The nature of such non-apparent burden or
servitude is such that it must presumed that
the buyer would not have acquired it had he
been aware thereof.
a. When Warranty Not Applicable
The warranty does not apply:
(a) If the servitude is mentioned in the agreement;40
(b) If the non-apparent burden or servitude is
recorded in the Registry of Deeds, unless
there is an express warranty that the thing is
free from all burdens and encumbrances.41
94 SCRA 413 (1979).
Art. 1560, Civil Code.
41
Art. 1560, Civil Code.
39
40
502
LAW ON SALES
b. Remedies and Prescriptive Period
The buyer may either bring an action for rescission or sue
for damages only if he does so within one (1) year computed
from the execution of the deed.
If such one year period has lapsed, the buyer 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.42
4. Warranty Against Hidden Defects
Under Article 1561 of the Civil Code, the seller shall be responsible for warranty against “hidden defect” only when:
(a) The nature of the hidden defect is such that
it should render the subject matter unfit for
the use for which it is intended; or
(b) Should diminish its fitness for such use to
such an extent that, had the buyer been
aware thereof, he would not have acquired
it or would have given a lower price for it.
The seller is not answerable for patent defects or those
which are visible, or even for those which are not visible if the
buyer is an expert who, by reason of his trade or profession,
should have known them.43
The seller is responsible to the buyer for any hidden faults or
defects in the thing sold, even though he was not aware thereof.44
The warranty applies to both movable and immovable
subject matters. For example, in Investments & Development,
Inc. v. Court of Appeals,45 the Court held that the implied warranty
against hidden defects under Article 1547 of the Civil Code covers
only those that make the object of the sale unfit for the use for
which it was intended at the time of sale, and that in the sale
of agricultural land, the existing tenancy relationship pertaining
Art. 1560, Civil Code.
Art. 1561, Civil Code.
44
Art. 1566, Civil Code.
45
162 SCRA 636 (1988).
42
43
CONDITIONS AND WARRANTIES
503
thereto cannot be considered as “hidden fault or defect” since it
did not go into the use of the land.
a. Requisites for Breach of Warranty
Nutrimix Feeds Corp. v. Court of Appeals,46 held that “the
requisites to recover on account of hidden defects are as follows:”
(a) Defect must be hidden;
(b) Defect must exist at the time the sale was
made;
(c) Defect must ordinarily have been excluded
from the contract;
(d) Defect, must be important (render the thing
unfit or considerably decreases fitness);
(e) Action must be instituted within the statute
of limitations.
b. Remedies of Buyer and Obligation of
Seller for Breach of Warranty
In the event of breach of the warranty against hidden defects,
Nutrimix Feeds Corp. also confirmed the principle under Article
1567 of the Civil Code that the remedy of the buyer is either to
withdraw from the contract (accion redhibitoria) or to demand a
proportionate reduction of the price (accion quanti minoris), with
damages in either case. A choice of remedies is available to the
buyer only when the thing has not been lost.
If the subject matter of sale is actually lost, the extent of the
obligations of the seller for breach of warranty against hidden
defects depends upon the: cause of the lost, knowledge of the
hidden defect by seller, and whether there has been a waiver of
the warranty, thus:
(a) If the thing sold should be lost as a
consequence of the hidden faults:
(i) If the seller was aware of them, he shall
bear the loss, and shall be obliged to
46
441 SCRA 357 (2004).
504
LAW ON SALES
return the price and refund the expenses
of the contract, with damages; or
(ii) If seller was not aware of them, the
seller is obliged only to return the price
and interest thereon, and reimburse the
expenses of the contract which the buyer
might have paid, but not for damages.47
(b) If thing is lost through a fortuitous event or
through the fault of the buyer, then:
(i) If the seller was not aware of the hidden
defects, the buyer may demand from
the seller the price which he paid, less
the value which the thing had when it
was lost;
(ii) If the seller acted in bad faith, in addition
he shall pay damages to the buyer.48
c. Waiver of Warranty
If there has been a stipulation exempting the seller from
hidden defects, then:
(a) If the seller was not aware of the hidden
defects, the loss of the thing by virtue of
such defect will not make the seller liable at
all to the buyer; or
(b) If the seller was fully aware of such defect,
such waiver is in bad faith, and the seller
would still be liable for the warranty.49
In Filinvest Credit Corp. v. Court of Appeals,50 the Court held
that a provision in a contract of lease with option to purchase
(which it treated as a sale of movable on installments) that the
buyer-lessee “absolutely releases the lessor from any liability
Art. 1568, Civil Code.
Art. 1569, Civil Code.
49
Art. 1566, Civil Code.
