1
Part I
SALES
(Title VI, Arts. 1458-1637)
INTRODUCTION
Governing law.
The provisions of the Code of Commerce relating to sales have been repealed by the Civil Code. (Art.*
2270[2].) Today, sales are governed by the provisions of the Civil Code on the subject. (Book IV, Title VI, Arts.
1458-1637.) The distinction between the so-called civil sales and commercial sales is eliminated.
The provisions of the Civil Code on Obligations (Title I, Arts. 1156-1304.) and Contracts (Title II, Arts.
1305-1422.) are applicable to the contract of sale, but Articles 1458 to 1637 are special rules which are peculiar
to sales alone.
Sources of our law on sales.
(1) The Philippine law on sales, as it exists today, is an admixture of civil law and common law principles.
According to the Code Commission:
“A majority of the provisions of the Uniform Sales Law which is in force in 31 States and Territories of
the American Union have been adopted in the Civil Code with modifications to suit the principles of
Philippine Law.” (Report of the Code Commission, p. 60.)
*Unless otherwise indicated, refers to article in the Civil Code.
1
In incorporating some provisions of the Uniform Sales Act of the United States, the Commission states:
“This incorporation of a goodly number of American rules on sale of goods has been prompted by these
reasons:
(1)
The present [old] Code does not solve questions arising from certain present-day business
practices. Among them are: the sale of “future goods” (Art. 1482.); sale of goods by description or by sample
(Art. 1501.); when goods are delivered “on sale or return” (Art. 1522.); sale of goods by negotiation or
transfer of a document of title (Arts. 1527 to 1540.); and the rights of the unpaid seller of goods. (Arts. 1545
to 1555.)1
(2)
The present Code fails to regulate many incidents and aspects of delivery and acceptance of
goods, of warranty of title and against hidden defects, and of payment of the price.
(3)
It is probable that a considerable portion of the foreign trade of the Philippines will continue for
many years with the United States. In order to lessen misunderstanding between the merchants on both sides
of the Pacific, their transactions should, as far as possible, be governed by the same rules. This desirable
condition will not only facilitate trade but will also perpetuate sentiments of esteem and goodwill between
the two peoples. It is but a truism to say that fair and mutually beneficial trade incalculably enhances
international friendship.” (Ibid., pp. 60-61.) (2) In addition:
“The Title on ‘Sales’ has been enriched by the addition of new provisions based on the opinions of
commentators (Arts. 1479, 1480, 1481, 1485, 1490, 1491, 1497, 1498, 1512, 1516, 1558, 1561, 1569, 1570,
1571.2) and on judicial decisions (Arts. 1486, 1487.3) and of new rules adopted with modifications to suit the
philosophy and framework of Philippine Law, from the Uniform Sales Act of
1
The articles mentioned are now Arts. 1462, 1481, 1502, 1507-1520, 1525-1935, respectively, in the new Code.
Now, Arts. 1459, 1460, 1461, 1465, 1470, 1471, 1477, 1478, 1492, 1496, 1538, 1541, 1549, 1550, 1551, respectively.
3 Now, Arts. 1466, 1467, respectively.
2
2
SALES
INTRODUCTION
the United States, Arts. 1482 to 1484, 1494, 1496, 1501, 1503, 1514, 1522 to 1526, 1527 to 1540, 1541 to 1543,
1545 to 1555, 1565, 1566, 1567, 1582 to 1585, 1602 to 1608, 1614 to 1617, 1618 to 1619, 16574x x x.”
Many of the original articles were also amended for clarification or improvement.” (Ibid., p. 141.)
— oOo —
4
Now, Arts. 1462 to 1464, 1474, 1476, 1481, 1483, 1494, 1502-1506, 1507-1520, 15211523, 1525-1535, 1545, 1546, 1547, 1562-1565, 1582-1586,
1594-1597, 1598-1599, 1637, respectively.
3
Chapter 1 NATURE AND FORM OF THE CONTRACT
ART. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay therefor
a price certain in money or its equivalent.
A contract of sale may be absolute or conditional. (1445a)
Concept of contract of sale.
The contract of sale is an agreement whereby one of the parties (called the seller or vendor) obligates himself
to deliver something to the other (called the buyer or purchaser or vendee) who, on his part, binds himself to pay
therefor a sum of money or its equivalent (known as the price).
Under the Spanish Civil Code, the contract was referred to as a contract of “purchase and sale.” As every
“sale” necessarily presupposes a “purchase,” this name was regarded as redundant. Hence, the name of Title VI
has been simplified by calling it “sales” and the name of the contract has been changed for the same reason to
“contract of sale.” (Report of the Code Commission, p. 141.)
“It is required in the proposed Code that the seller transfers the ownership of the thing sold. (Arts. 1458,
1459, 1495, 1547.) In the present Code (Art. 1445.), his obligation is merely to deliver the thing, so that even
if the seller is not the owner, he may validly sell, subject to the warranty (Art. 1474.) to maintain the buyer
in the legal and peaceful possession of the
4
4
SALES
Art. 1458
thing sold. The Commission considers the theory of the present law
unsatisfactory from the moral point of view.”
(Ibid.)
Characteristics of a contract of sale. The
contract of sale is:
(1) Consensual, because it is perfected by mere consent without
any further act;
(2) Bilateral, 5 because both the contracting parties are bound to
fulfill correlative obligations towards each other — the seller, to deliver
and transfer ownership of the thing sold and the buyer, to pay the price;
(3) Onerous, because the thing sold is conveyed in consideration
of the price and vice versa (see Gaite vs. Fonacier, 2 SCRA 820
[1961].);
(4) Commutative, because the thing sold is considered the
equivalent of the price paid and vice versa. (see Ibid.) However, the
contract may be aleatory 6 as in the case of the sale of a hope (e.g.,
sweepstakes ticket);
(5) Nominate, because it is given a special name or designation in
the Civil Code, namely, “sale”; and
(6) Principal, because it does not depend for its existence and
validity upon another contract.
ILLUSTRATIVE CASES:
1. Trial Court decided that there was no payment by buyer of
lumber covered by invoices of seller but Court of Appeals held that
delivery of lumber was not duly proved because counter-receipts
5
Obligations are bilateral when both parties are mutually bound to each other. They are
reciprocal when the performance one is designed to be the equivalent and the condition for the
performance of the other. In a contract of sale, in the absence of any stipulation, the obligations of
the seller and buyer are reciprocal, the obligation or promise of each party is the cause or
consideration for the obligation or promise by the other. The reciprocal obligations would normally
be, in the case of the buyer, the payment of the agreed price and in the case of the seller, the
fulfillment of certain express warranties.
6 Art. 2010. By an aleatory contract, one of the parties or both reciprocally bind themselves
to give or to do something in consideration of what the other shall give or do upon the happening
of an event which is uncertain, or which is to occur at an indeterminate time.
Art. 1458
NATURE AND FORM OF THE CONTRACT
issued by buyer merely certified to receipt of certain statement on
claims for the lumber allegedly delivered.
Facts: S filed a complaint for collection of a sum of money
against B for lumber purchased on credit and received by B. B denied
all the material allegations of the complaint. The trial court rendered
judgment in favor of S. On appeal, the Court of Appeals reversed the
judgment on the ground that the delivery of the lumber to B was not
duly proved.
S asserts that the case having been tried and decided by the trial
court on the issue of whether or not there was payment by B of the
lumber covered by invoices of S and counterreceipts issued by B, it is
alone on this issue that the Court of Appeals should have decided the
case and not on the issue of whether or not there was delivery of the
lumber in question. The Court of Appeals found that the counterreceipts merely certified the fact of having received from S certain
statements on claims for lumber allegedly delivered.
Issue: Did the Court of Appeals decide the case on a new issue
not raised in the pleadings before the lower court?
Held: No. The issue of delivery is no issue at all. For delivery and
payment in a contract of sale, or for that matter in quasicontracts, are
so interrelated and interwined with each other that without delivery of
the goods there is no corresponding obligation to pay. The two
complement each other. (see Art. 1458, par. 1.) It is clear that the two
elements cannot be dissociated, for the contract of purchase and sale
is, essentially, a bilateral contract, as it gives rise to reciprocal
obligations. (Pio Barretto Sons, Inc. vs. Compania Maritima, 62
SCRA 167 [1975].)
———
————
———-
2. To secure payment of the balance of the purchase price of iron
ore, buyer executed a surety bond in favor of seller, the buyer,
however, claiming that such payment was subject to a suspensive
condition — the sale of the iron ore by buyer.
Facts: B, owner of a mining claim, appointed S as attorneyin-fact
to enter into a contract with any individual or juridical person for the
exploration and development of said claim on a royalty basis. S
himself embarked upon the exploitation of the claim.
Subsequently, B revoked the authority granted by him to S who
assented thereto subject to certain conditions. As a result, a document
was executed wherein S transferred to B all of S’s rights and interests
5
6
SALES
Art. 1458
over the “24 tons of iron ore, more or less” that S had already extracted
from the mineral claims in consideration of the sum of P75,000.00,
P10,000.00 of which was paid upon the signing of the agreement, and
“the balance of P65,000.00 will be paid from and out of the first letter
of credit covering the first shipment of iron ores and of the first
amount derived from the local sale of iron ore” from said claims.
To secure the payment of the balance, B executed in favor of S a
surety bond. No sale of approximately 24,000 tons of iron ore had
been made nor had the balance of P65,000.00 been paid to S.
Issue: Is the shipment or local sale of the iron ore a condition
precedent (or suspensive condition) to the payment of the balance, or
only a suspensive period or term?
Held: (1) Obligation of B one with a term. — The words of the
contract express no contingency in the buyer’s obligation to pay.
There is no uncertainty that the payment will have to be made sooner
or later; what is undetermined is merely the exact date at which it will
be made. By the very terms of the contract, therefore, the existence of
the obligation to pay is recognized; only its maturity or demandability
is deferred.
Furthermore, to subordinate B’s obligation to the sale or shipment
of the ore as a condition precedent would be tantamount to leaving the
payment at his discretion (Art. 1182.), for the sale or shipment could
not be made unless he took steps to sell the ore.
(2) A contract of sale is normally commutative and onerous. —
In a contract of sale, not only does each one of the parties assume a
correlative obligation, but each party anticipates performance by the
other from the very start.
Nothing is found in the record to evidence that S desired or
assumed to run the risk of losing his right over the ore without getting
paid for it, or that B understood that S assumed any such risk. This is
proved by the fact that S insisted on a bond to guarantee the payment
of the P65,000.00 and the fact that B did put such bond, indicated that
he admitted the definite existence of his obligation to pay the balance
of P65,000.00. The only rational view that can be taken is that the sale
of the ore to B was a sale on credit, and not an aleatory contract, where
the transferor, S, would assume the risk of not being paid at all by
B. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)
Essential requisites of a contract of sale.
Art. 1458
NATURE AND FORM OF THE CONTRACT
7
The rules of law governing contracts in general are applicable to
sales. Like every contract, “sale” has the following requisites or
elements:
(1) Consent or meeting of the minds. — This refers to the consent
on the part of the seller to transfer and deliver and on the part of the
buyer to pay. (see Art. 1475.) The parties must have legal capacity to
give consent and to obligate themselves. (Arts. 1489, 1490, 1491.) The
essence of consent is the conformity of the parties on the terms of the
contract, the acceptance by one of the offer made by the other. The
contract to sell is a bilateral contract. Where there is merely an offer by
one party without the acceptance of the other, there is no consent.
(Salonga vs. Farrales, 105 SCRA 359 [1981].) The acceptance of
payment by a party is an indication of his consent to a contract of sale,
thereby precluding him from rejecting its binding effect. (Clarin vs.
Rulova, 127 SCRA 512 [1984].)
There may, however, be a sale against the will of the owner in case
of expropriation (see Art. 1488.) and the three different kinds of sale
under the law, namely: an ordinary execution sale (see Rules of Court,
Rule 39, Sec. 15.), judicial foreclosure sale (Ibid., Rule 68.), and extrajudicial foreclosure sale. (Act No. 3135, as amended.) A different set of
law applies to each class of sale mentioned. (see Fiestan vs. Court of
Appeals, 185 SCRA 751 [1990].)
The sale of conjugal property requires the consent of both the
husband and the wife. The absence of the consent of one renders the
sale null and void (see Art. 124, Family Code.) while the vitiation
thereof (see Art. 1390.) makes it merely voidable. (Guiang vs. Court of
Appeals, 95 SCAD 264, 290 SCRA 372 [1998].)
(2) Object or subject matter. — This refers to the determinate thing
which is the object of the contract. (Art. 1460.) The thing must be
determinate or at least capable of being made determinate because if the
seller and the buyer differ in regard to the thing sold, there is no meeting
of the minds; therefore, there is no sale. The subject matter may be
personal or real property. The terms used in the law are “thing” (e.g.,
Art. 1458), “article” (Art. 1467), “goods” (e.g., Art. 1462), “personal
property” (e.g., Art. 1484), “property” (e.g., Art. 1490), “movable
property” (e.g., Art. 1498), “real estate” (e.g., Art. 1539), “immovable”
8
SALES
Art. 1458
(e.g., Ibid.), “immovable property” (e.g., Art. 1544), and “real
property.” (Art. 1607.)
A buyer can only claim right of ownership over the object of the
deed of sale and nothing else. Where the parcel of land described in the
transfer certificate of title is not in its entirety the parcel sold, the court
may decree that the certificate of title be cancelled and a correct one be
issued in favor of the buyer, without having to require the seller to
execute in favor of the buyer an instrument to effect the sale and transfer
of the property to the true owner. (Veterans Federation of the
Philippines vs. Court of Appeals, 138 SCAD 50, 345 SCRA 348
[2000].)
The sale of credits and other incorporeal rights is covered by
Articles 1624 to 1635; and
(3) Cause or consideration. — This refers to the “price certain in
money or its equivalent” (Art. 1458.) such as a check or a promissory
note, which is the consideration for the thing sold. It does not include
goods or merchandise although they have their own value in money.
(see Arts. 1468, 1638.) However, the words “its equivalent” have been
interpreted to mean that payment need not be in money, so that there
can be a sale where the thing given as token of payment has “been
assessed and evaluated and [its] price equivalent in terms of money
[has] been determined.” (see Republic vs. Phil. Resources Dev. Corp.,
102 Phil. 968 [1958].)
The price must be real, not fictitious; otherwise, the sale is void
although the transaction may be shown to have been in reality a
donation or some other contract. (Art. 1471.) A seller cannot render
invalid a perfected contract of sale by merely contradicting the buyer’s
allegation regarding the price and subsequently raising the lack of
agreement as to the price. (David vs. Tiongson, 111
SCAD 242, 313 SCRA 63 [1999].)
The absence of any of the above essential elements negates the
existence of a perfected contract of sale. 7 Sale, being a consensual
7
When a contract of sale is void, the possessor is entitled to keep the fruits during the period
for which he held the property in good faith. Good faith of the possessor ceases when an action to
recover possession of the property is filed against him and he is served summons therefor.
(Development Bank of the Phils. vs. Court of Appeals, 316 SCRA 650 [1999]; see Arts. 526, 528.)
Art. 1458
NATURE AND FORM OF THE CONTRACT
9
contract (see Art. 1475.), he who alleges it must show its existence by
competent proof. (Dizon vs. Court of Appeals, 302 SCRA 288 [1999].)
Natural and accidental elements.
The above are the essential elements of a contract of sale or those
without which no sale can validly exist. They are to be distinguished
from:
(1) Natural elements or those which are deemed to exist in certain
contracts, in the absence of any contrary stipulations, like warranty
against eviction (Art. 1548.) or hidden defects (Art. 1561.); and
(2) Accidental elements or those which may be present or absent
depending on the stipulations of the parties, like conditions, interest,
penalty, time or place of payment, etc.
ILLUSTRATIVE CASES:
1. Supposed sale was evidenced by a receipt acknowledging
receipt of P1,000.00.
Facts: B bought on a partial payment of P1,000.00, evidenced by
a receipt, a portion of a subdivision from S, administrator of the testate
estate of his deceased spouse. Subsequently, S was authorized by the
court to sell the subdivision. In the meantime, PT Co. became the new
administrator. It sold the lot to another which sale was judicially
approved.
B files a complaint which seeks, among other things, for the
quieting of title over the lot in question.
Issue: Was there a valid and enforceable sale to B?
Held: No. An examination of the receipt reveals that the same can
neither be regarded as a contract of sale nor a promise to sell. There
was merely an acknowledgment of the sum P1,000.00. There was no
agreement as to the total purchase price of the land nor to the monthly
installments to be paid by B. The requisites for a valid contract of sale
are lacking. (Leabres vs. Court of Appeals, 146 SCRA 158 [1986].)
———— ———— ————
2. Buyer did not sign draft of Contract to Sell because it covered
seven (7) lots instead of six (6), but sent to seller five (5) checks as
down payment which the seller did not encash.
10
SALES
Art. 1458
Facts: B Company and S, subdivision developer, agreed to enter
into a new Contract to Sell whereby S will sell seven (7) lots at
P423,250.00 with a down payment of P42,325.00 and the balance
payable in 48 monthly installments of P7,395.94. The draft of the
Contract to Sell prepared by S was sent to B Company but B’s
president did not sign it although he sent five (5) checks covering the
down payment totalling P27,542.72. S received the checks but did not
encash it because B’s president did not sign the draft contract, the
reason given by the latter was that the draft covered seven (7) lots
instead of six (6).
Since no written contract was signed, S sued B to recover
possession of the lots still occupied by the latter.
Issues: (1) May the unsigned draft be deemed to embody the
agreement between the parties?
(2) May the receipt of the five (5) checks by S serve to produce
the effect of tender of down payment by B?
Held: (1) Based on the facts, the parties had not arrived at a
definite agreement. The only agreement they arrived at was the price
indicated in the draft contract. The number of lots to be sold was a
material component of the Contract to Sell. Without an agreement on
the matter, the parties may not in any way be considered as having
arrived at a contract under the law.
(2) Moreover, since the five (5) checks were not encashed, B
should have deposited the corresponding amount of the said checks as
well as the installments agreed upon. A contract to sell, as in this case,
involves the performance of an obligation, not merely the exercise of
a privilege or a right. Consequently, performance or payment may be
effected not by tender of payment alone but by both tender and
consignation. It is consignation which is essential to extinguish B’s
obligation to pay the balance of the purchase price. (see Arts. 12561258.) B did not even bother to tender and make consignation of the
installments or to amend the contract to reflect the true intention of the
parties as regards the number of lots to be sold. (People’s Industrial
Commercial Corp. vs. Court of Appeals, 88 SCAD 559, G.R. No.
112733, Oct. 24, 1997.)
Effect of absence of price/nonpayment of
price.
Art. 1458
NATURE AND FORM OF THE CONTRACT
11
(1) There can be no sale without a price. (see Art. 1474.)
Technically, the cause in sale is, as to the seller, the buyer’s promise to
pay the price, and as to the buyer, the seller’s promise to deliver the
thing sold. A contract of sale is void and produces no effect whatsoever
where the same is without cause or consideration (Art. 1409[3].) in that
the purchase price, which appears thereon as paid, has, in fact, never
been paid by the buyer to the seller. Such sale is nonexistent and cannot
be considered consummated. (Mapalo vs. Mapalo, 17 SCRA 116
[1966]; Ladanga vs. Court of Appeals, 31 SCRA 361 [1984]; Castillo
vs. Galvan, 85 SCRA 526 [1978].)
Where the figures referred to by the buyer as prices are mere
estimates given them by the seller of the condominium units in question,
the transaction lacks an essential requisite for the perfection of the
contract of sale. (Raet vs. Court of Appeals, 98 SCAD 584, 295 SCRA
677 [1998].)
(2) Non-payment of the purchase price is a resolutory condition for
which the remedy is either rescission or specific performance under
Article 1191 of the Civil Code. It constitutes a very good reason to
rescind a sale, for it violates the very essence of the contract of sale.
(Central Bank of the Philippines vs. Bachara,
328 SCRA 807 [2000].)
But the failure to pay the price in full within a fixed period does not,
by itself, dissolve a contract of sale in the absence of any agreement that
payment on time is essential (Ocampo vs. Court of Appeals, 52 SCAD
610, 233 SCRA 551 [1994]; see Art. 1592.), or make it null and void
for lack of consideration, but results at most in default on the part of the
vendee for which the vendor may exercise his legal remedies. (Balatbat
vs. Court of Appeals, 73 SCAD 660, 261 SCRA 128 [1996].) It is
incumbent upon the party challenging the recital of a notarized deed of
sale that the vendor has received the purchase price to prove his claim
with clear and convincing evidence. A notarized document is evidence
of high character. (Diaz vs. Court of Appeals, 145 SCRA 346 [1986].)
An action to declare a contract void or inexistent does not prescribe.
(Art. 1410.)
Transfer of title to property for a price,
essence of sale.
12
SALES
Art. 1458
(1) Obligations to deliver and to pay. — The transfer of title to
property or agreement to transfer title for a price actually paid or
promised, not a mere physical transfer of the property, is the essence of
sale. (see Ker & Co., Ltd. vs. Lingad, 38 SCRA 524 [1971]; see Gardner
vs. Court of Appeals, 131 SCRA 585 [1984]; Santos vs. Court of
Appeals, 337 SCRA 67 [2000].) But neither is the delivery of the thing
bought nor the payment of the price necessary for the perfection of the
contract of sale. Being consensual, it is perfected by mere consent. (See
Art. 1475.) However, where the seller can no longer deliver the object
of the sale to the buyer because the latter has already acquired title and
delivery thereof from the rightful owner, such contract may be deemed
to be inoperative and may thus fall, by analogy, under Article 1409(5)
of the Civil Code: “those which contemplate an impossible service,’’
since delivery of ownership is no longer possible. (Nool vs. Court of
Appeals, 84 SCAD 941, 276 SCRA 149 [1997]; Heirs of San Miguel
vs. Court of Appeals, 364 SCRA 523 [2001].)
It is only upon the existence of the contract of sale that the seller is
obligated to transfer ownership to the buyer and the buyer, to pay the
purchase price to the seller. (Chua vs. Court of Appeals, 401 SCRA 54
[2003].) In defining the contract of sale, Article 1458 merely specifies
the obligations of the parties to transfer ownership and to pay under the
contract. The parties will have these obligations even without Article
1458.
ILLUSTRATIVE CASE:
Spouses exchanged their properties for no par shares of a
corporation as a result of which they gained control of the
corporation.
Facts: Spouses H & W, stockholders of DT Corporation,
conveyed to said DT a parcel of land leased to E, in exchange for 2,500
shares of stock equivalent to 55% majority in the corporation. E
questioned the transaction on the ground that it was not given the first
option to buy the leased property pursuant to the proviso in the lease
agreement.
Issue: Is the “deed of exchange” a contract of sale which, in
effect, prejudiced E’s right of first refusal over the leased property?
Held: No. In effect, DT Corporation is a business conduit of H
and W. What they really did was to invest their properties and change
Art. 1458
NATURE AND FORM OF THE CONTRACT
13
the nature of their ownership from unincorporated to incorporated
form by organizing DT to take control of their properties and at the
same time save on inheritance taxes. The deed of exchange cannot be
considered a contract of sale. There was no transfer of actual
ownership interests by H and W to a third party. They merely changed
their ownership from one form to another. The ownership remained in
the same hands. Hence, E has no basis for its claim of a right of first
refusal under the lease contract. (Delpher Trades Corporation vs.
Intermediate Appellate Court, 157 SCRA 349 [1988].)
(2) Where transfer of ownership not intended by the parties. — A
contract for the sale or purchase of goods/commodity to be delivered
at a future time, if entered into without the intention of having any
goods/commodity pass from one party to another, but with an
understanding that at the appointed time, the purchaser is merely to
receive or pay the difference between the contract and the market
prices, is illegal. Such contract falls under the definition of what is
called “futures” in which the parties merely gamble on the rise or fall
in prices and is declared null and void by law. 8 (Onapal Philippines
Commodities, Inc. vs. Court of Appeals, 218 SCRA 281 [1993].)
Kinds of contract of sale.
(1) As to presence or absence of conditions. — A sale may be
either:
(a)
Absolute. — where the sale is not subject to any
condition whatsoever and where title passes to the buyer upon
delivery of the thing sold. Thus, it has been held that a deed of sale
is absolute in nature although denominated as a “Deed of
Conditional Sale” in the absence of any stipulation that the title to
the property sold is reserved in the vendor until full payment of the
purchase price nor a stipulation giving the vendor the right to
unilaterally rescind the contract the moment the vendee fails to pay
within a fixed period. (Dignos vs. Court of Appeals, 158 SCRA 375
[1988]; Pingol vs. Court of Appeals, 44 SCAD 498, 226 SCRA 118
[1995]; People’s Industrial and Commercial Corporation vs. Court
8
Art. 2018. If a contract which purports to be for the delivery of goods, securities or shares
of stock is entered into with the intention that the difference between the price stipulated and the
exchange or market price at the time of the pretended delivery shall be paid by the loser to the
winner, the transaction is null and void. The loser may recover what he has paid.
14
SALES
Art. 1458
of Appeals, 88 SCAD 559, 281 SCRA 206 [1997].) In such case,
ownership of the property sold passes to the vendee upon the actual
or constructive delivery thereof. (see Art. 1497.)
Payment of the purchase price is not essential to the transfer of
ownership as long as the property sold has been delivered. Such
delivery (see Art. 1497.) operates to divest the vendor of title to the
property which may not be regained or recovered until and unless
the contract is resolved or rescinded in accordance with law
(Philippine National Bank vs. Court of Appeals, 82 SCAD 472, 272
SCRA 291 [1997].); or
(b)
Conditional. — where the sale contemplates a
contingency (Arts. 1461, 1462, par. 2; Art. 1465.), and in general,
where the contract is subject to certain conditions (see Art. 1503,
par. 1.), usually, in the case of the vendee, the full payment of the
agreed purchase price (Art. 1478; see People’s Homesite &
Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984].) and
in the case of the vendor, the fulfillment of certain warranties, e.g.,
the timely eviction of squatters on the property sold. (Romero vs.
Court of Appeals, 65 SCAD 621, 250 SCRA 223 [1995].)
In sales with assumption of mortgage, the assumption of
mortgage is a condition to the seller-mortgagor’s consent to the sale
so that without approval by the mortgagee no sale is perfected and
the seller remains the owner and mortgagor of the subject property
with the right to redeem in the case of foreclosure. (Ramos vs. Court
of Appeals, 87 SCAD 24, 279 SCRA 118 [1997].)
However, a sale denominated as a “Deed of Conditional Sale’’
is still absolute where the contract is devoid of any proviso that title
is reserved or the right to unilaterally rescind is stipulated, e.g., until
or unless the price is paid. (Heirs of Juan San Andres vs. Rodriguez,
332 SCRA 769 [2000].)
The delivery of the thing sold does not transfer title until the
condition is fulfilled. Where the condition is imposed, instead, upon
the perfection of the contract the failure of such condition would
prevent such perfection (Galang vs. Court of Appeals, 43 SCAD
737, 225 SCRA 37 [1993]; Roque vs. Lapuz, 96 SCRA 741 [1980];
Babasa vs. Court of Appeals, 94 SCAD 679, 290 SCRA 532
[1998].) or the juridical relation itself from coming into existence.
Art. 1458
NATURE AND FORM OF THE CONTRACT
15
If the condition is imposed on an obligation of a party (e.g.,
ejection by the vendor of squatters within a certain period before
delivery of property) not upon the perfection of the contract itself,
which is not complied with, the other party may either refuse to
proceed or waive said condition. (see Art. 1545; Romero vs. Court
of Appeals, 65 SCAD 621, 250 SCRA 223 [1995].) The stipulation
that the “payment of the full consideration [of a parcel of land] shall
be due and payable in five (5) years from the execution of a formal
deed of sale’’ is not a condition which affects the efficacy of the
contract of sale. It merely provides the manner by which the full
consideration is to be computed and the time within which the same
is to be paid. (Heirs of Juan San Andres vs. Rodriguez, supra.)
Similarly, the mere fact that the obligation of the buyer to pay the
balance of the purchase price was made subject to the condition that
the seller first deliver the reconstituted title of the house and lot sold
does not make the contract a contract to sell for such condition is
not inconsistent with a contract of sale. (Laforteza vs. Machuca, 127
SCAD 798, 333 SCRA 643 [2000].)
(2) Other kinds. — There are, of course, other kinds of sale
depending on one’s point of view, e.g., as to the nature of the subject
matter (real or personal, tangible or intangible), as to manner of payment
of the price (cash or installment), as to its validity (valid, rescissible,
unenforceable, void), etc.
Contract of sale and contract to sell with
reserved title distinguished.
At this stage, it would be desirable to point out that there are
distinctions between the two contracts.
(1) Transfer of title. — In a contract of sale, title passes to the buyer
upon delivery of the thing sold, while in a contract to sell (or of
“exclusive right and privilege to purchase”), where it is stipulated that
ownership in the thing shall not pass to the purchaser until he has fully
paid the price (Art. 1478.), ownership is reserved in the seller and is not
to pass until the full payment of the purchase price. In the absence of
such stipulation, especially where the buyer took possession of the
property upon execution of the contract, indicates that what the parties
contemplated is a contract of absolute sale.
16
SALES
Art. 1458
(2) Payment of price. — In the first case, non-payment of the price
is a negative resolutory condition (see Art. 1179.), and the remedy of
the seller is to exact fulfillment or to rescind the contract (see Arts.
1191, 1592.), while in the second case, full payment is a positive
suspensive condition, the failure of which is not a breach, casual or
serious, of the contract but simply an event that prevents the obligation
of the vendor to convey title from acquiring binding force. (Manvel vs.
Rodriguez, 109 Phil. 1 [1960]; Roque vs. Lapuz, 96 SCRA 741 [1980];
Jacinto vs. Kaparaz, 209 SCRA 246 [1992]; Adelfa Properties, Inc. vs.
Court of Appeals, 58 SCAD 462, 240 SCRA 565 [1995].) Where the
seller promises to execute a deed of absolute sale upon full payment of
the purchase price, the agreement is a contract to sell. (Rayos vs. Court
of Appeals, 434 SCRA 365 [2004].)
(3) Ownership of vendor. — Being contraries, their effect in law
cannot be identical. In the first case, the vendor has lost and cannot
recover the ownership of the thing sold and delivered, actually or
constructively (see Art. 1497.), until and unless the contract of sale itself
is resolved and set aside. In the second case, however, the title remains
in the vendor if the vendee does not comply with the condition
precedent of making payment at the time specified in the contract. (see
Heirs of P. Escanlar vs. Court of Appeals, 88 SCAD 532, 281 SCRA
176 [1997]; People’s Industrial and Commercial Corporation vs. Court
of Appeals, 281 SCRA 206 [1997]; Luzon Brokerage Co. vs. Maritime
Bldg. Co., Inc., 43 SCRA 93 [1972] and 86 SCRA 305 [1978]; Katigbak
vs. Court of Appeals, 4 SCRA 243 [1962]; Lim vs. Court of Appeals,
182 SCRA 564 [1990]; Tuazon vs. Garilao, 152 SCAD 699, 362 SCRA
654 [2001].) There is no actual sale until and unless full payment of the
price is made (see Bowe vs. Court of Appeals, 220 SCRA 158 [1993].)
and a contract of sale is entered into to consummate the sale. If the
vendor should eject the vendee for failure to meet the condition
precedent he is enforcing the contract and not rescinding it. Article
11915 is not applicable. A contract to sell is commonly entered into so
as to protect the seller against a buyer who intends to buy a property in
installments by withholding ownership over the property until the buyer
effects full payment therefore. (City of Cebu vs. Heirs of C. Rubi, 106
SCAD 61, 306 SCRA 408 [1999].) A stipulation in a contract providing
for automatic rescission upon non-payment of the purchase price within
the stipulated period is valid. (see Art. 1191.) It is in the nature of an
Art. 1458
NATURE AND FORM OF THE CONTRACT
17
agreement granting a party the right to rescind a contract unilaterally in
case of breach without need of going to court. (Pangilinan vs. Court of
Appeals, 87 SCAD 408, 279 SCRA 590 [1997].)
ILLUSTRATIVE CASES:
1. Vendor “sells, transfers, and conveys” a land to the vendee
who may sell or assign the land prior to full payment of all
installments.
Facts: The dispositive part of a deed entitled “Deed of Sale of
Real Property” states: “for and in consideration of the sum of
P140,000, payable under the terms and conditions stated in the
foregoing premises, the VENDOR sells, transfers and con-
5Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the rights of third persons who have acquired
the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)
veys unto the VENDEE x x x” the property in question as of
December 22, 1971, the date of said document.”
In paragraph 5 thereof, it is provided that “should the VENDEE
prior to the full payment of all the amounts aforementioned, decide to
sell or to assign part or all of the aforementioned parcel of land, the
VENDOR shall be informed in writing and shall have the option to
repurchase the property x x x. Should the VENDOR herein decide to
repurchase and the property is sold or transferred to a third person, the
balance of the consideration herein still due to the VENDOR shall
constitute automatically a prior lien on the consideration to be paid
by the third person to herein VENDEE.”
Issue: Is the above instrument a contract to sell?
Held: No. (1) Title to land transferred to vendee. — “It is a deed
of sale in which title to the subject land was transferred to the vendee
as of the date of the transaction, notwithstanding that the purchase
price had not yet been fully paid at that time. Under the first-cited
stipulation, what is deferred is not the transfer of ownership but the
full payment of the purchase price, which is to be made in
18
SALES
Art. 1458
installments, on the dates indicated. Under the second stipulation, it is
recognized that the vendee may sell the property even ‘prior to full
payment of all the amounts aforementioned,’ which simply means that
although the purchase price had not yet been completely paid, the
vendee had already become the owner of the land. As such, he could
sell the same subject to the right of repurchase reserved to the vendor.”
(2) Right of vendor where land sold by vendee. — “In fact, the
contract also provides for the possibility of the vendee selling the
property to a third person, in which case the vendor, if she wishes to
repurchase the land, shall have a lien on any balance of the
consideration to be paid by the third person to the vendee.” (Filoil
Marketing Corp. vs. Intermediate Appellate Court, 169 SCRA 293
[1989].)
———— ———— ————
2. The sale of scrap iron is subject to the condition that the buyer
will open a letter of credit in favor of the seller for P250,000.00 on or
before May 15, 1983.
Facts: In May 1, 1983, B (buyer) and S (seller) entered into a
contract entitled “Purchase and Sale of Scrap Iron” whereby S bound
itself to sell the scrap iron upon the fulfillment by B of his obligation
to make or indorse an irrevocable and unconditional letter of credit
not later than May 15, 1983.
On May 17, 1983, B, through his men, started to dig and gather
scrap iron at S’s premises. S cancelled the contract because of B’s
alleged non-compliance with the essential preconditions among which
is the opening of the letter of credit. It appeared that the opening of
the letter of credit was made on May 26, 1983 by a corporation which
was not a party to the contract, with a bank not agreed upon, and was
not irrevocable and unconditional, for it was without recourse and
stipulated certain conditions.
In his complaint, B, private respondent, prayed for judgment
ordering S, petitioner corporation, to comply with the contract and to
pay damages.
Issue: Is the transaction between S and B a mere contract to sell
or promise to sell, and not a contract of sale?
Held: (1) The contract is not one of sale. — “The petitioner
corporation’s obligation to sell is unequivocally subject to a positive
suspensive condition, i.e., the private respondent’s opening, making
or indorsing of an irrevocable and unconditional letter of credit. The
Art. 1458
NATURE AND FORM OF THE CONTRACT
former agreed to deliver the scrap iron only upon payment of the
purchase price by means of an irrevocable and unconditional letter of
credit. Otherwise stated, the contract is not one of sale where the buyer
acquired ownership over the property subject to the resolutory
condition that the purchase price would be paid after delivery. Thus,
there was to be no actual sale until the opening, making or indorsing
of the irrevocable and unconditional letter of credit. Since what
obtains in the case at bar is a mere promise to sell, the failure of the
private respondent to comply with the positive suspensive condition
cannot even be considered a breach — casual or serious — but simply
an event that prevented the obligation of petitioner corporation to
convey title from acquiring binding force.”
(2) The obligation of the petitioner corporation to sell did not
arise. — “Consequently, the obligation of the petitioner corporation
to sell did not arise; it, therefore, cannot be compelled by specific
performance to comply with its prestation. In short, Article 1191 of
the Civil Code does not apply; on the contrary, pursuant to Article
1597 of the Civil Code, the petitioner corporation may totally rescind,
as it did in this case, the contract.’’ Since the refusal of petitioner to
deliver the scrap iron was founded on the “non-fulfillment by the
private respondent of a suspensive condition,’’ it cannot be held liable
for damages. (Visayan Sawmill Company, Inc. vs. Court of Appeals,
219 SCRA 381 [1993].)
Romero, J., dissenting:
(1)
The contract reached the stage of perfection. —
“Evidently, the distinction between a contract to sell and a contract of
sale is crucial in this case. Article 1458 has this definition: x x x.
Article 1475 gives the significance of this mutual undertaking of the
parties, thus: x x x. Thus, when the parties entered into the contract
entitled “Purchase and Sale of Scrap Iron” on May 1, 1983, the
contract reached the stage of perfection, there being a meeting of the
minds upon the object which is the subject matter of the contract and
the price which is the consideration. Applying Article 1475 from that
moment, the parties may reciprocally demand performance of the
obligations incumbent upon them, i.e., delivery by the vendor and
payment by the vendee.
(2)
The seller has placed the goods in the control and
possession of the vendee. — From the time the seller gave access to
the buyer to enter his premises, manifesting no objection thereto but
even sending 18 or 20 people to start the operation, he has placed the
19
20
SALES
Art. 1458
goods in the control and possession of the vendee and delivery is
effected. For, according to Article 1497, “The thing sold shall be
understood as delivered when it is placed in the control and possession
of the vendee.”
(3)
That payment of the price in any form was not yet
effected is immaterial to the transfer of ownership. — “That payment
of the price in any form was not yet effected is immaterial to the
transfer of the right of ownership. In a contract of sale, the
nonpayment of the price is a resolutory condition which extinguishes
the transaction that, for a time, existed and discharges the obligations
created thereunder. x x x.
“Consequently, in a contract of sale, after delivery of the object
of the contract has been made, the seller loses ownership and cannot
recover the same, unless the contract is rescinded. But in the contract
to sell, the seller retains ownership and the buyer’s failure to pay
cannot even be considered a breach, whether casual or substantial, but
an event that prevented the seller’s duty to transfer title to the object
of the contract.”
(4)
The transaction is an absolute contract of sale and not
a contract to sell. — “The phrase in the contract ‘on the following
terms and conditions’ is standard form which is not to be construed as
imposing a condition, whether suspensive or resolutory, in the sense
of the happening of a future and uncertain event upon which an
obligation is made to depend. There must be a manifest understanding
that the agreement is in what may be referred to as “suspended
animation” pending compliance with provisions regarding payment.
The reservation of title to the object of the contract in the seller is one
such manifestation. Hence, it has been decided in the case of Dignos
vs. Court of Appeals (158 SCRA 375 [1988].) that, absent a proviso in
the contract that the title to the property is reserved in the vendor until
full payment of the purchase price or a stipulation giving the vendor
the right to unilaterally rescind the contract the moment the vendee
fails to pay within the fixed period, the transaction is an absolute
contract of sale and not a contract to sell.”
Contract to sell
distinguished.
and
conditional
sale
A contract to sell may be defined as a bilateral contract whereby the
prospective seller, while expressly reserving the ownership of the
subject property despite delivery thereof to the prospective buyer, binds
Art. 1458
NATURE AND FORM OF THE CONTRACT
21
himself to sell the said property exclusively to the prospective buyer
upon fulfillment of the condition agreed upon, that is, full payment of
the purchase price.
(1) Transfer of title to the buyer. — A contract to sell as defined
above may not even be considered as a conditional contract of sale
where the seller may likewise reserve title to the property subject of the
sale until the fulfillment of the suspensive condition, because in a
conditional contract of sale, the first element of consent is present,
although it is conditioned upon the happening of a contingent event
which may or may not occur. If the suspensive condition is not fulfilled,
the perfection of the contract of sale is completely abated. (cf. Homesite
and Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984].)
However, if the suspensive condition is fulfilled, the contract of sale is
thereby perfected, such that if there had already been previous delivery
of the property subject of the sale to the buyer, ownership thereto
automatically transfers to the buyer by operation of law without any
further act having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition
which is the full payment of the purchase price, ownership will not
automatically transfer to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey
title to the prospective buyer by entering into a contract of absolute sale
to consummate the transaction.
(2) Sale of subject property to a third person. — It is essential to
distinguish between a contract to sell and a conditional contract of sale
specially in cases where the subject property is sold by the owner not to
the party the seller contracted with, but to a third person. In a contract
to sell, there being no previous sale of the property, a third person
buying such property despite the fulfillment of the suspensive condition
such as the full payment of the purchase price, for instance, cannot be
deemed a buyer in bad faith and the prospective buyer cannot seek the
relief of reconveyance of the property. There is no double sale in such
case. Title to the property will transfer to the buyer after registration
22
SALES
Art. 1458
because there is no defect in the owner-seller’s title per se, but the latter,
of course, may be sued for damages by the intending buyer.9
In a conditional contract of sale, however, upon the fulfillment of
the suspensive condition, the sale becomes absolute and this will
definitely affect the seller’s title thereto. In fact, if there had been
previous delivery of the subject property, the seller’s ownership or title
to the property is automatically transferred to the buyer, such that the
seller will no longer have any title to transfer to any third person.
Applying Article 1544 of the Civil Code, such second buyer of the
property who may have had actual or constructive knowledge of such
defect in the seller’s title, or at least was charged with the obligation to
discover such defect, cannot be a registrant in good faith. Such second
buyer cannot defeat the first buyer’s title. In case a title is issued to the
second buyer, the first buyer may seek reconveyance of the property
subject of the sale. (Coronel vs. Court of Appeals, 75 SCAD 141, 263
SCRA 15 [1996].)
Other cases of contract to sell.
(1) Where the subject matter is not determinate (Arts. 1458, 1460.)
or the price is not certain (Art. 1458.), the agreement is merely a
contract to sell. (Yu Tek vs. Gonzales, 29 Phil. 384 [1915]; Ong & Jang
Chuan vs. Wise & Co., 33 Phil. 339 [1916].) For purposes of the
perfection of a contract of sale (see Art. 1475.), there is already a price
certain where the determination of the price is left to the judgment of a
specified person or persons (see Art. 1469, par. 1.), and notwithstanding
that such determination has yet to be made.
(2) A sale of future goods (see Art. 1462.) even though the contract
is in the form of a present sale operates as a contract to sell the goods.
(3) Where the stipulation of the parties is that the deed of sale and
corresponding certificate of sale would be issued only after full payment
of the purchase price, the contract entered into is a contract to sell and
not a contract of sale. (David vs. Tiongson, 111 SCAD 242, 313 SCRA
63 [1999].)
9 A prior contract to sell made by a decedent during his lifetime prevails over a subsequent
sale made by an administrator without probate court approval. The estate is bound to convey the
property upon full payment of the consideration. (Liu vs. Loy, Jr., 438 SCRA 244 [2004].)
Art. 1458
NATURE AND FORM OF THE CONTRACT
23
It has been held that the act of the vendor of delivering the
possession of the property (land) to the vendee contemporaneous with
the contract (deed of sale in a private instrument) was an indication that
an absolute contract of sale was intended by the parties and not a
contract to sell. (Dignos vs. Court of Appeals, 158 SCRA 375 [1988].)
ILLUSTRATIVE CASE:
Seller of interest in a business claims the profits derived by
business before the price thereof was fixed by appraisers designated
by the parties in the contract.
Facts: S sold to B his interest in a company, the price to be
ascertained by three (3) appraisers. After six (6) months, the
appraisers rendered their report at which time S signed a document
whereby he acknowledged receipt of the price arrived at and
relinquished any claim that he had in the business. The
24
SALES
report of the appraisers did not contain any segregation of the assets
of the business from the accumulated profits.
S is now claiming the profits from B from the time of the
execution of the sale to the time he acknowledged receipt of the price
on the ground that before the price was fixed by the appraisers, the
contract was not a sale but merely a contract to sell.
Issue: Is this contention of S tenable?
Held: No. The contract of sale is perfected when the parties agree
upon the thing sold and upon the price (see Art. 1475.), it being
sufficient for the price to be certain that its determination be left to the
judgment of a specified person. (Barretto vs. Sta. Maria, 26 Phil. 200
[1913].)
ART. 1459. The thing must be licit and the vendor
must have a right to transfer the ownership thereof at
the time it is delivered. (n)
Requisites concerning object.
(1) Things. — Aside from being (a) determinate (Arts. 1458, 1460.),
the law requires that the subject matter must be (b) licit or lawful, that
is, it should not be contrary to law, morals, good customs, public order,
or public policy (Arts. 1347, 1409[1, 4].), and should (c) not be
impossible. (Art. 1348.) In other words, like any other object of a
contract, the thing must be within the commerce of men.
If the subject matter of the sale is illicit, the contract is void and
cannot, therefore, be ratified. (Art. 1409.) In such a case, the rights and
obligations of the parties are determined by applying the following
articles of the Civil Code:
“Art. 1411. When the nullity proceeds from the illegality of the
cause or object of the contract, and the act constitutes a criminal offense,
both parties being in pari delicto, they shall have no action against each
other, and both shall be prosecuted. Moreover, the provisions of the
Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of contract.
This rule shall be applicable when only one of the parties is
Art. 1459
Art. 1459
NATURE AND FORM OF THE CONTRACT
25
guilty; but the innocent one may claim what he has given, and shall not
be bound to comply with his promise.”
“Art. 1412. If the act in which the unlawful or forbidden cause
consists does not constitute a criminal offense, the following rules
shall be observed:
(1)
When the fault is on the part of both contracting parties,
neither may recover what he has given by virtue of the contract, or
demand the performance of the other’s undertaking;
(2)
When only one of the contracting parties is at fault, he
cannot recover what he has given by reason of the contract, or ask
for the fulfillment of what has been promised him. The other, who
is not at fault, may demand the return of what he has given without
any obligation to comply with his promise.”
(2) Rights. — All rights which are not intransmissible or personal
may also be the object of sale (Art. 1347.), like the right of usufruct
(Art. 572.), the right of conventional redemption (Art. 1601.), credit
(Art. 1624.), etc.
Examples of intransmissible rights are the right to vote, right to
public office, marital and parental rights, etc.
No contract may be entered upon future inheritance except in cases
expressly authorized by law. (Art. 1347, par. 2.) While services may be
the object of a contract (Art. 1347, par. 3.), they cannot be the object of
a contract of sale. (Art. 1458; see Art. 1467.)
Kinds of illicit things.
The thing may be illicit per se (of its nature) or per accidens
(because of some provisions of law declaring it illegal).
Article 1459 refers to both. Decayed food unfit for consumption is
illicit per se, while lottery tickets (Art. 195, Revised Penal Code.) are
illicit per accidens. Land sold to an alien is also per accidens because
the sale is prohibited by the Constitution.10 The rule is well-settled that
the mortgagor (or pledgor) continues to be the owner of the property
mortgaged, and, therefore, has the power to alienate the same; however,
10 A sale of land in violation of the constitutional prohibition against the transfer of lands to
aliens (Art. XII, Sec. 7, Constitution.) is void (see Art. 1409[1, 7].) and the seller or his heirs may
recover the property. But where a land is sold to an alien, who later sold it to a Filipino, the sale to
the latter cannot be impugned. (Herrera vs. Tuy Kim Guan, 1
SCRA 406 [1961]; Godinez vs. Fong Pak Luen, 120 SCRA 223 [1983].)
26
SALES
he is obliged, under pain of penal liability, to secure the consent of the
mortgagee. (Service Specialist, Inc. vs. Intermediate Appellate Court,
174 SCRA 80 [1989].)
Right to transfer ownership.
(1) Seller must be owner or authorized by owner of thing sold. —
It is essential in order for a sale to be valid that the vendor must be able
to transfer ownership (Art. 1458.) and, therefore, he must be the owner
or at least must be authorized by the owner of the thing sold. This rule
is in accord with a well-known principle of law that one can not transmit
or dispose of that which he does not have — nemo dat quod non-habet.
Accordingly, one can sell only what one owns or is authorized to sell,
and the buyer can acquire no more than what the seller can transfer
legally. (Azcona vs. Reyes & Larracas, 59 Phil. 446 [1934]; Manalo vs.
Court of Appeals, 366 SCRA 752 [2001]; Tangalin vs. Court of
Appeals, 159 SCAD 343, 371 SCRA 49 [2001]; for exceptions, see Art.
1505.)
Thus, a sale of paraphernal (separate) property of the deceased wife
by the husband who was neither an owner nor administrator of the
property at the time of sale is void ab initio. Such being the case, the
sale cannot be the subject of ratification by the administrator or the
probate court. (Manotok Realty, Inc. vs. Court of Appeals, 149 SCRA
372 [1987].) Only so much of the share of the vendor-co-owner can be
validly acquired by the vendee even if he acted in good faith in buying
the shares of the other co-owners. (Segura vs. Segura, 165 SCRA 368
[1988].) Where the sale from one person to another was fictitious as
there was no consideration, and, therefore, void and inexistent, the latter
has no title to convey to third persons. (Traders Royal Bank vs. Court
of Appeals, 80 SCAD 12, 269 SCRA 15 [1997].)
(2) Right must exist at time of delivery. — Article 1459, however,
does not require that the vendor must have the right to transfer
ownership of the property sold at the time of the perfection of the
contract. (Martin vs. Reyes, 91 Phil. 666 [1952].) Perfection per se does
not transfer ownership which occurs upon the actual or constructive
delivery of the thing sold. Sale, being a consensual conArt. 1459
Art. 1459
NATURE AND FORM OF THE CONTRACT
27
tract, it is perfected by mere consent (see Art. 1475.), and ownership by
the seller of the thing sold is not an element for its perfection. It is
sufficient if the seller has the “right to transfer the ownership thereof at
the time it is delivered.” Thus, the seller is deemed only to impliedly
warrant that “he has a right to sell the thing at the time when the
ownership is to pass.” (Art. 1547[1].)
The reason for the rule is obvious. Since future goods (Arts. 1461,
par. 1; 1462 par. 1.) or goods whose acquisition by the seller depends
upon a contingency (Art. 1462, par. 2.) may be the subject matter of
sale, it would be inconsistent for the article to require that the thing sold
must be owned by the seller at the time of the sale inasmuch as it is not
possible for a person to own a thing or right not in existence. An
agreement providing for the sale of property yet to be adjudicated by a
court is thus valid and binding. (Republic vs. Lichauco, 46 SCRA 305
[1972].)
(3) Where property sold registered in name of seller who employed
fraud in securing his title. — Although generally a forged or fraudulent
deed is a nullity and conveys no title, there are instances when such a
document may become the root of a valid title. One such instance is
where the certificate of title was already transferred from the name of
the true owner to the forger, and while it remained that way, the land
was subsequently sold to an innocent purchaser for value. Where there
is nothing in the certificate to indicate any cloud or vice in the
ownership of the property, or any encumbrance thereon, or in the
absence of any fact or circumstance to excite suspicion, the purchaser
is not required to explore further than what the Torrens title upon its
face indicates in quest for any hidden defect or inchoate right that may
subsequently defeat his right thereto.
If the rule were otherwise, the efficacy and conclusiveness of the
certificate of title which the Torrens System seeks to insure would
entirely be futile and nugatory. The established rule is that the rights of
an innocent purchaser for value must be respected and protected,
notwithstanding the fraud employed by the seller in securing his title.
The proper recourse of the true owner of the property who was
prejudiced and fraudulently dispossessed of the same is to bring an
action for damages against those who caused or employed the fraud,
and if the latter are insolvent, an action against the Treasurer of the
Philippines may be filed for recovery of damages against the Assurance
Fund. (Fule vs. Legare, 7 SCRA 351 [1951]; Pino vs. Court of Appeals,
28
SALES
198 SCRA 434 [1991]; Phil. National Bank vs. Court of Appeals, 187
SCRA 735 [1990]; Eduarte vs. Court of Appeals, 68 SCAD 179, 256
SCRA 391 [1996].)
(4) Where properly sold in violation of a right of first refusal of
another person. — The prevailing doctrine is that a contract of sale
entered into in violation of a right of first refusal of another person,
while valid is rescissible. (Guzman, Bocaling and Co. vs. Bonnevie, 206
SCRA 668 [1992]; Conculada vs. Court of Appeals, 156 SCAD 624,
367 SCRA 164 [2001].) A right of first refusal is neither “amorphous
nor merely preparatory’’ and can be executed according to its terms. In
contracts of sale, the basis of the right of first refusal must be the current
offer of the seller to sell or the offer to purchase of the prospective
buyer. Only after the grantee fails to exercise his right under the same
terms and within the period contemplated can the owner validly offer
to sell the property to a third person, again, under the same terms as
offered to the grantee. (Polytechnic University of the Philippines vs.
Court of Appeals, 368 SCRA 691 [2001]; Equatorial Realty
Development, Inc. vs. Mayfair, Inc., 76 SCAD 407, 264 SCRA 483
[1996]; Parañaque King’s Enterprises, Inc. vs. Court of Appeals, 79
SCAD 936, 268 SCRA 727 [1997].) Where, however, there is no
showing of bad faith on the part of the vendee, the contract of sale may
not be rescinded (see Arts. 1380-1381[3].), and the remedy of the
person with the right of first refusal is an action for damages against the
vendor. (Rosencor Development Corporation vs. Inquing, 145 SCAD
484, 354 SCRA 119 [2001].)
(5) Where real property, subject of unrecorded sale, subsequently
mortgaged by seller which mortgage was registered. — The
mortgagee’s registered mortgage right over the property is inferior to
that of the buyer’s unregistered right. The unrecorded sale between the
buyer and the seller is preferred for the reason that if the seller the
original owner, had parted with his ownership of the thing sold then, he
no longer had ownership and free disposal of that thing so as to be able
to mortgage it again. Registration of the mortgage is of no moment since
it is understood to be without prejudice to the better right of third
parties. (State Investment
Art. 1460
House, Inc. vs. Court of Appeals, 69 SCAD 135, 254 SCRA 368
Art. 1459
NATURE AND FORM OF THE CONTRACT
29
[1996]; Dela Merced vs. GSIS, 154 SCAD 816, 365 SCRA 1 [2001].)
ART. 1460. A thing is determinate when it is
particularly designated or physically segregated from
all others of the same class.
The requisite that a thing be determinate is
satisfied if at the time the contract is entered into, the
thing is capable of being made determinate without
the necessity of a new or further agreement between
the parties. (n)
Subject matter must be determinate.
(1) When thing determinate. — A thing is determinate or specific
(not generic) when it is particularly designated or physically segregated
from all others of the same class. (see Art. 1636[1].) This requisite that
the object of a contract of sale must be determinate is in accordance
with the general rule that the object of every contract must be
determinate as to its kind. (Art. 1349.) A determinate thing is identified
by its individuality, e.g., my car (if I have only one); the watch I am
wearing; the house located at the corner of Rizal and Del Pilar Streets,
etc.;
(2) Sufficient if subject matter capable of being made determinate.
— It is not necessary that the thing sold must be in sight at the time the
contract is entered into. It is sufficient that the thing is determinable or
capable of being made determinate without the necessity of a new or
further agreement between the parties (Art. 460, par. 2; see Melliza vs.
City of Iloilo, 23 SCRA 477 [1968].) to ascertain its identity, quantity,
or quality. The fact that such an agreement is still necessary constitutes
an obstacle to the existence of the contract (Art. 1349.) and renders it
void. (Art. 1409[3].)
Thus, a person may validly sell all the cavans of rice in a particular
bodega or a parcel of land located at a particular street but if the bodega
is not specified and the seller has more than one bodega or owns more
than one parcel of land at the particular street, and it cannot be known
what may have been sold, the contract shall be null and void. (Arts.
1378, par. 2; 1409[6].) Similarly, an obligation by a person to sell one
of his cars is limited to the
30
Art. 1460
SALES
cars owned by him. The subject matter is determinable; it becomes determinate the moment it is delivered.
In a case, the respondent purchased a portion of a lot containing 345 square meters, which portion is located
in the middle of another lot with a total area 854 square meters, and referred to in the receipt as the “previously
paid lot.’’ held: “Since the lot subsequently sold to respondent is said to adjoin the ‘previously paid lot’ on three
sides thereof, the subject lot is capable of being determined without the need of any new contract. The fact that
the exact area of these adjoining residential lots is subject to the result of a survey does not detract from the fact
that they are determinate or determinable.’’ (Heirs of Juino San Andres vs. Rodriguez, 337 SCRA 769 [2000].)
ILLUSTRATIVE CASES:
1.
Tobacco factory sold was specifically pointed out. — A tobacco factory with its contents having been
specifically pointed out by the parties and distinguished from all other tobacco factories was held sold under a
contract which did not provide for the delivery of the price of the thing until a future time. (McCullough vs. Aenille
Co., 13 Phil. 284 [1909].)
———
————
———-
2.
Payment of price was withheld pending proof by vendor of his ownership. — A sale of a specific
house was held perfected between the vendor and the vendee, although the delivery of the price was withheld until
the necessary documents of ownership were prepared by the vendee. (Borromeo vs. Franco, 5 Phil.
49 [1905].)
———— ———— ————
3.
Purchase price agreed upon had not yet been paid. — A quantity of hemp delivered by the vendor
into the warehouse of the vendee and thus set apart and distinguished from all other hemp was held sold, although
the purchase price which had been agreed upon had not yet been paid. (see Tan Leoncio vs. Go Inqui, 8 Phil. 531
[1907].)
———— ———— ————
4.
Subject matter is sugar of specified quantity and given quality. — A contract whereby a party
obligates himself to sell for a
Art. 1460
price certain (P3,000.00) a specified quantity of sugar (600 piculs) of a given quality (of the first grade and second
grade) without designating a particular lot of sugar, is not perfected until the quantity agreed upon has been selected
and is capable of being physically designated and distinguished from all other sugar. (Yu Tek & Co. vs. Gonzales,
29 Phil. 348 [1915]; De Leon vs. Aquino,
87 Phil. 193 [1950].)
In this case, the contract is merely an executory contract to sell, its subject matter being a generic or
indeterminate thing. A thing is generic when it is indicated only by its kind and cannot be pointed out with
particularity.
———— ———— ————
5.
Subject matter is flour of a certain brand and specified quantity. — Similarly, the undertaking of a
party to sell 1,000 sacks of “Mano” flour at P11.05 per barrel, 500 to be delivered in September and 500, in October,
is a promise to deliver a generic thing and not a determinate thing within the meaning of Article 1460. Hence, there
is no perfected sale. (Ong & Jang Chuan
vs. Wise & Co., 33 Phil. 339 [1916].)
———— ———— ————
6.
Subject matter are palay grains produced in the farmland. — Where S initially offered to sell palay
grains in his farmland to NFA and the latter accepted to buy 2,640 cavans, there was already a meeting of the minds
between the parties. The object of the contract, being the palay grains produced in S’s farmland and the NFA was
to pay the same depending upon its quality. The fact that the exact number of cavans of palay to be delivered has
not been determined does not affect the perfection of the contract.
In this case, there was no need for NFA and S to enter into a new contract to determine the exact number of
cavans of palay to be sold. S can deliver so much of his produce as long as it does not exceed 2,640 cavans. (National
Grains Authority vs. Intermediate Appellate Court, 171 SCRA 131 [1989].)
———— ———— ————
7.
Lots sold were described by their lot numbers and area and as the ones needed according to a named
development plan. — The deed of sale describes the four parcels of land sold by their lot numbers and area; and
then it goes on to further describe not only those lots already mentioned but the lots object of the sale,
Art. 1460
by stating that said lots are the ones needed for the construction of the City Hall site, avenues and parks according
to the Arellano Plan, the development plan of the city, which was then in existence.
It was held that the specific mention of some of the lots plus the statement that the lots object of the sale are
the ones needed, etc., according to the aforementioned plan, sufficiently provide a basis, as of the time of the
NATURE AND FORM OF THE CONTRACT
31
execution of the contract, for rendering determinate said lots without the need of a new and further agreement of
the parties. (Melliza vs. City of Iloilo, 23 SCRA 477 [1968].)
———— ———— ————
8.
Receipt issued stated that the lot being purchased was the one earlier earmarked for the buyer’s sister.
— B presented the following receipt signed by S, seller, as evidence of payment: “Received from B the sum of
P500.00 as additional partial payment for the lot which is the portion formerly earmarked for T wherein she already
paid the sum of P1,500; hence, by agreement of B and T, who are sisters, the sum of P1,500.00 is applied as
additional payment for and in behalf of B, thereby making the total payments made by B to said lot in the sum of
P2,000.00.’’ The subject lot is adequately described in the receipt, or at least can be easily determinable. Any
mistake in the designation of the lot does not vitiate the consent of the parties or affect the validity and binding
effect of the contract of sale. (David vs. Tiongson, 111 SCAD 242, 313 SCRA 63 [1999].)
———— ———— ————
9.
Sugar quota of certain number of piculs sold without specification of the land to which it relates. —
Section 4 of R.A. No. 1825 (An Act to Provide for the Allocation, Reallocation and Administration of the Absolute
Quota of Sugar) reads: “The production allowance or quota corresponding to each piece of land under the provisions
of this Act shall be deemed to be an improvement attaching to the land entitled thereto.
The intangible property that is the sugar quota should be considered as real property by destination, an
improvement attaching to the land entitled thereto.” Sugar quota allocations do not have existence independently
of any particular tract of land. There can be no sale simply of sugar quota of a certain number of piculs without
specification of the land to which it
Art. 1461
relates. Such a sale would be void for want of a determinate subject matter. (Compania General De Tabacos De
Filipinos vs. Court of Appeals, 185 SCRA 284 [1990].)
ART. 1461. Things having a potential existence may be the object of the contract of
sale.
The efficacy of the sale of a mere hope or expectancy is deemed subject to the
condition that the thing will come into existence.
The sale of a vain hope or expectancy is void. (n)
Sale of things having potential existence.
Even a future thing (Arts. 1461, par. 1; 1347, par. 1.) not existing at the time the contract is entered into may
be the object of sale provided it has a potential or possible existence, that is, it is reasonably certain to come into
existence as the natural increment or usual incident of something in existence already belonging to the seller, and
the title will vest in the buyer the moment the thing comes into existence.
Thus, a valid sale may be made of “the wine a vine is expected to produce; or the grain a field may grow in
a given time; or the milk a cow may yield during the coming year; or the wool that shall thereafter grow upon a
sheep; or what may be taken at the next cast of a fisherman’s net; or the goodwill of a trade, or the like. The thing
sold, however, must be specific and identified. They must be also owned by the vendor at the time.” (Sibal vs.
Valdez, 50 Phil. 522 [1927]; Pichel vs. Alonzo, 111 SCRA 341 [1982]; see 46 Am. Jur. 223.)
Sale of a mere hope or expectancy.
The efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing
contemplated or expected will come into existence. (par. 2.)
The sale really refers to an “expected thing” which is not yet in existence, and not to the hope or expectancy
which already exists, in view of the condition that the thing will come into existence. But the sale of a mere hope
or expectancy is valid even if the
Art. 1461
thing hoped or expected does not come into existence, unless the hope or expectancy is vain in which case, the
sale is void. (par. 3.)
A plan whereby prizes can be obtained without any additional consideration (when a product is purchased at
the usual price plus the chance of winning a prize) is not a lottery. (Phil. Refining Co. vs. Palomar, 148 SCRA
313 [1987].)
EXAMPLES:
(1)
S binds himself to sell for a specified price to B a parcel of land if he wins a case for the recovery of
said land pending in the Supreme Court.
Here, the obligation of S to sell will arise, if the “expected thing,’’ the land, will come into existence, i.e., if he
wins the case.
32
SALES
Before a decision is rendered, there is only “the mere hope or expectancy’’ that the thing will come into
existence.
(2)
B buys a sweepstakes ticket in the hope of winning a prize. Here, the object of the contract is the hope
itself. The sale is valid even if B does not win a prize because it is not subject to the condition that the hope will be
fulfilled.
Sale of thing expected and sale of hope itself distinguished.
Emptio rei speratae (sale of thing expected) is the sale of a thing not yet in existence subject to the condition
that the thing will exist and on failure of the condition, the contract becomes ineffective and hence, the buyer has
no obligation to pay the price. On the other hand, emptio spei is the sale of the hope itself that the thing will come
into existence, where it is agreed that the buyer will pay the price even if the thing does not eventually exist.
(1) In emptio rei speratae, the future thing is certain as to itself but uncertain as to its quantity and quality.
Such sale is subject to the condition that the thing will come into existence (see Art. 1545, par. 2.), whatever its
quantity or quality. In emptio spei (like the sale of a sweepstake ticket), it is not certain that the thing itself
(winning a prize) will exist, much less its quantity and quality.
(2) In the first, the contract deals with a future thing, while in
Art. 1461
the second, the contract relates to a thing which exists or is present — the hope or expectancy.
(3) In the first, the sale is subject to the condition that the thing should exist, so that if it does not, there will
be no contract by reason of the absence of an essential element. On the other hand, the second produces effect
even though the thing does not come into existence because the object of the contract is the hope itself, unless it
is a vain hope or expectancy (like the sale of a falsified sweepstake ticket which can never win).
Presumption in case of doubt.
In case of doubt, the presumption is in favor of emptio rei speratae which is more in keeping with the
commutative character of the contract. (see 10 Manresa 29-30.)
ILLUSTRATIVE CASE:
Buyer executed a surety bond in favor of seller to secure payment of the balance of purchase price of iron ore,
which balance shall be paid out of amount derived from sale by buyer of the iron ore.
Facts: S embarked upon the exploration and development of mining claims belonging to B. Later, they
executed a document wherein S transferred to B all of S’s rights and interest over the 24,000 tons of iron ore, “more
or less” that S had already extracted from the mineral claims in consideration of a down payment of P10,000.00,
and the balance of P65,000.00 which will be paid out of the “first shipment of iron ore and of the first amount
derived from the local sale of iron ore made” from said claims, which amount was secured by a surety bond executed
by B in favor of S.
No sale of the approximately 24,000 tons of iron ore had been made nor had the P65,000.00 been paid.
Issue: Is the obligation of B to pay the remaining P65,000.00 subordinated to the sale or shipment of the ore as
a condition precedent?
Held: No. A contract of sale is normally commutative and onerous (see Art. 1458.): not only does each one of
the parties assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold and the
buyer to pay the price),
Art. 1462
but such party anticipates performance by the other from the very start.
(1)
Contingent character of obligation to pay must clearly appear. — Where in a sale, the obligation of
one party can be lawfully subordinated to an uncertain event, so that the other understands that he assumes that risk
of receiving nothing for what he gives as in the case of a sale of hopes or expectations (emptio spei), it is not in the
usual course of business to do so, hence, the contingent character of the obligation must clearly appear.
(2)
Surety bond negates such contingent character. — In the case at bar, nothing is found in the record
to evidence that S desired or assumed to run the risk of losing his rights over the ore without getting paid for it, or
that B understood that S assumed any such risk. This is proven by the fact that S insisted on a bond by a surety
company to guarantee payment of the P65,000.00; and the fact that B did put up such bond indicates that he admitted
the definite existence of his obligation to pay the balance of P65,000.00. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)
ART. 1462. The goods which form the subject of a contract of sale may be either
existing goods, owned or possessed by the seller, or goods to be manufactured, raised,
or acquired by the seller after the perfection of the contract of sale, in this Title called
“future goods.”
There may be a contract of sale of goods, whose acquisition by the seller depends
upon a contingency which may or may not happen. (n)
NATURE AND FORM OF THE CONTRACT
33
Goods which may be the object of sale.
Goods which form the subject of a contract of sale may be either:
(1) Existing goods or goods owned or possessed by the seller; or
(2) Future goods or goods to be manufactured (like the sale of milk bottles to be manufactured with the
name of the buyer pressed in the glass), raised (like the sale of the future harvest of
Art. 1462
palay from a ricefield), or acquired (like the sale of a definite parcel of land the seller expects to buy).11 (Art.
1460.)
Future goods as object of sale.
A sale of future goods, even though the contract is in the form of a present sale, is valid only as an executory
contract to be fulfilled by the acquisition and delivery of the goods specified.
In other words, “property or goods which at the time of the sale are not owned by the seller but which
thereafter are to be acquired by him, cannot be the subject of an executed sale but may be the subject of a contract
for the future sale and delivery thereof,” even though the acquisition of the goods depends upon a contingency
which may or may not happen. In such case, the vendor assumes the risk of acquiring the title and making the
conveyance, or responding in damages for the vendee’s loss of his bargain. (Martin vs. Reyes, 91 Phil. 666
[1952]; 77 C.J.S. 604.)
Paragraph 1 of Article 1462 does not apply if the goods are to be manufactured especially for the buyer and
not readily saleable to others in the manufacturer’s regular course of business. The contract, in such case, must
be considered as one for a piece of work. (Art. 1467.)
Article 1462 contemplates a contract of sale of specific goods where one of the contracting parties binds
himself to transfer the ownership of and deliver a determinate thing and the other to pay therefor a price certain
in money or its equivalent. The said article requires that there be delivery of goods, actual or constructive, to be
applicable. It does not apply to a transaction where there was no such delivery; neither was there any intention to
deliver a determinate thing. Thus, a “futures” contract where the parties merely speculate on the rise and fall on
the price of the goods subject matter of the transaction is a form of gambling was declared null and void by
Article 2018 of the Civil Code. (see note 2.)
Arts. 1463-1464
ART. 1463. The sole owner of a thing may sell an undivided interest therein. (n)
Sale of undivided interest in a thing.
The sole owner of a thing may sell the entire thing; or only a specific portion thereof; or an undivided interest
therein and such interest may be designated as an aliquot part of the whole.
The legal effect of the sale of an undivided interest in a thing is to make the buyer a co-owner in the thing
sold. As co-owner, the buyer acquires full ownership of his part and he may, therefore, sell it. Such sale is, of
course, limited to the portion which may be allotted to him in the division of the thing upon the termination of
the co-ownership. (Article 493.)12 This rule operates similarly with respect to ownership of fungible goods. (Art.
1464.)
Article 1463 covers only the sale by a sole owner of a thing of an undivided share or interest thereof.
EXAMPLE:
S is the owner of a parcel of land with an area of 1,000 square meters. As the sole owner, S can sell to B the
entire portion; or only 500 square meters of the land by metes and bounds in which case he becomes the sole owner
of the remaining 500 meters and B the portion sold; or he may sell an undivided half of the land without specially
designating or identifying the portion sold, in which case they become co-owners.
As a co-owner, S or B can convey or transfer only the title pertaining to the undivided half of the land, for vital
to the validity of a contract of sale is that the vendor be the owner of the thing sold. (Art. 1459.)
ART. 1464. In the case of fungible goods, there may be a sale of an undivided share
of a specific mass, though the seller purports to sell and the buyer to buy
11 Art. 751. Donations cannot comprehend future property. By future property is understood anything which the donor cannot dispose of at the time
of the donation. (635)
Art. 1347. x x x No contract may be entered into upon future inheritance except in cases expressly authorized by law. x x x.
12 Art. 493. Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining thereto, and he may therefore alienate,
assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or the
mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon the termination of the coownership. (399)
34
SALES
Art. 1464
a definite number, weight or measure of the goods in the mass, and though the number,
weight or measure of the goods in the mass is undetermined. By such a sale the buyer
becomes owner in common of such a share of the mass as the number, weight or
measure bought bears to the number, weight or measure of the mass. If the mass
contains less than the number, weight or measure bought, the buyer becomes the owner
of the whole mass and the seller is bound to make good the deficiency from goods of
the same kind and quality, unless a contrary intent appears. (n)
Sale of an undivided share of a specific mass.
The Civil Code classifies movable goods into consumable or non-consumable (Art. 418.), thereby discarding
the old classification (Art. 334, old Civil Code.) into fungible and non-fungible. This change of classification
seems to be in name only as the definition of fungible goods as those which cannot be used without being
consumed under the old Civil Code is precisely that of consumable goods. Article 1464, however, still speaks of
fungible goods.
(1) Meaning of fungible goods. — It means goods of which any unit is, from its nature or by mercantile
usage, treated as the equivalent of any other unit (Uniform Sales Act, Sec. 76.), such as grain, oil, wine, gasoline,
etc.
(2) Effect of sale. — The owner of a mass of goods may sell only an undivided share thereof, provided the
mass is specific or capable of being made determinate. (Art. 1460.)
(a)
By such sale, the buyer becomes a co-owner with theseller of the whole mass in the proportion
in which the definite share bought bears to the mass.
(b)
It must follow that the aliquot share of each owner canbe determined only by the measurement
of the entire mass. If later on it be discovered that the mass of fungible goods contains less than what was
sold, the buyer becomes the owner of the whole mass and furthermore, the seller shall supply
Art. 1464
whatever is lacking from goods of the same kind and quality, subject to any stipulation to the contrary.
(3) Risk of loss. — If the buyer becomes a co-owner, with the seller, or other owners of the remainder of the
mass, it follows that the whole mass is at the risk of all the parties interested in it, in proportion to their various
holdings.
(4) Subject matter. — Take note that in the sale of an undivided share, either of a thing (Art. 1463.) or of
that of mass of goods (Art. 1464.), the subject matter is an incorporeal right. (Art. 1501.) Here, ownership passes
to the buyer by the intention of the parties.
EXAMPLE:
S owns 1,000 cavans of palay stored in his warehouse. If S sells to B 250 cavans of such palay which cavans
are not segregated from the whole mass, B becomes a co-owner of the said mass to the extent of 1/4. If the
warehouse happens to contain only 200 cavans, S must deliver the whole 200 cavans and supply the deficiency of
50 cavans of palay of the same kind and quality.
In the same example, the number of cavans in the warehouse may be unknown or undetermined and S may sell
only 1/4 share of the contents. The legal effect of such a sale is to make B a co-owner in that proportion. It is
obvious that in such case, the obligation of the seller “to make good the deficiency” will not arise.
(5) Applicability of Article 1464 to non-fungible goods. — Although Article 1464 speaks of “fungible
goods,” nevertheless it may also apply to goods not strictly fungible in nature. “Indeed, the earliest case in which
the doctrine was applied related to barrels of flour. Though flour of the same grade is fungible in the strictest
sense, barrels of flour are necessarily so. Other cases also have applied the doctrine to goods in barrels. So it has
been applied to bales of cotton and even to cattle or sheep. It is obvious that all cattle are not alike and that some
cattle in a herd are more valuable than the others. But in the cases under consideration, the parties had virtually
agreed to act on the assumption that all were alike and it can be seen that this is really the essential thing.” (1
Williston on Sales, 3rd ed., pp. 421-423.)
Arts. 1465-1466
ART. 1465. Things subject to a resolutory condition may be the object of the contract
of sale. (n)
Sale of thing subject to a resolutory condition.
A resolutory condition is an uncertain event upon the happening of which the obligation (or right) subject to
it is extinguished. Hence, the right acquired in virtue of the obligation is also extinguished. (see Arts. 1179, 1181.)
NATURE AND FORM OF THE CONTRACT
35
EXAMPLES:
(1)
S (vendor a retro) sold a parcel of land to B (vendee a retro) subject to the condition that S can
repurchase the property within two years from the date of sale. If S exercises the right to repurchase, then the sale
made by B to C before the lapse of the two (2)-year period falls.
The rule, however, that a vendor cannot transfer to his vendee a better right than he had himself, suffers an
exception in case of property with Torrens title. (see Hernandez vs. Katigbak Vda. de Salas, 69 Phil. 748 [1940].)
(2)
For failure to pay his debt, the land of S (mortgagor) was sold to B, the highest bidder and purchaser
in an extrajudicial foreclosure of a real estate mortgage.
Under the law (Act No. 3135, as amended.), the mortgagor may redeem the property at any time within one
year from and after the date of the registration of the sale. If S redeems the property, then the sale made to B is
extinguished.
One of the obligations of the vendor is to transfer the ownership of the thing object of the contract. (Art.
1458.) If the resolutory condition attaching to the object of the contract, which object may include things as well
as rights (Arts. 1427, 1347, par. 1.), should happen, then the vendor cannot transfer the ownership of what he
sold since there is no object.
ART. 1466. In construing a contract containing provisions characteristic of both the
contract of sale and of the contract of agency to sell, the essential clauses of the whole
instrument shall be considered. (n)
Art. 1466
Sale distinguished from agency to sell.
By the contract of agency, a person binds himself to render some service or to do something in representation
or on behalf of another, with the consent or authority of the latter. (Art. 1868.)
In order to classify a contract, due regard must be given to its essential clauses. A contract is what the law
defines it to be, and not what it is called by the contracting parties. (Quiroga vs. Parson Hardware Co., 38 Phil.
501 [1918]; Baluran vs. Navarro, 79 SCRA 309 [1977].) Sale may be distinguished from an agency to sell, as
follows:
(1) In a sale, the buyer receives the goods as owner; in an agency to sell, the agent receives the goods as the
goods of the principal who retains his ownership over them and has the right to fix the price and the terms of the
sale and receive the proceeds less the agent’s commission upon the sales made;
(2) In a sale, the buyer has to pay the price; in an agency to sell, the agent has simply to account for the
proceeds of the sale he may make on the principal’s behalf;
(3) In a sale, the buyer, as a general rule, cannot return the object sold; in an agency to sell, the agent can
return the object in case he is unable to sell the same to a third person;
(4) In a sale, the seller warrants the thing sold (see Arts. 1547, 1548, 1561.); in an agency to sell, the agent
makes no warranty for which he assumes personal liability as long as he acts within his authority and in the name
of the seller; and
(5) In a sale, the buyer can deal with the thing sold as he pleases being the owner; in an agency to sell, the
agent in dealing with the thing received, must act and is bound according to the instructions of his principal.13
Art. 1466
ILLUSTRATIVE CASES:
1. One given exclusive right to sell beds furnished by manufacturer, agreed to pay discounted invoice price at
a certain period.
Facts: S granted B the exclusive right to sell the former’s beds in Visayas. S was to furnish B with the beds
which the latter might order. The price agreed upon was the invoice price of the beds in Manila with a discount of
from 20% to 25%. Payment was to be made at the end of sixty days.
Issue: S claimed that the contract was an agency to sell while B maintained that it was a sale.
Held: The stipulations are precisely the essential features of a contract of purchase and sale. There was the
obligation on the part of S to supply the beds and on the part of B, to pay their price.
These features exclude the legal conception of an agency or order to sell whereby the mandatory or agent
receives the thing to sell it and does not pay its price but delivers to the principal the price he obtains from the sale
of the thing to a third person, and if he does not succeed in selling, he returns it. By virtue of the contract between
S and B, the latter, on receiving the beds was necessarily obliged to pay their price within the terms fixed without
An agreement that the buyer shall deal exclusively with the products of the seller — a well-known practice in the business world — is not
inconsistent with the contract of sale, much less convert it into one of agency; and where the entire control and direction of the business operation remains
with the dealer, the latter cannot be considered a mere alter ego of the manufacturer. (Asbestos Integrated Manufacturing, Inc. vs. Peralta, 155 SCRA 213
[1987].)
13
36
SALES
any other consideration and regardless as to whether he had sold the beds. (Quiroga vs. Parson Hardware Co., 38
Phil. 501 [1918].)
———— ———— ————
2. Partial payments were made without mention of goods unsold and without stipulation for their return.
Facts: B received from S 350 pairs of shoes, the price of which is stated as P2,450.00 or P7.00 per pair. B made
partial payments on account thereof.
Issue: On the issue of the nature of the transaction, S claimed that it was an absolute sale and not a consignment.
Held: The transaction was an absolute sale. In making said partial payments, B made no mention whatsoever
of the number of shoes sold by him and the number of shoes remaining unsold which he should have done had the
sale been on the consignment basis. He merely mentioned the balance of the purchase price after deducting the
several payments made by him.
Art. 1467
Furthermore, if the sale had been on consignment, a stipulation as to the period of time for the return of the
unsold shoes should have been made but that had not been done and B kept the shoes unsold more or less
indefinitely. (Royal Shirt Factory, Inc. vs. Co Bon Tic, 94 Phil. 994 [1954].) It has been held that where a foreign
company has an agent here selling its goods and merchandise, the same agent could not very well act as agent for
local buyers because the interests of his foreign principal and those of the buyers would be in direct conflict. He
could not serve two masters at the same time. (G. Puyat & Sons, Inc. vs. Arco Amusement, 72 Phil. 402 [1941]; see
Far Eastern Export & Import Co. vs. Lim Teck Suan, 97 Phil. 171 [1955].)
Contract creating both a sale and an agency relationship.
The transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If such
transfer puts the transferee in the position of an owner and makes him liable for the agreed price, the transaction
is a sale. On the other hand, the essence of an agency to sell is the delivery to an agent, not as his property, but
as the property of his principal, who remains the owner and has the right to control sales, fix the price and terms,
demand and receive the proceeds less the agent’s commission upon sales made. (Ker & Co., Inc. vs. Lingad, 38
SCRA 524 [1971]; Schmid and Oberly, Inc. vs. RJL Martinez Fishing Corp., 166 SCRA 493 [1988].)
In some circumstances, however, a contract can create both a sale and an agency relationship. For example:
An automobile dealer receives title to the cars he orders from the manufacturer and that transaction is a sale; but
he is an agent to the extent that he is authorized to pass on to the ultimate purchaser the limited warranty of the
manufacturer. In any event, the courts must look at the entire transaction to determine if it is a principal-agent
relationship or a buyer-seller relationship. (1 Williston on Sales, 4th ed., pp. 16-17.)
ART. 1467. A contract for the delivery at a certain price of an article which the vendor
in the ordinary course of his business manufactures or procures for
Art. 1467
the general market, whether the same is on hand at the time or not, is a contract of sale,
but if the goods are to be manufactured specially for the customer and upon his special
order, and not for the general market, it is a contract for a piece of work. (n)
Sale distinguished from contract for a piece of work.
By the contract for a piece of work the contractor binds himself to execute a piece of work for the employer,
in consideration of a certain price or compensation. The contractor may either employ his labor or skill, or also
furnish the material. (Art. 1713.)
The distinction between a contract of sale and one for work, labor or materials or for a piece of work is tested
by the inquiry whether the thing transferred is one not in existence and which never would have existed but for
the order of the party desiring to acquire it, or a thing which would have existed and been the subject of sale to
some other person, even if the order had not been given.
(1) In the first case, the contract is one for work, labor and materials and in the second, one of sale. (Inchausti
& Co. vs. Cromwell, 20 Phil. 345 [1911]; see Celestino Co. & Co. vs. Coll., 99 Phil. 841 [1956]; Comm. vs.
Engineering Equipment and Supply Co., 64 SCRA 590 [1975]; Comm. vs. Arnoldus Carpentry Shop, Inc., 159
SCRA 199 [1988]; Engineering & Machinery Corp. vs. Court of Appeals, 67 SCAD 113, 252 SCRA 156 [1996].)
(2) In the first case, the risk of loss before delivery is borne by the worker or contractor, not by the employer
(the person who ordered). (Arts. 1717, 1718.) A contract is for a piece of work if services dominate that contract
even though there is a sale of goods involved. Where the primary objective of a contract is a sale of a
manufactured item, it is a sale of goods even though the item is manufactured by labor furnished by the seller
and upon previous order of the customer. (see 1 Williston, 4th ed., p. 23.)
(3) The importance of marking the line that divides contracts for a piece of work from contracts of sale arises
from the fact that the former is not within the Statute of Frauds. (see Art. 1483.)
NATURE AND FORM OF THE CONTRACT
37
Art. 1468
EXAMPLE:
If B is buying a pair of shoes of a particular style and size from S which the latter ordinarily manufactures or
procures for the general market but the same is not available, an order for one would be a contract of sale, since the
article would have existed and been the subject of sale to some other person even if the order had not been given.
On the other hand, if B places an order for a pair of shoes of a particular shape because his feet are deformed,
the fact that such kind of shoes is not suitable for sale to others in the ordinary course of the seller’s business and
is to be manufactured especially for B and upon his special order, makes the contract one for a piece of work.
ART. 1468. If the consideration of the contract consists partly in money, and partly in
another thing, the transaction shall be characterized by the manifest intention of the
parties. If such intention does not clearly appear, it shall be considered a barter if the
value of the thing given as a part of the consideration exceeds the amount of the money
or its equivalent; otherwise, it is a sale. (1446a)
Sale distinguished from barter.
By the contract of barter or exchange, one of the parties binds himself to give one thing in consideration of
the other’s promise to give another thing. (Art. 1638.) On the other hand, in a contract of sale, the vendor gives
a thing in consideration for a price in money. (Art. 1458.)
(1) The above distinction is not always adequate to distinguish one from the other. Hence, the rule in
Article 1468 for those cases in which the thing given in exchange consists partly in money and partly in another
thing.
(a)
In such cases, the manifest intention of the parties isparamount in determining whether it is one
of barter or of sale and such intention may be ascertained by taking into account the contemporaneous and
subsequent acts of the parties. (Art.
1371.)
Art. 1468
(b)
If this intention cannot be ascertained, then the last sentence of the article applies. But if the
intention is that the contract shall be one of sale, then such intention must be followed even though the value
of the thing given as a part consideration is more than the amount of the money given.
(2) The only point of difference between the two contracts is in the element which is present in sale but not
in barter, namely: “price certain in money or its equivalent.” (see Art. 1641.)
EXAMPLES:
(1)
S, a sugar miller, and B, a manufacturer and dealer of whisky, entered into an agreement whereby S
was to deliver sugar worth P20,000.00 to B who was to give 100 bottles of whisky worth also P20,000.00. This is
a contract of barter.
(2)
Suppose at the date of delivery, B had only 25 bottles of whisky. With the consent of S, S paid the
difference of P15,000 in cash. In this case, the contract is still barter. The consideration for the sugar is not cash but
the whisky, and the amount of P15,000.00 paid by B is in consideration for the 75 bottles of liquor.
(3)
Suppose, in the same example, B had no whisky at the stipulated date of delivery and he paid S
P20,000.00 instead of giving whisky. Did the contract become one of sale? No, because the payment is in
consideration of the value of the whisky, and not of the sugar. The manifest intention of the parties was to enter
into a contract of barter. But if B had whisky at the date of delivery and he paid P20,000.00 with the consent of S,
the contract would become one of sale.
(4)
Assume now that the contract between S and B was for S to deliver sugar to B who agreed to give
100 bottles of whisky or to pay P20,000.00 cash. If B, instead of whisky, paid P20,000.00 cash, it is clear that the
resulting contract is that of sale, and not barter.
(5)
If the obligation of B is to deliver 50 bottles of whisky and pay P10,000.00 cash, or 75 bottles of
whisky and P5,000.00 cash, or 25 bottles of whisky and P15,000.00 cash, the transaction shall be considered a
barter or sale depending on the manifest intention of the parties. Under Article 1468, if such intention does not
clearly appear, the contract shall be considered a
Art. 1468
barter, where the cash involved is P5,000.00, or a sale, in case it is P15,000.00, or either in case it is P10,000.00.
Sale distinguished from lease.
In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for
a price certain and for a period which may be definite or indefinite. (Art. 1643.) In other words, in a lease, the
38
SALES
landlord or lessor transfers merely the temporary possession and enjoyment of the thing leased. In a sale, the
seller transfers ownership of the thing sold.
Sale distinguished from dation in payment.
Dation in payment (or dacion en pago) is the alienation of property to the creditor in satisfaction of a debt in
money. (see Art. 1619.) It is governed by the law on sales. (Art. 1245.) As such the essential elements of a
contract of sales, namely, consent: object certain, and cause or considerations, must be present.
The distinctions are the following:
(1) In sale, there is no preexisting credit, while in dation in payment, there is;
(2) In sale, obligations are created, while in dation in payment, obligations are extinguished;
(3) In sale, the cause is the price paid, from the viewpoint of the seller, or the thing sold, from the viewpoint
of the buyer, while in dation in payment, the extinguishment of the debt, from the viewpoint of the debtor, or the
object acquired in lieu of the credit, from the viewpoint of the creditor;14
(4) In sale, there is more freedom in fixing the price than in dation in payment; and
(5) In sale, the buyer has still to pay the price, while in dation in payment, the payment is received by the
debtor before the contract is perfected. (see 10 Manresa 16-17.)
Art. 1469
EXAMPLE:
S owes B P10,000.00. To pay his debt, S, with the consent of B, delivers a specific television set. If the value
of the television set, however, is only P8,000.00, S is still liable for P2,000.00 unless the parties have considered
the conveyance as full payment.
ART. 1469. In order that the price may be considered certain, it shall be sufficient that
it be so with reference to another thing certain, or that the determination thereof be left
to the judgment of a specified person or persons.
Should such person or persons be unable or unwilling to fix it, the contract shall be
inefficacious, unless the parties subsequently agree upon the price.
If the third person or persons acted in bad faith or by mistake, the courts may fix the
price.
Where such third person or persons are prevented from fixing the price or terms by
fault of the seller or the buyer, the party not in fault may have such remedies against the
party in fault as are allowed the seller or the buyer, as the case may be. (1447a)
When price considered certain.
The price in a contract of sale ought to be settled for there can be no sale without a price. (see Borromeo vs.
Borromeo, 98 Phil. 432 [1955].) It must be certain or capable of being ascertained in money or its equivalent;
and money is to be understood as currency, and its equivalent means promissory notes, checks and other
mercantile instruments generally accepted as representing money.
The fact that the exact amount to be paid for the thing sold is not precisely fixed, is no bar to an action to
recover such compensation, provided the contract, by its terms furnishes a basis or measure for ascertaining the
amount agreed upon. (Majarabas vs. Leonardo, 11 Phil. 272 [1908]; Villanueva vs. Court of Appeals, 78
SCAD 484, 267 SCRA 89 [1997].)
Art. 1469
Under the above article, the price is certain if:
(1) The parties have fixed or agreed upon a definite amount; or
(2) It be certain with reference to another thing certain (see Art. 1472; Majarabas vs. Leonardo, 11 Phil. 272
[1908].); or
(3) The determination of the price is left to the judgment of a specified person or persons and even before
such determination. (see Barretto vs. Sta. Maria, 26 Phil. 200 [1913], under Art. 1458.)
It must be understood that the last two cases are applicable only when no specific amount has been stipulated
by the parties.
ILLUSTRATIVE CASES:
14
What actually takes place in dation in payment is an objective novation of the obligation where the thing offered as an accepted equivalent of the
performance of an obligation is considered as the purchase price. (see Art. 1291[1], Civil Code.)
NATURE AND FORM OF THE CONTRACT
39
1. Price was fixed at 10% below the price in the inventory, at the invoice price, and in accordance with the
price list less 20% discount.
Facts: S sold to B a tobacco and cigarette factory together with the trademark “La Maria Cristina,” the stocks
of tobacco, machinery, labels, wrappers, etc. for a sum subject to modification, in accordance with the result shown
by the inventory to be drawn up. In this inventory the value of each individual price of furniture was fixed at 10%
below the price in the partnership inventory. The value of the tobacco, both in leaf and in process of manufacture,
was fixed at the invoice price.
The value of tobacco made up into cigars was fixed in accordance with the price list of the company less 20%
discount.
Issue: Under the terms of the agreement, may the price of the property sold be considered certain within the
meaning of the law?
Held: The price may be considered certain. The articles which were the subject of the sale were definitely and
finally agreed upon. The price for each article was fixed. It is true that the price of the tobacco, for example, was
not stated in pesos and centavos. But by its terms B agreed to pay therefor the amount named in the invoices then
in existence. The price could be made certain by a mere reference to these invoices. (McCullough vs. Aenille & Co.,
13 Phil. 258 [1909].)
———— ———— ————
Art. 1469
2. Price was fixed at a certain amount subject to modifications based on known factors.
Facts: S contracted to sell large quantity of coal to B. The basic price fixed in the contract was P9.45 per long
ton but it was stipulated that the price was subject to modifications “in proportion to variations in calories and ash
content and not otherwise.”
Issue: Is the price certain within the meaning of the law?
Held: By stipulation, the price could be made certain by the application of known factors (Art. 1469.), and for
the purposes of this case, it may be assumed that the price was fixed at P9.45 per long ton. (Mitsui Bussan Kaisha
vs. Manila B.R.R. and L. Co., 39 Phil. 624 [1919].)
———— ———— ————
3. Price (compensation) promised was the cost of maintenance.
Facts: X rendered services as wet nurse and governess to Y’s infant daughter. Y promised to compensate X
for the services, providing for the maintenance of X, her husband and her children during all the time that the
services were required.
Y contends that there was no valid contract of lease of services because the price thereof was not fixed.
Issue: Does the contract furnish a basis or measure by which the amount of compensation may be ascertained?
Held: Yes. In this case, the cost of maintenance determines the compensation according to the agreement of
the parties. (Majarabas vs. Leonardo, supra.)
———— ———— ————
4. Price was fixed at “not greater than P210.00 per square meter.”
Facts: Under the contract of lease with option to buy entered into in 1975, the lessee was given the option to
purchase the parcel of land lease within a period of 10 years from the date of signing of the contract “at a price not
greater than P210.00 per square meter.”
Issue: Is the price certain or definite?
Held: Yes, given the circumstances of the case. “Contracts are to be construed according to the sense and
meaning of the terms which the parties themselves have used. In the present
Art. 1469
dispute, there is evidence to show that the intention of the parties is to peg the price of P210 per square meter. This
was confirmed by the petitioner [lessor] himself in his testimony as follows. x x x
Moreover by his subsequent acts of having the land titled under the Torrens System, and in pursuing the back
[lessee] manager to effect the sale immediately means that he understood perfectly well the terms of the contract.
He even had the same property mortgaged to the respondent back sometime in 1979, without the slightest hint of
wanting to abandon his offer to sell the property at the agreed price of P210 per square meter.’’ (Serra vs. Court of
Appeals, 47 SCAD 55, 229 SCRA 60 [1994].)
Effect where price fixed by third person designated.
As a general rule, the price fixed by a third person designated by the parties is binding upon them. There are,
however, exceptions such as:
(1) When the third person acts in bad faith or by mistake as when the third person fixed the price having in
mind not the thing which is the object of the sale, but another analogous or similar thing in which case the court
may fix the price. But mere error in judgment cannot serve as a basis for impugning the price fixed; and
(2) When the third person disregards specific instructions or the procedure marked out by the parties or the
data given him, thereby fixing an arbitrary price. (see 10 Manresa 53-54.)
40
SALES
EXAMPLE:
S sold to B a diamond ring. The determination of the price was left to C whom the parties thought was a jeweler.
If C acted by mistake, as when he is incompetent to know the price of the diamond ring, or in bad faith, as
when he connived with S, the court may fix the price.
ILLUSTRATIVE CASE:
Price was fixed on the basis of a certain proportion of total net value of business to be ascertained by
appraisers.
Art. 1470
Facts: S executed a document whereby he agreed to transfer to B “the whole of the right, title, and interest” in
a business. This whole was 4/173 of the entire net value of the business. The parties agreed that the price should be
4/173 of the total net value. The ascertainment of such net value was left unreservedly to the judgment of the
appraisers.
Issue: Is the price certain?
Held: Yes, for the minds of the parties have met on the thing and the price. Nothing was left unfinished and all
questions relating thereto were settled. This is an example of a perfected sale. (Barretto vs. Santa Maria, 26 Phil.
200 [1913].)
Effect where price not fixed by third person designated.
(1) If the third person designated by the parties to fix the price refuses or cannot fix it (without fault of the
seller and the buyer), the contract shall become ineffective, as if no price had been agreed upon unless, of course,
the parties subsequently agree upon the price. (par. 2.)
(2) If such third person is prevented from fixing the price by the fault of the seller or the buyer, the party not
in fault may obtain redress against the party in fault (par. 2.) which consists of a choice between rescission or
fulfillment, with damages in either case. (Art. 1191, par. 2; see Art. 1594.) If the innocent party chooses
fulfillment, the court shall fix the price.
ART. 1470. Gross inadequacy of price does not affect a contract of sale, except as it
may indicate a defect in the consent, or that the parties really intended a donation or
some other act or contract. (n)
Effect of gross inadequacy of price in voluntary sales.
(1) General rule. — While a contract of sale is commutative, mere inadequacy of the price or alleged hardness
of the bargain generally does not affect its validity when both parties are in a position to form an independent
judgment concerning the transaction. (Askav vs. Cosalan, 46 Phil. 79 [1924]; Ereñeta vs. Bezore,
Art. 1470
54 SCRA 13 [1973]; Auyong Hian vs. Court of Appeals, 59 SCRA 110 [1974]; see Ong vs. Ong, 139 SCRA 133
[1985].) This rule holds true in voluntary contracts of sale otherwise free from invalidating defects. A valuable
consideration, however small or nominal, if given or stipulated in good faith is, in the absence of fraud, sufficient.
(Rodriguez vs. Court of Appeals, 207 SCRA 553 [1992].)
In determining whether the price is adequate or not, the price obtaining at the date of the execution of the
contract, not those obtaining a number of years later, should be considered. (Siopongco vs. Castro, [C.A.] No.
12448-R, Jan. 18, 1957.)
(2) Where low price indicates a defect in the consent. — The inadequacy of price, however, may indicate a
defect in the consent such as when fraud, mistake, or undue influence is present (Art. 1355.) in which case the
contract may be annulled not because of the inadequacy of the price but because the consent is vitiated. Contracts
of sale entered into by guardians or representatives of absentees are rescissible whenever the wards or absentees
whom they represent suffer lesion by more than 1/4 of the value of the things which are the object thereof. (Art.
1381[1, 2].)
The unsupported claim that the sale of property was made for an inadequate price is a mere speculation which
has no place in our judicial system. Since every claim must be substantiated by sufficient evidence, such a
conjectural pretension cannot be entertained. Allegation of inadequacy of price must be proven. (Ng Cho Cio vs.
Ng Diong, 1 SCRA 275 [1961].)
(3) Where price so low as to be “shocking to conscience”. — While it is true that mere inadequacy of price
is not a sufficient ground for the cancellation of a voluntary contract of sale, it has been held that where the price
is so low that “a man in his senses and not under a delusion” would not accept it, the sale may be set aside and
declared an equitable mortgage to secure a loan. (Aguilar vs. Rubiato, 40 Phil. 570 [1919]; De Leon vs. Salvador,
36 SCRA 507 [1970]; Art. 1602[1].) But where the price paid is much higher than the assessed value of the
property and the sale is effected by a father to his daughter in which filial love must be taken into account, the
NATURE AND FORM OF THE CONTRACT
41
price is not to be construed “as so inadequate to shock the court’s conscience.” (Alsua-Bett vs. Court of Appeals,
92 SCRA 332 [1979]; Jocson vs. Court of Appeals, 170 SCRA 333 [1989].)
Art. 1470
ILLUSTRATIVE CASES:
1.
Selling price is 1/26 of value of property.
Facts: S sold to B with pacto de retro (right to repurchase) a land valued at P26,000 for only P1,000.00.
Issue: May the contract be construed as an equitable mortgage? (see Arts. 1602, 1603.)
Held: As the price is so grossly inadequate, the contract will be interpreted to be one of loan with equitable
mortgage with the price paid as principal of said loan and the land given merely as security. (Aguilar vs. Rubiato,
40 Phil. 570 [1919].)
———— ———— ————
2.
Purchaser of property earned greater profit by its subsequent resale than that earned by seller by the
sale to such purchaser.
Facts: S bought a land for P870.00. One year later, he sold the same land to B for P1,125.00. Subsequently, B
sold 1/20 of the land for P681.00. S brought action to have the sale annulled, claiming that the price of the land was
“so inadequate as to shock the conscience of men’’ as shown by B’s sale of 1/20 of the land for more than half of
what was paid to S.
Issue: Is the price of P870.00 grossly inadequate?
Held: Having sold the land to B for the sum of P1,125.00 one year after he had purchased it for P870.00 at a
profit of about 28%, S had no ground for complaint. A sale may not be annulled simply because the purchaser
subsequently resold the property or a part of it at a greater profit than that earned by his vendor. (Alarcon vs. Kasilag,
[C.A.] 40 O.G. [Supp. 11] 203.)
———— ———— ————
3. Conveyance of property is for P1.00 and other valuable considerations.
Fact: S, for and in consideration of P1.00 and other valuable considerations, executed in favor of B then a
minor, a Quitclaim Deed whereby she transferred to B all her rights and interests in the 1/2 undivided portion of a
parcel of land. Later, S claimed that the deed is null and void as it is equivalent to a Deed of Donation, acceptance
of which by the donee is necessary to give it validity. lssue: Is the Quitclaim Deed a conveyance of property with
a valid cause or consideration?
Art. 1470
Held: Yes. The cause or consideration is not the P1.00 alone but also other valuable considerations. Although
the cause is not stated in the contract it is presumed that it is existing unless the debtor proves the contrary. (Art.
1354.) This presumption cannot be overcome by a simple assertion of lack of consideration especially when the
contract itself states that consideration was given, and the same has been reduced into a public instrument with all
due formalities and solemnities.
Moreover, even granting that the Quitclaim Deed is a donation, Article 741 of the Civil Code provides that the
requirement of the acceptance of the donation in favor of a minor by parents or legal representatives applies only
to onerous and conditional donations where the donee may have to assume certain charges or burdens. (Ong vs.
Ong, 139 SCRA 133 [1985].)
Effect of gross inadequacy of price in involuntary sales.
(1) General rule. — A judicial or execution sale is one made by a court with respect to the property of a
debtor for the satisfaction of his indebtedness.15
Like in a voluntary sale, mere inadequacy of price is not a sufficient ground for the cancellation of an
execution sale if there is no showing that in the event of a resale, a better price can be obtained. It has been held
that the public sale of a lot valued at P40,500.00 for P12,000.00 cash “does not appear to be inadequate.” (see Cu
Bie vs. Court of Appeals, 15 SCRA 306 [1965]; Pascua vs. Heirs of Segundo Simeon, 161 SCRA 1 [1988].)
(2) Where price so low as to be “shocking to the conscience.” — If the “price is so inadequate as to shock
the conscience of the Court”, “such that the mind revolts at it and such that a reasonable mind would neither
directly or indirectly be likely to consent to it,’’ a judicial sale, say, of real property, will be set aside. (National
Bank vs. Gonzales, 45 Phil. 693 [1923]; Warnes, Barnes & Co. vs. Santos,
Art. 1471
15 Phil. 446 [1910]; Paras vs. Court of Appeals, 91 Phil. 389 [1952]; Cometa vs. Court of Appeals, 143 SCAD
90, 351 SCRA 294 [2001].) Thus, where a land with an assessed value of more than P60,000.00 was sold for
15 There are three (3) types of sale arising from failure to pay a mortgage debt, namely, the extra-judicial foreclosure sale, the judicial foreclosure
sale, and the ordinary execution sale. They are governed by three (3) different laws which are, respectively, Act No. 3135, Rule 68, and Rule 39 of the
Rules of Court. (Abaca Corporation of the Phils. vs.
Court of Appeals, 81 SCAD 635, 272 SCRA 475 [1997].)
42
SALES
only P867.00, the sale was set aside. (Director of Lands vs. Abarca, 61 Phil. 70 [1934]; Jalandoni vs. Ledesma,
64 Phil. 1058 [1937].)
Similarly, an execution sale whereby 33 hectares of land were ceded to the judgment creditor to satisfy a
liability for 146 cavans of palay was held void for inadequacy of price. (Singson vs. Babida, 79 SCRA 111
[1977].) So, also the price of the sale of properties at around 10% of their value was held to be grossly inadequate.
(Provincial Sheriff of Rizal vs. Court of Appeals, 68 SCRA 329 [1975].)
(3) Where seller is given the right to repurchase. — The validity of the sale is not necessarily affected where
the law gives to the owner the right to redeem, as when a sale is made at public auction, upon the theory that the
lesser the price, the easier it is for the owner to effect the redemption. (De Leon vs. Salvador, 36 SCRA 567
[1970]; Ravanera vs. Imperial, 93 SCRA 589 [1979]; Ramos vs. Pablo, 146 SCRA 24 [1986]; Francia vs.
Intermediate Appellate Court, 162 SCRA 753 [1988]; Abaca Corporation of the Phils. vs. Garcia, 81 SCAD 635,
272 SCRA 475 [1997].) He may reacquire the property or also sell his right to redeem and thus recover the loss
he claims he suffered by reason of the price obtained at the execution sale. (Tolentino vs. Agcaoli, [unrep.] 91
Phil. 917 [1952]; Barrozo vs. Macaraeg, 83 Phil. 378 [1949]; Velasquez vs. Coronel, 5 SCRA 985 [1962]; Dev.
Bank of the Phils. vs. Moll, 43 SCRA 82 [1972].)
ART. 1471. If the price is simulated, the sale is void, but the act may be shown to have
been in reality a donation, or some other act or contract. (n)
Effect where price is simulated.
(1) If the price is simulated or false such as when the vendor really intended to transfer the thing gratuitously,
then the sale is void but the contract shall be valid as a donation. (Arts. 1471, 1345, 1353.)
Art. 1471
EXAMPLE:
S sold to B a parcel of land worth P50,000.00 for only P30,000.00. This contract of sale is valid although the
price is grossly inadequate. However, if it is shown that B induced S to sell the land through fraud, mistake, or
undue influence, the contract may be annulled on that ground.
If the price is simulated, B may prove another consideration like the liberality of S and if such liberality is
proved, then the contract is valid as a donation; or B may prove that the act is in reality some other contract, like
barter and, therefore, the transfer of ownership is unaffected.
(2) If the contract is not shown to be a donation or any other act or contract transferring ownership because
the parties do not intend to be bound at all (Art. 1345, ibid.), the ownership of the thing is not transferred. The
contract is void and inexistent. (Art. 1409[2].) The action or defense for the declaration of the inexistence of a
contract does not prescribe. (Art. 1410; see Catindig vs. Heirs of Catalina Roque, 74 SCRA 83 [1976].)
(3) Simulation occurs when an apparent contract is a declaration of a fictitious will deliberately made by
agreement of the parties, in order to produce, for the purpose of deception, the appearance of a juridical act which
does not exist or is different from that which was really executed. Its requisites are (a) an outward declaration of
will different from the will of the parties; (b) the false appearance must have been intended by mutual agreement;
and (c) the purpose is to deceive third persons. (Tongoy vs. Court of Appeals, 123 SCRA 99 [1983];
Bayongayong vs. Court of Appeals, 430 SCRA 210 [2004].)
The fact that the seller continues to pay realty taxes on the land sold even after the execution of the contract
to sell does not necessarily prove ownership, much less simulation of said contract. The non-payment of the price
does not prove simulation; at most, it gives the seller the right to sue for collection. Generally, in a contract of
sale, payment of the price is a resolutory condition and the remedy of the seller is to exact fulfillment or, in case
of a substantial breach, to rescind the contract. (Villaflor vs. Court of Appeals, 87 SCAD 778, 280 SCRA 297
[1997].) The non-payment of the price by the supposed buyer, a minor, when taken into acArts. 1472-1473
count together with the many intrinsic defects of the deed of sale, may, however, show that the price is simulated,
making the sale void. (Lebagela vs. Santiago, 371 SCRA 360 [2001].)
ART. 1472. The price of securities, grain, liquids, and other things shall also be
considered certain, when the price fixed is that which the thing sold would have on a
definite day, or in a particular exchange or market, or when an amount is fixed above or
below the price on such day, or in such exchange or market, provided said amount be
certain. (1448)
Price on a given day at particular market.
The above provision follows the principle in Article 1469 that a price is considered certain if it could be
determined with reference to another thing certain.
NATURE AND FORM OF THE CONTRACT
43
Note the last phrase of the above article: “provided said amount be certain.” When an amount is fixed above
or below the price on a given day or in a particular exchange or market, the said amount must be certain;
otherwise, the sale is inefficacious (Art. 1474.) because the price cannot be determined.
This article is especially applicable to fungible things like securities, grain, liquids, etc. the price of which
are subject to fluctuations of the market.
ART. 1473. The fixing of the price can never be left to the discretion of one of the
contracting parties. However, if the price fixed by one of the parties is accepted by the
other, the sale is perfected. (1449a)
Fixing of price by one of the contracting parties, not allowed.
The reason for the rule is obvious.
(1) If consent is essential to a contract of sale, the determination of the price cannot be left to the discretion
of one of the contracting parties; otherwise, it cannot be said that the other consented to a price he did not and
could not previously know. (see
Art. 1474
10 Manresa 6061.) The validity or compliance of the contract cannot be made to depend upon the will of one
party. (Art. 1308.)
(2) Moreover, to be just, the price must be determined impartially by both parties (Art. 1458.) or left to the
judgment of a specified person or persons. (Art. 1469.)
However, where the price fixed by one party is accepted by the other, the contract is deemed perfected
because in this case, there exists a true meeting of minds upon the price. (Art. 1475.)
ART. 1474. Where the price cannot be determined in accordance with the preceding
articles, or in any other manner, the contract is inefficacious. However, if the thing or
any part thereof has been delivered to and appropriated by the buyer, he must pay a
reasonable price therefor. What is a reasonable price is a question of fact dependent on
the circumstances of each particular case. (n)
Effect of failure to determine price.
(1) Where contract executory. — If the price cannot be determined in accordance with Articles 1469 and
1472, or in any other manner, and the bargain is still executory, the contract is without effect. Price certain is an
essential element of the contract of sale. (Art. 1458.) Consequently, there is no obligation on the part of the
vendor to deliver the thing and on the part of the vendee to pay.
(2) Where delivery has been made. — If the thing or any part thereof has already been delivered and
appropriated by the buyer, the latter must pay a reasonable price therefor. This obligation of the buyer is
sometimes contractual (if the agreement omits any reference to price), and sometimes, quasi-contractual (if the
agreement provides that the parties are thereafter to agree on the price). (see Art. 2142.)
(a)
If a buyer, for example, orders a cavan of rice from astore, nothing being said as to the price, the
parties intend and understand that a reasonable price shall be paid. The obligation here is contractual. The
law merely enforces the intention of the parties.
Art. 1474
(b)
Article 1474 applies only where the means contemplated by the parties for fixing the price have,
for any reason, proved ineffectual. In this case, the obligation of the buyer to pay a reasonable price is an
obligation imposed by law as distinguished from a contractual obligation. It is based on the fundamental
principle that no one should enrich himself at the expense of another. (Ibid.) In case, however, the parties do
not intend to be bound until after the price is settled, the buyer must return any goods already received or if
unable to do so, must pay their reasonable value at the time of delivery, and the seller must return any portion
of the amount received.
Concept of reasonable price.
The reasonable price or value of goods is generally the market price at the time and place fixed by the contract
or by law for the delivery of the goods. Under special circumstances of unnatural conditions in the market, the
market price does not furnish the only test. In the leading case upon this point, the court said:
“A reasonable price may or may not agree with the current price of the commodity at the port of shipment
when such shipment is made. The current price of the day may be highly unreasonable from accidental
circumstances, as on account of the commodity having been purposely kept back by the vendor himself, or
44
SALES
with reference to the price at the other ports in the immediate vicinity, or from various other causes. This
doctrine has been applied in cases where the market has been monopolized.” (1 Williston,16 op. cit., p. 447.)
Determination of fair market value.
Offers to sell are not competent evidence of the fair market value of a property, because they are no better
than offers to buy, which have been held to be inadmissible as proof of said values. (City of Manila vs. Estrada,
25 Phil. 208 [1913]; Manila Railroad Co. vs. Aguilar, 35 Phil. 118 [1913].)
“In discussing the term ‘market value’, the author of a wellknown treatise on the subject of damages observes
that to make a
16
If not indicated, the 3rd edition thereof.
Art. 1475
NATURE AND FORM OF THE CONTRACT
45
market there must be both buying and selling; and the ‘market value’ is
that ‘reasonable’ sum which property would bring on a fair sale by a
man willing but not obliged to sell to a man willing but not obliged to
buy.” (Sedgewick on Damages, Sec. 245, cited in Compagnie FrancoIndo Chinoise vs. Deutsch-Australiache, 39
Phil. 474 [1919]; Perez vs. Araneta, 6 SCRA 457 [1962].)
ART. 1475. The contract of sale is perfected at the
moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.
From that moment, the parties may reciprocally
demand performance, subject to the provisions of the
law governing the form of contracts. (1450a)
Perfection of contract of sale.
This article follows the general rule that contracts are perfected by
mere consent. (Art. 1315.) The contract of sale being consensual, it is
perfected at the moment of consent without the necessity of any other
circumstances. From the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price (see Art.
1624.), the reciprocal obligations of the parties arise even when neither
has been delivered. (see Pacific Oxygen & Acetylene Co. vs. Central
Bank, 37 SCRA 685 [1971]; Villongco Realty Co. vs. Bormacheco,
Inc., 65 SCRA 352 [1975]; Vargas Plow Factory, Inc. vs. Central Bank,
27 SCRA 84 [1969]; Xentrex Automotive, Inc. vs. Court of Appeals, 94
SCAD 923, 290 SCRA 66 [1998].) The essence of consent is the
conformity of the parties on the term of the contract, the acceptance by
one of the offer made by the other. (Salonga vs. Farrales, 105 SCRA
359 [1981]; Firme vs. Buklod Enterprises and Dev. Corp., 414 SCRA
190 [2003].)
(1) Conduct of the parties. — Appropriate conduct by the parties
may be sufficient to establish an agreement. While there may be
instances where interchanged correspondence does not disclose the
exact point at which the deal was closed, the actions of the parties may
indicate that a binding obligation has been undertaken. (Maharlika
Publishing Corp. vs. Tagle, 142 SCRA 553 [1986].) There is, however,
no perfected sale where it is conditional (e.g., approval by higher
46
SALES
Art. 1475
authorities) and the condition is not fulfilled. (see People’s Homesite &
Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984].)
(2) Transfer of ownership. — The ownership is not transferred
until the delivery of the thing. (Arts. 1496, 1164. 17 ) The parties,
however, may stipulate that the ownership in the thing, notwithstanding
its delivery, shall not pass to the purchaser until after he has fully paid
the purchase price thereof. (Arts. 1478, 1306.)
(3) Form of contract. — Generally, a contract of sale is binding
regardless of its form. (Art. 1356.) However, in case the contract of sale
should fall within the provisions of the Statute of Frauds (Art. 1403[2].)
or of any other applicable statute which requires a certain form for its
enforceability or validity (Art. 1356.), then that form must be complied
with. (Art. 1483.) A contract of sale may be in a private instrument; the
contract is valid and binding between the parties upon its perfection and
a party may compel the other to execute a public instrument embodying
the contract. (see Arts. 1357, 1358.)
A sale of real estate, whether made as a result of a private
transaction or of a foreclosure or execution sale, becomes legally
effective against third persons only from the date of its registration.
(Campillo vs. Phil. National Bank, 28 SCRA 720 [1969].)
In a case, a letter-offer to buy a particular property for a specified
price was received by the offeree who annotated on the copy the phrase
“Received original, 9-4-89’’ beside which appears his signature. Held:
The receipt can neither be regarded as a contract of sale nor a promise
to sell. Such an annotation by the offeree amounts to neither a written
nor an implied acceptance of the offer. It is merely a memorandum of
the receipt by him of the offer. The requisites of a valid contract of sale
are lacking in said receipt. (Jovan Land, Inc. vs. Court of Appeals, 79
SCAD 428, 268 SCRA 160 [1997].)
(4) Consent reluctantly given. — There is no difference in law
where a person gives his consent reluctantly and even against his good
sense and judgment as when he acts voluntarily and freely. (Acasio vs.
Corp. de los PP. Dominicos de Filipinas, 100 Phil. 253 [1956].)
17 Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to
deliver it arises. However, he shall acquire no real right over it until the same has been delivered
to him.
Art. 1475
NATURE AND FORM OF THE CONTRACT
47
(5) Notarized deed of sale states receipt of price. — The
unsupported verbal claim of the seller that the sale of a motor vehicle
was not consummated for failure of the purchaser to pay the purchase
was held insufficient to overthrow a notarized deed of sale wherein it is
recited that the seller “sold, transferred and conveyed” the motor
vehicle to the purchaser “for and in consideration of the amount of
P10,000 and other valuable considerations, receipt of which is hereby
acknowledged.”
To overcome a public document solemnly executed before a notary
public, the evidence to the contrary must be clear, strong, and
convincing. Parol evidence will not suffice to negate the clear and
positive recitals of a public document not otherwise tainted with fraud
or falsification. (Regalario vs. Northwest Finance Corporation, 117
SCRA 45 [1982].)
(6) Applicant’s qualification to buy still subject for investigation.
— In a case, the agreement denominated as “contract of sale” was
considered by the court as a mere application to buy the land in
question, and not a perfected contract of sale. Although it embodied all
the essential elements of a contract of sale by installment, it appearing
that “after the approval of such application it was still necessary to have
the [applicant’s] qualifications investigated as well as whether or not he
has complied with the provisions of the law regarding the disposition of
lands by the Board of Liquidators,” the application was subject to
revocation in case the applicant was found not to possess the
qualifications necessary. (Alvarez vs. Board of Liquidators, 4 SCRA 95
[1962]; Galvez vs. Tagle Vda. de Kangleon, 6 SCRA 162 [1962].)
(7) Chattel mortgage of car by mortgagor-buyer prior to transfer
of title to his name. — The fact that the chattel mortgage of a car by the
buyers in favor of the seller was executed on a date earlier than the
transfer of the registration certificate thereof in the name of the buyers
does not render the said mortgage made by the buyers invalid, because
the mortgagors were already the owner of the car when the mortgage
was executed, inasmuch as at the time of the sale wherein the parties
agreed over the car and the price, the contract became perfected, and
when part of the purchase price was paid and the car was delivered,
upon the execution of the promissory note and the mortgage by the
mortgagors, the sale became consummated. The registration of the
48
SALES
Art. 1475
transfer of automobiles and of the certificates of license for their use in
the Bureau of Land Transportation merely constitutes an administrative
proceeding which does not bear any essential relation to the contract of
sale entered into between the parties. (Montano vs. Lim Ang, 7 SCRA
250 [1963].)
Registration of motor vehicles is required not because it is the
operative act that transfers ownership in vehicles (as in land registration
cases), but because it is the means to identify the owner thereof in case
of accident so that responsibility for the same can be fixed. (De Peralta
vs. Mangusang, 11 SCRA 598 [1964].)
(8) Non-fulfillment by one party of his obligation. — In case one
of the contracting parties should not comply with what is incumbent
upon him, the injured party may sue for fulfillment or rescission with
the payment of damages in either case. (Art. 1191, pars. 1 and 2.) This
right is predicated on the violation of the reciprocity between the parties
brought about by a breach of obligation by one of them.
ILLUSTRATIVE CASES:
1. Purchase order form directed to seller asking delivery of a
piano carries the address of purchaser in Dipolog City while delivery
receipt form directed to purchaser carries address of seller in
Cagayan de Oro City.
Facts: B, an appliance center of Dipolog City, issued a purchase
order to S, an appliance center of Cagayan de Oro City, directing the
latter to furnish the former a Weinstein Accousticon Piano. The order
was honored by S, which issued a delivery receipt for the item. B’s
representative received the piano, and signed the delivery receipt at
Cagayan de Oro, and assumed the responsibility and expenses of
bringing it to Dipolog City.
Upon the refusal of B to pay, S filed a complaint for collection
with the City Court of Cagayan de Oro. B filed a motion to dismiss
alleging that there being no written agreement between the parties
specifying where the action arising out of the contract should be filed,
the venue of the case properly falls in Dipolog City under Section 1(b),
Rule 4 of the Rules of Court.
Issue: Where is the place of the execution of the contract or the
place where there was meeting of the minds of the parties?
Art. 1475
NATURE AND FORM OF THE CONTRACT
Held: The meeting of minds took place in Cagayan de Oro City
when S received the purchase order, agreed to its terms, and acted
upon it. As a matter of fact, it was not the meeting of minds alone but
also the consummation of the contract which happened in Cagayan de
Oro City.
Under the circumstances of the case, the documents evidencing
the contract show the place of execution to be Cagayan de Oro City.
The purchase order is the contract sued upon. By itself, it was only an
offer to buy directed to S with address at Cagayan de Oro City. It was
brought to said city to be acted upon at that place. The delivery receipt
indicates the acceptance of the offer and the delivery of the piano also
at Cagayan de Oro City. The entry on the delivery receipt showing
that the purchased item was delivered to B of Dipolog City merely
indicates the name and address of the buyer but not the place of the
execution of the contract. (Raza Appliance Center vs. Villaraza, 117
SCRA 576 [1982].)
———— ———— ————
2. A co-owner sold 10 hectares portion of a land owned in
common which portion was to be surveyed, with acknowledgment of
the receipt of an initial payment.
Facts: S executed two documents: in the first, S agreed to sell and
B agreed to buy, for P2,500.00, 10 hectares of land, which is part and
parcel of a bigger lot owned in common by S and his sister although
the boundaries of the 10 hectares would be delineated at a later date
and in the second, S acknowledged receipt as initial payment of P800.
Additional payments of P300 were made. B filed a complaint for
specific performance after S returned the amounts paid.
Issue: Was there a perfected contract of sale between the parties?
Held: Yes. While it is true that the two documents are in
themselves not contracts of sale, there are, however, clear evidence
that a contract of sale was perfected. S’s acceptance of the initial
payment of P800.00 clearly showed his consent to the contract thereby
precluding him from rejecting its binding effect. With the contract
being partially executed, the same is no longer covered by the
requirements of the Statute of Frauds in order to be enforceable. As
co-owner, S cannot dispose of a specific portion of the land, but his
share shall be bound by the effect of the sale under Article 493 of the
Civil Code. (Clarin vs. Rulona, 127 SCRA 512 [1984].)
49
50
SALES
Art. 1475
When definite agreement on manner of
payment essential.
As a consensual contract, a contract of sale becomes a binding and
valid contract upon the meeting of the minds of the parties as to the
price, despite the manner of payment, or even the breach of that manner
of payment. It is not the act of payment of price that determines the
validity of a contract of sale. (Buenaventura vs. Court of Appeals, 416
SCRA 263 [2003].)
Where the parties, however, still have to meet and agree on how and
when the downpayment and installment payments are to be made, it
cannot be said that a contract of sale has been perfected.
Thus, in a case where the buyer is “to give a down-payment of
P10,000 to be followed by P20,000 and the balance of P70,000 would
be paid in installments, the equal monthly amortization of which has to
be determined as soon as the P30,000 had been completed,” it was held
that the fact that the buyer delivered the sum of P1,000 as part of the
downpayment cannot be considered as sufficient proof of the perfection
of any purchase and sale agreement between the parties under Article
1482. In this case, a definite agreement on the manner of payment of
the purchase price is an essential element in the formation of a binding
and enforceable contract of sale. (Velasco vs. Court of Appeals, 51
SCRA 439 [1973]; Limketkai Sons Milling, Inc. vs. Court of Appeals,
69 SCAD 976, 255 SCRA 626 [1996]; see Navarro vs. Sugar Producers
Corp. Mktg. Assoc., 1 SCRA 1180 [1961]; Co vs. Court of Appeals,
286 SCRA 76 [1998].)
It appears, however, that the parties in the Velasco case agreed on
the purchase price of P100,000. It is believed that upon the meeting of
the minds of the parties on the thing which is the object of the contract
and the price (P100,000), the contract of sale must be deemed to have
been perfected. (Art. 1475.) The terms and conditions of payment are
merely accidental, not essential, elements of the contract of sale except
where the parties themselves clearly stipulate that in addition to the
subject matter and the price, they are essential or material to the
contract. (see A. Magsaysay, Inc. vs. Cebu Portland Cement Co., 100
Phil. 351 [1956].) A disagreement on the manner of payment is
tantamount to a failure to agree on the price. (Swedish Match, AB vs.
Court of Appeals, 441 SCRA 1 [2004].)
Art. 1475
NATURE AND FORM OF THE CONTRACT
51
Article 119718 of our Civil Code authorizes courts to fix the period
or periods of payment where there is lack of agreement regarding the
same.
In Uraca vs. Court of Appeals (86 SCAD 734, 278 SCRA 702
[1997].), S sent a letter to B, offering to sell a lot and commercial
building for P1,050,000. B sent a reply-letter within the 3-day period
contained in the offer accepting the aforesaid offer. Later, B was told by
S that the price was P1,400,000 in cash or manager’s check and not
P1,050,000 as erroneously dated in the letter-offer. B agreed to the price
of P1,400,000 but counter-proposed that payment be paid in
installments, with a downpayment of P1,000,000 and the balance of
P400,000 to be paid in 30 days. It was held that a contract of sale was
perfected at the original price of P1,050,000 but there was no agreement
in the sale at the increased price of P1,400,000. The qualified
acceptance by B constitutes a counter-offer and, in effect, a rejection of
S’s offer. (Art. 1319.) Since there was no definite agreement on the
manner of the payment of the purchase price of P1,400,000, the first
sale for P1,050,000 remained valid and existing.
Although the law does not expressly state that the minds of the
parties must also meet on the terms or manner of payment of the price,
the same is needed. Agreement on the manner of payment goes into the
price such that a disagreement on the manner of payment is tantamount
to failure to agree on the price. (Toyota Shaw, Inc. vs. Court of Appeals,
61 SCAD 310, 244 SCRA 320 [1995]; San Miguel Properties
Philippines, Inc. vs. Huang, 130 SCAD 713, 336 SCRA 737 [2000].)
An agreement on the price but a disagreement on the manner of its
payment will not result in consent. This lack of consent is separate and
distinct from lack of consideration where the contract states that the
price has been paid when in fact it has never been paid. (Montecillo vs.
Reyes, 170 SCAD 440, 385 SCRA 244 [2002], infra.)
18 Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances
it can be inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the
debtor.
In every case, the courts shall determine such period as may under the circumstances have
been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed
by them. (1128a)
52
SALES
Art. 1475
ILLUSTRATIVE CASE:
The buyer, having failed to open a letter of credit as required by
the seller, claimed that there was no perfected contract of sale
between the parties.
Facts: B (buyer) established contact with S (seller) through the
Philippine Consulate General in Hamburg, West Germany, because
he wanted to purchase MAN bus spare parts from Germany.
On October 16, 1981, B submitted to S a list of the parts he
wanted to purchase, with specific parts number and description. On
December 17, 1971, S submitted its formal offer containing the item
number, quantity, part number, description, unit price and total to B.
On December 24, 1981, B informed S of his desire to avail of the
prices of the parts at that time and enclosed its Purchase Order
containing the item number, part number and description. On
December 29, 1981, B personally submitted the quantities he wanted
to the General Manager of S in the Philippines. H, trading partner of
S, sent a pro forma invoice to be used by B in applying for a letter of
credit; said invoice required that said letter be opened in favor of J.
On February 16, 1982, S reminded B to open the letter of credit
to avoid delay in the shipment and payment of interest. On October
18, 1982, S again reminded B of his order and advised that the case
may be endorsed to its lawyers. B replied that he did not make any
valid Purchase Order and that there was no definite contract between
him and S. Subsequently, S filed a complaint for recovery of actual or
compensatory damages, unearned profits, interest, attorney’s fees and
costs against B.
Issue: The issue posed for resolution is whether or not a contract
of sale has been perfected between the parties.
Held: (1) A meeting of the minds has occurred. — “The offer by
petitioner [S] was manifested on December 17, 1981 when petitioner
submitted its proposal containing the item number, quantity, part
number, description, the unit price and total to private respondent [B].
On December 24, 1981, private respondent informed petitioner of his
desire to avail of the prices of the parts at that time and simultaneously
enclosed its Purchase Order No. 0101 dated December 14, 1981. At
this stage, a meeting of the minds between vendor and vendee has
occurred, the object of the contract being the spare parts and the
consideration, the price stated in petitioner’s offer dated December 17,
1981 and accepted by the respondent on December 24, 1981.
Art. 1475
NATURE AND FORM OF THE CONTRACT
Although said purchase order did not contain the quantity he
wanted to order, private respondent made good his promise to
communicate the same on December 29, 1981. At this juncture, it
should be pointed out that private respondent was already in the
process of executing the agreement previously reached between the
parties.’’
(2)
B has accepted S’s offer. — “There appears this
statement made by private respondent: “Note above P.O. will include
a 3% discount. The above will serve as our initial P.O.” This notation
on the purchase order was another indication of acceptance on the part
of the vendee, for by requesting a 3% discount, he implicitly accepted
the price as first offered by the vendor. The immediate acceptance by
the vendee of the offer was impelled by the fact that on January 1,
1982, prices would go up, as in fact, the petitioner informed him that
there would be a 7% increase effective January 1982. On the other
hand, concurrence by the vendor with the said discount requested by
the vendee was manifested when petitioner immediately ordered the
items needed by private respondent from Schuback Hamburg which
in turn ordered from NDK, a supplier of MAN spare parts in
West Germany.”
(3)
Contract was perfected on December 24, 1981. —
“While we agree with the trial court’s conclusion that indeed a
perfection of the contract was reached between the parties, we differ
as to the exact date when it occurred, for perfection took place, not on
December 29, 1981, but rather on December 24, 1981. Although the
quantity to be ordered was made determinate on only December 24,
1991, quantity is immaterial in the perfection of sales contract. What
is of importance is the meeting of the minds as to the object and cause,
which from the facts disclosed, show that as of December 24, 1981,
these essential elements had already concurred.”
(4)
Opening of letter was not intended as a suspensive
condition. — “On the part of the buyer, the situation reveals that
private respondent failed to open an irrevocable letter of credit without
recourse in favor of Johannes Schuback of Hamburg, Germany. This
omission, however, does not prevent the perfection of the contract
between the parties, for the opening of a letter of credit is not to be
deemed a suspensive condition. The facts herein do not show that
petitioner reserved title to the goods until private respondent had
opened a letter of credit. Petitioner, in the course of its dealings with
private respondent, did not incorporate any provision declaring their
contract of sale without effect until after the fulfillment of the act of
53
54
SALES
Art. 1475
opening a letter of credit. The opening of a letter of credit in favor of
vendor in only a mode of payment. It is not among the essential
requirements of a contract of sale enumerated in Articles of day of
which will prevent the perfection of the contract from taking place.”
(Johannes Schuback & Sons Phil. Trading Corp. vs. Court of Appeals,
46 SCAD 240, 227 SCRA 717 [1993].)
Effect of failure to pay price.
Failure to pay the consideration of contract is different from lack of
consideration; the former results in a right to demand fulfillment or
cancellation of the obligation under an existing valid contract, while the
latter prevents the existence of a valid contract. (Montecillo vs. Reyes,
170 SCAD 440, 385 SCRA 244 [2002].)
(1) The failure to pay the stipulated price after the execution of the
contract does not convert the contract into one without cause or
consideration as to vitiate the validity of the contract, it not being
essential for the existence of cause that payment or full payment be
made at the time of the contract. (Puato vs. Mendoza, 64 Phil. 417
[1937].) Non-payment of the purchase price is not among the instances
where the law declares a contract of sale to be null and void. (Peñalosa
vs. Santos, 153 SCAD 531, 363 SCRA 545 [2001].) Such failure does
not ipso facto resolve the contract in the absence of any agreement to
that effect. (De la Cruz vs.
Legaspi, 98 Phil. 43 [1955]; Ocampo vs. Court of Appeals, 52 SCAD
610, 233 SCRA 551 [1994].)
The situation is rather one in which there is failure to pay the
consideration, with its resultant consequences. The vendor’s remedy in
such case is generally to demand specific performance or rescission
with damages in either case under Article 1191. (De la Cruz vs. Legaspi,
supra; Chua Hai vs. Kapunan, Jr., 103 Phil. 110 [1958]; Lebrilla vs.
Intermediate Appellate Court, 180 SCRA 188 [1989].)
(2) But a contract of sale is null and void where the purchase price,
which appears thereon as paid, has, in fact, never been paid by the buyer
to the seller. In such case, the sale is without cause or consideration.
(Art. 1409[3].) Such sale is non-existent or cannot be considered
consummated. It produces no effect whatsoever. (Mapalo vs. Mapalo,
17 SCRA 114 [1966]; Yu Bun Guan vs. Ong,
Art. 1475
NATURE AND FORM OF THE CONTRACT
55
157 SCAD 38, 367 SCRA 559 [2001]; Montecillo vs. Reyes, supra.)
If the real price is not stated in the contract, then the contract is valid
but subject to reformation. If there is no meeting of the minds of the
parties as to the price, because the price stipulated in the contract is
simulated, then the contract is void. Article 1471 states that if the price
is simulated, the sale is void. (Buenaventura vs. Court of Appeals, 416
SCRA 263 [2003].)
ILLUSTRATIVE CASES:
1. Seller is authorized by the contract, in case of buyer’s default,
to recover interest sold in property which was subsequently damaged,
and buyer defaulted.
Facts: S and B were the co-owners in equal shares of a motor
boat. By written contract, S sold her undivided interest in the boat to
B payable in three (3) equal installments. In case of default “the buyer
authorizes the seller to recover her one-half participation of ownership
of the boat without obligation to reimburse the payments made by the
buyer.” B defaulted after P750.00 was paid. Later, the boat was
damaged by a typhoon.
S filed action to recover the balance of the purchase price. B
answered that he had notified S to take over her half interest in the
boat, which she refused to do.
Issue: Under the contract, is B relieved of the obligation to pay
the purchase price?
Held: No. The sole fact that the contract of sale between the
parties only provides that in case of default “the buyer authorizes
xxx,” and is silent on the seller’s right to exact payment of the
outstanding balance, there being no other stipulations incompatible
therewith, does not import that the seller has thereby lost the
alternative right to demand full payment. (see Cui vs. Sun Chuan, 41
Phil. 523.) This becomes more apparent from the circumstance that
the contract as written confers upon the seller the right (“buyer
authorizes the seller”) to rescind the sale and recover her half interest,
but does not obligate her to do so.
Since S chose to collect full payment as she is entitled to do, the
loss of the boat without fault of the buyer (B) is irrelevant to the case.
The generic obligation to pay monthly is not excused by fortuitous
loss of any specific property of the debtor. (Ramirez vs. Court of
Appeals, 98 Phil. 225 [1956].)
56
SALES
Art. 1475
———— ———— ————
2. Subject matter of sale is “24,000 tons of iron ore, more or less”
already extracted, for a lump sum, and buyer, refusing to pay, claims
short-delivery and asks for damages.
Facts: S embarked upon the exploration and development of
mining claims belonging to B. Later, they executed a document
wherein S transferred to B all of S’s rights and interest over the
“24,000 tons of iron ore, more or less” that S had already extracted
from the mineral claims in consideration of a downpayment of
P10,000.00 and the balance of P65,000.00 which will be paid out of
the “first shipment of iron ore and of the first amount derived from the
local sale of iron ore made” from said claims, which amount was
secured by a surety bond executed by B in favor of S.
No sale of the approximately 24,000 tons of iron ore had been
made nor had the P65,000.00 been paid. S brought suit for the
recovery of the balance of the purchase price. B claims a short
delivery, and asks for damages. There is no charge that S did not
deliver to B all the ore found in the stockpiles in the mining claims in
question.
Issue: If there had been short delivery, as claimed by B, is he
entitled to the payment of damages?
Held: No. (1) Contract is sale of specific mass of tangible goods.
— “The sale between the parties is a sale of specific mass of fungible
goods because no provision was made in their con-
NATURE AND FORM OF THE CONTRACT
57
Art. 1476
tract for the measuring or weighing of the ore sold in order to complete
or perfect the sale nor was the price of P75,000.00 agreed upon based
upon any such measurement. (Art. 1480, par. 2.) The subject matter
of sale is a determinate object, the mass, for a single price or lump
sum (the quantity ‘24,000 tons of iron ore, more or less,’ being a mere
estimate by the parties of the total tonnage weight of the mass), and
not the actual number of units or tons contained therein so that all that
was required of S was to deliver in good faith to B all the ore found in
the mass, notwithstanding that the quantity delivered is less than the
amount estimated by them.’’
(2) Reasonable percentage of error considered. — “Even
granting the estimate of 21,889.7 tons made by B is correct,
considering that the actual weighing of each unit of the mass was
practically impossible, a reasonable percentage of error should be
allowed anyone making an estimate of the exact quantity in tons found
in the mass. In this case, both parties predicated their respective claims
only upon an estimated number of cubic meters of ore multiplied by
the average tonnage factor per cubic meter. Furthermore, the contract
expressly stated the amount to be 24,000 tons more or less.’’ (Gaite
vs. Fonacier, 2 SCRA 830 [1961].)
Right of owner to fix his own price.
(1) The owner of a thing has the right to quote his own price,
reasonable or unreasonable. It is up to the prospective buyer to accept
or reject it. He may even impose a condition hard to fulfill and name a
price quite out of proportion to the real value of the thing offered for
sale. (Cornejo vs. Calupitan, 87 Phil. 555 [1950].)
(2) He is also well within his right to quote a small or nominal
consideration (see Arts. 1470-1471.) and such consideration is just as
effectual and valuable a consideration as a larger sum stipulated or paid.
(see Pelacio vs. Adiosola, [C.A.] No. 7572-R, Sept. 10, 1952.)
ART. 1476. In the case of a sale by auction:
(1)
Where goods are put up for sale by auction
in lots, each lot is the subject of a separate contract
of sale.
Art. 1476
58
SALES
(2)
A sale by auction is perfected when the
auctioneer announces its perfection by the fall of the
hammer, or in other customary manner. Until such
announcement is made, any bidder may retract his
bid; and the auctioneer may withdraw the goods from
the sale unless the auction has been announced to be
without reserve.
(3)
A right to bid may be reserved expressly by
or on behalf of the seller, unless otherwise provided
by law or by stipulation.
(4)
Where notice has not been given that a sale
by auction is subject to a right to bid on behalf of the
seller, it shall not be lawful for the seller to bid himself
or to employ or induce any person to bid at such sale
on his behalf or for the auctioneer, to employ or
induce any person to bid at such sale on behalf of the
seller or knowingly to take any bid from the seller or
any person employed by him. Any sale contravening
this rule may be treated as fraudulent by the buyer.
(n)
Rules governing auction sales.
(1) Sales of separate lots by auction are separate sales. — Where
separate lots are the subject of separate biddings and are separately
knocked down, there is a separate contract in regard to each lot. As soon
as the hammer falls on the first lot, the purchaser of that lot has a
complete and separate bargain. He need not make another. When a
second lot is put up and knocked down to the highest bidder, there is a
separate complete contract as to the said lot whether the bidder who
secured the first lot or whether another person happens to be the highest
bidder. Such is the rule in No. (1) though no doubt the parties may
subsequently consolidate all the purchases into one transaction — as by
giving a single note — for the aggregate price. (see 2 Williston on Sales
[1948 Rev. Ed.], pp. 199-200.)
(2) Sale perfected by the fall of the hammer. — In putting up the
goods for sale, the seller is merely making an invitation to those present
to make offers which they do by making bids (Art. 1326.), one of which
is ultimately accepted. Each bid is an offer and the
Art. 1476
NATURE AND FORM OF THE CONTRACT
59
contract is perfected only by the fall of the hammer or in other
customary manner. It follows that the bidder may retract his bid and the
auctioneer may withdraw the goods from sale any time before the
hammer falls. However, if the sale has been announced to be without
reserve, the auctioneer cannot withdraw the goods from sale once a bid
has been made and the highest bidder has a right to enforce his bid. (see
2 Williston, op. cit., pp. 200-201, 204205.)
(3) Right of seller to bid in the auction. — The seller or his agent
may bid in an auction sale provided: (a) such right was reserved; (b)
notice was given that the sale is subject to a right to bid on behalf of the
seller; and (c) the right to bid by the seller is not prohibited by law or
by stipulation.19
(a)
Where no notice given of right to bid. — Where there
is no notice that the sale is subject to seller’s right to bid, it shall be
unlawful for the seller to bid either directly or indirectly or for the
auctioneer to employ or induce any person to bid on behalf of the
seller. (No. 4.) The purpose of the notice is to prevent puffing or
secret bidding by or on behalf of the seller by people who are not
themselves bound. The employment of a puffer or by bidder to
enhance or inflate the price of the goods sold is a fraud upon the
purchaser and a sufficient ground for relieving him from his bid and
avoiding the sale. (see Fisher vs. Hersey, 17 Hun. [N.Y.] 370.) This
is true although the employment of the puffer by the auctioneer was
without the owner’s knowledge, since the auctioneer is the owner’s
agent.
(b)
Where notice of right to bid given. — Though bidding
by the seller or his agent is fraudulent, a right to bid may be
expressly reserved by or on behalf of the seller. (No. 3.) It is,
therefore, the secrecy of puffing which renders it a fraud upon
bidding. (2 Williston, op. cit., p. 208.) Where there is notice of the
intention to bid by the seller, the bidding in such a case would not
operate as a fraud.
19
Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have
a better right if he should offer the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the only bidder.
Art. 2114. All bids at the public auction shall offer to pay the purchase price at once. If any
other bid is accepted, the pledgee is deemed to have received the purchase price, as far as the
pledgor or owner is concerned.
60
SALES
Arts. 1477-1478
(4) Contract not to bid. — A sale may be fraudulent not only
because of conduct of the seller, but because of conduct of the buyer. It
is not permissible for intending buyers at auction or other competitive
sales to make an agreement for a consideration that only one of them
shall bid, in order that the property may be knocked down at a low price.
The bargain is fraudulent as regards the seller though the agreement is
without consideration, if it is actually carried out, for the fraud against
the seller is the same as if there were considerations. (Ibid., pp. 209219.)
(5) Advertisements for bidders. — They are simply invitations to
make proposals, and the advertiser is not bound to accept the highest or
lowest bidder, unless the contrary appears. (Art. 1326.)
Right of owner to prescribe terms of
public auction.
The owner of property which is offered for sale, either at public or
private auction, has the right to prescribe the manner, conditions, and
terms of such sale. He may provide that all of the purchase price or any
portion thereof should be paid at the time of the sale, or that time will
be given for that payment, or that any or all bids may be rejected.
The conditions of a public sale announced by an auctioneer or by
the owner of the property at the time and place of the sale are binding
upon all bidders, whether they knew of such conditions or not.
(Leoquinco vs. Postal Savings Bank, 47 Phil. 772
[1925].)
ART. 1477. The ownership of the thing sold shall
be transferred to the vendee upon the actual or
constructive delivery thereof. (n)
ART. 1478. The parties may stipulate that
ownership in the thing shall not pass to the purchaser
until he has fully paid the price. (n)
Ownership of thing transferred by
delivery.
NATURE AND FORM OF THE CONTRACT
61
The delivery of the thing sold is essential in a contract of sale.
Without it, the purchaser may not enjoy the thing sold to him. It
Arts. 1477-1478
is only after the delivery of the thing sold that the purchaser acquires a
real right or ownership over it. (Arts. 1164, 1496-1497.)
In the absence of stipulation to the contrary, the ownership of the
thing sold passes on to the vendee upon delivery thereof. (see Froilan
vs. Pan Oriental Shipping Co., 12 SCRA 276 [1964]; Boy vs. Court of
Appeals, 427 SCRA 196 [2004].) This is true even if the purchase has
been made on credit. Payment of the purchase price is not essential to
the transfer of ownership, as long as the property sold has been
delivered. (Sampaguita Pictures, Inc. vs. Jalwindor Manufacturers, Inc.,
93 SCRA 420 [1979].) Non-payment only creates a right to demand
payment or to rescind the contract, or to criminal prosecution in the case
of bouncing checks. (EDCA Publishing and Distributing Corp. vs.
Santos, 184 SCRA 614 [1990].)
The delivery may be actual (Art. 1497.) or constructive. (Arts.
1498-1501.) The contract is consummated by the delivery of the thing
sold and of the purchase money.
In all forms of delivery, it is necessary that the act of delivery,
whether actual or constructive, should be coupled with the intention of
delivering the thing sold. The act without the intention is insufficient;
there is no tradition. (Union Motor Corporation vs. Court of Appeals,
151 SCAD 714, 361 SCRA 506 [2001].) It has been held that the
issuance of a sales invoice does not prove transfer of ownership of the
thing sold to the buyer, an invoice being nothing more than a detailed
statement of the nature, quantity, and cost of the thing sold, and
considered not a bill of sale. (Ibid., citing P.T. Cerna Corporation vs.
Court of Appeals, 221 SCRA 19 [1993]; Norkis Distributor’s, Inc. vs.
Court of Appeals, 93 SCRA 694 [1991].)
Exceptions to the rule.
(1) Contrary stipulation. — The ownership of things is transferred
by delivery, and not by mere payment. However, the parties may
stipulate that despite the delivery, the ownership of the thing shall
remain with the seller until the purchaser has fully paid the price. (see
Art. 1503.) In other words, non-payment of the price, after the thing has
62
SALES
been delivered, prevents the transfer of ownership only if such is the
stipulation of the parties. This stipulaArts. 1477-1478
tion is usually known as pactum reservati dominii or contractual
reservation of title, and is common in sales on the installment plan.
(Jovellanos vs. Court of Appeals, 210 SCRA 126 [1992].) A contract
which contains this kind of stipulation is considered a contract to sell.
The agreement may be implied. (Adelfa Properties, Inc. vs. Court of
Appeals, 58 SCAD 462, 240 SCRA 565 [1995].)
(a)
Where in a contract of sale the seller agreed that
theownership of the goods shall remain with the seller until the
purchase price shall have been fully paid, merely to secure the
performance by the buyer of his obligation, such stipulation cannot
make the seller liable in case of loss of the goods. (see Lawyers
Cooperative Publishing Co. vs. Tabora, 13 SCRA 762 [1965]; see
Art. 1503, par. 2.)
(b)
If there is doubt by the wording of the contract whether
the parties intended a suspensive condition (Art. 1478.) or a
suspensive period (Art. 1193, par. 1.) for the payment of the
stipulated price, the doubt shall be resolved in favor of the greatest
reciprocity of interests. (see Art. 1378.) There can be no question
that greater reciprocity will be obtained if the buyer’s obligation is
deemed to be actually existing, with only its maturity (due date)
postponed or deferred. Sale is essentially onerous. (Gaite vs.
Fonacier, 2 SCRA 830 [1961].)
(c)
A stipulation that ownership in the thing sold shall
notpass to the purchaser until after he has fully paid the price
thereof could only be binding upon the contracting parties, their
assigns, and heirs (see Art. 1311, par. 1.) but not upon third persons
without notice. Such a stipulation is only a kind of security for the
benefit of the vendor who has not been fully paid.
(2) Contract to sell. — In contracts to sell, where ownership is
retained by the seller and is not to pass until the full payment of the
price, such payment is a positive suspensive condition, the failure of
which is not a breach, casual or serious, but simply an event that
prevents the obligation of the vendor to convey title from acquiring
binding force. To say that there is only a casual breach is to proceed
NATURE AND FORM OF THE CONTRACT
63
from the assumption that the contract is one of absolute sale, where nonpayment is a resolutory condition, which is not the case. (Luzon
Brokerage Co., Inc. vs. Maritime Bldg., Co.
64
SALES
Art. 1479
Inc., 43 SCRA 93 [1972] and 86 SCRA 305 [1978]; Manuel vs.
Rodriguez, 109 Phil. 1 [1960]; Roque vs. Lapuz, 96 SCRA 741 [1980];
see Art. 1184.)
(3) Contract of insurance. — A perfected contract of sale even
without delivery vests in the vendee an equitable title, an existing
interest over the goods sufficient to be the subject of insurance. (see
Sec. 14[a], Insurance Code.) Thus, a perfected contract of sale between
the vendee-consignee and the shipper of goods operates to vest in the
former an equitable title even before delivery or before he performed
the conditions of the sale, the contract of shipment, whether under
F.O.B., or C.I.F., or C & F, being immaterial in the determination of
whether the vendee has an insurable interest or not in the goods.
(Filipino Merchants Insurance
Co., Inc. vs. Court of Appeals, 179 SCRA 638 [1989].)
ART. 1479. A promise to buy and sell a
determinate thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon
the promissor if the promise is supported by a
consideration distinct from the price. (1451a)
Kinds of promise treated in Article 1479.
The above article refers to three kinds of promises, namely:
(1) An accepted unilateral promise to sell in which the promisee
(acceptor) elects to buy;
(2) An accepted unilateral promise to buy in which the promisee
(acceptor) elects to sell; and
(3) A bilateral promise to buy and sell reciprocally accepted in
which either of the parties chooses to exact fulfillment. (see 10 Manresa
71.)
Effect of unaccepted unilateral promise.
A unilateral promise or offer to sell or to buy a thing which is not
accepted creates no juridical effect or legal bond. Such unaccepted
Art. 1479
NATURE AND FORM OF THE CONTRACT
65
imperfect promise or offer is called policitacion. A period may be given
to the offeree within which to accept the offer. (infra.)
EXAMPLE:
S offers or promises to sell to B his car at a stated price and B
just let the promise go by without accepting it. Neither S nor B is
bound by any contract. Obviously, this is not the one contemplated
in Article 1479.
Meaning of option.
An option is a privilege existing in one person for which he has paid
a consideration which gives him the right to buy/sell, for example,
certain merchandise or certain specified property, from/to another
person, if he chooses, at any time within the agreed period at a fixed
price, or under, or in compliance with certain terms and conditions.
Nature of option contract.
(1) An option is a contract. It is a preparatory contract, separate and
distinct from the main contract itself (subject matter of the option)
which the parties may enter into upon the consummation of the option.
(2) It gives the party granted the option the right to decide, whether
or not to enter into a principal contract, while it binds the party who has
given the option, not to enter into the principal contract with any other
person during the agreed time and within that period, to enter into such
contract with the one to whom the option was granted if the latter should
decide to use the option. 20 (see Carceller vs. Court of Appeals, 103
SCAD 258, 302 SCRA 718 [1999]; Litonjua vs. L & R Corporation,
328 SCRA 796 [2000].)
(3) An option must be supported by a consideration distinct from
the price. (Co. vs. Court of Appeals, 312 SCRA 528 [1999]; Laforteza
vs. Machuca, 127 SCAD 798, 333 SCRA 643 [2000]; Abalos vs.
Macatangay, Jr., 439 SCRA 649 [2004].) The promisee has the burden
of proving such consideration. (see Vasquez vs.
20 In a right of first refusal, while the object might be made determinate, the exercise of the
right would be dependent not only on the grantor’s eventual intention to enter into a binding
juridical relation with another but also on terms, including the price, that are yet to be firmed up.
(Vasquez vs. Ayala Corporaton, 443 SCRA 218 [2004].)
66
SALES
Art. 1479
Court of Appeals, 199 SCRA 102 [1991].)
(4) A consideration of an option contract is just as important as the
consideration for any other kind of contract. (see Enriquez de la Cavada
vs. Diaz, 37 Phil. 982 [1918].) An option without consideration is void;
the effect is the same as if there was no option.
Effect of accepted unilateral promise.
The second paragraph of Article 1479 refers to what is called as
“option” in the commercial world.
A unilateral promise to sell or to buy a determinate thing for a price
certain does not bind the promissor even if accepted and may be
withdrawn at any time. It is only if the promise is supported by a
consideration distinct and separate from the price that its acceptance
will give rise to a perfected contract.
The optionee (holder of the option), after accepting the option and
before he exercises it, has the right, but not the obligation, to buy or sell,
as the case may be. Once the option is exercised, i.e., offer is accepted
before a breach of the option, a bilateral promise to sell and to buy
ensues and both parties are then reciprocally bound to comply with their
respective undertakings. It would be a breach of the option for the
optioner-offeror to withdraw the offer during the agreed period. If in
fact, he withdraws the offer before its acceptance (exercise of the
option) by the optionee-offeree, the latter may not sue for specific
performance on the proposed contract since it has failed to reach its own
stage of perfection. The offeror, however, renders himself liable for
damages for breach of the option.21 (Asuncion vs. Court of Appeals, 56
SCAD 163, 238 SCRA 602 [1994].)
Consideration in an option contract may be anything of value,
unlike in sale where it must be the price certain in money or its
equivalent. Lacking any proof of such consideration, the option is
21
An option imposes no binding obligation on the optionee, aside from the consideration for
the offer. Until accepted, it is not, properly speaking, treated as a contract. (Tayag vs. Lacson, 426
SCRA 282 [2004]; Adelfa Properties, Inc. vs. Court of Appeals, 240 SCRA 565 [1995].) When
the consideration given, for what otherwise would have been an option, partakes the nature in
reality of a part payment of the purchase price (termed as earnest money [Art. 1482.] and
considered as an initial payment thereof), an actual contract of sale is deemed entered into and
enforceable as such. (Asuncion vs.
Court of Appeals, supra.)
Art. 1479
NATURE AND FORM OF THE CONTRACT
67
unenforceable. (San Miguel Properties Philippines, Inc. vs. Huang, 130
SCAD 713, 336 SCRA 737 [2000].) A contract of option to buy is
separate from the contract to sell, and both contracts need separate and
distinct considerations for validity. (Dijamco vs. Court of Appeals, 440
SCRA 190 [2004].)
EXAMPLE:
In the preceding example, even if B accepts the promise of S (this
is a case of an accepted unilateral promise to sell), S is not bound to
sell his car to B because there is no promise, in turn, on the part of B
to buy.
However, if the promise is covered by a consideration distinct
from the price of the car, as when B paid or promised to pay a sum of
money to S for giving him the right to buy the car if he chooses within
an agreed period at a fixed price, its acceptance produces consent or
meeting of the minds. A legally binding and independent contract of
option is deemed perfected.
ILLUSTRATIVE CASE:
Stipulation in mortgage deed gives mortgagees option to
purchase mortgaged property within a certain period at an agreed
price.
Facts: A provision in a mortgage deed states: “That it has
likewise been agreed that if the financial condition of the mortgagees
will permit, they may purchase said land absolutely on any date within
the two-year term of this mortgage at the agreed price of P3,900.” The
mortgagors contend that as such, they cannot be deprived of the right
to redeem the mortgaged property because such right is inherent in
and inseparable from this kind of contract.
Issue: Having reasonably advised the mortgagors that they had
decided to buy the land in question pursuant to the aforequoted
provision, are the mortgagees entitled to specific performance
consisting of the execution by the mortgagors of the corresponding
deed of sale?
Held: Yes. The added special provision renders the mortgagors’
right to redeem defeasible at the election of the mortgagees. There is
nothing illegal or immoral in this. It is simply an option to buy
sanctioned by Article 1479. In this case, the mortgagors’ promise to
sell is supported by the same consideration as that as the mortgage
itself, which is distinct from that which would support the sale, an
68
SALES
Art. 1479
additional amount having been agreed upon, to make up the entire
price of P3,900, should the option be exercised. The mortgagors’
promise was in the nature of a continuing offer, non-withdrawable
during a period of two years which, upon acceptance by the
mortgagees, gave rise to a perfected contract of purchase and sale.
(Soriano vs. Bautista, 6 SCRA 946 [1962]; see Direct Funders
Holdings Corp. vs. Laviña, 373 SCRA 645 [2002].)
Full payment of price not necessary for
exercise of option to buy.
The obligations under an option to buy are reciprocal obligations —
the performance of one obligation is conditioned upon the simultaneous
fulfillment of the other obligation. (Art. 1169.)
In an option to buy, the party who has an option may validly and
effectively exercise his right by merely notifying the owner of the
former’s decision to buy and expressing his readiness to pay the
stipulated price.
The notice need not be coupled with actual payment of the purchase
price so long as this is delivered to the owner of the property upon the
execution and delivery by him of the deed of sale. The payment of the
price is contingent upon the delivery of the deed of sale. Unless and
until the owner shall have done this, the buyer who has the option is not
and cannot be held in default in the discharge of his obligation to pay.
(Nietes vs. Court of Appeals, 46 SCRA 654 [1972].) Consequently,
since the obligation to pay is not yet due, consignation22 in court of the
purchase price is not required. (Heirs of Luis Bacus vs. Court of
Appeals, 341 SCRA 2295 [2003].)
An option to buy is not, of course, a contract of purchase and sale.
(Kilosbayan, Inc. vs. Morato, 63 SCAD 97, 246 SCRA 540 [1995].)
Article 1479 and Article 1324 compared.
Article 1324 of the Civil Code provides as follows:
22 Consignation is the act of depositing the thing or sum due with the proper court whenever
the creditor cannot accept or refuses to accept payment. It generally requires a prior tender of
payment. Where no debt is due and owing, consignation is not proper.
(see Arts. 1256, 1257, 1258; Legaspi vs. Court of Appeals, 142 SCRA 82 [1986].)
Art. 1479
NATURE AND FORM OF THE CONTRACT
69
“When the offerer has allowed the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance
by communicating such withdrawal, except when the option is
founded upon a consideration, as something paid or promised.”
Under the above-quoted article, the general rule regarding offer and
acceptance (see Art. 1319.) is that, when the offerer has allowed the
offeree a certain period within which to accept the offer, the offer may
be withdrawn as a matter of right at any time before acceptance. But if
the option is founded upon a separate consideration, the offerer cannot
withdraw his offer, even if the same has not yet been accepted, before
the expiration of the stipulated period. Regardless of whether it is
supported by a consideration or not, the offer, of course, cannot be
withdrawn after acceptance of the offer.
This general rule as embodied in Article 1324 was interpreted as
modified by the provision of Article 1479 which applies specifically to
a promise “to buy or to sell.” As already stated, this rule requires that
for a promise to sell to be valid, it must be supported by a consideration
distinct from the price. American authorities which hold that an offer,
once accepted, cannot be withdrawn, regardless of whether or not it is
supported by a consideration (62 Am. Jur. 528.), uphold the general rule
applicable to offer and acceptance as contained in our Civil Code. (Art.
1319; see Southern Sugar & Mollasses Co. vs. Atlantic Gulf & Pacific
Co., 97 Phil. 249 [1955]; Mendoza vs. Comple, 15 SCRA 162 [1965].)
In a later case (Sanchez vs. Rigos, 45 SCRA 368 [1972], infra.), the
Supreme Court abandoned the view adhered to in Southwestern Sugar
(supra.) which holds that an option to sell can still be withdrawn, even
if accepted, if the same is not supported by any consideration, and
reaffirmed the doctrine in Atkins, Kroll & Co., Inc. vs. Cua Hian Tek
(102 Phil. 948 [1958], infra.), holding that it could no longer be
withdrawn after acceptance. In other words, if acceptance is made
before withdrawal, it constitutes a binding contract of sale although the
option is given without consideration. Before acceptance, the offer may
be withdrawn as a matter of right.20 Be that as it may, the offerer cannot
revoke, before the period has expired, in an arbitrary or capricious
manner the offer without being liable for damages which the offeree
may suffer under Article 19 of the Civil Code.
ILLUSTRATIVE CASES:
70
SALES
Art. 1479
1. Promissor withdrew an option to sell, which is not supported
by any consideration, after its acceptance by promisee.
Facts: S and B executed an instrument, entitled “Option to
Purchase,” whereby S agreed, promised, and committed “x x x to sell”
to B for a certain sum a parcel of land within two (2) years with the
understanding that said option shall be deemed “terminated and
elapsed” if B shall fail to exercise the right to buy the property “within
the stipulated period.’’
Inasmuch as several tenders of payment made by B were rejected
by S, the former commenced an action for specific performance.
Issue: Can the promissor withdraw an option to sell, after
acceptance, if the option is not supported by any consideration?
20Article 1324 may be interpreted to refer to a bilateral promise (e.g., to buy and sell). Hence,
the offer (to sell or buy) may not be withdrawn after acceptance of the offer. The offer may be
withdrawn before acceptance since there is no meeting of minds yet, unless an option supported
by a consideration has been granted. A unilateral promise to sell or buy does not bind the offerer
even after acceptance except where the promise is supported by a consideration distinct from the
price.
In Rural Bank of Parañaque vs. Remolado (135 SCRA 409 [1985].), the commitment by a
bank to resell a property within a specified period, although accepted by the party in whose favor
it was made, was considered an option not supported by a consideration distinct from the price and,
therefore, not binding upon the promissor. Lacking such consideration, the option was held void
pursuant to Southwestern Sugar and Molasses Co. case.
To the same effect is the recent case of Natno vs. Intermediate Appellate Court. (179 SCRA
323 [1991].) Citing Rural Bank of Parañaque, Inc. case, the Supreme Court held that the promise
made by the President of a bank to allow the petitioners to buy (or to re-sell to them) the foreclosed
property (not redeemed since the offer took place after the expiration of the redemption period) at
any time they have money is not binding on the bank because it was a promise unsupported by a
consideration distinct from the repurchase price.
In Diamante vs. Court of Appeals (206 SCRA 52 [1992].), the Option to Repurchase executed
by the vendee after the sale in favor of the vendor was held merely a promise to sell governed by
Article 1479, sale in the absence of a separate consideration was not binding upon the promissor
(vendee) even if the promise was accepted.
Held: No. (1) Acceptance resulted in perfected contract of sale.
— “Since there may be no valid contract without cause or
consideration, the promissor (S) is not bound by his promise and may
accordingly withdraw it. Pending notice of its withdrawal, his
accepted promise partakes, however, of the nature of an offer to sell
which, if accepted, results in a perfected contract of sale. This view
has the advantage of avoiding a conflict between Article 1324 (on the
general principles on contracts) and Article 1479 (on sales) of the
Civil Code, in line with the cardinal rule of statutory construction that,
in construing different provisions of one and the same law or code,
Art. 1479
NATURE AND FORM OF THE CONTRACT
71
such interpretation should be favored as will reconcile or harmonize
said provisions and avoid a conflict between the same.’’
(2) Exceptions not favored. — “Moreover, the decision in the
Southwestern case (supra.), in effect, considers Article 1479 as an
exception to Article 1324, and exceptions are not favored unless the
intention to the contrary is clear, and it is not so insofar as said two (2)
articles are concerned. What is more, the reference, in both the second
paragraph of Article 1479 and Article 1324, to an option or promise
supported by or founded upon a consideration, strongly suggests that
the two (2) provisions intended to enforce or implement the same
principle.
The doctrine laid down in the Atkins case (supra.) is reaffirmed,
and, insofar as inconsistent therewith, the view adhered to in
Southwestern case should be deemed abandoned or modified. 23
(Sanchez vs. Rigos, supra.)
————
————
————
2. The Deed of Option which was in the same document does not
provide for the period within which the parties may demand the
performance of their respective undertakings.
Facts: R, owner of a 600-meter lot, sold a portion of 300 square
meters of the lot to spouses V, for P21,000.00 or P70.00 per square
meter. Subsequently, R, with the consent of her husband, executed a
Deed of Option in favor of V in which the remaining 300 square
meters portion of the property would be sold to V under the conditions
stated therein. The Court of Appeals ruled that the Deed of Option was
void for lack of consideration.
23
In the case of Cronico vs. J.M. Tuazon & Co., Inc. (78 SCRA 331 [1977].), the Supreme
Court said: “In order that a unilateral promise may be binding upon a promissor, Article 1479 . . .
requires the concurrence of the condition that the promise be supported by a consideration distinct
from the price.” To the same effect is Montilla vs. Court of Appeals (161 SCRA 167 [1988].) and
Salame vs. Court of Appeals, 57 SCAD 631, 239 SCRA 356 (1994).
In an earlier case, the Supreme Court, in rejecting the holding of the Court of Appeals, “that
Isabel Ariolas’ promise (to sell) does not bind Rowena Teodoro (petitioner) because it is not
supported by a consideration distinct from the price pursuant to Article 1479, held: “That
consideration is expressed in Exhibit ‘A’ under which the petitioners shouldered all rental expenses
payable by Ariola for her occupation of the property (leased and subsequently sold to her by the
former owner). This should be distinguished from a sublease arrangement in which the sublessee’s
responsibility as and for rents due the lessor is subsidiary. But here, the petitioners bound
themselves primarily to answer for the rents. That is enough consideration to support Ariola’s
promise.” (Teodoro vs. Court of Appeals, 155 SCRA 547 [1987].)