50
178 SCRA 188 (1989).
47
48
CONDITIONS AND WARRANTIES
505
whatsoever as to any and all matters in relation to warranty in
accordance with the provisions hereinafter stipulated,” was an
express waiver of warranty against hidden defects in favor of
the seller-lessor which “absolved the [seller-lessor] from any
liability arising from any defect or deficiency of the machinery
they bought.”51
The Court also held in that case that since the buyerslessees deal with such particular type of machinery, they should
shoulder the responsibility of protecting themselves against the
product defects, thus: “This is where the waiver of warranties is
of paramount importance. Common sense dictates that a buyer
inspects a product before purchasing it (under the principle of
caveat emptor or ‘buyer beware’) and does not return it for defects
discovered later on, particularly if the return of the product is not
covered by or stipulated in a contract or warranty.”52
The Court further held that “to declare the waiver as non-effective, as the lower courts did, would impair the obligation of contracts. Certainly, the waiver in question could not be considered a
mere surplusage in the contract between the parties.”53
NDC v. Madrigal Wan Hai Lines Corp.,54 held that in contracts
of sale, the phrase “as is, where is” basis pertains solely to the
physical condition of the thing sold, not to its legal situation,
and therefore does not amount to a waiver on the legal defects
pertaining to the subject matter. The Court ruled that the U.S. tax
liabilities which constituted a potential lien pertained only to the
legal situation of the subject matter, and not to its physical aspect,
and that the buyer of the thing had no obligation to shoulder the
same.
d. Applicability to Judicial Sales
The warranty against hidden defects shall be applicable to
judicial sales, except that the judgment debtor shall not be liable
for damages.55
Ibid, at p. 196.
Ibid, at p. 197.
53
Ibid, at p. 197.
54
412 SCRA 375 (2003).
55
Art. 1570, Civil Code.
51
52
506
LAW ON SALES
e. Prescriptive Period
Actions on warranties against hidden defects shall be barred
after six (6) months from the delivery of the thing sold.56
5. Redhibitory Defects of Animals
Under Article 1576 of the Civil Code, even when professional
inspection has been made, if the hidden defect of animals 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.57
a. Sale of Team
Under Article 1572 of the Civil Code, 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 buyer 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.
Note that the foregoing rules with respect to the sale of
animals shall in like manner be applicable to the sale of other
things.58
b. Other Rules on Sale of Animals
There is no warranty against hidden defects of animals
sold at fairs or at public auctions, or of live stock sold as
condemned.59
The sale of animals suffering from contagious diseases
shall be void.60
Art. 1571, Civil Code.
Art. 1576, second paragraph, Civil Code.
58
Art. 1573, Civil Code.
59
Art. 1574, Civil Code.
60
Art. 1575, Civil Code.
56
57
CONDITIONS AND WARRANTIES
507
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.61
c. Prescriptive Period
The redhibitory action, based on the faults or defects of
animals, must be brought within forty (40) days from the date of
their delivery to the buyer.62
If the animal should die within three (3) days after its
purchase, the vendor shall be liable if the disease which cause
the death existed at the time of the contract.63
When the buyer returns the objects bought and demands
the payment of the purchase price, he is in effect “withdrawing
from the contract” as provided in Article 1567, where the
prescriptive period is six (6) months from the delivery of the
thing sold.64
d. Obligation of Buyer to Return
If the sale be rescinded, the animal shall be returned in the
condition in which it was sold and delivered, the buyer being
answerable for any injury due to his negligence, and not arising
from the redhibitory fault or defect.65
e. Remedies of Buyer
In the sale of animals with redhibitory defects, the buyer
may also elect between withdrawing from the contract and
demanding a proportionate reduction of the price, with damages
in either case; but he must make use thereof within the same
period which has been fixed for the exercise of the redhibitory
action.66
Art. 1575, Civil Code.
Art. 1577, Civil Code.
63
Art. 1578, Civil Code.
64
Diño v. Court of Appeals, 359 SCRA 91 (2001).
65
Art. 1579, Civil Code .
66
Art. 1580, Civil Code.
61
62
508
LAW ON SALES
IMPLIED WARRANTIES IN SALE OF GOODS
1. Warranty as to Fitness or Quality
Under Article 1562 of the Civil Code, in a sale of goods, there
is an implied warranty or condition as to the quality or fitness of
the goods, as follows:
(a) 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;
(b) Where the goods are bought 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.
An implied warranty or condition as to the quality or fitness for
a particular purpose may be annexed by the usage of trade.67
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.68
a. Requisites for Breach of Warranty to Apply
Nutrimix Feeds Corp. v. Court of Appeals,69 which covered
a contract of sale of animal feeds, described the requisites to be
established for breach of the implied warranty that the goods sold
are reasonably fit and suitable to be used for the purpose which
both parties contemplated, thus:
Art. 1564, Civil Code.
Art. 1563, Civil Code.
69
441 SCRA 357 (2004).
67
68
CONDITIONS AND WARRANTIES
509
(a) That the buyer sustained injury because of
the product;
(b) That the injury occurred because the
product was defective or unreasonably
unsafe; and
(c) The defect existed when the product left the
hands of the seller.
Nutrimix Feeds Corp. also held that a manufacturer or
seller of a product cannot be held liable for any damage allegedly
caused by the product in the absence of any proof that the product
in question is defective; that the defect must be present upon
the delivery or manufacture of the product, or when the product
left the manufacturer’s or seller’s, or when the product was sold
to the purchaser; or the product must have reached the user or
consumer without substantial change in the condition it was sold.
b. Measure of Damage In Case of Breach of
Warranty on Quality
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.70
2. Sale of Goods by Sample and/or by Description
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.71
Mendoza v. David,72 held that in a sale by sample, there is
an implied warranty that the goods shall be free from any defect
Art. 1599, Civil Code.