72
SALES
Art. 1479
Issue: The pivotal issue to be resolved is the validity of the Deed
of Option whereby the private respondents (R and her husband)
agreed to sell their lot to petitioners (spouses V) “whenever the need
of such sale arises” on the part of either parties.
Held: (1) Option supported by a consideration. — “As expressed
in Gonzales vs. Trinidad (67 Phil. 682 [1939].), consideration is ‘the
why of the contract, the essential reason which moves the contracting
parties to enter into the contract’. The cause or the impelling reason
on the part of private respondent in executing the deed of option as
appearing in the deed itself is the petitioners’ having agreed to buy the
300 square meters of private respondents’ land at P70.00 per square
meter portion ‘which was greatly higher than the actual reasonable
prevailing price’. This cause or consideration is clear from the deed
which stated: ‘That the only reason why the spouses-vendees Julio
Villamor and Marina V. Villamor agreed to buy the said one-half
portion at the above-stated price of about P70.00 per square meter, is
because I, and my husband Roberto Reyes, have agreed to sell and
convey to them the remaining one-half portion still owned by me x x
x.’
The respondent appellate court failed to give due consideration to
petitioners’ evidence which shows that in 1969 the Villamor spouses
bought an adjacent lot from the brother of Macaria Labing-isa for only
P18.00 per square meter which the private respondents did not rebut.
Thus, expressed in terms of money, the consideration for the deed of
option is the difference between the purchase price of the 300-square
meter portion of the lot in 1971 (P70.00 per sq.m.) and the prevailing
reasonable price of the same lot in 1971. Whatever it is (P25.00 or
P18.00), though not specifically stated in the deed of option, was
ascertainable. Petitioners’ allegedly paying P52.00 per square meter
for the option may, as opined by the appellate court, be improbable
but improbabilities do not invalidate a contract freely entered into by
the parties.”
(2)
Private respondents as well were granted an option to
sell. — “The ‘deed of option’ entered into by the parties in this case
had unique features. Ordinarily, an optional contract is a privilege
existing in one person, for which he had paid a consideration and
which gives him the right to buy, for example, certain merchandise or
certain specified property, from another person, if he chooses, at any
time within the agreed period at a fixed price. (Enriquez de la Cavada
vs. Diaz, 37 Phil. 982 [1918].) If we look closely at the ‘deed of
option’ signed by the parties, we will notice that the first part covered
Art. 1479
NATURE AND FORM OF THE CONTRACT
the statement on the sale of the 300-square-meter portion of the lot to
Spouses Villamor at the price of P70.00 per square meter ‘which was
higher than the actual reasonable prevailing value of the lands in that
place at that time (of sale).’
The second part stated that the only reason why the Villamor
spouses agreed to buy the said lot at a much higher price is because
the vendor (Reyeses) also agreed to sell to the Villamors the other
half-portion of 300 square meters of the land. Had the deed stopped
there, there would be no dispute that the deed is really an ordinary
deed of option granting the Villamors the other half-portion of 300
square meters of the lot in consideration of their having agreed to buy
the other half of the land for a much higher price. But, the ‘deed of
option’ went on and stated that the sale arises, either on our (Reyeses)
part or on the part of the Spouses Julio Villamor and Marina V.
Villamor. It appears that while the option to buy was granted to the
Villamors, the Reyeses were likewise granted an option to sell. In
other words, it was not only the Villamors who were granted an option
to buy for which they paid a consideration. The Reyeses as well were
granted an option to sell should the need for such sale on their part
arises.”
(3)
Offer to sell had been accepted. — “In the instant case,
the option offered by private respondents had been accepted by the
petitioner, the promisee, in the same document. The acceptance of an
order to sell for a price certain created a bilateral contract to sell and
buy and upon acceptance, the offeree ipso facto assumes obligations
of a vendee. (see Atkins, Kroll & Co. vs. Cua Hian Tek, 102 Phil. 948
[1958].) Deman dability may be exercised at any time after the
execution of the deed. In Sanchez vs. Rigos (45 SCRA 368 [1972].),
We held: ‘In other words, since there may be no valid contract without
a cause of consideration, the promissor is not bound by this promise
and may accordingly withdraw it. Pending notice of its withdrawal,
his accepted promise partakes, however, of the nature of an offer to
sell which, if accepted, results in a perfected contract of sale.”
(4)
Acceptance created a perfected contract of sale. — A
contract of sale is, under Article 1475 of the Civil Code, perfected at
the moment there is a meeting of minds upon the thing which is the
object of the contract and upon the price. From that moment, the
parties may reciprocally demand performance, subject to the
provisions of the law governing the form of contracts. Since there was,
between the parties, a meeting of minds upon the object and the price,
there was already a perfected contract of sale. What was, however, left
73
74
SALES
Art. 1479
to be done was for either party to demand from the other their
respective undertakings under the contract. It may be demanded at any
time either by the private respondents, who may compel the
petitioners to pay for the property or the petitioners, who may compel
the private respondents to deliver the property.”
(5)
Action to enforce contract had prescribed. —
“However, the Deed of Option did not provide for the period within
which the parties may demand the performance of their respective
undertakings in the instrument. The parties could not have
contemplated that the delivery of the property and the payment thereof
could be made indefinitely and render uncertain the status of the land.
The failure of either parties to demand performance of the obligation
of the other for an unreasonable length of time renders the contract
ineffective.
Under Article 1144(1) of the Civil Code, actions upon a written
contract must be brought within ten (10) years. The Deed of Option
was executed on November 11, 1971. The acceptance, as already
mentioned, was also accepted in the same instrument. The complaint
in this case was filed by the petitioners on July 13, 1987, seventeen
(17) years from the time of the execution of the contract. Hence, the
right of action had prescribed.’’ (Villamor vs. Court of Appeals, 202
SCRA 607 [1991].)
———— ———— ————
3. The contract of lease gives the lessee 30-day exclusive option
to purchase the leased premises
Facts: A contract of lease in paragraph 8 provides: “x x x that if
the lessor [R] should desire to sell the leased premises, the LESSEE
[E] shall be given 30 days exclusive option to the same. In the event,
however, that the leased premises is sold to someone other than the
LESSEE, the LESSOR is bound and obligated, as it hereby binds and
obligates itself, to stipulate in the Deed of Sale thereof that the
purchaser shall recognize this lease and be bound by all the terms and
conditions thereof.’’
The lessor later sold his property including the leased premises
located thereon to petitioner (P).
Rereading the law on the matter of sales and option contracts,
respondent Court of Appeals differentiated between Article 1324 and
Article 1479 of the Civil Code, analyzed their application to the facts
of this case, and concluded that since paragraph 8 of the two lease
contracts does not state a fixed price for the purchase of the leased
Art. 1479
NATURE AND FORM OF THE CONTRACT
premises, which is an essential element for a contract of sale to be
perfected, what paragraph 8 is, must be a right of first refusal and not
an option contract. Besides the ruling that paragraph 8 vests in E the
right of first refusal as to which the requirement of distinct
consideration indispensable in an option contract has no application,
respondent appellate court also addressed the claim of R that assuming
arguendo that the option is valid and effective, it is impossible of
performance because it covered only the leased premises and not the
entire property of R whose offer to sell pertained to the entire property
in question.
Issue: Does the contractual stipulation provide for an option
clause or an option contract?
Held: (1) Contractual stipulation is an option clause. — “We
agree with the respondent Court of Appeals that the aforecited
contractual stipulation provides for a right of first refusal in favor of
Mayfair [E]. It is not an option clause or an option contract. It is a
contract of a right of first refusal.
As early as 1916, in the case of Beaumont vs. Prieto (41 Phil.
670.), unequivocal was our characterization of an option contract as
one necessarily involving the choice granted to another for a distinct
and separate consideration as to whether or not to purchase a
determinate thing at a predetermined fixed price. x x x
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.
Notably, in one case we held that the lessee loses his right to buy
the leased property for a named price per square meter upon failure to
make the purchase within the time specified (Tuazon, Jr. vs. De Asis,
107 Phil. 131 [1960].); in one other case we freed the landowner from
her promise to sell her land if the prospective buyer could raise
P4,500.00 in three weeks because such option was not supported by a
distinct consideration (Mendoza vs. Comple, 15 SCRA 162 [1965].);
in the same vein in yet one other case, we also invalidated an
instrument entitled, “Option to Purchase’’ a parcel of land for the sum
of P1,510.00 because of lack of consideration (Sanchez vs. Rigor, 45
SCRA 368 [1972].); and as an exception to the doctrine enumerated
in the two preceding cases, in another case, we ruled that the option to
buy the leased premises for P12,000.00 as stipulated in the lease
contract, is not without consideration for in reciprocal contracts, like
lease, the obligation or promise of each party is the consideration for
75
76
SALES
Art. 1479
that of the other. (Vda. de Quirino vs. Palanca, 29 SCRA 1 [1969].) In
all these cases, the selling price of the object thereof is always
predetermined and specified in the option clause in the contract or in
the separate deed of option. x x x.
In the light of the foregoing disquisition and in view of the
wording of the questioned provision in the instant case, we so hold
that no option to purchase in contemplation of the second paragraph
of Article 1479 of the Civil Code, has been granted to E under the
lease contract.
Respondent Court of Appeals correctly ruled that the said
paragraph 8 grants the right of first refusal to E and is not an option
contract. It also correctly reasoned that as such, the requirement of a
separate consideration for the option has no applicability in the instant
case.’’
(2)
Right of first refusal is an integral part of the contract
of lease. — “An option is a contract granting a privilege to buy or sell
within an agreed time and at a determined price. It is a separate and
distinct contract from that which the parties may enter into upon the
consummation of the option. It must be supported by consideration.
In the instant case, the right of first refusal is an integral part of the
contract of lease. The consideration is built into the reciprocal
obligations of the parties.
To rule that a contractual stipulation such as that found in
paragraph 8 of the contract is governed by Article 1324 on withdrawal
of the offer or Article 1479 on promise to buy and sell would render
ineffectual or “inutile’’ the provisions on right of first refusal so
commonly inserted in leases of real estate nowadays. The Court of
Appeals is correct in stating that paragraph 8 was incorporated into
the contract of lease for the benefit of E which wanted to be assured
that it shall be given the first crack or the first option to buy the
property at the price which R is willing to accept. It is not also correct
to say that there is no consideration in an agreement of right of first
refusal. The stipulation is part and parcel of the entire contract of lease.
The consideration for the lease includes the consideration for the right
of first refusal. Thus, E is in effect stating that it consents to lease the
premises and to pay the price agreed upon provided the lessor also
consents that, should it sell the leased property, then, E shall be given
the right to match the offered purchase price and to buy the property
at that price.’’
(3)
Consequential rights, obligations and liabilities of R, E,
and P. — “It is undisputed that R did recognize this right of E, for it
Art. 1479
NATURE AND FORM OF THE CONTRACT
informed the latter of its intention to sell the said property in 1974.
There was an exchange of letters evidencing the offer and counteroffers made by both parties. R, however, did not pursue the exercise
to its logical end. While it initially recognized E’s right of first refusal,
R violated such right when without affording its negotiation with E
the full process to ripen to at least an interface of a definite offer and
a possible corresponding acceptance within the “30-day exclusive
option’’ time granted E, R abandoned negotiations, kept a low profile
for some time, and then sold, without prior notice to E, the entire Claro
M. Recto property to Equatorial (P).
Since P is a buyer in bad faith, this finding renders the sale to it
of the property in question rescissible. We agree with respondent
Appellate Court that the records bear out the fact that P was aware of
the lease contract because its lawyers had, prior to the sale, studied the
said contract. As such, P cannot tenably claim to be a purchaser in
good faith, and, therefore, rescission lies.
xxx
xxx
Since E has a right of first refusal, it can execise the right only if
the fraudulent sale is first set aside or rescinded. All of these matters
are now before us and so there should be no piecemeal determination
of this case and leave festering sores to deteriorate into endless
litigation. The facts of the case and considerations of justice and
equity require that we order rescission here and now.
xxx
xxx
This Court has always been against multiplicity of suits where all
remedies according to the facts and the law can be included. Since R
sold the property for P11,300,000.00 to P, the price at which E could
have purchased the property is, therefore, fixed. It can neither be more
nor less. There is no dispute over it. The damages which E suffered
are in terms of actual injury and lost opportunities. The fairest solution
would be to allow E to exercise its right of first refusal at the price
which it was entitled to accept or reject which is P11,300,000.00.
xxx
xxx
Under the Ang Yu Asuncion vs. Court of Appeals (57 SCAD 163,
238 SCRA 602 [1994].) decision, the Court stated that there was
nothing to execute because a contract over the right of first refusal
belongs to a class of preparatory juridical relations governed not by
the law on contracts but by the codal provisions on human relations.
This may apply here if the contract is limited to the buying and selling
of the real property. However, the obligation of R to first offer the
77
78
SALES
Art. 1479
property to E is embodied in a contract. It is Paragraph 8 on the right
of first refusal which created the obligation. It should be enforced
according to the law on contracts instead of the panoramic and
indefinite rule on human relations. The latter remedy encourages
multiplicity of suits. There is something to execute and that is for R to
comply with its obligation to the property under the right of the first
refusal according to the terms at which they should have been offered
then to E, at the price when that offer should have been made. Also, E
has to accept the offer. This juridical relation is not amorphous nor it
is merely preparatory.
On the question of interest payments on the principal amount of
P11,300,000.00, it must be borne in mind that both R and P acted in
bad faith. R knowingly and deliberately broke a contract entered into
with E. x x x On the part of P, it cannot be a buyer in good faith
because it bought the property with notice and full knowledge that E
had a right to or interest in the property superior to its own. R and P
took unconscientious advantage of E.
Neither may R and P avail of considerations based on equity
which might warrant the grant of interests. The vendor received as
payment from the vendee what, at the time, was a full and fair price
for the property. It has used the P11,300,000.00 all these years earning
income or interest from the amount. P, on the other hand, has received
rents and otherwise profited from the use of the property turned over
to it by R. In fact, during all the years that this controversy was being
litigated, E paid rentals regularly to the buyer who had an inferior right
to purchase the property. E is under no obligation to pay any interest
arising from the judgment to either R and P.’’ (Equatorial Realty
Development, Inc. vs. Mayfair Theater, Inc., 76 SCAD 407,
264 SCRA 483 [1996].)
———— ———— ————
4.
Lessee with right of first refusal, offered to buy leased
property at P5.000 per square meter, which property was sold by the
lessor-owner to another for P5,300 per sq. meter.
Facts: Under the contract of lease executed by defendant Reyes
(lessor) with plaintiff Riviera (lessee), the “Lessee shall have the right
of first refusal should the lessor decide to sell the property during the
term of the lease.’’
Since the beginning of the negotiation between the plaintiff and
defendant Reyes for the purchase of the property, in question, the
plaintiff was firm and steadfast in its position, expressed in writing by
Art. 1479
NATURE AND FORM OF THE CONTRACT
its President Vicente Angeles, that it was not willing to buy the said
property higher than P5,000.00, per square meter, which was far lower
than the asking price of defendant Reyes for P6,000.00, per square
meter, undoubtedly, because, in its perception, it would be difficult
for other parties to buy the property, at a higher price than what it was
offering, since it is in occupation of the property, as lessee, the term
of which was to expire after about four (4) years more.
In the petition at bar, Riviera posits the view that its right of first
refusal was totally disregarded or violated by Reyes by the latter’s sale
of the subject property to Cypress and Cornhill at P5,300 per square
meter. It contends that the right of first refusal principally amounts to
a right to match in the sense that it needs another offer for the right to
be exercised.
Issue: Has Riviera lost its right of first refusal?
Held: Yes. (1) Concept and interpretation of the right of first
refusal. — “The concept and interpretation of the right of first refusal
and the consequences of a breach thereof evolved in Philippine juristic
sphere only within the last decade. It all started in 1992 with Guzman,
Bocaling & Co. vs. Bonnevie (206 SCRA 668 [1992].), where the
Court held that a lease with a proviso granting the lessee the right of
first priority ‘all things and conditions being equal’ meant that there
should be identity of the terms and conditions to be offered to the
lessee and all other prospective buyers, with the lessee to enjoy the
right of first priority. A deed of sale executed in favor of a third party
who cannot be deemed a purchaser in good faith, and which is in
violation of a right of first refusal granted to the lessee is not voidable
under the Statute of Frauds but rescissible under Articles 1380 to
1381(3) of the New Civil Code.
Subsequently in 1994, in the case of Ang Yu Asuncion vs. Court
of Appeals (238 SCRA 602 [1994].), the Court en banc departed from
the doctrine laid down in Guzman, Bocaling & Co. vs. Bonnevie and
refused to rescind a contract of sale which violated the right of first
refusal. The Court held that the so-called “right of first refusal” cannot
be deemed a perfected contract of sale under Article 1458 of the new
Civil Code and, as such, a breach thereof decreed under a final
judgment does not entitle the aggrieved party to a writ of execution of
the judgment but to an action for damages in a proper forum for the
purpose.
In the 1996 case of Equatorial Realty Development, Inc. vs.
Mayfair Theater, Inc. (264 SCRA 483 [1996].), the Court en banc
reverted back to the doctrine in Guzman Bocaling & Co. vs. Bonnevie
79
80
SALES
Art. 1479
stating that rescission is a relief allowed for the protection of one of
the contracting parties and even third persons from all injury and
damage the contract may cause or to protect some incompatible and
preferred right by the contract.
Thereafter in 1997, in Parañaque Kings Enterprises, Inc. vs.
Court of Appeals (268 SCRA 727 [1997].), the Court affirmed the
nature of and the concomitant rights and obligations of parties under
a right of first refusal. The Court, summarizing the rulings in Guzman,
Bocaling & Co. vs. Bonnevie and Equatorial Realty Development, Inc.
vs. Mayfair Theater, Inc., held that in order to have full compliance
with the contractual right granting petitioner the first option to
purchase, the sale of the properties for the price for which they were
finally sold to a third person should have likewise been first offered to
the former. Further, there should be identity of terms and conditions
to be offered to the buyer holding a right of first refusal if such right
is not to be rendered illusory. Lastly, the basis of the right of first
refusal must be the current offer to sell of the seller or offer to purchase
of any prospective buyer.’’
(2)
Prevailing doctrine. — “Thus, the prevailing doctrine is
that a right of first refusal means identity of terms and conditions to
be offered to the lessee and all other prospective buyers and a contract
of sale entered into in violation of a right of first refusal of another
person, while valid, is rescissible. However, we must remember that
general propositions do not decide specific cases. Rather, laws are
interpreted in the context of the peculiar factual situation of each
proceeding. Each case has its own flesh and blood and cannot be ruled
upon on the basis of isolated clinical classroom principles. Analysis
and construction should not be limited to the words used in the
contract, as they may not accurately reflect the parties’ true intent. The
court must read a contract as the average person would read it and
should not give it a strained or forced construction.’’
(3)
Riviera intractable in its position. — “As clearly shown
by the records and transcripts of the case, the actions of the parties to
the contract of lease, Reyes and Riviera, shaped their understanding
and interpretation of the lease provision ‘right of first refusal’ to mean
simply that should the lessor Reyes decide to sell the leased property
during the term of the lease, such sale should first be offered to the
lessee Riviera. And that is what exactly ensued between Reyes and
Riviera, a series of negotiations on the price per square meter of the
subject property with neither party, especially Riviera, unwilling to
Art. 1479
NATURE AND FORM OF THE CONTRACT
budge from his offer, as evidenced by the exchange of letters between
the two contenders.
It can clearly be discerned from Riviera’s letters dated December
2, 1988 and February 4, 1989 that Riviera was so intractable in its
position and took obvious advantage of the knowledge of the time
element in its negotiations with Reyes as the redemption period of the
subject foreclosed property drew near. Riviera strongly exhibited a
‘take-it or leave-it’ attitude in its negotiations with Reyes. It quoted its
‘fixed and final’ price as Five Thousand Pesos (P5,000.00) and not
any peso more. It voiced out that it had other properties to consider so
Reyes should decide and make known its decision ‘within fifteen
days.’ x x x.”
(4)
Reyes under no obligation to Riviera to disclose his offer
to another. — “Nary a howl of protest or shout of defiance spewed
forth from Riviera’s lips, as it were, but a seemingly whimper of
acceptance when the counsel of Reyes strongly expressed in a letter
dated December 5, 1989 that Riviera had lost its right of first refusal.
Riviera cannot now be heard that had it been informed of the offer of
Five Thousand Three Hundred Pesos (P5,300.00) of Cypress and
Cornhill it would have matched said price. Its stubborn approach in its
negotiations with Reyes showed crystal-clear that there was never any
need to disclose such information and doing so would be just a futile
effort on the part of Reyes. Reyes was under no obligation to disclose
the same. Pursuant to Article 1339 of the New Civil Code, silence or
concealment, by itself, does not constitute fraud, unless there is a
special duty to disclose certain facts, or unless according to good faith
and the usages of commerce the communication should be made. We
apply the general rule in the case at bar since Riviera failed to
convincingly show that either of the exceptions are (sic) relevant to
the case at bar.’’ (Riviera Filipina, Inc. vs. Court of Appeals, 380
SCRA 245 [2002].)
———— ———— ————
5. Petitioner claims that there was a perfected contract to sell
while respondents argue that what was perfected between them was a
mere option.
Facts: The Receipt that contains the contract between petitioner
L and respondent spouses H and W, provides substantially as follows:
“Received from L the sum of P20,000 as earnest money with
option to purchase a parcel of land owned by H located at x x x with
an area of x x x. Should the transaction not materialize without the
81
82
SALES
Art. 1479
fault of the buyer [L], I [H] obligate myself to return the P20,000; if
through the fault of the buyer the said amount shall be forfeited. I
guarantee to notify L or her representative and get her conformity
should I sell or encumber the property to a third person. The option to
buy is good within 10 days x x x.
Issue: Is the agreement between the parties a contract of option or
a contract to sell?
Held: (1) Contract of option. — “The above Receipt really shows
that respondent spouses and petitioner only entered into a contract of
option; a contract by which respondent spouses agreed with petitioner
that the latter shall have the right to buy the former’s property at a
fixed price of P34.00 per square meter within ten (10) days from 31
July 1978. Respondent spouses did not sell their property; they did not
also agree to sell it; but they sold something, i.e., the privilege to buy
at the election or option of petitioner. The agreement imposed no
binding obligation on petitioner, aside from the consideration for the
offer.’’
(2)
Option money. — “The consideration of P20,000.00
paid by petitioner to respondent spouses was referred to as ‘earnest
money.’ However, a careful examination of the words used indicates
that the money is not earnest money but option money. ‘Earnest
money’ and ‘option money’ are not the same but distinguished thus:
(a) earnest money is part of the purchase price, while option money is
the money given as a distinct consideration for an option contract; (b)
earnest money is given only where there is already a sale, while option
money applies to a sale not yet perfected; and (c) when earnest money
is given, the buyer is bound to pay the balance, while when the
wouldbe buyer gives option money, he is not required to buy (De
Leon, Comments and Cases on Sales, 1986 Rev. Ed., p. 67.), but may
even forfeit it depending on the terms of the option.
(3)
Contents of Receipt. — “There is nothing in the Receipt
which indicates that the P20,000.00 was part of the purchase price.
Moreover, it was not shown that there was a perfected sale between
the parties where earnest money was given. Finally, when petitioner
gave the ‘earnest money,’ the Receipt did not reveal that she was
bound to pay the balance of the purchase price. In fact, she could even
forfeit the money given if the terms of the option were not met. Thus,
the P20,000.00 could only be money given as consideration for the
option contract. That the contract between the parties is one of option
is buttressed by the provision therein that should the transaction of the
property not materialize without fault of petitioner as buyer,
Art. 1479
NATURE AND FORM OF THE CONTRACT
respondent Lorenzo de Vera obligates himself to return the full
amount of P20,000.00 “earnest money” with option to buy or forfeit
the same on the fault of petitioner. It is further bolstered by the
provision therein that guarantees petitioner that she or her
representative would be notified in case the subject property was sold
or encumbered to a third person. Finally, the Receipt provided for a
period within which the option to buy was to be exercised, i.e., ‘within
ten (10) days’ from 31 July 1978.
(4)
Absence of acceptance by L. — “Doubtless, the
agreement between respondent spouses and petitioner was an ‘option
contract’ or what is sometimes called an ‘unaccepted offer.’ During
the option period the agreement was not converted into a bilateral
promise to sell and to buy where both respondent spouses and
petitioner were then reciprocally bound to comply with their
respective undertakings as petitioner did not timely, affirmatively and
clearly accept the offer of respondent spouses. x x x But there is
nothing in the acts, conduct or words of petitioner that clearly manifest
a present intention or determination to accept the offer to buy the
property of respondent spouses within the 10-day option period. The
only occasion within the option period when petitioner could have
demonstrated her acceptance was on 5 August 1978 when, according
to her, she agreed to meet respondent spouses and the Ramoses at the
Office of the Register of Deeds of Makati. Petitioner’s agreement to
meet with respondent spouses presupposes an invitation from the
latter, which only emphasizes their persistence in offering the property
to the former. But whether that showed acceptance by petitioner of the
offer is hazy and dubious. On or before 10 August 1978, the last day
of the option period, no affirmative or clear manifestation was made
by petitioner to accept the offer. Certainly, there was no concurrence
of private respondent spouses’ offer and petitioner’s acceptance
thereof within the option period. Consequently, there was no perfected
contract to sell between the parties.
xxx
xxx
The option period having expired and acceptance was not
effectively made by petitioner, the purchase of subject property by
respondent SUNVAR was perfectly valid and entered into in good
faith.” (Limson vs. Court of Appeals, 147 SCAD 887, 357 SCRA 209
[2001].)
———— ———— ————
83
84
SALES
Art. 1479
6. Under a contract to sell a parcel of land, full payment was not
made by the vendee because of the non-fulfillment of a suspensive
condition, which property was later sold absolutely by the vendor to
another.
Facts: S and B entered into a contract to sell a parcel of land
evidenced by a memorandum of agreement which stipules, inter alia,
that S, vendor, reserves to herself ownership and possession of the
property until full payment of the purchase price by B and that the
balance thereof was payable within six (6) months from the date S
would notify B that the certificate of title of the property could be
transferred to B. Subsequently, S executed a deed of absolute sale of
the property in favor of T.
It appeared that S exerted efforts to register the property and B
had no intention to buy the property and was only interested in dealing
with other buyers to make a profit. S even pleaded with him several
times to purchase the property, less the expenses of registration, as
there were other interested buyers.
Issue: Is the memorandum of agreement contract of sale, an
option to purchase, or a contract to sell?
Held: (1) Contract to Sell. — “An examination of said
Memorandum of Agreement shows that it is neither a contract of sale
nor an option to purchase, but it is a contract to sell. An option is a
contract granting a privilege to buy or sell at a determined price within
an agreed time, the specific length or duration of which is not present
in the Memorandum of Agreement. In a contract to sell, the title over
the subject property is transferred to the vendee only upon the full
payment of the stipulated consideration. Unlike in a contract of sale,
the title in a contract to sell does not pass to the vendee upon the
execution of the agreement or the Delivery of the thing sold. x x x
The agreement was in the nature of a contract to sell as the vendor,
Encarnacion Diaz Vda. de Reston, clearly reserved to herself
ownership and possession of the property until full payment of the
purchase price by the vendees, such payment being a positive
suspensive condition, the failure of which is not considered a breach,
casual or serious, but simply an event which prevented the obligation
from acquiring obligatory force.’’
(2) No perfected sale. — “Petitioners, however, argue that their
obligation to pay the balance of the purchase price had not arisen as
the Memorandum of Agreement stipulated that the balance of
P18,042.00 was payable within six (6) months from the date the
Art. 1479
NATURE AND FORM OF THE CONTRACT
vendor would notify them that the certificate of title of the property
could already be transferred in their names. Said argument, however,
does not change the nature of the contract they entered into, being a
contract to sell, so that there was no actual sale until full payment was
made by the vendees, and that on the part of the vendees, no full
payment would be made until a certificate of title was ready for
transfer in their names.’’ (Buot vs. Court of Appeals, 148 SCAD 615,
357 SCRA 846 [2001].)
85
86
SALES
Art. 1480
Effect of bilateral promise to buy and
sell.
When the promise is bilateral, that is, one party accepts the other’s
promise to buy and the latter, the former’s promise to sell a determinate
thing for a price certain, it has practically the same effect as a perfected
contract of sale since it is reciprocally demandable.
EXAMPLE:
S promised to sell his car to B and B promised to buy the said car
for P100,000.00. The parties are bound by their contract so that in case
one of them should not comply with what is incumbent upon him, the
other has the right to choose between the fulfillment and the recission
of the obligation, with the payment of damages in either case. (Art.
1191, par. 2.)
ILLUSTRATIVE CASE:
Promissor withdrew an option to sell which is not supported by
any consideration, after its acceptance by promisee.
Facts: S wrote B making a “firm offer for the sale” at a definite
price of a determinate quantity of sardines. B accepted the offer
unconditionally.
Issue: Is there a perfected contract of sale?
Held: Yes, as the promise is bilateral, i.e., a promise to buy and
sell. Before accepting the promise of S and before exercising his
option, B is not bound to buy. Upon accepting S’s offer, a bilateral
promise to sell and to buy ensues; B assumes ipso facto the obligations
of a purchaser, and not merely the right subsequently to buy or not to
buy. The concurrence of both acts — the offer and the acceptance —
generates a binding contract of sale. (see Atkins, Kroll & Co., Inc. vs.
Cua Hian Tek, 102 Phil. 948 [1958].)
ART. 1480. Any injury to or benefit from the thing
sold, after the contract has been perfected, from the
moment of the perfection of the contract to the time
of delivery, shall be governed by articles 1163 to 1165,
and 1262.
Art. 1480
NATURE AND FORM OF THE CONTRACT
87
This rule shall apply to the sale of fungible things,
made independently and for a single price, or without
consideration of their weight, number, or measure.
Should fungible things be sold for a price fixed
according to weight, number, or measure, the risk
shall not be imputed to the vendee until they have
been weighed, counted, or measured, and delivered,
unless the latter has incurred in delay. (1452a)
Risk of loss or deterioration.
Four rules may be given regarding risk of loss:
(1) If the thing is lost before perfection, the seller and not the one
who intends to purchase it bears the loss (see Roman vs. Grimalt, 6 Phil.
96 [1906].) in accordance with the principle that the thing perishes with
the owner (res perit domino);
(2) If the thing is lost at the time of perfection, the contract is void
or inexistent. (Art. 1409[3].) The legal effect is the same as when the
object is lost before the perfection of the contract of sale (see Art.
1493.);
(3) If the thing is lost after perfection but before its delivery, that
is, even before the ownership is transferred to the buyer, the risk of loss
is shifted to the buyer as an exception to the rule of res perit domino
(Arts. 1480, pars. 1 and 2, 1538, 1189, and 1269.); and
(4) If the thing is lost after delivery, the buyer bears the risk of loss
following the general rule of res perit domino.
Scope of Article 1480.
Article 1480 contemplates two rules:
(1) The first rule — where the thing is lost after perfection but
before its delivery (see Rule No. 3, supra.) — applies to non-fungible
things (par. 1.) and fungible things sold independently and for a single
price or for a price fixed without consideration of their weight, number,
or measure. (par. 2.)
Under this rule, which follows the Roman Rule, the risk of the thing
sold passes to the buyer, even though the thing has not yet been
88
SALES
Art. 1480
delivered to him. Therefore, if a house (sold) be destroyed wholly or
partly by fire the loss falls upon the buyer who must pay the price, even
though he has not received the thing. For the seller is not liable for
anything which happens without his fraud or negligence. But if after the
sale any alluvion has accrued to the land, the benefit goes to the buyer
for the benefit ought to belong to him who has the risk. (Sherman,
Inchiridion Romani Juris, Sec. 296.) In other words, the buyer assumes
the risk of loss caused by fortuitous event (Art. 1174.) without the fault
of the seller (Art. 1262.), that is, in spite of the exercise of due diligence
on his part (Art. 1163.) and before he has incurred in delay (Arts. 165,
1170, 1262.) after the perfection of the contract to the time of delivery.
(Art. 1480, par. 1.) With respect to the fruits, the buyer has a right to the
same from the time the obligation to deliver the thing arises. (Art. 1164.)
If the risk ought to belong to the buyer before delivery, the benefit ought
to belong to him who has the risk. (see Arts. 1538, 1189[5].)
Article 1480, paragraph 1 is applicable only where the thing is
determinate. (Art. 1460.) It also applies to fungible things sold for a
price not fixed in relation to weight, number, or measure because in such
case the fungible things have been “particularly designated or
physically segregated.” (Ibid., par. 2.)
Is Article 1480 above in conflict with Article 1504 (infra.)?
(2) The second rule relates to fungible things sold for a price fixed
in relation to weight, number, or measure. Under the third paragraph,
“the risk shall not be imputed to the vendee until they have been
weighed, counted, or measured, and delivered.” (see U.S. vs. De Vera,
43 Phil. 1001 [1922].) Paragraph 3 is an exception to the rule that the
vendee bears the loss after the perfection of the contract and before
delivery. However, the vendee assumes the risk if he has incurred in
delay in receiving the goods sold. (North Negros Sugar Co., Inc. vs.
Compania General Tabacos de Filipinas,
100 Phil. 1103 [1957].)
ILLUSTRATIVE CASES:
1. The sugar which the seller intended to deliver was destroyed
by flood.
Art. 1480
NATURE AND FORM OF THE CONTRACT
Facts: B advanced P3,000 to S in payment of 600 piculs of sugar.
The written contract did not specify that the sugar was to come from
the crop on S’s land which was destroyed by a flood.
Issue: S claimed that the fortuitous cause excused nonperformance by him of the contract.
Held: S promised to deliver a generic thing. Any sugar of the
quality stipulated, regardless of origin or however acquired, (lawfully)
would be obligatory on the part of B to receive and would discharge
the obligation. It seems, therefore, plain that the sugar to be sold not
having been segregated, the sale was not perfected and the loss of the
crop even through force majeure, did not extinguish S’s obligation to
deliver the sugar.
Flood, like other catastrophes, was a contingency, a collateral
incident, which S should have provided for by proper stipulations.
Genus nunquam perit (genus never perishes). (Yu Tek & Co. vs.
Gonzales, 29 Phil. 384 [1915]; De Leon vs. Soriano, 87 Phil. 193
[1950]; Bunge Corp. vs. Camenforte & Co., 91 Phil. 861
[1954].)
———— ———— ————
2. Buyer denies liability for price of tobacco delivered to its agent
by seller for inspection, grading and weighing, because it was burned
before it could be inspected, graded, and weighed.
Facts: S (vendor) delivered the tobacco in question to the
redrying plant of A, trading agent of B (vendee). The tobacco was
burned while awaiting inspection, grading, and weighing.
It appeared that S directed, supervised, and controlled A in
receiving shipments of tobacco and in the performance of its activities,
and that shipments, once received from trading entities like S, were
under B’s control, and not subject to withdrawal without its authority.
Issue: Should B be considered as having accepted the tobacco
shipments as of the fire and, therefore, should bear the loss?
Held: Yes. The contract of sale has been perfected at the time of
the loss (see Art. 1475.) and the shipment was placed in the control
and possession of B. The technical defect that the tobacco in question
“were still to be inspected, graded and weighed” cannot suffice to
overturn the decision. Aside from raising an issue of fact (for B’s own
fieldmen had the responsibility of such tobacco being graded,
weighed, baled and loaded on trucks duly sealed for transportation to
its redrying plant and that responsibility was fulfilled according to the
89
90
SALES
Art. 1480
trial court), the delay was traceable to the fault of B and A and that A
was negligent in causing the fire, whereas S had done everything that
was required of him by B’s regulations in order to have the tobacco
inspected and paid for.
Furthermore, for sometime after the conflagration, there was no
question raised by B as to its liability. It would, therefore, be the height
of injustice to deny S’s claim for payment.
(Phil.-Virginia Tobacco Adm. vs. De Los Angeles, 87 SCRA 9 [1978].)
Dissenting opinion by R.C. Aquino, J.: The judgment is
erroneous. The sale was not consummated because there was no
tradition or delivery to B of the tobacco which was lost when it was
still owned by S. A was merely an agent of B. Even as agent, A had
not yet accepted delivery of the tobacco before it was lost during the
fire. There was no acceptance of delivery because the tobacco, at the
time it was lost, had not yet been properly inspected, graded and
weighed. Under the contract between B and A, the latter’s
responsibility as agent of the former begins from the moment the
tobacco had been delivered, received and accepted from the trading
entities (like S) and the same had been properly graded and weighed.
These requirements had not yet been satisfied at the time the
tobacco was lost in A’s redrying plant. Inasmuch as B did not become
the owner of the lost tobacco and as S was still the owner thereof, the
loss should be borne by S, not by B. Res perit domino. Hence, B was
not obligated to pay for the tobacco. S’s cause of action was really
against A. S did not appeal from the lower court’s judgment absolving
A. Under the contract between B and A, the latter was supposed to
advance to the trading entities the payment for the tobacco delivered
to A, and B would then reimburse A for its advances. No such
advances were made by A, a circumstance which may signify that the
sale was not consummated.
Author’s Note: The buyer assumes the risk of loss caused by
fortuitous event after the perfection of the contract even before the
delivery of the thing sold. (see Rule 3 under “Risk of loss or
deterioration.”) In the mind of the author, the opinion of Justice
Aquino is that no contract of sale was perfected between S and B;
neither was there delivery of the tobacco to B before it was lost. The
opinion expresses its conformity to the following excerpts, among
others, from the brief of the Solicitor General for PVTA (B):
“Viewed thus, the conclusion is inescapable that the tobacco
shipments brought to the redrying plant to be inspected, graded,
and weighed are considered not delivered and sold in legal
Art. 1480
NATURE AND FORM OF THE CONTRACT
contemplation, until after grading and weighing where the
‘meeting of minds’ takes place because the price or consideration
is determined by the grade and weight thereof. And without
agreement as to price, the sale is not perfected. It is worth
emphasizing that before the tobacco shipments were graded and
weighed, they remained properties of the respondent trading
entities (S and others) subject to their control and possession, and
at their risk; consequently, respondents shall bear the loss which
occurred prior to the grading and weighing of the tobaccos.”
———— ———— ————
3. Bales of tobacco were lost while in the control and possession
of buyers’ agent before they were graded and weighed.
Facts: PVTA, a government corporation, entered into a contract
of procuring, redrying and servicing with FVTR for the 1963 tobacco
trading operation. Petitioners ATC shipped to FVTR bales of tobacco.
Not all the bales of tobacco were graded and weighed because some
officers and employees in the premises of FVTR asked for money to
have the remaining bales graded and weighed. The remaining
ungraded and unweighed bales were lost while they were in the
possession of FVTR.
Having learned of such loss, ATC demanded for their value and
the application of the same to ATC’s merchandising loan with PVTA
but both the latter and the FVTR refused to heed said demands.
Issue: Was the contract of sale between ATC and PVTA perfected
by ATC’s delivery of all bales of tobacco to FVTR, a contractee of
PVTA, so as to hold PVTA liable for the loss of said bales while in
the possession of FVTR?
Held: (1) Delivery to buyer’s agent (FVTR) proven. — “Under the
Santiago Virginia Tobacco Planters Assoc. vs. PVTA (31 SCRA 528
[1970].) case, shipping documents and checklists which are
accomplished prior to delivery do not prove actual delivery. To prove
such delivery, documents such as the weigher’s tally sheet and the
warehouse receipts which are accomplished when the actual delivery
is made, are necessary. The factual circumstances extant in this case
are different from those in the Santiago case.
In said case, there was a need to prove actual delivery because the
petitioner therein demanded for the payment of tobacco shipments
which were allegedly delivered to the FVTR. In other words, the
actual physical delivery of the shipments was not proven. On the other
91
92
SALES
Art. 1480
hand, in this case, the lower court established from the testimonies of
witnesses the fact that petitioner entrusted to the FVTR a total of 263
bales of tobacco, 89 bales of which were even actually weighed and
graded in the redrying plant. However, for reason beyond the control
of the petitioner, the FVTR refused to weigh and grade the remaining
174 bales. On top of this, the FVTR also refused to grant petitioner’s
request to withdraw the unweighed and ungraded shipments. As it
turned out later, said shipments were lost while in the custody of
FVTR, thereby placing the petitioner in a ‘no win’ situation.’’
(2)
Seller (ATC) lost possession and control over shipment.
— “The Civil Code provides that ownership of the thing sold shall be
transferred to the vendee upon the actual or constructive delivery
thereof. (Art. 1477.) There is delivery when the thing sold is placed in
the control and possession of the vendee. (Art. 1497.) Indeed, in
tobacco trading, actual delivery plays a pivotal role. The peculiar
procedure undergone in trading, which procedure was set out at length
in both the Santiago and the PVTA vs. De los Angeles (87 SCRA 197
[1978].) cases, reveals that delivery seals the contract of sale because
the trader loses not only possession but also control over the shipment.
Outlined by the PVTA pursuant to its power ‘to take over and assume,
and, therefore, exclusively direct, supervise and control, all functions
and operations with respect to the processing, warehousing, and
trading of Virginia tobacco, the provisions of any existing law to the
contrary notwithstanding, the procedure is observed by everyone
involved in the trade.’”
(3)
Tobacco traders placed at a disadvantage. — “Verily,
the tobacco trading procedure conceived and formulated by the PVTA
is akin to a contract of adhesion wherein only one party has a hand in
the determination of the terms. But observance of the procedure more
often than not renders a trader at a disadvantage. The moment the
shipment is placed in the hands of the PVTA or its representative and
it is lost, the trader is left empty-handed. While the flaw may not really
be in the procedure itself, the same way may be found in the persons
charged with the implementation of the procedure. Some personnel
NATURE AND FORM OF THE CONTRACT
93
Art. 1481
mishandle the shipment to the detriment of the trader. Some demand
grease money to facilitate the trading process. Sadly, this is what
happened in this case.”
(4)
Delivery considered effective delivery to seller (PVTA).
— “Hence, while under an ideal situation, there would have been merit
in respondent PVTA’s contention that the contract of sale could not
have been perfected pursuant to Article 1475 because to determine the
price of the tobacco traded, the shipment should first be inspected,
graded and weighed, a strict interpretation of the provision may result
in adverse effects to small planters who would not be paid for the lost
products of their toil. Such situation was what the ruling in PVTA vs.
De los Angeles sought to avoid.
Equity and fair dealing, the anchor of said case, must once more
prevail. Since PVTA had virtual control over the lost tobacco bales,
delivery thereof to the FVTR should also be considered effective
delivery to the PVTA.” (Alliance Tobacco, Inc. vs. Phil. Virginia
Tobacco Administration, 179 SCRA 336 [1989].)
ART. 1481. In the contract of sale of goods by
description or by sample, the contract may be
rescinded if the bulk of the goods delivered do not
correspond with the description or the sample, and if
the contract be by sample as well as by description,
it is not sufficient that the bulk of goods correspond
with the sample if they do not also correspond with
the description.
The buyer shall have a reasonable opportunity of
comparing the bulk with the description or the
sample. (n)
Sale of goods by description and/or
sample.
The above article covers a sale of goods by description, by sample,
and by sample as well as by description. It provides a cause for
rescission distinct from those stated in Article 1597.
(1) Sale by description. — Sale by description occurs where a
seller sells things as being of a particular kind, the buyer not know-
94
Art. 1481
SALES
ing whether the seller’s representations are true or false, but relying on
them as true; or, as otherwise stated, where the purchaser has not seen
the article sold and relies on the description given him by the vendor, or
has seen the goods but the want of identity is not apparent on inspection.
(77 C.J.S. 1170.)
The reason for the rule is that a dealer who sells an article describing
it as the kind of an article of commerce the identity of which is not
known to the purchaser, must understand that such purchaser relies
upon the description as a representation by the seller that it is the thing
described. (55 C.J. 739.) If the bulk of the goods delivered do not
correspond with the description, the contract may be rescinded. (Art.
1481.) But if the thing delivered is as described, the fact that the buyer
cannot use the thing sold for the purpose for which it was intended
without the seller’s fault does not exempt the buyer from paying the
purchase price agreed upon. (see Pacific Commercial Co. vs. Ermita
Market & Cold Stores, 55 Phil. 617 [1931].)
(2) Sale by sample. — To constitute a sale by sample, it must
appear that the parties contracted solely with reference to the sample,
with the understanding that the bulk was like it. But a mere exhibition
of a sample by the seller in the absence of any showing that it was an
inducement of the sale or formed the sole basis thereof, does not amount
to a sale by sample as where the quality of the articles to be furnished
is expressly described in the contract without reference to the sample or
the parties agree that the goods ordered shall differ from the sample in
some particular matter. Whether a sale is by sample is determined by
the intent of the parties as shown by the terms of the contract and the
circumstances surrounding the transaction. (77 C.J.S. 925.) In a sale by
sample, the vendor warrants that the thing sold and to be delivered by
him shall conform with the sample in kind, character, and quality. (77
C.J.S. 1169; see Art. 1565.)
A sale by sample is really a species of sale by description. The
sample is employed instead of words to communicate to the buyer the
characteristics of the goods being sold. It is itself a tacit assertion of the
qualities of the bulk it represents.
(3) Sale by description and sample. — When a sale is made both by
sample and by description, the goods must satisfy all the
NATURE AND FORM OF THE CONTRACT
95
Art. 1482
warranties (see Art. 1565.) appropriate to either kind of sale, and it is
not sufficient that the bulk of the goods correspond with the sample if
they do not also correspond with the description, and vice versa. (77
C.J.S. 1172.)
Meaning of bulk of goods.
In this article, the term “bulk of goods” is not used to designate the
greater portion of the goods. Rather, it is used to denote the goods as
distinguished from the sample with which they must correspond. The
word “goods” in the phrase is an oppositional genitive defining “bulk.”
In other words “bulk of goods” mean the same as “goods” which, as a
whole body, must correspond substantially with the sample and
description. (see 77 C.J.S. 1172.)
The buyer is given a reasonable opportunity of comparing the bulk
with the description or the example. (Art. 1481, par. 2.)
ART. 1482. Whenever earnest money is given in a
contract of sale, it shall be considered as part of the
price and as proof of the perfection of the contract.
(1454a)
Meaning of earnest money.
Earnest money is something of value given by the buyer to the seller
to show that the buyer is really in earnest, and to bind the bargain. It is
actually a partial payment of the purchase price and is considered as
proof of the perfection of the contract. (see Villongco Realty vs.
Bormaecheco, 65 SCRA 352 [1975]; Topacio vs. Court of Appeals, 211
SCRA 291 [1992]; see Laforteza vs. Machuca, 127 SCAD 798, 333
SCRA 643 [2000].) Since earnest money constitutes an advance
payment, it must be deducted from the total price.24
24 Hence, it cannot be forfeited in case the buyer should fail to pay the balance of the price,
especially in the absence of a clear and express agreement thereon. In a case, by reason of its failure
to make payment, petitioner, through its agent, informed private respondents that it would no
longer push through with the sale. In other words, petitioner resorted to extra-judicial rescission of
the contract with private respondents who did not interpose any objection to the rescission.
(Golden, Ltd., Inc. vs. Court of Appeals, 299 SCRA 141 [1998].)
96
Art. 1482
SALES
Note: By agreement of the parties, the amount given may be merely
a deposit of what would eventually become earnest money or
downpayment should a contract of sale be made by them, not as a part
of the purchase price and as proof of the perfection of the contract of
sale but only as a guarantee that the buyer would not back out of the
sale. Thus, it is not really the giving of earnest money but the proof of
the concurrence of all the essential elements of a contract which
establishes the existence of the perfected contract. There is no sale
where the parties still have to agree on the acceptable terms of payment.
(San Miguel Properties Philippines, Inc. vs. Huang, 130 SCAD 713, 336
SCRA 737 [2000].) The earnest money forms part of the consideration
only if the sale is consummated upon full payment of the purchase price.
(Chua vs. Court of Appeals, 401 SCRA 54 [2003].)
Under Article 145425 of the old Civil Code, it has been held that the
delivery of part of the purchase price should not be understood as
constituting earnest money to bind the agreement in the absence of
something in the contract showing that such was the intention of the
parties. (Salas Rodriguez vs. Leuterio, 47 Phil. 818 [1925].)
Earnest
money
distinguished.
and
option
money
They may be distinguished as follows:
(1) Earnest money is part of the purchase price, while option
money (see Art. 1479, par. 2.) is the money given as distinct
consideration for an option contract;
(2) Earnest money is given only where there is already a sale, while
option money applies to a sale not yet perfected; and
(3) When earnest money is given, the buyer is bound to pay the
balance, while the would-be buyer who gives option money is not
required to buy. (Adelfa Properties, Inc. vs. Court of Appeals, 58 SCAD
962, 240 SCRA 565 [1995] and Limson vs. Court
25 In this article, it is declared that “When earnest money or a pledge had been given to bind
a contract of purchase and sale, the contract may be rescinded if the vendee should be willing to
forfeit the earnest money or pledge or the vendor to return double the amount.”
Art. 1483
NATURE AND FORM OF THE CONTRACT
97
of Appeals, 357 SCRA 209 [2001], quoting De Leon, Comments and
Cases on Sales, 1986 rev. ed., p. 67.)
But option money may become earnest money if the parties so
agree.
ART. 1483. Subject to the provisions of the Statute
of Frauds and of any other applicable statute, a
contract of sale may be made in writing, or by word of
mouth, or partly in writing and partly by word of
mouth, or may be inferred from the conduct of the
parties. (n)
Form of contract of sale.
(1) General rule. — The form of a contract refers to the manner in
which it is executed or manifested. As a general rule, a contract may be
entered into in any form provided all the essential requisites for its
validity are present. (Art. 1356.) It may be in writing; it may be oral; it
may be partly in writing and partly oral. It may even be inferred from
the conduct of the parties. Sale is a consensual contract and is perfected
by mere consent. (Art. 1475.)
(2) Where form is required in order that a contract may be
enforceable. — In case the contract of sale should be covered by the
Statute of Frauds, the law requires that the agreement (or some note or
memorandum thereof) be in writing subscribed by the party charged, or
by his agent; otherwise, the contract cannot be enforced by action. (see
Art. 1403[2].)
Under the Statute of Frauds (Art. 1403[2, a, d, e].) of the Civil Code,
the following contracts must be in writing; otherwise, they shall be
unenforceable by action:
(a)
P500.00;
Sale of personal property at a price not less than
(b)
Sale of real property or an interest therein regardlessof
the price involved; and
(c)
Sale of property not to be performed within a year from
the date thereof regardless of the nature of the property and the price
involved.
98
SALES
Art. 1483
The purpose of the Statute of Frauds is to prevent fraud and perjury
in the enforcement of obligations depending for their evidence upon the
unassisted memory of witnesses by requiring certain enumerated
contracts and transactions to be evidenced in writing. (Claudel vs. Court
of Appeals, 199 SCRA 113 [1991], citing 4 Tolentino, Civil Code of
the Phils., p. 580 [1973].) Contracts infringing the Statute of Frauds are
ratified when the defense fails to object to the introduction of parol
evidence, or asks questions on cross-examination, which elicits
evidence proving the existence of a perfected contract of sale.
(Limketkai Sons Milling, Inc. vs. Court of Appeals, 66 SCAD 136, 250
SCRA 523 [1995].)
The Statute of Frauds refers to specific kinds of transactions and
cannot apply to any other transaction that is not enumerated therein. The
application of the Statute presupposes the existence of a perfected
contract. A right of first refusal is not among those listed as
unenforceable under the statute. At best, it is a contractual grant not of
the sale of the property involved, but of the right of first refusal over the
property sought to be sold. Hence, a right of first refusal need not be
written to be enforceable and may be proven by oral evidence.
(Rosencor Development Corporation vs. Inquing, 145 SCAD 484, 354
SCRA 119 [2001].)
(3) Where form is required in order that a contract may be valid.
— Where the “applicable statute” requires that the contract of sale be
in a certain form for its validity, the required form must be observed in
order that the contract may be both valid and enforceable. (see Art.
1356.)
(4) Where form is required only for the convenience of the parties.
— In certain cases, a certain form (e.g., public instrument) is required
for the convenience of the parties in order that the sale may be registered
in the Registry of Deeds to make effective as against third persons the
right acquired under such sale. As between the contracting parties, the
form is not indispensable since they are allowed by law to compel each
other to observe that form. (Arts. 1357, 1358[1].) Hence, the fact that
the deed of sale of a parcel of land still had to be signed and notarized
does not mean that no contract had already been perfected. A sale of
land is valid regardless of the form it may have been entered into as
long as the requisites for a valid contract of sale are present.
Art. 1483
NATURE AND FORM OF THE CONTRACT
99
On the other hand, the fact that a deed of sale is a notarized
document does not necessarily justify the conclusion that the said sale
is a true conveyance to which the parties thereto are irrevocably bound.
Though its notarization vests in its favor the presumption of regularity
and due execution (Manzano vs. Perez, 152 SCAD 473, 362 SCRA 430
[2001].), it is not the function of the notary public to validate and make
binding an instrument never intended by the parties to have any binding
legal effect upon them. The intention of the parties still and always is
the primary consideration in determining the true nature of the contract.
(Suntay vs. Court of Appeals, 66 SCAD 711, 251 SCRA 430 [1995];
Nazareno vs. Court of Appeals, 343 SCRA 637 [2000].) Where the
vendor did not personally appear before the notary public, such fact
raises doubt regarding the vendor’s consent to the sale notwithstanding
that the deed states the contrary. (Tan vs. Mandap, 429 SCRA 711
[2004].)
An invalidly notarized deed of sale must be considered merely as a
private document. Even if validly notarized, the deed would still be
classified as a private document if it is merely subscribed and sworn to
by way of jurat but was not properly acknowledged. (Tigno vs. Aquino,
444 SCRA 61 [2004].)
Sale of real property or an interest therein.
(1) A sale of a piece of land or interest therein when made through
an agent is void unless the agent’s authority is in writing. (Art. 1874;
see Copon vs. Umali, 87 Phil. 91 [1950].)
(2) For the sale of real property to be effective against third
persons, the sale must be registered in the Registry of Deeds (or
Property) of the province or city where the property is located. The sale
must be in a public document (e.g., acknowledged before a notary
public or any public officer authorized by law to administer oath) for
otherwise, the registration will be refused.
(3) The real purpose of registration of a contract of sale being to
give notice to third persons and to protect the buyer against claims of
third persons arising from subsequent alienations by the vendor, it is
certainly not necessary to give efficacy to the deed of sale, as between
the parties to the contract (Phil. Suburban Dev. Corp. vs. The Auditor
General, 63 SCRA 397 [1975].) and their privies because actual notice
100
SALES
Art. 1483
is equivalent to registration. It is settled that registration is not a mode
of acquiring ownership. (Bollozo vs. Yu Tieng Su, 155 SCRA 50
[1987].)
(4) The sale of land in a private instrument is valid and binding
upon the parties, for the time-honored rule is that even a verbal contract
of sale of real estate produces legal effects between the parties (Bucton
vs. Gabar, 55 SCRA 499 [1974]; Gallar vs. Husain, 20 SCRA 186
[1967].), since sale is a consensual contract and is perfected by mere
consent. (Carbonell vs. Court of Appeals, 69 SCRA 99 [1976].)
(5) The fact that the notarization of a deed of sale of real property
is false is of no consequence, for it need not be notarized; it is enough
that it be in writing. (Heirs of Amparo del Rosario vs. Santos, 108
SCRA 43 [1981].)
EXAMPLES:
(1)
S orally sold to B a parcel of land. The sale is valid (Art.
1356; Lopez vs. Alvarez, 9 Phil. 28 [1907]; Guerrero vs. Raquel, 10
Phil. 52 [1908].) but it is unenforceable because the law requires that
it be in writing to be enforceable. (Art. 1403[e].)
(2)
If the contract of sale above is in private writing, then it
is valid and binding but only as between the parties and their privies
(Soriano vs. Latoño, 87 Phil. 757 [1950]; Gallar vs. Husain, supra.)
and not as against third persons without notice until the sale is
registered in the Registry of Property. B has the right to compel S to
put the contract in a public instrument so that it can be registered to
affect third persons. (Art. 1357; see Carbonell vs. Court of Appeals,
supra; Mahilum vs. Court of Appeals, 17 SCRA 482 [1966].)
Modes of satisfaction of the Statute of
Frauds.
The statute specifies three ways in which contracts of sales of goods
within its terms may be made binding, namely:
(1) the giving of a memorandum;
(2) acceptance and receipt of part of the goods (or things in action)
sold and actual receipt of the same (see Art. 1585.); and
(3) payment or acceptance at the time some part of the purchase
price.
Art. 1483
NATURE AND FORM OF THE CONTRACT
101
The requirement of a memorandum is obviously suitable either for
a contract to sell or a sale. The other two modes of satisfaction seem
more naturally to apply to sales than to executory contracts. (Williston,
op. cit., Sec. 73.)
The Statute of Frauds applies not only to goods but to things in
action as well. (see Art. 1403[2, d].) Thus, an assignment of credit (Art.
1624.) at a price not less than P500.00 is within the operation of the
Statute.
Statute of Frauds applicable only to
executory contracts.
The Statute of Frauds is applicable only to executory contracts
(where no performance, i.e., delivery and payment, has as yet been
made by both parties) and not to contracts which are totally
(consummated) or partially performed. (see Vda. de Espiritu vs. CFI of
Cavite, 47 SCRA 354 [1972].) It does not forbid oral evidence to prove
a consummated sale. (Diama vs. Macalebo, 74 Phil. 70 [1942].)
(1) Reason for the rule. — The reason is that partial performance
like the writing, furnishes reliable evidence of the intention of the
parties or the existence of the contract. A contrary rule would result in
injustice or unfairness to the party who has performed his obligation,
and would promote fraud or bad faith on the part of the party who has
not performed his obligation, for it would enable him to keep the
benefits already derived by him from the transaction and at the same
time, evade the responsibilities or liabilities assumed or contracted by
him. (Carbonnel vs.
Poncio, 103 Phil. 655 [1958]; Art. 1405.)
Thus, where a parol contract of sale is adduced not for the purpose
of enforcing it, but as a basis of the possession of the person claiming
to be the owner, the Statute of Frauds is not applicable, in the same way
that it does not apply to contracts which are either totally or partially
performed upon the theory that there is a wide field for the commission
of frauds in executory contracts which can only be prevented by
requiring them to be in writing, a fact which is reduced to a minimum
in executed contracts because the intention of the parties become
apparent by their execution. (Pascual vs. Realty Invest., Inc., 91 Phil.
257 [1952].)
102
SALES
Art. 1483
(2) Circumstances indicating partial performance. — Where there
is partial performance of a parol contract of sale of realty, the principle
excluding evidence of such contract does not apply.
Other circumstances indicating partial performance of an oral
contract of sale of realty are relinquishment of rights, continued
possession by a purchaser who is already in possession, building of
improvements, tender of payment, rendition of services, payment of
taxes, surveying of the land at the vendee’s expense (Ortega vs.
Leonardo, 103 Phil. 870 [1958]; see 49 Am. Jur. 44, 755756, 772.), and
acceptance of initial payment. (Clarin vs. Rulona, 127 SCRA 512
[1984].)
The application of the Statute of Frauds presupposes the existence
of a perfected contract and requires only that a note or memorandum
subscribed by the party charged or by his agent be executed in order to
compel judicial enforcement. Where there is no perfected contract, there
is no basis for the application of the Statute. (Villanueva vs. Court of
Appeals, 78 SCAD 484, 267 SCRA 89 [1997].) Thus, the annotation on
the letter-offer of the phrase “Received original, 9-4-89,’’ beside which
appears the signature of the addressee, can neither be regarded as a
contract of sale nor a promise to sell. It is merely a memorandum of the
receipt of the offer. Hence, the alleged transaction is unenforceable as
the requirements under the Statute of Frauds have not been complied
with. (Jovan Land, Inc. vs. Court of Appeals, 79 SCAD 428, 268 SCRA
160 [1997].)
Legal recognition of electronic data messages and
electronic documents.
The following are the pertinent provisions of the implementing
rules and regulations of R.A. No. 8792, otherwise known as the
“Electronic Commerce Act.’’
(1) Validity and enforceability. — Information shall not be denied
validity or enforceability solely on the ground that it is in the form of
an electronic data message or electronic document, purporting to give
rise to such legal effect. Electronic data messages or electronic
documents shall have the legal effect, validity or enforceability as any
other document or legal writing. In particular, subject to the provisions
of R.A. No. 8792 and the Rules: (a) A requirement under law that
Art. 1483
NATURE AND FORM OF THE CONTRACT
103
information is in writing is satisfied if the information is in the form of
an electronic data message or electronic document.
(b)
A requirement under law for a person to provide
information in writing to another person is satisfied by the provision
of the information in an electronic data message or electronic
document.
(c)
A requirement under law for a person to provide
information to another person in a specified non-electronic form is
satisfied by the provision of the information in an electronic data
message or electronic document if the information is provided in
the same or substantially the same form.
(d)
Nothing limits the operation of any requirement under
law for information to be posted or displayed in specified manner,
time or location; or for any information or document to be
communicated by a specified method unless and until a functional
equivalent shall have been developed, installed, and implemented.
(Sec. 7, Rules.)
(2) Incorporation by reference. — Information shall not be denied
validity or enforceability solely on the ground that it is not contained in
an electronic data message or electronic document but is merely
incorporated by reference therein. (Sec. 8, Ibid.)
(3) Writing. — Where the law requires a document to be in writing,
or obliges the parties to conform to a writing, or provides consequences
in the event information is not presented or retained in its original form,
an electronic document or electronic data message will be sufficient if
the latter:
(a)
maintains its integrity and reliability; and
(b)
can be authenticated so as to be usable for
subsequentreference, in that:
1) It has remained complete and unaltered, apart from the
addition of any endorsement and any authorized change, or any
change which arises in the normal course of communication,
storage and display; and
2) It is reliable in the light of the purpose for which it was
generated and in the light of all relevant circumstances. (Sec.
10, Ibid.)
104
SALES
Art. 1483
(4) Original. — Where the law requires that a document be
presented or retained in its original form, that requirement is met by an
electronic document or electronic data message if:
(a)
There exists a reliable assurance as to the integrity
ofthe electronic document or electronic data message from the time
when it was first generated in its final form and such integrity is
shown by evidence aliunde (that is, evidence other than the
electronic data message itself) or otherwise; and
(b)
The electronic document or electronic data message
iscapable of being displayed to the person to whom it is to be
presented.
(c)
For the purposes of No. (1) above:
1) The criteria for assessing integrity shall be whether the
information has remained complete and unaltered, apart from
the addition of any endorsement and any change which arises
in the normal course of communication, storage and display;
and
2) The standard of reliability required shall be assessed in
the light of the purpose for which the information was
generated and in the light of all relevant circumstances.
An electronic data message or electronic document meeting and
complying with the requirements of Section 6 or 7 of R.A. No. 8792
shall be the best evidence of the agreement and transaction contained
therein. (Sec. 11, Ibid.)
(5) Solemn contracts. — No provision of the R.A. No. 8792 shall
apply to vary any and all requirements of existing laws and relevant
judicial pronouncements respecting formalities required in the
execution of documents for their validity. Hence, when the law requires
that a contract be in some form in order that it may be valid or
enforceable, or that a contract is proved in a certain way, that
requirement is absolute and indispensable. (Sec. 12, Ibid.)
Legal recognition of electronic signatures.
The following are the pertinent provisions of the implementing
rules and regulations:
Art. 1483
NATURE AND FORM OF THE CONTRACT
105
An electronic signature relating to an electronic document or
electronic data message shall be equivalent to the signature of a person
on a written document if the signature:
(1) is an electronic signature as defined in Section 6(g) of the
Rules; and
(2) is proved by showing that a prescribed procedure, not alterable
by the parties interested in the electronic document or electronic data
message, existed under which:
(a)
A method is used to identify the party sought to
bebound and to indicate said party’s access to the electronic
document or electronic data message necessary for his consent or
approval through the electronic signature;
(b)
Said method is reliable and appropriate for the purpose
for which the electronic document or electronic data message was
generated or communicated, in the light of all circumstances,
including any relevant agreement;
(c)
It is necessary for the party sought to be bound, in order
to proceed further with the transaction, to have executed or
provided the electronic signature; and
(d)
The other party is authorized and enabled to verify the
electronic signature and to make the decision to proceed with the
transaction authenticated by the same.
The parties may agree to adopt supplementary or alternative
procedures provided that the requirements of paragraph
(b) are complied with. (Sec. 13, Rules.)
Communication of electronic data messages and
electronic documents.
The following are the pertinent provisions of the implementing
rules and regulations:
(1) Formation and validity of electronic contracts. — Except as
otherwise agreed by the parties, an offer, the acceptance of an offer and
such other elements required under existing laws for the formation and
perfection of contracts may be expressed in, demonstrated and proved
106
SALES
Art. 1483
by means of electronic data message or electronic documents and no
contract shall be denied validity or en-
Art. 1484
NATURE AND FORM OF THE CONTRACT
107
forceability on the sole ground that it is in the form of an electronic data
message or electronic document, or that any or all of the elements
required under existing laws for the formation of the contracts is
expressed, demonstrated and proved by means of electronic documents.
(Sec. 21, Rules.)
(2) Consummation of electronic transactions with banks. —
Electronic transactions made through networking among banks, or
linkages thereof with other entities or networks, and vice versa, shall be
deemed consummated under rules and regulations issued by the Bangko
Sentral ng Pilipinas, upon the actual dispensing of cash or the debit of
one account and the corresponding credit to another, whether such
transaction is initiated by the depositor or by an authorized collecting
party. The obligation of one bank, entity, or person similarly situated to
another arising therefrom shall be considered absolute and shall not be
subjected to the process of preference of credits. The foregoing shall
apply only to transactions utilizing the Automated Teller Machine
switching network.
Without prejudice to the foregoing, all electronic transactions
involving banks, quasi-banks, trust entities, and other institutions which
under special laws are subject to the supervision of the Bangko Sentral
ng Pilipinas shall be covered by the rules and regulations issued by the
same pursuant to its authority under Section 59 of R.A. No. 8791 (The
General Banking Act), R.A. No. 7653 (the Charter of the Bangko
Sentral ng Pilipinas) and Section 20, Article XII of the Constitution.
(Sec. 22, Ibid.)
(3) Recognition by parties of electronic data message. — As
between the originator and the addressee of an electronic data message
or electronic document, a declaration of will or other statement shall not
be denied legal effect, validity or enforceability solely on the ground
that it is in the form of an electronic data message or electronic
document. (Sec. 23, Ibid.)
ART. 1484. In a contract of sale of personal
property the price of which is payable in installments,
the vendor may exercise any of the following
remedies:
108
SALES
Art. 1484
(1)
Exact fulfillment of the obligation, should
the vendee fail to pay;
(2)
Cancel the sale, should the vendee’s
failure to pay cover two or more installments;
(3)
Foreclose the chattel mortgage on the
thing sold; if one has been constituted, should the
vendee’s failure to pay cover two or more
installments. In this case, he shall have no further
action against the purchaser to recover any unpaid
balance of the price. Any agreement to the contrary
shall be void. (1454-Aa)
Remedies of vendor in sale of personal
property payable in installments.
The vendor of personal property payable in installments may
exercise any of the following remedies:
(1) elect fulfillment upon the vendee’s failure to pay; or
(2) cancel the sale, if the vendee shall have failed to pay two or
more installments; or
(3) foreclose the chattel mortgage, if one has been constituted, if
the vendee shall have failed to pay two or more installments.
Remedies alternative.
These remedies are alternative and are not to be exercised
cumulatively or successively and the election of one is a waiver of the
right to resort to the others. (Pacific Commercial Co. vs. De la Rama,
62 Phil. 380 [1935]; Erlanger & Galinger, Inc. vs. Flor, [C.A.] 57 O.G.
482; Cruz vs. Filipinas Invest. & Finance Corp., 23 SCRA 791 [1968];
Filipinas Invest. & Finance Corp. vs. Ridad, 30 SCRA 564 [1969];
Industrial Finance Corp. vs. Tobias, 78 SCRA 28 [1977]; Nonato vs.
Intermediate Appellate Court, 140 SCRA 255 [1985].)
Thus, where from the prayer of the vendor in its brief, it asks the
appellate court to order the vendee to pay the remaining unpaid sum
under the promissory note, it thereby waives the other remedies.
(Servicewide Specialists, Inc. vs. Intermediate Appellate Court, 174
Art. 1484
NATURE AND FORM OF THE CONTRACT
109
SCRA 80 [1989].) To file an action containing the three remedies: to
collect the purchase price; to seize the property purchased by suing for
replevin; and to foreclose the mortgage executed thereon, is not only
irregular but is a flagrant circumvention of the prohibition of the law.
(Luneta Motor Co. vs. Dimagiba, 3 SCRA 884 [1961].)
Applicability of Article 1484.
The law is aimed at those sales of personal property where the price
is payable in several installments.
(1) Sale of personal property not payable in installments. —
Article 1484 does not apply to a sale of personal property on straight
term or partly in cash and partly in term. Where the balance, after
payment of the initial sum, should be paid in its totality at the time
specified, the transaction is not by installment as contemplated in
Article 1484. (Levi Hermanos, Inc. vs. Gervacio, 69 Phil. 52 [1939].)
(2) Sale or mortgage of real estate. — Neither does the article
apply to sale of immovable property nor to real estate mortgage. Under
Article 1484, the creditor is given the right or option to seize the chattel
and dispose of the same in accordance with the Chattel Mortgage Law,
while the mortgage on real property may only be foreclosed in
conformity with the provisions of the Rules of Court, or those of Act
No. 3135, if a special power to sell is granted to the creditor under the
contract. (Pacific Commercial Co. vs. Jocson, [C.A.] 39 O.G. 1859.)
(3) Action of replevin. — It does not also apply to an action of
replevin. (Universal Motors Corp. vs. Dy Hian Tat, 28 SCRA 161
[1969].) An action by the mortgagee for recovery of possession of
personal property with replevin as a provisional remedy is not an action
for collection much less for foreclosure (extra-judicial) of chattel
mortgage. It is a preliminary step to foreclosure which should be
conducted in accordance with Section 14 of Act No. 1508. (Universal
Motors Corp. vs. Velasco, 98 SCRA 545 [1980]; PAMECA Wood
Treatment Plant, Inc. vs. Court of Appeals, 109 SCAD 7, 310 SCRA
281 [1999].)
Right of vendor to recover unpaid balance of
purchase price.
110
SALES
Art. 1484
(1) Remedy of specific performance. — The vendor who has
chosen to exact the fulfillment of the obligation is not limited to the
proceeds of the sale of the mortgaged goods. He may still recover from
the purchaser the unpaid balance of the price, if any (see Tajanlangit vs.
Southern Motors, Inc., 101 Phil. 606 [1957]; Vda. de Quimba vs.
Manila Motor Co., Inc., 3 SCRA 444 [1961].), on the real and personal
properties of the purchaser not exempt by law from attachment or
execution. (Southern Motors, Inc. vs. Magbanua, 101 Phil. 155 [1957].)
The mere fact that the seller secures possession of the personal property
through an attachment after filing an action for collection of the unpaid
balance, with a prayer for an issuance of a writ of preliminary
attachment does not necessarily mean that he intends to resort to a
foreclosure of the mortgage. Unlike in a judicial foreclosure sale, there
is no need for the court to confirm the sale on execution. (Palma vs.
Court of Appeals, 52 SCAD 38, 232 SCRA 714 [1994].)
(2) Remedy of cancellation. — If the vendor chooses rescission or
cancellation of the contract upon the vendee’s failure to pay two or more
installments, the latter can demand the return of payments already made
unless there is a stipulation about forfeiture. (see Art. 1486.) In a case,
for failure of the buyer to pay two or more installments, the vendormortgagee (or his assignee) repossessed the car. The receipt issued by
the vendor’s assignee to the vendee when it took possession of the
vehicle states that the vehicle could be redeemed within 15 days,
meaning that should the vendee fail to redeem within the said period by
paying the balance of the purchase price, the assignee would retain
permanent possession of the vehicle as it did in fact. It was held that by
this act, the vendor exercised its option to cancel the contract of sale,
barring it from exacting payment of the balance of the purchase price.
“It cannot have its cake and eat it too.” (Nonato vs. Intermediate
Appellate Court, 140 SCRA 255 [1985].)
(3) Remedy of foreclosure. — If the vendor has chosen the third
remedy of foreclosure of the chattel mortgage if one has been given on
the property, he is not obliged to return to the vendee the amount of the
installments already paid should there be an agreement to that effect.
(Ibid.) But he shall have no further action against the vendee for the
recovery of any unpaid balance of the price remaining after the
foreclosure and actual sale of the mortgaged chattel, and any agreement
to the contrary is void. (Zayas, Jr. vs. Luneta Motor Company, 117
Art. 1484
NATURE AND FORM OF THE CONTRACT
111
SCRA 726 [1982]; PAMECA Wood Treatment Plant, Inc. vs. Court of
Appeals, 310 SCRA 281 [1999].)
(a)
Recovery by mortgagee of other than unpaid balance
of purchase price. — Article 1484(3) is inapplicable where the
amounts adjudged in favor of the vendor-mortgagee were not part
of the unpaid balance of the purchase price or in the concept of a
deficiency judgment but were expenses of the suit. (Universal
Motors Corp. vs. Velasco, 98 SCRA 545 [1980], infra.) Where the
mortgagor plainly refuses to deliver the chattel subject of the
mortgage upon his failure to pay two or more installments or if he
conceals the chattel to place it beyond the reach of the mortgagee it
logically follows as a matter of common sense, that the necessary
expenses incurred in the prosecution by the mortgagee in the
prosecution of the action for replevin so that he can regain
possession of the chattel, should be borne by the mortgagor.
Recoverable expenses would include expenses properly incurred in
effecting seizure of the chattel and attorney’s fees in prosecuting
the action for replevin. (Agustin vs.
Court of Appeals, 81 SCAD 827, 271 SCRA 457 [1997].)
(b)
Recourse of mortgagee against guarantor of vendee.
— Neither can the vendor after the foreclosure of the chattel
mortgage proceed against any third party who may have guaranteed
the vendee’s performance of his obligation, for “if the guarantor
should be compelled to pay the balance of the purchase price, the
guarantor will, in turn, be entitled to recover what he has paid from
the debtor-vendee (Art. 2066.); so that ultimately, it will be the
vendee who will be made to bear the payment of the balance of the
price, despite the earlier foreclosure of the chattel mortgage given
by him. Thus, the protection given by Article 1484 (to the unpaid
vendor) would be indirectly subverted, and public policy
overturned.” (Cruz vs. Filipinas Invest. & Finance Corp., 23 SCRA
791 [1968]; Pascual vs. Universal Corporation, 61 SCRA 121
[1974].)
(c)
Recourse of assignee against mortgagee. — When the
vendor assigns his credit to another person, the latter is likewise
bound by the same law. Accordingly, when the assignee forecloses
on the mortgage, there can be no further recovery of the deficiency
112
SALES
Art. 1484
and the seller-mortgagee is deemed to have renounced any right
thereto. (Borbon II vs. Servicewide Specialists, Inc., 72 SCAD 111,
258 SCRA 634 [1996].) Article 1484(3), however, does not bar one
to whom the seller-mortgagee has assigned on a with-recourse basis
his credit against the buyer from recovering from the seller the
assigned credit in full although the seller may have no right of
recovery against the buyer for the deficiency. (Filipinas Invest. &
Finance Corp. vs. Vitug, Jr., 28 SCRA 658 [1969].)
ILLUSTRATIVE CASE:
Seller-mortgagee assigned on a recourse basis a promissory note
covering purchase price of motor vehicle executed by buyermortgagor who defaulted, and assignee seeks to recover from
assignor unpaid balance remaining after foreclosure.
Facts: B delivered to S a promissory note covering the purchase
price of a motor vehicle bought by B from S, secured by a chattel
mortgage over such automobile. S negotiated the note to C, assigning
all S’s rights to the same, the assignment including the right of
recourse against S.
B defaulted. The car was sold at public auction but the proceeds
still left a deficiency.
Issue: After the foreclosure and sale by C, could it hold S liable
for the payment of the outstanding balance, plus attorney’s fees and
costs?
Held: Yes. Article 1483 is not applicable. The transaction
between S and C was purely an ordinary discounting transaction. The
remedy sought by C is not against the buyer (B) of the car but against
the seller (S), independent of whether or not S may have a right of
recovery against B, which in this case, he does not have. What Article
1484(3) seeks to protect are only the buyers on installment. Surely,
Congress could not have intended to impair and much less to do away
with the right of the seller to make commercial use of his credit against
the buyer, provided said buyer is not burdened beyond what the law
allows.
The contention by S that since what were assigned to C were only
whatever rights it had against B (the buyer), it should follow that
inasmuch as S has no right to recover from B beyond the proceeds of
the foreclosure sale, C, as assignee, should have also no right to
recover any deficiency is untenable. The very fact that C was given
Art. 1484
NATURE AND FORM OF THE CONTRACT
113
the right of recourse against S negates the idea that the parties
contemplated to limit the recovery of C to only the proceeds of the
mortgage sale. (Ibid.)
Note: In the case of Cruz vs. Filipinas Invest. & Finance Corp.
(supra.), the Supreme Court broadened the scope of the Recto Law
(now Art. 1484.) beyond its letter and held that within its spirit, a seller
of goods on installments does not have any right of action against a
third party who, in addition to the buyer’s mortgage of the goods sold,
furnishes additional security for the payment of said installment or the
purchase price of said goods. That case is entirely different from the
one at bar. In that case, the corporation was trying to recover from the
guarantor of the buyer, whereas in the present case, it is precisely
stipulated, in effect, that C had a right of recourse against the seller
should the buyer failed to pay the assigned credit in full. (Ibid.)
Meaning of certain terms as used in
Article 1484.
(1) “Exercise.” — In a case, the issue was “whether the plaintiff
(mortgagee) is precluded to press for collection of an account secured
by a chattel mortgage, after it shall have informed the defendant
(mortgagor) of its intention to foreclose on the same mortgage and the
voluntary acceptance of such step (foreclosure) by the defendants.”
The Supreme Court held that such desistance of the plaintiff, on its
own initiative, from proceeding with the auction sale without gaining
any advantage or benefit, and without causing any disadvantage or harm
to the defendant-mortgagor, rendered useless its previous choice to
foreclose, and for this reason, it could not be considered as having
“exercised” (the Code uses the word “exercise”) the remedy of
foreclosure because of its incomplete implementation. Therefore, the
plaintiff was not barred from suing on the unpaid account. In desisting
from a foreclosure of chattel mortgage, and suing instead for the unpaid
balance, the creditor does not assume really inconsistent positions, nor
is he estopped considering that detriment to the opposing party is a
prerequisite to the operation of estoppel. (Radiowealth, Inc. vs.
Lavin, 7 SCRA 804 [1963].)
(2) “Action.” — Considering the purpose for which the prohibition
contained in Article 1484 was intended, the word “action” used therein
may be construed as referring to any judicial or extra-judicial
114
SALES
Art. 1484
proceeding by virtue of which the vendor may lawfully be enabled to
exact recovery of the supposed unsatisfied balance of the purchase price
from the purchaser or his privy. (Cruz vs. Filipinas Investment and
Finance Corp., 23 SCRA 791 [1968].)
(3) “Any unpaid balance.” — The phrase should be interpreted as
having reference to the deficiency judgment to which the mortgagee
may be entitled where, after the mortgaged chattel is sold at public
auction, the proceeds obtained therefrom are insufficient to cover the
full amount of the secured obligation. It includes all other claims that
may likewise be called for such as interest on the principal, attorney’s
fees, expenses of collection, and the costs. Were it the intention of the
legislature to limit its meaning to the unpaid balance of the principal, it
would have so stated. (Macondray & Co., Inc. vs. Eustaquio, 64 Phil.
446 [1937].) Thus, where the mortgagor unjustifiably refused to
surrender the chattel subject of the mortgage upon failure of two or
more installments, or if he concealed the chattel to place it beyond the
reach of the mortgagee, that thereby constrained the latter to seek court
relief, the expenses incurred for the prosecution of the case, such as
attorney’s fees, could rightly be awarded. (Borbon II vs.
Servicewide Specialists, Inc., 72 SCAD 111, 258 SCRA 634 [1996].)
(4) “Foreclosure.” — Article 1484(3), in referring to foreclosure
of a chattel mortgage given to secure payments in installments of the
purchase price of the thing sold, means foreclosure by the usual
methods including sale of the thing at public auction.
(a)
Where there is no sale because the sheriff released
theproperty without proceeding to sell the same and the sale was
not rescinded by the vendor, the latter was not precluded from suing
the vendee for the balance of the purchase price. (Pacific
Commercial Co. vs. De La Rama, 72 Phil. 380 [1941].)
(b)
Similarly, where the action instituted is for specific
performance and the mortgaged property is subsequently attached
and sold by virtue of an execution, the sale thereof does not amount
to a foreclosure of the mortgage; hence, the sellercreditor is entitled
to deficiency judgment (Southern Motors, Inc. vs. Moscoso, 2
SCRA 168 [1961].) and for an alias writ of execution for the portion
of the judgment that has not been satisfied. (Industrial Finance
Corp. vs. Ramirez, 77 SCRA 152 [1977].)
Art. 1484
NATURE AND FORM OF THE CONTRACT
115
(c)
Under the law, the delivery by the mortgagor of
thepossession of the mortgaged chattel to the mortgagee
preparatory for its foreclosure sale can only operate to extinguish
the mortgagor’s liability if the mortgagee had actually caused the
foreclosure of the property when it recovered possession thereof. It
is the fact of foreclosure and actual sale of the mortgaged chattel
that bars the recovery by the vendor of the balance of the vendee’s
outstanding obligation not satisfied by the sale. Accordingly, if the
vendor desisted, on his own initiative, from consummating the
auction sale when it discovered that foreclosure would be
impractical, such desistance would operate as a timely disavowal of
the remedy of foreclosure, and the vendor can still sue for specific
performance. The mortgagee who accepted delivery of the
mortgaged property is not estopped from demanding payment of
the unpaid obligation in the absence of clear consent on his part to
accept the delivery in full satisfaction of the mortgaged debt in the
concept of dacion en pago. 26 (Filinvest Credit Corp. vs. Phil.
Acetylene Co., Inc., 111 SCRA 421 [1982]; see De la Cruz vs.
Asian Consumer & Industrial Finance Corp., 214 SCRA 103
[1992].)
(d)
In ordinary alternative obligations, a mere choice
categorically and unequivocally made and then communicated by
the person entitled to exercise the option concludes the parties. The
creditor may not thereafter exercise any other option, unless the
chosen alternative proves to be ineffectual or unavailing due to no
fault on his part. This rule, in essence, is the difference between
alternative obligations, on the one hand, and alternative remedies,
upon the other hand, where, in the latter case, the choice generally
becomes conclusive only 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
26 Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction
of debt in money, shall be governed by the law on sales.
116
SALES
Art. 1484
an extrajudicial foreclosure, that property may still be levied on
execution and an alias writ may be issued if the proceeds thereof
are insufficient to satisfy the judgment credit. So, also, a mere
demand to surrender the object which is not heeded by the
mortgagor will not amount to a foreclosure, but the repossession
thereof by the vendor-mortgagee would have the effect of
foreclosure. (Borbon II vs. Servicewide Specialists, Inc., supra.)
(e)
Actual sale in accordance with the Chattel
MortgageLaw (Act No. 1508, Sec. 14.) resulting in a deficiency of
the mortgaged chattel is the foreclosure contemplated by law.
(Manila Motor Co. vs. Fernandez, 99 Phil. 782 [1956]; Northern
Motors, Inc. vs. Sapinoso, 33 SCRA 356 [1970]; Industrial Finance
Corp. vs. Tobias, 78 SCRA 28 [1977]; see Vda. de Quiambao vs.
Manila Motor Co., 3 SCRA 444 [1961].) But the taking by the
mortgagee of the mortgaged chattel without proceeding to the sale
of the same at public auction is not lawful. The express purpose of
taking the mortgaged property is to sell the same and/or foreclose
the mortgage constituted thereon either judicially or extra-judicially
and thereby liquidate the indebtedness in accordance with law.
(Esguerra vs. Court of Appeals, 173 SCRA 1 [1989].)
ILLUSTRATIVE CASES:
1. Defaulting buyer-mortgagor was given by assignee the option
to pay unpaid balance of truck brought on installments or to surrender
the same, and the assignee, having learned after buyer exercised the
second option that the truck had met an accident, filed suit for
recovery of unpaid balance of price.
Facts: B bought a truck on installments from S. Payment was
secured by a chattel mortgage. The promissory note and the mortgage
was assigned by S to C. B defaulted on the installment payments. As
a consequence, C demanded payment of the entire unpaid balance of
the price or surrender of the truck. B replied that he was voluntarily
surrendering the truck to C. He said the truck was being repaired at
the shop of S as it had met with an accident, that there was too much
delay in the repair, and that he was not satisfied with the repair of the
finished portions.
C decided not to get the truck. It filed a suit for the recovery of
the balance of the obligation.
Art. 1484
NATURE AND FORM OF THE CONTRACT
Issue: Is C estopped to insist on its claim on the balance of the
promissory note when it demanded the return or surrender of the
truck?
Held: No. C did not know about the accident. Even B cannot
expect C to accept the term of surrender because aside from the fact
that the truck being surrendered met an accident, C was not satisfied
with the repair of the finished portions of the truck in question. C,
therefore, was justified in refusing to accept such surrender and in
bringing suit to recover the balance of the purchase price.
Since the case involves the sale of personal property on
installments, Article 1484 of the Civil Code should apply. The
remedies provided for in Article 1484 are considered alternative, not
cumulative such that the exercise of one would bar the exercise of the
others. Here, C has not cancelled the sale, nor has it exercised the
remedy of foreclosure. Foreclosure, judicial or extrajudicial,
presupposes something more than a mere demand to surrender
possession of the object of the mortgage. Since C has not availed itself
of the remedy of cancelling the sale of the truck in question or of
foreclosing the chattel mortgage on said truck, C is still free to avail
of the remedy of exacting fulfillment of the obligation of B, the vendee
of the truck in question. (Industrial Finance Corp. vs. Tobias, 78
SCRA
28 [1977].)
———— ———— ————
2. In a suit for recovery of unpaid balance of purchase price of
mortgaged truck sold on installments, seller caused the attachment
and subsequent sale of the vehicle.
Facts: B bought from S a truck on installment basis. Upon making
a downpayment, B executed a promissory note for the unpaid balance
of the purchase price to secure the payment of which a chattel
mortgage was constituted on the truck in favor of S. B failed to pay S
installments on the balance. S filed a complaint for recovery of the
unpaid balance. Pursuant to a writ of attachment, the truck and other
properties of A were attached.
B contends that S had availed of the third remedy provided in
Article 1484, viz., the foreclosure of the chattel mortgage on the truck.
On the other hand, S claims that in filing the complaint, it availed of
the first remedy, i.e., to exact fulfillment of the obligation (specific
performance).
117
118
SALES
Art. 1484
Issue: Do the attachment and subsequent sale of the mortgaged
truck amount to a foreclosure of the mortgage, hence, S (sellercreditor) is not entitled to deficiency judgment?
Held: No. There is nothing unlawful or irregular in B’s act of
attaching the mortgaged truck. Since S has chosen to exact the
fulfillment of B’s obligation, it may enforce execution of the judgment
that may be favorably rendered thereon, on all personal and real
properties of B not exempt from execution sufficient to satisfy such
judgment. (Southern Motors, Inc. vs. Moscoso, 2 SCRA 168 [1961].)
Note: There is a substantial difference between the effect of
foreclosing a chattel mortgage and attaching the mortgaged chattel.
The variance lies in the ability of the debtor to retain possession of the
property attached by giving a counterbond and thereby discharging
the attachment. This remedy the debtor does not have in the event of
foreclosure. (Reyes, J.B.L., J., concurring.)
———— ———— ————
3. Seller brought suit to recover mortgaged truck sold on
installment basis preparatory to foreclosure, and lower court held
that expenses of suit adjudged in his favor may be enforced only
against proceeds of the vehicle.
Facts: B brought from S a truck on installment basis. To secure
the balance of the purchase price B executed a promissory note and a
chattel mortgage. B defaulted in his payments. S asked him to
surrender the vehicle in accordance with the chattel mortgage
contract, but B failed to surrender the truck. S filed an action to
recover the truck preparatory to foreclosure of the mortgage. By virtue
of a writ of replevin, S was able to repossess the truck. The parties
submitted a stipulation of facts which mentioned, among other things,
the expenses incurred by S in securing possession of the vehicle.
On the basis of the stipulation, the lower court rendered a decision
which said, among other things, that the sums adjudged in S’s favor
may be enforced only against the proceeds of the vehicle mortgaged.
Issue: Is the third paragraph of Article 1484 applicable to the case
at bar?
Held: No. First, the action instituted in the court a quo was not
for foreclosure of the chattel mortgage but for replevin; and second,
the amounts adjudged in favor of the plaintiff were not part of the
unpaid balance of the purchase price or in the concept of deficiency
Art. 1484
NATURE AND FORM OF THE CONTRACT
judgment but were for the expenses of the suit. (Universal Motors
Corp. vs. Velasco, 98 SCRA 545 [1980].)
———— ———— ————
4. Chattel mortgage covers not only the personal property sold
on installment payments but other personal property of the
vendeemortgagor.
Facts: B purchased from S two Ford sedans payable in
installments. B executed a promissory note and a deed of chattel
mortgage covering not only the two new cars but also an old car and
his certificate of public convenience for the operation of a taxicab
fleet. With the conformity of B, S assigned its rights to the note and
the mortgage to F. Due to the failure of B to pay the installments, F
foreclosed the chattel mortgage extra-judicially. At the public auction,
F was the purchaser. Another auction sale was held because B’s
obligation was not fully satisfied by the sale of the vehicles. At the
second sale, the franchise to operate the taxicab service was sold to F.
B filed an action for annulment of the contract of mortgage. The trial
court held the chattel mortgage was null and void insofar as the taxicab
franchise and the old car were concerned.
Issue: Is the chattel mortgage valid insofar as the franchise and
the subsequent sale thereof are concerned?
Held: The resolution of said issue is unquestionably governed by
the provisions of Article 1484 of the Civil Code. Under the article, the
vendor of personal property the purchase price of which is payable in
installments, has the right, should the vendee default in the payment
of two or more of the agreed installments, to exact fulfillment by the
purchaser of the obligation, or to cancel the sale, or to foreclose the
mortgage on the purchased personal property, if one was constituted.
Whichever right the vendor elects, he cannot avail of the other, these
remedies being alternative, not cumulative. Furthermore, if the vendor
avails himself of the right to foreclose his mortgage, the law prohibits
him from further bringing an action against the vendee for the purpose
of recovering whatever balance of the debt secured not satisfied by the
foreclosure sale.
Consequently, the lower court rightly declared the nullity of the
chattel mortgage in question insofar as the taxicab franchise and the
used car of B are concerned. F has to content himself with the proceeds
of the sale at the public auction of the two cars which were sold on
installment and mortgaged to S, his assignor. To allow the sale of other
properties would be equivalent to obtaining a writ of execution against
119
120
SALES
Art. 1484
B concerning said properties which are separate and distinct from
those which were sold on installment. This would be contrary to
public policy and the very spirit and purpose of the law limiting the
vendor’s right to foreclose the chattel mortgage only on the thing sold.
(Ridad vs. Filipinas Investment and Finance Corp., 120 SCRA 246
[1983]; see Levi Hermanos, Inc. vs. Pacific Commercial, 71 Phil. 587
[1941].)
Recovery of deficiency after foreclosure
prohibited.
(1) Purpose of prohibition. — The principal object of Article 1484
(3) is to remedy the abuses committed in connection with foreclosure
of chattel mortgages. This amendment prevents mortgagees from
seizing the mortgaged property, buying it at foreclosure sale for a low
price and then bringing suit against the mortgagor for a deficiency
judgment. The almost invariable result of this procedure was that the
mortgagor found himself minus the property and still owing practically
the full amount of his original indebtedness. In other words, in all
proceedings for the foreclosure of chattel mortgages, the mortgagee is
limited to the property included in the mortgage. (Bachrach Motor Co.
vs. Milan, 61 Phil. 409 [1935]; Manila Trading & Supply Co. vs. Reyes,
62 Phil. 461 [1935].) He has no more cause of action against the
purchaser or his guarantor. (Luneta Motor Co. vs. Salvador, 108 Phil.
1057 [1960].) “Although, of course, the purchaser must suffer the
consequences of his imprudence and lack of foresight, the chastisement
must not be to the extent of ruining him completely and, on the other
hand, enriching the vendor in a manner which shocks the conscience.”
(Manila Trading and Supply Co. vs. Reyes, supra.)
(2) Prohibition not affected by assignment by vendor of his rights.
— The assignment by the vendor of his rights to the sale of personal
property on installment basis covered by Article 1484 of the Civil Code
does not change the nature of the transaction between the parties — the
vendor and the vendee. It remains the same. Hence, the assignee can
have no better rights than the assignor. Accordingly, where the
obligation of the vendee had already been discharged by sale at public
auction of the property subject of the chattel mortgage, no deficiency
amount can be recovered by the assignee. To rule otherwise would pave
the way for subverting the policy underlying Article 1484 on the
Art. 1484
NATURE AND FORM OF THE CONTRACT
121
foreclosure of chattel mortgages over personal property sold on
installment basis. (Zayas, Jr. vs. Luneta Motor Company, 117 SCRA
726 [1982].)
Sale or financing of real estate on
installment payments.
(1) Rights of buyer. — In transactions or contracts involving the
sale or financing of real estate on installment payments (see Appendix
“B.”), including residential condominium apartments, the following are
the rights given to the buyer who has paid at least two (2) years of
installments in case he defaults in the payment of succeeding payments:
(a)
To pay without additional interest, the unpaid
installments due within the total grace period earned by him fixed
at the rate of one (1)-month grace period for every one (1) year of
installment payments made. This right however, shall be exercised
by him only once in every five (5) years of the life of the contract
and its extension, if any; and
(b)
If the contract is cancelled, the seller shall refund to the
buyer the cash surrender value of the payments on the property
equivalent to 50% of the total payments made and, after five (5)
years of installments, an additional 5% every year but not to exceed
90% of the total payments made. (Sec. 3, R.A. No. 6552 [Realty
Installment Buyer Protection Act]; see Layug vs.
Intermediate Appellate Court, 67 SCRA 627 [1988].)
(c)
The buyer has the right to sell his right or assign
thesame before actual cancellation of the contract (see Sec. 5, R.A.
No. 6552.) and to pay in advance any unpaid installment anytime
without interest and to have such full payment of the purchase price
annotated in the certificate of title covering the property. (see Sec.
6, ibid.)
(2) Conditions for cancellation of sale by seller. — The actual
cancellation shall take place after 30 days from receipt by the buyer of
the notice of cancellation or the demand for rescission by a notarial act
and upon full payment of the cash surrender value to the buyer. Down
payments, deposits or options on the contract shall be included in the
computation of the total number of installment payments made. (Sec. 3,
Ibid.; see McLaughlin vs. Court of Appeals, 144 SCRA 693 [1986].)
122
SALES
Art. 1484
In case the defaulting buyer has paid less than two (2) years of
installments, the seller shall give him a grace period of not less than 60
days from the date the installment became due. If he fails to pay the
installments due at the expiration of the grace period, the seller may
cancel the contract after 30 days from receipt by the buyer of the notice
of cancellation or the demand for rescission of the contract by a notarial
act. (Sec. 4, R.A. No. 6552.)
(3) Installment sales not covered. — The Act excludes from its
operation sales on installments of industrial lots, commercial buildings,
and sales to tenants under the Code of Agrarian Reforms.27 (Ibid.) In
other words, in the case of such kind of property, the Act recognizes the
vendor’s right unqualifiedly to cancel the sale upon the buyer’s default.
(Luzon Brokerage Co., Inc.
vs. Maritime Bldg. Co., Inc., 86 SCRA 305 [1978]; see Art. 1592.)
(4) Purpose of the law. — The purpose is to protect buyers of real
estate on installment payments against onerous and oppressive
conditions. (Sec. 2, R.A. No. 6552.)
In a case, the petitioner claims that he is entitled to a conveyance of
at least eight (8) of the 12 lots subject of the conditional sale, on the
theory that since the total price of the 12 lots was P120,000, each lot
then had a value of P10,000 and, therefore, with
27 R.A. No. 3844, as amended; now, R.A. No. 6657, the Comprehensive Agrarian Reform
Law of 1988.
NATURE AND FORM OF THE CONTRACT
123
Art. 1485
his P80,000.00, he had paid in full the price for the 8 lots. In support of
his claim, he invokes earlier rulings in Legarda Hermanos vs. Saldaña
(55 SCRA 324 [1978].) and Calasanz vs. Angeles. (135 SCRA 323
[1985].)
In the first case, the contract of sale provided for payment of the
price of two (2) subdivision lots at P1,500.00 each, exclusive of interest,
in 120 monthly installments and at time of default, the buyer had already
paid P3,582.00, inclusive of interest; and in the second, the agreement
had a price of P3,720.00 with interest at 7% per annum, and at time of
default, the buyer had paid installments totaling P4,533.38, inclusive of
interest. Upon considerations of justice and equity and in the light of the
general provisions of the civil law, the Supreme Court resolved in the
first case to direct the conveyance of one of the lots to the buyer since
he had already paid more than the value thereof, and in the second, to
disallow cancellation by the seller and direct transfer of title to the buyer
upon payment of the first installments yet unpaid.
In both cases, the Supreme Court equitably allocated the benefits
and losses between the parties to preclude undue enrichment by one at
the expense of the other. It was held that the cited precedents are not
applicable. The petitioner cannot be permitted to claim that all his
payments should be credited to him in their entirety, without regard
whatever, to the damages his default might have caused to the seller. In
any event, it is no longer possible to apply the rulings in the said cases
to the case at bar, i.e., to resort to principles of equity and the general
provisions of the Civil Code in the resolution of the present controversy,
because at the time of the execution of the contract in question and the
breach thereof, R.A. No. 6552 was already in force and applicable
thereto. It precludes resort to equity and analogous provisions of the
Civil Code, it being axiomatic that where there is an adequate remedy
at law available to the parties, equity should not come into play. (Layug
vs. Intermediate Appellate Court, 167 SCRA 627 [1988].)
ART. 1485. The preceding article shall be applied
to contracts purporting to be leases of personal
property with option to buy, when the lessor has
deprived the lessee of the possession or enjoyment
of the thing.
124
SALES
(1454-A-a)
Art. 1485
Lease of personal property with
option to buy.
(1) Nature of transaction. — Leases of personal property with
option to buy on the part of the lessee who takes possession or
enjoyment of the property leased are really sales of personalty payable
in installments. Accordingly, the rules provided in Article 1484 are
equally applicable to the so-called leases of personal property. Sellers
desirous of making conditional sales of their goods but do not wish
openly to make a bargain in that form, for one reason or another, have
frequently resorted to the device of making contracts in the form of
leases either with option to the buyer to purchase for small
consideration at the end of the term provided the so-called rent has been
duly paid, or with the stipulation that if the rent throughout the term is
paid, the title shall thereupon vest on in the lessee. (Filinvest Credit
Corp. vs. Court of Appeals, 178 SCRA 188 [1989].)
(2) Purpose of provision. — The evident purpose of Article 1485
is to prevent vendors from resorting to this form of contract which
usually is in reality contract of sale of personal property payable in
installments in contravention of the provisions of Article 1484. Through
the set-up, the vendor by retaining ownership over the property in the
guise of being the lessor, retains likewise the right to repossess the
same, without going through the process of foreclosure, in the event the
vendee-lessee defaults in the payment of the installments. There arises,
therefore, no need to constitute a chattel mortgage over the movable
sold. More important, the vendor, after repossessing the property and,
in effect, cancelling the contract of sale, gets to keep all the
installments-cumrental already paid. (Filinvest Credit Corp. vs. Court
of Appeals, 178 SCRA 188 [1989].)
EXAMPLE:
B entered into a contract called “contract of lease” with S
whereby B leased the car of S. It is stipulated that B, the alleged lessee,
shall pay P10,000.00, upon signing the contract, and on or before the
5th day of every month, P2,000.00 by way of rental.
NATURE AND FORM OF THE CONTRACT
The contract fixed the value of the vehicle to be P100,000.00. It
also provided that B has the option to purArt. 1486
chase the car for the said amount and the payment made by way of
rentals shall be deducted from the amount agreed in the option and
upon the full value fixed being paid, the lease would terminate and
title to the leased property would be transferred to B; and S would
have the right to terminate the contract and repossess the vehicle
should B fail to make payments on the dates specified, and in such
event, the payments theretofore made should remain the property of S
and not be recoverable by B.
There can hardly be any question that the contract in this case is
one of sale on installments and not lease, with the socalled monthly
rentals being in truth monthly amortizations on the price of the car,
and is, therefore, subject to the provision that “when the lessor had
deprived the lessee of the enjoyment or possession” of the personal
property, he shall have no further action against the lessee “to recover
any unpaid balance” owing by the latter, “any agreement to the
contrary being void.” In choosing the alternative remedy of depriving
the lessee of the enjoyment of the leased property, the lessor, in such
case, waives the right to bring an action for unpaid rentals on the said
vehicle. (see U.S. Commercial vs. Halili, 93 Phil. 271 [1953]; Manila
Gas Corporation vs. Calupitan, 66 Phil. 646 [1938]; see Elisco Tool
Manufacturing Corp. vs. Court of Appeals, 307 SCRA 731 [1999].)
(3) Repossession by lessor need not be through court action. —
Even where the lessee voluntarily delivers the property to the lessor,
the case is not taken out of the purview of Article 1485 if he does so
in obedience to the lessor’s demands. The article does not require that
the deprivation of the enjoyment of the property be brought about
through court action. Specially where the contract specifically
authorizes the lessor to repossess the property whenever the lessee
defaults in the payment of rent, court action for such purpose is not
essential. (U.S. Commercial Co. vs. Halili, supra.)
ART. 1486. In the cases referred to in the two
preceding articles, a stipulation that the installments
or rents paid shall not be returned to the vendee or
lessee shall be valid insofar as the same may not be
unconscionable under the circumstances. (n)
125
126
SALES
Art. 1487
Stipulation authorizing the forfeiture of
installments or rents paid.
In sales of personal property by installments or leases of personal
property with option to buy, the parties may stipulate that the
installments or rents paid are not to be returned. Such a stipulation is
valid “insofar as the same may not be unconscionable under the
circumstances’’; otherwise, the court has the power to order the return
of a portion of the total amount paid in installments or rents. (Zaragosa
vs. Dimayuga, [C.A.] 62 O.G. 7028; see Art. 1229.)
Thus, in a case, where the monthly installment payable by
defendants (buyers) was P774.00 and the P5,655.92 installment
payments corresponded only to seven (7) monthly installments, the
treatment of the installment as rentals as stipulated in the contract of
sale for failure of the defendants to comply with the terms thereof, was
held not unconscionable, since they admitted having used the airconditioners sold for 22 months, meaning they did not pay 15 monthly
installments on the said air-conditioners and were thus using the same
free for said period to the prejudice of the plaintiff (seller). (Delta Motor
Sales Corp. vs. Nui Kim Duan, 213 SCRA 259 [1992].) In another case,
the forfeiture of the installments paid as rentals, was applied only to the
purchase price of P3,556 which was considered as fair and reasonable
rental for the period in which the property was under the control of the
awardee of the homelot but not to the overpayment of the amount of
P8,244.00 for “a contrary ruling would unjustly enrich the vendor to the
prejudice of the vendee.’’ (Gomez vs. Court of Appeals, 134 SCAD
206, 340 SCRA 720 [2000].)
ART. 1487. The expenses for the execution and
registration of the sale shall be borne by the vendor,
unless there is a stipulation to the contrary. (1455a)
Expenses for execution and registration.
Under this article, the vendor has the duty to pay not only the
expenses for the execution of the sale but also for the registration of the
same in the absence of any agreement between the parties to the
contrary.
NATURE AND FORM OF THE CONTRACT
127
Art. 1487
Expenses incurred subsequent to the transfer of title are to be borne
by the buyer, unless caused by the fault of the seller.
ILLUSTRATIVE CASES:
(1) Vendee assumed liability for taxes and other expenses.
Facts: In the Deed of Absolute Sale, B, buyer, assumed liability
for taxes and other expenses “relative to the execution and/or
implementation” of the Deed “including, among others,
documentation, documentary and service stamps, expenses
for registration and transfer of titles.’’
Issue: Is B liable for overdue real estate taxes?
Held: No. The interpretation that B assumed a liability in overdue
real estate taxes for the years prior to the contract of sale when he was
neither the owner nor the beneficial owner of the property is
incongruent to the tax policy that the user of the property bears the
tax, because there was no immediate transfer of possession of the
property previous to the full payment of the purchase price. If he
intended to assume liability, the contract should have specifically
stated “real estate taxes” due for the previous years. The payments
made under protest cannot be construed to be an admission of liability.
Hence, the tax assessed and collected should be refunded. (Estate of
C.T. Lim vs. City of Manila, 182 SCRA 482 [1990].)
———— ———— ————
2. The Decision commands the petitioner (seller) to “execute a
Deed of Absolute Sate in favor of private respondents (buyers) and
deliver the corresponding certificate of title to them.” Facts:
See above.
Issue: Can it be inferred from these directives that petitioner
should also pay for the expenses in notarizing the deed and obtaining
a new certificate of title?
Held: No. “The obligation to pay for such expenses is
unconnected with and distinct from the obligations to execute and
deliver the deed of absolute and the certificate of title. Since there is
no qualification that the duties to execute and to deliver shall also
compel petitioner to assume the expenses for transferring the pertinent
title in favor of private respondents, the ordinary and literal meaning
of the words ‘execute’ and
128
SALES
Art. 1488
‘deliver’ should prevail, that is, for petitioner to perform all necessary
formalities of the deed of sale and give or cede the res of the certificate
of title (that certificate which naturally must be in their possession
since petitioner cannot give what it does not have) to the actual or
constructive control of private respondents. Needless to stress,
petitioner can actually discharge these obligations without settling for
its own account the expenses which private respondents are
demanding. In this regard, petitioner can appear before the notary
public for notarization of the deed of absolute sale and assist in the
cancellation of the certificate of title in its name by giving this
certificate together with the deed of absolute sale to private
respondents for presentation at the Registry of Deeds, which it has
several times expressed willingness to do so.’’ (Jose Clavano, Inc. vs.
Housing and Land Use Regulatory Board, 378 SCRA 172 [2002].)
ART. 1488. The expropriation of property for
public use is governed by special laws. (1456)
Expropriation of property for public use.
The procedure for the exercise of the power of eminent domain is
provided for in Rule 67 of the Rules of Court. Expropriation must be
decreed by competent authority and for public use and always upon
payment of just compensation. (Art. 435, par. 1, Civil Code; Art. III,
Sec. 9, Constitution.)
— oOo —
129
Chapter 2 CAPACITY TO
BUY OR SELL
ART. 1489. All persons who are authorized in this
Code to obligate themselves, may enter into a
contract of sale, saving the modifications contained
in the following articles.
Where necessaries are sold and delivered to a
minor or other person without capacity to act, he
must pay a reasonable price therefor. Necessaries are
those referred to in article 290. (1457)
Person who may enter into a contract of
sale.
As a general rule, all persons, whether natural or juridical, who can
bind themselves have also legal capacity to buy and sell. There are
exceptions to this rule in those cases when the law determines that a
party suffers from either absolute or relative incapacity.
Kinds of incapacity.
Such incapacity is absolute in the case of persons who cannot bind
themselves; and relative where it exists only with reference to certain
persons or a certain class of property. (Wolfson vs. Estate of Martinez,
20 Phil. 340 [1911].) Persons who are merely relatively incapacitated
are mentioned in Articles 1490-1491.
There are no incapacities except those provided by law and such
incapacities cannot be extended to other cases by implication for the
reason that such construction would be in conflict with the very nature
of Article 1489. (Ibid.)
145
Art. 1490
Liability for necessaries of minor or other
person without capacity to act.
130
SALES
Necessaries are those things which are needed for sustenance,
dwelling, clothing, medical attendance, education and transportation
according to the financial capacity of the family of the incapacitated
person. (see Art. 194, Family Code.) Whether the nature of the contract
is such that it can under any circumstances, be regarded as a contract for
necessaries, is a question which depends upon the facts of the particular
case.
Generally, the contracts entered into by a minor and other
incapacitated persons (e.g., insane or demented persons, deafmutes who
do not know how to write), are voidable. (Arts. 1327, 1390.) However,
where necessaries are sold and delivered to him (without the
intervention of the parent or guardian), he must pay a reasonable price
therefor. (Art. 1489, par. 2.) The contract is, therefore, valid but the
minor has the right to recover any excess above a reasonable value paid
by him.
Sale by minors.
The courts have laid down the rule that the sale of real estate
effected by minors who have already passed the ages of puberty and
adolescence and are now in the adult age, when they pretended to have
already reached their majority, while in fact they have not, is valid, and
they cannot be permitted afterwards to excuse themselves from
compliance with the obligations assumed by them or to seek their
annulment. (see Mercado and Mercado vs. Espiritu, 37 Phil. 265
[1917].)
The doctrine is entirely in accord with the provisions of the Rules
of Court (see Rule 131, Sec. 1.) and the Civil Code (see Art. 1431.)
which determine cases of estoppel.
ART. 1490. The husband and the wife cannot sell
property to each other, except:
(1)
When a separation of property was agreed
upon in the marriage settlements; or
Art. 1490
CAPACITY TO BUY OR SELL
131
(2)
When there has been a judicial separation
of property under article 191.* (1458a)
Relative incapacity of husband and
wife.
(1) The husband and the wife are prohibited by the above article
from selling property to each other. A sale between husband and wife
in violation of Article 1490 is inexistent and void from the beginning
because such contract is expressly prohibited by law. (Art. 1409[7]; Uy
Siu Pin vs. Chua Hue vs. Cantollas, 70 Phil. 55 [1940]; Camia de Reyes
vs. Reyes de Ilano, 63 Phil. 629 [1936]; Medina vs. Collector of Internal
Revenue, 1 SCRA 302 [1961].)
(2) They are also prohibited from making donations to each other
during the marriage except moderate gifts on the occasion of any family
rejoicing. (Art. 87, Family Code.) However, if there has been a
separation of property agreed upon in the marriage settlements, or when
there has been a judicial separation of property decreed between them
by the court, the sales between husband and wife are allowed. They
have, therefore, in the two cases mentioned, capacity to buy from or to
sell to each other.
Incidentally, a marriage settlement (also called “ante-nuptial
contract”) is an agreement entered into by persons who are about to be
united in marriage, and in consideration thereof, for the purpose of
fixing the property relations that would be followed by them for the
duration of the marriage. (see Arts. 74-80, Ibid.)
Reason for prohibition under Article 1490.
The reason for the law is not based so much on the union of the
personality of the husband and wife nor on the weakness of the sex and
on the possibility that the husband will induce his wife to engage in
ruinous operations, but primarily, for the protection of third persons 1
who, relying upon supposed property of either
*Now, Art. 135, Family Code.
1The husband cannot alienate or encumber any real property of the conjugal partnership
without the wife’s consent. (Art. 166.) An action to annul the questioned transaction may be
instituted by the wife during the marriage and within 10 years from the transaction. (Art. 173.)
The lack of consent makes the transaction merely voidable. The
132
SALES
Art. 1491
spouse, enters into a contract with either of them only to find out that
the property relied upon was transferred to the other spouse. (see 10
Manresa 95-96.)
Persons permitted to question sale.
(1) Although certain transfers between husband and wife are
prohibited under Article 1490, such prohibition can be taken advantage
of only by persons who bear such relation to the parties making the
transfer or to the property itself that such transfer interferes with their
rights or interests. Unless such a relationship appears, the transfer
cannot be attacked. Thus, the heirs of either spouse, as well as creditors
at the time of the transfer, can attack the validity of the sale but not
creditors who became such only after the transaction. (Cook vs.
McMicking, 27 Phil. 10 [1914].)
(2) The government is always an interested party in all matters
involving taxable transactions. It is competent to question their validity
or legitimacy whenever necessary to block tax evasion. It can impugn
sales between husband and wife. (Medina vs.
Collector of Internal Revenue, supra.)
ART. 1491. The following persons cannot acquire
by purchase, even at a public or judicial auction,
either in person or through the mediation of another:
(1)
The guardian, the property of the person or
persons who may be under his guardianship;
(2)
Agents, the property whose administration
or sale may have been entrusted to them, unless the
consent of the principal has been given;
(3)
Executors and administrators, the property
of the estate under administration;
(4)
Public officers and employees, the
property of the State or of any subdivision thereof, or
of any govlegal prohibition against the disposition of conjugal property by one spouse without the consent of
the other has been established for the benefit, not of third persons, but only of the other spouse for
Art. 1491
CAPACITY TO BUY OR SELL
133
whom the law desires to save the conjugal partnership from damages that might be caused.
(Villaranda vs. Villaranda, 423 SCRA 571 [2004]; Papa vs.
Montenegro, 54 Phil. 331 [1930].)
ernment owned or controlled corporation, or
institution, the administration of which has been
entrusted to them; this provision shall apply to
judges and government experts who, in any manner
whatsoever, take part in the sale;
(5)
Justices, judges, prosecuting attorneys,
clerks of superior and inferior courts, and other
officers and employees connected with the
administration of justice, the property and rights in
litigation or levied upon an execution before the court
within whose jurisdiction or territory they exercise
their respective functions; this prohibition includes
the act of acquiring by assignment and shall apply to
lawyers, with respect to the property and rights which
may be the object of any litigation in which they may
take part by virtue of their profession;
(6)
(1459a)
Any others specially disqualified by law.
Incapacity by reason of relation to
property.
The above article enumerates the persons who, by reason of the
relation of trust with the persons under their charge or their peculiar
control over the property, are prohibited from acquiring said property
either directly or indirectly and whether in private or public sale. They
are the: (1) guardians; (2) agents; (3) executors and administrators; (4)
public officers and employees; (5) judicial officers, employees and
lawyers; and (6) others especially disqualified by law. (Rubias vs.
Batiller, 51 SCRA 120 [1973].)
The persons disqualified to buy referred to in Articles 1490 and
1491 are also disqualified to become lessees of the things mentioned
thereon. (Art. 1646.)
134
SALES
Art. 1491
Reason for prohibitions under Article
1491.
The disqualifications imposed by Article 1491 on the person
enumerated is grounded on public policy considerations which disallow
the transactions entered into by them, whether directly or indirectly, in
view of the fiduciary relationship involved or the peculiar control
exercised by these individuals over the properties or rights covered.
(Mananquil vs. Villegas, 189 SCRA 335 [1990].)
The prohibitions seek to prevent frauds on the part of such persons
and minimize temptations to the exertion of undue and improper
influence. The fear that greed might get the better of the sentiments of
loyalty and disinterestedness is the reason underlying Article 1491. The
law does not trust human nature to resist the temptations likely to arise
out of antagonism between the interest of the seller and buyer. (23
Scaevola 403; Gregorio Araneta, Inc. vs. Tuazon de Paterno, 91 Phil.
786 [1952].)
Prohibition with respect to guardians.
The relation between guardian and ward is so intimate, the
dependence so complete and the influence so great that any transaction
between the two parties entered while the relationship exists are, in the
highest sense, suspicious and presumptively fraudulent. This influence
is presumed to last while the guardian’s functions are to any extent still
unperformed, while the property is still under his control and until the
accounts have been finally settled. (39 Am. Jur. 2d 160.)
Prohibition with respect to agents.
The agent’s incapacity to buy his principal’s property rests on the
fact that the agent and the principal form one juridical person. Like the
guardian, the agent stands in a fiduciary relation with his principal. A
sale made by an agent to himself, directly or indirectly, without the
permission of the principal is ineffectual. (see Gregorio Araneta, Inc.
vs. Tuazon de Paterno, supra; Barton vs. Leyte Asphalt and Mineral
Co., 46 Phil. 938 [1924].) The consent of the principal removes the
transaction out of the prohibition contained in Article 1491(2). (Distajo
vs. Court of Appeals, 132 SCAD 577, 339 SCRA 52 [2000].)
Art. 1491
CAPACITY TO BUY OR SELL
135
(1) The incapacity of the agent is only against buying the property
he is required to sell during the existence of the relationship. Therefore,
an agent can buy for himself the property after the termination of the
agency (Valera vs. Velasco, 51 Phil. 695 [1928].) or other properties
different from those he has been commissioned to sell. (Moreno vs.
Villonea, [C.A.] 40 O.G. 2322.)
(2) Of course, the agent may buy property placed in his hands for
sale or administration if the principal gives his consent thereto. (Cui vs.
Cui, 100 Phil. 913 [1957].)
(3) The prohibition does not apply where the sale of the property
in dispute was made under a special power inserted in or attached to the
real estate mortgage pursuant to Section 5 of Act No. 3135, as amended,
a special law which governs extra-judicial foreclosure of real estate
mortgage. The power to foreclose is not an ordinary agency that
contemplates exclusively the representation of the principal by the
agent but is primarily an authority conferred upon the mortgagee for the
latter’s own protection. By virtue of the exception, the title of the
mortgagee-creditor over the property cannot be impeached or defeated
on the ground that the mortgagee cannot be a purchaser at his own sale.
(Fiestan vs. Court of Appeals, 185 SCRA 751 [1990].)
Prohibition with respect to executors and
administrators.
The prohibition refers only to properties under the administration of
the executor or administrator at the time of the acquisition and does not
extend, therefore, to property not falling within this class.
Executors do not administer the hereditary rights of any heir. Such
rights do not form part of the property delivered to the executor for
administration. Consequently, the prohibition in No. (3) of Article 1491
does not apply to a purchase by an executor of such hereditary rights
(e.g., 1/10 interest in the estate), even in those cases in which the
executor administers the property pertaining to the estate. (Naval vs.
Enriquez, 3 Phil. 669 [1904]; see Garcia vs. Rivera, 95 Phil. 831
[1954].)
ILLUSTRATIVE CASE:
136
SALES
Art. 1491
Administrator sold certain properties of the estate to his son for
a grossly low price.
Facts: S, administrator of the estate of his deceased mother, was
authorized by the court to sell certain described properties of the estate
to settle its outstanding obligations at the best price obtainable. The
sale was made to B, S’s son, for P75,000. On the same date, B
executed a deed of sale of the same property for P80,000 in favor of
C. Z, etc., heirs of X, filed an action for the annulment/revocation of
the two sales. C claimed that the actual consideration was P225,000
and being a purchaser in good faith and for value, his title to the
property is indefeasible pursuant to law. It appears that S entered into
a “mutual agreement of promise to sell’’ to spouses H and W the
property already sold to C for P220,000 for which they paid P70,000
as earnest money.
H and W alleged that both sales to B and C were simulated and
fictitious, made to defraud the estate and other heirs, and that C
supplied the consideration of the sale to B who was not gainfully
employed. After several hearings, the court allowed all the interested
parties to bid for the property. C offered to buy for P280,000. H and
W counter-offered at P282,000, spot cash, which was increased to
P300,000. Later all the parties, except H and W and B, submitted an
amicable settlement seeking approval of the two sales and accepting
the offer of C. H and W questioned the court’s approval of the
amicable settlement and the non-acceptance of their offer.
Issue: Did the assent of practically all the heirs to the compromise
agreement justify its approval by the court?
Held: No. (1) Sale is illegal, irregular and fictitious. — As
administrator, S occupies a position of the highest trust and
confidence. In the discharge of his functions, an administrator should
act with utmost circumspection to preserve the estate and guard
against its dissipation so as not to prejudice its creditors and the heirs
of the decedent who are entitled to the net residue thereof. In the case
at bar, the sale was made necessary “in order to settle other existing
obligations of the estate, but it was made, of all people, to his son B,
and for a grossly low price of only P75,000. B had no income
whatsoever, was, in fact, still a dependent of his father, and not a
single centavo of the consideration was ever accounted for nor
reported by B to the probate court. It was only after the sales were
questioned in court by H and W that B was compelled to admit that
the actual consideration of the sale to C was P200,000.
Art. 1491
CAPACITY TO BUY OR SELL
137
The sale to B was not submitted to the probate court for approval
as mandated by the order authorizing S to sell. The sale was
indubitably illegal, irregular, and fictitious, and the court’s approval
of the assailed compromise agreement violated Article 1409 and
“cannot work to ratify a fictitious contract which is non-existent and
void from the very beginning.”
(2)
Consent of heirs not a ground for court’s approval of
sale. — The assent of the parties-signatories “to such an illegal
scheme does not legalize the same nor does it impose an obligation
upon the court to approve the same to the prejudice not only of the
creditors of the estate, and of the government by the non-payment of
the correct amount of taxes legally due from the estate.”
(3)
Offer of H and W more advantageous. — The offer of H
and W “is decidedly more beneficial and advantageous not only to the
estate, the heirs of the decedent, but more importantly, to its creditors
for whose account and benefit the sale was made. No satisfactory and
convincing reason appeared given for the rejection and nonacceptance of said offer, thus giving rise to a well-grounded suspicion
that a collusion of some sort exists between the administrator and the
heirs to defraud the creditors and the government.” (Lao vs. Genato,
137 SCRA 77 [1985].)
Prohibition with respect to public officials
and employees.
The prohibition refers only to properties: (1) belonging to the State,
or of any subdivision thereof, or of any government-owned or controlled corporation or institution, (2) the administration of which has
been entrusted to the public officials or employees. Thus, a provincial
governor or treasurer entrusted with the administration of property
belonging to a province cannot buy said property while the school
superintendent who has no charge of the same is not within the scope of
the prohibition.
Note that the prohibition includes judges and government experts
who, in any manner, take part in the sale.
ILLUSTRATIVE CASE:
Land foreclosed by GSIS was sold by it at public auction to the
wife of a GSIS official.
138
SALES
Art. 1491
Facts: For failure to comply with the conditions of sale, GSIS
cancelled the sale of a parcel of land to MPC and later sold the
property at public auction to T (as the highest bidder), the wife of the
Chief, Retirement Division, GSIS. MPC questioned the validity of the
sale to T.
Issue: Does the sale fall under the prohibited transactions under
Article 1491?
Held: Yes. (1) GSIS official with influence or authority. —
“Public officers who hold positions of trust may not bid directly or
indirectly to acquire properties foreclosed by their offices and sold at
public auction. A division chief of the GSIS is not an ordinary
employee without influence or authority. The mere fact that the
husband of T exercises ample authority with respect to a particular
activity, i.e., retirement, shows that his influence cannot be lightly
regarded. The point is that he is a public officer and his wife acts for
and in his name in any transaction with the GSIS.
(2)
Sale is void. — If he is allowed to participate in the
public bidding of properties foreclosed or confiscated by the GSIS
there will always be the suspicion among other bidders and the general
public that the insider official has access to information and
connections with his fellow GSIS officials as to allow him to
eventually acquire the property. It is precisely the need to forestall
such suspicions and to restore confidence in the public service that the
Civil Code declares such transactions to be void from the beginning
and not merely voidable.
(3)
Reasons for prohibition. — The reasons are grounded
on public order and public policy.28 Assuming the transaction to be
fair and not tainted with irregularity, it is still looked upon with
disfavor because it places the officer in a position which might
become antagonistic to his public duty. (Maharlika Broadcasting
Corp. vs. Tagle, 142 SCRA 553 [1986].)
Note: Here, the GSIS official was not entrusted with the
administration of the property in question.
Prohibition with respect to judges, etc., and
lawyers.
28 Art. 1409. The following contracts are inexistent and void from the beginning: (1) those
whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy; x x x.
Art. 1491
CAPACITY TO BUY OR SELL
139
The prohibition in Article 1491(5) applies only to the sale or
assignment of property which is the subject of litigation to the persons
disqualified therein. For the prohibition to operate, the sale or
assignment must take place during the pendency of the litigation
involving the property. (Laig vs. Court of Appeals, 86 SCRA 641
[1978]; Valencia vs. Cabanteng, 196 SCRA 302 [1991].) The
prohibition applies when, for example, a lawyer has not paid for the
property and it was merely assigned to him in consideration of legal
services rendered at a time when the property is still subject of a pending
case. (Ordonio vs. Eduarte, 207 SCRA 229 [1992].) The prohibition on
purchase is all embracing to include not only sales to private individuals
but also public or judicial sales. (Ramos vs. Ngaseo, 445 SCRA 529
[2004].)
(1) When property considered “in litigation.” — For property to
be considered “in litigation,” it is not required that some contest or
litigation over the property should have been tried by the judge. Such
property is “in litigation” from the moment it became subject to the
judicial action of the judge who afterwards purchased it. Hence, a
purchase made by judge at a public auction of a property pursuant to an
order of execution issued by said judge is within the prohibition whether
or not the property had been the subject of litigation in his court.
(Gontingco vs. Pobinguit, 35 Phil. 81 [1911].)
There is no violation of the prohibition (although it may be improper
under the Canons of Judicial Ethics) where the judge purchased the
property in question after the decision involving the property had
already become final because none of the parties therein filed an appeal
within the reglementary period; hence, the same was no longer in
litigation. (Macariola vs. Asuncion, 114 SCRA 77 [1982].)
(2) Where property acquired by lawyer in foreclosure sale after
termination of case. — A lawyer cannot purchase, directly or indirectly,
the property or rights which are the subject of litigation in which he
takes part by virtue of his profession. (see Rubias vs. Satiller, 51 SCRA
120 [1973].) The fact that the property in question was first mortgaged
by the client to his lawyer and only subsequently acquired by the latter
in a foreclosure sale long after the termination of the case will not
remove it from the scope of the prohibition for at the time the mortgage
was executed the relationship of lawyer and client still existed, the very
140
SALES
Art. 1491
relation of trust and confidence sought to be protected by the
prohibition, when a lawyer occupies a vantage position to press upon or
dictate terms to a harassed client. To rule otherwise would be to
countenance indirectly what cannot be done directly. (Fornilda vs.
Regional Trial Court, 166 SCRA 281 [1988].)
(3) Liability of lawyer for violation of prohibition. — A violation
of the prohibition constitutes a breach of professional ethics and
malpractice for which the lawyer may be reprimanded, suspended or
disbarred from the practice of the legal profession. Good faith is not a
defense. (In re Attorney Melchor E. Ruste, 70 Phil. 243 [1940];
Hernandez vs. Villanueva, 40 Phil. 775 [1920]; Mananquil vs. Villegas,
189 SCRA 335 [1990].)
(4) Where lawyer member of law firm involved. — Contracts of
sale or lease where the vendee or lessee is a partnership, of which a
lawyer is a member, over a property involved in a litigation in which he
takes by virtue of his profession are covered by the prohibition.
(5) Cases not covered. — The prohibition does not include sale of
the property of the client effected before it became involved in the
action (Gregorio Araneta, Inc. vs. Tuazon de Paterno, 91 Phil. 786
[1952].); nor does it apply to an assignment of the amount of a judgment
made by a person to his attorney in payment of professional services in
other cases (Municipal Council of Iloilo vs. Evangelista, 55 Phil. 290
[1930].); nor to the sale of a parcel of land, acquired by a client to satisfy
a judgment in his favor, to his attorney as long as the property was not
the subject of the litigation. (Daroy vs. Abecia, 100 SCAD 376, 298
SCRA 239 [1998].) It has also been held that the law does not prohibit
a lawyer from charging a contingent fee (to be given in a case the suit
is won) based on a certain percentage of the value of the property in
litigation (Recto vs. Harden, 100 Phil. 427 [1954].), because the
payment of said fee is not made during the pendency of the litigation
but only after judgment has been rendered in the case handled by the
lawyer. In fact, under the 1988 Code of Professional Responsibility
(Rule 16.03, Canon 10 thereof.), a lawyer may have a lien over funds
and property of his client and may apply so much thereof as may be
necessary to satisfy his lawful fees and disbursements. (Fabillo vs.
Intermediate Appellate Court, 195 SCRA 28 [1991].)
Other persons especially disqualified.
Art. 1491
CAPACITY TO BUY OR SELL
141
Examples of persons especially disqualified by law are:
(1) aliens who are disqualified to purchase private agricultural
lands (Art. XII, Secs. 3, 7, Constitution; see Krivenko vs. Register of
Deeds, 79 Phil. 461 [1947].);
(2) an unpaid seller having a right of lien or having estopped the
goods in transitu, who is prohibited from buying the goods either
directly or indirectly in the resale of the same at a public or private sale
which he may make (Art. 1533, par. 5; Art. 1476[4].); and
(3) The officer conducting the execution sale or his deputies cannot
become a purchaser, or be interested directly or indirectly in any
purchase at an execution sale. (Sec. 19, Rule 39, Rules of Court.)
In the case of aliens, the disqualification is founded on express
provision of the Constitution and not by reason of any fiduciary
relationship. It has been held, however, that where a land is sold to an
alien who later sold it to a Filipino, the sale to the latter cannot be
impugned. In such case, there would be no more public policy to be
served in allowing the Filipino seller or his heirs to recover the land as
the same is already owned by a qualified person. (Herrera vs. Tuy Kim
Guan, 1 SCRA 406 [1961]; Godinez vs. Fong Pak Luen, 120 SCRA 223
[1983].)
Effect of sale in violation of prohibition.
If the sale is made, would the transaction be void or merely
voidable?
(1) With respect to Nos. 1 to 3, the sale shall only be voidable
because in such cases only private interests are affected. (see Wolfson
vs. Estate of Martinez, 20 Phil. 340 [1911].) The defect can be cured by
ratification of the seller. (see Arts. 1392-1396.)
(2) With respect to Nos. 4 to 6, the sale shall be null and void,
public interests being involved therein. (see Art. 1409[1]; Rubias vs.
Batiller, 51 SCRA 120 [1973].)
In a case, the Supreme Court affirmed the decision of a lower court
declaring invalid the sale made by the client in favor of his
142
SALES
Art. 1492
attorney. (Director of Lands vs. Abragat, 53 Phil. 147 [1929]; see
Fornilda vs. Regional Trial Court, 166 SCRA 281 [1988].)
Nullity of prohibited contracts differentiated.
(1) Public officers, etc., justices, etc., and lawyers. — The nullity
of such prohibited contracts, i.e., by public officers and employees of
government property entrusted to them and by justices, judges, fiscals,
and lawyers of property and rights in litigations submitted to or handled
by them, under paragraphs (4) and (5) is definite and permanent and
cannot be cured by ratification. The public interest and public policy
remain paramount and do not permit of compromise or ratification. In
this aspect, their disqualification is grounded on public policy.
(2) Guardian, agents, and administrators. — The disqualification
of public officers differs from the first three cases of guardians, agents,
and administrators, as to whose transactions, it has been opined that
they may be “ratified” by means of and in the form of a new contract,
in which case its validity shall be determined only by the circumstances
at the time of execution of such new contract.
(a)
The causes of nullity which have ceased to exist cannot
impair the validity of the new contract. Thus, the object which was
illegal at the time of the first contract, may have already become
lawful at the time of the ratification or second contract; or the
service which was impossible may have become possible; or the
intention which could not be ascertained may have been clarified
by the parties.
(b)
The ratification or second contract could then be valid
from its execution; however, it does not retroact to the date of the
first contract. (Director of Lands vs. Abragat, supra.)
ART. 1492. The prohibitions in the two preceding
articles are applicable to sales by virtue of legal
redemption, compromises and renunciations. (n)
Art. 1492
CAPACITY TO BUY OR SELL
Prohibition extends
redemption, etc.
to
sales
in
143
legal
(1) The relative incapacity provided in Articles 1490 and 1491
applies also to sales by virtue of legal redemption (see Art. 1619.),
compromises, and renunciations.
(a)
Compromise is a contract whereby the parties, by
reciprocal concessions, avoid a litigation or put an end to one
already commenced. (Art. 2028.) It is the amicable settlement of a
controversy.
(b)
By renunciation, a creditor gratuitously abandons his
right against his creditor. The other terms used by the law are
condonation and remission. (see Art. 1270.)
(2) The persons disqualified to buy referred to in Articles 1490 and
1491 are also disqualified to become lessees of the things mentioned
therein. (Art. 1646.)
— oOo —
Chapter 3 EFFECTS OF THE CONTRACT
WHEN
THE THING SOLD HAS BEEN LOST
ART. 1493. If at the time the contract of sale is
perfected, the thing which is the object of the contract
has been entirely lost, the contract shall be without
any effect.
But if the thing should have been lost in part only,
the vendee may choose between withdrawing from
the contract and demanding the remaining part,
paying its price in proportion to the total sum agreed
upon. (1460a)
Effect of loss of thing at the time of
sale.
The loss or injury referred to in this article is one which has taken
place before or at the time the contract of sale is perfected. It must be
144
SALES
distinguished from the loss or injury mentioned in Articles 1480 and
1504 which occurs after the contract is perfected but prior to the time of
delivery.
(1) Thing entirely lost. — Where the thing is entirely lost at the
time of perfection, the contract is inexistent and void (Art. 1409[3].)
because there is no object. (Art. 1318, par. 2.) There being no contract,
there is no necessity to bring an action for annulment.
(2) Thing only partially lost. — If the subject matter is only
partially lost, the vendee may elect between withdrawing from the
contract and demanding the remaining part, paying its proportionate
price. (Art. 1493, par. 2.)
160
145
Art. 1494
EFFECTS OF THE CONTRACT WHEN THE
THING SOLD HAS BEEN LOST
EXAMPLES:
(1)
S sold his car to B. Unknown to both of them, the car
has been totally destroyed before they agreed on the sale. In this case,
there is no valid contract of sale for lack of object. S, as owner, bears
the loss and B does not have to pay for the price.
(2)
If the car sold is only partially destroyed, there still
remains of the object. However, since it is not of the character or in
the condition contemplated by the parties, the buyer may withdraw
from the contract or demand the delivery of the car, paying its
proportionate price.
When a thing considered lost.
The thing is lost when it perishes or goes out of commerce or
disappears in such a way that its existence is unknown or it cannot be
recovered. (Art. 1189[2].)
The word “perishes” is sufficiently inclusive as to cover a case
where there has been material deterioration or complete change in the
nature of the thing in such a manner that it loses its former utility taking
into consideration the time the contract was entered into. (see 10
Manresa 129.)
ART. 1494. Where the parties purport a sale of
specific goods, and the goods without the knowledge
of the seller have perished in part or have wholly or in
a material part so deteriorated in quality as to be
substantially changed in character, the buyer may at
his option treat the sale:
(1)
as avoided; or
(2) as valid in all of the existing goods or in so
much thereof as have not deteriorated, and as
binding the buyer to pay the agreed price for the
goods in which the ownership will pass, if the sale
was divisible. (n)
Effect of loss in case of specific goods.
146
SALES
Article 1493 applies to a sale of specific thing. Article 1494, on the
other hand, applies to sales of goods, that is, the object of the
Art. 1494
sale consists of a mass of “specific goods” which means “goods
identified and agreed upon at the time a contract of sale is made.” (Art.
1636.)
Both articles have actually the same essence providing two
alternative remedies to the buyer in case of deterioration or partial loss
of the object prior to the sale, namely: to rescind or withdraw from the
contract or to give it legal effect, paying the proportionate price of the
remaining object.
(1) Sale divisible. — The second option is available only if the sale
is divisible. (Art. 1494, par. 2.) A contract is divisible when its
consideration is made up of several parts. (see Art. 1420.) When the
consideration is entire and single, the contract is indivisible.
(2) Sale indivisible. — Suppose the sale is not divisible, what price
is the buyer to pay for the remaining goods if he elects to continue with
the sale? It is believed that the buyer should be made to pay only the
proportionate price of the remaining goods as provided for in paragraph
2 of the preceding article. If the sale is indivisible, the object thereof
may be considered as a specific thing.
EXAMPLE:
Suppose the subject matter sold was 100 cavans of rice in the
warehouse of S at P1,000.00 per cavan or for a total price of
P100,000.00. If 60 cavans of rice were lost, B may, at his option,
withdraw from the contract without the obligation to pay for the rice;
or demand the delivery of the 40 cavans, but binding him to pay the
agreed price thereof which is P40,000.00.
If the contract is indivisible, that is, the 100 cavans of rice were
sold for P100,000.00 fixed without consideration of the number of
cavans, B should be made to pay only the proportionate price of 40
cavans which is also P40,000.00.
— oOo —
147
Chapter 4 OBLIGATIONS OF THE
VENDOR
SECTION 1. — General Provisions
ART. 1495. The vendor is bound to transfer the
ownership of and deliver, as well as warrant the thing
which is the object of the sale. (1461a)
Principal obligations of the vendor.
The principal obligations of a vendor are:
(1) to transfer the ownership of the determinate thing sold;
(2) to deliver the thing, with its accessions and accessories, if any,
in the condition in which they were upon the perfection of the contract
(Art. 1537.);
(3) to warrant against eviction and against hidden defects (Arts.
1495, 1547.);
(4) to take care of the thing, pending delivery, with proper
diligence (see Art. 1163.); and
(5) to pay for the expenses of the deed of sale, unless there is a
stipulation to the contrary. (Art. 1487.)
Obligation to transfer ownership and deliver.
(1) Ownership by vendor at time of perfection of contract not
essential. — The vendor need not be the owner of the thing at the time
of perfection of the contract; it is sufficient that he has “a right to
transfer the ownership thereof at the time it is delivered.” (Art. 1459.)
The obligation to transfer ownership and to deliver is really implied in
every contract of sale. (see Arts. 1458, 1459, 1547.)
163
Art. 1495
148
SALES
One who sells something he does not yet own is bound by the sale
when he acquires it later. (Bucton vs. Gabar, 55 SCRA 499 [1974].)
When a property belonging to a person is unlawfully taken by
another, the former has the right of action against the latter for the
recovery of the property. Such right may be transferred by the sale or
assignment of the property and the transferee can maintain such action
against the wrongdoer. (Heirs of Q. Seraspi vs. Court of Appeals, 331
SCRA 293 [2000]; Waite vs. Peterson, 8 Phil.
235 [1907].)
ILLUSTRATIVE CASE:
Goods which seller warranted as already on the way did not
arrive.
Facts: B, vendee, gave his consent to the purchase and sale of
certain goods on the assertion of S, vendor, stated in the contract, that
the goods were already on the way. The goods did not arrive.
Issue: Has S the right to demand from B the payment of the price?
Held: No. The assertion made by S is a warranty (see Arts. 1545,
1546.), the non-fulfillment of which constitutes a breach of contract
and deprives him the right to demand of B the payment of the price of
the sale. Having elected to bind himself in that way, S, as vendor, is
responsible, even if the prompt transportation of the goods does not
depend upon him but upon the importers, for he who contracts and
assumes an obligation is presumed to know the circumstances under
which it can be complied with. (Soler vs. Chesley, 43 Phil. 529
[1922].)
(2) Transfer not essential to perfection of contract. — The transfer
of ownership and the delivery of the thing sold are not essential to the
perfection of the contract. But if the seller does not deliver at the time
stipulated, the buyer may ask for the rescission of the contract or
fulfillment with the right to damages in either case. (Art. 1191.)
(3) No obligation to make delivery during period of redemption. —
The purchaser in execution sales (see Rules of Court, Rule 39, Secs. 30,
35.), however, is not entitled to immediate possession of the
Art. 1495
OBLIGATIONS OF THE VENDOR
General Provisions
property sold. The effective conveyance of the land is accomplished by
the deed which is issued only after the period of redemption has expired.
149
(Flores vs. Lim, 50 Phil. 738 [1927]; Gonzales vs. Calimbas and
Poblete, 51 Phil. 355 [1927].) In other words, the debtor is not obliged
to make delivery during the period of redemption. In all cases of extrajudicial foreclosure sale, the mortgagor may redeem the real property
sold within one year from the date of registration of the sale. (see Act
No. 3155, Sec. 6.) In judicial foreclosure of real estate mortgage, the
general rule is that the mortgagor cannot exercise his right of
redemption after the sale is confirmed by the court. (see Rules of Court,
Rule 68, Sec. 3.)
(4) Right of vendee to transfer of certificate of title. — In a sale of
registered land, the vendee has a right to receive and the vendor the
corresponding obligation to transfer to him, not only the possession and
employment of the land but also the certificate of title. (Gabila vs.
Perez, 169 SCRA 517 [1989].)
(5) Right of buyer to recover the price paid. — The right of a party
to recover the amount given as a consideration has been passed upon in
a case where it was held that: “Whenever money is paid upon the
representation of the receiver that he has either a certain title in property
transferred in consideration of the payment or a certain authority to
receive the money paid, when in fact he has no such title or authority,
then, although there be no fraud or intentional misrepresentation on his
part, yet there is no consideration for the payment. The money remains,
in equity and good conscience, the property of the payer and may be
recovered by him. (Development Bank of the Phils. vs. Court of
Appeals, 65 SCAD 82, 249 SCRA 331 [1995], citing Leather
Manufacturers National Bank vs. Merchants National Bank, 128 U.S.
26; 9 S. C.T. 5; 32 L. ed., 362.) Therefore, the purchaser is entitled to
recover the money paid by him where the contract is set aside by reason
of the mutual material mistake of the parties as to the identity or
quantity of the land sold. And where the purchaser recovers the
purchase price from a vendor who fails or refuses to deliver the title, he
is entitled, as a general rule, to interest on the money paid from the time
of payment. (Ibid., citing Wolfinger vs. Thomas, 22 SD 57; 115 NW
100; Robinson vs. Bresslor, 122 Neb. 461; 240 NW 564.)
Art. 1496
ART. 1496. The ownership of the thing sold is
acquired by the vendee from the moment it is
150
SALES
delivered to him in any of the ways specified in
articles 1497 to 1501, or in any other manner
signifying an agreement that the possession is
transferred from the vendor to the vendee. (n)
Ways of effecting delivery.
The ownership of the thing sold shall be transferred to the vendee
upon the delivery thereof (see Art. 1477.) which may be effected in any
of the following ways or modes:
(1)
by actual or real delivery (Art. 1497.);
(2)
by constructive or legal delivery (Arts. 1498-1501.); or
(3)
by delivery in any other manner signifying an
agreement that the possession is transferred to the vendee. (Arts.
1496-1499.) In all the different modes of delivery, the critical factor
which gives legal effect to the act is the actual intention of the
vendor to deliver, and its acceptance by the vendee. The act,
without the intention, is insufficient. There is no tradition. (Norkis
Distributors, Inc. vs. Court of Appeals, 195 SCRA 694 [1991];
Santos vs. Santos, 156 SCAD 97, 366 SCRA 395 [2001].) Although
transfer of ownership is the primary purpose of sale, delivery
remains an indispensable requisite as our law does not admit the
doctrine of transfer of ownership of property by mere consent.
(People’s Industrial & Commercial Corp. vs. Court of Appeals, 88
SCAD 559, 274 SCRA 597 [1997].) The delivery must be made to
the vendee or his authorized representative. Where the vendee did
not name any person to whom the delivery shall be made in his
behalf, the vendor is bound to deliver exclusively to him. (Lagon
vs. Hooven Comalco Industries, Inc., 141 SCAD 353, 349 SCRA
363 [2001].)
ILLUSTRATIVE CASE:
For rice sold, vendor was not paid by vendee who sold it to
another, the second vendee, the latter refusing to return the rice after
he was repaid by first vendee.
Facts: S agreed to sell 170 cavans of rice to B at the price of
P37.25 per cavan, delivery to be made at T’s store. After the
Art. 1496
OBLIGATIONS OF THE VENDOR
General Provisions
151
goods were unloaded at T’s store, S’s driver tried to collect the
purchase price from T as B was nowhere to be found, but T refused,
stating that he had purchased the goods from B at P33.00 per cavan
and the price had already been paid to him.
This is a simple case of swindling perpetrated by B at the expense
of S and T. However, three days after delivery, T was repaid by B.
Issue: Is T duty bound to return the 170 cavans of rice to S or to
pay its value?
Held: Yes. (1) Sale between B and T voluntarily rescinded by the
repayment. — There was a perfected sale. (Art. 1475.) Ownership of
the rice, too, was transferred to the vendee, B, upon its delivery at the
place stipulated (Art. 1521.), and pursuant to Articles 1477 and 1496.
At the very least, B had a rescissible title to the goods for non-payment
of the purchase price but which had not been rescinded at the time of
the sale to T. Having been repaid the purchase price by B, the sale, as
between B and T, had been voluntarily rescinded, and T was thereby
divested of any claim to the rice. Technically, therefore, he should
return the rice to B.
(2) Rule against unjust enrichment applies. — Since the rice had
not been returned to B who was ready to return the rice to S, it follows
that T should return the rice to S. T cannot be allowed to unjustly
enrich himself at the expense of another by holding on to property no
longer belonging to him. (Art. 22.) In law and in equity, therefore, S
is entitled to recover the rice, or the value thereof since he was not
paid the price therefor. (Obaña vs. Court of Appeals, 135 SCRA 557
[1985].)
Ways of effecting constructive delivery.
(1) Equivalent to actual delivery. — Constructive delivery is a
general term comprehending all those acts which, although not
conferring physical possession of the thing, have been held by
construction of law equivalent to acts of real delivery. (Banawa vs.
Mirano, 97 SCRA 517 [1980]; Aguilar vs. Court of Appeals, 129 SCAD
274, 335 SCRA 308 [2000].) It may be effected in any of the following
ways:
(a) by the execution of a public instrument (Art. 1498, par.
1.);
Art. 1496
152
SALES
(b) by symbolical tradition or traditio symbolica (ibid.,
par.
2.);
(c) by traditio longa manu (Art. 1499.);
(d) by traditio brevi manu (Ibid.);
(e) by traditio constitutum possessorium (Art. 1500.); or
(f) by quasi-delivery or quasi-traditio. (Art. 1501.)
As a specie of constructive delivery, the execution of a public
document is also considered a form of symbolic delivery.
(2) Contrary may be stipulated. — The parties, however, may
stipulate that ownership in the thing shall pass to the purchaser only
after he has fully paid the price (Art. 1478.) or fulfilled certain
conditions. In a contract of absolute sale, ownership is transferred
simultaneously with the delivery of the thing sold. (Joseph & Sons
Enterprises, Inc. vs. Court of Appeals, 143 SCRA 663
[1986].)
— oOo —
SECTION 2. — Delivery of the Thing Sold
ART. 1497. The thing sold shall be understood as
delivered, when it is placed in the control and
possession of the vendee. (1462a)
Concept of tradition or delivery.
Tradition is a derivative mode of acquiring ownership by virtue of
which one who has the right and intention to alienate a corporeal thing,
transmits it by virtue of a just title to one who accepts the same. (10
Manresa 122.)
Importance of tradition.
(1) Transfer of ownership. — Article 1496 emphasizes the
necessity of tradition for the transfer of ownership of the thing sold. Our
law does not admit the doctrine of transfer of property by mere consent.
(Chua vs. Court of Appeals, 401 SCRA 54 [2003].)
153
(a)
The ownership over it is not transferred by
contractmerely but by delivery, actual or constructive. The critical
factor in all the different modes of effecting delivery which gives
legal effect to the act, is the actual intention of the creditor to
deliver, and its acceptance by the vendee. (Norkis Distributors, Inc.
vs. Court of Appeals, 195 SCRA 494 [1991].)
(b)
Contracts only constitute titles or rights to the transfer
or acquisition of ownership, while delivery or tradition is the
method of accomplishing the same, the title and the method of
acquiring it being different in our law. (Gonzales vs. Roxas, 16 Phil.
51 [1910].) But, there is no delivery as to transfer ownership where
the vendee takes possession of the personal property subject matter
of the contract of sale by
169
Art. 1497
stealing the same while in the custody of the vendor or his agent.
(see Aznar vs. Yapdiangco, 13 SCRA 486 [1965].)
(c)
It is during the delivery that the law requires the sellerto
have the right to transfer ownership of the thing sold. In general, a
perfected contract of sale cannot be challenged on the ground of the
seller’s non-ownership of the thing sold at the time of the perfection
of the contract. (Alcantara-Daus vs. De Leon, 404 SCRA 74
[2003].)
(2) Liability in case of loss. — When the thing subject of the sale
is placed in the control and possession of the vendee (Art. 1497.) or his
agent, the delivery is complete and the vendee cannot avoid liability in
case the thing is subsequently lost without the fault of the vendor. (La
Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217 [1968]; Phil. Virginia
Tobacco Adm. vs. Delos Angeles, 87 SCRA 197 [1987]; see Chrysler
Phils. Corp. vs. Court of Appeals, 133 SCRA 507 [1984].)
(3) Right of vendor to claim payment. — Delivery produces its
natural effects in law, the principal and most important of which being
the transfer of ownership without prejudice to the right of the vendor to
claim payment of the price. (Ocejo Perez & Co. vs. International
Banking Corp., 37 Phil. 631 [1918]; Municipality of Victorias vs. Court
of Appeals, 149 SCRA 32 [1987].)
154
SALES
Where the buyer has not become the owner for lack of delivery, his
action is not accion reinvidicatoria but one against the vendor for
specific performance or rescission, with damages in either case. (Art.
1191.)
(4) Consummation of contract. — Delivery of the thing together
with the payment of the price, marks the consummation of the contract
of sale.29 (Phil. National Bank vs. Ling, 69 Phil. 611 [1940];
29
In a deed of sale of a parcel of land with a deed of mortgage to secure payment of the
balance of the purchase price, where title has been transferred to the buyer, the relationship
between the parties is no longer one of buyer and seller because the contract of sale has been
perfected and consummated. It is already one of a mortgagor and a mortgagee. In consideration of
the buyer’s promise to pay on installment basis the balance of the purchase price, the seller has
accepted the mortgage as security for the obligation, thereby becoming the mortgagee. The buyer’s
(mortgagor’s) breach of the obligation will not be with respect to the perfected contract of sale but
the obligations created by the mortgage contract. (Suria vs. Intermediate Appellate Court, 151
SCRA 661 [1987].)
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
155
Art. 1497
Froilan vs. Pan Oriental Shipping Co., 12 SCRA 276 [1964]; La Fuerza,
Inc. vs. Court of Appeals, 23 SCRA 1217 [1968].) Perfection of the
contract, on the other hand, relates to the moment when the meeting of
minds between the parties takes place. (Art. 1475.)
(5) Enjoyment of thing sold. — Delivery is also necessary to enable
the vendee to enjoy and make use of the property purchased.
Actual delivery of the thing sold.
(1) When deemed made. — There is actual delivery when the thing
sold is placed in the control and possession of the vendee (Art. 1497.)
or his agent. (see Alliance Tobacco Corp., Inc. vs. Phil. Virginia
Tobacco Administration, 179 SCRA 336 [1989].) This involves the
physical delivery of the thing and is usually done by the passing of a
movable thing from hand to hand.
ILLUSTRATIVE CASE:
Bank (pledgee) took possession, as security, of the sugar sold and
delivered by unpaid seller to buyer (pledgor) who subsequently
became insolvent.
Facts: S sold sugar to B. The sugar was delivered by S into B’s
warehouse, leaving it entirely subject to his control. B, however, failed
to make payment after completion of delivery as per agreement. C, a
bank, took possession of the sugar pursuant to a contract of pledge
entered into between the bank and B to secure the latter’s indebtedness
of P20,000. Subsequently, B became insolvent.
Issue: Is S still the owner of the sugar as to entitle him to recovery
of its possession?
Held: No. When S delivered the sugar into B’s warehouse,
leaving it entirely subject to his control, it is difficult to see how S
could have divested himself more completely of the possession of the
sugar, or how he could have placed it more completely under the
control of the buyer. The fact that the price has not yet been paid, in
the absence of stipulation, was not, nor could it be an obstacle to the
acquisition of ownership by B, without prejudice, of course, to the
right of S to claim payment of the sum due. (Ocejo Perez & Co. vs.
International Bank, 37 Phil.
156
SALES
Art. 1498
631 [1918].)
(2) Not always essential to passing of title. — Actual or manual
delivery of an article sold is not always essential to the passing of title
thereto. (Art. 1475.) The parties to the contract may agree when and on
what conditions the ownership in the subject of the contract shall pass
to the buyer. As for example, the parties may stipulate that ownership
in the thing sold shall pass to the vendee only after he has fully paid the
price. (Art. 1478.)
ART. 1498. When the sale is made through a public
instrument, the execution thereof shall be equivalent
to the delivery of the thing which is the object of the
contract, if from the deed the contrary does not
appear or cannot clearly be inferred.
With regard to movable property, its delivery may
also be made by the delivery of the keys of the place
or depository where it is stored or kept. (1463)
Execution of a public instrument or
document.
(1) Possession transferred to buyer by notarized deed of
conveyance. — The execution of a public instrument (i.e., an instrument
or document attested and certified by a public officer authorized to
administer oath, such as a notary public) as a manner of delivery applies
to movable as well as immovable property since the law does not make
any distinction and it can be clearly inferred by the use of the word
“also” in paragraph 2 of Article 1498. This manner of delivery is
symbolic. The buyer may use the document as proof of his ownership
of the property sold (Florendo vs. Foz, 20 Phil. 388 [1911];
Municipality of Victorias vs. Court of Appeals, 149 SCRA 32 [1987];
see Dy, Jr. vs. Court of Appeals, 198 SCRA 826 [1991].), for purposes,
for example, of mortgaging the same. (Garcia vs. Court of Appeals, 312
SCRA 180 [1999].) Under Article 1498, possession is transferred to the
vendee (or lessee) by virtue of the notarized deed of conveyance (Ong
Ching Po vs. Court of Appeals, 57 SCAD 619, 239 SCRA 341 [1994].)
(or lease) including the incorporeal rights appurtenant thereto, e.g., right
to eject tenants or squatters from the property in question. Since the
execution of the deed of conveyance is deemed equivalent to delivery,
prior physical delivery or possession is not legally required. Thus,
Art. 1498
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
157
notwithstanding the presence of illegal occupants on the subject
property, transfer of ownership by symbolic delivery under Article
1498 can still be effected through the execution of the deed of
conveyance. The key word is “control,’’ not possession, of the property.
(Sabio vs. International Corporate Bank, 154 SCAD 377, 364 SCRA
385 [2001].)
(2) Delivery presumptive only. — Under Article 1498, the mere
execution of the deed of sale in a public document is equivalent to the
delivery of the property “if from the deed the contrary does not appear
or cannot clearly be inferred.” Therefore, prior physical delivery or
possession is not required. (M.R. Dulay Enterprises, Inc. vs. Court of
Appeals, 44 SCAD 297, 225 SCRA 678 [1993].) Article 1498,
however, lays down the general rule. It confines itself to providing that
“the execution thereof shall be equivalent” to delivery, which means
that there is only a presumptive (not conclusive) delivery which can be
rebutted by evidence to the contrary. (Montenegro vs. Roxas Gomez,
58 Phil. 723 [1932].) Such presumption is destroyed when the delivery
is not effected because of a legal impediment. Nowhere in the Civil
Code is it provided that the execution of a deed of sale is a conclusive
presumption of delivery of the object of the sale. (Ten Realty and
Development Corp. vs. Cruz, 410 SCRA 484 [2003].)
(a)
If it appears from the document or it can be
inferredtherefrom that it was not the intention of the parties to make
delivery, no tradition can be deemed to have taken place. Such
would be the case, for instance, where a certain date is fixed when
the purchaser should take possession of the thing, or where the
vendor reserves the right to use and enjoy the property until a
certain period, or where it is stipulated that until payment of the last
installment is made, the title to the property should not be deemed
to have been transmitted, or where the vendor has no control over
the thing sold at the moment of the sale, and, therefore, its material
delivery could not have been made. (Phil. Suburban Dev. Corp. vs.
The Auditor General, 63 SCRA 397 [1975]; see 10 Manresa 129;
Aviles vs. Arcega, 44 Phil. 924 [1923]; Addison vs. Felix, 38 Phil.
404 [1918];
Masallo vs. Gaspar, 39 Phil. 134 [1918].)
(b)
Presumptive delivery by execution of public
instrument can also be negated by failure of the vendee to take
158
SALES
Art. 1498
material possession of the land subject of the sale in the concept of
purchaser-owner. (Danguilan vs. Intermediate Appellate Court, 158
SCRA 22 [1988]; Pasaqui vs. Villablanca, 68 SCRA 18 [1975].)
The continued possession by the vendor of the property sold may
make dubious the contract of sale between the parties. (Santos vs.
Santos, 156 SCAD 47, 366 SCRA 395 [2001]; Alcos vs.
Intermediate Appellate Court, 162 SCRA 823 [1988].)
ILLUSTRATIVE CASES:
1. After delivery of possession coupled with execution of the deed
of sale of real property embodied in a public instrument but before its
registration and payment of the price, buyer is being made responsible
for the payment of the realty tax.
Facts: S (PSDC) and B (PHHC, a government corporation)
entered into a contract of sale embodied in a public instrument
whereby S conveyed unto B two parcels of land subject to certain
terms and conditions among which that S should register the deed of
absolute sale and secure a new title in the name of B before the latter
can be compelled to pay the purchase price.
Prior to the signing of the deed, B had acquired possession of the
property with the consent of S. The provincial treasurer requested B
to withhold the amount of P30,000.00 from the purchase price to be
paid by it to S representing the realty tax due on the property involved.
Issue: Who is liable to the payment of the real property tax, S or
B?
Held: B. When the sale of real property is made in a public
instrument the execution thereof is equivalent to the delivery of the
thing object of the contract, if from the deed the contrary does not
appear or cannot clearly be inferred.
(1)
Vendee actually placed in possession. — In the case at
bar, there is no question that the vendor (S) had actually placed the
vendee (B) in possession and control over the property sold, even
before the date of the sale.
(2)
Payment of price not essential to transfer of ownership.
— The condition that S should first register the deed of sale and secure
a new title in the name of B before the latter shall pay the purchase
price, did not preclude the transmission of ownership. In the absence
of an express stipulation to the contrary, the payment of the purchase
price of the goods is not a condition precedent to the transfer of title
to the buyer, but title passes by the delivery of the goods.
Art. 1498
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
159
(3)
Title transferred to vendee. — Since the delivery of
possession coupled with the execution of the deed of absolute sale,
had consummated the sale and transferred title to B, the payment of
the real estate tax after such transfer is the responsibility of the
purchaser.30 (Phil. Suburban Dev. Corp. vs. The Auditor General, 63
SCRA 397 [1975].)
———— ———— ————
2. Lessor sold property leased to a third party in violation of the
“exclusive option to purchase the same,’’ given to lessee who filed a
suit for specific performance and annulment of the sale.
Facts: Respondent MT, Inc. leased portions of a commercial
building together with the land owned by CB, lessor, which it used as
a movie theater. Under two contracts of lease, inter alia, MT, Inc.
“shall be given 30-days exclusive option to purchase the same,’’ if CB
should desire to sell the leased premises. CB sold the building to ERD,
petitioner, which received rents from MT, Inc. for sometime.
Subsequently, MT, Inc., claiming it had been denied its right to
purchase the leased property in accordance with the lease contracts
with CB, filed a suit for specific performance and annulment of sale
with prayer to enforce its “exclusive option to purchase’’ the property.
The dispute between MT, Inc., CB and ERD reached the Supreme
Court (referred to as “Mother case’’) which rescinded the absolute
sale to ERD, ordered CB to return to ERD the purchase price, directed
ERD to execute the documents necessary to return ownership of the
disputed lots to CB, and ordered CB to allow MT, Inc. to buy the said
lots for P11,300,000. This decision became final and executory on
March 17, 1997.
MT, Inc. filed with the trial court a motion for execution which
was granted. Subsequently, the Clerk of Court of the Manila Regional
Trial Court, as Sheriff, executed a deed of conveyance in favor of CB
and a deed of sale in favor of MT, Inc. On the basis of these
documents, the Registry of Deeds of Manila cancelled ERD’s titles
and issued new certificates of title in the name of MT, Inc.
On September 18, 1997, or after the execution of the decision of
the Supreme Court, ERD filed with the Regional Trial Court an action
for collection of a sum of money against MT, to wit: (1) the sum of
P11,548,941.76 plus legal interest, representing the total amount of
unpaid monthly rentals/reasonable compensation from June 1, 1987
30 Under Republic Act No. 1322 (Sec. 7 thereof.), however, the PHHC (now National
Housing Authority) was not subject to real property tax.
160
SALES
Art. 1498
to July 31, 1997; (2) the sums of P849,567.12 and P458,853.44 a
month, plus legal interest as rental/reasonable compensation for the
use and occupation of the property from August 1, 1997 to May 1,
1997; and (3) the sum of P500,000 as and for attorney’s fees, plus
other expenses of litigation, and the costs of the suit.
Issue: Is ERD entitled to back rentals?
Held: No. (1) Rental, a civil fruit of ownership. — “Rent is a civil
fruit that belongs to the owner of the property producing it by right of
accession. Consequently and ordinarily, the rentals that fell due from
the time of the perfection of the sale to petitioner until its rescission
by final judgment should belong to the owner of the property during
that period.’’
(2)
Ownership transferred by delivery. — “Ownership of
the thing sold is a real right, which the buyer acquires only upon
delivery of the thing to him ‘in any of the ways specified in articles
1497 to 1501, or in any other manner signifying an agreement that the
possession is transferred from the vendor to the vendee.’ This right is
transferred, not by contract alone, but by tradition or delivery. Non
nudis pactis sed traditione dominia rerum transferantur. And there is
said to be delivery if and when the thing sold ‘is placed in the control
and possession of the vendee.’ Thus, it has been held that while the
execution of a public instrument of sale is recognized by law as
equivalent to the delivery of the thing sold, such constructive or
symbolic delivery, being merely presumptive, is deemed negated by
the failure of the vendee to take actual possession of the land sold.’’
(3)
Concept of delivery. — “Delivery has been described as
a composite act, a thing in which both parties must join and the minds
of both parties concur. It is an act by which one party parts with the
title to and the possession of the property, and the other acquires the
right to and the possession of the same. In its natural sense, delivery
means something in addition to the delivery of property or title; it
means transfer of possession. In the Law on Sales, delivery may be
either actual or constructive, but both forms of delivery contemplate
‘the absolute giving up of the control and custody of the property on
the part of the vendor, and the assumption of the same by the
vendee.’’’
(4)
ERD never took actual control and possession of the
property sold to it. — “From the peculiar facts of this case, it is clear
that petitioner never took actual control and possession of the
property sold, in view of respondent’s timely objection to the sale and
the continued actual possession of the property. The objection took
the form of a court action impugning the sale which, as we know, was
rescinded by a judgment rendered by this Court in the mother case. It
Art. 1498
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
has been held that the execution of a contract of sale as a form of
constructive delivery is a legal fiction. It holds true only when there is
no impediment that may prevent the passing of the property from the
hands of the vendor into those of the vendee. When there is such
impediment, ‘fiction yields to reality — the delivery has not been
effected.’
Hence, respondent’s opposition to the transfer of the property by
way of sale to ERD’s was a legally sufficient impediment that
effectively prevented the passing of the property into the latter’s
hands.’’
(5)
Presumption of delivery by execution of public
instrument is only prima facie. — “The execution of a public
instrument gives rise, therefore, only to a prima facie presumption of
delivery. Such presumption is destroyed when the instrument itself
expresses or implies that delivery was not intended; or when by other
means it is shown that such delivery was not effected, because a third
person was actually in possession of the thing. In the latter case, the
sale cannot be considered consummated.’’
(6)
ERD did not acquire rights to fruits of property. —
“However, the point may be raised that under Article 1164 of the Civil
Code, ERD, as buyer, acquired a right to the fruits of the thing sold
from the time the obligation to deliver the property to petitioner arose.
That time arose upon the perfection of the Contract of Sale on July 30,
1978, from which moment the laws provide that the parties to a sale
may reciprocally demand performance. Does this mean that despite
the judgment rescinding the sale, the right to the fruits belonged to,
and remained enforceable by, ERD?