Art. 1565, Civil Code.
72
441 SCRA 172 (2004).
70
71
510
LAW ON SALES
which is not apparent or reasonable upon examination of the
sample and which would render the goods unmerchantable.
On the other hand, in a sale of goods by description,
Mendoza held that a “seller’s description of the goods which is
made part of the basis of the transaction creates a warranty that
the goods will conform to that description. Where the goods are
bought by description from a seller who deals in the goods of that
description, there is an implied warranty that the goods are of
mechantable quality.”73
3. Buyer’s Option in Case of Breach of Warranty
Under Article 1599 of the Civil Code, where there is a breach
of warranty by the seller in the sale of goods, the buyer may, at
his election, avail of the following remedies:
(a) 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;
(b) Accept or keep the goods and maintain an
action against the seller for damages;
(c) Refuse to accept the goods, and maintain
an action against the seller for damages;
(d) 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
any of these ways, no other remedy can thereafter be granted,
without prejudice to the buyer’s right to rescind, even if previously
he has chosen specific performance when fulfillment has become
impossible.74
73
74
Ibid, at p. 185.
Art. 1191, second paragraph, Civil Code.
CONDITIONS AND WARRANTIES
511
4. Waiver of Remedies by Buyer
When 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 of 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.75
5. Obligation of Buyer on the Price
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.76
6. Refusal of Seller to Accept Return of Goods
Where the buyer is entitled to rescind the sale and elects
to do so, and 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
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 of the Civil Code.77
Art. 1599, Civil Code.
Art. 1599, Civil Code.
77
Art. 1599, Civil Code.
75
76
512
LAW ON SALES
ADDITIONAL TERMS OF WARRANTIES FOR CONSUMER GOODS
The term “consumer products” is defined under Article 4(q) of
the Consumer Act of the Philippines,78 to cover goods “which are
primarily for personal, family, household or agricultural purposes,
which shall include but not limited to, food, drugs, cosmetics, and
devices.”
Article 68 of the Consumer Act provides that when the seller
or manufacturer gives an express warranty, it shall be operative
from the moment of sale, and consequently such seller or
manufacture shall:
(a) Set forth the terms of warranty in clear
and readily understandable language and
clearly identify himself as the warrantor;
(b) Identify the party to whom the warranty is
extended;
(c) State the products or parts covered;
(d) State what the warrantor will do in the
event of a defect, malfunction or failure
to conform to the written warranty and at
whose expense;
(e) State what the consumer must do to avail
of the rights which accrue to the warranty;
and
(f) Stipulate the period within which, after
notice of defect, malfunction or failure to
conform to the warranty, the warrantor
will perform any obligation under the
warranty.
1. Subsidiary Liability of Retailer
The retailer shall be subsidiarily liable under the warranty in
case of failure of both the manufacturer and distributor to honor
78
Rep. Act No. 7394.
CONDITIONS AND WARRANTIES
513
the warranty, and that in such case the retailer shall shoulder the
expenses and costs necessary to honor the warranty.
The remedy of the retailer in such case would be to proceed
against the distributor or manufacturer.79
2. Enforcement of Warranty
The warranty rights can be enforced by presentment to the
immediate seller either the warranty card or the official receipt
along with the product to be serviced or returned to the immediate
seller. No other documentary requirement shall be demanded
from the purchaser.80
3. Duration of Warranty
The seller and the consumer may stipulate the period
within which the express warranty shall be enforceable. But if
the implied warranty on merchantability accompanies an express
warranty, both will be of equal duration.
Any other implied warranty shall endure not less than sixty
(60) days nor more than one (1) year following the sale of new
consumer products.81
4. Breach of Warranties
In case of breach of express warranty, the consumer may
elect to have the goods repaired or its purchase price refunded
by the warrantor.
In case the repair of the product in whole or in part is
elected, the warranty work must be made to conform to the
express warranty within thirty (30) days by either the warrantor
or his representative.
The thirty-day period, however, may be extended by
conditions which are beyond the control of the warrantor or his
representatives.
Art. 68, Rep. Act 7394.
Ibid.
81
Ibid.
79
80
514
LAW ON SALES
In case the refund of the purchase price is elected, the
amount directly attributable to the use of the consumer prior to
the discovery of the non-conformity shall be deducted.82
In case of breach of implied warranty, the consumer may
retain the goods and recover damages, or reject the goods,
cancel the contract and recover from the seller so much of the
purchase price as has been paid, including damages.83
5. Contrary Stipulations
All covenants, stipulations or agreements contrary to the
provisions of Article 68 are specifically declared null and void,
and without legal effect.
—oOo—
82
83
Ibid.
Ibid.