Article 1385 of the Civil Code answers this question in the
negative, because ‘[r]escission creates the obligation to return the
things which were the object of the contract, together with their fruits,
and the price with its interest; x x x.’ Not only the land and building
sold, but also the rental payments paid, if any, had to be returned by
the buyer.’’
(7)
Rental payments by MT, Inc. did not mean recognition
of ERD’s title. — “The fact that MT, Inc. paid rentals to ERD’s during
the litigation should not be interpreted to mean either actual delivery
or ipso facto recognition of ERD’s title. ERD as alleged buyer of the
disputed properties and as alleged successor-in-interest of CB rights
as lessor — submitted two ejectment suits against MT, Inc. Filed in
the Metropolitan Trial Court of Manila, the first was docketed as Civil
Case No. 121570 on July 9, 1987; and the second, as Civil Case No.
131944 on May 28, 1990. MT, Inc. eventually won them both.
161
162
SALES
Art. 1498
However, to be able to maintain physical possession of the premises
while awaiting the outcome of the mother case, it had no choice but to
pay the rentals. The rental payments made by MT, Inc., should not be
construed as a recognition of ERD as the new owner. They were made
merely to avoid imminent eviction.’’
(8)
General principle that rescissible contract is valid until
rescinded not applicable. — “At bottom, it may be conceded that,
theoretically, a rescissible contract is valid until rescinded. However,
this general principle is not decisive to the issue of whether ERD ever
acquired the right to collect rentals. What is decisive is the civil law
rule that ownership is acquired, not by mere agreement, but by
tradition or delivery. Under the factual environment of this
controversy as found by this Court in the mother case, ERD was never
put in actual and effective control or possession of the property
because of MT, Inc. timely objection.
As pointed out by Justice Holmes, general propositions do not
decide specific cases. Rather, ‘laws are interpreted in the context of
the peculiar factual situation of each case. Each case has its own flesh
and blood and cannot be decided on the basis of isolated clinical
classroom principles.’ ”
(9)
Sale of ERD not consummated. — “In short, the sale to
ERD may have been valid from inception, but it was judicially
rescinded before it could be consummated. Petitioner never acquired
ownership, not because the sale was void, as erroneously claimed by
the trial court, but because the sale was not consummated by a legally
effective delivery of the property sold.’’
(10)Benefits precluded by ERD’s bad faith. — “Furthermore,
assuming for the sake of argument that there was valid delivery,
petitioner is not entitled to any benefits from the ‘rescinded’ Deed of
Absolute Sale because of its bad faith. This being the law of the
mother case decided in 1996, it may no longer be changed because it
has long become final and executory. x x x.’’ (Equatorial and Realty
Development, Inc. vs. Mayfair Theater, Inc., 158 SCAD 783, 370
SCRA 56 [2001].)
(3) Sale of thing not subject to control of vendor. — Symbolic
delivery by the execution of a public instrument is equivalent to actual
delivery only where the thing is subject to the control of the vendor and
there is no impediment that may prevent the passing of the property
from the hands of the vendor into those of the vendee. Hence, the
vendor who executes said public instrument fails in his obligation to
deliver it, if the vendee cannot enjoy its material possession because of
Art. 1498
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
163
the opposition or resistance of a third person (e.g., squatter) who is in
actual possession. The legal fiction yields to reality. It is not enough to
confer upon the purchaser the ownership and the right of possession.
The thing sold must be placed in his control in order that it can be said
that delivery has been effected. (Addison vs. Felix Tioco, 38 Phil. 404
[1918]; Power Commercial & Industrial Corp. vs. Court of Appeals, 84
SCAD 67, 274 SCRA 597 [1997].)
In other words, a seller cannot deliver constructively if he cannot
actually deliver even if he wants to. Of course, if the sale had been made
under the express agreement of imposing upon the vendee the obligation
to take the necessary steps to obtain the material possession of the thing
sold and if it were proven that he knew that the thing was in the
possession of a third person claiming to have property rights thereon,
such agreement would be perfectly valid. (Ibid.)
(4) Sale of registered land. — The provisions of Article 1498
regarding passing of title upon delivery by execution of a public
instrument must be deemed modified by the provisions of the
164
SALES
Art. 1499
Property Registration Decree (Pres. Decree No. 1529.) insofar as
registered land is concerned. Section 51 of the decree is very clear that
no deed purporting to convey or affect registered land, shall take effect
as a conveyance or bind the land (as against third persons) until its
registration. In accordance with this section, no act of the parties can
transfer the ownership of real estate under the Torrens System. That is
done by the act of registration of the conveyance which the parties have
made. (see Tuazon vs. Raymundo, 28 Phil. 635 [1914]; Manuel vs.
Rodriguez, 109 Phil. 1 [1960].)
(5) Possession of a part as constructive possession of whole. —
Where apart from the delivery de jure of a land sold by symbolic
tradition resulting from the execution of a public instrument of sale, the
evidence shows that the purchaser took actual possession of the
considerable portion of the land sold by the exercise of possessory acts
of clearing the area of trees and of cultivating the same through tenants,
such possession and cultivation of a part is logically and legally
constructive possession of the whole. (Ramos vs. Director of Lands, 39
Phil. 175 [1918].)
Symbolic tradition.
Constructive delivery is symbolic when to effect the delivery, the
parties make use of a token symbol to represent the thing delivered.
The delivery of the key where the thing sold is stored or kept is
equivalent to the delivery of the thing (par. 2.) because the key
represents the thing. Similarly, there is symbolic delivery of goods to
vendee upon delivery to him of delivery orders (see Art. 1636[1].)
which would authorize him to withdraw the goods from a warehouse.
Upon withdrawal, there is actual delivery (supra.) which consummates
the sale. (Lim Yhi Luya vs. Court of Appeals, 99 SCRA 668 [1980].)
ART. 1499. The delivery of movable property may
likewise be made by the mere consent or agreement
of the contracting parties, if the thing sold cannot be
transferred to the possession of the vendee at the
time of the sale, or if the latter already had it in his
possession for any other reason. (1463a)
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
165
Arts. 1500-1501
Traditio longa manu.
The first part of Article 1499 refers to traditio longa manu.
This mode of delivery takes place by the mere consent or agreement
of the contracting parties as when the vendor merely points to the thing
sold which shall thereafter be at the control and disposal of the vendee.
It should be noted that delivery “by the mere consent or agreement
of the contracting parties” is qualified by the phrase “if the thing sold
cannot be transferred to the possession of the vendee at the time of the
sale.”
Traditio brevi manu.
This mode of legal delivery happens when the vendee has already
the possession of the thing sold by virtue of another title as when the
lessor sells the thing leased to the lessee. Instead of turning over the
thing to the vendor so that the latter may, in turn, deliver it, all these are
considered done by action of law.
ART. 1500. There may
constitutum possessorium. (n)
also
be
tradition
Traditio constitutum possessorium.
This mode of delivery is the opposite of traditio brevi manu.
It takes place when the vendor continues in possession of the
property sold not as owner but in some other capacity, as for example,
when the vendor stays as a tenant of the vendee. In this case, instead of
the vendor delivering the thing to the vendee so that the latter may, in
turn, deliver it back to the vendor, the law considers that all these have
taken place by mere consent or agreement of the parties. (see Amig vs.
Teves, 96 Phil. 252 [1954]; Bautista vs. Sioson, 39 Phil. 615 [1919];
Carbonell vs. Court of Appeals, 69 SCRA 99 [1970]; see 10 Manresa
124.)
ART. 1501. With respect to incorporeal property,
the provisions of the first paragraph of article 1498
shall govern. In any other case wherein said
166
SALES
provisions are not applicable, the placing of the titles
of
Art. 1501
ownership in the possession of the vendee or the use
by the vendee of his rights, with the vendor’s consent,
shall be understood as a delivery. (1464)
Quasi-traditio.
Tradition can only be made with respect to corporeal things. In the
case of incorporeal things, delivery is effected:
(1) by the execution of a public instrument; or
(2) when that mode of delivery is not applicable, by the placing of
the titles of ownership in the possession of the vendee; or
(3) by allowing the vendee to use his rights as new owner with the
consent of the vendor.
This mode of delivery of incorporeal things or rights is known as
quasi-traditio. Thus, the delivery to a person of a negotiable document
of title in which it is stated that the goods referred to therein will be
delivered to the bearer amounts to delivery of the goods to such person.
(Arts. 1507, 1508.)
ILLUSTRATIVE CASES:
1. Property, title papers to which were delivered by debtor to
creditor as security for a debt, was included in the inventory of the
estate of debtor upon his death.
Facts: S owed B money and as security therefor delivered to B
the title papers over four parcels of land. It was orally agreed that since
S had no money, B was to have the land, permitting S to cultivate upon
condition that, after deducting expenses, 1/2 of the products was to go
to B.
Then S died and the four parcels were included in the inventory
of the estate of S. B brought action to exclude them from the
inventory.
Issue: Is there delivery of the property in contemplation of law?
Held: Yes. The land should have been excluded in the inventory.
The contract made between S and B although not in writing, was valid
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
167
and the delivery of the title deeds of the property was equivalent in its
effect to a delivery of the property itself. (Marella vs. Reyes &
Paterno, 12 Phil. 1 [1908].)
Art. 1501
———— ———— ————
2. Before the sale at public auction, the property in question was
sold by the owner who merely delivered the title deeds thereof to the
first purchaser.
Facts: The lot and warehouse standing thereon belonging to S
were sold at public auction by the sheriff to B. D claimed that the
property was sold by S long before the auction sale to C who, in turn,
sold it to D. S merely delivered the title deeds to C but remained in
possession as lessee. C also delivered the title deeds to D. D brought
action for the recovery of the lot and warehouse.
Issue: Is there delivery of the property in contemplation of law?
Held: Yes. Although there was no material delivery of the
property, “the placing of the titles of ownership in the possession of
the vendee or the use which he may make of his right with the consent
of the vendor shall be considered as delivery.” (Tablante vs. Aquino,
28 Phil. 35 [1914].)
Note: The Supreme Court in both cases cited Article 1464 of the
Spanish Civil Code. (Art. 1501 of our Civil Code.) It is submitted that
Article 1501 refers to delivery merely of incorporeal rights. The result
arrived at, however, may be sustained in that the delivery of the title
deeds may be considered a symbolical delivery, as the delivery of the
key to a house constitutes a delivery of said house.
Intention to deliver and to accept a
transfer of possession.
(1) In all the forms of delivery, it is necessary that the act be
coupled with the intention of delivering the thing. For instance, there is
no constructive delivery, where the keys to the place where the thing is
deposited are delivered to the vendee in order only that he may examine
it or the titles of ownership of property are placed in the possession of
the vendee for his study or inspection but not with the intention of
making the delivery. The act, without the intention to deliver, is
insufficient. (see 10 Manresa 132.) Similarly, the issuance of a sales
168
SALES
invoice does not prove transfer of ownership of the thing sold to the
buyer. An invoice is nothing more than a detailed statement of the
nature, quality and cost of
Art. 1502
the thing sold and has been considered not a bill of sale. (Norkis
Distributors, Inc. vs. Court of Appeals, 193 SCRA 694 [1991]; P.T.
Cerna Corp. vs. Court of Appeals, 221 SCRA 19 [1993].)
(2) For the same reason, any act, although not provided for in the
preceding articles, but accompanied by the evident intention of the
vendor to deliver or of the vendee to receive the thing sold, will be
considered as constituting tradition. It is the intention which is essential.
(ibid.) It is a well-established rule that a mere contract for the sale of
goods, where nothing remains to be made by the vendor, as when the
parties agreed that the delivery of the logs should be made alongside a
vessel of the vendee and that was done by the vendor, transfers the right
of property although the price has not been paid, nor the thing sold
actually delivered to the vendee whose employees attempted to load
them in the vessel but failed to do so for want of the proper loading
equipment. (Bean Admir vs. Cadwallader Co., 10 Phil. 606 [1908].)
In other words, in all the different modes of effecting delivery, it is
the real intention of the parties, to deliver on the part of the vendor, and
to accept on the part of the vendee, which gives legal effect to the act.
Without such intention, there is no tradition. (see Abuan vs. Garcia, 14
SCRA 759 [1965]; Norkis Distributors, Inc. vs. Court of Appeals,
supra.)
ART. 1502. When goods are delivered to the buyer
“on sale or return” to give the buyer an option to
return the goods instead of paying the price, the
ownership passes to the buyer on delivery, but he
may revest the ownership in the seller by returning or
tendering the goods within the time fixed in the
contract, or, if no time has been fixed, within a
reasonable time. (n)
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
169
When goods are delivered to the buyer on
approval or on trial or on satisfaction, or other similar
terms, the ownership therein passes to the buyer.
(1)
When he signifies his approval or
acceptance to the seller or does any other act
adopting the transaction;
Art. 1502
(2)
If he does not signify his approval or
acceptance to the seller, but retains the goods
without giving notice of rejection, then if a time has
been fixed for the return of the goods, on the
expiration of such time, and, if no time has been fixed,
on the expiration of a reasonable time. What is a
reasonable time is a question of fact. (n)
Contract of sale or return, and of sale on trial
or approval or satisfaction.
(1) In general. — It is evidently possible for the parties to agree
that the buyer shall temporarily take the goods into his possession to see
whether they are satisfactory to him and that if they are not, he may
refuse to become owner. It is clear also that the same object may be
attained by an agreement that the property shall pass to the buyer on
delivery but that he may return the goods if they are unsatisfactory. The
question is one of fact in every case whether the parties intend to make
approval a condition, without which the ownership shall not pass, or
whether their intent is that the ownership shall pass at once with the
right to return the goods.31 (see 2 Williston, op. cit., pp. 30-33.)
31 “The provision in the Uniform Sales Act and the Uniform Commercial Code from which
Article 1502 was taken, clearly requires an express written agreement to make a sales contract
either a “sale or return” or a “sale on approval.” Parol or extrinsic testimony could not be admitted
for the purpose of showing that an invoice or bill of sale that was complete in every aspect and
purporting to embody a sale without a condition or restriction constituted a contract of sale or
return. If the purchaser desired to incorporate a stipulation securing to him the right of return, he
should have done so at the time the contract was made. (Industrial Textile Manufacturing Co. vs.
LPJ Enterprises, Inc., 217 SCRA 322 [1993], citing 67 Am. Jur. 2d 733.)
170
SALES
The question of what is a reasonable time for the return of the
property is one of fact to be determined upon the particular
circumstances of the case. The duty of the buyer with regard to the
return of the goods requires, ordinarily, that they be returned in the same
or substantially the same condition in which they were when the
contract was made. Undoubtedly, if they are injured or damaged
substantially through negligence or misuse of the buyer, his right to
return is lost and the sale becomes absolute. (Ray vs. Thompson, 12
Cush [Mass.] 281, 59 Am. Dec. 187.)
Art. 1502
(2) Sale or return. — It is a contract by which property is sold but
the buyer, who becomes the owner of the property on delivery, has the
option to return the same to the seller instead of paying the price.
(a)
Under this contract, the option to purchase or returnthe
goods rests entirely on the buyer without reference to the quality of
the goods. The buyer may revest the ownership in the seller by
returning or tendering the goods within the time fixed in the
contract, or, if no time has been fixed, within a reasonable time (Art.
1502, par. 1.); otherwise, the sale becomes absolute and the buyer
is liable for the price. The seller cannot, in this type of sale, prevent
the revesting of title by refusing to accept the return of the property.
(b)
Since title passes to the buyer on delivery, the loss
ordestruction of the property prior to the exercise of the buyer’s
option to return falls upon him and renders him responsible to the
seller for the purchase price or such part thereof as remains unpaid.
(Art. 1504; 46 Am. Jur. 647.) The word “return” itself implies a
previous transfer of title.
(3) Sale on trial or approval. — It is a contract in the nature of an
option to purchase if the goods prove satisfactory, the approval of the
buyer being a condition precedent. (77 C.J.S. 938.)
(a)
In this kind of contract, the title shall continue in
theseller until the sale has become absolute either by the buyer’s
approval of the goods, or by his failing to comply with the express
or implied conditions of the contract as to giving notice of
dissatisfaction or as to returning the goods (Ibid., 655; Art. 1502,
Nos. 1 and 2.), or by his doing any other act adopting the transaction
such as mortgaging the property or selling it to a third person.
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
171
(b)
For the reason that the title to the goods does not
passand the relationship between the seller and the purchaser is that
of bailor and bailee, the risk of loss or injury to the article pending
the exercise by the buyer of his option to purchase or return it, is
upon the seller except as the buyer may be at fault in respect of the
care and condition of the article, or may have agreed to stand the
loss. (see 67 Am. Jur. 2d 430-431.)
172
SALES
Art. 1503
(c)
The buyer cannot accept part and reject the rest of
thegoods since this falls outside the normal intent of the parties.
(Industrial Textile Manufacturing Co. vs. LPJ Enterprises, Inc.,
supra.)
“Sale or return” distinguished from sale on trial. The
distinctions are the following:
(1) “Sale or return” is a sale subject to a resolutory condition, while
sale on trial is subject to a suspensive condition;
(2) “Sale or return” depends entirely on the will of the buyer, while
sale on trial depends on the character or quality of the goods;
(3) In “sale or return,” the ownership of the goods passes to the
buyer on delivery and subsequent return of the goods reverts ownership
in the seller, while in sale on trial, the ownership remains in the seller
until the buyer signifies his approval or acceptance to the seller; and
(4) In “sale or return,” the risk of loss or injury rests upon the
buyer, while in sale on trial, the risk still remains with the seller.
Note: Article 1502 uses the phrase “on sale or return.” If the contract
uses instead the phrase “for sale or return,” the intention may be to enter
into a contract of agency.
ART. 1503. Where there is a contract of sale of
specific goods, the seller may, by the terms of the
contract, reserve the right of possession or
ownership in the goods until certain conditions have
been fulfilled. The right of possession or ownership
may be thus reserved notwithstanding the delivery of
the goods to the buyer or to a carrier or other bailee
for the purpose of transmission to the buyer.
Where goods are shipped, and by the bill of lading
the goods are deliverable to the seller or his agent, or
to the order of the seller or of his agent, the seller
thereby reserves the ownership in the goods. But if,
except for the form of the bill of lading, the ownership
would have passed to the buyer on shipment of the
Art. 1503
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
173
goods, the seller’s property in the goods shall be
deemed to be only for the purpose of securing
performance by the buyer of his obligations under the
contract.
Where goods are shipped, and by the bill of lading
the goods are deliverable to 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.
Where the seller of goods draws on the buyer for
the price and transmits the bill of exchange and bill of
lading together to the buyer to secure acceptance or
payment of the bill of exchange, the buyer is bound
to return the bill of lading if he does not honor the bill
of exchange, and if he wrongfully retains the bill of
lading he acquires no added right thereby. If,
however, the bill of lading provides that the goods are
deliverable to the buyer or to the order of the buyer,
or is indorsed in blank, or to the buyer by the
consignee named therein, on who purchases in good
faith, for value, the bill of lading, or goods from the
buyer will obtain the ownership in the goods,
although the bill of exchange has not been honored,
provided that such purchaser has received delivery
of the bill of lading indorsed by the consignee named
therein, or of the goods, without notice of the facts
making the transfer wrongful. (n)
When ownership not transferred upon
delivery.
This article relates to a sale of specific goods. (see Arts. 1494,
1636.) As a general rule, the ownership in the goods sold passes to the
buyer upon their delivery to the carrier. There are, however, certain
exceptions and they are:
174
SALES
Art. 1503
(1) if a contrary intention appears by the terms of the contract (Arts.
1523, par. 1; 1503, par. 1; see Art. 1478.);
(2) in the cases provided in the second and third paragraphs of
Article 1523; and
(3) in the cases provided in the first, second, and third paragraphs
of Article 1503.
Transfer of ownership where goods sold
delivered to carrier.
(1) General rule. — As stated above, the general rule is that
delivery, be it only constructive, passes title in the thing sold (see Art.
1496.); and delivery to the carrier is deemed to be a delivery to the
buyer. (Art. 1523, par. 1.) The risk of loss, therefore, as between the
buyer and the seller, falls upon the buyer. The theory upon which the
law is based is perfectly simple. If a seller consigns goods to another
specified person it indicates an intention to deliver to the carrier as
bailee for the person named, and, if such shipment was authorized by
that person as a buyer, the ownership vests in him. The same result
follows it, after the goods have been shipped without a named
consignee, the carrier at the consignor’s request, agrees to deliver to a
specified person.
(2) Where right of possession or ownership of specific goods sold
reserved. — On the other hand, if the seller directs the carrier to
redeliver the goods at their destination to the seller himself, or to his
order, it indicates an intention that the carrier shall be the bailee for the
seller and the ownership will remain in the latter. (see 2 Williston, op.
cit., p. 147.) The seller may, by the terms of the contract, reserve the
right of possession or ownership in the goods until certain conditions
are fulfilled. (Art. 1505, par. 1.)
Where seller or his agent is consignee.
(1) Carrier becomes bailee for seller. — Where goods are shipped
and by the bill of lading32 (see Art. 1507.), the goods are deliverable to
32 Logically, since a bill of lading acknowledges receipt of goods to be transported, delivery
of the goods to the carrier normally precedes the issuance of the bill; or to some extent, delivery
of the goods and issuance of the bill are regarded in commercial practice as simultaneous acts.
Art. 1503
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
175
the seller or his agent or to the order of the seller or his agent, the seller
thereby reserves the ownership in the goods (par. 2.) and the carrier is
a bailee for him and not the buyer. This principle is applicable even
though the goods are shipped on the buyer’s vessel.
(2) Rights of seller. — The seller may not only retain the goods
until the buyer performs his obligation under the contract, but he may,
even in violation of the contract, dispose of them to third persons. If the
seller does this, of course, he is liable for damages to the buyer but the
second purchaser from the seller acquires a better right. (see 2 Williston,
op. cit., pp. 152-153.)
Where seller’s title only for purpose of
security.
(1) Form of bill of lading not conclusive. — The form in which the
bill of lading is taken is not always conclusive. The specification in the
bill of lading to the effect that the goods are deliverable to the order of
the seller or his agent does not necessarily negate the passing of title to
the goods upon delivery to the carrier. (Butuan Sawmill, Inc. vs. Court
of Tax Appeals, 16 SCRA 715 [1966].)
(2) Where ownership would have passed but for the form of bill of
lading. — The circumstances may be such that were it not for the form
of the bill of lading, the ownership would have passed to the buyer or
shipment of the goods. (par. 2, 2nd sentence.) This is true when the
object of the seller in reserving ownership is simply to secure himself
in regard to the performance by the buyer of the latter’s obligation. By
shipping the goods, the seller has definitely lost all use of them to the
buyer. If the shipper could be perfectly sure that the buyer would fulfill
his obligation, it can hardly be doubted that he would have made a
straight consignment to the latter. (see 2 Williston, op. cit., pp. 155156.)
Significance where title held merely
as security.
However, except as may be prohibited by law, there is nothing to prevent an inverse order of
events, that is, the execution of the bill even prior to actual possession and control by the carrier
of the cargo to be transported. There is no such law. (Saludo, Jr. vs. Court of Appeals, 207 SCRA
198 [1992].)
176
SALES
Art. 1503
The importance of distinguishing between a title held merely for the
purpose of security and the ordinary case where the seller retains
ownership are two-fold:
(1) Risk of loss on buyer. — In the first place, the beneficial owner
(buyer), not the one who holds for security (seller), will be subject to
the risk of loss or deterioration (see Lawyers Cooperative Publishing
Co. vs. Tabora, 13 SCRA 762 [1965].) from the time the goods are
delivered to the carrier even though the legal title remains in the seller.
That the risk should be borne by the buyer if the seller retains title
merely to secure performance by the buyer of his obligations under the
contract is a consequence of the theory that such a bargain is, in effect,
although not in form, a sale to the buyer and a mortgage back by him of
the goods to secure the price. The title does not pass to the buyer until
he receives the order bill of lading properly indorsed. (2 Williston, op.
cit., p. 219.)
(2) Buyer’s right of action based on ownership. — In the second
place, the buyer has more than a mere contract right in regards to the
goods. (Ibid., p. 157.) As beneficial owner, he may, as against any one
except an innocent purchaser for value of the bill of lading from the
consignee, bring an action based on ownership on making tender of the
price.
Where buyer or his agent is consignee but
seller retains order bill of lading.
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
retains a right to the possession of the goods as against the buyer. (par.
3.)
(1) Effect of retention. — Although the property in the goods will
ordinarily pass to the buyer on delivery, the latter is unable to obtain the
goods without the bill. The effect of the retention of the bill of lading,
under such circumstances, controlling as it does the possession of the
goods, is, therefore, closely analogous to the retention of a lien by the
seller after the property has passed to the buyer. (Ibid., p. 163.)
Art. 1503
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
177
(2) Surrender of order bill necessary. — The carrier cannot be
compelled to surrender possession of the goods until the order bill
(properly indorsed) has been surrendered. In an order bill, it cannot with
certainty be determined who is the person named to whose order the
goods are deliverable unless the bill of lading itself is presented.
(3) Identification of consignee sufficient in case of straight bill. —
On the other hand, the shipper who issues a straight bill of lading (goods
are by its terms deliverable not to the order of the consignee but to the
consignee only) ordinarily does not require the surrender of the bill by
the consignee in order for the latter to get the goods. The consignee need
only to identify himself. Hence, where the buyer is the consignee, the
seller must use an order bill of lading. (see Ibid., pp. 162-163.)
Where a third person who retains the
bill is consignee.
Two devices have already been considered by which the seller of
goods retains a hold upon them by means of the bill of lading after he
has shipped them; first, by consigning the goods to himself, either by an
order bill or a straight bill and second, by consigning the goods to the
order of the buyer and retaining possession of the bill of lading.
A third method also in common use is to consign the goods to a
third person (usually a banker) requesting the latter to retain the bill of
lading or goods until payment of the price. When the price is paid, the
consignee of the goods indorses the bill or delivers the goods to the
buyer.
(1) Immaterial whether bill an order or straight bill. — For the
success of this third device, it is immaterial, so far as the protection of
the seller is concerned, whether the bill is a straight bill or an order bill.
(a)
If it is an order bill, the carrier will not deliver the
goods until the bill is surrendered and the buyer cannot get it so as
to make the necessary surrender except from the holder, the
consignee.
(b)
Even if it is not an order bill, the carrier, though it
maynot require the surrender of the bill of lading, will deliver only
to the consignee. Accordingly, the buyer in either event, is unable
178
SALES
Art. 1503
to get them except by obtaining an order from the holder of the bill
of lading.
(2) Legal title vested in third person. — By naming a third person
as consignee of the bill of lading, the seller vests a legal title in the third
person. This title is held merely for the benefit of the seller if the third
person is the seller’s agent only and has not advanced money of his own
to the seller. Frequently, however, the third person is a banker and by
discounting a draft drawn on the buyer by the shipper, or under an
arrangement with the buyer by paying or accepting a draft drawn on
himself, has acquired a personal interest in the goods. (Ibid., pp. 164165.)
(3) Risk of loss on buyer. — The buyer as is true where the seller
consigns the goods to himself, or his agent, or to a third person, bears
the risk of loss.
Where bill of lading sent forward with
draft attached.
Where the seller draws on the buyer for the price and transmits the
bill of exchange and the bill of lading together to the buyer to secure
acceptance or payment of the bill of exchange (par. 4.), the title is
regarded as retained in the seller until the bill of exchange is paid. The
fact that the bill of lading and a bill of exchange are attached together
indicates that the seller intends to make the delivery of the goods
conditional upon the payment or acceptance of the draft.
(1) Duty of buyer if draft not paid. — The buyer is bound to
return the bill of lading if he does not honor the bill of exchange. If he
wrongfully retains the bill of lading, he acquires no additional right
thereby. In carrying out the device in question, it is customary to send
the bill of lading with the draft attached thereto to some person other
than the buyer, for if the bill of lading and the draft are sent directly to
the buyer, the latter may obtain the goods without paying the draft and
the seller, even if he has a good right of action against the buyer on
this account, is compelled to enter upon litigation in order to enforce
his rights, whereas if the bill of lading and draft are sent through the
third person, ordinarily a bank, the buyer is unable to obtain the goods
without paying the price. (see Ibid., pp. 178-180.)
Art. 1503
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
179
(2) Effect of buyer obtaining possession of bill of lading without
honoring draft. — As regard third persons, however, if the bill of
180
SALES
Art. 1504
lading provides that the goods are deliverable to the buyer or to the order
of the buyer (Art. 1507.), or is indorsed in blank (Art. 1508[2].), or is
indorsed to the buyer by the consignee named therein (Art. 1509.), a
purchaser in good faith for value of 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.
Distinctions in regard to the form
of the bill of lading. They must
here be observed:
(1) If the seller has named the buyer as consignee, the property has
passed to the consignee or at least it seems to have been so to one who
inspects the document;
(2) If the bill of lading, though naming the seller as consignee, is
indorsed by him to the buyer or in blank, the possession of the document
by the buyer gives him, if not the actual title, at least an apparent
ownership; and
(3) If the bill of lading names the seller or a third person as
consignee and no indorsement of the document had been made,
possession by the buyer would not indicate that the buyer had title.
Where the document gives the buyer apparent ownership and a third
person purchases the goods relying thereon, it seems clear on broad
principles of justice that since one of two innocent parties must suffer,
he should suffer whose act has brought about the loss. Consequently,
the seller ought not to be allowed to recover the goods from the third
person. (see Ibid., pp. 191-192.)
ART. 1504. Unless otherwise agreed, the goods
remain at the seller’s risk until the ownership therein
is transferred to the buyer, but when the ownership
therein is transferred to the buyer, the goods are at
the buyer’s risk whether actual delivery has been
made or not, except that:
(1)
Where delivery of the goods has been
made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the
goods has been
Art. 1504
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
181
retained by the seller merely to secure performance
by the buyer of his obligations under the contract, the
goods are at the buyer’s risk from the time of such
delivery;
(2)
Where actual delivery has been delayed
through the fault of either the buyer or seller the
goods are at the risk of the party in fault. (n)
Risk of loss generally attends title.
As a general rule, if the thing is lost by fortuitous event, the risk is
borne by the owner of the thing at the time of the loss under the principle
of res perit domino. (see Chrysler Phils. Corp. vs. Court of Appeals, 133
SCRA 567 [1984].) Article 1504 above states the exceptions.
(1) Where the seller reserves the ownership of the goods merely to
secure the performance by the buyer of his obligations under the
contract, the ownership is considered transferred to the buyer who,
therefore, assumes the risk from the time of delivery. (see Lawyers
Cooperative Publishing Co. vs. Tabora, 13 SCRA 762 [1965].)
(2) Where 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
with respect to any loss which might not have occurred but for such
fault. In this case, the law punishes the party at fault.
Risk of loss by fortuitous event after
perfection but before delivery.
(1) Conflict between Article 1480 and Article 1504. — Under
Article 1480, if the thing sold is lost after perfection of the contract but
before its delivery, that is, even before the ownership is transferred to
the buyer, the risk of loss by fortuitous event without the seller’s fault
is borne by the buyer as an exception to the rule of res perit domino.
Consequently, the buyer’s obligation to pay the price subsists if he has
not yet paid the same or if he had, he cannot recover it from the seller
although the latter’s obligation to deliver the thing is extinguished by
its loss.
However, the first paragraph of Article 1504 which has been
inserted in our Civil Code presents a contrary rule. Taken from the
182
SALES
Art. 1504
American law on sales (Sec. 22 of the Uniform Sales Act.), it provides
that: “Unless otherwise agreed, the goods remain at the seller’s risk until
the ownership therein is transferred to the buyer.” By Article 1480, as
already pointed out, the risk of loss of the thing after perfection is shifted
from the seller to the buyer even though the buyer has not yet acquired
ownership thereof.
(2) Solution suggested to avoid conflict. — A solution has been
suggested to avoid the conflict, to wit: Article 1504 should be restricted
in its application to sale of “goods” as this term is defined in Article
1636, and Article 1480, to sales of “things” which cannot be called
“goods,” as for the example, to sales of real estate. This would make
Article 1480 the general rule on risk of loss and Article 1504, the
exception. By this conclusion, it is claimed, the cardinal rule of statutory
construction that all provisions of a law should, as much as possible, be
given effect is satisfied; for to say that there is an irreconcilable conflict
between Article 1480 and Article 1504 is to render either of them
useless.
(3) Article 1480 states the correct rule. — It is submitted that
Article 1480 is the correct rule governing loss of thing sold after the
perfection of the contract in view of the following:
(a)
The opinion of Manresa (an eminent Spanish
commentator on the Spanish Civil Code upon which our Civil Code
is based) that the obligation of the buyer to pay the price is not
extinguished by the loss of the thing before delivery is the settled
construction of Article 1452 (now Art. 1480.) and this opinion is
well known to the Code Commission which prepared the draft of
the Civil Code. It is to be presumed that Congress, which passed
the Civil Code, a majority of whose members were lawyers, was
likewise familiar with Manresa’s opinion. Aside from Manresa,
“many writers on the Spanish Civil Code including Castan, Fabres,
Von Tuhr, Bonet, and De Buen, believe that the buyer bears the loss
and he must pay the price” (A.M. Tolentino, Civil Code of the
Philippines, 1959 ed., Vol. V, p. 22.);
(b)
Article 1480 follows the Roman Law rule “that risk
ofthe thing sold passes to the buyer even though the thing has not
yet been delivered to the buyer”;
Art. 1504
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
183
(c)
A reading of Article 1189 in relation to Article 1538
(infra.), shows that Article 1480 is in consonance with Article 1189
(see Art. 1538.);
(d)
Article 1504 cannot be reconciled with Articles 1480
and 1189, unless Article 1504 is applied only to sale of “goods.” It
must be noted, however, that Article 1480 applies also to sale of
fungible goods. (par. 2.) Furthermore, there is nothing to justify the
exclusion of “goods” from the sales of “things” as the latter term is
used in Article 1480 and several scattered provisions of our present
law on sales;
(e)
In case of improvement, the rule is that it should pertain
to the buyer. (Art. 1189[5].) This is a counterpart of the risk which
the buyer assumes for the loss of the thing;
(f)
Furthermore, under Article 1537 (infra.), the fruits
pertain to the vendee from the perfection of the contract. The same
right is given to the vendee under Article 1164 which together with
Articles 1165 and 1262, is referred to in Article 1480 as governing
the question being discussed; (g) Article 1165, paragraph 3, states:
“If the obligor delays, or has promised to deliver the same thing
to two or more persons who do not have the same interest, he shall
be responsible for any fortuitous event until he has effected the
delivery.”
Arguing a contrario, if the obligor (seller) is not guilty of delay and
has not promised to deliver the thing sold to two or more persons, he
shall not be responsible for loss due to a fortuitous event;
(h) Article 1262, paragraph 1, provides:
“An obligation which consists in the delivery of a determinate
thing shall be extinguished if it should be lost or destroyed without
the fault of the debtor and before he has incurred in delay;
In this connection, Article 1269 (Civil Code) says:
“The obligation having been extinguished by the loss of the
thing, the creditor shall have the rights of action which the debtor
may have against third persons by reason of the loss.” It is very
clear that the creditor (buyer) may not have a right of action against
third persons unless he suffers a loss which is the price he has paid
or the price the law requires him to pay the debtor (seller) if he has
not paid the same.
184
SALES
Art. 1504
(4) Contrary view. — On this question, a recognized authority on
Civil Law supports the contrary view as follows:
“A contrary view to that expressed above, is held by other writers
on the Spanish Civil Code, like Perez and Alguer, who say: This
solution is not absolutely certain and perhaps the contrary view is more
in harmony with equity and with the nature of reciprocal obligations.”
To our mind, the latter view is really more logical: the vendor in the
case given, should bear the loss and the vendee should not be bound to
pay the price. The following arguments may be advanced to support this
view:
(a)
It is fundamental in the Civil Code, expressed in
Articles 1477 and 1496, that ownership is transferred by delivery;
hence, before delivery, the vendor owns the thing and should suffer
its loss: res perit domino. If he is allowed to recover the price, he
suffers no loss, which is imposed upon the vendee who has not yet
acquired ownership;
(b)
The obligations of vendor and vendee are
reciprocal,and, therefore, one depends upon the other. If the
obligation of the vendor to deliver is extinguished, the correlative
obligation of the vendee to pay, which depends upon it, cannot
remain subsisting;
(c)
Article 1480, paragraph 3, is not an exception but is
anexpression of the general rule that the risk is not imputed to the
vendee until after delivery. That paragraph considers the delivery
completed only when the fungibles have been weighed, counted, or
measured because it is only then that the thing becomes
determinate. Before such completion of delivery, the vendor bears
the risk; and
(d)
Purchase and sale is an onerous contract, where
thecause, with respect to the vendee, is the thing. If he cannot have
the thing, it is juridically illogical and unjust to make him pay its
price.
Art. 1505
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
185
In the French code, the risk of loss is upon the buyer from the
perfection of the contract, because ownership in that code is transferred
by mere contract, without need for delivery. Res perit domino. The
vendee suffers the loss and must pay the price of the thing even if he
does not receive it. But where the ownership is transferred by delivery,
as in our Code, the application of the axiom res perit domino, imposes
the risk of loss upon the vendor; hence, if the thing is lost by fortuitous
event before delivery, the vendor suffers the loss and cannot recover the
price from the vendee. (A.M. Tolentino, op. cit., pp. 23-27.)
(5) Legislation necessary to avoid irreconcilable conflict. — The
contrary view is really “more in harmony with equity” considering that,
while the vendee has a mere contract right to the thing sold, the vendor
has not only the ownership but also the possession or control of it and
even the power to dispose of it to the prejudice of the vendee; and
having in mind also the reciprocal character of the contract of sale, the
vendor should, therefore, be the one to shoulder the loss and not the
vendee. But until the lawmaking body adopts the contrary view, the
correct rule, it is believed, is that contained in Article 1480 under which
the vendee bears the risk of loss, and he is bound to pay the price which
rule has already been shown, is sustained and confirmed by other
provisions of the Civil Code.
ART. 1505. Subject to the provisions of this Title,
where goods are sold by a person who is not the
owner thereof, and who does not sell them under
authority or with the consent of the owner, the buyer
acquires no better title to the goods than the seller
had, unless the owner of the goods is by his conduct
precluded from denying the seller’s authority to sell.
Nothing in this title, however, shall affect:
(1)
The provisions of any factors’ acts,
recording laws, or any other provision of law enabling
the apparent owner of goods to dispose of them as if
he were the true owner thereof;
(2)
statu-
The validity of any contract of sale under
186
SALES
Art. 1505
tory power of sale or under the order of a court of
competent jurisdiction;
(3)
Purchases made in a merchant’s store, or
in fairs, or markets, in accordance with the Code of
Commerce and special laws. (n)
Sale by a person not the owner.
It is a fundamental doctrine of law that no one can give what he has
not or transfer a greater right to another than he himself has. Sale is a
derivative mode of acquiring ownership and the buyer gets only such
rights as the seller had. (see Arts. 1458-1459.) A derivative right cannot
exist higher than its source.33 (Reyes vs. Sierra, 73 SCRA 472 [1979].)
The exceptions to the rule are given below.
(1) Where the owner of the goods is, by his conduct, precluded
from denying the seller’s authority to sell. — Thus, where a parcel of
land is sold by one not the owner or the agent of the owner, but the real
owner thereof upon being questioned in a criminal case instituted
against the vendor states that he authorized such sales so that the vendor
was acquitted of the charge against him, a purchaser in good faith
acquires a valid title to the property as it is not lawful nor permissible
for said owner to deny or retract his former sworn statement that he had
consented to said sale. (Gutierrez Hermanos vs. Orense, 28 Phil. 571
[1914]; see Arts. 1437, 1438.)
(2) Where the law enables the apparent owner to dispose of the
goods as if he were the true owner thereof. — The Philippines, unlike
other jurisdictions as England and several states of the United States,
has no such law as the Factors’ Act. The law referred to here, therefore,
must be found in the provisions of our Civil Code on agency. (C.
Alvendia, Law on Sales, 1950 ed., p. 153.)
(a)
Factors Acts are designed to protect third persons who
(under specified conditions) deal with an agent (e.g., a person to
33 What the law requires is that the seller has the right to transfer ownership at the time the
thing sold is delivered. A perfected contract of sale (which is a consensual contract perfected by
mere consent) cannot be challenged on the ground of non-ownership on the pact of the seller at
the time of its perfection, hence the sale is still valid. (Quijada vs. Court of Appeals, 101 SCAD
463, 299 SCRA 695 [1998].)
Art. 1505
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
187
whom the owner delivered goods for sale or as security, or entrusted
documentary evidence of title thereto) believing him to be the
owner of goods. (Babb & Martin, Business Law, 1952 ed., p. 117.)
(b)
Examples of the recording laws which may have a
bearing on the validity of a sale made by a person who is not the
owner or the agent of the owner are: P.D. No. 1529 (Property
Registration Decree), R.A. No. 4136 (Land Transportation and
Traffic Code), and the Revised Administrative Code with regards
to the sale of large cattle (Sec. 529.) and sale of vessels. (Sec. 1171.)
Examples of “any other provision of law” referred to in No. (1) are
Act No. 2031 (Negotiable Instruments Law) and Act No. 2137.
(Warehouse Receipts Law) (see Arts. 15071520.)
(c)
In a case, the car in question which was acquired bythe
respondent by purchase from its registered owner for a valuable
consideration under a notarial deed of absolute sale was seized and
impounded by land transportation agents as stolen property. It was
held that the acquirer or the purchaser in good faith of a chattel or
movable property is entitled to be respected and protected in his
possession as if he were the true owner thereof until a competent
court rules otherwise. In the meantime, he cannot be compelled to
surrender possession nor to be required to institute an action for the
recovery of the chattel, whether or not an indemnity bond is issued
in his favor. The filing of an information charging that the chattel
was illegally obtained through estafa from its true owner by the
transferor of the bona fide possessor does not warrant disturbing the
possession of the chattel against the will of the possessor. Finally,
under Section 60 of R.A. No. 4136, the right of the Land
Transportation Commission to impound motor vehicles is only
good for the proper enforcement of lien upon motor vehicles of
unpaid fees for registration, re-registration, or delinquent
registration of motor vehicles. (Edu vs. Gomez, 129 SCRA 601
[1984].)
(d)
With respect to real property, it has been ruled that
a“fraudulent and forged document of sale may become the root of
a valid title if the certificate of title has already been transferred
from the name of the true owner to the name indicated by the
forger.” Every person dealing in good faith and for valuable
188
SALES
Art. 1505
consideration with registered land may safely rely upon what
appears in the certificate of title and does not have to inquire further.
If the rule were otherwise, the efficacy and conclusiveness of
Torrens Certificates of Titles would be futile and nugatory.” (Duran
vs. Intermediate Appellate Court, 138 SCRA 489 [1985].) The
remedy of the person prejudiced is to bring an action for damages
against those who employed the fraud, within four (4) years after
the discovery of the deception (see Art. 1391.), and if the latter are
insolvent, an action against the Treasurer of the Philippines may be
filed for recovery of damages against the Assurance Fund. (Veloso
vs. Court of Appeals, 73 SCAD 303, 260 SCRA 593 [1996]; Delos
Reyes vs. Court of Appeals, 285 SCRA 81 [1998].)
(3) Where the sale is sanctioned by statutory or judicial authority.
— According to Article 559 of the Civil Code, “the possession of
movable property acquired in good faith is equivalent to title.
Nevertheless, one who has lost any movable, or has been unlawfully
deprived therefor, may recover it from the person in possession of the
same. If the possessor of a movable lost or of which the owner has
unlawfully been deprived has acquired it in good faith at a public sale,
the owner cannot obtain its return without reimbursing the price paid
therefor.” (see Art. 1537, par. 2.)
Different laws apply to different types of forced or involuntary sales
under our jurisdiction, namely: (a) an ordinary execution sale, which is
governed by the pertinent provisions of Rule 39 of the Rules of Court
on Execution, Satisfaction and Effect of Judgments; (b) judicial
foreclosure sales, which are governed by Rule 68 of the Rules of Court,
captioned “Foreclosure of Mortgage’’; and (c) extra-judicial foreclosure
sales of real estate mortgages, which are governed by Act No. 3135, as
amended by Act No. 4118, otherwise known as “An Act to Regulate the
Sale of Property Under Special Powers Inserted in or Annexed to Real
Estate Mortgages.’’ (Supena vs. De la Rosa, 78 SCAD 409, 267 SCRA
1 [1997].)
The government, however, does not warrant the title to properties
sold by the sheriff at public auction or judicial sales. (see Art. 1570.)
(4) Where the sale is made at merchant’s stores, fairs or markets.
— No. 3 of Article 1505 is a case of an imperfect or void title ripening
into a valid one as a result of some intervening due causes. The sale is
Art. 1505
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
189
necessary not only to facilitate commercial sales on movables but also
to give stability to business transactions especially in a country like the
Philippines, 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. (Sun Brothers Co. vs. Velasco, [C.A.] 54 O.G. 5103.)
(5) Where the seller has a voidable title which has not been
avoided at the time of the sale. — See Article 1506.
(6) Where seller subsequently acquires title. — When a person
conveys property to another of which at the time he is not the owner,
his subsequent acquisition of title validates his previous conveyance.
(Llacer vs. Munoz, 12 Phil. 328 [1908]; Abella vs. Gonzaga, 56 Phil.
132 [1931]; see Art. 1434.) This doctrine is equally applicable to
conveyance of usufructs as well as to transfers of full ownership. (Feria
vs. Silva, [C.A.] No. 6151-R, Aug. 10, 1951.)
ILLUSTRATIVE CASE:
Unpaid books were sold by the impostor-buyer to another who
acted in good faith and with proper care.
Facts: X, identifying himself as Professor JC, placed an order by
telephone with petitioner EDCA for 406 books payable on delivery.
EDCA, petitioner, prepared the corresponding invoice and delivered
the books for which X issued a personal check covering the purchase
price, which was dishonored. X sold the books to Y who, after
verifying the seller’s ownership from the invoice X showed her, paid
X.
Petitioner argues that the impostor acquired no title to the books
that he could have validly transferred to Y, the private respondent. Its
reason is that as the payment check bounced for lack of funds, there
was a failure of consideration that nullified the contract of sale
between it and X.
Issue: Has EDCA been unlawfully deprived of the books because
the check issued by the impostor X in payment therefor was
dishonored?
Held: No. (1) Contract of sale is consensual. — “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:
190
SALES
Art. 1505
‘ART. 1475. The contract of sale is perfected at the moment there
is a meeting of minds upon the thing which is the object of the contract
and upon the price.
From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing the form
of contracts. x x x
ART. 1477. The ownership of the thing sold shall be transferred
to the vendee upon the actual or constructive delivery thereof.
ART. 1478. The parties may stipulate that ownership in the thing
shall not pass to the purchaser until he has fully paid the price.’”
(2)
Ownership of thing sold is transferred upon delivery. —
“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 a 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 above noted, delivery of the thing
sold will effectively transfer ownership to the buyer who can in turn
transfer it to another.”
(3)
There is no unlawful deprivation of personal property.
— “In Asiatic Commercial Corporation vs. Ang (40 O.G.S. No. 15, p.
102.), the plaintiff sold some cosmetics to Francisco Ang, who, in
turn, sold them to Tan Sit Bin. Asiatic, not having been paid by Ang,
sued for the recovery of the articles from Tan, who claimed he had
validly bought them from Ang, paying for the same in cash. Finding
that there was no conspiracy between Tan and Ang to deceive Asiatic,
the Court of Appeals declared:
‘Yet the defendant invoked Article 464 (now Art. 559.) of the
Civil Code providing among other things that ‘one who has been
unlawfully deprived of personal property may recover it from any
person possessing it. We do not believe that the plaintiff has been
unlawfully deprived of the cartons of Gloco Tonic within the scope of
this legal provision. It has voluntarily parted with them pursuant to a
contract of purchase and sale. The circumstance that the price was not
subsequently paid did not render illegal a transaction which was valid
and legal at the beginning.
Art. 1505
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
In Tagatac vs. Jimenez (53 O.G. No. 12, p. 3792.), the plaintiff
sold her car to Feist, who sold it to Sanchez, who sold it to Jimenez.
When the payment check issued to Tagatac by Feist was dishonored,
the plaintiff sued to recover the vehicle from Jimenez on the ground
that she had been unlawfully deprived of it by reason of Feist’s
deception. In ruling for Jimenez, the Court of Appeals held:
‘The point of inquiry is whether plaintiff-appellant Trinidad C.
Tagatac has been unlawfully deprived of her car. At first blush, it
would seem that she was unlawfully deprived thereof, considering that
she was induced to part with it by reason of the chicanery practiced
on her by Warner L. Feist. Certainly, swindling, like robbery, is an
illegal method of deprivation of property. In a manner of speaking,
plaintiff-appellant was “illegally deprived” of her car, for the way by
which Warner L. Feist induced her to part with it is illegal and is
punished by law. But does this unlawful deprivation come within the
scope of Article 559 of the New Civil Code? x x x The fraud and deceit
practiced by Warner L. Feist earmarks this sale as a voidable contract.
(Article 1390, N.C.C.) Being a voidable contract, it is susceptible of
either ratification or annulment. If the contract is ratified, the action to
annul it is extinguished (Article 1392, N.C.C.) and the contract is
cleansed from all its defects (Article 1396, N.C.C.); if the contract is
annulled, the contracting parties are restored to their respective
situation before the contract and mutual restitution follows as a
consequence. (Article 1398, N.C.C.)
However, as long as no action is taken by the party entitled, either
that of annulment or of ratification, the contract of sale remains valid
and binding. When plaintiff-appellant Trinidad C. Tagatac delivered
the car to Feist by virtue of said voidable contract of sale, the title to
the car passed to Feist. Of course, the title that Feist acquired was
defective and voidable. Nevertheless, at the time he sold the car to
Felix Sanchez, his title on the latter, provided he brought the car in
good faith, for value and without notice of the defect in Feist’s title.
(Article 1506,
N.C.C.) There being no proof on record that Felix Sanchez acted in
bad faith, it is safe to assume that he acted in good faith.’
(4)
JC acquired ownership over the books sold. — Actual
delivery of the books having been made, JC acquired ownership over
the books which could then validly transfer to the private respondents.
The fact that he had not yet paid for them to EDCA was a matter
between him and EDCA and did not impair the title acquired by the
private respondents to the books.
191
192
SALES
Art. 1505
One may well imagine the adverse consequences if the phrase
“unlawfully deprived” were to be interpreted in the manner suggested
by the petitioner. A person relying on the seller’s title who buys a
movable property from him would have to surrender it to another
person claiming to be the original owner who had not yet been paid
the purchase price therefor. The buyer in the second sale would be left
holding the bag, so to speak, and would be compelled to return the
thing bought by him in good faith without even the right to
reimbursement of the amount he had paid for it.”
(5)
EDCA was negligent. — “It bears repeating that in the
case before us, Y took care to ascertain first that the books belonged
to X before she agreed to purchase them. The EDCA invoice X
showed her assured her that the books had been paid for on delivery.
By contrast, EDCA was less than cautious — in fact, too trusting —
in dealing with the impostor. Although it had never transacted with
him before, it readily delivered the books he had ordered (by
telephone) and as readily accepted his personal check in payment. It
did not verify his identity although it was easy enough to do this. It
did not wait to clear the check of this unknown drawer. Worse, it
indicated in the sales invoice issued to him, by the printed terms
thereon, that the books had been paid for on delivery, thereby vesting
ownership in the buyer.”
(6)
Private respondent acted in good faith and with proper
care. — “Surely, the private respondent did not have to go beyond
that invoice to satisfy herself that the books being offered for sale by
X belonged to him; yet she did. Although the title of X was presumed
under Article 559 by his mere possession of the books, these being
movable property, Y nevertheless demanded more proof before
deciding to buy them.
It would certainly be unfair now to make the private respondents
bear the prejudice sustained by EDCA as a result of
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
193
Art. 1506
its own negligence. We cannot see the justice in transferring EDCA’s
loss to Y who had acted in good faith, and with proper care, when they
bought the books from X.
While we sympathize with the petitioner for its plight, it is clear
that its remedy is not against the private respondent but against X, who
has apparently caused all this trouble.” (EDCA Publishing &
Distributing Corp. vs. Santos, 184 SCRA 614 [1990].)
ART. 1506. Where the seller of goods has a
voidable title thereto, but his title has not been
avoided at the time of the sale, the buyer acquires a
good title to the goods, provided he buys them in
good faith, for value, and without notice of the seller’s
defect of title. (n)
Sale by one having a voidable title.
(1) Requisites for acquisition of good title by buyer. — If the seller
has only a voidable title to the goods, the buyer acquires a good title to
the goods provided he buys them: (a) before the title of the seller has
been avoided; (b) in good faith for value; and (c) without notice of the
seller’s defect of title. (see Arts. 1385, 1388.)
(2) Basis of rule. — Article 1506 seems to be predicated on the
principle that where loss has happened which must fall on one of two
innocent persons, it should be borne by him who is the occasion of the
loss. It is similar to the rule in P.D. No. 1529 (Property Registration
Decree) referring to an innocent purchaser for value in good faith (Sec.
51 thereof.) and to the rule in Act No. 2031 (Negotiable Instruments
Law) referring to a holder in due course to whom a negotiable
instrument is negotiated for value and in good faith. (see Sec. 57
thereof.)
EXAMPLES:
(1)
S, a minor, sold his television set to B, a person of
majority age. Under the law (see Art. 1390, Civil Code.), the contract
is voidable or annullable because a minor is incapable of giving
194
SALES
consent to a contract. B, in turn, sold the television set to C who acted
in good faith.
Art. 1507
In this case, C acquires a valid title to the television set after its
delivery if the contract had not yet been annulled by a proper action
in court.
(2)
B bought in good faith for value a car which was stolen
from C, the lawful owner. As against B, C has a better right to the car.
Article 1506 is clearly inapplicable where the seller had no title at all.
(Aznar vs. Yapdiangco, 13 SCRA [1965].)
C may recover the car without paying any indemnity, except
when B acquired it in a public sale. (Art. 559, supra.)
ART. 1507. A document of title in which it is stated
that the goods referred to therein will be delivered to
the bearer, or to the order of any person named in
such document is a negotiable document of title. (n)
Definition of terms.
(1) Document of title to 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 indorsement or by delivery,
goods represented by such document. (Art. 1636[1].)
(2) Goods. — Included all chattels personal but not things in action
or money of legal tender in the Philippines. The term includes growing
fruits or crops. (ibid.)
(3) Order. — Relating to documents of title means an order by
indorsement on the documents. (ibid.)
Nature and function of documents of title.
(1) Receipts of, or orders upon, a bailee of goods represented. —
Documents of title refer to goods and not to money. They all have this
in common: that they are receipts of a bailee, or orders upon a bailee. A
different name is given in popular speech to the document when it is
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
195
issued by a carrier and when it is issued by a warehouseman, but in
substance the nature of the document is the same in both cases. (see 2
Williston, op. cit., p. 505.)
Art. 1507
(2) Evidence of transfer of title and possession of the goods and
contract between the parties. — A document of title is symbol of the
goods covered by it, serving as evidence of (a) transfer of title and (b)
transfer of possession. It also serves as an evidence of the (c) contract
between the parties who are bound by its terms. So far as concerns the
transfer of property between the parties, their intention would be
effectual without the document, but where third parties’ rights are
involved, the form of the document (i.e., negotiable or non-negotiable)
becomes important.
Most common forms of documents of
title.
There are three most common forms or documents of title, namely:
(1) Bill of lading. — It is a contract and a receipt for the transport
of goods and their delivery to the person named therein, to order, or to
bearer. It usually involves three persons — the carrier, the shipper, and
the consignee. The shipper and the consignee may be one and the same
person. Its acceptance generally constitutes the contract of carriage even
though not signed.
Such instrument may be called a shipping receipt, a forwarder’s
receipt, or receipt for transportation. The designation, however, is
immaterial (Saludo, Inc. vs. Court of Appeals, 207 SCRA 498 [1992].);
(2) Dock warrant. — It is an instrument given by dock owners to
an importer of goods warehoused on the dock as a recognition of the
importer’s title to the said goods, upon production of the bill of lading
(see Bouvier’s Law Dictionary, p. 911.); and
(3) Warehouse receipt. — a contract or receipt for goods deposited
with a warehouseman containing the latter’s undertaking to hold and
deliver the said goods to a specified person, to order, or to bearer.
Quedan is a warehouse receipt usually for sugar received by a
warehouseman.
196
SALES
Laws governing documents of title.
The following laws govern documents of title:
(1) The Civil Code (in Arts. 1507 to 1520, 1532 [2nd par.], 1535
Art. 1508
[2nd par.], and 1749.) primarily governs documents of title other than
warehouse receipts;
(2) The Warehouse Receipts Law (Act No. 2137.) primarily
governs warehouse receipts; and
(3) The Code of Commerce subsidiarily governs bills of lading
issued by common carriers (in Arts. 350 to 354 for land carriers and in
Arts. 706 to 718 for maritime carriers).
The provisions in the Civil Code on documents of title are
reproduced practically verbatim from the Uniform Sales Act which is
in force in many states in the United States.
Classes of documents of titles.
Documents of title may be either:
(1) Negotiable documents of title or those by the terms of which
the bailee undertakes to deliver the goods to the bearer and those by the
terms of which the bailee undertakes to deliver the goods to the order
of a specified person (Art. 1508.); or
(2) Non-negotiable documents of title or those by the terms of
which the goods covered are deliverable to a specified person.
(Art. 1511.)
ART. 1508. A negotiable document of title may be
negotiated by delivery:
(1)
Where by the terms of the document the
carrier, warehouseman or other bailee issuing the
same undertakes to deliver the goods to the bearer;
or
(2)
Where by the terms of the document the
carrier, warehouseman or other bailee issuing the
same undertakes to deliver the goods to the order of
a specified person, and such person or a subsequent
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
197
indorsee of the document has indorsed it in blank or
to the bearer.
Where by the terms of a negotiable document of
title the goods are deliverable to bearer or where a
negotiable document of title has been indorsed in
blank or to bearer, any holder may indorse the same
Art. 1509
to himself or to any specified person, and in such
case the document shall thereafter be negotiated only
by the indorsement of such indorsee. (n)
Negotiation of negotiable document by
delivery.
A negotiable document of title is negotiable by delivery if the goods
are deliverable to the bearer, or when it is indorsed in blank or to the
bearer by the person to whose order the goods are deliverable or by a
subsequent indorsee. An indorsement is in blank when the holder
merely signs his name at the back of the receipt without specifying to
whom the goods are to be delivered.
If the document is specially indorsed, it becomes an order document
of title and negotiation can only be effected by the indorsement of the
indorsee. A special indorsement specifies the person to whom or to
whose order the goods are to be delivered.
Article 1508 is similar to Section 37 of the Warehouse Receipts Law
(Act No. 2137.) except that the latter treats only of a negotiable receipt
which may be issued by a warehouseman.
ART. 1509. A negotiable document of title may be
negotiated by the indorsement of the person to
whose order the goods are by the terms of the
document deliverable. Such indorsement may be in
blank, to bearer or to a specified person. If indorsed
to a specified person, it may be again negotiated by
the indorsement of such person in blank, to bearer or
198
SALES
to
another
specified
person.
Subsequent
negotiations may be made in like manner. (n)
Negotiation of negotiable document by
indorsement.
A negotiable document of title by the terms of which the goods are
deliverable to a person specified therein may be negotiated only by the
indorsement of such person.
(1) If indorsed in blank or to bearer, the document becomes
negotiable by delivery. (Art. 1508.)
Art. 1510
(2) If indorsed to a specified person, it may be again negotiated
by the indorsement of such person in blank, to bearer, or to another
specified person. Delivery alone is not sufficient.
A party is liable only as guarantor and not as indorser if his
indorsement is made for the purpose of identification only. (see
American Bank vs. Macondray & Co., 4 Phil. 695 [1905].)
Article 1509 is similar to Section 38 of the Warehouse Receipts
Law.
ART. 1510. If a document of title which contains an
undertaking by a carrier, warehouseman or other
bailee to deliver the goods to bearer, to a specified
person or order of a specified person or which
contains words of like import, has placed upon it the
words “not negotiable” “non-negotiable,” or the like,
such document may nevertheless be negotiated by
the holder and is a negotiable document of title within
the meaning of this Title. But nothing in this Title
contained shall be construed as limiting or defining
the effect upon the obligations of the carrier,
warehouseman, or other bailee issuing a document of
title or placing thereon the words “not negotiable,”
“nonnegotiable,” or the like. (n)
Negotiable documents of title marked
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
199
“non-negotiable.”
Under Article 1510, the words “not negotiable,” “non-negotiable”
and the like when placed upon a document of title in which the goods
are to be delivered to “order” or to “bearer” have no effect and the
document continues to be negotiable. (Roman vs. Asia Banking Corp.,
46 Phil. 705 [1924].)
Under the Warehouse Receipts Law, any provision inserted in a
negotiable receipt that it is non-negotiable is declared void. (Sec. 5, par.
2.)
When the document of title is to order, the bailee is obliged to take
it up before delivering the goods. Accordingly, he is liable to the
holder of an order document if the goods are delivered to the
Arts. 1511-1512
consignee without surrender of the document even though the latter was
marked “not negotiable.”
Note: The first sentence of Article 1510 should read “to a specified
person or order or to the order of a specified person.” This is how
Section 30 of the Uniform Sales Act, from which Article 1510 was
adopted, is worded.
ART. 1511. A document of title which is not in such
form that it can be negotiated by delivery may be
transferred by the holder by delivery to a purchaser
or donee. A non-negotiable document cannot be
negotiated and the indorsement of such a document
gives the transferee no additional right. (n)
Transfer of non-negotiable documents.
A non-negotiable document of title cannot be negotiated.
Nevertheless, it can be transferred or assigned by delivery. In such a
case, the transferee or assignee acquires only the rights stated in Article
1514. Even if the document is indorsed, the transferee acquires no
additional right.
Article 1511 is exactly the same as Section 39 of the Warehouse
Receipts Law.
200
SALES
ART. 1512. A negotiable document of title may be
negotiated:
(1)
By the owner thereof; or
(2) By any person to whom the possession or
custody of the document has been entrusted by the
owner, if, by the terms of the document the bailee
issuing the document undertakes to deliver the
goods to the order of the person to whom the
possession or custody of the document has been
entrusted, or if at the time of such entrusting the
document is in such form that it may be negotiated
by delivery. (n)
Persons who may negotiate a document.
It will be noticed that the provision does not give a power to
negotiate documents of title equal to that allowed under the NeArt. 1513
gotiable Instruments Law (Act No. 2031.) in the case of bills of
exchange and promissory notes inasmuch as neither a thief nor a finder
is within the terms of the article. (but see Art. 1518.) However, if the
owner of the goods permits another to have the possession or custody
of negotiable receipts running to the order of the latter or to bearer, it is
a representation of title upon which bona fide purchasers for virtue are
entitled to rely despite breaches of trust or violations of agreement on
the part of the apparent owner. As between two innocent persons, the
loss must fall upon him whose misplaced confidence made the loss
possible. (Siy Cong Bieng & Co. vs. Hongkong & Shanghai Banking
Corp., 56 Phil. 598 [1932].)
Article 1512 is similar to Section 40 of the Warehouse Receipts
Law. Compare this article with Article 1518.
ART. 1513. A person to whom a negotiable
document of title has been duly negotiated acquires
thereby:
(1)
Such title to the goods as the person
negotiating the document to him had or had ability to
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
201
convey to a purchaser in good faith for value and also
such title to the goods as the person to whose order
the goods were to be delivered by the terms of the
document had or had ability to convey to a purchaser
in good faith for value; and
(2)
The direct obligation of the bailee issuing
the document to hold possession of the goods for
him according to the terms of the document as fully
as if such bailee had contracted directly with him. (n)
Rights of person to whom document has
been negotiated.
This article specifies the rights of a person to whom a negotiable
document of title has been duly negotiated, either by delivery, in the
case of a document of title to bearer, or by indorsement and delivery, in
the case of a document of title to order. Such person acquires:
Art. 1514
(1) The title of the person negotiating the document, over the goods
covered by the document;
(2) The title of the person (depositor or owner) to whose order by
the terms of the document the goods were to be delivered, over such
goods; and
(3) The direct obligation of the bailee (warehouseman or carrier) to
hold possession of the goods for him, as if the bailee had contracted
directly with him.
One who purchases, therefore, a negotiable document of title issued
to a thief acquires no right over the goods as the thief has no right to
transfer, notwithstanding that such purchaser is innocent. But the
purchaser acquires a good title where the owner, by his conduct, is
estopped from asserting his title.
A provision similar to Article 1513 is found in Section 41 of the
Warehouse Receipts Law.
202
SALES
ART. 1514. A person to whom a document of title
has been transferred, but not negotiated, acquires
thereby, as against the transferor, the title to the
goods, subject to the terms of any agreement with the
transferor.
If the document is non-negotiable, such person
also acquires the right to notify the bailee who issued
the document of the transfer thereof, and thereby to
acquire the direct obligation of such bailee to hold
possession of the goods for him according to the
terms of the document.
Prior to the notification to such bailee by the
transferor or transferee of a non-negotiable
document of title, the title of the transferee to the
goods and the right to acquire the obligation of such
bailee may be defeated by the levy of an attachment
of execution upon the goods by a creditor of the
transferor, or by a notification to such bailee by the
transferor or a subsequent purchaser from the
transferor of a subsequent sale of the goods by the
transferor. (n)
Art. 1515
Rights of person to whom document has
been transferred.
This article refers to the rights of a person to whom a negotiable
document of title (not duly negotiated) has been transferred (par. 1.) or
of the transferee of a non-negotiable document. (pars. 2 and 3.) Such
person acquires:
(1) The title to the goods as against the transferor;
(2) The right to notify the bailee of the transfer thereof; and
(3) The right, thereafter, to acquire the obligation of the bailee to
hold the goods for him.
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
203
The right of the transferee is not absolute as it is subject to the terms
of any agreement with the transferor. He merely steps into the shoes of
the transferor.
Attachment of goods covered by
document transferred.
(1) The transfer of a non-negotiable document of title does not
effect the delivery of the goods covered by it. Accordingly, before
notification, the bailee is not bound to the transferee whose right may
be defeated by a levy of an attachment or execution upon the goods by
the creditor of the transferor or by a notification to such bailee of the
subsequent sale of the goods.
(2) If the document is negotiable, the goods cannot be attached or
be levied under an execution unless the document be first surrendered
to the bailee or its negotiation enjoined. (Art. 1519.)
Article 1514 is similar to Section 42 of the Warehouse Receipts
Law.
Note: The word “of” between “attachment” and “execution” in the
third paragraph should more properly read “or”. This is how Section 34
of the Uniform Sales Act, from which Article 1514 was adopted, is
worded.
ART. 1515. Where a negotiable document of title is
transferred for value by delivery, and the indorsement
of the transferor is essential for negotiation, the
transferee acquires a right against the transferor to
Art. 1516
compel him to indorse the document unless a
contrary intention appears. The negotiation shall take
effect as of the time when the indorsement is actually
made. (n)
Transfer of order
indorsement.
document
without
204
SALES
This article specifies the rights of a person to whom an order
document of title, which may not properly be negotiated by mere
delivery, has been delivered, without indorsement. They are:
(1) The right to the goods as against the transferor (Art. 1514.); and
(2) The right to compel the transferor to indorse the indorsement.
(see Art. 1357.)
If the intention of the parties is that the document should be merely
transferred, the transferee has no right to require the transferor to
indorse the document.
Rule
where
indorsed.
document
subsequently
For the purpose of determining whether the transferee is a purchaser
for value in good faith without notice (see Arts. 1506, 1513.), the
negotiation shall take effect as of the time when the indorsement is
actually made, not at the time the document is delivered. The reason is
that the negotiation becomes complete only at the time of indorsement.
So, if by that time the purchaser already had notice that the title of the
seller was defective, he cannot be considered a purchaser in good faith
though he had no such notice when he bought the document.
A provision similar to Article 1515 is found in Section 43 of the
Warehouse Receipts Law. (Sec. 49 of the Negotiable Instruments Law
is to the same effect.)
ART. 1516. A person who for value negotiates or
transfers a document of title by indorsement or
delivery, including one who assigns for value a claim
secured by a document of title unless contrary
intention appears, warrants:
Art. 1516
(1)
That the document is genuine;
(2)
That he has a legal right to negotiate or
transfer it;
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
205
(3)
That he has knowledge of no fact which
would impair the validity or worth of the document;
and
(4)
That he has a right to transfer the title to
the goods and that the goods are merchantable or fit
for a particular purpose, whenever such warranties
would have been implied if the contract of the parties
had been to transfer without a document of title the
goods represented thereby. (n)
Warranties on sale of documents.
This article treats of the warranties or liabilities of a person
negotiating or transferring a document. They are similar to those of a
person negotiating an instrument by delivery or by a qualified
indorsement under the Negotiable Instruments Law. (see Sec. 65
thereof.) The liability is limited only to a violation of the four warranties
set forth in Article 1516. (see Art. 1517.) Thus, the person negotiating
or transferring a document could be held liable as when, for example,
the document was a forgery, or he had stolen it, or he had knowledge
that the document was invalid for want of consideration, or that the
goods had been damaged.
One who assigns for value a claim secured by a document of title is
also liable for the violation of the four warranties enumerated unless a
contrary intention appears.
It is the duty of every indorsee to know that all previous
indorsements are genuine; otherwise, he will not acquire a valid title to
the instrument. (Great Eastern Life Ins. Co. vs. Hongkong & Shanghai
Banking Corporation, 43 Phil. 678 [1922].) Under the Negotiable
Instruments Law, the last indorser warrants that all previous
indorsements are genuine. (see Secs. 65, 66 thereof.)
Article 1516 is similar to Section 44 of the Warehouse Receipts
Law. (see Sec. 65 of the Negotiable Instruments Law, which is also
similar.)
Arts. 1517-1518
206
SALES
ART. 1517. The 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. (n)
Indorser not a guarantor.
The indorsement of a negotiable instrument has a double effect. It
is at the same time a conveyance of the instrument and a contract of
the indorser with the indorsee that on certain conditions the indorser
will pay the instrument if the party primarily liable fails to do so.
The indorsement of a document of title amounts merely to a
conveyance by the indorser, not a contract of guaranty. (see 2 Williston,
op. cit., pp. 627-628.) Accordingly, an indorser of a document of title
shall not be liable to the holder if, for example, the bailee fails to deliver
the goods because they were lost due to his fault or negligence.
Article 1517 is similar to Section 45 of the Warehouse Receipts
Law.
ART. 1518. The validity of the negotiation of a
negotiable document of title is not impaired by the
fact that the negotiation was a breach of duty on the
part of the person making the negotiation, or by the
fact that the owner of the document was deprived of
the possession of the same by loss, theft, fraud,
accident, mistake, duress, or conversion, if the
person to whom the document was negotiated or a
person to whom the document was subsequently
negotiated paid value therefor in good faith without
notice of the breach of duty, or loss, theft, fraud,
accident, mistaken, duress or conversion. (n)
When negotiation not impaired by fraud,
mistake, duress, etc.
Under this article, a negotiable document may be negotiated by any
person in possession of the same, however such possesArt. 1519
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
207
sion may have been acquired. (see National Bank vs. Producers’
Warehouse Association, 42 Phil. 608 [1922]; Hill vs. Veloso, 31 Phil.
160 [1915].) In other words, it may be negotiated even by a thief or
finder and the holder thereof would acquire a good title thereto if he
paid value therefor in good faith without notice of the seller’s defect of
title. (see Art. 1506.) It will be remembered that under Article 1512,
neither a thief nor a finder may negotiate a negotiable document of title.
The two provisions thus appear contradictory to each other.
Under the Warehouse Receipts Law, it is provided:
“Sec. 47. When negotiation not impaired by fraud, mistake or
duress. — The validity of the negotiation of a receipt is not impaired
by the fact that such negotiation was a breach of duty on the part of
the person making the negotiation or by the fact that the owner of
the document was induced by fraud, mistake or duress to entrust
the possession or custody thereof to such person, if the person to
whom the document was negotiated or a person to whom the
document was subsequently negotiated paid value therefor, without
notice of the breach of duty or fraud, mistake or duress.”
Clearly, under Section 40 (see Art. 1512.) and Section 47 of the
Warehouse Receipts Law, the negotiation is invalidated by the fact that
the owner of the document was deprived of its possession by loss or
theft.
It should be noted that Article 1518 speaks of theft of the document
and not of the goods covered by such document. In the latter case, it
needs no argument to show that even a bona fide holder of a document
issued over such stolen goods cannot acquire title. (see Art. 1513.)
ART. 1519. If goods are delivered to a bailee by the
owner or by a person whose act in conveying the title
to them to a purchaser in good faith for value would
bind the owner and a negotiable document of title is
issued for them they cannot thereafter, while in
possession of such bailee, be attached by
garnishment or otherwise or be levied under an
execution
Art. 1520
208
SALES
unless the document be first surrendered to the
bailee or its negotiation enjoined. The bailee shall in
no case be compelled to deliver up the actual
possession of the goods until the document is
surrendered to him or impounded by the court.
Attachment or levy upon goods covered by a
negotiable document.
The bailee has the direct obligation to hold possession of the goods
for the original owner or to the person to whom the negotiable document
of title has been duly negotiated. (see Art. 1513.) While in the
possession of such bailee, the goods cannot be attached or levied under
an execution unless the document be first surrendered, or its negotiation
prohibited by the court.
The bailee cannot be compelled to deliver up the possession of the
goods until the document is surrendered to him or impounded by the
court. This prohibition is for the protection of the bailee since he could
be made liable to a subsequent purchaser for value in good faith.
Where depositor not owner.
The provisions of Article 1519 do not apply if the person depositing
is not the owner of the goods (like a thief) or one who has no right to
convey title to the goods binding upon the owner. Neither does it apply
to actions for recovery or manual delivery of goods by the real owner
nor to cases where the attachment is made before the issuance of the
negotiable document of title.
The rights acquired by attaching creditors cannot be defeated by the
issuance of a negotiable document of title thereafter. (see International
vs. Terminal Warehouse Co., 126 Atl. 902.)
A similar provision in the Warehouse Receipts Law is Section
25. (see also Sec. 54.)
ART. 1520. A creditor whose debtor is the owner
of a negotiable document of title shall be entitled to
such aid from courts of appropriate jurisdiction by
injunction and otherwise in attaching such document
Art. 1521
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
209
or in satisfying the claim by means thereof as is
allowed at law or in equity in regard to property which
cannot readily be attached or levied upon by ordinary
legal process. (n)
Creditor’s remedies to reach negotiable
documents.
Inasmuch as the goods themselves cannot readily be attached or
levied upon by ordinary legal process, as limited by the preceding
article, this article expressly gives the court full power to aid by
injunction and otherwise a creditor seeking to get a negotiable document
covering such goods. However, if an injunction is issued but the
negotiable document of title is negotiated to an innocent person, the
transfer is nevertheless effectual.
Article 1520 is similar to Section 26 of the Warehouse Receipts
Law.
ART. 1521. Whether it is for the buyer to take
possession of the goods or for the seller to send them
to the buyer is a question depending in each case on
the contract, express or implied, between the parties.
Apart from any such contract, express or implied, or
usage of trade to the contrary, the place of delivery is
the seller’s place of business if he has one, and if not,
his residence; but in case of a contract of sale of
specific goods, which to the knowledge of the parties
when the contract or the sale was made were in some
other place, then that place is the place of delivery.
Where by a contract of sale the seller is bound to
send the goods to the buyer, but no time for sending
them is fixed, the seller is bound to send them within
a reasonable time.
Where the goods at the time of sale are in the
possession of a third person, the seller has not
fulfilled his obligation to deliver to the buyer unless
and until such third person acknowledges to the
buyer that he holds the goods on the buyer’s behalf.
210
Art. 1521
SALES
Demand or tender of delivery may be treated as
ineffectual unless made at a reasonable hour. What is
a reasonable hour is a question of fact.
Unless otherwise agreed, the expenses of and
incidental to putting the goods into a deliverable state
must be borne by the seller. (n)
Place of delivery of goods sold.
Should the buyer take possession of the goods or should the seller
send them? In other words, where is the place of delivery? The
following are the rules:
(1)
Where there is an agreement, express or implied, the
place
of delivery is that agreed upon;
(2)
Where there is no agreement, the place of delivery is
that
determined by usage of trade;
(3)
Where there is no agreement and there is also no prevalent usage, the place of delivery is the seller’s place of business;
(4)
In any other case, the place of delivery is the seller’s
residence; and
(5)
In case of specific goods, which to the knowledge of
the parties at the time the contract was made were in some other
place, that place is the place of delivery, in the absence of any
agreement or usage of trade to the contrary. (see Art. 1251.)
From the above, it can be seen that the presumption is that the buyer
must take the goods from the seller’s place of business or residence
rather than the seller to deliver them to the buyer.
Wherever the proper place of delivery may be, either party acquires
a right of action by being ready and willing at that place to perform his
legal duty, if the other party is not there present or even if present, is not
prepared to perform in a proper manner with what is incumbent upon
him. (see Art. 1169, par. 3.) Where, however, the delivery was not
effected at the place specified in the contract but the buyer accepted the
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
211
goods nevertheless without complaint, the buyer would be deemed to
have waived the seller’s failure to deliver according to the terms of the
contract, and would be liable to pay the price agreed upon. (Sullivan vs.
Gird, 22 Ariz. 332.)
Art. 1521
Time of delivery of goods sold.
The time of delivery is also determined by the agreement of the
parties or, in the absence thereof, by the usage of trade.
(1) If no time is fixed by the contract, then the seller is bound to
send the goods to the buyer within a reasonable time. (par. 2.) What is
a reasonable time is properly a question of fact as it is dependent upon
the circumstances attending the particular transaction, such as the
character of the goods, the purpose for which they are intended, the
ability of the seller to produce the goods if they are to be manufactured,
the facilities available for transportation and distance the goods must be
carried, and the usual course of business in the particular trade. (Smith
Bell & Co. vs. Sotelo Matti, 44 Phil. 874 [1923].) Thus, where the goods
are to be manufactured, the time reasonably necessary to manufacture
and deliver them furnishes the test. Where the goods are at the time of
the bargain in a deliverable state (see Art. 1636[3].) and perishable in
nature, a reasonable time for delivery would be a very short time.
(2) If the contract provides a fixed time for performance, the
question is whether time is of the essence, and if so, whether correct
performance was offered within that time. (see Art. 1169, par. 2; see
Soler vs. Chesley, 43 Phil. 529 [1922].) If time is not of the essence, the
question is whether correct performance was offered within a
reasonable time. (2 Williston, op. cit., p. 714.)
(3) Where the contract does not specify the time for delivery so that
delivery is to be made within a reasonable time, time is not of the
essence. (MC Cutcheon vs. Kimbal, 135 Misc. 299, 238 N.Y.S. 192.)
In such case, the buyer cannot make time the essence of the contract
without giving the seller notice of his intention to cancel unless delivery
is made on or before a fixed time. (Robinson Day Products Co. vs.
Thatcher, 150 N.Y.S. 658.)
212
SALES
Delivery of goods in possession of
a third person.
It is important to observe a distinction between the delivery which
will satisfy the seller’s duty to the buyer and the delivery which is
necessary to protect the buyer against third persons.
Art. 1521
The seller can hardly be discharged from his obligation where the
goods are in the possession of a third person by simply telling the buyer
that they are there or by notifying the bailee to deliver to the buyer. It is
not enough to discharge the seller that the bailee has become by
operation of law the agent for the buyer. (2 Williston, op. cit., pp. 706707.) To affect third persons, the person holding the goods must
acknowledge being the bailee for the buyer.
Hour of delivery of goods sold.
The demand or tender of delivery to be effectual must be made at a
reasonable hour of the day. (par. 4.)
(1) What is a reasonable hour is a question of fact largely
dependent upon the circumstances. Generally, however, where all that
is required of the other party is to receive a payment or performance
which can readily be accepted, it seems probable that any hour when
the debtor could find the creditor would be reasonable for that purpose.
(2) In case of goods which are bulky or needed special care, an
hour might be unreasonable which would not be so in an ordinary
payment of a small sum of money.
(3) Where the question is not merely one of tender but also of
demand, reasonableness will depend on the justifiable expectation that
the hour is reasonable for giving as well as receiving. (Ibid., op. cit., pp.
711-712.)
Duty of seller to put goods in deliverable
condition.
Unless otherwise agreed, the seller bears the expenses to place the
thing in a deliverable state (par. 5.), that is, in such a state that the buyer
would, under the contract, be bound to take delivery of them. (Art.
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
213
1636[2].) This provision is a necessary consequence of the duty of the
seller to deliver the goods bargained for. (see Art. 1247.)
The buyer is not bound to make tender of payment until the seller
has complied with his obligations.
Art. 1522
ART. 1522. Where the seller delivers to the buyer
a quantity of goods less than he contracted to sell,
the buyer may reject them, but if the buyer accepts or
retains the goods so delivered, knowing that the
seller is not going to perform the contract in full, he
must pay for them at the contract rate. If, however, the
buyer has used or disposed of the goods delivered
before he knows that the seller is not going to perform
his contract in full, the buyer shall not be liable for
more than the fair value to him of the goods so
received.
Where the seller delivers to the buyer a quantity of
goods larger than he contracted to sell, the buyer may
accept the goods included in the contract and reject
the rest. If the buyer accepts the whole of the goods
so delivered he must pay for them at the contract rate.
Where the seller delivers to the buyer the goods
he contracted to sell mixed with goods of a different
description not included in the contract, the buyer
may accept the goods which are in accordance with
the contract and reject the rest.
In the preceding two paragraphs, if the subject
matter is indivisible, the buyer may reject the whole
of the goods.
The provisions of this article are subject to any
usage of trade, special agreement, or course of
dealing between the parties. (n)
Delivery of goods
contracted.
less
than
quantity
214
SALES
Where the seller is under a contract to deliver a specific quantity of
goods and he delivers a smaller quantity as full performance of his
obligation, the buyer may reject the goods so delivered. (see Art. 1233.)
The buyer may, however, accept the goods in which case he must pay
for their (1) price at the contract rate if he knew that no more were to be
delivered or (2) the fair value to
Art. 1522
him of the goods, if he did not know that the seller is going to be guilty
of a breach of contract. (par. 1.)
“Fair value to him” should be interpreted to mean the benefit which
the buyer may have received from the goods. It is not necessarily the
market value. Since the defaulting seller is the wrongdoer, the buyer is
not required to pay the contract price if such price for the goods is more
than fair value to him of the goods.
EXAMPLE:
S sold to B 200 cavans of rice at P1,000.00 per cavan or for a total
price of P200,000.00, delivery to be made at the place of business of
B.
If S delivers only 120 cavans, B can refuse to accept them. If he
accepts them knowing that B is not going to perform the contract in
full, he is liable to pay at the rate agreed upon for the 120 cavans or
P120,000. But if B was not aware that full delivery would not be made,
he would be liable only for the fair value to him of the goods at the
time of delivery even if it should be less than the contract price.
Of course, B cannot be liable, in any case, for more than the
contract price of P120,000.00 with respect to the 120 cavans actually
received by him.
ILLUSTRATIVE CASE:
Some of the goods contracted to be sold were missing through
fault of carrier.
Facts: S, a domestic corporation, alleges that B, a general
partnership, refused to pay the price of various automotive products,
with the latter claiming that it had not received the merchandise. It
appears that upon receipt of the Bill of Lading, B initiated, but did not
pursue, steps to take delivery as it was advised by NN Company,
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
215
owner of the vessel on which the spare parts were loaded by S’s
forwarding agent, that because some parts were missing, they would
just be informed as soon as the missing parts were located.
It was only four years later when a warehouseman of NN found
in its bodega, parts of the shipment in question, but already
deteriorated and valueless.
Art. 1522
Issue: Under the circumstances, can B be faulted for not accepting
or refusing to accept the shipment from NN four years after shipment?
Held: No. NN could not produce the merchandise nor ascertain
its whereabouts at the time B was ready to take delivery. From the
evidentiary record, NN was the party negligent in failing to deliver the
complete shipment to B who was never placed in the control and
possession of the same. Where the seller delivers to the buyer a
quantity of goods less than he contracted to sell, the buyer may reject
them. (Chrysler Phils. Corp. vs. Court of Appeals, 133 SCRA 567
[1984].)
Delivery of goods
contracted.
more
than
quantity
Where the seller delivers a quantity larger than that contracted for,
the buyer may accept the quantity contracted for and reject the excess.
However, if he accepts all the goods delivered, he makes himself liable
for the price of all of them. (par. 2; see Art. 1540 re sale of immovable
property.)
The offer of a quantity not contracted for is a manifestation of the
seller’s willingness to sell that quantity; and the act of the buyer in
knowingly taking them is sufficient evidence of assent. If by the terms
of the original contract, the price of the goods was based on their
number, weight, or measure, the same must be paid for the larger
quantity.
EXAMPLE:
In the preceding example, if S delivered 250 cavans of rice, B
may accept only 200 and reject the rest. If he accepts the entire
delivery, he may pay for them at the same contract rate of P1,000.00
per cavan or P250,000.00 for the 250 cavans.
216
SALES
ILLUSTRATIVE CASE:
See facts.
Facts: The contract calls for the delivery of a quantity of
almaciga (mastic) of less than 500 piculs.
Issue: Is the delivery of 500 piculs sufficient compliance with the
contract?
Art. 1522
Held: Yes. As the law takes no account of trifles (de minimis non
curat les), it is obvious that the discrepancy may be disregarded, and,
therefore, the buyer cannot escape liability on account of such trifling
difference. (Matute vs. Cheong Boo, 67 Phil. 373 [1939].)
Delivery of goods mixed with others.
Where the goods delivered are mixed with goods of different
description not included in the contract, the buyer may accept those
which are in accordance with the contract and reject the rest. The buyer,
of course, may accept them all if he so desires.
This case is analogous to the preceding topic and the discussion
there suffices.
Effect of indivisibility of subject matter.
If the subject matter of the sale is indivisible, in case of delivery of
a larger quantity of goods (par. 2.) or of mixed goods (par. 3.), the buyer
may reject the whole of the goods. (par. 4.)
It can be inferred from our law that the buyer has the right of
rejecting the whole of the goods delivered in the last two cases
mentioned only if the subject matter is indivisible.
EXAMPLES:
(1)
S agreed to sell to B a live carabao with a weight of not
less than 100 kilos but not more than 120 kilos. S delivered a carabao
weighing 130 kilos. B may reject the carabao.
(2)
If the agreement is for S to deliver “wagwag” rice
mixed with corn of a particular variety and the rice or corn delivered
is of a different variety, B may reject the whole of the goods.
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
217
Application of usage of trade, special
agreement, or course of dealing.
The provision of the 5th paragraph of Article 1522 permitting
evidence of usage of trade special agreement or course of dealing
between the parties is but a special application of the general rules
concerning contracts.
(1) A usage of trade is any practice or method of dealing having
such regularity of observance in a place, vocation or trade as
Art. 1523
to justify an expectation that it will be observed with respect to the
transaction in question. The existence and scope of such a usage are to
be proved as facts. (Uniform Commercial Code, Sec. 205[2].)
(2) A course of dealing is a sequence of previous conduct between
the parties to a particular transaction which is fairly to be regarded as
establishing a common basis of understanding for interpreting their
expressions and other conduct. (Ibid., Sec. 205[1].)
Under modern methods of doing business especially in regard to
such fungible goods as grains and oil, and other commodities which are
dealt in the same way, it is very common to mingle goods of different
owners and to constitute a co-ownership in a whole mass of a specified
quantity. Where such method of business prevails, it would be a natural
consequence that a tender of a right in the mass would be a good
delivery. (see 2 Williston, op. cit., p. 732.)
ART. 1523. Where, in pursuance of a contract of
sale, the seller is authorized or required to send the
goods to the buyer, delivery of the goods to a carrier,
whether named by the buyer or not, for the purpose
of transmission to the buyer is deemed to be a
delivery of the goods to the buyer, except in the cases
provided for in article 1503, first, second and third
paragraphs, or unless a contrary intent appears.
Unless otherwise authorized by the buyer, the
seller must make such contract with the carrier on
behalf of the buyer as may be reasonable, having
218
SALES
regard to the nature of the goods and the other
circumstances of the case. If the seller omits so to do,
and the goods are lost or damaged in course of
transit, the buyer may decline to treat the delivery to
the carrier as a delivery to himself, or may hold the
seller responsible in damages.
Unless otherwise agreed, where goods are sent by
the seller to the buyer under circumstances in which
the seller knows or ought to know that it is usual
Art. 1523
to insure, the seller must give such notice to the
buyer as may enable him to insure them during their
transit, and, if the seller fails to do so, the goods shall
be deemed to be at his risk during such transit. (n)
Delivery to carrier on behalf of buyer.
(1) General rule. — Where the seller is authorized or required to
send the goods to the buyer (Art. 1521, par. 1.), the general rule is that
delivery of such goods to the carrier34 constitutes delivery to the buyer,
whether the carrier is named by the buyer or not. (see Behn, Meyer &
Co., [Ltd.] vs. Yangco, 38 Phil. 602 [1918].) In such case, the delivery
of the goods on board the carrying vessel partakes the nature of actual
delivery since from that time, the buyer assumes the risk of loss of the
goods. (Filipino Merchant Insurance Co., Inc. vs. Court of Appeals, 179
SCRA 638 [1989].)
(2) Exceptions. — They are those provided for in paragraphs 1, 2,
and 3 of Article 1503 and when a contrary intent appears, that is, the
parties did not intend the delivery of the goods to the buyer through the
carrier. The seller is not responsible for misdelivery by the carrier where
34
There is delivery to the carrier when the goods are ready for and have been placed in the
exclusive possession, custody and control of the carrier for the purpose of their immediate
transportation and the carrier has accepted them. Where such delivery has thus been accepted by
the carrier, its liability commences eo instanti. Ordinarily, a receipt is not essential to a complete
delivery of goods to the carrier for transportation but, when issued is competent and prima facie
but not conclusive evidence of delivery to the carrier. (Saludo, Jr. vs. Court of Appeals, 207 SCRA
498 [1992].)
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
219
the carrier was chosen and authorized by the buyer to make the delivery.
(Smith Bell and Co. [Phils.], Inc. vs. Jimenez, 8 SCRA 407 [1963].)
Paragraphs 2 and 3 are in accordance with mercantile usages.
Seller’s duty after delivery to carrier.
The fact that the ownership in the goods may have passed to the
buyer does not mean that the seller has already fulfilled his duty to the
buyer.
(1) To enter on behalf of buyer into such contract reasonable
under the circumstances. — The seller must make such contract with
the
Art. 1523
carrier on behalf of the buyer as may be reasonable under the
circumstances. If he omits to do so, the buyer may decline to treat the
delivery to the carrier as a delivery to himself in case the goods are lost
or damaged in course of transit, or the buyer may hold the seller
responsible in damages. (par. 2.) If the buyer exercises the first right,
the transfer of ownership will be deemed not to have taken place.
The law does not make a carrier for all purposes the agent of the
buyer to whom goods are consigned. The agency relates to the
transmission of the merchandise only.
(2) To give notice to buyer regarding necessity to insure goods.
— The seller must give notice to the buyer as may enable him to
insure the goods during their transit if under the circumstances it is
usual to insure them. If the seller fails to do so, the risk will be borne
by him. But the seller who had failed to give notice is not liable for
loss of goods, if the buyer had all the information necessary to insure.
The two preceding obligations of the seller are respectively subject
to specific instructions of the buyer or any agreement to the contrary.
Definition of shipping terms.
Three commonly used terms are, namely:
(1) C.O.D. — The initials stand for the words, “collect on
delivery.” If the goods are marked C.O.D., the carrier acts for the seller
220
SALES
in collecting the purchase price. The buyer must pay for the goods
before he can obtain possession. C.O.D. terms do not prevent title from
passing to the buyer on delivery to the carrier where they are solely
intended as security for the purchase price (see Art. 1503.);
(2) F.O.B. — The initials stand for the words, “free on board”.
They mean that the goods are to be delivered free of expense to the
buyer to the point where they are F.O.B. In general, the point of F.O.B.,
either the point of shipment or the point of destination, determines when
the ownership passes. (Behn, Meyer & Co. [Ltd.] vs. Yangco, 38 Phil.
602 [1918].) Here, title presumably passes when the goods are so
delivered F.O.B.; and
Art. 1524
(3) C.I.F. — The initials stand for the words, “cost, insurance and
freight.” They signify that the price fixed covers not only the cost of the
goods, but the expense of freight and insurance to be paid by the seller
(ibid.) up to the point of destination. Title passes to the buyer at the
moment of delivery to the point especially named.
Presumption arising from payment of
freight.
Both the terms “F.O.B.” and “C.I.F.” merely make rules of
presumption which yield to proof of contrary intention.
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 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. (Ibid.; see General Foods Corp.
vs. National Coconut Corp., 100 Phil. 337 [1956].)
ART. 1524. The vendor shall not be bound to
deliver the thing sold, if the vendee has not paid him
the price, or if no period for the payment has been
fixed in the contract. (1466)
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
221
Delivery, simultaneous with payment of
price.
As a general rule, the obligation to deliver the thing subject matter
of a contract arises from the moment of its perfection and from that time
the obligation may be enforced. (see Art. 1315.) But the contract of
purchase and sale is bilateral and from it arises not only the obligation
to deliver the thing but also that of paying the price. The obligations are
reciprocal.
Consequently, if the vendor is bound to deliver the thing sold, it is
no less certain that the vendee must pay the price. If the vendee does not
pay the price, the consideration for the obligation of the vendor is absent
and if the consideration is absent, the obligation
Art. 1524
likewise does not exist or at least is suspended. (10 Manresa 138; see
Lafont vs. Pascacio, 5 Phil. 391 [1905].) The vendor is not also obliged
to make delivery if no period has been fixed in the contract and the
vendee has not paid the price.
A vendor who continued to effect sales and deliveries to the vendee
even without promptly getting paid is considered for all intents and
purposes, to have sold on credit. (Castro vs. Mendoza, 44 SCAD 995,
226 SCRA 611 [1993].)
When delivery must be made before payment
of price.
The provisions of Article 1524 contain a rule and an exception: the
rule is that the thing shall not be delivered unless the price be paid; and
the exception is that the thing must be delivered though the price be not
first paid, if time for such payment has been fixed in the contract. (see
Warner, Barnes & Co. vs. Inza, 43 Phil. 505 [1922]; Ocejo, Perez & Co.
vs. International Bank, 37 Phil. 631 [1918]; Lafont vs. Pascasio, supra.)
If this period was fixed, the vendor notwithstanding such period has
not terminated, nor, consequently, that he has not collected the price, is
obliged to deliver the thing sold. The vendor’s obligation to convey the
thing arises from the force and validity of the contract. (Florendo vs.
Foz, 20 Phil. 388 [1911]; 10 Manresa 131-134.) But even if a period has
222
SALES
been fixed for the payment of the price, the vendor is not bound to
deliver in case the vendee has lost the right to make use of the period
and still has not paid the price. (Art. 1536.)
EXAMPLE:
S sold to B the former’s horse for P10,000.00. No date is fixed by
the parties for performance of their respective obligations.
In this case, S is not bound to deliver the horse, if B himself does
not pay the price. But if a time of payment has been fixed in the
contract, say, within two (2) months, then S is obliged to deliver the
horse where the term of credit has not expired although B has not paid
the price.
Art. 1525
ART. 1525. The seller of goods is deemed to be an
unpaid seller within the meaning of this Title:
(1)
When the whole of the price has not been
paid or tendered;
(2)
When a bill of exchange or other negotiable
instrument has been received as conditional
payment, and the condition on which it was received
has been broken by reason of the dishonor of the
instrument, the insolvency of the buyer, or otherwise.
In articles 1525 and 1535 the term “seller” includes
an agent of the seller to whom the bill of lading has
been indorsed, or a consignor or agent who has
himself paid, or is directly responsible for the price,
or any other person who is in the position of a seller.
(n)
Meaning of unpaid seller.
An unpaid seller is one who has not been paid or tendered the whole
price or who has received a bill of exchange or other negotiable
instrument as conditional payment and the condition on which it was
received has been broken by reason of the dishonor of the instrument.
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
223
The term “unpaid seller” within the scope of Articles 1525 up to
1535 includes: (1) an agent of the seller; (2) a consignor or agent who
has himself paid or is directly responsible for the price; or (3) any other
person in the position of the seller. A seller is unpaid within the
definition whether title has or has not passed. (see Art. 1526.)
Where whole of price has not been paid.
(1) Tender of payment by buyer. — Although tender of payment is
not the same as performance, and a seller to whom the price of goods
has been tendered is strictly unpaid, and can, therefore, bring an action
subsequently for the price, which he has refused, yet tender destroys the
seller’s lien. Accordingly, so far as concerns his rights against the
goods, he is not an unpaid seller after the tender of the price.
Art. 1526
(2) Payment of part of price. — Payment of a part only of the price
does not destroy a seller’s lien. (2 Williston, op. cit., pp. 9697.) The
seller remains an unpaid seller even if title has passed to the buyer.
(3) Payment by negotiable instrument. — According to paragraph
2 of Article 1249 (Civil Code), “the delivery of promissory notes
payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed
or when through the fault of the creditor they have been impaired.”
ART. 1526. Subject to the provisions of this Title,
notwithstanding that the ownership in the goods may
have passed to the buyer, the unpaid seller of goods,
as such, has:
(1)
A lien on the goods or right to retain them
for the price while he is in possession of them;
(2)
In case of the insolvency of the buyer, a
right of stopping the goods in transitu after he has
parted with the possession of them;
(3)
A right of resale as limited by this Title;
224
SALES
(4)
A right to rescind the sale as likewise
limited by this Title.
Where the ownership in the goods has not passed
to the buyer, the unpaid seller has, in addition to his
other remedies, a right of withholding delivery similar
to and co-extensive with his rights of lien and
stoppage in transitu where the ownership has passed
to the buyer. (n)
Special remedies of an unpaid seller of
goods.
Article 1526 gives the unpaid seller of goods certain remedies but
they do not cover an action for the purchase price. (see Art. 1595.) Even
if the ownership in the goods has already passed to the buyer, the unpaid
seller may exercise the following rights:
Art. 1526
(1)
A lien on the goods or right to retain them for the price
while in his possession (Arts. 1527-1529.);
(2)
A right of stopping the goods in transitu in case of
insolvency of the buyer (Art. 1530.);
(3)
A right of resale (Art. 1533.); and
(4)
A right to rescind the sale. (Art. 1534.)
If the unpaid seller still retains ownership in the goods, he cannot
be said to have a lien (on his goods). But he does have, in addition to
his other remedies, right of withholding delivery. (Art. 1526, par. 2.)
Nature of unpaid seller’s possessory lien
on the goods.
The right given by this article though denominated as a lien,
is in truth greater than a lien.
The seller’s position is very nearly that of a pledgee (see Art. 2112.)
with power to sell at private sale in case of default, and the power
survives till payment of the price. An action for the price is not
inconsistent with the later enforcement of the lien though the buyer must
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
225
be credited with any payment of the price in reduction of the lien.
(D’Oprile vs. TurnerLooker Co., 147 N.E. 15; see Art. 1529, par. 2.)
Unpaid seller’s lien on the price.
The possessory lien referred to in Articles 1527 to 1529 should be
distinguished from the preferred claim or lien as provided for in Article
2241(3) of the Civil Code.
The possessory lien entitles the seller to retain possession of the
goods as security for the purchase price. Where the goods are in the
possession of the buyer (see Art. 1529[2].), the seller has no more
possessory lien but his claim for the unpaid price is a preferred claim or
lien. Simply stated, upon delivery, the seller’s possessory lien on the
goods is lost, but his lien on the price remains.
Basis of rights of unpaid seller.
The ground upon which an unpaid seller is allowed a lien and
kindred remedies is the inherent injustice of depriving him of
Art. 1527
goods with which he has not finally parted where it is evident that he
has not been or will not be paid the price for them when it is due.
The same principle of justice is applicable in every case where a
possessor of goods is entitled to receive a price on the surrender of the
goods. Accordingly, the term “unpaid seller’’ has a wider meaning than
the literal language would import. (Art. 1525, par. 2; 3 Williston, op.
cit., p. 99.)
ART. 1527. Subject to the provisions of this Title,
the unpaid seller of goods who is in possession of
them is entitled to retain possession of them until
payment or tender of the price in the following cases,
namely:
(1)
Where the goods have been sold without
any stipulation as to credit;
(2)
Where the goods have been sold on credit,
but the term of credit has expired;
226
SALES
(3)
Where the buyer becomes insolvent.
The seller may exercise his right of lien
notwithstanding that he is in possession of the goods
as agent or bailee for the buyer. (n)
When unpaid seller’s possessory lien may
be exercised.
(1) Sale without stipulation as to credit. — In a credit sale, the
seller binds himself to give the goods over to the buyer without
receiving at that time payment for them. Where there is a “stipulation
as to credit” (No. 1.), a period for payment of the price has been fixed
in the contract. (see Art. 1193.)
In the absence of any stipulation as to the credit, the seller is entitled
to the payment of the price at the same time that he transfers the
possession of the goods. (Art. 1524; see Distributors, Inc. vs. Flores, 92
Phil. 145 [1952].) Accordingly, the seller has always a lien upon the
goods which he sells until payment or tender of the entire price. (3
Williston, op. cit., pp. 103-104.)
Art. 1528
(2) Expiration of term of credit. — Even where the parties agree
upon a sale on credit, the seller’s right of lien may be exercised. By the
nature of a credit sale, the buyer is entitled to possession of the goods
without paying the price; but if he fails to exercise his right until the
term of credit has expired and the price becomes due, he loses the right
which he theretofore had. (Ibid., p. 104.) In this case, the obligation of
the buyer to pay will also be governed by Article 1524.
(3) Insolvency of the buyer. — The insolvency of the buyer is
another situation where the lien of the seller in possession is revived
even though the time for payment of the price has not yet arrived. This
doctrine is only an application of a general principle in the law of
contracts that when one party to a bilateral contract is incapacitated
from performing his part of the agreement, the other party also is
excused from performing. It should be noticed that insolvency does not
dissolve the bargain; it merely revives the seller’s lien. (Ibid., p. 105.)
The insolvency of the debtor is one of the grounds for the loss of
the right to make use of the period fixed in an obligation. (Art. 1198[1].)
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
227
A person is “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. (Art.
1636[2].)
Unpaid seller as bailee for the buyer.
It is immaterial that the seller holds the goods as bailee for the
buyer. Indeed, this always is the situation where the seller’s lien is in
question: for the property having passed, the seller is necessarily
holding the buyer’s goods and, therefore, acting as bailee for him. And
though he has charged the buyer storage for the goods, the lien may still
be asserted.
ART. 1528. Where an unpaid seller has made part
delivery of the goods, he may exercise his right of lien
on the remainder, unless such part delivery has been
made under such circumstances as to show an intent
to waive the lien or right of retention. (n)
Art. 1529
Lien generally not lost by part delivery.
When part of the goods are delivered, the unpaid seller has a lien
upon the remainder for the proportion of the price which is due on
account of the goods so retained. However, if the delivery of the part is
intended as symbolical delivery of the whole, and, therefore, a waiver
of any right of retention as to the remainder, the lien is lost. (Art.
1529[3].)
The intent to make such waiver may be inferred from the
circumstances.
ART. 1529. The unpaid seller of goods loses his
lien thereon:
(1)
When he delivers the goods to a carrier or
other bailee for the purpose of transmission to the
228
SALES
buyer without reserving the ownership in the goods
or the right to the possession thereof;
(2)
When the buyer or his agent lawfully
obtains possession of the goods;
(3)
By waiver thereof.
The unpaid seller of goods, having a lien thereon,
does not lose his lien by reason only that he has
obtained judgment or decree for the price of the
goods. (n)
When unpaid seller loses possessory lien.
(1) Delivery to agent or bailee of buyer. — An unconditional
delivery to an agent or bailee for the buyer is, so far as the seller’s lien
is concerned, the same as delivery to the buyer himself. It is true that
the seller may stop the goods while on their way to the buyer after
delivery to a bailee for the buyer but it cannot be said that the seller has
still any lien upon them.
(2) Possession by buyer or his agent. — If the goods are already in
the possession of the buyer at the time of the bargain, it is plain that
when the ownership is transferred, the seller has no lien simply because
he has no possession necessary for a lien. The wrongArt. 1530
ful taking, however, of the goods by the buyer without the seller’s
consent does not destroy the lien. Thus, if the goods are put into the
possession of the buyer merely for the purpose of allowing the latter to
examine them, this would not amount to an assent to a surrender of the
lien. (3 Williston on Sales, op. cit., p. 111.)
(3) Waiver of the lien. — The seller may lose his lien either by
express agreement to surrender it. Thus, it has been held that where the
buyer was allowed to alter the character of the goods and make them
much more valuable, the seller could no longer assert a lien. (Ibid., p.
115.)
Note that mere judgment by a court obtained by the unpaid seller
for the price of the goods is not a ground for the loss of his lien. (Art.
1529, par. 2.)
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
229
Revival of lien after delivery.
(1) If the buyer refuses to receive the goods after they have been
delivered to a carrier or other bailee on his behalf, though the seller has
parted with both the ownership and the possession, he may reclaim the
goods and revest himself with his lien. (see Art. 1531, par. 1[2].)
(2) Likewise, if the buyer returns the goods in wrongful
repudiation of the sale, the lien is revived.
ART. 1530. Subject to the provisions of this Title,
when the buyer of goods is or becomes insolvent, the
unpaid seller who has parted with the possession of
the goods has the right of stopping them in transitu,
that is to say, he may resume possession of the
goods at any time while they are in transit, and he will
then become entitled to the same rights in regard to
the goods as he would have had if he had never
parted with the possession. (n)
Right of seller to stop goods in transitu.
If the unpaid seller has already parted with the possession of the
goods, he may still exercise the second right of stoppage in transitu (Art.
1520[2].), that is, he may resume possession of the
Art. 1530
goods while they are in transit, when the buyer is or becomes insolvent.
The right is exercised either by obtaining actual possession of the goods
or by giving notice of his claim to the carrier or other bailee in
possession. (Art. 1532.) The unpaid seller exercising his right of
stoppage in transitu becomes entitled to the same rights to the goods as
if he had never parted with the possession thereof.
Take note that the buyer’s insolvency need not be judicially
declared. (see Art. 1636[2].) An insolvent debtor forfeits his rights to
the period stipulated for payment. (see Art. 1536.)
Requisites for the exercise of right of
stoppage in transitu.
230
SALES
The following are the requisites for the existence of the right:
(1)
The seller must be unpaid (Art. 1525.);
(2)
The buyer must be insolvent;
(3)
The goods must be in transit (Art. 1531.);
(4)
The seller must either actually take possession of the
goods sold or give notice of his claim to the carrier or other person in
possession (Art. 1532, par. 1.);
(5)
The seller must surrender the negotiable document of
title, if any, issued by the carrier or bailee (Ibid., par. 2.); and
(6)
The seller must bear the expenses of delivery of the
goods after the exercise of the right. (Ibid.)
Basis and nature of right of stoppage in
transitu.
(1) The essential basis of the right of stoppage in transitu is clearly
the injustice of allowing the buyer to acquire ownership and possession
of the goods when he has not paid and, owing to his insolvency, cannot
pay the price which was to be given in return for the goods. In other
words, the fundamental basis of the right is the far-reaching principle
allowing rescission and restitution where there is actual or prospective
failure of consideration.
(3 Williston, op. cit., p. 122.)
Art. 1531
(2) This right does not proceed from any agreement of the parties
but is independently conferred by law. It may be regarded as a legal
extension of the unpaid seller’s lien.
ART. 1531. Goods are in transit within the meaning
of the preceding article:
(1)
From the time when they are delivered to a
carrier by land, water, or air, or other bailee for the
purpose of transmission to the buyer, until the buyer,
or his agent in that behalf, takes delivery of them from
such carrier or other bailee;
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
231
(2)
If the goods are rejected by the buyer, and
the carrier or other bailee continues in possession of
them, even if the seller has refused to receive them
back;
Goods are no longer in transit within the meaning
of the preceding article:
(1)
If the buyer, or his agent in that behalf,
obtains delivery of the goods before their arrival at
the appointed destination;
(2)
If, after the arrival of the goods at the
appointed destination, the carrier or other bailee
acknowledges to the buyer or his agent that he holds
the goods on his behalf and continues in possession
of them as bailee for the buyer or his agent; and it is
immaterial that further destination for the goods may
have been indicated by the buyer;
(3)
If the carrier or other bailee wrongfully
refuses to deliver the goods to the buyer or his agent
in that behalf.
If the goods are delivered to a ship, freight train,
truck, or airplane chartered by the buyer, it is a
question depending on the circumstances of the
particular case, whether they are in the possession of
the carrier as such or as agent of the buyer.
Art. 1531
If part delivery of the goods has been made to the
buyer, or his agent in that behalf, the remainder of the
goods may be stopped in transitu, unless such part
delivery has been under such circumstances as to
show an agreement with the buyer to give up
possession of the whole of the goods. (n)
When goods are in transit.
232
SALES
The goods are not yet in transit until they are delivered to a carrier
or other bailee for the purpose of transmission to the buyer. The goods
are in transit —
(1) after delivery to a carrier or other bailee and before the buyer
or his agent takes delivery of them; and
(2) if the goods are rejected by the buyer, and the carrier or other
bailee continues in possession of them. (par. 1.)
When goods considered no longer in
transit.
The right of stoppage in transitu arises solely when an unpaid seller
has shipped goods to an insolvent buyer. The right to retake continues
only while the goods are in transit. The goods are no longer in transit in
the following cases:
(1) After delivery to the buyer or his agent in that behalf;
(2) If the buyer or his agent obtains possession of the goods at a
point before the destination originally fixed;
(3) If the carrier or bailee acknowledges to hold the goods on
behalf of the buyer; and
(4) If the carrier or bailee wrongfully refuses to deliver the goods
to the buyer. (par. 2.)
Attornment by the bailee.
The right to stop the goods may be terminated not simply by
delivery to the buyer, but by attornment of the bailee to the buyer. (Art.
1531, par. 2[2].)
At the time when a carrier first receives goods consigned to the
buyer, the carrier is agent for the seller for the purpose of carArt. 1531
rying out the transit between the seller and the buyer. In order to
terminate the seller’s right to stop, the carrier must enter into a new
relation, distinct from the original contract of carriage, to hold the goods
for the buyer as his agent not for the purpose of expediting them to the
place of original destination, pursuant to that contract, but in a new
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
233
character for the purpose of custody on the buyer’s account. (see 3
Williston, op. cit., pp. 134-135.)
Effect of refusal of carrier to attorn or
deliver the goods.
The carrier is not allowed to enlarge the seller’s right by wrongfully
refusing to deliver or attorn as the buyer’s agent. (Art. 1531, par. 2[3].)
But a rightful refusal by the carrier, based for instance, on the refusal of
the buyer or his agent to pay the freight will not terminate the right to
stop. (Ibid., pp. 135-136.)
Delivery to a ship, etc., chartered or
owned by buyer.
(1) Chartered by the buyer. — The mere fact that the carrier is
chartered by the buyer does not make a delivery to the carrier a delivery
to the buyer. Whether delivery to a carrier chartered by the buyer means
possession by the carrier as such or possession by the carrier as agent
of the buyer, in which case, the goods are no longer in transit, is a
question depending on the circumstances of the particular case. (par. 3.)
(2) Owned by the buyer. — As delivery to an agent, other than one
whose only duty is to forward the goods, is a delivery to the principal,
delivery to the buyer’s servant who is under a general duty to obey his
master’s order, is necessarily a delivery to the buyer. Hence, delivery to
a vessel belonging to the buyer is delivery to the buyer. (see Ibid., p.
145.)
Effect of partial delivery.
The mere fact that part of the goods has been delivered does not
deprive the seller of the right to stop with respect to the remainder (par.
4.) just as the seller may still exercise his right of lien on the remainder
after part of the goods had been delivered.
Art. 1532
(Art. 1528.) However, it may be shown that the seller has an agreement
with the buyer to give up possession of the whole of the goods.
234
SALES
ART. 1532. The unpaid seller may exercise his
right of stoppage in transitu either by obtaining actual
possession of the goods or by giving notice of his
claim to the carrier or other bailee in whose
possession the goods are. Such notice may be given
either to the person in actual possession of the goods
or to his principal. In the latter case, the notice, to be
effectual, must be given at such time and under such
circumstances that the principal, by the exercise of
reasonable diligence, may prevent a delivery to the
buyer.
When notice of stoppage in transitu is given by the
seller to the carrier, or other bailee in possession of
the goods, he must redeliver the goods to, or
according to the directions of, the seller. The
expenses of such delivery must be borne by the
seller. If, however, a negotiable document of title
representing the goods has been issued by the
carrier or other bailee, he shall not be obliged to
deliver or justified in delivering the goods to the seller
unless such document is first surrendered for
cancellation. (n)
Ways of exercising the right to stop.
The seller may exercise the right of stoppage in transitu either: (1)
by taking actual possession of the goods. — The seller’s power to stop
in transitu includes not only the power to counter delivery to the buyer
but to order redelivery to himself. (par. 2, 1st and 2nd sentences.) The
duty imposed on the carrier by the exercise of the power is, however,
qualified by the existence of a lien of the carrier on the goods for charges
due for their carriage. The seller has the obligation to pay the freight on
them and other necessary expenses of the delivery (3 Williston, op. cit.,
pp. 156-157.); or
(2) by giving notice of his claim to the carrier or bailee. — To make
a notice effective as a stoppage in transitu, it must be given at such
Art. 1533
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
235
time, and under such circumstances that the principal, by the exercise
of reasonable diligence, may communicate it to his agent to prevent the
delivery to the buyer. There is no form of notice which is essential; it is
only necessary that the goods be sufficiently described for
identification.
Effect of outstanding bill of lading.
If the goods are covered by a negotiable document of title, the
carrier or bailee has no obligation to deliver the goods to the seller
unless such document is first surrendered for cancellation. (par. 2, 3rd
sentence; see Art. 1519.)
Should the carrier surrender the goods to the seller and afterwards
the bill of lading be negotiated to an innocent purchaser for value, the
latter would be entitled to demand delivery of the goods. (Art. 1518.)
The only way in which the carrier can be assured that no subsequent
purchaser can arise is by requiring a surrender of the document of title.
The right of the purchaser for value in good faith to whom such
document has been negotiated is superior to the seller’s unpaid lien or
stoppage in transitu even when such purchaser acquired the same after
notice of stoppage was given by the seller to the carrier. (see Art. 1535,
par. 2.)
ART. 1533. Where the goods are of perishable
nature, or where the seller expressly reserves the
right of resale in case the buyer should make default,
or where the buyer has been in default in the payment
of the price for an unreasonable time, an unpaid seller
having a right of lien or having stopped the goods in
transitu may resell the goods. He shall not thereafter
be liable to the original buyer upon the contract of
sale for any profit made by such resale, but may
recover from the buyer damages for any loss
occasioned by the breach of the contract of sale.
Where a resale is made, as authorized in this
article, the buyer acquires a good title as against the
original buyer.
It is not essential to the validity of a resale that
notice of an intention to resell the goods be given by
236
SALES
Art. 1533
the seller to the original buyer. But where the right to
resell is not based on the perishable nature of the
goods or upon an express provision of the contract
of sale, the giving or failure to give such notice shall
be relevant in any issue involving the question
whether the buyer had been in default for an
unreasonable time before the resale was made.
It is not essential to the validity of a resale that
notice of the time and place of such resale should be
given by the seller to the original buyer.
The seller is bound to exercise reasonable care
and judgment in making a resale, and subject to this
requirement may make a resale either by public or
private sale. He cannot, however, directly or indirectly
buy the goods. (n)
Unpaid seller’s right of resale.
(1) When resale allowable. — The third right of an unpaid seller is
the right of resale. (Art. 1526[3].) An unpaid seller can exercise the right
to resell only when he has either a right of lien (Ibid., [1].) or a right to
stop the goods in transitu (Ibid., [2].) and under any of the three
following cases:
(a)
where the goods are perishable in nature;
(b)
where the right to resell is expressly reserved in casethe
buyer should make a default; and
(c)
where the buyer delays in the payment of the price
foran unreasonable time. (see Hanlon vs. Haussermann and Beam,
40 Phil. 796 [1920].)
Article 1533 provides that the seller having the right “may resell the
goods.” The language is permissive in nature rather than mandatory.
(2) Effect of resale. — In case of resale, the seller is not liable for
any profit made by such resale; but if he sells for less than the price, he
has a right to sue for the balance. (par. 1.) As against the original buyer,
the new buyer acquires a good title to the goods.
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
237
(par. 2.)
Art. 1533
ILLUSTRATIVE CASE:
Seller resold tractor for failure of buyer to take delivery and pay
the price.
Facts: S sold to B a tractor, payable at P5,000.00 upon delivery
and the balance of P7,000.00 within 60 days. B failed to take delivery
of the tractor and pay the purchase price. S was forced to sell the same
to a third person for only P10,000.00.
Issue: Is B liable for the difference of P2,000.00?
Held: Yes. In a contract of sale which is executory as to both
parties, the vendor is entitled to resell the goods if the purchaser fails
to take delivery and pay the purchase price. 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.
There is no need of an action for 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. (Katigbak vs. Court of
Appeals, 4 SCRA 243 [1962], citing Hanlon vs. Hausserman, supra.)
(3) Notice of resale not essential. — The seller’s right to resell the
goods for the buyer’s account may depend to some extent upon the
length of time the buyer has been in default. A notice by the seller of
his intention to resell may operate to fix the time within which it is
reasonable that the buyer should perform his obligations. It is, therefore,
provided in paragraph 3, that except in the case of perishable goods,
which it is obvious may require an expeditious sale, and where the right
to resell is reserved, the failure to give notice shall be relevant upon the
question whether the buyer has been in default for an unreasonable time.
What is reasonable time will vary according to the circumstances of the
case.
Though the seller is not bound to give notice of his intention to
resell and of the time and place where the resale will be held (par. 4.),
it is however, prudent to give the buyer such notice, as the giving or
failure to give it may be important evidence in regard to the fairness of
the sale. (3 Williston, op. cit., p. 172.)
238
SALES
(4) Manner of resale. — Any absolute rule requiring the formality
of an auction sale might bear harshly on the seller in case where
Art. 1534
the goods are of small value and the buyer is financially irresponsible.
The law “is satisfied with a fair sale made in good faith according to the
established business methods with no attempt to take advantage of the
vendee.” (Ibid., pp. 168-169.) The seller is only required to exercise
reasonable care and judgment in making a resale. He cannot, however,
directly or indirectly, buy the goods. (see Art. 1491[6].)
ART. 1534. An unpaid seller having the right of lien
or having stopped the goods in transitu, may rescind
the transfer of title and resume the ownership in the
goods, where he expressly reserved the right to do so
in case the buyer should make default, or where the
buyer has been in default in the payment of the price
for an unreasonable time. The seller shall not
thereafter be liable to the buyer upon the contract of
sale, but may recover from the buyer damages for any
loss occasioned by the breach of the contract.
The transfer of title shall not be held to have been
rescinded by an unpaid seller until he has manifested
by notice to the buyer or by some other overt act an
intention to rescind. It is not necessary that such
overt act should be communicated to the buyer, but
the giving or failure to give notice to the buyer of the
intention to rescind shall be relevant in any issue
involving the question whether the buyer had been in
default for an unreasonable time before the right of
rescission was asserted. (n)
Unpaid seller’s right of rescission.
(1) When seller may rescind. — The fourth right of an unpaid seller
is the right to rescind the sale. (Art. 1526[4].) An unpaid seller has a
right to rescind only if he has either a right of lien (Ibid., No. 1.) or a
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
239
right to stop the goods in transitu (Ibid., No. 2.) and under either of two
situations:
(a)
where the right to rescind is expressly reserved in
casethe buyer should make a default; or
Art. 1535
(b)
where the buyer delays in the payment of the price
foran unreasonable time. (see Ocejo, Perez & Co. vs. International
Bank, 37 Phil. 631 [1918].)
(2) Effect of rescission. — In the case of rescission, the seller
resumes ownership in the goods. While the seller shall not be liable to
the buyer upon the contract of sale, the latter, however, may be made
liable to the seller for damages for any loss occasioned by the breach of
contract. (par. 1; see Art. 1533, par. 1.)
(3) Manner of rescission. — An election by the seller to rescind
may be manifested by notice to the buyer or by some other overt act
showing an intention to rescind. Communication of such election to the
buyer is not necessary. But, as in regard to resale (Art. 1533, par. 3.),
the giving or failure to give notice is relevant in determining the
reasonableness of the time given the buyer to make good his obligations
under the contract. (par. 2.)
ART. 1535. Subject to the provision of this Title,
the unpaid seller’s right of lien or stoppage in transitu
is not affected by any sale, or other disposition of the
goods which the buyer may have made, unless the
seller has assented thereto.
If, however, a negotiable document of title has
been issued for goods, no seller’s lien or right of
stoppage in transitu shall defeat the right of any
purchaser for value in good faith to whom such
document has been negotiated, whether such
negotiation be prior or subsequent to the notification
to the carrier, or other bailee who issued such
document, of the seller’s claim to a lien or right of
stoppage in transitu. (n)
240
SALES
Effect of sale of goods subject to lien or
stoppage in transitu.
(1) Where goods not covered by negotiable document of title. — It
is fundamental, as a general rule, that a seller can give no larger right
than he has. When, therefore, goods are subject to a legal lien, as they
are when an unpaid seller is in possession of them, a purchaser from the
original buyer can acquire only such right as the buyer then had. (3
Williston, op. cit., pp. 188-189.)
Art. 1536
(2) Where goods covered by negotiable document of title. — If,
however, the goods are covered by a negotiable document of title, the
seller’s lien cannot prevail against the rights of a purchaser for value in
good faith to whom the document has been indorsed. (see Arts. 1506,
1518, 1532 [2nd par.].) The reason for this provision rests upon the
nature of a negotiable document of title which in legal fiction operates
as a delivery of the goods described therein when indorsed. The rule
protects a purchaser without notice after the seller had stopped the
goods either by virtue of his right of lien or stoppage in transitu.
The term “purchaser,” as used in Article 1534, includes mortgagee
and pledgee. (Roman vs. Asia Banking Corporation, 46 Phil.
705 [1924].)
ART. 1536. The vendor is not bound to deliver the
thing sold in case the vendee should lose the right to
make use of the term as provided in article 1198.
(1467a)
Right of vendor to withhold delivery in
sale on credit.
In a contract of sale, the obligation to pay the price is correlative to
the obligation to deliver the thing sold. Accordingly, the vendor is not
bound to make delivery if the vendee has not paid him the price. (Art.
1524.) If, however, a period has been fixed for payment, the vendor
must deliver the thing sold though the price be not first paid. (see Art.
1527[1].) But even if the vendee was given the benefit of a period, the
vendor may not be compelled to make delivery, in case the vendee
should lose the right to make use of the term as provided in Article 1198
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
241
of the Civil Code and such vendee has not yet paid the price. Said article
states:
“The debtor [vendee] shall lose every right to make use of the
period:
(1)
When after the obligation has been contracted, he
becomes insolvent, unless he gives a guaranty or security for the
debt [price];
(2)
When he does not furnish to the creditor [vendor] the
guaranties or securities which he has promised;
Art. 1537
(3)
When by his own acts he has impaired said guaran-ties
or securities after their establishment, and when through a
fortuitous event they disappear, unless he immediately gives new
ones equally satisfactory;
(4)
When the debtor [vendee] violates any undertaking, in
consideration of which the creditor agreed to the period; (5) When
the debtor [vendee] attempts to abscond.”
EXAMPLE:
S sold to B a car on credit. S has a right to withhold delivery in
any of the following situations:
(1)
B becomes insolvent, unless B gives sufficient guaranty
or security; or
(2)
B promised to mortgage his house to secure the purchase
price and he failed to furnish said security as promised; or
(3)
If the payment of the purchase price is secured by a
mortgage on the house of B, but the house was partially burned
because of B’s fault; or was totally destroyed without B’s fault, unless
B gives a new security, equally satisfactory; or
(4)
Where in consideration of the sale on credit, B obliged
himself, say, to repair the piano of S, and B failed to comply with such
undertaking; or
(5)
Where B shows an intent not to pay the price after the
car is delivered to him.
242
SALES
ART. 1537. The vendor is bound to deliver the
thing sold and its accessions and accessories in the
condition in which they were upon the perfection of
the contract.
All the fruits shall pertain to the vendee from the
day on which the contract was perfected. (1468a)
Condition of thing to be delivered.
In entering into a contract of sale, the parties take into consideration
not only the particular thing which is the subject matter of the contract,
but also its condition at the time such contract
Art. 1537
was perfected. The vendor is, therefore, obliged to preserve the thing
pending delivery (see Arts. 1163, 1164.) because the thing sold and its
accessions and the accessories must be in the condition in which they
were upon the perfection of the contract. (Art. 1537, par. 1.)
It is the seller’s duty to deliver the thing sold in a condition suitable
for its enjoyment by the buyer for the purposes contemplated. Thus, a
subdivision lot seller should not shift to the buyer the burden of
providing access to and from the subdivision. It is seller’s duty to
construct the necessary roads in the subdivision that could serve as
outlets. Proper access to the residence is essential to its enjoyment.
(Consing vs. Court of Appeals, 177 SCRA 14 [1989].)
While a sale of a determinate thing (e.g., land) includes all its
accessions (e.g., house) and accessories even though they may not have
been mentioned (see Art. 1166.), a sale of the latter is not sufficient to
convey title or right to the former. (see Pornellosa vs. Land Tenure
Administration, 1 SCRA 375 [1961].)
Note: Accessions are the fruits of a thing; or additions to, or
improvements upon, a thing such as the young of animals, house or trees
on a land, etc.
Accessories are anything attached to a principal thing for its
completion, ornament, or better use such as picture frame, key of a
house, etc.
Right of vendee to the fruits.
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
243
(1) When vendee entitled. — The vendee has a right to the fruits of
the thing sold from the time the obligation to deliver it arises. (Art.
1164.) The obligation to deliver arises upon the perfection of the
contract of sale. (see Art. 1475.)
EXAMPLE:
S sold his horse to B for P8,000.00. No date or condition was
stipulated for the delivery of the horse. While still in the possession of
S, the horse gave birth to a colt. Who has a right to the colt?
(1)
B is entitled to the colt which was born after the
perfection of the contract. This holds true even if the delivery is subArt. 1538
ject to a suspensive period (e.g., next month) or a suspensive condition
(e.g., upon demand) if B has paid the purchase price.
(2)
But S has a right to the colt if it was born before his
obligation to deliver the horse has arisen (Art. 1164.) and B has not
yet paid the purchase price. In this case, upon the fulfillment of the
condition or the arrival of the period, S does not have to give the colt
and B is not obliged to pay legal interests since the colt and the
interests are deemed to have been mutually compensated. (see Art.
1187.)
(2) When vendee not entitled. — In the following cases, the vendee
is not entitled to the fruits:
(a)
When the rule provided in Article 1537 (par. 2.) is
modified by agreement of the parties, their agreement shall, of
course, govern;
(b)
If the vendee rescinds the contract of sale instead of
exacting the fulfillment thereof, he is entitled only to damages like
interest, attorney’s fees and costs but he may not also claim the
fruits of the thing sold (Hodges vs. Granada, 59 Phil. 429
[1934]; see Art. 1385.); and
(c)
In a contract of promise to sell, the vendee is not
entitled to the fruits. The only right of the contracting parties is to
reciprocally demand the fulfillment of the contract. Prior to the sale
and conveyance of the subject matter of the contract, the promisee
244
SALES
or would-be vendee acquires no right to the fruits thereof. (De Vera
vs. De Vera, [C.A.] O.G. 3318, Sept., 1948.)
ART. 1538. In case of loss, deterioration or
improvement of the thing before its delivery, the rules
in article 1189 shall be observed, the vendor being
considered the debtor. (n)
Rules in case of loss, deterioration, or improvement of
thing before delivery.
Article 1189 of the Civil Code states:
“When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give, the following rules
shall be observed in case of the improvement,
Art. 1538
loss or deterioration of the thing during the pendency of the
condition:
(1)
If the thing is lost without the fault of the debtor, the
obligation shall be extinguished;
(2)
If the thing is lost through the fault of the debtor, he
shall be obliged to pay damages; it is understood that the thing is
lost when it perishes, or goes out of commerce, or disappears in
such a way that its existence is unknown or it cannot be recovered;
(3)
When the thing deteriorates without the fault of the
debtor, the impairment is to be borne by the creditor;
(4)
If it deteriorates through the fault of the debtor, the
creditor may choose between the rescission of the obligation and its
fulfillment, with indemnity for damages in either case;
(5)
If the thing is improved by its nature, or by time, the
improvement shall inure to the benefit of the creditor;
(6)
If it is improved at the expense of the debtor, he shall
have no other right than that granted to the usufructuary.”
A reading of the above article shows that it is in consonance with
Article 1480 (supra.) which provides for the rules governing injury to,
or benefit from, the thing sold after the contract has been perfected but
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
245
before its delivery. Both under Articles 1480 (pars. 1 and 2.) and 1538,
the loss shall be at the risk of the vendee pending delivery. As heretofore
pointed out, Article 1504 (supra.), which has been taken from the
American law on sales, provides another rule governing risk of loss
which is contrary to Articles 1480 and 1538.
EXAMPLE:
S sold to B his car. If before delivery —
(1)
the car is lost or destroyed without the fault of S
(assuming S is not guilty of delay and there is no contrary stipulation
that he shall be liable), the obligation to deliver is extinguished and B
shall be obliged to pay the price if he has not paid the same;
(2)
if the loss is through S’s fault, he shall be liable to pay
damages to B;
Art. 1539
(3)
if the car suffers damages without the fault of S, B shall
have to suffer the impairment;
(4)
if the damage was due to S’s fault, B may choose,
between the rescission (cancellation) of the contract with damages or
the delivery of the car also with damages;
(5)
if the market value of the car increased, the increase
shall inure to the benefit of B inasmuch as he suffers the deterioration
in case of a fortuitous event;
(6)
if S had the car painted and its seat cover changed at his
expense, he shall have the rights of a usufructuary with respect to the
improvements.35
ART. 1539. The obligation to deliver the thing sold
includes that of placing in the control of the vendee
all that is mentioned in the contract, in conformity
with the following rules:
35 Art. 579. The usufructuary may make on the property held in usufruct such useful
improvements or expenses for mere pleasure as he may deem proper, provided he does not alter
its form or substance; but he shall have no right to be indemnified therefor. He may, however,
remove such improvements, should it be possible to do so without damage to the property.
Art. 580. The usufructuary may set off the improvements he may have made on the property
against any damage to the same.
246
SALES
If the sale of real estate should be made with a
statement of its area, at the rate of a certain price for
a unit of measure or number, the vendor shall be
obliged to deliver to the vendee, if the latter should
demand it, all that may have been stated in the
contract; but, should this be not possible, the vendee
may choose between a proportional reduction of the
price and the rescission of the contract, provided
that, in the latter case, the lack in the area be not less
than one-tenth of that stated.
The same shall be done, even when the area is the
same, if any part of the immovable is not of the quality
specified in the contract.
The rescission, in this case, shall only take place
at the will of the vendee, when the inferior value of
Art. 1539
the thing sold exceeds one-tenth of the price agreed
upon.
Nevertheless, if the vendee would not have bought
the immovable had he known of its smaller area or
inferior quality, he may rescind the sale. (1469a)
Sale of real property by unit of
measure or number.
(1) Entire area stated in contract must be delivered. — If the sale
of real estate should be made with a statement of its area, at the rate of
a certain price per unit of measure or number, the cause of the contract
with respect to the vendee is the number of such units or, if you wish,
the thing purchased as determined by the stipulated number of units.
The vendor must deliver the entire property agreed upon. (pars. 1 and
2.) Thus, if the parcel of land is stated in the contract as having an area
of 500 square meters and sold at P1,000.00 per square meter, the vendor
must deliver the entire area as stated. (see Santa Ana, Jr. vs. Hernandez,
18 SCRA 973 [1966].) Furthermore, the immovable must be of the
quality specified in the contract. (par. 3.)
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
247
(2) Where entire area could not be delivered. — If all that is
included within the stipulated boundaries is not delivered, then the
object of the contract, its cause as far as the vendee is concerned, is not
delivered. Hence, he is entitled to rescind it. He may, however, enforce
the contract with the corresponding decrease in price. (Teran vs.
Villanueva Viuda de Riosa, 56 Phil. 677 [1932].)
When vendee entitled to rescind sale
of real property.
Under the above article, the right of rescission is available to the
vendee in the following cases:
(1) If the lack in area is at least 1/10th than that stated or stipulated.
(par. 2.) The 1/10th mentioned must be based on the area stipulated in
the contract, and not on the real area which the thing may actually have
(see 10 Manresa 149-154.);
(2) If the deficiency in the quality specified in the contract exceeds
1/10th of the price agreed upon (par. 3.); and
Arts. 1540-1541
(3) If the vendee would not have brought the immovable had he
known of its smaller area or inferior quality irrespective of the extent of
the lack in area or quality. (pars. 4 and 5.)
The above remedies are also available under the second paragraph
of Article 1542.
Note that in case of fulfillment, the vendee is entitled only to a
proportionate reduction of the price where there is a deficiency in area
or number. (par. 2; see Azarraga vs. Gray, 52 Phil. 599 [1928].) The
rule is different where there is a violation of the warranty against hidden
defects. (Art. 1571.) The vendor is also liable for damages. (Art. 1567;
see Art. 1191, par. 2.)
ART. 1540. If, in the case of the preceding article,
there is a greater area or number in the immovable
than that stated in the contract, the vendee may
accept the area included in the contract and reject the
248
SALES
rest. If he accepts the whole area, he must pay for the
same at the contract rate. (1470a)
Where immovable of a greater area or
number.
If the area or number in the immovable is greater than that stipulated
in the contract, the vendee may accept the area included in the contract
and reject the rest. If he accepts the whole, he makes himself liable for
the price of the same at the contract rate. (see
comments under Article 1522, par. 2.)
The vendee may not withdraw from the contract.
ART. 1541. The provisions of the two preceding
articles shall apply to judicial sales. (n)
Application of Articles 1539 and 1540 to
judicial sales.
The provisions of Articles 1539 and 1540 are applicable to both
private (voluntary) and judicial sales when the immovable sold is
lacking in area or is of inferior quality or is greater in area than stated in
the contract. (see Arts. 1552 and 1570.) The reason is that
Art. 1542
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
249
the rules they contain are derived from the very nature of the contract
of sale.
The rules, however, may be varied or suppressed by agreement
between the contracting parties. (10 Manresa 138.)
ART. 1542. In the sale of real estate, made for a
lump sum and not at the rate of a certain sum for a
unit of measure or number, there shall be no increase
or decrease of the price, although there be a greater
or less area or number than that stated in the
contract.
The same rule shall be applied when two or more
immovables are sold for a single price; but if, besides
mentioning the boundaries, which is indispensable in
every conveyance of real estate, its area or number
should be designated in the contract, the vendor shall
be bound to deliver all that is included within said
boundaries, even when it exceeds the area or number
specified in the contract; and should he not be able
to do so, he shall suffer a reduction in the price, in
proportion to what is lacking in the area or number,
unless the contract is rescinded because the vendee
does not accede to the failure to deliver what has
been stipulated. (1471)
Sale of real estate made for
a lump sum.
(1) Mistake in area stated in contract immaterial. — If the sale is
made for a lump sum, and not so much per unit of measure or number,
the cause of the contract is the thing sold independent and irrespective
of its number or measure. (see 10 Manresa 145.) In this case, the law
presumes that the purchaser had in mind a determinate price for the real
estate and that he ascertained its area and quality before the contract
was perfected. (Teran vs. Villanueva, 56 Phil. 677 [1932].)
In other words, it is presumed that the purchaser intended to buy a
determinate object in its entirety and not just any unit of measure or
250
SALES
Art. 1542
number, and the price is determined with relation to it; hence, its greater
or lesser area cannot influence the increase or decrease of the price
agreed upon, whether the object be single realty or whether they are two
or more immovables. The boundaries of the land stated in the contract
determine the effects and scope of the sale, not the area thereof. (Semira
vs. Court of Appeals, 49 SCAD 93, 230 SCRA 577 [1994]; 10 Manresa
156-157.) Hence, the vendor is obligated to deliver all the land included
within the boundaries, regardless of whether the real area should be
greater or smaller than that recited in the deed (Balantakbo vs. Court of
Appeals, 65 SCAD 74, 249 SCRA 323 [1995].) inasmuch as it is the
entirety thereof that distinguishes the determinate object. (Roble vs.
Arbasa, 152 SCAD 115, 362 SCRA 69 [2001], citing Tolentino Civil
Code of the Philippines, Vol. V, 1992 ed., p. 94.)
The possibility of error is a hazard which the parties must be
presumed to have assumed. This hazard is not one-sided but works both
ways. (Gonzales-Mondragon vs. Santos, 87 Phil. 471 [1950].) The rule
in Article 1542, however, admits of exceptions. (infra.)
(2) Where area or number stated together with boundaries. — If
the vendor cannot deliver to the vendee all that is included within the
boundaries mentioned in the contract, the latter has the option to reduce
the price in proportion to the deficiency or to set aside the contract. (Art.
1542, par. 2.) The phrase “should he not be able to do so” refers to a
situation when the vendor, either because a part or parcel of the real
estate does not belong to him, cannot deliver all that is included within
the boundaries. (see 10 Manresa 145-154.)
EXAMPLE:
S sold to B a parcel of land for the lump sum (or a cuerpo cierto)
of P300,000.00. The contract states that the area is 500 square meters.
Subsequently, it was ascertained that the area included within the
boundaries is really 600 square meters.
In this case, S is bound to deliver all the 600 square meters which
are included within said boundaries without increase in price. If S does
not deliver also the extra 100 square meters, B has the right to rescind
the contract or pay a proportionately reduced price, namely: 5/6 of the
original price or P250,000.00.
ILLUSTRATIVE CASES:
Art. 1542
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
1. The area of land sold for a lump sum is less than that stated in
the contract.
Facts: S sold to B lot No. 20, Calle San Jose, Ermita, Manila for
the sum of P3,200.00. The document recites that the tract contains
152.46 square meters. On the date assigned for the execution of the
final deed of sale, B refused to pay the agreed price claiming that the
land was actually less in area than that stated in the contract.
B claimed a proportional reduction of the price or else he would
not buy. So S brought action for specific performance.
Issue: Is B relieved from the obligation of paying the price? Held:
No. The fact that the specified parcel of land bought by B at the price
of P3,200.00 is not as large as he thought, does not relieve him from
the obligation of paying its price. If he intended to buy by the meter,
he should have so stated in the contract. (Goyena vs. Tambunting, 1
Phil. 490.) In the matter of sales of land made for a lump sum and not
so much a unit of measure or number, the boundaries of said land
stated in the contract, not the area thereof, are the determining factor
of the effects, scope, or meaning of said contract. The real and true
area of the land must prevail over that given in the document. (Pacia
vs. Lagman, 68 Phil. 351 [1939]; see Gov’t. vs. Abaya, 52
Phil. 261 [1928]; Gov’t. vs. Abad, 47 Phil. 573.)
———— ———— ————
2. In a sale of land for a lump sum, the deficiency in the stated
area to which the parties paid particular attention when they entered
into that contract was almost 1/3.
Facts: S sold to B the hacienda Maria which, according to S,
contained an area of 25 hectares more or less, the standing crop
thereon capable of yielding not less than 2,000 piculs of sugar. During
the negotiations, B always doubted the correctness of the area and the
amount of crop given by S who always assured B that they were
correct.
In short, the parties made the sale with particular attention to the
area.
It turned out that the land contained only 18 hectares and the crop
yielded only 800 piculs of sugar.
Issue: Has B the right to ask for rescission of the sale or the
proportionate reduction of the price?
Held: Yes. While it is true that in a sale of land for a lump sum,
the vendee may not ask for the rescission of the sale or the
251
252
SALES
Art. 1542
proportional reduction in the price if the area delivered be less than
that stated in the contract, the rule does not apply if the deficiency is
so material as to go to the essence of the contract for, under such
circumstances, gross mistake may be inferred which is the duty of a
court of equity to correct. In the case at bar, the parties paid particular
attention to the area of the land when they made the contract. The use
of “more or less” or similar words in designating quantity covers only
a reasonable excess or deficiency. The vendee does not thereby ipso
facto take all risks of quantity in the land. (Asian vs. Jalandoni, 45
Phil. 296 [1923].)
———— ———— ————
3. In a sale for a lump sum of a fishpond of which buyer had been
in possession as a lessee for two years, the deficiency is about 1/ 4 of
the stated area.
Facts: S sold to B a fishpond for the lump sum of P14,000.00.
The deed of sale recited that the area of the fishpond was “11 hectares,
38 ares, and 77 centares, more or less.” It was subsequently discovered
that its area was only 8 hectares or about 1/4 less than that stated in
the contract. B had been leasing the fishpond for about two years.
S brought action to recover the purchase price.
Issue: Is B relieved from paying the price?
Held: Although the shortage amounts to practically 1/4 of the
total area, B clearly intended to take the risk of quantity and that the
area has been mentioned in the contract merely for the purpose of
description, considering that B had been in possession of the fishpond
as a lessee for two years and, therefore, can rightly be presumed to
have acquired a good estimate of its value and area. (Garcia vs.
Velasco, 72 Phil. 248 [1941].)
Note: In other words, the parties in this case did not take into
consideration the area of the fishpond in question when they made the
contract.
(3) Where there is conflict between area stipulated and title to
property. — In case of conflict between the area included within the
stipulated boundaries and that which the title shows, the former shall
prevail when the boundaries are certain and no alteration thereof has
been proven. (Government vs. Abaya, 52 Phil. 261 [1928].) That which
really defines a piece of ground is not the area, calculated with more or
less certainty mentioned in its description, but the boundaries therein
Art. 1542
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
253
laid down as enclosing the land and indicating its limits. It is not of vital
consequence that a contract on sale of land should disclose the area with
mathematical accuracy. It is sufficient if its extent is objectively
indicated with sufficient precision to enable one to identify it. An error
as to the superficial area is immaterial. (Erico vs. Heirs of Chigas, 98
SCRA 575 [1980]; Dichoso vs. Court of Appeals, 192 SCRA 169
[1990].)
(4) Where identity of erroneously designated property clearly
established. — Where the identity of the disputed property has been
clearly established by both parties’ pleadings, the mistake in
designating the property in the deed of sale “does not vitiate consent of
the parties or affect the validity and binding effect of the contract. The
reason is that when one sells or buys real property — a piece of land,
for example — 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.” (Dihiansen vs. Court of
Appeals, 153 SCRA 712 [1987]; Atilano vs. Atilano, 28 SCRA 231
[1969].) The remedy for such a situation is to have the document
reformed. (Art. 1359, et seq.)
(5) Where words “about,’’ “more or less,” etc. are used. — The
words when used in connection with quantity or distance, are words of
safety and caution, intended to cover some slight or unimportant
inaccuracy, and, while enabling an adjustment to the imperative
demands of fixed monuments, they do not weaken or destroy the
statements of distance and quantity when no other guides are furnished.
The rule in measuring distances is that words of qualification (e.g., “50
feet, more or less’’) should be disregarded and the exact distance
adopted. The words “about,’’ “approximately,” and “more or less’’ in
connection with courses and distances may be disregarded if not
controlled or explained by monuments, boundaries and other
expressions of intention. In a case, the petitioner insists that there should
have been an allowance of around 300 meters since the technical
description of the land in question states that the boundary line should
be for around 16,000 meters more or less; held: The disputed gap of
300 meters is not an insignificant distance. Thus, the petitioner cannot
capitalize on the phrase “around 16,000 meters more or less’’ for the
words “more or less’’ only cover an incidental and insubstantial
254
SALES
Art. 1542
inaccuracy. (Sta. Ines Melale Forest Products Corp. vs. Macaraig, Jr.,
299 SCRA 491 [1998].)
In another case, an area of “644 square meters more’’ was held not
a reasonable excess or deficiency, to be deemed included in the deed of
sale relating to a piece of land with an “approximate area of 240 square
meters more or less.’’ A vendee of land when sold in gross or with the
description “more or less’’ with reference to its area, does not thereby
ipso facto take all risk of quantity in the land for such description or
similar words in designating quantity covers only a reasonable excess
or deficiency. (Roble vs. Arbasa, 152 SCAD 115, 362 SCRA 69
[2001].)
Conflict between area stated and boundaries.
(1) Where boundaries given are sufficiently certain. — The
proposition of law is to the effect that “where it appears that the land is
so described by boundaries as to put its identification beyond doubt,”
an erroneous statement relative to the area of the questioned parcel may
be disregarded because what really defines a piece of ground is not the
area mentioned in its description but the boundaries therein laid down
as enclosing the land and indicating its limits. (Vda. De Tan vs.
Intermediate Apppellate Court, 213 SCRA 95 [1992]; Loyola vs.
Bartolome, 39 Phil. 546 [1919].) This proposition, however, holds true
only where the boundaries given are sufficiently certain, and the
identity of the land proved by the boundaries clearly indicates that an
erroneous statement concerning the area can be disregarded or ignored.
(Paterno vs. Salud, 9 SCRA 81 [1963].)
(2) Where boundaries do not identify land or overlapping of
boundaries exists. — The above rule is not applicable where the
boundaries relied upon do not identify the land beyond doubt. (Buiser
vs. Cabrera, 81 Phil. 669 [1948].) In such case, the area stated in the
document should be followed. (Paterno vs. Salud, supra.)
In a case, the deed of sale did not even indicate with particularity
the area of the land covered thereby. The parties merely pointed at
boundaries which were even beyond what could have
255
SALES
Art. 1543
been bought by the vendee. An area delimited by boundaries properly
identifies a parcel of land. However, in controversial cases, where there
appeared to be an overlapping of boundaries, the actual size of the
property gains importance. It is well-settled that anyone who claims that
he has a better right to a property must prove both ownership and
identity of the said property.
(Oclarit vs. Court of Appeals, 52 SCAD 337, 238 SCRA 239 [1994].)
(3) Where discrepancy in measurement is so great. — In a case
where petitioner claimed in his application to be entitled for registration
of a parcel of land whose area after the survey turned out to be 626
hectares while the grant given to him only mentions 92 hectares, the
court rejected the claim ruling that “when the land sought to be
registered is almost seven times as much as that described in the deed,
the evidence as to natural boundaries must be very clear and convincing
before that rule (that natural boundaries will prevail over area) can be
applied.” (Pamintuan vs. Insular Gov‘t., 8 Phil. 512 [1907]; see also
Paras vs. Insular Gov‘t., 11 Phil. 378 [1908]; Carillo vs. Insular Gov‘t.,
11 Phil. 379 [1908]; Waldorf vs. Castañeda, 25 Phil. 50 [1913]; Sales
vs. Director of Lands, 61 Phil. 759 [1935].)
In another case, the court properly rejected the contention of the
plaintiff that the property sought to be recovered was originally a
portion of a bigger portion of land belonging to him, it appearing that
“it is only on the north and south sides of the property in question where
the natural boundaries are identical because on the east and west sides
there are no natural boundaries. . . The discrepancy in the measurement
. . . is so great that there could hardly be any room to suppose that a 30hectare land area might have been wrongly or inaccurately estimated to
be only 1,200 square meters.” (Paterno vs. Salud, supra.)
ART. 1543. The actions arising from articles 1539
and 1542 shall prescribe in six months, counted from
the day of delivery. (1472a)
Prescription of actions.
256
SALES
Art. 1544
The actions based on Articles 1539 and 1542 for either rescission
of the contract or proportionate reduction of the price must be brought
within six months counted from the day of delivery.
ART. 1544. If the same thing should have been
sold to different vendees, the ownership shall be
transferred to the person who may have first taken
possession thereof in good faith, if it should be
movable property.
Should it be immovable property, the ownership
shall belong to the person acquiring it who in good
faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership
shall pertain to the person, who in good faith was first
in the possession; and, in the absence thereof, to the
person who presents the oldest title, provided there
is good faith. (1473)
Rules as to preference of ownership in
case of a double sale.
If the same property is sold by the same vendor to different vendees,
the conflicting rights of said vendees shall be resolved in accordance
with the following rules:
(1) If the property sold is movable, the ownership shall be acquired
by the vendee who first takes possession in good faith (see Villa Rey
Transit, Inc. vs. Ferrer, 25 SCRA 861 [1968].);
(2) If the property sold is immovable, the ownership shall belong,
in the order hereunder stated, to:
(a) The vendee who first registers the sale in good faith in the
Registry of Property (Registry of Deeds) has a preferred right over
another vendee who has not registered his title even if the latter is
in actual possession of the immovable property. More credit is
given to registration than to actual possession. (see Paylago vs.
Jarabe, 22 SCRA 1247 [1968]; Beatriz vs. Cedeña, 4 SCRA 617
[1962]; Carbonell vs. Court of Appeals, 69 SCRA 99 [1976];
Barretto vs. Arevalo, 99 Phil. 771 [1956]; Nuguid vs. Court of
Appeals, 171 SCRA 213 [1989]; Tañedo vs.
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
257
Court of Appeals, 67 SCAD 57, 252 SCRA 80 [1996]; Balatbat vs.
Court of Appeals, 73 SCAD 660, 261 SCRA 128 [1996].)
When a conveyance has been properly recorded, such record is
constructive notice to the whole world of its contents and all
interests, legal and equitable, included therein. Because of this
principle of constructive notice, one who deals with registered
property which is the subject of an annotated levy or attachment
cannot invoke the rights of a purchaser in good faith. (Biñan Steel
Corporation vs. Court of Appeals, 391 SCRA 90 [2002].) However,
the mere registration is not enough; good faith must concur with the
registration. To be entitled to priority, the second purchaser must
have also acted in good faith, without knowledge of the previous
alienation by the vendor to another. (Bautista vs. Court of Appeals,
48 SCAD 629, 230 SCRA 446 [1994].) The defense of
indefeasibility of torrens title does not extend to a transferee who
takes the certificate of title in bad faith with notice of its flaw.
(Occeña vs. Esponilla, 431 SCRA 116 [2004].)
The requirement of the law then is two-fold: acquisition in good
faith and registration in good faith. (Gabriel vs. Mabanta, 399
SCRA 73 [2003]; San Lorenzo Development Corporation vs. Court
of Appeals, 449 SCRA 99 [2005].) The rule applies to the
annotation of an adverse claim in double sales. (Bucad vs. Court of
Appeals, 216 SCRA 423 [1992].)
The governing principle is prius tempore, patior jure (first in
time, stronger in right). Knowledge by the first buyer of the second
sale cannot defeat the first buyer’s right except when the second
first registers in good faith the second sale. (Olivares vs. Gonzales,
159 SCRA 33 [1988].) Conversely, knowledge gained by the
second buyer of the first sale defeats his rights even if he is first to
register, since such knowledge taints his registration with bad faith.
(Astorga vs. Court of Appeals, 133 SCRA 748 [1984]; Santiago vs.
Court of Appeals, 63 SCAD 636, 247 SCRA 336 [1995].)
(b) In the absence of registration, the vendee who first takes
possession in good faith; and
(c) In the absence of both registration and possession, thevendee
who presents the oldest title (who first bought the property) in good
faith.
258
SALES
Art. 1544
Article 1544 has no application to lands not registered with the
Torrens system. If the sale is not registered, it is binding only as between
the seller and the buyer; it does not affect innocent third persons.
Possession of property sold.
The taking of possession of the property sold may be in any of the
ways provided in Articles 1497 to 1501.
The phrase “who first took possession” is equivalent to tradition,
real or symbolic, such as that which is acquired by the execution of a
public instrument. Thus, after the sale of realty by means of a public
instrument, the vendor, who resells it to another does not transmit
anything to the second vendee, and if the latter, by virtue of this second
sale, takes material possession of the thing, he does it as mere detainer,
and it would be unjust to protect this detention as against the rights to
the thing lawfully acquired by the first vendee. (Quimson vs. Rosete, 89
Phil. 159 [1950]; Navera vs. Court of Appeals, 184 SCRA 584 [1990].)
Registration of immovable sold.
(1) Sale merely presented for registration. — The mere
presentation to the office of the register of deeds of a document on
which acknowledgment of receipts is written is not equivalent to
registration. Registration in its juridical aspect must be understood as
the entry made in a book or public registry of deeds. (Po Sun Tun vs.
Price Prov. Gov’t. of Leyte, 54 Phil. 192 [1912].)
(2) Sale registered in bad faith. — Article 1544 does not declare
void a deed of sale registered in bad faith. It does not mean, however,
that said contract is not void. Article 1544 specifically provides who
shall be the owner in case of a double sale of an immovable property.
To give full effect to this provision, the status of the two contracts must
be determined and clarified. One contract must be declared valid so that
one vendee may exercise all the rights of an owner, while the other
contract must be declared void to cut off all rights which may arise from
said contract.
(Caram, Jr. vs. Laureta, 102 SCRA 7 [1981].)
Accordingly, where the second purchaser had knowledge of the
other sale, prior to or at the time of the sale to him, his knowledge taints
his purchase with bad faith. The applicable rule in this case would be
that the ownership shall pertain to the person who, in good faith, first
entered into possession of the property or in the absence of possession,
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
259
to the person who presents the oldest title, provided there is good faith.
(Gatmaitan vs. Court of Appeals, 200 SCRA 37 [1992]; Berico vs.
Court of Appeals, 44 SCAD 84, 225 SCRA 469 [1993].)
(3) Issuance of transfer certificate of title noted/not noted on
original certificate of title. — In a case, it appears that the issuance of a
transfer certificate of title to the first buyers was never noted on the
original certificate of title which was not cancelled at all, whereas the
issuance of a transfer certificate of title to the second buyers was noted
in the original certificate of title which was cancelled by virtue of said
issuance. It was held that the second buyers acquired ownership over
the disputed lot since they were the first to register in good faith their
sale in the registry of property. (Astorga vs. Court of Appeals, 133
SCRA 748 [1984].)
(4) Immovable registered/not registered. — Article 1544 (2nd and
3rd pars.) covers all kinds of immovables, including land, and makes
no distinction as to whether the immovable is registered or not. But
insofar as registered land is concerned, the rule is in perfect accord with
Section 50 36 of the Land Registration Law (Act No. 496.) 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. (Revilla vs.
Galindez, 107 Phil. 480 [1960].) One who buys from a person who is
not the registered owner of property is not a purchaser in good faith.
(Liu vs. Lay, Jr., 405 SCRA 316 [2003].)
The peculiar force of a title under Act No. 496 is exhibited only
when the purchaser has sold to innocent third parties the land described
in the conveyance. (Medina vs. Imaz and Warner Barnes Co., 27 Phil.
314 [1914].) With respect to banks, the rule that persons dealing with
registered lands can rely solely on the certificate of title does not apply
to banks because their business is one affected with public interest
keeping in trust money belonging to their depositors. They are expected
to exercise greater case and prudence before entering into a contract
involving registered lands. (Navarro vs. Second Laguna Development
Bank, 398 SCRA 227 [2003].)
Note: The defense of indefeasibility of torrens title refers to sale of
lands, and not to sale of properties situated therein. Thus, the mere fact
36
Now Section 51 of the Property Registration Decree. (Pres. Decree No. 1529.)
260
SALES
Art. 1544
that the lot where a factory and disputed properties stand is in a person’s
name does not automatically make such person the owner of everything
found therein. (Tsai vs. Court of Appeals, 156 SCAD 28, 366 SCRA
324 [2001].)
(5) Property attached while still registered in the name of judgment
debtor. — A sale of real estate, whether made as a result of a private
transaction or of a foreclosure or execution sale, becomes legally
effective against third persons only from the date of its registration.
Consequently, where the property was actually attached and levied
upon at a time when said properties stood in the official records of the
Registry of Deeds as still owned by and registered in the name of the
judgment debtor, the attachment, levy and subsequent execution sale
made in favor of the judgment creditor transferred to him all the rights
of the judgment debtor in the said property, unaffected by any prior
transfer or unencumbrance not so recorded therein.
While purchasers at execution sales should bear in mind that the
rule of caveat emptor applies to such sales (see Art. 1566.), that the
sheriff does not warrant the title to real property sold by him as sheriff,
and that it is not incumbent upon him to place the purchaser in
possession of such property, still the rule applies that a person dealing
with registered land is not required to go behind the register to
determine the condition of the property and he is merely charged with
notice of the burdens on the property which are noted on the face of the
register or the certificate of title. (Campillo vs. Court of Appeals, 129
SCRA 513 [1984].) Accordingly, in case of a conflict between a vendee
and an attaching creditor who registers the order of attachment and the
sale of the property to him as the highest bidder, the latter acquire a
valid title to the property as against the former who had previously
bought the same property from the registered owner but who failed to
register his deed of sale, but where the attaching creditor has knowledge
of a prior existing interest which is unregistered at a time he acquired a
right to the same land, his knowledge of that prior unregistered interest
has the effect of registration as to him.
(Ruiz, Sr. vs. Court of Appeals, 152 SCAD 86, 362 SCRA 40 [2001].)
(6) Unregistered property sold at execution sale was previously
sold by judgment debtor. — A sale of unregistered land which sale has
not been registered in the office of the register of deeds is valid and
binding as between the parties themselves. (Galasicao vs. Austria, 97
Phil. 83 [1955].) The rule in Article 1544 applies to lands covered by
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
261
Torrens title, where the prior sale is neither recorded nor known to the
execution purchaser prior to the levy.
But where the land is not registered under the Torrens System, the
rule is different. While under Article 1544, registration in good faith
prevails over possession in the event of a double sale by the vendor of
the same piece of land to different vendees, said article is of no
application even if the latter vendee, at a sheriff’s execution sale which
was registered, was ignorant of the prior sale made by his judgment
debtor in favor of another vendee. The reason is that 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. This is
specifically provided by Section 35 of Rule 39 of the Rules of Court.
(Carumba vs. Court of Appeals, 31 SCRA 558 [1970]; see Hernandez
vs. Katigbak, 69 Phil. 744 [1940]; Executive Commission vs. Abadilla,
74 Phil. 68 [1943].)
(7) Notice of adverse claim was registered previous to sale to
possessor. — Since the owner’s copy of the certificate of title was not
delivered in due time to the first buyer despite the promise by the seller
(attorney-in-fact) to deliver the same in a few days, the buyer registered
with the Register of Deeds on September 6, 1982 his notice of adverse
claim as vendee over the property sold. The second sale was registered
only on November 11, 1982 whereby a new title was issued in favor of
the second buyer. The first buyer has a superior right to the property in
question. Article 1544 is clear that a prior right is accorded to the vendee
who first recorded his right in good faith over an immovable property.
(Valdez vs. Court of Appeals, 194 SCRA 360 [1991].)
(8) Sale was registered before the execution sale but after its levy.
— The doctrine is that a levy on execution duly registered takes
preference over a prior unregistered sale, and that even if the prior
unregistered sale is subsequently registered before the sale on execution
but after the levy was duly made, the validity of the execution sale
should be maintained because it retroacted to the date of the levy. This
rule applies by analogy as regards encumbrances made after the
registration of the levy on execution. The reason therefor is that if the
rule were otherwise, the preference enjoyed by the levy on execution in
a case would be meaningless and illusory.
262
SALES
Art. 1544
In short, the priority enjoyed by the levy on execution extends with
full force and affect to the buyer at the auction sale conducted by virtue
of such levy. (First Integrated Bonding & Insurance Co. vs. Court of
Appeals, 73 SCAD 731, 261 SCRA 203 [1996]; Biñan Steel
Corporation vs. Court of Appeals, 391 SCRA 90 [2002]; Du vs.
Stronghold Insurance Co., Inc., 432 SCRA 43 [2004].)
Requirement of good faith.
The fundamental premise of the preferential rights established by
Article 1544 is good faith (Bernas vs. Bolo, 81 Phil. 16 [1948]; see
Manacop vs. Cansino, 1 SCRA 572 [1961]; Paylago vs. Jarabe, 22
SCRA 247 [1968].), that is to say, ignorance of the rights of the first
vendee. (Gallardo vs. Gallardo, [CA] 46 O.G. 5568.) He is deemed a
possessor in good faith who is not aware that there exists in his title or
mode of acquisition any flaw which invalidates it. (Art. 526.)
(1) Mere registration of sale not enough. — Good faith is an
essential requisite of registration to acquire new title because “public
records cannot be converted into instruments of fraud and oppression
by one who secures an inscription thereon in bad faith.” (Leung Yee vs.
F.L. Strong Machinery Co., 37 Phil. 644 [1918]; Fernandez vs.
Mercader, 43 Phil. 581 [1922]; Cagaoan vs. Cagaoan, 43 Phil. 554
[1922].) Bad faith renders the registration nothing but an exercise in
futility. (Cardente vs. Intermediate Appellate Court, 155 SCRA 685
[1987].)
It does not vest title to an immovable property, it is merely evidence
of such title. (Berico vs. Court of Appeals, 44 SCAD 84, 225 SCRA 469
[1993].) The law will not protect anything done in bad faith. (Palanca
vs. Director of Lands, 43 Phil. 149 [1922].)
It is presumed, however, that the registration of sale was made
in good faith.
(2) Purchase must be for valuable consideration. — And it is not
only required that the purchaser of real property who has registered the
same should have done so in good faith, but also for a valuable
consideration. (Arcenas vs. Del Rosario, 67 Phil. 238 [1939].) Thus, a
“purchaser in good faith” is defined as 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
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
263
other person in the property. (Cui vs. Henson, 57 Phil. 696 [1932];
David vs. Malay, 115 SCAD 820, 318 SCRA 711 [1999]; Tanongon vs.
Samson, 167 SCAD 455, 382 SCRA 130 [2002]; Castro vs. Miat, 397
SCRA 271 [2003].) One cannot close his eyes to facts that should put a
reasonable person on guard and still claim to have acted in good faith.
Thus, a person engaged in business would be wary of buying from a
company that is closing shop because it may be dissipating its assets to
defraud its creditors. (Tanongon vs. Samson, supra.)
(3) Continuation of good faith. — The mere fact that the second
contract of sale was perfected in good faith is not sufficient if, before
title passes, the second vendee acquires knowledge of the first
transaction. The good faith or innocence of the posterior vendee needs
to continue until his contract ripens into ownership by tradition or
registration. (Gallardo vs. Gallardo, supra; Palanca vs. Director of
Lands, 46 Phil. 149, supra.) The second buyer must show that he acted
in good faith throughout (i.e., ignorance of the first sale and the first
buyer’s right) — from the time of acquisition until the title is transferred
to him or registration or, failing registration, by delivery of possession.
(Cruz vs. Cabana, 129 SCRA 656 [1984]; Uraca vs. Court of Appeals,
86 SCAD 734, 278 SCRA 702 [1997]; Bautista vs. Court of Appeals,
118 SCAD 327, 322 SCRA 365 [2000]; Tan vs. Court of Appeals, 369
SCRA 255 [2001]; Consolidated Rural Bank, Inc. vs. Court of Appeals,
448 SCRA 347 [2005].) In other words, where title to the property is
recorded in the Register of Deeds, the requirement of the law, as
mentioned before, is two-fold: acquisition in good faith and recording
in good faith. (Martin vs. Court of Appeals, 358 SCRA 38 [2001].)