515
CHAPTER 13
EXTINGUISHMENT OF SALE
IN GENERAL
The same grounds by which obligations in general are extinguished, also apply to the extinguishment of the obligations
arising from contracts of sale. They include payment of the price
or performance (i.e., delivery of subject matter), loss of the subject matter, condonation or remission, confusion or merger of the
rights of creditor and debtor, compensation, novation, annulment,
rescission, fulfillment of a resolutory condition, and prescription.1
Payment or performance only extinguishes the obligations
to which they pertain to in a contract of sale, but not necessarily
the contract itself, since the relationship between buyer and seller
remains after performance or payment, such as the continuing
enforceability of the warranties of the seller.
More importantly, under Article 1600 of the Civil Code,
sales are also extinguished by conventional or legal redemption.
Redemption as a mode of extinguishment is therefore unique to
contracts of sale.
CONVENTIONAL REDEMPTION
1. Definition
Conventional redemption shall take place when the seller
reserved for himself the right to repurchase the thing sold, with
the obligation to: (a) return the price of the sale, (b) the expenses
of the contract, (c) any other legitimate payments made by reason
of the sale, (d) and the necessary and useful expenses made on
the thing sold.2
1
2
Art. 1231, Civil Code.
Arts. 1601 and 1616, Civil Code.
515
516
LAW ON SALES
Even when a sale is one with a right of repurchase, the buyer
would still be subrogated to the seller’s rights and actions even
during the period when redemption can be made by the seller.3
In other words, the redemption feature of sale does not prevent
its full consummation.
Unlike a debt which a third party may satisfy even against
the debtor’s will,4 the right of repurchase may be exercised only
by the seller in whom the right is recognized by a contract,5 or
by any person to whom the right may have been transferred,6
or in the case of legal redemption, by the person so entitled by
law.
2. Proper Reservation of Right to Repurchase
Villarica v. Court of Appeals,7 distinguished between the
right to redeem from an option to purchase, in that it is clear
from Article 1601 of the Civil Code that “the right of repurchase
... must be reserved by the vendor, by stipulation to that effect,
in the contract of sale.”8 It held that “[T]he right of repurchase is
not a right granted [to] the vendor by the vendee in a subsequent
instrument, but is a right reserved by the vendor in the same
instrument of sale as one of the stipulations of the contract. Once
the instrument of absolute sale is executed, the vendor can no
longer reserve the right to repurchase, and any right thereafter
granted the vendor by the vendee in a separate instrument cannot
be a right of repurchase but some other right like the option to
buy in the instant case.”9
In another way of looking at it, Misterio v. Cebu State
College of Science and Technology,10 held that the essence of
a pacto de retro sale is that title and ownership of the property
sold is immediately vested in the vendee a retro, subject to the
Art. 1609, Civil Code.
Art. 1236, Civil Code.
5
Ordoñez v. Villaroman, 78 Phil. 117 (1947).
6
Gallar v. Husain, 20 SCRA 186 (1967).
7
26 SCRA 189 (1968).
8
Ibid, at p. 193.
9
Ibid, at p. 193. Reiterated in Torres v. Court of Appeals, 216 SCRA 287 (1992).
10
461 SCRA 122 (2005).
3
4
EXTINGUISHMENT OF SALE
517
restrictive condition of repurchase by the vendor a retro within
the redemption period.11
In Nool v. Court of Appeals,12 two separate documents were
executed, one a sale agreement, and the other an agreement
granting the sellers the right of repurchase; but that when
they were executed the sellers had actually lost ownership of
the subject parcel of land which had been foreclosed by the
mortgagee bank. When the buyer learned that the sellers no
longer owned the property, he arranged for its direct purchase
from the mortgagee-bank. The sellers then sought to exercise
the right of repurchase against the buyer. Recognizing that a sale
contract does not become void by reason only that the subject
matter is not owned by the seller at the time of the perfection, the
Court, nevertheless considered the underlying sale contract as
“inoperative” under item 5 of Article 1409 which declares void a
contract which “contemplates an impossible service,” in line with
Article 1459 of the Civil Code which requires that “the vendor
must have a right to transfer the ownership thereof at the time it is
delivered.” Since the underlying contract of sale was inoperative,
and consequently, void, then the right of repurchase reserved
would also be void.
Nool indicates that the valid existence of a stipulated right of
repurchase is premised upon the fact that the underlying contract
of sale is valid and there has been performance (i.e., delivery of
the subject matter and transfer of ownership to the buyer), upon
which the right to repurchase can be exercised later on.
3. Right of Repurchase May Be Proved
by Parol Evidence
Since a right to repurchase is merely a feature of the contract
of sale, it is governed also by the Statute of Frauds. However, the
Supreme Court has held that when the contract of sale has been
reduced in writing, parol evidence may be adduced to prove the
agreement granting the seller a right to repurchase the property
Reiterated in Cadungog v. Yap, 469 SCRA 561 (2005).