(4) Burden of proof. — Good faith is always presumed. It is upon
those who allege the bad faith on the part of the possessor rests the
burden of proof. But the burden of proving the status of one as a
purchaser in good faith and for value lies upon him who asserts that
status where the seller had none to transmit to the purchaser and the
other claimant is himself a purchaser in good faith from the successorin-interest of the original title holder. In discharging that burden, it is
not enough to invoke the ordinary or legal presumption of good faith,
i.e., that every one is presumed to act in good faith. The good faith that
is essential here is an integral part with the very status which must be
proved. (Baltazar vs. Court of Appeals, 168 SCRA 354 [1988]; see
Mathay vs. Court of Appeals, 98 SCAD 489, 295 SCRA 556 [1998];
Aguirre vs. Court of Appeals, 421 SCRA 310 [2004].) Insinuations and
264
SALES
Art. 1544
inferences will not overcome the presumption that a sale was concluded
in all good faith, for value, and without secret reservations. (see Naguit
vs. Deang, [C.A.] No. 6319-R, August 13, 1952.)
In a case, the first buyer failed to prove that the second buyer knew
of the prior sale to the former. Since the second buyer was considered
to have registered his deed of sale in good faith, it was held that the
ownership of the disputed property should belong to them. (Bucad vs.
Court of Appeals, 216 SCRA 423 [1992].)
(5) Good faith/bad faith, a question of intention. — “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 by
actual or fancied tokens or signs.” (Leung Yee vs. F.L. Strong
Machinery Co., 37 Phil. 644 [1918]; Manacop, Jr. vs. Cansino, 1 SCRA
572 [1961].) It consists in an honest intention to abstain from taking any
unconscientious advantage of another. It is the opposite of fraud and
bad faith and its non-existence may be established by competent proof.
(Cui vs. Henson, 57 Phil. 696 [1932]; Fule vs. De Legare, 7 SCRA 351
[1963]; Lizardo vs. Herrera, 98 Phil. 603 [1956].) Bad faith does not
simply connote bad judgment or negligence; it imputes a dishonest
purpose, some moral obliquity and conscious doing of a wrong. It
partakes of the nature of fraud. (Llorente, Jr. vs. Sandiganbayan, 92
SCAD 418, 287 SCRA 382 [1998].)
In ascertaining the intention by which one is actuated on a given
occasion, the courts are necessarily controlled by the evidence as to the
conduct and outward acts by which alone, the inward motive may, with
safety, be determined. (Dayao vs. Diaz, 91 Phil. 919 [1952].) The
purchaser is obligated to make a reasonable investigation as to the
identity of the thing sold and the seller’s title thereto. He 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. (see J.M. Tuazon & Co., Inc. vs. Court
of Appeals, 93 SCRA 146 [1979]; Vital vs. Anore, 90 Phil. 855 [1952];
Cruz vs. Pahati, 98 Phil. 788 [1956]; Conspecto vs. Fruto, 51 Phil. 144
[1927]; Leung Yee vs. F.L. Strong Machinery Co., supra; Republic vs.
Court of Appeals, 148 SCRA 480 [1987]; Cardente vs. Intermediate
Appellate Court, 155 SCRA 685 [1987].)
(6) Property purchased already peaceably possessed by another.
— 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
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
265
faith under the belief that there was no defect in the title of the vendor.
Thus, the vendee who purchased property which was already peaceably
possessed by another, without inquiring into the status of the property
or the vendor’s title thereto, takes the risks and losses consequential to
such failure. He is required to go beyond the certificate of title and make
inquiries concerning the rights of the actual possessor. (Salvoro vs.
Tanega, 87 SCRA 349 [1978]; Lucena vs. Court of Appeals, 111 SCAD
227, 313 SCRA 47 [1999]; see also Caram, Jr. vs. Laureta, 103 SCRA
7 [1981]; Heirs of T. de Leon Vda. de Roxas vs. Court of Appeals, 422
SCRA 101 [2004].) The absence of such inquiry will remove him from
the realm of bona fide acquisition. (Bautista vs. Court of Appeals, 48
SCAD 629, 230 SCRA 446 [1994]; Heirs of Ramon Durano, Sr. vs.
Sps. Uy, 137 SCAD 111, 344 SCRA 238 [2000].)
A cautious and prudent purchaser would usually make an ocular
inspection of the premises, this being standard practice in the real estate
industry. Should such prospective buyer find out that the land he intends
to buy is being occupied by anybody other than the seller, who is not in
actual possession, it would then be incumbent upon him 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. (Dela Merced vs. GSIS, 365 SCRA
11 [2001]; Heirs of Amado Celestial vs. Heirs of Editha Celestial, 408
SCRA 293 [2003]; Occeña vs. Esponilla, 431 SCRA 116 [2004].)
(7) Purchaser with notice of right of repurchase which has already
elapsed. — Similarly, one who buys property with notice that it is
subject to right of repurchase from his vendor (the vendee a retro in a
previous sale of the property), although such right has already elapsed
and there is no annotation of any repurchase by the vendor a retro but
the title has not yet been cleared of the encumbrance, without looking
into the right of redemption inscribed on the title, cannot be said to be
a purchaser in good faith for he has notice that some other person could
have a right or interest in the property. (Conde vs. Court of Appeals,
119 SCRA 245 [1982].) Actual notice is equivalent to, and indeed more
binding than, presumed notice by registration. (Guzman, Bocaling &
Co. vs. Bonnevie, 206 SCRA 668 [1992].)
(8) Adverse claim previously annotated on title of property sold.
— A subsequent sale of land cannot prevail over an annotated adverse
266
SALES
Art. 1544
claim which was previously annotated in the certificate of title of the
property. A prior judicial determination of the validity of the adverse
claim before it can flaw the title of subsequent transferees is not
required. A contrary rule contradicts the very essence of adverse claims.
The annotation of an adverse claim is a measure designed to protect the
interest of a person over a piece of real property, and serves as a notice
and warning to third parties dealing with said property that someone is
claiming an interest in the same or has a better right than the registered
owner thereof. (Gardner vs. Court of Appeals, 131 SCRA 585 [1984].)
It has been held, however, that a buyer cannot be considered as
being aware of a flaw which invalidates his acquisition where the
alleged flaw, the notice of lis pendens, was already being ordered
cancelled at the time of the purchase. (Po Lam vs. Court of
Appeals, 347 SCRA 86 [2000].)
(9) Purchaser examined only the latest certificate of title. — In
order that a purchaser may be considered as a purchaser in good faith,
it is enough that he examines the latest certificate of title. He is not
bound by the original certificate of title but only by the certificate of
title of the person from whom he purchased the property. (Cangas and
Basco vs. Tan Chuan Leung, 110 Phil. 168 [1960].) Good faith is
presumed. (Art. 527.) Under the established principles of land
registration law, the presumption is that the transferee of registered land
is not aware of any defect in the title of the property he purchased.
(Lopez vs. Court of Appeals, 169 SCRA 271 [1989].) He may rely on
the Torrens title of the seller. In the absence of anything to excite
suspicion, the buyer is not obligated to look beyond the certificate to
investigate the title of the seller appearing on the face of the certificate.
(Republic vs. Intermediate Appellate Court, 209 SCRA 90 [1992];
Heirs of Spouses B. Gavino and J. Euste vs. Court of Appeals, 95 SCAD
358, 291 SCRA 495 [1998]; AFP Mutual Benefit Association, Inc. vs.
Court of Appeals, 122 SCAD 389, 327 SCRA 203 [2000].) Where the
seller is not the registered owner himself, the law requires a higher
degree of prudence, even if the land object of the transaction is
registered. (Bautista vs. Court of Appeals, supra.) The principle under
the torrens system does not apply where the vendee has actual
knowledge of facts and circumstances that would impel a reasonably
cautious man to make an inquiry with respect to the title in his vendor.
(Domingo vs. Rocos, 401 SCRA 197 [2003].)
EXAMPLES:
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
(1)
S sold to B a cash register. The register, however, was
allowed to remain in the hands of S. Subsequently, S sold the same
register to C who bought it in good faith and took possession thereof.
Under the first paragraph of Article 1544, C should be considered as
the owner of the property sold. (see Olsen vs. Yearsly, 11 Phil. 178
[1908].)
(2)
S sold a parcel of land to B. Later, S sold the same land
to C who, in good faith, first registered the deed of sale. In case of
double registration, the title should remain in the name of the person
first securing registration in good faith. (see Legarda and Prieto vs.
Laleeby, 31 Phil. 500 [1915]; Reyes & Nadres vs. Director of Lands,
50 Phil. 791 [1927]; Granados vs. Monton, 86 Phil. 429 [1950].)
The ownership belongs to C even if B is in actual possession of
the land. (see Paylago vs. Jarabe [1968].) The remedy of
B is to sue S for breach of warranty against eviction. (Art. 1548.) If C
had knowledge of the previous unregistered sale to B, such knowledge
is equivalent to registration. C is not a buyer in good faith. (Leung Yee
vs. F.L. Strong Machinery, 37 Phil. 644 [1918]; Winkleman vs. Veluz,
43 Phil. 604 [1922]; Bernas vs. Bolo, 81 Phil. 16 [1948]; Cruz vs.
Cabana, 129 SCRA 656 [1984].) To be considered a purchaser in bad
faith, it is not required that C had actual knowledge of the sale to B. It
is sufficient that he has knowledge of facts which should put him upon
inquiry and investigation as to possible defects of title of S and he fails
to make such inquiry and investigation. (Paylago vs. Jarabe, supra.)
If neither sale was registered and C first took possession of the
land, in good faith, the ownership shall also belong to him.
In the absence of registration and possession by B and C, the
ownership shall pertain to B, his title being older than that of C.
(3) Suppose in the same example, S sold the parcel of land to B
and then to C, who both acted in good faith. After acquiring
knowledge of the second sale to C, B registered the sale. In this case,
B, as the first vendee, has still a better right. His good faith when he
purchased the land subsisted and continued to exist when he registered
the sale. (Carbonell vs. Court of Appeals, 49 SCRA 99 [1976], infra.)
Assume now that it is C who registered the sale to him, but after
he has acquired knowledge of the previous sale to B. As second
vendee, good faith at the time of purchase is not sufficient. He must
have also acted in good faith in recording his sale. Here, the rule of
caveat emptor applies. (see Art. 1566.) Hence, the registration by C is
considered registration in bad faith and will not confer upon him any
right. (Salvoro vs. Tañega, 87 SCRA 349 [1978].)
267
268
SALES
Art. 1544
ILLUSTRATIVE CASES:
1. Sale of land to vendee a retro who never took material
possession was executed in a public instrument which was not
recorded, while sale to second buyer who took material possession
was made by means of a private document after lapse of period for
repurchase.
Facts: S sold a parcel of land to B under pacto de retro. The sale
was executed in a public instrument but was not recorded in the
registry of deeds. B never took material possession of the land. The
period for repurchase elapsed without S making use of it. Later on, S
sold the same land by means of a private document to C, who
immediately took material possession thereof.
B brought action for recovery of the land.
Issue: Who has a better right to the land, B or C?
Held: B. He was the first to take possession of the land, and
consequently, the sale executed in his favor is preferable. The
possession mentioned in Article 1544 includes not only material but
also the symbolic possession, which is acquired by the execution of a
public instrument. (Sanchez vs. Ramos, 40 Phil. 614 [1919].)
Note: In case of double sale, symbolical tradition is equivalent to
physical possession. (see Bautista vs. Sioson, 39 Phil. 615; Olsen vs.
Yearsly, 11 Phil. 187 [1908]; Williams vs. McMicking, 16 Phil. 412
[1910].) An unrecorded public instrument transfers symbolic
possession to the vendee. (Quimzon vs. Rosete, 87 Phil. 159 [1950].)
However, the execution of a public instrument does not have the effect
of symbolic delivery where it contains a stipulation that the vendor is
to continue in possession. (Aviles and Villafuerte vs. Arcega and de
Leon, 44 Phil. 924 [1923], infra.)
———— ———— ————
2.
Second purchaser who first registered sale to him
executed a quitclaim and subsequently “cancelled” it.
Facts: S sold a parcel of land to two persons, first to B, and then
to C, who registered the sale to him ahead of B. Later, C executed a
quitclaim deed relinquishing his rights to the property.
Issue: Does the subsequent “cancelling” of the quitclaim revive
C’s preferential right as against B?
Held: No. C’s preferential right is extinguished and this is true
even if the quitclaim is not recorded in the registry of property.
(Casica vs. Villaseca, [Unrep.], 101 Phil. 1205 [1957].)
———— ———— ————
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
3.
First buyer of land in a private document registered her
adverse claim such after learning of the second sale in a public
instrument of same land to another but before registration of the
second sale.
Facts: S executed on January 27 a private memorandum of sale
of a land in favor of B who assumed and paid the mortgage
indebtedness of S with a bank, out of the purchase price. On February
2, S sold the same property for a higher price to C, this time executing
a formal registerable deed of sale in favor of the latter. When B saw S
on January 31, bringing the formal deed of sale for S’s signature and
the balance of the agreed cash payment, S told B that he could not
proceed anymore with the sale because had already formalized the
sale of the lot to C.
On February 5, B saw C erecting a wall around the lot with a gate.
On the advice of a lawyer, B registered on February 8 her adverse
claim as first buyer entitled to the property. C registered the deed of
sale in her favor ten days later on February 12, and, therefore, the
transfer certificate of title issued in her favor carried the duly
annotated adverse claim of B as the first buyer.
Issue: Who is legally entitled to the property, B or C?
Held: B. Under the first and third paragraphs of Article 1544,
good faith must characterize the prior possession. Under the second
paragraph, good faith must characterize the act of anterior registration.
If there is no inscription, what is decisive is prior possession. If there
is inscription, prior registration in good faith is a precondition to
superior title.
When B bought the lot in question from S on January 27, she was
the only buyer thereof and the title of S was still in his name, solely
encumbered by bank mortgage duly annotated thereon. B was not
aware — and she could not have been aware — of any sale to C as
there was no such sale to C. Hence, B’s prior purchase of the land was
made in good faith. Her good faith subsisted and continued to exist
when she recorded her adverse claim four (4) days prior to registration
of C’s deed of sale. B’s good faith did not cease after S told her on
January 31 of his second sale of the same lot to C. Because of that
information, B wanted an audience with C who refused to see her. So
B did the next best thing to protect her right — she registered her
adverse claim. Under the circumstances, this recording of her adverse
claim should be deemed to have been done in good faith and should
emphasize C’s bad faith when she registered her deed of sale four (4)
days later, on February 12. (Carbonell vs. Court of Appeals, supra.)
269
270
SALES
Art. 1544
Teehankee, J., concurring: Both these registrations were in good
faith.37 As the first registrant, B is legally entitled to the property. The
fact that she registered only an adverse claim is of no moment. B had
to register such claim as first buyer otherwise the subsequent
registration of C’s deed of sale would have obliterated her legal rights
and enable S to achieve his fraudulent act of selling the property a
second time for a better price in derogation of her prior right thereto.
The fact that S informed B that the former had sold the property to C
did not convert B’s prior registration of her adverse claim into one of
bad faith. The fraudulent act of S of informing B that he has
wrongfully sold his property for a second time cannot work out to his
own advantage and to the detriment of the first buyer (by being
considered as an “automatic registration” of the second sale) and
defeat the first buyer’s right of priority, in time, in right, and in
registration.
Knowledge gained by the first buyer of the second sale cannot
defeat the first buyer’s rights except only as provided in Article 1544
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 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.
Muñoz-Palma, J., dissenting: The two purchasers, B and C, are
both purchasers in good faith. That C is likewise a buyer in good faith
is supported by express findings of fact of the trial court and the Court
of Appeals which findings are generally binding and conclusive. The
question to be resolved is who of the two first registered her purchase
or title in good faith. This requirement of good faith is not only
37 The majority opinion ruled that C was a buyer in bad faith in view of other circumstances
indicated in the decision.
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
applicable to the second or subsequent purchaser but to the first as
well.
The notation of B’s adverse claim was not accomplished in good
faith as she was cognizant of facts which impaired her title to the
property in question, to wit: that S informed her that S had already
given the lot to C; that B saw C erecting a wall around the lot with a
gate; that she consulted a lawyer who advised her to present her
adverse claim, and that being informed that the sale in favor of C had
not yet been registered, the said lawyer prepared the notice of adverse
claim which was signed and sworn to and registered by B. The
annotation of the adverse claim did not produce any legal effects as to
place her in a preferential situation to that of C, for the simple reason
that a registration made in bad faith is equivalent to no registration at
all.
The act of registration of C’s deed of sale on February 12 was but
a formality, in the sense that it simply formalized what had already
been accomplished earlier, that is, the registration of C’s purchase as
against B when the latter acquired knowledge of the second sale on
January 31. The long-accepted rule is that knowledge is equivalent to
registration. What would be the purpose of registration other than to
give notice to interested parties and to the whole world of the existence
of rights or liens against the property under question?
———— ———— ————
4. Both first and second sales were made by means of a public
document but second buyer was first to take material possession,
because by virtue of stipulation in the first sale, vendor continued in
possession.
Facts: S sold the same house erected on a leasehold land to B and
subsequently, to C, in public documents. None of the sales is
registered. In the sale to B, it is stipulated that S shall continue in
possession of the house for four (4) months.
C took possession of the property immediately after the sale to
him, B never having taken possession thereof. Both sales were not
registered.
Issue: Who has a better right to the house?
Held: C. The execution of the public document in favor of B does
not have the effect of the symbolic delivery of the house sold. (see
Art. 1498.) In view of the stipulation in his document of sale, B does
not acquire any title to the property, unless he should have taken
possession of the same after the lapse of the four (4)-month period.
271
272
SALES
Art. 1544
This being so, C, the second purchaser, to whom the property was sold
after the said period, acquired title thereto, either by taking physical
possession thereof, or by virtue of the symbolic delivery which
ordinarily takes place upon the execution of the public document.
(Aviles vs. Arcega, 44 Phil. 924 [1923]; Note: This is a 5 to 4
decision.)
———— ———— ————
5. First sale was made before registration of land under the
Torrens System in the name of the seller, while subsequent execution
sale in favor of seller’s judgment creditor took place after
registration.
Facts: While his application for the registration of a parcel of land
under the Torrens System was pending, S sold the property to B who
thereafter took possession thereof and made substantial improvements
therein. A month later, an original certificate of title covering the land
was issued in the name of S free from all liens and encumbrances. The
following year, a levy was made upon the land in favor of C, judgment
creditor of S. S did not exercise his right of redemption.
The corresponding notice of levy, certificate of sale, and the
sheriff’s certificate of final sale in favor of C were duly registered. C
sold all its rights and title to the property to DTC.
Issue: Who has a better right to the land, B or DTC?
Held: B. (1) Judgment creditor merely acquired right and interest
of judgment debtor. — If the property covered by the conflicting sales
were unregistered land, B would have a better right. If duly registered
land, DTC would have a better right because in case of conveyance of
registered real estate, the registration of the deed of sale is the
operative act that gives validity to the transfer. The present case,
however, does not fall within either situation. Here, the sale in favor
of B was executed before the land was originally registered, while the
conflicting sale in favor of DTC was executed after the same property
had been registered. What should determine the issue are the
provisions of the last paragraph of Section 35, Rule 39 of the Rules of
Court to the effect that upon execution and delivery of the final
certificate of sale in favor of the purchaser of land sold in execution
sale, which purchaser “shall be substituted to and acquire all the right,
title, interest and claim of the judgment debtor to the property as of
the time of the levy.” S had no more interest and claim on the property
at the time of the levy which he had already conveyed for a
considerable time prior thereto to B “fully and irretrievably.”
(2) Unregistered sale, not cancelled by subsequent issuance of
Torrens title. — The unregistered sale and the consequent conveyance
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
273
of title in favor of B could not have been cancelled and rendered of no
effect upon the subsequent issuance of the Torrens title over the land.
“In the inevitable conflict between a right of ownership already fixed
and established under the Civil Law — which cannot be affected by
any subsequent levy or attachment or execution — and a new law or
system which would make possible the overthrowing of such
ownership on admittedly artificial and technical grounds, the former
must be upheld and applied.” (Dagupan Trading Co. vs. Macam, 14
SCRA
179 [1965].)
———— ———— ————
6. Purchaser bought registered land from seller who is not the
registered owner and could not show any title or capacity to make the
transfer.
Facts: Pursuant to a free patent issued to S in 1956, an original
certificate of title was entered under her name. X entered the land and
cultivated it. In 1962, S sold the land to B. Subsequently, X sold his
rights to Y. When Y bought the land from X, the latter could not and
did not, at any time, produce any title or application to said land.
Issue: Is Y a purchaser in good faith?
Held: No. Well settled is the rule that, “The law protects to a
greater degree a purchaser who buys from the registered owner
himself. Corollarily, it requires a higher degree of prudence from one
who buys from a person who is not the registered owner, although the
land object of the transaction is registered. x x x.”
If such degree of prudence is required of a purchaser of registered
land from one who shows a certificate of title but who appears not to
be the registered owner, more so should the law require the utmost
caution from a purchaser of registered land from one who could not
show any title nor any evidence of his capacity to transfer the land.
Failing to exercise caution of any kind whatsoever, as in the case of
Y, is tantamount to bad faith. (Barrios vs. Court of Appeals, 78 SCRA
477 [1977].)
Other rulings on application of rules.
(1) Contract to sell/promise to sell. — Article 1544 is applicable
not only to a contract of sale but also to a contract to sell because in the
Civil Law, where tradition is necessary for the transfer of ownership,
there is no real distinction between a contract of sale and a contract to
sell. (Alterado vs. Jimenez, [C.A.] 57 O.G. 9213; see Dela Merced vs.
274
SALES
Art. 1544
GSIS, 154 SCAD 816, 365 SCRA 1 [2001].) It has been held, however,
that the provision does not apply to a case where there was a sale to one
party of the land itself while the other contract was a mere promise to
sell the land or at most an actual assignment of the right to repurchase
the same land. There is no double sale of the same land in this case.
(Dichoso vs. Roxas, 11 Phil. 768 [1908]; San Lorenzo Development
Corp. vs. Court of Appeals, 449 SCRA 99 [2005].)
(2) Donation. — It applies to donations. A deed of donation
executed with all the formalities of the law is on the same footing as a
deed of sale in the form of a public instrument. (Cagaoan vs. Cagaoan,
43 Phil. 554 [1922]; Ortiz vs. Court of Appeals, 97 Phil. 46 [1955]; see
Art. 744.)
(3) Subsequent mortgage registered under Act No. 3344. — An
unrecorded sale of a house of a prior date is preferred to a recorded
mortgage of the same house of a later date for the reason that, if the
original owner had parted with his ownership of the thing sold, then he
no longer had the ownership and full disposal of that thing so as to be
able to mortgage it. The registration of a mortgage under Act No. 3344
is without prejudice to the better right of third parties. (Lanuza vs. De
Leon, 20 SCRA 361 [1967].)
(4) Subsequent mortgage of land registered under the torrens
system, registered by mortgagee. — In a case, Z, after selling his land
to M (under a contract to sell) which sale was not registered, mortgaged
the same property to GSIS which registered the mortgage and acquired
the property as the highest bidder in the extrajudicial foreclosure sale.
The registered right of GSIS as mortgagee of the property was held
inferior to the unregistered right of M, the previous buyer, the
unrecorded sale between M as the vendee, and Z, the original owner, is
preferred for the reason that if Z had parted with his ownership of the
land sold, then he no longer had ownership and free disposal of the same
so as to be able to mortgage it.38 (Dela Merced vs. GSIS, supra.)
38
“Respondents cannot even assert that as mortgagee of land registered under the Torrens
System, GSIS was not required to do more than rely upon the certificate of title. As a general rule,
where there is nothing on the certificate of title to indicate any cloud or vice in the ownership of
the property, or any encumbrance thereon, the purchaser is not required to explore further than
what the Torrens Title upon its face indicates in quest for any hidden defect or inchoate right that
may subsequently defeat his right thereto. This rule, however, admits of an exception as where the
purchaser or mortgagee has knowledge of a defect or lack of title in the vendor, or that he was
aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the
property in litigation. (Ibid., citing State Investment House, Inc. vs. Court of Appeals, 254 SCRA
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
275
(5) Sale of unregistered land. — A bona fide purchaser of a
registered land at an execution sale acquires a good title as against a
prior transferee, if such transfer was unrecorded. However, if the land
is unregistered, a different rule applies. Under Act No. 3344,
registration of documents affecting unregistered land is “without
prejudice to a third party with a better right.” The quoted phrase has
been held to mean that the mere registration of a sale in one’s favor does
not give him any right over the land if the vendor was not anymore the
owner of the land, having previously sold the same to somebody else,
even if the earlier sale was unrecorded. Article 1544 has no application
to land not registered under the land registration law. (Pres. Decree No.
1529, formerly Act No. 496.) Thus, it cannot be invoked to benefit the
purchaser at the execution sale, though the latter was a buyer in good
faith and even if the second sale was registered. (Radiowealth Finance
Company vs. Palileo, 197 SCRA 245 [1991]; Carumba vs. Court of
Appeals, 31 SCRA 558 [1970].)
Registration, however, 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 in good faith (see Arts. 708-709; Revilla vs.
Galindez, 107 Phil. 480 [1960]; Taguba vs. Peralta, 132 SCRA 700
[1984]; Santiago vs. Court of Appeals, 63 SCAD 636, 247 SCRA 336
[1995], citing Vitug, supra.) On account of the registration under Act
No. 3344 by the first buyer, necessarily there is absent good faith in the
subsequent registration of the second sale by the second buyer for said
registration has the effect of constructive notice to the second buyer that
can defeat his right as such buyer. (Bayoca vs. Nogales, 340 SCRA 154
[2000].)
If the property in dispute is already registered under the Torrens
system, the registration of the sale under Act No. 3344 is not effective
for purposes of Article 1544. (Abrigo vs. De Vera, 432 SCRA 544
[2004].)
(6) Sale to different vendees. — Clearly, Article 1544 applies to a
situation where the same property is sold to different vendees. There
must be at least two (2) deeds of sale over the same property. It is not
368 [1996].) When the purchaser or mortgagee is a bank or financing institution, the general rule
that a purchaser or mortgagee of land is not required to look further than what appears on the face
of the title does not apply. (Sunshine Finance and Investment, Corp. vs. Intermediate Appellate
Court, 203 SCRA 210 [1991]; Philippine
National Bank vs. Office of the President, 252 SCRA 52 [1996].)
276
SALES
Art. 1544
applicable where there is only one sale. (Remalente vs. Tibe, 158 SCRA
138 [1988].) Thus, in a case, although the deed of extra-judicial
partition which merely mentioned the alleged sale in favor of petitioners
of the subject property was registered while the pacto de retro sale in
favor of private respondents was not, but the alleged deed of sale was
never offered in evidence by the petitioners, it was held that such
registration did not operate as a registration of the deed of sale because
insofar as third persons are concerned, what could validly transfer or
convey the vendee’s right to the property to petitioners was the deed of
sale and not the deed of extra-judicial partition which only mentioned
the former. (Vda. de Alcantara vs. Court of Appeals, 67 SCAD 347, 252
SCRA 457 [1996].) There is, of course, no double sale where after the
sale of the property in favor of a person, the vendor did not anymore
execute another sale over the same property in favor of another. (Land
Authority vs. De Leon, 120 SCRA 128 [1983].)
Article 1544 cannot be involved when two different contracts of
sale are made to 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. (Consolidated Rural Bank, Inc. vs. Court of Appeals,
449 SCRA 347 [2005].)
(7) Pacto de retro sale. — It is not applicable to a case which
involves an earlier pacto de retro sale of an unregistered land and the
subsequent donation thereof by the vendor a retro to another who, in
turn, sold it to a third party while the property was still in the possession
of the vendee a retro who had already acquired title before the donation
because of the failure of the vendor a retro to repurchase the same.
There being no title to the property which the vendor a retro could
convey to the supposed donee, since he was no longer the owner
thereof, no title could be conveyed by the donee by the sale of the
property. (De Guzman, Jr. vs. Court of Appeals, 156 SCRA 701
[1987].)
(8) Contract of sale fictitious or forged, or seller without right to
sell. — It does not apply if the contract of sale first registered is
fictitious or forged or if the vendor is not the owner of the property sold
and had no right to sell the same. (see Espiritu vs. Valerio, 9 SCRA 761
[1963]; Cruzado vs. Bustos & Escolar, 34 Phil. 17 [1917].)
But a forged deed of sale of registered land can legally be the root
of a valid title when an innocent purchaser for value intervenes. A deed
Art. 1544
OBLIGATIONS OF THE VENDOR
Delivery of the Thing Sold
277
of sale executed by an impostor without authority of the owner of the
land sold is a nullity, and registration will not validate what otherwise
is an invalid document. However, the certificate of title was already
transferred from the name of the true owner to the forger, and, while it
remains that way, the land is subsequently sold to an innocent
purchaser, the vendee has the right to rely upon what appears in the
certificate and, in the absence of anything to excite suspicion, is under
no obligation to look beyond the certificate and investigate the title of
the vendor appearing on the face of said certificate. The remedy of the
true owner is to bring an action for damages against the one who caused
or employed the fraud and if the latter is insolvent, an action against the
Treasurer of the Philippines may be filed for recovery of damages
against the Assurance Fund. (TenioObsequio vs. Court of Appeals, 49 SCAD 68, 230 SCRA 550 [1994].)
(9) Sale of property to one party and assignment of right to the
property to another. — The provisions of paragraph 3, Article 1544 do
not apply to a case where the sale in favor of one party was the property
itself, while the transaction in favor of another was a mere promise to
assign or, at most, an actual assignment of the right to repurchase the
same property. (Dichoso vs. Roxas, 5 SCRA 781 [1962].)
(10)Sale of property subject of contract to sell/conditional sale to a
third person. — In a contract to sell, there being no previous sale of the
property, a third person buying such property despite the fulfillment of
the suspensive condition such as the full payment of the purchase price,
for instance, cannot be deemed a buyer in bad faith and the prospective
buyer cannot seek the relief of reconveyance of the property. There is
no double sale in such case. Title to the property will transfer to the
buyer after registration because there is no defect in the owner-seller’s
title per se, but the latter, of course, may be sued for damages by the
intending buyer.
In a conditional contract of sale, however, upon the fulfillment of
the suspensive condition, the sale becomes absolute and this will
definitely affect the seller’s title thereto. In fact, if there had been
previous delivery of the subject property, the seller’s ownership or title
to the property is automatically transferred to the buyer such that, the
seller will no longer have any title to transfer to any third person.
Applying Article 1544 of the Civil Code, such second buyer of the
property who may have had actual or constructive knowledge of such
278
SALES
Art. 1544
defect in the seller’s title, or at least was charged with the obligation to
discover such defect, cannot be a registrant in good faith. Such second
buyer cannot defeat the first buyer’s title. In case a title is issued to the
second buyer, the first buyer may seek reconveyance of the property
subject of the sale. (Coronel vs. Court of Appeals, 75 SCAD 141, 263
SCRA 15
[1996].)
— oOo —
279
SECTION 3. — Conditions and Warranties
ART. 1545. Where the obligation of either party to
a contract of sale is subject to any condition which is
not performed, such party may refuse to proceed with
the contract or he may waive performance of the
condition. If the other party has promised that the
condition should happen or be performed, such first
mentioned party may also treat the non-performance
of the condition as a breach of warranty.
Where the ownership in the thing has not passed,
the buyer may treat the fulfillment by the seller of his
obligation to deliver the same as described and as
warranted expressly or by implication in the contract
of sale as a condition of the obligation of the buyer to
perform his promise to accept and pay for the thing.
(n)
Meaning of condition.
A condition, as used in Article 1545, means an uncertain event or
contingency on the happening of which the obligation (or right) of the
contract depends. In such a case, the obligation of the contract does not
attach until the condition is performed. (see Art. 1462, par. 2.)
(1) The term, in the context of 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. (Romero vs. Court of Appeals,
65 SCAD 621, 250 SCRA 223 [1995].)
291
Art. 1545
(2) The term is not used in the sense of a “promise” with the
possible exception of the buyer’s promise to accept and pay for the thing
sold which is conditioned on the seller’s performance of his promise to
deliver the thing as described and warranted. (Art. 1545, par. 2.)
280
SALES
Effect of non-fulfillment of condition.
A contract of sale may be absolute or conditional. (Art. 1458.)
(1) If the obligation39 of either party is subject to any condition and
such condition is not fulfilled, such party may either:
(a)
refuse to proceed with the contract; or
(b) proceed with the contract, waiving the performance of
the condition.
(2) If the condition is in the nature of a promise that it should
happen, the non-performance of such condition may be treated by the
other party as a breach of warranty. (see Art. 1546.)
EXAMPLES:
(1)
B (buyer) entered into a contract with S for the purchase
of certain machinery. The arrival of the goods to be shipped from
Japan is made a condition of the bargain, there being no promise by S
that the goods will arrive. If the machinery does not arrive, S is not
guilty of breach of contract.
But if S promises or warrants that the machinery will be shipped
or that it was already on its way, the non-arrival conArt. 1545
stitutes a breach of contract. B is entitled to claim damages. (see
McCullough vs. Berger, 43 Phil. 828 [1922]; Soler vs. Chesley, 43
Phil. 529 [1922].)
(2)
S promised to sell his parcel of land to B, should S win
a case pending in the Supreme Court. S lost the case. S may either
39 A distinction must be made between a condition imposed on the perfection of a contract
and a condition imposed merely on the performance of an obligation. The failure to comply with
the first condition would prevent the juridical relation itself from coming into existence, while
failure to comply with the second merely gives the option either to refuse to proceed with the sale
or to waive the condition. (Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223 [1995];
Lim vs. Court of Appeals, 75 SCAD 574, 263 SCRA 560 [1996]; Babasa vs. Court of Appeals, 94
SCAD 679, 290 SCRA 532 [1998]; see Art. 1458.)
It has been held that a subdivision developer can rightly seek to ensure that the property
continues to meet the conditions and requirements, like building specifications and easement
provisions stipulated in, and made part of the individual contracts which its buyers. As developer
of the property, it has its own agreed undertakings in favor of the buyers which could well survive
the transfer of ownerships and provide it with such genuine stake in the controversy as would
sufficiently clothe it with personality. (Fajardo, Jr. vs. Freedom to Build, Inc., 347 SCRA 474
[2000].)
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
281
refuse to sell the parcel of land or he may waive the performance of
the condition and sell the parcel of land.
(3)
S sold to B certain subdivision lots, with S promising to
construct the necessary roads that would serve as outlets for entrance
and egress to and from the lots in accordance with the requirements of
existing laws and regulations. B may treat the non-performance of S’s
promise as a breach of warranty. It is the seller’s duty to deliver the
thing sold in a condition suitable for its enjoyment by the buyer for
the purposes contemplated. In this case, proper access to his residence
is essential to the enjoyment by B of the lots purchased. (see Limus
vs. De los Santos, 8 SCRA 798 [1963].)
(4)
S agrees to sell to B a parcel of land, subject to the
condition that the balance of the purchase price shall be paid by B 10
days after the removal of all squatters from the property by S within
45 days after the signing of the contract. If after 45 days from the
signing of the contract, S shall not be able to remove the squatters, the
down payment made by B shall be returned by S.
May S demand the rescission of the contract for the sale of the
land for his own failure to have the squatters evicted within the
stipulated period?
No. The ejectment of the squatters is a condition, the operative
act which sets into motion the period of compliance by B of his own
obligation. S’s failure to comply with the condition does not result in
the failure of the contract; it only gives B the option either to refuse to
proceed with the agreement or waive that condition. This option
clearly belongs to B and not to S who is not the injured party. 40
It would be the height of inequity for S to invoke the continued
occupation by the squatters of the property as a justification to ignore
his obligation to evict them. The performance of his obligation should
not be made subject to the will and
Art. 1546
caprices of the occupants. (see Romero vs. Court of Appeals, 65
SCAD 621, 250 SCRA 223 [1995]; Lim vs. Court of Appeals, 75
40 The right of a party to rescind an obligation under Article 1191 of the Civil Code is
predicated on the non-compliance by the other party with what is incumbent upon him that violates
the reciprocity between them.
282
SALES
SCAD 574, 263 SCRA 560 [1996]; Adalin vs. Court of Appeals, 88
SCAD 55, 280 SCRA 536 [1997].)
ART. 1546. Any affirmation of fact or any promise
by the seller relating to the thing is an express
warranty if the natural tendency of such affirmation or
promise is to induce the buyer to purchase the same,
and if the buyer purchases the thing relying thereon.
No affirmation of the value of the thing, nor any
statement purporting to be a statement of the seller’s
opinion only, shall be construed as a warranty, unless
the seller made such affirmation or statement as an
expert and it was relied upon by the buyer. (n)
Meaning of warranty.
A warranty is a statement or representation made by the seller of
goods, contemporaneously and as a part of the contract of sale, having
reference to the character, quality, or title of the goods, and by which he
promises or undertakes to insure that certain facts are or shall be as he
then represents them. (see Black L.D. vs. Estes, 122 Ga. 807.)
Terminology used by parties not controlling.
It is not necessary that the word “warranty” or “warrant” be used by
the seller to constitute a warranty. Any word is sufficient to show the
intention of the parties to consider the representation or promise as an
express warranty; and the fact that a stipulation in the contract of sale is
specially called a “warranty” does not of itself establish that the
agreement thus referred to is a warranty.
Kinds of warranty.
Warranties by the seller may be express, as in the above article, or implied, as in Article 1547.
The seller is liable for his express warranties (Art. 1546.) and for
the implied warranties of title (Art. 1547.), absence of hidden defects
(Ibid.), fitness or merchantability (Art. 1562.), description
(Arts. 1481, 1562.), and sample. (Arts. 1481, 1565.)
Art. 1546
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
283
Meaning of express warranty.
An express warranty is any affirmation of fact or any promise by
the seller relating to the thing, the natural tendency of which is to
induce the buyer to purchase the thing and the buyer thus induced,
does purchase the same.
Effect of express warranty.
Under the definition, statements not only relating to quality or title
of the thing but relating to other incidents to it may be warranties.
A warranty being a part of the contract of sale, it is immaterial
whether the seller did not know that it was true or false. No intent is
necessary to make the seller liable for his warranty. It is the natural
consequences of what the seller says and the reliance thereon by the
buyer that alone are important. (see 1 Williston, op. cit., pp. 498-501.)
Accordingly, where the seller (importer-assembler) expressly intimated
to the buyer that the taxes and customs duties on two (2) assembled
trucks were already paid, such representation shall be considered, as a
seller’s warranty under Article 1546 which covers any affirmation of
fact or any promise by the seller which induces the buyer to purchase
the object of sale and actually purchases it relying on the affirmation or
promise. (Harrison Motors Corporation vs. Navarro, 125 SCAD 673,
331 SCRA 202 [2000].)
It has been held that where there is no dispute that the defendant
(seller), in bad faith and with gross negligence, infringed the express
warranty made by it to the general public with respect to its products
sold to and installed in the house of the plaintiff (buyer), who relied on
the warranty, the identity of the individual who actually dealt with the
defendant and asked the latter to make the delivery and installation by
its workers is pointless. (Del
Rosario vs. Court of Appeals, 78 SCAD 542, 267 SCRA 158 [1997].)
EXAMPLE:
S sells to B an automobile for P90,000.00, telling the latter that it
is a 1977 model and that it is worth about P100,000.00. B sees the
automobile and after a test run, expresses satisfaction
Art. 1546
284
SALES
over its condition. The automobile is really of 1976 vintage and is only
worth about P80,000.00.
In this case, B has no right of action for breach of warranty
because the inducing cause of the purchase is not the erroneous
statement as to its model and value, but B’s reliance on its appearance
and demonstrated condition. But the statement that the automobile is
in excellent running condition constitutes a violation of warranty if
such is not the fact.
Effect of expression of opinion.
A mere expression of opinion, no matter how positively asserted,
does not import a warranty unless the seller is an expert and his opinion
was relied upon by the buyer. Thus, assertions that things are fine or
valuable or better than products of rival manufacturers are in their nature
so dependent on individual opinion that no matter how positive the
seller’s assertion may be, they are not held to create a warranty.
The tendency of the courts, however, is in the direction of greater
strictness against the seller’s untruthful puffing of his wares. (see Ibid.,
pp. 517-518.)
The following provisions of law are pertinent:
“The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent.”
(Art. 1340.)
“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.” (Art. 1341.)
“Misrepresentation made in good faith is not fraudulent but
may constitute error.” (Art. 1343.)
EXAMPLES:
(1)
Expressions or advertisements like: “the cigarette that
will give you utmost smoking pleasure”, “the most effective pain
reliever”; “you like it, it likes you”, etc. are mere “sales talk” or
“seller’s puffing.”
They are not construed as warranties because the buyer knows
that they are mere exaggerations.
Art. 1546
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
285
(2)
S, a farmer, found a ring which he sold to B, honestly
believing and representing to B that it was a diamond ring. It turned
out that the ring was ordinary glass.
Here, S merely expressed an opinion. Since the misrepresentation
was made in good faith, it is considered a mere error or mistake. But
if S is an expert, and his statement was relied upon by B, the same
shall be construed as a warranty even if expressed in the form of an
opinion.
ILLUSTRATIVE CASES:
1. The number of coconut trees is less than that stated in the
contract but it appeared that buyer inspected land and estimated
number of trees thereon.
Facts: B exchanged his property in Pasay City with S’s coconut
plantation. In the deed of exchange, S stated that there were no less
than 6,000 coconut trees in his plantation.
Issue: Is S liable for breach of warranty?
Held: No. Where it does not appear that defendant (S)
deliberately violated the truth when he stated his belief that there were
no less than 6,000 coconut trees on the land, and it appears that the
plaintiff (B) inspected said land and estimated the number of trees
thereon before the exchange, no action will lie for the rescission of the
contract or for damages. (Gochingco vs. Dean, 47 Phil. 687 [1925].)
———— ———— ————
2. Sugar cane crops sold yielded less than that represented but
seller made no guarantee of yield.
Facts: S sold his sugar cane crop to B for P12,000.00. Previous
to the sale, S represented that the crop would yield 3,000 piculs. It
yielded only 2,017 piculs instead. It was shown, however, that S did
not and in fact refused to guarantee the quantity of sugar which would
be produced.
S bought action for the balance of the purchase price.
Issue: Is S guilty of misrepresentation?
Held: No. 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 refusal of the seller
to warrant his estimate indicated that it was put forth
Art. 1547
286
SALES
as a mere opinion. It is elementary that a misrepresentation upon a
mere matter of opinion is not an actionable deceit, nor is it a sufficient
ground for avoiding a contract as fraudulent. (Songco vs. Sellner, 37
Phil. 254 [1917].)
ART. 1547. In a contract of a sale, unless a
contrary intention appears, there is:
(1)
An implied warranty on the part of the
seller that he has a right to sell the thing at the time
when the ownership is to pass, and that the buyer
shall from that time have and enjoy the legal and
peaceful possession of the thing;
(2)
An implied warranty that the thing shall be
free from any hidden faults or defects, or any charge
or encumbrance not declared or known to the buyer.
This article shall not, however, be held to render
liable a sheriff, auctioneer, mortgagee, pledgee, or
other person professing to sell by virtue of authority
in fact or law, for the sale of a thing in which a third
person has a legal or equitable interest. (n)
Meaning of implied warranty.
An implied warranty is that which the law derives by implication or
inference from the nature of the transaction or the relative situation or
circumstances of the parties (Black L.D. vs. Estes, 122 Ga. 807.),
irrespective of any intention of the seller to create it.
Implied warranties in sale.
The term implied warranty is reserved for cases where the law
attaches an obligation to the seller which is not expressed in any words.
(1 Williston, op. cit., p. 498.) Implied warranties under Articles 1547
and 1562 are:
(1) Implied warranty as to seller’s title. — that the seller guarantees
that he has a right to sell the thing sold and to transfer ownership to the
buyer who shall not be disturbed in his legal and peaceful possession
thereof (Art. 1548.);
Art. 1547
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
287
(2) Implied warranty against hidden defects or unknown
encumbrance. — that the seller guarantees that the thing sold is free
from any hidden faults or defects or any charge or encumbrance not
declared or known to the buyer (Art. 1561.); and
(3) Implied warranty as to fitness or merchantability. — that the
seller guarantees that the thing sold is reasonably fit for the known
particular purpose for which it was acquired by the buyer or, where it
was bought by description, that it is of merchantable quality. (Art.
1562.)
The right of the seller to sell the thing need not reside in him at the
time the contract is perfected. It is sufficient that the vendor has a right
“at the time when the ownership is to pass.” (Art. 1547[1].) This
complements Article 1459 that “the vendor must have a right to transfer
the ownership thereof at the time it is delivered” and Article 1562 which
allows the sale of “future goods” or of goods the acquisition of which
depends upon a contingency.
ILLUSTRATIVE CASE:
Seller of agricultural land warranted as “free from all liens and
encumbrances” was occupied by a tenant.
Facts: G sold a parcel of agricultural land to ID, Inc. warranting
that the land was “free from all liens and encumbrances.” ID, Inc., in
turn, sold the land to AA, Inc. to which ID, Inc. warranted that the
land was “free from all liens, adverse claims, encumbrances, claims
of any tenant and/or agricultural workers, whether arising as
compensation for disturbance or from improvements.” When G
bought the land from the original owner, it was forced to stop
cultivating the land because of the bulldozing caused by AA, Inc.
G filed a complaint against ID, Inc., AA, Inc. for disturbance
compensation under the land reform law. ID, Inc. in return, filed a
cross-claim against G in case of a judgment adverse to it while AA,
Inc. filed a cross-claim against ID, Inc.
Issue: Did G violate his warranty to ID, Inc.?
Held: No. The term “hidden faults or defects” in Article 1547
pertains only to those that make the object of the sale unfit for the use
for which it was intended at the time of the sale. Since
Art. 1547
288
SALES
the object of the sale by G to ID, Inc. is an agricultural land, the
existing tenancy relationship with respect to the land cannot be a
“hidden fault or defect.” It is not a lien or encumbrance that the vendor
warranted did not exist at the time of the sale. It is a relationship which
any buyer of agricultural land should reasonably expect to be present
and which it is his duty to specifically look into and provide for. AA,
Inc. saw to it that the warranty was specific when it, in turn, purchased
the land. The difference in the phraseology of the two warranties is
not an idle one. (Investment & Development, Inc. vs. Court of Appeals,
162 SCRA 636 [1988].)
Nature of implied warranty.
An implied warranty is a natural, not an essential, element of a
contract, because it is presumed to exist even though nothing has been
said in the contract on the subject. It is, therefore, deemed as
incorporated in the contract of sale.
An implied warranty may, however, be waived or modified by
express stipulation. (see Arts. 1548, 1566.)
When implied warranty not applicable.
(1) “As is and where is” sale. — The phrase “as is and where is”
(which has been adopted from dispositions of army surplus property)
means nothing more than that the vendor makes no warranty as to the
quality or workable condition of the goods, and that the vendee takes
them in the conditions in which that they are found and from the place
where they are located. It does not extend to liens or encumbrances
unknown to the vendee and could not be disclosed by a physical
examination of the goods sold. (Monfort vs. Willis, [C.A.] No. 6963-R,
Oct. 15, 1951.)
The term “as is” in public auction of (imported) goods refers to the
physical condition of the merchandise and not to the legal situation in
which it was at the time of the sale. It has no bearing at all on the
obligation of the seller (Bureau of Customs) under Article 1495 “to
transfer the ownership and deliver, as well as warrant the thing which is
the object of sale.” This warranty is as to the right to sell and capacity
to deliver. (Auyong Hian vs. Court of Tax Appeals, 109 SCRA 470
[1981].)
Art. 1547
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
289
(2) Sale of second-hand articles. — There is no implied warranty
as to the condition, adaptation, fitness or suitability for the purpose for
which made, or the quality of an article sold as and for a second-hand
article. But such articles might be sold under such circumstances as to
raise an implied warranty. A certification issued by the vendor that a
second-hand machine was in A-1 condition is an express warranty
binding on the vendor. (Moles vs. Intermediate Appellate Court, 169
SCRA 777 [1989].)
(3) Sale by virtue of authority in fact or law. — No warranty of title
is implied in a sale by one not professing to be the owner. Accordingly,
the rule on implied warranty does not apply to a sheriff, auctioneer,
mortgagee, pledgee or other person who sells by virtue of authority in
fact or law. (see Art. 1570.) In other words, they are not liable to a
person with a legal or equitable interest in the thing sold. (Art. 1547,
par. 2.) They do not warrant the title of the person who is supposed to
own the thing sold. (see Art. 1552.) The risk of defective title here is on
the purchaser, the circumstances surrounding such sales being sufficient
to put him on notice as to interests of third persons in the thing sold.
(Babb & Martin, op. cit., p. 94.) The persons enumerated are, however,
liable for actual representations, fraud or negligence in the exercise of
their duties. (1 Williston, op. cit., p. 567.)
(a)
The purchaser of a property sold at public auction
fortax delinquency takes all the chances. There is no warranty on
the part of the state. (Government vs. Adriano, 41 Phil. 112 [1920].)
The purchaser of real estate at a tax sale obtains only such title as
that held by the taxpayer. (Serfino vs. Court of Appeals, 154 SCRA
19 [1987].)
(b)
The rule of caveat emptor (buyer beware) applies to
execution sales. (see Art. 1570.) The sheriff does not guarantee the
title to real property sold by him as sheriff and it is not incumbent
upon him to place the purchaser in possession of such property.
(Pabico vs. Ong Pauco, 43 Phil. 572 [1922]; Juan Lim vs. Laag, 51
Phil. 930 [1928].) It is elementary that a purchaser at a sheriff’s sale
acquires no better title or greater right than the judgment debtor has.
(Villegas vs. Tan, 57 Phil. 656 [1932]; Laxamana vs. Carlos, 57
Phil. 722 [1932]; Ruiz vs.
Fieldman’s Insurance Co., 9 C.A. Rep. 2d, 105 [1966].)
Art. 1548
290
SALES
ILLUSTRATIVE CASE:
Lessor who, by virtue of stipulation in a contract of lease with
lessee, acquired ownership over jalousies sold on credit and delivered
to buyer (lessee) by seller, seeks nullification of sheriff’s sale of said
items levied upon by seller who was the highest bidder.
Facts: P leased to B a building with a stipulation in the lease
contract that all permanent improvements made by B on the leased
premises shall belong to P and as part of the consideration of the
monthly rental. Subsequently, B purchased on credit from S glass and
wooden jalousies which were delivered and installed in the leased
premises by S, replacing the existing windows.
For failure of B to pay for the items purchased, the same was
levied upon and sold at public auction with S as the highest bidder. P
filed an action to nullify the sheriff’s sale.
Issue: Will the action prosper?
Held: Yes. When the items in question were delivered and
installed in the leased premises, B became the owner thereof even if
the purchase price has been made on credit (see Arts. 1477, 1496,
1497.), and by virtue of the lease contract when levy was made, B, the
judgment debtor, was no longer the owner thereof. The power of the
court in execution of judgment extends only to properties
unquestionably belonging to the judgment debtor only, and the
purchaser acquires only the right as the debtor has at the time of the
auction sale. (Sampaguita Pictures, Inc. vs. Jalwindor Manufactures,
Inc., 93 SCRA 419 [1979].)
SUBSECTION 1. — Warranty in Case of Eviction
ART. 1548. Eviction shall take place whenever by
a final judgment based on a right prior to the sale or
an act imputable to the vendor, the vendee is deprived
of the whole or of a part of the thing purchased.
The vendor shall answer for the eviction even
though nothing has been said in the contract on the
subject.
The contracting parties, however, may increase,
diminish, or suppress this legal obligation of the
vendor. (1475a)
Art. 1548
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
291
Meaning of eviction.
Eviction may be defined as the judicial process, whereby the vendee
is deprived of the whole or part of the thing purchased by virtue of a
final judgment based on a right prior to the sale or an act imputable to
the vendor.
Essential elements of warranty
against eviction. The essential
elements are:
(1) The vendee is deprived in whole or in part of the thing
purchased;
(2) He is so deprived by virtue of a final judgment (Art. 1557.);
(3) The judgment is based on a right prior to the sale or an act
imputable to the vendor;
(4) The vendor was summoned in the suit for eviction at the
instance of the vendee (Art. 1558.); and
(5) There is no waiver on the part of the vendee.
EXAMPLES:
(1)
S sells a parcel of land to B. Subsequently, C files an
action for the recovery of possession, claiming that he is the owner of
the land. At the instance of B, S was summoned to defend his title.
The court renders final judgment, declaring that C has a better right.
Accordingly, B is evicted.
In this case, S is liable to B for failure to comply with his warranty
against eviction. Here, the judgment is based on a right of a third
person prior to the sale.
(2)
In the same example, suppose S was really the owner of
the parcel of land. However, B did not have the sale registered.
Immediately, S sold the same land to C who, in good faith, registered
the sale.
Here, the right upon which C based his claim is posterior to the
sale. Nevertheless, B can sue S for damages because of the breach of
warranty against eviction, the act giving rise to C’s right being
imputable to the vendor.
Art. 1549
292
SALES
Trespass contemplated by warranty against
eviction.
Mere trespass in fact does not give rise to the application of the
doctrine of eviction. (see Art. 1590.) In such case, the vendee has a
direct action against the trespasser in the same way as the lessee has
such right. (Art. 1664.)
The disturbance referred to in the case of eviction is a disturbance
in law which requires that a person go to the courts of justice claiming
the thing sold, or part thereof, and invoking reasons. If final judgment
is rendered depriving the vendee of the thing sold or any part thereof,
the doctrine of eviction becomes applicable. (10 Manresa 184.)
Vendor’s liability is waivable.
Warranty is not an essential element of a contract of sale and may,
therefore, be increased, diminished, or suppressed by agreement of the
parties. (Art. 1548, par. 3.)
Any stipulation, however, exempting the vendor from the obligation
to answer for eviction shall be void if he acted in bad faith. (Art. 1553.)
ART. 1549. The vendee need not appeal from the
decision in order that the vendor may become liable
for eviction.
Vendee has no duty to appeal from
judgment.
The vendee’s right against the vendor is not lost because he, the
vendee, did not appeal. With a judgment becoming final whatever be
the cause of finality, the requirement of the law is deemed satisfied.
Furthermore, the vendor, having been notified of the action, could
have very well followed up the case and made use of all possible
remedies. If he did not do that, he should suffer for his omission. In
reality, he does not have the right to demand of the vendee such
diligence that he himself did not have and which he
Art. 1550
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
293
was more obliged to observe, especially if the cause of eviction was
anterior to the sale. (Canizares Tiana vs. Torrejon, 21 Phil. 127
[1912].)
ART. 1550. When adverse possession had been
commenced before the sale but the prescriptive
period is completed after the transfer, the vendor
shall not be liable for eviction. (n)
Effect of prescription.
By prescription, one acquires ownership and other real rights
through the lapse of time in the manner and under the conditions
prescribed by law. In the same way, rights and actions are lost by
prescription. (Art. 1106.)
(1) Completed before sale. — The vendee may lose the thing
purchased to a third person who has acquired title thereto by
prescription. When prescription has commenced to run against the
vendor and was already complete before the sale, the vendee can
enforce the warranty against eviction. In this case, the deprivation is
based on a right prior to the sale and an act imputable to the vendor.
(2) Completed after sale. — Even if prescription has started before
the sale but has reached the limit prescribed by law after the sale, the
vendor is not liable for eviction. The reason is that the vendee could
easily interrupt the running of the prescriptive period by bringing the
necessary action.
If the property sold, however, is land registered under the Torrens
system, Article 1550 will have no application. Under the Torrens
system, ownership of land is not subject to prescription.
EXAMPLES:
(1)
S sold to B a parcel of land which is claimed by C, who
has been in possession of the property in the concept of owner publicly
and continuously for 30 years. Under the law, C is deemed to have
acquired ownership over the land by prescription without need of title
or of good faith. (see Art. 1137.) In this case, S shall be liable to B in
case of eviction.
Arts. 1551-1552
294
SALES
(2)
If, in the same example, C was in adverse possession of
the land for only 25 years at the time of the sale, and the prescriptive
period is completed after the sale, S shall not be liable to B in case of
eviction as B could have brought action against C during the
remaining five-year period to recover the property.
ART. 1551. If the property is sold for nonpayment
of taxes due and not made known to the vendee
before the sale, the vendor is liable for eviction. (n)
Deprivation for nonpayment of taxes.
If the vendee is deprived of the ownership of the property because
it is sold at public for nonpayment of taxes due from the vendor, the
latter is liable for eviction for an act imputable to him. It is required,
however, that at the time of the sale, the non-payment of taxes was not
known to the vendee.
ART. 1552. The judgment debtor is also
responsible for eviction in judicial sales, unless it is
otherwise decreed in the judgment. (n)
Liability of judgment debtor.
While the rule on implied warranty does not apply to a sheriff who
sells by virtue of authority in law (Art. 1549, par. 2.), the judgment
debtor is responsible for eviction (Art. 1552.) and hidden defects (Art.
1570.) even in judicial sales, unless otherwise decreed in the judgment.
Article 1552 is based on the general principle that a person may not
enrich himself at the expense of another. Thus, if the purchaser of real
property sold on execution be evicted therefrom because the judgment
debtor had no right to the property sold, the purchaser is entitled to
recover the price paid with interest from the judgment debtor. If the sale
was effected by the judgment creditor, the latter should not be permitted
to retain the proceeds of the sale, at the expense of the purchaser.
(Bonzon vs.
Standard, Bill Co. & Osorio, 27 Phil. 142 [1942].)
Arts. 1553-1554
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
295
ART. 1553. Any stipulation exempting the vendor
from the obligation to answer for eviction shall be
void, if he acted in bad faith. (1476)
Stipulation waiving warranty.
(1) Effect of vendor’s bad faith. — The vendor’s bad faith under
Article 1553 consists in his knowing beforehand at the time of the sale,
of the presence of the fact giving rise to eviction, and its possible
consequence. (10 Manresa 194; Angelo vs. Pacheco, 56 Phil. 29
[1931].) Thus, if the vendor after selling his property to another, sold it
again to another purchaser, he cannot even by stipulation, be exempt
from warranty against eviction, because he acted in bad faith.
(2) Effect of vendee’s bad faith. — It is a requisite, however, that
the vendee is not himself guilty of bad faith in the execution of the sale.
If he knew the defect of title at the time of sale, or had knowledge of
the facts which should have put him upon inquiry and investigation as
might be necessary to acquaint him with the defects of the title of the
vendor, he cannot claim that the vendor has warranted his legal and
peaceful possession of the property sold on the theory that he proceeded
with the sale with the assumption of the danger of eviction. He is not,
therefore, entitled to the warranty against eviction, nor is he entitled to
recover damages. (J.M. Tuazon & Co., Inc. vs. Court of Appeals, 94
SCRA 413 [1979]; Aspiras vs. Dalon, [C.A.] 53 O.G. 8854.)
ART. 1554. If the vendee has renounced the right
to warranty in case of eviction, and eviction should
take place, the vendor shall only pay the value which
the thing sold had at the time of the eviction. Should
the vendee have made the waiver with knowledge of
the risks of eviction and assumed its consequences,
the vendor shall not be liable. (1477)
Kinds of waiver of eviction.
Article 1554 treats of two kinds of waiver, namely:
(1) Consciente, that is, the waiver is voluntarily made by the
Art. 1555
296
SALES
vendee without the knowledge and assumption of the risks of eviction;
and
(2) Intencionada, that is, the waiver is made by the vendee with
knowledge of the risks of eviction and assumption of its consequences.
Effect of waiver by vendee.
(1) If the waiver was only conscious, the vendor shall pay only the
value which the thing sold had at the time of eviction. This is a case of
solutio indebiti. The sole effect of a waiver unaccompanied by the
knowledge and assumption of the danger of eviction is to deprive the
purchaser of the benefits mentioned in Nos. 2, 3, 4, and 5 of Article
1555. (Ibid.; Lavina vs. Veloso, [C.A.] 40 O.G. 2331.)
(2) In the second kind of waiver, the vendor is exempted from the
obligation to answer for eviction, provided he did not act in bad faith.
(Art. 1553; see Andaya vs. Manansala, 107 Phil. 1151 [1960].)
Presumption as to kind of waiver.
From the terms of Article 1554, every waiver is presumed to be
consciente while the contrary is not proven, but to consider it
intencionada, it is necessary besides the act of waiver that it be
accompanied by some circumstance which reveals the vendee’s
knowledge of the risks of eviction and his intention to submit to its
consequences. (10 Manresa 180-181; Phil. National Bank vs. Silo, 72
Phil. 141 [1941].)
ART. 1555. When the warranty has been agreed
upon or nothing has been stipulated on this point, in
case eviction occurs, the vendee shall have the right
to demand of the vendor:
(1)
The return of the value which the thing sold
had at the time of the eviction, be it greater or less
than the price of the sale;
(2)
The income or fruits, if he has been
ordered to deliver them to the party who won the suit
against him;
Art. 1555
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
297
(3)
The costs of the suit which caused the
eviction and, in a proper case, those of the suit
brought against the vendor for the warranty;
(4)
The expenses of the contract, if the vendee
has paid them;
(5)
The
damages
and
interests
and
ornamental expenses, if the sale was made in bad
faith. (1478)
Rights and liabilities in case eviction occurs.
The provisions of the above article specify in detail the rights and
liabilities of the vendor and the vendee in the event eviction takes place
“when the warranty has been agreed upon or nothing has been stipulated
on this point,” that is, in the absence of waiver of eviction by the vendee.
(Art. 1554.)
(1) Return of value of thing. — If at the time of the eviction the
value of the property is really more or less than its value at the time of
the sale, by reason of improvements or deterioration, it is but just that
the vendor should pay the excess or not suffer the damage. (see Sta.
Romana vs. Imperio, 12 SCRA 625 [1965].) All kinds of improvements
whether useful or necessary or even recreational expense voluntarily
incurred by the vendee (Arts. 546548.) or caused by nature or time (Art.
551, ibid.) insofar as they may affect the value of property, are taken
into account in determining the increase in value. (10 Manresa 199200.) Note that the law does not speak of interest. Undoubtedly, the law
had intended that the interest on the price shall be set off against the
fruits received by the vendee from the thing while in his possession.
(Ibid.)
(2) Income or fruits of thing. — The vendee is liable to the party
who won the suit against him for the income or fruits received only if
so decreed by the court. The obvious inference from this provision is
that to the vendee belongs the use, free of any liability, of the subject
matter of the sale. And this benefit is not by any means gratuitous. It is
offset by the use without interest of the money of the vendee by the
vendor. (Ibid., 207; Lovina vs. Veloso, [C.A.] 40 O.G. 2331.)
(3) Costs of the suit. — The vendee is also entitled to recover
Art. 1555
298
SALES
the expense of litigation (see Rules of Court, Rule 142, Sec. 1.) resulting
in eviction, including the costs of the action brought against the vendor
to enforce his warranty. “Costs of the suit” mentioned in No. (3) does
not include travelling expenses incurred by the vendee in defending
himself in the action. (see Orense vs. Jaucian, 18 Phil. 553 [1911].) He
is not entitled to recover damages unless the sale was made by the
vendor in bad faith. (No. 5.)
(4) Expenses of the contract. — In the absence of any stipulation to
the contrary, the expenses in the execution and registration of the sale
are borne by the vendor. However, if the vendee should have paid for
such expenses, he shall have the right to demand the same from the
vendor.
(5) Damages and interests. — The right of the vendee to demand
“damages and interests and ornamental expenses” is qualified by the
condition that the sale was made in bad faith. If good faith is presumed,
the vendee is not entitled to recover damages unless bad faith on the
part of the vendor is shown in making the sale. (see Pascual vs. Lesaca,
91 Phil. 920 [1952].) The word “interests” does not cover interest on
the purchase price as in lieu thereof the vendee is entitled to the fruits
of the thing, and in cases he has been ordered by a court to deliver the
fruits to the successful party, the vendor must indemnify him. (see No.
2.)
ILLUSTRATIVE CASE:
Buyer purchased land after having been informed of prior right
of another to purchase the same based on prior occupancy.
Facts: In 1952, S executed in favor of B a contract to sell a lot.
At the time of the execution of the contract, the parties knew that a
portion of the lot was occupied by T. It was the understanding of the
parties that T would be ejected by S from the premises. After the
installments were paid, the deed of sale was executed. In 1958, S filed
a complaint for ejectment against T, but the court ruled against S,
owing to a compromise agreement in another case between S and D.
B filed an action against S to enforce the vendor’s warranty
against eviction or recover the value of the land. It appears that the
compromise agreement with D was sanctioned by the court and the
prior right of T to purchase the lot in question was based more on his
prior occupancy of the same since 1949 about
Art. 1555
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
299
which B was informed by S. The execution of the compromise
agreement merely recognized this prior right of T.
Issue: Is B entitled to the vendor’s warranty against eviction and
damages under Article 1555?
Held: No. One who purchases real estate with knowledge of a
defect or lack of title in his vendor cannot claim that 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 the 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. 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. Without being shown to be a vendee
in good faith, B is not entitled to the warranty against eviction, nor is
he entitled to recover damages.
“However, for justice’s sake, and in consonance with the salutary
principle of non-enrichment at another’s expense, S should
compensate B in the total sum of P126,000, representing the aggregate
value of the 1,050 square meters (which S was judicially ordered to
sell to T at the year 1958 at the prevailing rate of P60 per sq.m.) at the
value of P120 per square meter, doubling the price, due to the reduced
purchasing power of the peso with the legal rate of interest from the
date B filed his complaint.” (J.M. Tuazon, Inc. vs. Court of Appeals,
94 SCRA 413 [1979].)
Right of second purchaser to whom warranty
assigned.
Where a warranty against eviction was expressly agreed upon in a
contract of sale and the vendee sold the same land to another expressly
assigning to him the right to warranty, the second purchaser has a right
of action against the first vendor to make good the warranty against
eviction.
The rule that a contract binds only the parties, their assigns and heirs
(see Art. 1311, par. 2.) is not applicable to this case. The basis of the
second purchaser’s action is the first vendee’s transfer to him of the
right to the warranty, a right which the latter had against the seller and
which the former exercises by virtue of the transfer. (De la Riva vs.
Escobar, 51 Phil. 243 [1927].)
Art. 1556
300
SALES
ART. 1556. Should the vendee lose, by reason of
the eviction, a part of 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.
He may exercise this right of action, instead of
enforcing the vendor’s liability for eviction.
The same rule shall be observed when two or
more things have been jointly sold for a lump sum, or
for a separate price for each of them, if it should
clearly appear that the vendee would not have
purchased one without the other. (1479a)
Alternative rights of vendee in case of
partial eviction.
This article contemplates of partial eviction, while Article 1554
treats of total eviction. It states the rule that if there is partial eviction,
the vendee has the option either to enforce the vendor’s liability for
eviction (Art. 1555.) or to demand rescission of the contract. The above
rule is applicable —
(1) When the vendee is deprived of a part of the thing sold if such
part is of such importance to the whole that he would not have bought
the thing without said part (par. 1.); or
(2) When two or more things are jointly sold whether for a lump
sum or for a separate price for each, and the vendee would not have
purchased one without the other. (par. 2.)
EXAMPLE:
S sells to B a parcel of land, represented by S as containing 500
square meters, at the rate of P200.00 per square meter. B needs a lot
of at least 500 square meters on which to build a factory. B is evicted
from a 20-square-meter portion of the land. B would not have bought
the land had he known of its smaller area.
Under the facts, B can either sue for damages for breach of
warranty or demand rescission of the contract. He can also exArts. 1557-1558
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
301
ercise his alternative rights if these were two parcels of land sold and
he should lose one of them by reason of eviction.
Remedy of rescission not available in
case of total eviction.
In case the vendee is totally evicted from the thing sold, he cannot
avail of the remedy of rescission, because this remedy contemplates that
the one demanding it is able to return whatever he has received under
the contract. (Art. 1385.) This is not so when the vendee loses only a
part of the thing sold because there still remains a portion of the thing.
In case of rescission, the vendee can return the thing but it must not
be subject to “other encumbrances than those which it had when he
acquired it.” (see Art. 1556.)
ART. 1557. The warranty cannot be enforced until
a final judgment has been rendered, whereby the
vendee loses the thing acquired or a part thereof.
(1480)
Final judgment of eviction essential.
The above article merely reiterates two of the essential elements for
the enforcement of warranty in case of eviction, namely: (1) deprivation
of the whole or of a part of the thing sold; and (2) existence of a final
judgment. (Art. 1548.)
Eviction may take place by virtue of a final judgment of an
administrative office or board, and it is not indispensable that it be
rendered by a court, provided it was rendered by competent authority
and in conformity with the procedure prescribed by law. (Bonzon vs.
Standard Oil Co. of New York, 27 Phil. 141
[1914].)
ART. 1558. The vendor shall not be obliged to
make good the proper warranty, unless he is
summoned in the suit for eviction at the instance of
the vendee.
(1481a)
Art. 1558
302
SALES
Formal summons to vendor essential.
Another essential requisite before a vendor may be legally liable for
eviction is that, he should be summoned in the suit for eviction at the
instance of the vendee. (see Jovellano vs. Lualhati, 47 Phil. 371 [1975];
City of Manila vs. Lack, 19 Phil. 324 [1911].)
(1) Vendor to be made party in suit for eviction. — The phrase
“unless he is summoned in the suit for eviction” means that the vendor
should be made a party to the suit either by way of asking that the former
be made a co-defendant (Art. 1559.) or by the filing of a third-party
complaint against said vendor.
(a)
Furnishing the vendor by registered mail with a copyof
the opposition the vendee filed in the eviction suit is not the kind of
notice prescribed by Articles 1558 and 1559. (Escaler vs. Court of
Appeals, 138 SCRA 1 [1985].)
(b)
It is evident that the notification must be given in
theaction brought by the third party against the vendee, because it
is there that the vendor must defend the vendee’s peaceful and legal
possession, for which he is responsible, and not in the action to
enforce the warranty itself which already supposes the eviction. (De
la Riva vs. Escobar & Bank of P.I., 51 Phil. 243 [1928].)
(2) Object of the law. — The object is to give the vendor an
opportunity to intervene and defend the title that he has transferred, for,
after all, he alone would know the circumstances or reasons behind the
claim of the plaintiff and be in a position to defend the validity of his
title. (10 Manresa 219-220; De la Riva vs. Escobar & Bank of P.I.,
supra.) In the absence of such opportunity, the vendor is not bound to
his warranty. (Jovellano vs. Lualhati, supra; Angelo vs. Pacheco, 56
Phil. 70 [1931].)
ILLUSTRATIVE CASE:
In the eviction suit which was a mere incident in a land
registration proceedings for the cancellation of title, the vendee
merely furnished the vendor with a copy of the former’s opposition to
the petition for cancellation.
Facts: B, vendee, bought from S, vendor, 24 hectares of land
which S had purchased from R. At the time of the sale, the property
was still covered by OCT in the name of R. Subsequently,
Art. 1559
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
303
the Register of Deeds filed a petition for the cancellation of the OCT
in the name of R on the ground that the land in question had been
previously registered in the name of T.
B filed an opposition to the petition for cancellation furnishing S
and R by registered mail with copies of said opposition. The lower
court declared void the title of R and those derived therefrom like the
titles of S and B. B sued S to enforce the warranty against eviction
contained in the deed of sale executed by S.
Issue: Could B enforce the warranty against S?
Held: No. The requisite — that of the vendor being summoned in
the suit for eviction (case for cancellation) at the instance of the
vendee — is not present. Furnishing the vendor S, by registered mail,
with a copy of the opposition the vendee B filed in the eviction suit is
not the kind of notice prescribed by Articles 1558 and 1559.
R. Aquino, C.J., dissenting: It was not possible for B to comply
strictly with Articles 1558 and 1559. The eviction took place, not in
an ordinary suit wherein the vendor can be made a codefendant, but
as an incident in the cancellation of title in a land registration
proceeding. In such a case, the furnishing of the vendor with a copy
of the opposition was a substantial compliance with Articles 1558 and
1559. It was notice to the vendor. S’s vendor, R, was first notified of
the cancellation proceeding. It was not the fault of B that the eviction
case assumed the shape of a mere incident in the land registration
proceeding and not an ordinary contentious civil action. S could not
be made a co-defendant in that incident for cancellation of title, a
summary proceeding. A contrary view would enable S to enrich
himself unjustly at the expense of B. (Escaler vs. Court of Appeals,
138 SCRA 1 [1985].)
ART. 1559. The defendant vendee shall ask, within
the time fixed in the Rules of Court for answering the
complaint, that the vendor be made a co-defendant.
(1482a)
Vendor to be made co-defendant.
As previously stated, the notification required by Article 1559 refers
to a case where the vendee is the defendant in a suit instituted to deprive
him of the thing purchased.
Art. 1560
304
SALES
The defendant vendee threatened with eviction who wishes to
preserve his right of warranty, should call in the vendor to defend the
action which has been instituted against him. (Jovellano vs. Lualhati, 47
Phil. 371 [1925].) He should ask the court within the time allowed him
to answer (Rules of Court, Rule 11, Sec. 1.), that the vendor be made a
co-defendant to answer the complaint of the plaintiff who seeks to
deprive him (the vendee) of the property purchased.
ART. 1560. If the immovable sold should be
encumbered with any non-apparent burden or
servitude, not mentioned in the agreement, of such a
nature that it must be presumed that the vendee
would not have acquired it had he been aware thereof,
he may ask for the rescission of the contract, unless
he should prefer the appropriate indemnity. Neither
right can be exercised if the non-apparent burden or
servitude is recorded in the Registry of Property,
unless there is an express warranty that the thing is
free from all burdens and encumbrances.
Within one year, to be computed from the
execution of the deed, the vendee may bring the
action for rescission, or sue for damages.
One year having elapsed, he may only bring an
action for damages within an equal period, to be
counted from the date on which he discovered the
burden or servitude. (1483a)
Where immovable sold encumbered with
non-apparent burden.
(1) Right of vendee. — Although the vendee is not deprived of the
thing sold, totally or partially, the vendee may still rescind the contract
or ask for indemnity, if the thing sold should be encumbered with any
non-apparent burden or servitude, not mentioned in the agreement of
such a nature that the vendee would not have acquired it had he been
aware thereof.
The lack of knowledge on the part of the vendor is not a defense.
The contract can still be invalidated on the ground of
Art. 1561
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
305
mistake. (Art. 1331; see Arts. 1556, 1566; see Pineda vs. Santos, 56
Phil. 583 [1982].)
Note: A servitude (or easement) is an encumbrance imposed upon
an immovable for the benefit of another immovable belonging to a
different owner. (Art. 615.) An example of an apparent servitude is a
right of way establishing a permanent passage (Art. 649, par. 2.), which
is continually kept in view by external sign. An example of a nonapparent easement is a party wall (Art. 659.) which has no exterior sign.
(Art. 660.)
(2) When right cannot be exercised. — The alternative rights
granted by Article 1560 cannot be exercised in the following cases: (a)
If the burden or servitude is apparent, that is, “made known and is
continually kept in view by external signs that reveal the use and
enjoyment of the same’’ (Art. 615, par. 4.);
(b)
If the non-apparent burden or servitude is
registered;and
(c)
If the vendee had knowledge of the encumbrance,
whether it is registered or not.
The registration of the non-apparent burden or servitude in the
Registry of Property operates as a constructive notice to the vendee.
Hence, the vendor is relieved from liability unless there is an express
warranty that the immovable is free from any such burden or
encumbrance. If the burden is known to the vendee, there is no warranty.
(par. 1.)
(3) When action must be brought. — The action for rescission or
damages must be brought within one year from the execution of the
deed of sale. If the period has already elapsed, the vendee may only
bring an action for damages within one year from the date of the
discovery of the non-apparent burden or servitude. (pars. 2 and 3.)
SUBSECTION 2. — Warranty Against Hidden Defects
of, or Encumbrances Upon, the Thing Sold
ART. 1561. The vendor shall be responsible for
warranty against the hidden defects which the thing
sold may have, should they render it unfit for the use
for which it is intended, or should they diminish its
306
SALES
Art. 1561
fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have
acquired it or would have given a lower price for it;
but said vendor shall not be answerable for patent
defects or those which may be visible, or for those
which are not visible if the vendee is an expert who,
by reason of his trade or profession, should have
known them. (1484a)
Definition of terms.
(1) Redhibition is the avoidance of a sale on account of some vice
or defect in the thing sold, which renders its use impossible, or so
inconvenient and imperfect that it must be supposed that the buyer
would not have purchased it had he known of the vice. (Civil Code La.,
Art. 2406.)
(2) Redhibitory action is an action instituted to avoid a sale on
account of some vice or defect in the thing sold which renders its use
impossible, or so inconvenient and imperfect that it must be supposed
that the buyer would not have purchased it had he known of the vice.
(Cyc., Law Dictionary, 3rd ed., 945.) The object is the rescission of the
contract. If the object is to procure the return of a part of the purchase
price paid by the vendee, the remedy is known as accion quanti minoris
or estimatoris. (10 Manresa 226-227; see Art. 1567.)
(3) Redhibitory vice or defect is a defect in the article sold against
which defect the seller is bound to warrant. (see Cyc., Law Dictionary,
3rd ed., 1945.) The vice or defect must constitute an imperfection, a
defect in its nature, of certain importance; and a minor defect does not
give rise to redhibition. The mere absence of a certain quality in the
thing sold which the vendee thought it to contain is not necessarily a
redhibitory defect. One thing is that the thing lacks certain qualities and
another thing is that it positively suffers from certain defects. (10
Manresa 227-228.)
Requisites for warranty against hidden
defects.
Art. 1561
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
307
The following requisites must concur for the existence of the
warranty against hidden defects:
(1)
The defect must be important or serious;
(2)
It must be hidden;
(3)
It must exist at the time of the sale;
(4)
The vendee must give notice of the defect to the vendor
within a reasonable time (Art. 1586.);
(5)
The action for rescission or reduction of the price must
be brought within the proper period — 6 months from the delivery of
the thing sold (Art. 1571.) or within 40 days from the date of the
delivery in case of animals (Art. 1577, par. 1.); and
(6)
There must be no waiver of warranty on the part of the
vendee. (Art. 1548, par. 3.)
When defect important.
The defect is important if: (1) it renders the thing sold unfit for the
use for which it is intended; or (2) if it diminishes its fitness for such
use to such an extent that the vendee would not have acquired it had he
been aware thereof or would have given a lower price for it. (see Bryan
vs. Hankins, 44 Phil. 87 [1922]; Gochangco vs. Dean, 47 Phil. 687
[1925].)
The use contemplated must be that stipulated, and in the absence of
stipulation, that which is adopted to the nature of the thing and to the
business of the purchaser. (see 10 Manresa 227280.)
An imperfection or defect of little consequence does not come
within the category of being redhibitory. But where an expert witness
categorically established that a printing machine sold is in A-1
condition, required major repairs before it could be used, plus the fact
that the buyer never made appropriate use of the machine from the time
of purchase until an action was filed, attest to the major defects in said
machine justifying rescission of the contract. (Moles vs. Intermediate
Appellate Court, 169 SCRA 777 [1989].)
When defect hidden.
The defect is hidden (or latent) if it was not known and could not
have been known to the vendee. (see McCullough vs. Aenille
308
SALES
Art. 1561
& Co., 3 Phil. 284 [1904].) It is one which is hidden to the eyes and
cannot be discovered by ordinarily careful inspection or examination.
Hence, there is no warranty if the defect is patent or visible. For the
same reason, the vendor’s liability for warranty cannot be enforced
although the defect is hidden if the vendee is an expert who, by reason
of his trade or profession, should have known it.
The same defect, therefore, may be hidden with respect to one
person, but not hidden with respect to another.
EXAMPLE:
S sold to B a house. After the sale, B discovered that the main
posts of the house and other interior parts had been destroyed by
“anay” and “bukbok” and as a result, many parts of the house were
in danger of collapsing. The defects of the house were hidden and
concealed and were unknown to B until a closer inspection was made
by him.
Under the circumstances, S is liable for the defects even though
he was not aware thereof (Art. 1566.) and B may elect between the
rescission of the contract and a proportionate reduction of the price,
with damages in either case. (Art. 1567.)
ILLUSTRATIVE CASE:
Buyer refused, three years after acceptance, to pay balance of
purchase price of tobacco claiming it was not of good quality.
Facts: S sold to B at a fixed price certain quantity of tobacco
without specification as to quality. After receiving the merchandise, B
fully examined the same by opening many of the bundles and
examining the contents thereof and admitted the quantity and the
price.
Without making any allegation of fraud, B made a partial
payment. After a lapse of three years, B refused to pay the balance,
claiming that the tobacco was not of good quality.
Issue: Is B liable for the balance of the purchase price?
Held: Yes. In the absence of an express warranty, the vendor only
impliedly warrants the legal and peaceful possession of the thing sold
and that there are no hidden defects. (see Art. 1547.) B is, therefore,
liable for the balance of the purchase price. (Chong Yong Tek vs.
Art. 1561
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
309
Santos, 13 Phil. 52 [1909]; see Phil. Manufacturing Co. vs. Go Juco,
48 Phil. 621 [1925].)
Where defect patent or made known.
(1) A warranty, in general terms, does not cover defects which the
buyer must have observed. Thus, if the seller of a horse which is
obviously blind and which both parties know to be blind, says it is
sound, the meaning of “sound” as used in that connection must be sound
except as to its eyes.
(2) The same rule is applicable to a defect which is not obvious but
of which the seller tells the buyer, or which the buyer knows or should
have known. A well-recognized limitation on any doctrine freeing the
seller from liability for statements or promises in regard to obvious
defects is that, if the seller successfully uses art to conceal the defects,
the seller is liable. (see 1 Williston, op. cit., Sec. 207.)
(3) As a general rule, there is no implied warranty against hidden
defects in the sale of second-hand goods. Again, as an exception, the
seller shall be liable if he has been shown to have made
misrepresentation or acted in bad faith. (see Peralta vs. Jornada
Enterprises, Inc., 7 C.A. Rep. 2d, 270 [1965].)
(4) The seller may bind himself against patent or obvious defects
(manifest upon casual inspection) if the intent to do so is clearly evident.
In such a case, the seller cannot allege as a defense that inspection
(which the buyer failed to make) would have disclosed the defect or that
the buyer relied on his own judgment. (Babb & Martin, op. cit., pp. 9293.)