276 SCRA 149 (1997).
11
12
518
LAW ON SALES
sold, since the deed of sale and the verbal agreement allowing
the right of repurchase should be considered as an integral
whole, then the deed of sale relied upon by the seller “is in itself
the note or memorandum evidencing the contract,” which would
take the case outside the provisions of the Statute of Frauds.13
Parol evidence may also be admitted to prove that a right of
repurchase was part of a deed of sale, when no objection to such
parol evidence was made during trial.14
The Court also held that the “best evidence rule” would not
be an obstacle to the adducement of such parol evidence where
it is shown that the parol agreement was the moving cause of
the written contract, or where the parol agreement forms part of
the consideration of the written contract, and it appears that the
written contract was executed on the faith of the parol contract or
representation, and especially so when the right of repurchase
proved by parol evidence is not inconsistent with the terms of the
written contract.15
4. Distinguished from Option to Purchase
The differences between a right of redemption from an
option right may be summarized as follows:
(a) A right to redeem is not a separate contract,
but merely part of a main contract of sale,
and in fact cannot exist unless reserved at
the time of the perfection of the contract
of sale; whereas, an option to purchase
is generally a principal, albeit preparatory,
contract and may be created independent
of another contract;
(b) A right to redeem must be imbedded in a
contract of sale upon the latter’s perfection;
whereas, an option right may exist prior
13
(1996).
14
15
Mactan Cebu International Airport Authority v. Court of Appeals, 263 SCRA 736
Ibid, at p. 742.
Ibid, at p. 742.
EXTINGUISHMENT OF SALE
519
to or after the perfection of the sale, or be
imbedded in another contract, like a lease,
upon that contract’s perfection;
(c) The right to redeem does not need a
separate consideration in order to be
valid and effective; whereas, an option to
purchase in order to be valid must have a
consideration separate and distinct from
the purchase price;16
(d) For a right to redeem, the redemption period
cannot exceed ten (10) years; whereas, the
period for an option right may exceed ten
(10) years;
(e) The exercise of a right of redemption
requires notice to be accompanied by a
tender of payment, including consignment
when tender of payment cannot be made
effectively on the buyer; whereas, the
exercise of a option to purchase requires
only a notice of such exercise be given to
the optioner; and
(f) The exercise of a right of redemption extinguishes an existing contract of sale;
whereas, the valid exercise of an option
right results into the perfection of a contract
of sale.
5. Period of Redemption
a. When No Period Agreed Upon
In case of stipulated right to redeem, in the absence of an
express agreement as to the period when the right can be exercised, it shall last four (4) years from the date of the contract.17
16
17
Arts. 1324 and 1479, Civil Code.
Art. 1606, Civil Code.
520
LAW ON SALES
In Misterio v. Cebu State College of Science and Technology, the four year period was held to begin from the happening
of the stipulated condition contained in the covering deed of sale,
rather than from the date of the contract, and even when the entire
covered period from the date of the contract would exceed ten
(10) years. The inexplicable ruling in Misterio is further discussed
hereunder.
18
b. When Period Agreed Upon
Should there be an agreement as to the period of redemption,
the period cannot exceed 10 years;19 if exceeds 10 years, the
agreement is valid only for the first 10 years.
In Anchuel v. Intermediate Appellate Court,20 where it was
stipulated in the sale a retro that the seller cannot redeem the
property within a period of 19 years from the execution of the
contract, the Court held that such stipulation is void since it
violated Article 1601 of the Civil Code; it therefore held that the
period of redemption would be 10 years.21
In Tayao v. Dulay,22 it was stipulated by the parties in the sale
a retro that the seller’s right of redemption cannot be exercised
within 10 years. Although the Court found the stipulation to be
void, it held that such nullity of the stipulation did not convert the
contract into a mere indebtedness nor an equitable mortgage,
and since there was an agreement, although void, the provisions
of Article 1606 of the Civil Code would apply in that the seller
may exercise his right of redemption within a period of 10 years
from the date of the contract. Tayao illustrated clearly that when
a period of redemption is agreed upon by the parties in a sale
a retro, although the stipulation as to period may be unclear or
void, it is the 10 year period provided in Article 1606 that applies
and not the 4 year period provided therein where there is no
agreement as to period.
461 SCRA 122 (2005).
Art. 1606, Civil Code.
20
147 SCRA 434 (1987).
21
Ibid, citing Baluyot v. Venegas, 22 SCRA 412 (1969).
22
13 SCRA 758 (1965).
18
19
EXTINGUISHMENT OF SALE
521
Bandong v. Austria,23 held that the provisions of the contract
of sale which secured to the sellers a right of repurchase in the
month of March of any year after the date of the contract, but
such a right of redemption could be exercised for a period of 10
years from the date of the contract, but wholly without force and
effect thereafter.
Ochagabia v. Court of Appeals,24 held that the right to
redeem under a sale pacto de retro had prescribed when the
action was initiated more than six decades later, since the right
to redeem should have been exercised at the latest within (10)
years reckoned from the execution of the contract.
c. The Mysterious Aberration of Misterio
Appropriate to its name, the decision in Misterio v. Cebu
State College of Science and Technology,25 defies practically
all established jurisprudential rules on the proper application of
the statutory periods for the exercise of the conventional right of
redemption.
In Misterio, a deed of sale with right to repurchase was
executed in December, 1956 over a parcel of land “subject to
the right of the vendor to repurchase the property after the high
school shall have ceased to exist, or shall have transferred its site
elsewhere.”26 When the condition did happen in June, 1983 (or
more than twenty years from the date of the contract), the Court
ruled that since no period was agreed upon, the applicable period
under Article 1606 of the Civil Code should be four (4) years to
be counted, not from the “date of the contract” as required in
the article, but within four (4) years from the happening of the
condition, even though it would exceed the maximum 10-year
limitation provided in said Article 1606, which has been strictly
construed by the Supreme Court in previous rulings discussed
above. Was it oversight on the part of the Supreme Court or does
Misterio establish the new rule on redemption period?
31 Phil. 479 (1915).
304 SCRA 867 (1999).
25
461 SCRA 122 (2005).
26
Ibid, at p. 125.
23
24
522
LAW ON SALES
d. Pendency of Action Tolls Redemption Period
Ong Chua v. Carr,27 held that the pendency of an action
brought in good faith and relating to the validity of a sale a retro
tolls the running of the period of redemption, thus: “Neither was
it error on the part of the court to hold that the pendency of the
action tolled the term for the right of redemption; that is an old
and well established rule.”28
On the other hand, Misterio v. Cebu State College of
Science and Technology,29 held that the pendency of a litigation
pertaining to the right of redemption does not toll the period
because such period “is not suspended merely and solely
because there is a divergence of opinion between the parties
as to the precise meaning of the phrase providing for the
condition upon which the right to repurchase is triggered. The
existence of seller a retro’s right to repurchase the proper is not
dependent upon the prior final interpretation by the court of the
said phrase.”30
There is actually no contradiction between the Ong Chua
and the Misterio rulings on this particular matter, the important
consideration being the “vesting” of the exercise of the right
of redemption by its proper exercise, which require notice and
tender of payment. In the case of Ong Chua, the seller a retro
had given notice of the exercise of the redemption right within
the redemption period; whereas in Misterio the facts showed
the successors-in-interests of the sellers a retro actual sought to
exercise the redemption right after the expiration of the four-year
redemption period. In essence therefore, the completion of the
redemption process (i.e., the payment of the amounts required
by Article 1616) is tolled by the filing of a civil action relating to
the issue of such redemption, provided that the exercise of the
redemption right and the filing of the suit are done within the
redemption period.
53 Phil. 975 (1929).
Ibid, at p. 983.
29
461 SCRA 122 (2005).
30
Ibid, at pp. 136-137.
27
28
EXTINGUISHMENT OF SALE
523
e. Non-Payment of Price Does Not Affect
Running of Redemption Period
Catangcatang v. Legayada,31 held that the non-payment
of the purchase price by itself would not serve to suspend the
period of redemption, thus —
The sale was consummated upon the execution
of the document and the delivery of the land subject
matter thereof to the vendee, petitioner herein. It was
a perfectly valid agreement, and the non-payment
of the balance of the purchase price could not have
the effect of suspending the efficacy of the provisions
thereof. ... The sale under consideration was perfected
from the moment Legayada consented to sell the land
in question and Catangcatang agreed to purchase it
for the sum of 51,400.00 and the latter had partially
complied with his obligation by paying the sum of
51,200.00 and the former by delivering possession of
the land to the vendee.”32
6. Possession of Subject Matter During
Period of Redemption
In a sale a retro, the buyer has a right to the immediate
possession of the property sold, unless otherwise agreed upon.
It is basic that in a pacto de retro sale, the title and ownership
of the property sold are immediately vested in the buyer a retro,
subject only to the resolutory condition of repurchase by the seller
a retro within the stipulated period.33 Thus, Misterio v. Cebu State
College of Science and Technology,34 held —
Pending the repurchase of the property, the vendee
a retro may alienate, mortgage or encumber the same,
but such alienation or encumbrance is as revocable
as is his right. If the vendor a retro repurchases the
property, the right of the vendee a retro is resolved,
84 SCRA 51 (1978).
Ibid, at p. 56.
33
Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).
34
461 SCRA 122 (2005).
31
32
524
LAW ON SALES
because he has to return the property free from all
damages and encumbrances imposed by him. The
vendor a retro may also register his right to repurchase
under the Land Registration Act and may be enforced
against any person deriving title from the vendee a
retro.35
7. How Redemption Effected
The seller can avail himself of the right of repurchase by
returning to the buyer:
(a) The price of the sale:
(b) The expenses of contract, and any other
legitimate payments made by reason of the
sale;
(c) The necessary and useful expenses made
on the thing sold.36
The seller may bring his action against every possessor
whose right is derived from the buyer, even if in the second
contract no mention should have been made of the right to
repurchase, without prejudice to the provisions of the Mortgage
Law and the Property Registration Decree, with respect to third
persons, who may have bought in good faith and for value.37
Under Article 1616 of the Civil Code, the seller a retro must
pay for the useful improvements introduced by the buyer a retro.
Gargollo v. Duero,38 held that failure of the seller a retro to pay
the useful improvements, entitles the buyer a retro to retain
possession of the land until actual reimbursement is done by the
seller a retro.
The exercise of redemption is not limited only to the total
redemption price enumerated in Article 1616 of the Civil Code,
since said legal provision is not restrictive nor exclusive. It
Ibid, at pp. 135-136. Also Vda. de Rigonan v. Derecho, 463 SCRA 627 (2005).
Art. 1616, Civil Code.
37
Art. 1608, Civil Code.
38
1 SCRA 1311 (1961).
35
36
EXTINGUISHMENT OF SALE
525
should be construed with Article 1601 which provides that legal
redemption shall take place when the seller reserves the right to
repurchase the thing sold, with the obligation to comply with the
provisions of Article 1616 “and other stipulations which may have
been agreed upon.”39
a. How Redemption Exercised
Legaspi v. Court of Appeals,40 held that in order to exercise
the right to redeem, only tender of payment is sufficient. The Court
further held that “[S]ince the case at bar involves the exercise of
the right to repurchase, a showing that petitioner made a valid
tender of payment is sufficient. It is enough that a sincere or
genuine tender of payment and not a mock or deceptive one was
made. The fact that he deposited the amount of the repurchase
money with the Clerk of Court was simply an additional security
for the petitioner. It was not an essential act that had to be
performed after tender of payment was refused by the private
respondent although it may serve to indicate the veracity of the
desire to comply with the obligation.”41
The mere sending of letters by the seller expressing his
desire to repurchase the property without accompanying tender
of the redemption price does not comply with the requirement of
law.42
However, Catangcatang v. Legayada,43 held that when
tender of payment cannot be validly made, because the buyer
cannot be located, it becomes imperative for the seller a retro
then to file a suit for consignation with the courts of the redemption
price, and failing to do so within the redemption period, his right
of redemption shall lapse.
On the other hand, in Lee Chuy Realty Corp. v. Court
of Appeals,44 the Court held that a formal offer to redeem,
Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).
142 SCRA 82 (1986).
41
Ibid, at p. 88. Reiterated in Mariano v. Court of Appeals, 220 SCRA 716 (1993).
42
Vda. de Zulueta v. Octavio, 121 SCRA 314 (1983); Lee v. Court of Appeals, 68
SCRA 197 (1972).
43
84 SCRA 51 (1978).
44
250 SCRA 596 (1995).
39
40
526
LAW ON SALES
accompanied by a bona fide tender of redemption price, is
not essential where the right to redeem is exercised through a
judicial action within the redemption period and simultaneously
depositing the redemption price. The filing of the action itself
within the period of redemption is equivalent to a formal offer to
redeem. Lee Chuy held that there is actually no prescribed form
for an offer to redeem to be properly effected. It can either be
through a formal tender with consignation, or by filing a complaint
in court coupled with consignation of the redemption price within
the prescribed period, thus:
... a formal offer to redeem, accompanied by
a bona fide tender of the redemption price, is not
essential where the right to redeem is exercised
through a judicial action within the redemption period
and simultaneously depositing the redemption price.
The formal offer to redeem accompanied by a bona
fide tender of the redemption price prescribed by law
is only essential to preserve the right of redemption
for future enforcement even beyond the period of
redemption. The filing of the action itself within the
period of redemption is equivalent to a formal offer to
redeem.
In sum, the formal offer to redeem is not a distinct
step or condition sine qua non to the filing of the action
in court for the valid exercise of the right of legal
redemption. What constitutes a condition precedent
is either a formal offer to redeem or the filing of an
action in court together with the consignation of the
redemption price within the reglementary period.45
Outside of seeking court action within the redemption
period to enforce the redemption right, Lee Chuy thereby
discussed when the right of redemption is deemed “vested,” i.e.,
the “formal offer to redeem accompanied by a bona fide tender
of the redemption price” within the redemption period, which
thereafter allows the enforcement of the right even beyond the
redemption period.
45
Ibid, at pp. 601-602.
EXTINGUISHMENT OF SALE
527
b. In Multi-Parties Cases
In sale a retro, the buyer of part of an undivided immovable
who acquires the whole thereof in the case of Article 498,46 may
compel the seller to redeem the whole property, if the latter wishes
to make use of the right of redemption.47
If several persons, jointly and in the same contract, should
sell an undivided immovable with a right of repurchase, none of
them may exercise this right for more than his respective share.
The same rule shall apply if the person who sold an immovable
alone has left several heirs, in which case each of the latter may
only redeem the part which he may have acquired.48
In the case of the preceding situation, the buyer may demand
of all the vendors or co-heirs, that they come to an agreement
upon the repurchase of the whole thing sold; and should they fail
to do so, the buyer cannot be compelled to consent to a partial
redemption.49
On the other hand, each one of the co-owners of an
undivided immovable who may have sold his share separately,
may independently exercise the right of repurchase as regards
his own share, and the buyer cannot compel him to redeem the
whole property.50
In addition, the creditors of the seller cannot make use of
the right of redemption against the buyer, until after they have
exhausted the property of the seller.51
In De Guzman v. Court of Appeals,52 the Court held that
under the rules contained in Article 1612 of the Civil Code, should
one of the co-owners or co-heirs succeed alone in redeeming
the whole property, such co-owner or co-heir shall be considered
46
Art. 498. Whenever the thing is essentially indivisible and the co-owners cannot
agree that it be allotted to one of them who shall indemnify the others, it shall be sold and
its proceeds distributed.
47
Art. 1611, Civil Code.
48
Art. 1612, Civil Code.
49
Art. 1613, Civil Code.
50
Art. 1614, Civil Code .
51
Art. 1610, Civil Code.
52
148 SCRA 74 (1987).
528
LAW ON SALES
as a mere trustee with respect to the shares of his co-owners
or co-heirs; accordingly, no prescription will lie against the right
to any co-owner or co-heir to demand from the redemptioner
his respective share in the property redeemed, which share is
subject to a lien in favor of the redemptioner for the amount paid
by him corresponding to the value of the share.
8. When Redemption Not Made
Jurisprudence before the new Civil Code held that when
no redemption is made, the buyer a retro automatically acquires
full ownership.53 However, under the present Article 1607 of the
Civil Code, in the case of real property, the consolidation of the
ownership in the buyer by virtue of the failure of the seller to comply with his obligation to return the price and other legally mandated expenses, shall not be recorded in the Registry of Property
without a judicial order, after the seller has been duly heard.
The proceeding for consolidation of title under Article 1607 is
not a mere motion incident to a main action or special proceeding,
but is an ordinary civil action where a complaint or petition
must be filed;54 with the buyer a retro being made a party to the
complaint and summons being served upon him.55 If such action
for consolidation of ownership is denied because the contract is
found to be an equitable mortgage, another action can be filed to
collect on the indebtedness or to foreclose the mortgage.56
Article 1607 abolished automatic consolidation of ownership
in the buyer a retro upon expiration of the redemption period by
requiring the buyer to institute an action for consolidation where
the vendor a retro may be duly heard. If the buyer succeeds in
proving that the transaction was indeed a pacto de retro, the
vendor is still given a period of thirty days from the finality of the
judgment within which to repurchase the property.57
Oviedo v. Garcia, 40 SCRA 17 (1971).
Ongoco v. Judge, the Court of First Instance of Bataan, 15 SCRA 30 (1965).
55
Crisologo v. Centeno, 26 SCRA 48 (1968).
56
Heirs of Jose A. Arches v. Vda. de Diaz, 50 SCRA 440 (1973).
57
Solid Homes v. Court of Appeals, 275 SCRA 267 (1997); also Art. 1606, Civil
53
54
Code.
EXTINGUISHMENT OF SALE
529
Notwithstanding the provisions of Article 1607, the recording
in the Registry of Deeds of the consolidation of ownership of the
buyer is not a condition sine qua non to the transfer of ownership.
The buyer would still be the owner of the property when the seller
a retro fails to redeem the property within the redemption period.
The essence of a pacto de retro sale that the title and ownership
of the property sold are immediately vested in the buyer a retro,
subject to the resolutory condition of repurchase by the seller
a retro within the stipulated period. Failure of the seller a retro
to perform said resolutory condition vests absolute title and
ownership over the property sold. As title is already vested in
the buyer a retro, his failure to consolidate his title under Article
1607 does not impair such title or ownership for the method
prescribed thereunder is merely for the purpose of registering
the consolidated title.58
9. Grant of 30-day Redemption Right in
Case of Litigation and Article 1606
Under the last paragraph of Article 1606 of the Civil Code,
“the vendor may still exercise the right to repurchase within
thirty-days from the time final judgment was rendered in a civil
action on the basis that the contract was a true sale with right to
repurchase.”
When the period of redemption has expired, then ipso jure
the right to redeem has been extinguished. However, even when
the right to redeem has expired, and there has been a previous
suit on the nature of the contract, the seller may still exercise the
right to repurchase within 30 days from the time final judgment
was rendered in a civil action on the basis that the contract was
a true sale with right to repurchase.59
Tapas v. Court of Appeals,60 held that the 30-day period
granted under Article 1606 for the seller to redeem the property
sold a retro “contemplates a case involving a controversy as to
58
Cruz v. Leis, 327 SCRA 570 (2000); Vda. De Rigonan v. Derecho, 463 SCRA
627 (2005).
59
Art. 1606, Civil Code.
60
69 SCRA 393 (1976).
530
LAW ON SALES
the true nature of the contract, and the court is called upon to
decide whether it is a sale with pacto de retro or an equitable
mortgage ... there can be no controversy as to the contract being
one of absolute deed of sale, pure and simple. There could not
even then be a period of redemption.”61
Pangilinan v. Ramos,62 held that the 30-day period for
redemption granted under Article 1606 does not apply to a
contract found to be an absolute sale. It also held that the “thirty
day period is pre-emptory because the policy of the law is not to
leave the purchaser’s title in uncertainty beyond the established
thirty day period. It is not a prescriptive period but is more a
requisite or condition precedent to the exercise of the right of
legal redemption.”63 Nevertheless, it cited as authority the case
of Caro v. Court of Appeals,64 which referred to the 30-day legal
redemption right of a co-owner under Article 1623 of the Civil
Code, and not the 30-day period provided under Article 1606.
The rationale for the grant of the 30-day period of
redemption under Article 1606 is quite clear: although a period of
redemption is stated i