ILLUSTRATIVE CASE:
Buyer refused to pay balance of purchase price of a steel door on
ground of hidden defects.
Facts: Under a contract, S manufactured and installed a steel door
on B’s building. B complained of defects on the door and repairs were
made by S’s employees. Subsequently, S made a new door but B
refused to accept the same. B claimed that the defect of the steel door
in question was hidden within the contemplation of Article 1561, and,
therefore, he was not liable to pay the balance of the purchase price.
Art. 1562
310
SALES
The steel door has transparent glass frames, with no hidden parts
nor intricate mechanism that could not have been seen by B by means
of cursory examination at the time of its delivery.
Issue: Is B’s claim tenable?
Held: No. If the steel door had any defect, it could not be hidden
within the contemplation of implied warranty against hidden defects,
but rather patent and visible for which S is not answerable pursuant to
Article 1561. It appeared that the first complaint of defect was due to
the fact that the door was used before the cement placed to secure its
anchor clips had hardened, thereby completely loosening the steel
frame and subsequently, the breakage of the glass panels was due to
extraordinary force occasionally applied in closing the door or to the
hard blow of the wind. There was no showing that the proximate cause
of the glass breakage was defect in the steel door itself. (Hahn vs.
Hercules Steel Works, 5 C.A. Rep. 2d 118 [1964].)
ART. 1562. In a sale of goods, there is an implied
warranty or condition as to the quality or fitness of
the goods, as follows:
(1)
Where the buyer, expressly or by
implication, makes known to the seller the particular
purpose for which the goods are acquired, and it
appears that the buyer relies on the seller’s skill of
judgment (whether he be the grower or manufacturer
or not), there is an implied warranty that the goods
shall be reasonably fit for such purpose.
(2)
Where the goods are 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. (n)
Implied warranties of quality.
Quality of goods includes their state or condition. (Art. 1636.) The
purpose of holding the seller on his implied warranties is to promote
high standard in business and to discourage sharp deal-
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
311
Art. 1562
ings. They are based on the principle that “honesty is the best policy.”
(see Bekkevold vs. Potts, 216 N.W. 790.)
(1) Implied warranty of fitness. — There is no implied warranty as
to the quality or fitness for any particular purpose of goods under a
contract of sale, except as follows: where: (a) the buyer, expressly or by
implication, manifests to the seller the particular purpose for which the
goods are required, and (b) the buyer relies upon the seller’s skill or
judgment. Then, whether he be the grower or manufacturer or not —
there is an implied warranty that the goods are reasonably fit for such
purpose. (Babb & Martin, op. cit., p. 94.)
(a)
Particular purpose of goods. — It is not some purpose
necessarily distinct from a general purpose. For example, the
general purpose for which all food is bought is to be eaten, and this
would also be the particular purpose in a specific instance. It is, in
fact, the purpose expressly or impliedly communicated to the seller
for which the buyer buys the goods; and it may appear from the
very description of the article as, for example, “coatings” or a “hot
water bottle.” But where an article is capable of being applied to a
variety of purpose, the buyer must particularize the specific purpose
he has in view. (1 Williston, op. cit., p. 661.)
(b)
Test. — It is whether the buyer justifiably relied upon
the seller’s judgment that the goods furnished would fulfill the
desired purpose, or whether relying on his own judgment, the buyer
ordered or bought what is frequently called “a known, described,
and definite article.” (Ibid., p. 607; see Art. 1563; Co Cho Chit vs.
Henson, Oath & Stevenson, Inc., 103 Phil. 956 [1958].) The
occupation of the seller is important evidence of the justifiableness
of the buyer’s reliance. And where the buyer has had no opportunity
for previous inspection, he is entitled to rely, and will naturally be
presumed to have relied, upon the seller’s skill and judgment.
(2) Implied warranty of merchantability. — Where goods are
bought by description, the seller impliedly warrants that the goods are
of merchantable quality.
(a)
Merchantability. — It is not a warranty of quality in the
sense of requiring a particular grade, but it does require iden-
312
SALES
Art. 1562
tity between what is described in the contract and what is tendered,
in the sense that the latter is of such quality to have some value.
Judicial synonyms for “merchantability” include “salable’’ (or
“saleable,”) “standard,” or “average quality” of goods sold under a
particular description. (Babb & Martin, op. cit., p. 95.)
(b)
Causes of unmerchantability. — Goods may be
unmerchantable not because of any defect in their physical
condition but because of some other circumstances, e.g., their
infringement of trademarks of others renders them unsalable. Other
goods than food may be unmerchantable because the use of them is
dangerous or injurious in ways not to be expected from the goods
of the kind. Thus, if an ingredient of a face powder is such as to
cause irritation of the skin, the goods are not merchantable. Cases
of this sort may often involve the question whether the difficulty is
due to peculiar sensitiveness of the buyer and if so, whether there
is ground for a right of action when goods would not be injurious
to most persons.
(c)
Saleability in a particular market. — The requirement
of merchantable quality carries with it no implication that the goods
shall be saleable in a particular market. (1 Williston, op. cit., pp.
641-643.)
(d)
Applicability to goods in that description. — It must be
made clear that the warranty that the goods are of merchantable
quality applies to all goods bought from a seller who deals in goods
in that description, whether they are sold under a patent or trade
name or otherwise. (Ibid., p. 611.)
Warranty of merchantability distinguished
from warranty of fitness.
A warranty of merchantability is a warranty that goods are
reasonably fit for the general purpose for which they are sold. On the
other hand, a warranty of fitness is a warranty that the goods are suitable
for the special purpose of the buyer which will not be satisfied by mere
fitness for general purposes. (Dunfor Bros. Co. vs. Consolidated IronSteel Mfg. Co., C.C.A. Comm. 1928, 23 F. 2nd 461.)
Art. 1563
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
313
Fitness for a particular purpose and
merchantability.
It should be noticed that fitness for a particular purpose may be
merely the equivalent of merchantability. Thus, the particular purpose
for which a reaping machine is generally designed is reaping. If it will
not fulfill this purpose, it is not merchantable.
The particular purpose, however, may be narrower. Thus, a machine
may be desired for operation on rough ground and though it may be a
good reaping machine, it may yet be impossible to make it work
satisfactorily in the place where the buyer wishes to use it. (1 Williston,
op. cit., p. 467.)
Note: The word “of” before “judgment” in Article 1562(1) should
read “or.”
ILLUSTRATIVE CASE:
Machine purchased was in accordance with specifications in
contract but did not give the result expected by buyer.
Facts: Under a contract of sale, S delivered and installed in B’s
establishment a refrigerating machine. The machine was in perfect
accord with the description made in the contract but it did not give the
result expected by B. S brought action to recover the balance of the
purchase price.
Issue: Is B’s action in refusing to pay such balance justifiable
considering that he could not use the machine satisfactorily in his
establishment?
Held: No. The inability of B to use the machine satisfactorily
cannot be attributed to any defect in the machine nor to S’s fault since
the machine was strictly in accordance with the specifications in the
written contract of sale. (Pacific Commercial Co. vs. Ermita Market
& Cold Stores, 56 Phil. 617 [1932].)
ART. 1563. In the case of contract of sale of a
specified article under its patent or other trade name,
there is no warranty as to its fitness for any particular
purpose, unless there is a stipulation to the contrary.
(n)
Sale under a patent or trade name.
314
SALES
Under Article 1562(1), the buyer makes known to the seller the
particular purpose for which the goods are desired. Article
Art. 1564
1563 is naturally a provision limiting the application of Article 1562.
(1) By exactly defining what he wants, the buyer has exercised his
own judgment instead of relying upon that of the seller. This definition
may be given by means of a trade name or in any other way. The
description must be the buyer’s choice, or the goods must not only be
described and definite but known, in order to preclude warranty of
fitness. (Williston, op. cit., p. 612.)
(2) Article 1563 provides an exception in case of “a stipulation to
the contrary.” Thus, there is still an implied warranty of fitness for
particular purpose where the buyer relied upon the seller’s judgment
rather than the patent or trade name. “Particular purpose,” as used in
Article 1563, means a usage different from the ordinary uses the article
was made to meet. (Grant Mfg. Co. vs. Yates American Machine Co.,
111 F. 2d. 360.)
(3) The provision does not preclude an implied warranty of
merchantability or fitness for a purpose for which such specified article
is ordinarily or generally sold. Thus, if the seller is a dealer in food, and
the buyer is buying for immediate consumption and relies on the seller’s
skill or judgment, there is an implied warranty that the article sold is fit
for human consumption. (Babb & Martin, op. cit., p. 93.)
EXAMPLE:
B went to Western Motors, Inc. to buy a car. After he was shown
cars of different models and makes, he chose a Cougar car model
1982. B intended to enter the car in a race but this fact was not made
known to the seller.
If the car should not run as fast as B had expected, Western
Motors, Inc. is not liable because in buying the Cougar car, B relied
upon his own judgment. But if the seller was informed of the purpose
of B and B was assured that the car had a maximum speed of, say, 150
kilometers per hour, there is an express warranty for a particular
purpose and Western Motors is liable if the car should not be fit for
such purpose.
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
315
ART. 1564. An implied warranty or condition as to
the quality or fitness for a particular purpose may be
annexed by the usage of trade. (n)
Art. 1565
Effect of usage of trade.
A warranty as to the quality or fitness for a particular purpose may
be attached by usage to a contract containing no express provision in
regard to warranty, though in the absence of usage no warranty would
be implied. The usage is relied on for the purpose of showing the
intention of the parties. If there is no usage, the parties would naturally
express their intention.
A usage in order to bind both parties must be known to both or, if
unknown to one, the other must be justified in assuming knowledge on
the part of the person with whom he is dealing. (see 1 Williston, op. cit.,
pp. 566-655; see Art. 1522.) The presumption is that the parties are
aware of the usage of trade.
ART. 1565. In the case of a contract of sale by
sample, if the seller is a dealer in goods of that kind,
there is an implied warranty that the goods shall be
free from any defect rendering them unmerchantable
which would not be apparent on reasonable
examination of the sample. (n)
Merchantability of goods sold by
sample.
(1) Where sample not merchantable. — As a general rule, all the
buyer is entitled to, in case of a sale or contract to sell by sample, is
that the goods be like the sample, so he has no right to have the goods
merchantable if the sample which he has inspected is not.
The reason upon which this rule is based is identical with that which
generally denies an implied warranty to a buyer who has inspected the
goods which he buys. (see PMC vs. Go Juco, 48 Phil. 621 [1926];
Chang Yong Tek vs. Santos, 31 Phil. 152 [1915].)
316
SALES
(2) Where sample subject to latent defect. — Where the defect in
the goods is of such a character that inspection will not reveal it, so in
the case of a sale by sample, if the sample is subject to a latent defect,
and the buyer reasonably relies on the seller’s skill or judgment, the
buyer is entitled not simply to goods like the sample, but to goods like
those which the sample seems to represent, that is, merchantable
goods of that kind and character. (1 Williston, op. cit., pp. 678-679.)
Art. 1566
Under Article 1481, the contract may be rescinded where the bulk
of the goods delivered do not correspond with the sample.
ART. 1566. The vendor is responsible to the
vendee for any hidden faults or defects in the thing
sold, even though he was not aware thereof.
This provision shall not apply if the contrary has
been stipulated, and the vendor was not aware of the
hidden faults or defects in the thing sold. (1485)
Responsibility of vendor for hidden defects.
(1) Effect of ignorance of vendor. — The ignorance of the vendor
does not relieve him from liability to the vendee for any hidden faults
or defects in the thing sold. (see Bryan vs. Hankins, 44 Phil. 87 [1922].)
In other words, good faith cannot be availed of as a defense by the
vendor.
(2) Exception. — The parties, however, may provide otherwise in
their contract (see Art. 1581, par. 3.) provided the vendor acted in good
faith, that is, he was unaware of the existence of the hidden fault or
defect. (Arts. 1566, par. 2; 1553.)
(3) Where vendee aware of the defect. — If the vendee is aware of
the defect in the thing he buys or lack of title in the vendor, he cannot
later complain thereof. He is deemed to have wilfully and voluntarily
assumed the risk attendant to the sale. (Martinez vs. Court of Appeals,
56 SCRA 647 [1974].)
Doctrines of “caveat venditor” and
“caveat emptor.”
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
317
At early common law, the implied warranty of quality was not
recognized and the rule was then caveat emptor41 (let the buyer beware).
The seller’s liability for defects of the goods sold was then confined to
cases of express promise to warrant the quality of such goods and to
those in which the seller had knowledge of
Art. 1566
the hidden defects and the sale was made without the seller revealing
them, but in the latter cases, the basis of the seller’s liability was for
fraud. The Roman Law, like the English law, started with the doctrine
of caveat emptor.
(1) The old Civil Code, following the Roman Law, rejected the
maxim caveat emptor. (see Art. 1547.) The doctrine of caveat venditor
(let the seller beware) was adopted in accordance with which “the
vendor is liable to the vendee for any hidden faults or defects in the
thing sold, even though he was not aware thereof.” (Art. 1585, now Art.
1566 of our new Civil Code.) The doctrine is based on the principle that
a sound price warrants a sound article.
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 was defective. The defect must be present upon
delivery or manufacture of the product, or when the product left the
seller’s or manufacturer’s control; 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. Tracing the
defect to the seller or manufacturer requires some evidence that there
was no tampering with, or changing of the product. (Nutrimix Feeds
Corporation vs. Court of Appeals, 441 SCRA 357 [2004].)
(2) The maxim caveat emptor is still applicable, however, in
sheriff’s sales (Pabico vs. Ong Pauco, 43 Phil. 57 [1922]; Allure
Manufacturing, Inc. vs. Court of Appeals, 199 SCRA 285 [1991].), sales
of animals under Article 1574, and tax sales (see Art. 1547, last par.)
for there is no warranty of title or quality on the part of the seller in such
41 A basic premise of this doctrine is that there be no misrepresentation by the seller. This
ancient defense of caveat emptor belongs to a by-gone age, and has no place in contemporary
business ethics. (Erquiaga vs. Court of Appeals, 156 SCAD 810, 367 SCRA 357 [2001].)
318
SALES
sales. It also applies in double sales of property where the issue is who
between two vendees has a better right to the property. (see Art. 1544.)
The rule of caveat emptor requires the purchaser to be aware of the
supposed title of the vendor and one who buys without checking the
vendor’s title takes all the risks and losses consequent to such failure.
(Salvoso vs. Tanega, 87 SCRA 349 [1978].) But a person dealing with
registered land is merely charged with notice of the burdens on the
property which are noted on the face of the register or the certificate of
title. (Campillo vs. Court of Appeals, 129 SCRA 513 [1984].)
Arts. 1567-1568
ART. 1567. In the cases of articles 1561, 1562,
1564, 1565, and 1566, the vendee may elect between
withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in
either case. (1486a)
Alternative remedies of the buyer to
enforce warranty.
Under this article, the vendee has the option either: (1) to withdraw
from the contract, or (2) demand a proportionate reduction of the price,
with a right to damages in either case. This first is known as accion
redhibitoria (action for rescission), while the second is known as accion
quanti minoris. The remedies are alternative as they are incompatible
with each other.
The same right is given to the vendee in the sale of animals with
redhibitory defects. (Art. 1580.)
The vendee must present proof that he suffered damage as a result
of the breach of the vendor’s warranty to be entitled to actual damages.
(De Vera, Jr. vs. Court of Appeals, 157 SCAD 14, 367 SCRA 534
[2001].)
Note: The word “and” before “demanding” in Article 1567 should
read “or.”
ART. 1568. If the thing sold should be lost in
consequence of the hidden faults, and the vendor
was aware of them, he shall bear the loss, and shall
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
319
be obliged to return the price and refund the
expenses of the contract, with damages. If he was not
aware of them, he shall only return the price and
interest thereon, and reimburse the expenses of the
contract which the vendee might have paid. (1487a)
Effect of loss of thing sold on account of
hidden defects.
(1) Vendor aware of hidden defects. — If the vendor was aware of
the hidden defects in consequence of which the thing sold was
Art. 1569
lost, he shall bear the loss because he acted in bad faith. In such case,
the vendee has the right to recover:
(a)
the price paid;
(b)
the expenses of the contract; and(c) damages.
(2) Vendor not aware of hidden defects. — If the vendor was not
aware of them, he shall be obliged only to return:
(a)
the price paid;
(b)
interest thereon; and
(c) expenses of the contract if paid by the vendee. He isnot
made liable for damages because he is not guilty of bad faith.
ART. 1569. If the thing sold had any hidden fault at
the time of the sale, and should thereafter be lost by
a fortuitous event or through the fault of the vendee,
the latter may demand of the vendor the price which
he paid, less the value which the thing had when it
was lost.
If the vendor acted in bad faith, he shall pay
damages to the vendee. (1488a)
Effect of loss of defective thing sold.
320
SALES
If the thing sold had no hidden defects, its loss through a fortuitous
event or through the fault of the vendee is, of course, to be borne by the
vendee. However, the vendor is obliged to return the price paid less the
value of the thing at the time of its loss in case where hidden defects
existed. In other words, under Article 1569, the vendor is still made
liable on his warranty.
The difference between the price paid for the thing and the value at
the time of the loss, represents the damage suffered by the vendee and
is at the same time the amount with which the vendor enriched himself
at the expense of the vendee. (10 Manresa 238.) If the vendor acted in
bad faith, he shall also be liable for damages.
Art. 1570
EXAMPLE:
S sold to B a vessel for P5,000,000.00. The defects of the
construction of the vessel were hidden and concealed and were
unknown to B until an official inspection was made. To make the
vessel seaworthy, an investment of P500,000.00 for repairs was
necessary.
If through the fault of B, the vessel was burned, S is nevertheless
bound to return the purchase price of P5,000,000.00 paid by B less
P4,500,000.00 the value of the vessel at the time of the loss.
ART. 1570. The preceding articles of this
Subsection shall be applicable to judicial sales,
except that the judgment debtor shall not be liable for
damages. (1489a)
Warranty in judicial sales.
(1) As to judgment debtor. — In a judicial sale, it is not really the
sheriff who sells but the judgment debtor. Hence, the provisions
regarding warranty are also applicable to judicial sales. (see Art. 1574.)
The buyer can avail either of the alternative remedies to enforce the
warranty and the provisions of Articles 1568 and 1569. However, since
the judgment debtor is forced to sell, there can be no liability for
damages. The publicity surrounding a judicial sale and the fact that the
seller does not take an active part in the sale and in the determination of
the price precludes the existence of bad faith on his part. (see 10
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
321
Manresa 242.) While in voluntary sales or transactions the vendor or
transferor can be expected to defend his title because of his warranty to
the vendee, no such obligation is owed by the owner whose land is sold
at execution sale. (Santiago Land Development Corp. vs. Court of
Appeals, 78 SCAD 476, 276 SCRA 674 [1997].)
In a case, a land was sold at public auction for unpaid realty taxes.
It was held that the sale by the buyer of the land to a purchaser in good
faith for value was valid even if there was no compliance with all the
requirements of the law concerning tax sale of delinquent property.
(Reyes vs. Intermediate Appellate Court, 135 SCRA 214 [1985].) But
an auction sale conducted to satisfy a
Art. 1570
judgment which is null and void, necessarily is also null and void. (Ver
vs. Quetulio, 163 SCRA 80 [1988].)
(2) As to government. — In judicial sales, the principle of caveat
emptor applies, according to which the purchaser acquires by his
purchase no higher or better title or right than that of the judgment
debtor. If the latter has no right, interest, or lien in and to the property
sold, the purchaser acquires none. (Lanci vs. Yangco, 52 Phil. 563
[1928]; Laxamana vs. Carlos, 57 Phil. 722 [1929]; Parreno vs.
Ganancial, 29 SCRA 786 [1969]; Tay Chun Suy vs. Court of Appeals,
47 SCAD 139, 229 SCRA 151 [1994].) The rule of caveat emptor which
governs sheriff’s sales puts the purchaser upon inquiry as to the debtor’s
title, there being no warranty of title, such sales being involuntary as
distinguished from voluntary transactions, and if he buys, he must do
so at his own peril (Enriquez vs. De Delgado, [C.A.] No. 24466 R, Dec.
8, 1961.), and it is not incumbent on the sheriff to place the purchaser
in possession of the property. (Pabico vs. Ong Pauco, 43 Phil. 572
[1923].)
Right of purchaser in judicial sales.
(1) The purchaser of property on sale under execution and levy
takes as assignee only. (Pacheco vs. Court of Appeals, 153 SCRA 382
[1987].) Indeed, at a sheriff’s sale what is sold is not the property
advertised, but simply the interest of the debtor in the property; if it
afterwards develops that he has none, the purchaser is still liable on his
322
SALES
bid because he has offered so much for the debtor’s interest in open
market and it is for him to determine before he bids what the debtor’s
interest is worth. (Leyson vs. Tañada, 109 SCRA 66 [1981], citing 30
Am. Jur. 2d, pp. 691-692.)
(2) Where a judicial sale is voided or set aside without fault of the
purchaser, the latter is entitled to reimbursement of the purchase money
paid by him subject to set-off for benefits enjoyed while he had
possession of the property. As a general rule, a judicial sale can only be
set aside upon the return to the buyer of the purchase price with simple
interest and other expenses incurred by him. He is ordinarily entitled to
a lien on the property until he is repaid whatever may be due him.
(Seven Brothers Shipping Corp. vs. Court of Appeals, 62 SCAD 546,
246 SCRA 33 [1995].)
Arts. 1571-1572
ART. 1571. Actions arising from the provisions of
the preceding ten articles shall be barred after six
months, from the delivery of the thing sold. (1490)
Prescription of actions in cases of
implied/express warranty.
(1) The action for rescission of the contract or reduction of the
purchase price (Art. 1567.) prescribes six months from the date of
delivery of the thing sold. Outside this period the action is barred. It
follows that a vendee should not be permitted to offer as a defense,
hidden defects in the thing sold six months after he had received it.
(Gaba vs. Almonidovar, [C.A.] No. 24703-R, Feb. 24, 1960.) If the
action is not for breach of warranty but quasi-delict or negligence, the
prescriptive period is four (4) years. (see Art. 1146[2].)
The ten preceding articles referred to define the vendor’s liability
for the defects in the thing sold. (Ibid.) A cursory reading of said articles
reveals that Article 1571 may be applied only in cases of implied
warranty.
(2) With respect to an express warranty, in accordance with the
general rule on rescission of contract, the prescriptive period which is
four (4) years, shall apply (Moles vs. Intermediate Appellate Court, 169
SCRA 777 [1989]; Villostas vs. Court of Appeals, 210 SCRA 490
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
323
[1992].) unless another period is specified in the express warranty.
(Engineering & Machinery Corp. vs. Court of Appeals, 67 SCAD 113,
252 SCRA 156 [1996]; Isidoro vs. Nissan Motor Philippines, Inc., 116
SCAD 702, 319 SCRA
757 [1999].)
ART. 1572. If two or more animals are sold
together, whether for a lump sum or for a separate
price for each of them, the redhibitory defect of one
shall only give rise to its redhibition, and not that of
the others; unless it should appear that the vendee
would not have purchased the sound animal or
animals without the defective one.
Art. 1573
The latter case shall be presumed when a team,
yoke, pair, or set is bought, even if a separate price
has been fixed for each one of the animals composing
the same. (1491)
Sale of two or more animals together.
When two or more animals have been sold at the same time and the
redhibitory defect (Art. 1576.) is in one, or some of them but not in all,
the general rule is that the redhibition will not affect the others without
it. It is immaterial whether the price has been fixed for a lump sum for
all the animals or for a separate price for each.
The exception is when it can be shown by the vendee that he would
not have purchased the sound ones without those which are defective.
(see Art. 1556, par. 1.) Such intention need not be established by the
vendee but shall be presumed when a team, yoke, pair or set is bought
unless the vendor proves the contrary.
Although Article 1572 provides only for redhibitory actions, it does
not bar the right of the vendee to bring an action quanti minoris. (see
Arts. 1580, 1567.)
EXAMPLE:
324
SALES
S sold to B two carabaos for P10,000.00. If one carabao is
defective, S is liable for his warranty on the defective animal only. In
other words, B is not entitled to return the sound carabao unless he
can show that he would not have purchased it without the defective
one.
Such intention is presumed when the carabaos bought are a male
and a female but S may prove the contrary as, for example, B has no
present need or use for two carabaos.
In any event, B can accept the defective carabao and demand a
proportionate reduction of the price.
ART. 1573. The provisions of the preceding article
with respect to the sale of animals shall in like manner
be applicable to the sale of other things. (1492)
Arts. 1574-1575
Sale of two or more things together.
The points considered in the preceding article apply also to sale of
two or more things where only one or more of them but not all have
hidden defects.
ART. 1574. There is no warranty against hidden
defects of animals sold at fairs or at public auctions,
or of livestock sold as condemned. (1493a)
Sale of animals at fairs or at public auctions
or as condemned.
This article is a limitation to the provisions of Article 1570. It is
based on the assumption that the defects must have been clearly known
to the buyer.
Since the law does not make any distinction, the public auctions
referred to may be judicial or extrajudicial. Sale of animals as
condemned precludes all idea of warranty against hidden defects. (Art.
1561.) Such animals are bought not because of their quality or capacity
for work.
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
325
ART. 1575. The sale of animals suffering from
contagious diseases shall be void.
A contract of sale of animals shall also be void if
the use or service for which they are acquired has
been stated in the contract, and they are found to be
unfit therefor. (1494a)
When sale of animals void.
The article declares the class of animals which cannot be the object
of commerce — animals suffering from contagious diseases and those
found unfit for the use or service stated. The sale of such animals is void
as against public interest and not merely subject to rescission or
reduction of the price. (Art. 1567.) It is to be governed by the rules
relating to nullity of contracts. (see Art. 1409.)
Even if the animals are found fit for the use or service stated in the
contract, the vendee may still rescind the contract under
Arts. 1576-1577
Article 1561. This article contemplates a sale that has been perfected
and consummated.
ART. 1576. If the hidden defect of animals, even in
case a professional inspection has been made,
should be of such a nature that expert knowledge is
not sufficient to discover it, the defect shall be
considered as redhibitory.
But if the veterinarian, through ignorance or bad
faith, should fail to discover or disclose it, he shall be
liable for damages. (1495)
What constitutes redhibitory defect of
animals?
Article 1576 is another rule especially applicable to animals.
To be considered redhibitory, the defect must not only be hidden. It
must be of such a nature that expert knowledge is not sufficient to
discover it. However, if the veterinarian failed to discover it through his
326
SALES
ignorance, or failed to disclose it to the vendee through bad faith, he
shall be liable for damages. The responsibility is his and not the
vendor’s.
ART. 1577. The redhibitory action, based on the
faults or defects of animals, must be brought within
forty days from the date of their delivery to the
vendee.
This action can only be exercised with respect to
faults and defects which are determined by law or by
local customs. (1496a)
Limitation of action in sale of animals.
The redhibitory action based on the faults of animals shall be barred
unless brought within forty days from the date of their delivery to the
vendee.
According to the second paragraph, what should be considered
redhibitory defects in the sale of animals are only those determined by
law or by local customs. If the defects are patent, there
Arts. 1578-1579
is no warranty against such defects although there exists a redhibitory
vice.
ART. 1578. If the animal should die within three
days after its purchase, the vendor shall be liable if
the disease which caused the death existed at time of
the contract. (1497a)
Responsibility of vendor where animal dies.
If the animal sold is suffering from any disease at the time of the
sale, the vendor is liable should it die of said disease within three days
from the date of the sale (not date of delivery). This claim of the vendee
must be based on a finding of an expert that the disease causing the
death existed at the time of the contract.
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
327
If the death occurs after three days or the defect is patent or visible,
he is not liable. If the loss is caused by a fortuitous event or by the fault
of the vendee, and the animal has vices, Article 1569 should be applied.
ART. 1579. If the sale be rescinded, the animal
shall be returned in the condition in which it was sold
and delivered, the vendee being answerable for any
injury due to his negligence, and not arising from
redhibitory fault or defect. (1498)
Liability of buyer in case sale of animal is
rescinded.
If the vendee avails himself of the remedies granted by Article 1567
(see Art. 1580.), the vendee must return the animal in the condition in
which it was sold and delivered. In case of injury due to his negligence,
the vendee shall be responsible but this would be no obstacle to the
rescission of the contract due to the redhibitory defect or fault of the
animal. (see Art. 1569.)
Under Article 1556, the buyer may not ask for rescission where he
has created new encumbrances upon the thing sold.
Arts. 1580-1581
ART. 1580. In the sale of animals with redhibitory
defects, the vendee shall also enjoy the right
mentioned in article 1567; but he must make use
thereof within the same period which he has been
fixed for the exercise of the redhibitory action. (1499)
Alternative remedies of vendee in
sale of animals.
The vendee has the same right to bring at his option, either a
redhibitory action or an action quanti minoris. The action must be
brought within forty days from the date of the delivery of the animals
to the vendee. (Art. 1577.)
328
SALES
ART. 1581. The form of sale of large cattle shall be
governed by special laws. (n)
Form of sale of large cattle.
The special law governing the sale of large cattle is Act No. 4117,
now found in Sections 511 to 536 of the Revised Administrative Code,
as amended, providing for the registration, branding, conveyance, and
slaughter of large cattle.
The sale must appear in a public document. (see Art. 1358.)
— oOo —
Chapter 5 OBLIGATIONS OF THE
VENDEE
ART. 1582. The vendee is bound to accept delivery
and to pay the price of the thing sold at the time and
place stipulated in the contract.
If the time and place should not have been
stipulated, the payment must be made at the time and
place of the delivery of the thing sold. (1500a)
Principal obligations of vendee.
The principal obligations of the vendee are:
(1) to accept delivery; of the thing sold; and
(2) to pay the price 42 of the thing sold at the time and place
stipulated in the contract; and
42 The vendor and the vendee are legally free to stipulate for the payment of either the cash
price of the thing sold or its installment price. Should the vendee opt to purchase via the installment
payment system which has been the custom and widely used in our present-day commercial life
with respect to purchase and sale of subdivision lots, he is, in effect, paying interest on the cash
price whether the fact and rate of such interest payment is disclosed in the contract or not. (Relucio
vs. Brillante-Garfin, 187 SCRA 405 [1990].)
OBLIGATIONS OF THE VENDOR
Conditions and Warranties
329
(3) to bear the expenses for the execution and registration of the
sale and putting the goods in a deliverable state, if such is the
stipulation. (Arts. 1488, 1521, last par.)
A grace period granted the vendee in case of failure to pay the
amount/s due is a right, not an obligation. When uncondi-
340
330
Art. 1582
SALES
tionally conferred, it is effective without further need of demand either
calling for the payment of the obligation or for honoring the right. The
grace period must not be likened to an obligation, the non-payment of
which, under Article 1169 of the Civil Code, would generally still
require judicial or extrajudicial demand before “default” can be said to
arise. (Bricktown Dev’t. Corp. vs. Amor Tierra Dev’t. Corp., 57 SCAD
437, 239 SCRA 126 [1994].)
The general rule is that an agreement to extend the time of payment
in order to be valid, must be for a definite time. Although no precise
date is fixed, it is sufficient that the time can readily be determined. The
fact that the seller did not act on the request for what amounts to an
indefinite extension may be construed just as logically as a denial
thereof. (City of Cebu vs. Heirs of C. Rubi, 106 SCAD 61, 306 SCRA
408 [1999].)
Pertinent rules.
In connection with the above obligations, the following rules must
be borne in mind:
(1) In a contract of sale, the vendor is not required to deliver the
thing sold until the price is paid nor the vendee to pay the price before
the thing is delivered in the absence of an agreement to the contrary (La
Font vs. Pascacio, 5 Phil. 591 [1906]; see Art. 1524.);
(2) If stipulated, then the vendee is bound to accept delivery and to
pay the price at the time and place designated;
(3) If there is no stipulation as to the time and place of payment and
delivery, the vendee is bound to pay at the time and place of delivery;
(4) In the absence also of stipulation, as to the place of delivery, it
shall be made wherever the thing might be at the moment the contract
was perfected (Art. 1251.); and
(5) If only the time for delivery of the thing sold has been fixed in
the contract, the vendee is required to pay even before the thing is
delivered to him; if only the time for payment of the price has been
fixed, the vendee is entitled to delivery even before the price is paid by
him. (see Art. 1524.)
Art. 1582
OBLIGATIONS OF THE VENDEE
331
EXAMPLES:
(1)
S sold to B a specific refrigerator for P7,000.00. S is not
bound to deliver the refrigerator until payment by B; neither is B
required to pay P7,000.00 until delivery by S. From the moment either
party performs his obligation, the other must comply with his part;
otherwise, he will be guilty of delay. (Art. 1169, par. 3.)
(2)
If it has been stipulated that B must accept the
refrigerator and pay the price at the house of S on October 10, then B
is bound to accept delivery and to pay the price on October 10 at the
house of S.
(3)
If there is no stipulation, as to the time and place of
delivery and S delivers the refrigerator at the house of B on October
10, then B is bound to accept the refrigerator and to pay the price at
the same time and place.
(4)
If there is also no stipulation, S is not required to deliver
the refrigerator at the house of B because in such case the place of
delivery shall be where the refrigerator was at the moment the contract
was perfected. So if it was at the house of S at that time, then that is
the place of delivery and also the place of payment. (Art. 1582, par.
2.)
(5)
If the obligation of S to deliver is subject to a period
which has not yet arrived, B is bound to pay even before the
refrigerator is delivered to him. On the other hand, if the sale is on
credit, B is entitled to its delivery though the price be not first paid.
Liability of vendee for obligations of
company bought out.
(1) Obligation not of considerable amount or value. — In some
cases, when one company buys out another and continues the business
of the latter company, the buyer may be said to assume the obligations
of the company bought out when said obligations are not of
considerable amount or value, especially when incurred in the ordinary
course of trade and when the business of the latter company is
continued.
(2) Obligation of considerable amount or value. — When said
obligations are of extraordinary value and the company was brought out
not to continue its business but to stop its operation
Art. 1582
332
SALES
in order to eliminate competition, it cannot be said that the vendee
assumed all the obligations of the rival company. (Phil. Air Lines, Inc.
vs. Balinquit, 99 Phil. 486 [1956].)
ILLUSTRATIVE CASE:
See No. (2) above.
Facts: PAL purchased and acquired a majority of the shares of
FEATI. These two airlines were, previous to the said purchase, then
competing in various air routes throughout the Philippines with the
result that both companies were losing and it became necessary to
maintain only one airline. The purchase gave rise to the problem of
what to do with the FEATI employees. After some negotiations, the
parties finally reached an agreement on May 21, 1947, whereby PAL
agreed to absorb some 70% of the FEATI employees under the same
terms and conditions as they worked for the FEATI until such time as
they come to a definite understanding.
Under the collective agreement on August 1, 1946 between
FEATI and its employees, through their union, the latter were granted
vacation and sick leaves with pay every year. On July 9, 1947, PAL
reached a “definite understanding” with the union whereby they
entered into an agreement cancelling the agreements of May 21, 1947
and August 1, 1946. It also provided for the laying off of all the FEATI
employees as of June 15, 1947 and the payment of 1-1/2 months
separation pay which amounted roughly to P150,000.00.
The FEATI employees union filed a petition with the (defunct)
Court of Industrial Relations praying that PAL be ordered to pay
vacation and sick leave with pay from August 1, 1946, which had
already accrued at the time they were laid-off on June 15, 1947. The
employees claim that when PAL bought out FEATI, the former
assumed all the obligations and rights of the latter.
Issue: Is PAL legally liable for the payment of the money
equivalent of the vacation and sick leave earned from FEATI?
Held: No. As the obligation of FEATI is of considerable value,
which in this case amounts to P100,000.00, and FEATI was bought
out by PAL not to continue its business but to stop its operation in
order to eliminate competition, as shown by the fact that all the
employees of FEATI were laid-off, it cannot be said that PAL
assumed the obligations of FEATI, its rival
Art. 1583
OBLIGATIONS OF THE VENDEE
333
airline. The final agreement of July 9, 1947 failed to make any
mention whatsoever about the money equivalent of the vacation and
sick leave. This leave was earned by the employees from FEATI for
services rendered from August 1, 1946 up to May 21, 1947 when they
ceased to render said service to FEATI. For those employees who
were absorbed by PAL from May 21, 1947 to June 15, 1947, when
they were laid-off, they may be said to have earned the corresponding
leave from PAL.
Had the employees insisted on the payment of the leave already
earned from FEATI in the execution of the agreement of July 9, 1947,
FEATI could perhaps have been made to pay unless, of course, PAL
agreed to assume the obligation. When they failed to raise the question
or have it embodied in the agreement, said failure may be regarded as
a waiver of their right. (Ibid.)
ART. 1583. Unless otherwise agreed, the buyer of
goods is not bound to accept delivery thereof by
installments.
Where there is a contract of sale of goods to be
delivered by stated installments, which are to be
separately paid for, and the seller makes defective
deliveries in respect of one or more installments, or
the buyer neglects or refuses without just cause to
take delivery of or pay for one 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 a right to treat the whole
contract as broken. (n)
Rules governing delivery in installments.
(1) General rule. — In an ordinary contract for the sale of goods,
the buyer is not bound to receive delivery of the goods in installments.
He is entitled to delivery of all the goods at the same time and, it may
be added, is bound to receive delivery of all at
Art. 1583
334
SALES
the same time. Similarly, a buyer has no right to pay the price in
installments. Neither can he be required to make partial payments. By
agreement, however, the goods may be deliverable by installments or
the price payable in installments. (see Art. 1248.)
(2) Where separate price has been fixed for each installment. —
Where the contract provides for the delivery of goods by installments
and a separate price has been agreed upon for each installment, it
depends in each case on the terms of the contract and the circumstances
of the case whether the breach thereof is severable or not.
(a)
Where breach affects whole contract. — If the seller
makes defective, partial or incomplete deliveries or the buyer
wrongfully neglects or refuses to accept delivery or fails to pay any
installment, the injured party may sue for damages for breach of the
entire contract if the breach is so material (e.g., breach of one
installment prevents the further performance of the contract) as to
affect the contract as a whole.
(b)
Where breach severable. — Where the breach is
severable, it will merely give rise to a claim for compensation for
the particular breach but not a right to treat the whole contract as
broken.
ILLUSTRATIVE CASE:
Seller, after making partial deliveries, flatly refused to make any
more delivery.
Facts: S agreed to deliver to B monthly for a period of ten years
a specified amount of water gas tar and coal gas tar. S failed to make
delivery up to a certain date and “flatly refused to make any delivery
under the contract.”
Issue: May B sue for breach of the entire contract?
Held: Yes. As a general rule, a contract to do several things at
several times is divisible in nature, so as to entitle the injured party to
damages from time to time for breaches as they occur. But an
unqualified and positive refusal to perform a contract, though the
performance thereof is not yet due, may be treated as a complete
breach entitling and requiring the injured party to recover all his
damages in one suit. (Blossom & Co. vs. Manila
Gas Corporation, 55 Phil. 226 [1930].)
Art. 1584
OBLIGATIONS OF THE VENDEE
335
ART. 1584. Where goods are delivered to the buyer
which he has not previously examined, he is not
deemed to have accepted them unless and until he
has had a reasonable opportunity of examining them
for the purpose of ascertaining whether they are in
conformity with the contract, if there is no stipulation
to the contrary.
Unless otherwise agreed, when the seller tenders
delivery of goods to the buyer, he is bound, on
request, to afford the buyer a reasonable opportunity
of examining the goods for the purpose of
ascertaining whether they are in conformity with the
contract.
Where goods are delivered to a carrier by the
seller, in accordance with an order from or agreement
with the buyer, upon the terms that the goods shall
not be delivered by the carrier to the buyer until he
has paid the price, whether such terms are indicated
by marking the goods with the words “collect on
delivery,” or otherwise, the buyer is not entitled to
examine the goods before the payment of the price,
in the absence of agreement or usage of trade
permitting such examination. (n)
Buyer’s right to examine the goods.
Acceptance, as used in Article 1584, is assent to become owner of
the specific goods when delivery of them is offered to the buyer. (3
Williston, op. cit., p. 31.)
(1) Actual delivery contemplated. — The delivery referred to in
said article, as can be gathered from its context, is actual delivery. In
other words, the ownership of the goods shall be transferred only upon
actual delivery subject to a reasonable opportunity of examining them
to determine if they are in conformity with the contract. (par. 1; see
Arts. 1481, 1501, par. 2.)
The right of examination or inspection under paragraph 1 is thus a
condition precedent to the transfer of ownership unless there is a
stipulation to the contrary.
336
SALES
(2) Goods delivered C.O.D./not C.O.D. — Where, in pursuance of
a contract of sale, the seller is authorized or required to send
Art. 1585
the goods to the buyer, delivery of the goods to a carrier for the purpose
of transmission to the buyer is deemed to be delivery to the buyer. (see
Art. 1523, par. 1.)
(a)
Although title passes to the buyer by the mere delivery
to the carrier, the buyer unless the goods are sent C.O.D. which is
the normal procedure in importations, has the right to examine the
goods before paying. In this case, the right to examine the goods is
a condition precedent to paying the price after ownership has
passed.
(b)
It should be noted that even in a C.O.D. sale, the
buyeris allowed to examine the goods before payment of the price
should it have been so agreed upon or if it is permitted by usage.
(par. 3.)
(3) Right of examination not absolute. — The buyer does not have
an absolute right of examination since the seller is bound to afford the
buyer a reasonable opportunity of examining the goods only “on
request.” (par. 2.) If the seller refused to allow opportunity for the
inspection, the buyer may rescind the contract and recover the price or
any part of it that he has paid.
(4) Right to be exercised within reasonable time. — While Article
1584 accords the buyer the right to a reasonable opportunity to examine
the goods to ascertain whether they are in conformity with the contract,
such opportunity to examine should be availed of within a reasonable
time in order that the seller may not suffer undue delay or prejudice.
(Grageda vs. Intermediate Appellate Court, 155 SCRA 95 [1987].)
(5) Waiver of right to examine before payment. — The right of
inspection may, of course, be given up by the buyer by stipulation.
(Ibid.) The waiver, however, need not be in express terms. An
illustration of a bargain inconsistent with examination of the goods
before payment is a contract by which goods are to be sent to the buyer
C.O.D. (par. 3.) But the buyer is still entitled to examine the goods after
their delivery and payment of the price. (par. 1.) Here, the right of
OBLIGATIONS OF THE VENDEE
337
examination is a condition subsequent after transfer of ownership and
payment of the price.
ART. 1585. The buyer is deemed to have accepted
the goods when he intimates to the seller that he has
Art. 1585
accepted them, or when the goods have been
delivered to him, and he does any act in relation to
them which is inconsistent with the ownership of the
seller, or when, after the lapse of a reasonable time,
he retains the goods without intimating to the seller
that he has rejected them. (n)
Modes of manifesting acceptance.
Article 1585 expresses a definition of acceptance. It may be
manifested either expressly or impliedly.
(1)
Express acceptance takes place when the buyer, after
delivery of the goods, intimates to the seller, verbally or in writing,
that he has accepted them.
(2)
Implied acceptance takes place:
(a)
when the buyer, after delivery of goods, does any
actinconsistent with the seller’s ownership, as when he sells or
attempts to sell the goods, or he uses (see Smith Bell & Co. [Phils.],
Inc. vs. Gimenez, 8 SCRA 407 [1963]; Pan Pacific Company
[Phils.] vs. Advertising Corporation, 23 SCRA 977 [1968].) or
makes alteration in them in a manner proper only for an owner; or
(b)
when the buyer, after the lapse of a reasonable
time,retains the goods without intimating his rejection. Thus, the
failure of the buyer to interpose any objection to the invoices issued
to it, to evidence delivery of the materials ordered as per agreement
with the seller and which contained the conditions in question,
should be deemed as an implied acceptance by the buyer of the said
conditions. (Naga Development vs. Court of Appeals, 41 SCRA
106 [1971]; Sy vs. Mina, 164 SCRA 312 [1988].)
338
SALES
The retention of the goods is a strong evidence that the buyer
has accepted ownership of the goods. While retention may be
considered an act inconsistent with the ownership of the seller, it is
stated as a separate mode of manifesting acceptance as it is merely
a negative indication which may be due merely to carelessness.
Art. 1586
Delivery and acceptance, separate acts.
Delivery and acceptance are two distinct and separate acts of
different parties.
(1) Acceptance, not a condition to complete delivery. — Delivery
is an act of the vendor. Thus, one of the obligations of the vendor is the
delivery of the thing sold. (Art. 1495.) The vendee has nothing to do
with the act of delivery by the vendor.
On the other hand, acceptance is an obligation on the part of the
vendee. (Art. 1582.) Consequently, acceptance cannot be regarded as a
condition to complete delivery. (La Fuerza, Inc. vs. Court of Appeals,
23 SCRA 1217 [1968].) In other words, the seller must comply with his
obligation to deliver although there is no acceptance yet by the buyer.
(2) Acceptance and actual receipt do not imply the other. —
Acceptance of the buyer may precede actual delivery. There may be an
actual receipt without any acceptance and there may be acceptance
without any receipt. (1 Williston, 4th ed., op. cit., pp. 129-130.)
ART. 1586. In the absence of express or implied
agreement of the parties, acceptance of the goods by
the buyer shall not discharge the seller from liability
in damages or other legal remedy for breach of any
promise or warranty in the contract of sale. But, if,
after acceptance of the goods, the buyer fails to give
notice to the seller of the breach in any promise of
warranty within a reasonable time after the buyer
knows, or ought to know of such breach, the seller
shall not be liable therefor. (n)
Acceptance, not a bar to action for
damages.
OBLIGATIONS OF THE VENDEE
339
Acceptance, as used in this article, has the meaning explained
previously — assent to receive delivery as transferring possession and
ownership in the goods; but it does not carry with it the additional
agreement that the property in the goods shall be taken in full
satisfaction of all obligations. (3 Williston, op. cit., p. 37.)
Therefore, unless otherwise agreed, acceptance of the goods by the
buyer (Art. 1585.) does not discharge the seller from liabilArt. 1587
ity in damages or other legal remedy (like rescission) for breach of any
promise (Art. 1546.) or warranty (Art. 1547; see Ker & Co. vs. De la
Rama, 11 Phil. 453 [1908].) in the contract of sale. (see Art. 1599[1, 2].)
Notice to seller of breach of promise or
warranty.
(1) Necessity. — Article 1586 requires the buyer, in order to hold
the seller liable for breach of promise or warranty, to give notice to the
seller of any such breach within a reasonable time. (2nd sentence.) Time
is counted not simply from the moment the buyer knows of the defect,
but from the time when he ought to have known it. Prompt exercise of
opportunity for discovering defects is, therefore, essential.
(2) Purpose. — The purpose is to protect the seller against belated
claims which prevent him from making prompt investigation to
determine the cause and extent of his liability and also to enable him to
take any other immediate steps that his interest may require.
Note: The word “of’’ before “warranty” in Article 1586 should read
“or.”
ART. 1587. Unless otherwise agreed, where goods
are delivered to the buyer, and he refuses to accept
them, having the right so to do, he is not bound to
return them to the seller, but it is sufficient if he
notifies the seller that he refuses to accept them. If he
voluntarily constitutes himself a depositary thereof,
he shall be liable as such. (n)
Where buyer’s refusal to accept justified.
340
SALES
(1) Duty of buyer to take care of goods without obligation to return.
— If the goods have been sent to the buyer and he rightfully refuses to
accept them, as in the case where the goods are of not the kind and
quality agreed upon, he is in the position of a bailee who has had goods
thrust upon him without his assent. Doubtless, he has the obligation to
take reasonable care of the goods,
Art. 1588
but nothing more can be demanded of him. Accordingly, he is under no
obligation to return the goods to the seller.
(2) Duty of seller to take delivery of goods. — After notice that the
goods have not been and will not be accepted, the seller must have the
burden of taking delivery of said goods.
(3) Seller’s risk of loss of goods. — While the goods remain in the
buyer’s possession under these circumstances, they are, of course, at the
seller’s risk. But the buyer is not deemed and is not liable as a
depositary, unless he voluntarily constitutes himself as such.
(4) Right of buyer to resell goods. — Should the seller, when
notified to take delivery of the goods fails to do so, the buyer may resell
the goods. The provisions governing resale by the seller when the buyer
is in default, it seems, will generally apply. (see
Art. 1533.)
ART. 1588. If there is no stipulation as specified in
the first paragraph of article 1523, when the buyer’s
refusal to accept the goods is without just cause, the
title thereto passes to him from the moment they are
placed at his disposal. (n)
Where buyer’s refusal to accept wrongful.
Under this article, the buyer’s refusal to accept the goods is without
just cause while under Article 1587, the refusal is with a right to do so.
As a general rule, the delivery of the goods to a carrier is deemed to
be a delivery of the goods to the buyer. (Art. 1523, par. 1.) This is true
even if the buyer refuses to accept the goods in case his refusal is
without just cause. The title passes to the buyer and, therefore, the risk
of loss is borne by him (Art. 1504.) from the moment they are placed at
OBLIGATIONS OF THE VENDEE
341
his disposal. (Art. 1588.) In those cases where the right of the buyer to
inspect goods at the time of delivery is a condition precedent to transfer
of ownership (Art. 1584, par. 1.), the ownership passes by operation of
law after such inspection.
Art. 1589
ART. 1589. The vendee shall owe interest for the
period between the delivery of the thing and the
payment of the price, in the following three cases:
(1)
Should it have been so stipulated;
(2)
Should the thing sold and delivered
produce fruits or income;
(3)
Should he be in default, from the time of
judicial or extrajudicial demand for the payment of the
price. (1501a)
Liability of vendee for interest where payment
is made after delivery.
This article presupposes that the delivery of the thing sold and the
payment of the price were not made simultaneously but the thing sold
was delivered, first followed by the payment of the price after the lapse
of a certain period of time. The vendee is liable to pay interest from the
delivery of the thing until the payment of the price.
(1) Interest expressly stipulated. — In such case, the rate stipulated
governs. The stipulation of the parties to pay interest may be oral.
Article 1956 of the Civil Code which provides that “no interest shall be
due unless it has been expressly stipulated in writing” should be
construed as applicable only to contracts of loan.
If the parties failed to fix the rate, then the legal rate of interest shall
be due.
(2) Fruits or income received by vendee from thing sold. — Under
No. 2, two conditions must exist: (a) that the thing sold has been
delivered, and (b) that it produces fruits or income. If the vendee would
not be bound to pay interest for the use of the money, which he should
have paid, the principle of bilaterality which characterizes a contract of
sale would no longer exist.
342
SALES
Since the law makes no distinction, the vendee is still bound to pay
interest even if a term has been fixed for the payment of the price. (see
10 Manresa 278.)
Art. 1590
(3) Vendee guilty of default. — If the vendee incurs delay in the
payment of the agreed price (see Art. 1169.), the interest is due from the
time of judicial or extrajudicial demand by the vendor for the payment
of the price. This demand by the vendor is the starting point for the
commencement of default or delay on the part of the vendee. (10
Manresa 278.) Under Nos. 1 and 2 of Article 1589, no demand is
necessary. (see Art. 1169[1].)
ART. 1590. Should the vendee be disturbed in the
possession or ownership of the thing acquired, or
should he have reasonable grounds to fear such
disturbance, by a vindicatory action or a foreclosure
of mortgage, he may suspend the payment of the
price until the vendor has caused the disturbance or
danger to cease, unless the latter gives security for
the return of the price in a proper case, or it has been
stipulated
that,
notwithstanding
any
such
contingency, the vendee shall be bound to make the
payment. A mere act of trespass shall not authorize
the suspension of the payment of the price. (1502a)
Right of vendee to suspend payment
of price.
(1) When vendee has right. — The vendee, under this article, may
suspend the payment of the price in two cases only:
(a)
if he is disturbed in the possession or ownership of
thething bought; or
(b)
if he has a well-grounded fear that his possession
orownership would be disturbed by a vindicatory action or
foreclosure of mortgage.
Under the circumstances provided for by Article 1590, the vendee
is only entitled to retain the price that has not been paid to the vendor.
OBLIGATIONS OF THE VENDEE
343
He is not entitled to recover what has already been paid. Under the
second case, it is not necessary that an action be brought against the
vendee.
It has been held that a buyer of a condominium unit is justified in
suspending payment of his monthly amortizations where
Art. 1590
the seller fails to give him a copy of the contract to sell despite repeated
demands therefor. A buyer is entitled to a copy of the contract to sell;
otherwise, he would not be informed of his rights and obligations under
the contract. (Gold Loop Properties, Inc. vs. Court of Appeals, 142
SCAD 238, 350 SCRA 371 [2001].)
(2) When vendee has no right. — In the following cases, the vendee
cannot suspend the payment of the price even if there is disturbance in
his possession or ownership of the thing sold:
(a)
if the vendor gives security for the return of the pricein
a proper case;
(b)
if it has been stipulated that notwithstanding any such
contingency, the vendee must make payment (see Art. 1548, par.
3.);
(c)
if the vendor has caused the disturbance or danger
tocease (see Bareng vs. Court of Appeals, 107 Phil. 641 [1960].);
(d) if the disturbance is a mere act of trespass; and (e) if the vendee
has fully paid the price.
If the thing sold is in the possession of the vendee and the price is
already in the hands of the vendor, the sale is a consummated contract
and Article 1590 is no longer applicable. Article 1590 presupposes that
the price or any part thereof has not yet been paid and the contract has
not yet been consummated. (10 Manresa 286-287.)
Right of vendee to demand rescission.
Under the provisions of Article 1590, the vendee has no cause of
action for rescission before final judgment the reason being that
otherwise, the vendor might become the victim of machinations
between the vendee and the third person. (Bachrach Motor Co., Inc. vs.
344
SALES
Santos, 6 C.A. Rep. 706.) It must be noted that the disturbance must be
in the possession or ownership of the thing acquired.
The remedy of the buyer is rescission, not suspension of payment
where the disturbance is caused by the existence of a nonapparent
servitude. (see Art. 1560.)
Arts. 1591-1592
ART. 1591. Should the vendor have reasonable
grounds to fear the loss of immovable property sold
and its price, he may immediately sue for the
rescission of the sale.
Should such ground not exist, the provisions of
article 1191 shall be observed. (1503)
Right of vendor to rescind sale of
immovable property.
This article refers only to a sale of immovable or real property
where the vendor has good reasons to fear the loss of the property and
its price. It contemplates a situation where there has been a delivery of
the immovable property but the vendee has not yet paid the price.
“Suppose the vendee has not yet paid the price, but he destroys
the building sold, pulls out the plants on the land, cuts down the
forest, or places himself on the brink of insolvency. In other words,
the subject matter of the sale is going to perish. To think of
demanding payment from the vendee is something useless, because
the vendee has shown signs of irresponsibility. The only remedy
that can guarantee the vendor against such damage is the rescission
of the contract.” (10 Manresa 282-284.)
Article 1591 is applicable to both cash sales and to sales in
installments as it does not distinguish between one and the other. (Ibid.,
284-285.)
Pursuant to Article 1191 of the Civil Code, the vendor may sue for
either fulfillment or rescission with damages in either case upon the
vendee’s failure to comply with his obligation to pay the agreed price.
Rescission, however, is allowed only where the breach is substantial
and fundamental to the fulfillment of the obligation.
OBLIGATIONS OF THE VENDEE
ART. 1592. In the sale of immovable property, even
though it may have been stipulated that upon failure
to pay the price at the time agreed upon the
rescission of the contract shall of right take place, the
345
346
SALES
Art. 1592
vendee may pay, even after the expiration of the
period, as long as no demand for rescission of the
contract has been made upon him either judicially or
by a notarial act. After the demand, the court may not
grant him a new term. (1504a)
Rule where automatic rescission of sale of
immovable property stipulated.
As a general rule, the vendor may sue for rescission of the contract
should the vendee fail to pay the agreed price. (Art. 1191.) The sale of
real property, however, is subject to the stipulations agreed upon by the
parties and to the provisions of Article 1592 which speaks of nonpayment of the purchase price as a resolutory condition. Article 119143
is subordinated to the provisions of Article 1592 when applied to sales
of immovable property.
Before a demand for rescission of the contract (for non-payment of
the price) has been made by the vendor, either judicially44or by a notarial
act, the vendee may still pay the price even after the expiration of the
stipulated period for payment and notwithstanding a stipulation that
failure to pay the price on the stipulated date ipso facto resolves the sale.
(Adiarte vs. Court of Appeals, 92 Phil. 758 [1953]; Villareal vs. Tan
King, 43 Phil. 251 [1922].) A judicial or notarial act is necessary before
a valid rescission can take place, whether or not automatic rescission
has been stipulated. It is to be noted that the law uses the phrase “even
though,’’ emphasizing that when no stipulation is found on automatic
rescission, the judicial or notarial requirement still applies. (Iriñgan vs.
Court of Appeals, 155 SCAD 686, 366 SCRA 41 [2001].) A letter
informing the buyer of the automatic rescission of a contract of sale of
a real property of sale does not amount to a demand for rescission if it
is not notarized. The offer to pay prior to the demand for rescission is
43
See note 4 to Article 1458.
In the case of Luzon Brokerage Co., Inc. vs. Maritime Bldg. Co., Inc. (see facts, infra.), S
demanded from LBC, to whom B leased the properties sold, the payment of the monthly rentals
and the surrender of the same to S. As a consequence, LBC filed an action for interpleader. S, in
its answer, filed a cross-claim against B praying for the confirmation of its right to cancel the
contract. The Supreme Court held that even if the contract were considered an unconditional sale
so that Article 1592 could be deemed applicable, S’s answer to the complaint for interpleader in
the lower court constituted a judicial demand for the rescission of the contract.
44
Art. 1592
OBLIGATIONS OF THE VENDEE
347
sufficient to defeat the vendor’s right under Article 1592. (Ocampo vs.
Court of Appeals, 52 SCAD 610, 233 SCRA 551 [1994]; Laforteza vs.
Machuca, 127 SCAD 798, 333 SCRA 643 [2000].)
There is no existing provision in our laws authorizing the automatic
rescission of contracts of sale of real property for nonpayment of the
purchase price except as provided in Article 1592.45A complaint by the
vendor seeking the cancellation of the vendee’s adverse claim on the
vendor’s original certificate of title and for the refund of the payments
made, cannot be considered a judicial demand under Article 1592
because it does not pray for the rescission of the contract of sale. In other
words, seeking discharge from contractual obligations and an offer for
restitution is not the same as abrogation of the contract. To rescind is
“to declare a contract void in its inception and to put an end to it as
though it never were.” (Ocampo vs. Court of Appeals, supra; see Arra
Realty Corp. vs. Guarantee Development Corp. and Insurance Agency,
438 SCRA 441 [2004].)
Note: In Articles 1191 and 1592, the rescission is a principal action
which seeks the resolution or cancellation of the contract, while in
Article 1381, the action is a subsidiary one limited to cases of rescission
for lesion as enumerated in said article. The prescriptive period
applicable for rescission under Articles 1191 and 1592 is found in
Article 1144 which provides that the action upon a written contract
should be brought within 10 years from the time the right of action
accrues. (see Iriñgan vs. Court of Appeals, supra.)
Right of seller to rescind not absolute.
In a contract of sale, the remedy of the unpaid seller is either specific
performance or rescission with the right to claim damages in either case.
(Art. 1191.)
A seller, however, cannot unilaterally and extrajudicially rescind a
contract of sale of immovable property where there is no express
stipulation authorizing him to extrajudicially rescind (Laforteza vs.
45 “We concede the validity of the automatic forfeiture clause, which deems any previous
payments forfeited and the contract automatically rescinded upon the failure of the vendee to pay
three successive monthly installments or any one year-end lump sum payment. However,
petitioners failed to prove the conditions that would warrant the implementation of this clause.’’
(Valarao vs. Court of Appeals, 104 SCAD 114, 304 SCRA 155 [1999].)
348
SALES
Art. 1592
Machuca, supra.) except as provided in Article 1592. Judicial action for
rescission of a contract is not necessary where the contract provides for
automatic rescission in case of breach. (Gomez vs. Court of Appeals,
134 SCAD 206, 340 SCRA 720
[2000].)
(1) Court may grant vendee a new term. — The right to rescind is
not absolute and the court may extend the period for payment. (Art.
1191, par. 3.) Once a demand for rescission by suit or notarial act is
made, however, under Article 1592, the court may not grant the vendee
a new term. Nevertheless, in the interest of justice and equity, the court
may grant the vendee a new term where he has substantially performed
in good faith. (J.M. Tuazon & Co., Inc. vs. Javier, 31 SCRA 829
[1970].)
(2) Vendor may waive his right. — The right of “automatic
rescission” (subject to Article 1592 when applicable) stipulated in a
contract of sale is subject to waiver. In a case, the right was held waived
by the vendor who granted many extensions to the vendee, in all of
which, the vendor never called attention to the proviso on “automatic
rescission.” (Pilipinas Bank vs. Intermediate Appellate Court, 151
SCRA 546 [1987].) The unqualified acceptance by the vendor of
payments after the six-month period expired was held to constitute
waiver of the period and hence, of the ground to rescind under Article
1592. (Ocampo vs. Court of Appeals, supra.)
(3) Written notice of cancellation must be given. — While judicial
action for the rescission of contract is not necessary where the contract
provides that it may be cancelled for violation of its terms and
conditions, there must be at least a written notice sent to the defaulter
informing him of the rescission. The indispensability of notice of
cancellation to the buyer of real estate is underscored in Section 3(b) of
R.A. No. 6552 (see Appendix “B.”) which specifically provides that the
notice of cancellation or the demand for rescission of the contract must
be by a notarial act. (Jison vs. Court of Appeals, 164 SCRA 339 [1988];
Siska Development Corp. vs. Office of the President of the Phils., 50
SCAD 46, 231 SCRA 674 [1994].)
A notarial act presupposes signing before a notary public and two
competent witnesses. A letter to the vendee rescinding a contract of sale
which is not notarized is defective. More importantly, the notarized
Art. 1592
OBLIGATIONS OF THE VENDEE
349
demand must be proven to have been received by the vendee. (Ocampo
vs. Court of Appeals, supra.) Similarly, a letter in the form of a “Formal
Notice’’ ordering the buyer to vacate the premises in question for the
reason that the occupancy of the lot is presumed to be illegal as the lot
is still registered in the name of the seller does not amount to a demand
for rescission where there is no reference to the sale much less a
declaration that the sale is being rescinded or abrogated from the
beginning. (City of Cebu vs. Heirs of C. Rubi, 106 SCAD 61, 306
SCRA 408 [1999].) Neither will a letter written by the vendor declaring
his intention to rescind to operate to validly rescind the sale. But an
action for judicial confirmation of rescission and damages has been held
to comply with the requirement of the law for judicial decree of
rescission. Even a crossclaim found in the answer can constitute a
judicial demand for rescission that satisfies the requirement of the law.
(Iriñgan vs. Court of Appeals, 155 SCAD 686, 366 SCRA 41 [2001];
Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 43 SCRA
93 [1972].)
(4) Breach must be substantial. — The general rule is that rescission
of a contract will not be permitted for a slight or causal breach but only
for such substantial and fundamental breach as would defeat the very
object of the parties. This is especially true where the slight breach by
the vendee is outweighed by the bad faith of the vendor in reneging in
his own prestation. The question of whether a breach of a contract is
substantial depends, of course, upon the attendant circumstances. (Ibid.)
Where it was stipulated in the deed of sale that payment could be made
even after 10 years from the execution of the contract provided the
vendee paid 12% interest, the failure of the vendee to pay the balance
of the purchase price within 10 years from the execution of the deed
would not amount to a substantial breach. (Vda. de Mistica vs. Naguiat,
418 SCRA 73 [2003].)
When Article 1592 not applicable.
(1) Sale on installment of real estate. — Article 1592 which
requires rescission either by judicial action or notarial act contemplates
an absolute sale. It does not apply to sales on installment of real property
in which the parties have laid down the procedure to be followed in the
event the vendee failed to fulfill his obligation. (Albea vs. Inquimboy,
350
SALES
Art. 1592
86 Phil. 477 [1950]; Caridad Estates, Inc. vs. Santero, 71 Phil. 114
[1940]; Torralba vs. De Los Angeles, 96 SCRA 69 [1980].)
(2) Contract to sell/conditional sale of real estate. — Neither is
Article 1592 applicable to a mere promise to sell (executory contract to
sell) where the title remains with the vendor until fulfillment of a
positive condition, such as full payment of the price (Roque vs. Lapuz,
96 SCRA 741 [1980]; Caridad Estates vs. Santero, supra.; Manila
Racing Club vs. Manila Jockey Club, 69 Phil. 57 [1939]; Manuel vs.
Rodriguez, 109 Phil. 1 [1960]; Joseph & Sons Enterprises, Inc. vs.
Court of Appeals, 143 SCRA 663 [1986]; Alfonso vs. Court Appeals,
186 SCRA 400 [1990]; Adelfa Properties, Inc. vs. Court of Appeals, 58
SCAD 462, 240 SCRA 565 [1995]; Valarao vs. Court of Appeals, 104
SCAD 114, 304 SCRA 155 [1999]; Gomez vs. Court of Appeals, 134
SCAD 206, 340 SCRA 720 [2000].) Such payment is a positive
suspensive condition the failure of which is not a breach, casual or
serious, but simply an event that prevents the obligation of the vendor
to convey title from acquiring binding force. In an absolute sale, nonpayment is a resolutory condition. (Pangilinan vs. Court of Appeals, 87
SCAD 408, 279 SCRA 590 [1997]; Odyssey Park, Inc. vs. Court of
Appeals, 87 SCAD 735, 280 SCRA 253 [1997].)
(3) Cases covered by R.A. No. 6552. — R.A. No. 6552 (see
Appendix “B.”) recognizes in conditional sales of all kinds of real estate
the non-applicability of Article 1592 to such contracts to sell on
installments and the right of the seller to cancel the contract upon nonpayment, “which is simply an event that prevents the obligation of the
vendor to convey title from acquiring binding force.” The Act in
modifying the terms and application of Article 1592 recognizes the
vendor’s right to cancel unqualifiedly in case of “industrial lots,
commercial buildings, and sales to tenants” 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.
(Luzon Brokerage Co., Inc. vs. Maritime Bldg. Co., Inc., 43 SCRA 93
[1972] and 86 SCRA 305 [1978]; Rillo vs. Court of Appeals, 83 SCAD
905, 274 SCRA 461 [1997]; Olympia Housing, Inc. vs. Panasiatic
Travel Corporation, 395 SCRA 298 [2003].)
In other words, the vendee, in Nos. (1) and (2) above, may no longer
pay the price after the expiration of the time agreed upon although no
Art. 1592
OBLIGATIONS OF THE VENDEE
351
demand has yet been made upon him by suit or notarial act, except that
in the case of sale on installment payments of residential properties,
while the vendor’s right to cancel the contract to sell upon breach by
non-payment of the stipulated installments is recognized by R.A. No.
6552, a grace period is required, with the vendee entitled to refund of
certain percentages of payments in the event that the contract is
cancelled. But the rule upholding the validity of automatic rescission
clauses contained in contracts to sell industrial and commercial real
estates on installments upon failure to pay stipulated installments, and
allowing the retention or forfeiture as rentals of the installments
previously paid, is not applicable to a contract to sell real estate on
installments which is not essentially such a contract but is more of a
contract for the redemption of mortgaged property foreclosed by the
mortgagee. (Phil. National Bank vs. Court of Appeals, 94 SCRA 357
[1979].)
R.A. No. 6552 makes no distinction between “option” and “sale”
which, under Section 2(b) of P.D. No. 957 (Appendix B.), virtually
includes all transactions concerning land and housing acquisition
including reservation agreements. (Realty Exchange Venture Corp. vs.
Sendino, 53 SCAD 57, 233 SCRA 665 [1994].) This law, which
normally applies to all transactions or contracts, involving the sale or
financing of real estate on installments payments, including residential
condominium apartments, excludes industrial lots, commercial
buildings, and sales to tenants under R.A. No. 3844, the Code of the
Agrarian Reforms.46 (Odyssey Park, Inc. vs. Court of Appeals, supra.)
It has been held that a decision in an ejectment case can operate as notice
of cancellation required by Section 3(b) of R.A. No. 6552. (Leaño vs.
Court of Appeals, 158 SCAD 34, 369 SCRA 36 [2001].)
46 Superseded by R.A. No. 6657, otherwise known as the Comprehensive Agrarian Reform
Law of 1988.
352
SALES
Art. 1593
ILLUSTRATIVE CASE:
Vendor, retaining ownership of immovable property sold,
undertook to convey it provided vendee, who defaulted, paid in full
balance of purchase price payable in monthly installments.
Facts: S, vendor, entered into a contract entitled “Deed of
Conditional Sale” with B, vendee, involving three parcels of land with
the improvements thereon. The purchase price was P1,000,000. The
amount of P50,000 was paid upon the execution of the deed and the
balance of P950,000 was to be paid in monthly installments of
P10,000 a month with interest. It was stipulated that in case of failure
to pay any of the installments, the contract would be annulled at the
vendor’s option, all payments forfeited, and the property repossessed.
S advised B of the cancellation of the deed of conditional sale and
demanded the return of the property, B having failed to pay three
installments. Upon suit, B invoked Article 1592.
Issue: Is Article 1592 applicable?
Held: No. S’s obligation to convey the property was expressly
made subject to a suspensive (precedent) condition of the punctual and
full payment of the balance of the purchase price. What S sought was
a judicial declaration that because the suspensive condition (full and
punctual payment) had not been fulfilled, his obligation to sell to B
never arose or never became effective, and, therefore, S was entitled
to repossess the property object of the contract, possession being a
mere incident to its right of ownership. In seeking the ouster of B for
failure to pay the price as agreed upon, S was not rescinding (or more
properly, resolving) the contract, but precisely enforcing it according
to its express terms.
In short, the contract in question was not the ordinary contract of
sale envisaged in Article 1592 transferring ownership simultaneously
with delivery but one in which the vendor retained ownership of the
immovable property object of the sale, merely undertaking to convey
it provided B strictly complied with the terms of the contract. (Luzon
Brokerage Co., Inc. vs. Maritime Building Co., Inc., supra.)
ART. 1593. With respect to movable property, the
rescission of the sale shall of right take place in the
interest of the vendor, if the vendee, upon the expira-
OBLIGATIONS OF THE VENDEE
353
Art. 1593
tion of the period fixed for the delivery of the thing,
should not have appeared to receive it, or having
appeared, he should not have tendered the price at
the same time unless a longer period has been
stipulated for its payment. (1505)
Rule where automatic rescission of sale of
movable property stipulated.
In the sale of real property, the vendor must make a demand for
rescission before he can have the right to rescind the contract. (Art.
1592.) In the case of personal property (which has not yet been delivered
to the vendee), the vendor can rescind the contract, as a matter of right,
if the vendee, without any valid cause, does not (1) accept delivery or
(2) pay the price unless a credit period for its payment has been
stipulated.
The mere failure of the vendee to comply with the terms of the
contract does not rescind the same. It is necessary that the vendor should
take some affirmative action indicating his intention to rescind.
(Guevarra vs. Pascual, 12 Phil. 311 [1908].) The parties, however, may
validly enter into an agreement that violation of the terms of the contract
would cause cancellation thereof even without judicial intervention or
permission. (see University of the Phil. vs. De los Angeles, 35 SCRA
102 [1970]; Consing vs. Jamandre, 64 SCRA 1 [1975].)
EXAMPLE:
S sold his piano to B for P30,000.00; said piano is to be
delivered on October 18. If on October 18, B does not accept
delivery or pay the price without lawful cause, then S may elect to
enforce compliance or to rescind the contract with the right to
damages in either case.
Reason for the rule with respect to
movable property.
The reason for the difference is that personal properties are not
capable of maintaining a stable price in the market. Their prices are so
354
SALES
changeable that any delay in their disposal might cause the vendor a
great prejudice.
Art. 1593
This is not true in the case of real property which has more or less
stable price in the market and the delay that might result from the
requirement imposed on the vendor to demand rescission before being
entitled to rescind the contract will not in any way prove detrimental to
the interest of the vendor. (see 10 Manresa
291.)
— oOo —
355
Chapter 6 ACTIONS FOR BREACH OF
CONTRACT OF SALE OF GOODS
ART. 1594. Actions for breach of the contract of
sale of goods shall be governed particularly by the
provisions of this Chapter, and as to matters not
specifically provided for herein, by other applicable
provisions of this Title. (n)
Provisions governing breach of contract of
sale of goods.
“Goods” include all chattels personal but not things in action or
money of legal tender in the Philippines. The term includes growing
fruits or crops. (Art. 1636[1].)
Actions for breach of the contract of sale of goods are governed
primarily by the provisions of Chapter 6 (Arts. 1595-1599.) and
secondarily, by the other provisions of the Title on sales so far as said
provisions can apply. However, provisions concerning the sale of
immovable property have no application to the sale of goods.
Actions available.
In general, the actions available for breach of the contract of sale of
goods are the following:
(1) action by the seller for payment of the price (Art. 1595.);
(2) action by the seller for damages for non-acceptance of the
goods (Art. 1596.);
365
Art. 1595
(3) action by the seller for rescission of the contract for breach
thereof (Art. 1597.);
(4) action by the buyer for specific performance (Art. 1598.); and
(5) action by the buyer for rescission or damages for breach of
warranty. (Art. 1599.)
356
SALES
ART. 1595. Where, under a contract of sale, the
ownership of the goods has passed to the buyer, and
he wrongfully neglects or refuses to pay for the goods
according to the terms of the contract of sale, the
seller may maintain an action against him for the price
of the goods.
Where, under a contract of sale, the price is
payable on a certain day, irrespective of delivery or of
transfer of title, and the buyer wrongfully neglects or
refuses to pay such price, the seller may maintain an
action for the price, although the ownership in the
goods has not passed. But it shall be a defense to
such an action that the seller at any time before the
judgment in such action has manifested an inability
to perform the contract of sale on his part or an
intention not to perform it.
Although the ownership in the goods has not
passed, if they cannot readily be resold for a
reasonable price, and if the provisions of Article 1596,
fourth paragraph, are not applicable, the seller may
offer to deliver the goods to the buyer, and, if the
buyer refuses to receive them, may notify the buyer
that the goods are thereafter held by the seller as
bailee for the buyer. Thereafter the seller may treat the
goods as the buyer’s and may maintain an action for
the price. (n)
Seller’s right of action for the price.
The above article provides the three cases when an action for the
price of the goods under a contract of sale can be maintained by the
seller:
Art. 1595
(1) when the ownership of the goods has passed to the buyer and
he wrongfully neglects or refuses to pay for the price (par. 1.);
ACTIONS FOR BREACH OF CONTRACT
OF SALE OF GOODS
357
(2) when the price is payable on a certain day and the buyer
wrongfully neglects or refuses to pay such price, irrespective of delivery
or of transfer of the title (par. 2.); and
(3) when the goods cannot readily be resold for a reasonable price
and the buyer wrongfully refuses to accept them even before the
ownership in the goods has passed, if the provisions of
Article 1596, 4th paragraph (infra.) are not applicable. (par. 3.)
EXAMPLE:
S sold to B a specific refrigerator for P8,000.00. S can maintain
an action for the price in any of the following cases:
(1)
He has delivered the refrigerator to B and the latter
wrongfully fails to pay;
(2)
He has not yet delivered the refrigerator but the period
fixed for the payment has already arrived while the period fixed for
delivery is yet to come; and
(3)
B has refused to accept delivery without just cause and
S has notified B that he is holding the goods as bailee for B.
Under No. (1), where the unpaid goods are subsequently sold or
mortgaged to another who acted in good faith, the obligation to pay
remains with the buyer mortgagor-seller. The failure of the buyer to
pay the purchase price does not ipso facto revert ownership of the
goods to the (first) seller unless the sale is first liquidated. The (first)
seller has no cause of action against the purchaser or chattel
mortgagee. (see Philippine National Bank vs. Court of Appeals, 367
SCRA 198 [2001].)
Where ownership in goods has
not passed.
Unless the contrary appears, the presumption is that the payment of
the price and the delivery of the goods were intended to be concurrent
acts and the obligation of each party to perform will be dependent upon
the simultaneous performance by the other party.
From the above, it can be deduced that the seller cannot maintain an
action for the price if the ownership in the goods has not
Art. 1596
358
SALES
passed to the buyer, (1) unless the price is payable on a certain day or
(2) unless the goods cannot readily be resold for a certain price and the
provisions of Article 1596, 4th paragraph are not applicable.
It must be noted that under Article 1588, the title to the goods passes
to the buyer from the moment they are placed at his disposal when his
refusal to accept them is without just cause. The seller may, therefore,
bring an action for the price upon wrongful refusal of the buyer to
accept.
Recovery of price payable on
a certain day.
If different times are fixed for the payment of the price and the
delivery of the goods, the general rule is that the act which is to be
performed first is absolutely due on that day, while the performance
which is to take place on a later day is not due unless, as a condition
precedent, the prior performance has been rendered.
(1) Buyer given credit for the price. — It is common for sellers to
give credit for the price. But it is not common for buyers to give credit
for the goods. It may, however, happen that the buyer promises to pay
the price before acquiring the ownership or even the possession of the
goods. In such a case, the provisions of Article
1595, paragraph 2 are applicable. (3 Williston, op. cit., pp. 218-219.)
(2) Defense to action for the price. — Said paragraph 2 excuses,
however, the buyer from his obligation to pay the price when, before
the time of payment, the seller has manifested an inability to perform
the contract of sale or an intention not to perform it. A contract of sale
contemplates a double exchange. Accordingly, there is justice as well
as good reason for excusing the buyer from prior performance when he
will not get subsequent performance from the seller. In this case,
prospective failure to receive the thing promised is as good as a defense
as a failure which has actually occurred.
ART. 1596. Where the buyer wrongfully neglects
or refuses to accept and pay for the goods, the seller
may maintain an action against him for damages for
non-acceptance.
Art. 1596
ACTIONS FOR BREACH OF CONTRACT
OF SALE OF GOODS
359
The measure of damages is the estimated loss
directly and naturally resulting in the ordinary course
of events, from the buyer’s breach of contract.
Where there is an available market for the goods
in question, the measure of damages is, in the
absence of special circumstances showing proximate
damage of a different amount, the difference between
the contract price and the market or current price at
the time or times when the goods ought to have been
accepted, or, if no time was fixed for acceptance, then
at time of the refusal to accept.
If, while labor or expense of material amount is
necessary on the part of the seller to enable him to
fulfill his obligations under the contract of sale, the
buyer repudiates the contract or notifies the seller to
proceed no further therewith, the buyer shall be liable
to the seller for labor performed or expenses made
before receiving notice of the buyer’s repudiation or
countermand. The profit the seller would have made
if the contract or the sale had been fully performed
shall be considered in awarding the damages. (n)
Seller’s right of action for damages.
(1) If the buyer without lawful cause neglects or refuses to accept
and pay for the goods he agreed to buy, the seller may maintain an
action against him for damages for non-acceptance. (par. 1.)
(2) In an executory contract, where the ownership in the goods has
not passed, and the seller cannot maintain an action to recover the price
(see Art. 1595.), the seller’s remedy will be also an action for damages.
(3) If the goods are not yet identified at the time of the contract or
subsequently, the seller’s right is necessarily confined to an action for
damages.
Measure of damages for non-acceptance.
(1) Difference between contract price and market price. — The
measure of damage is the estimated loss directly and naturally
Art. 1596
360
SALES
resulting from the buyer’s breach of contract. It is conveniently
expressed by the formula — the difference between the contract price,
that is, the amount of the obligation which the buyer failed to fulfill, and
the market or current price, that is, the value of the goods which the
seller has left upon his hands. (see Siuliong & Co. vs. Nanyo Shoji
Kaisha, 42 Phil. 722 [1922]; Warner Barnes & Co. vs. Inza, 43 Phil. 505
[1922].) This follows the general rule that damages comprehend not
only the actual loss suffered but also unrealized profit. (Art. 2200.)
(a)
As the market price varies with time and place, the
market price is fixed at the time when and the place where the goods
ought to have been accepted or, if no time was fixed, at the time of
refusal to accept.
(b)
As the burden is upon the seller to show what damage,
if any, he has suffered, it is incumbent upon him, in order to make
out a case for recovery of more than nominal damages, to show that
the market value of the goods is less than the contract price.
(2) Full amount of damage. — If there is no available market in
which the goods can be sold at the time, the seller is “entitled to the full
amount of damage which he has really sustained by a breach of the
contract.” (3 Williston, op. cit., pp. 240-246; par. 2.)
(3) Proximate damages. — Article 1596 (par. 3.) allows the seller
under “special circumstances” proximate damages of a greater amount
than the difference between the contract price and market price when
such damages “may be reasonably attributed to the non-performance of
the obligation.” (see Art. 2201, par. 2.)
EXAMPLE:
S agreed to sell and deliver to B on a certain date 100 bags of
sugar of a certain quality for P50,000.00. On the date designated, B
wrongfully refused to accept delivery.
If the market value of the sugar at the time is P40,000.00, the
damage which S ought to receive is the amount of
P10,000.00, the profit he failed to realize. However, if the market
value equals or exceeds the contract price of P50,000.00, S
Art. 1597
ACTIONS FOR BREACH OF CONTRACT
OF SALE OF GOODS
361
has suffered no damage and, though entitled to judgment, can recover
only nominal damages.47
If B acted in bad faith (this may be considered as an example of
“special circumstances” mentioned in par. 3.), he is liable for all the
consequential damages incurred by S which clearly originated from
the breach of the contract. Thus, if the refusal of B to accept delivery
so angered S that the latter suffered a heart attack for which he was
hospitalized, hospitalization expenses may also be recovered from B
as they may be reasonably attributed to the non-performance of his
obligation.
Measure of damages for repudiation or
countermand.
In case the buyer repudiates the contract or notifies the seller to
proceed no further therewith, the measure of damages to which the
seller is entitled would include:
(1) the labor performed and expenses incurred for materials before
receiving notice of the buyer’s repudiation; and
(2) the profit he would have realized if the sale had been fully
performed. (Art. 1596, par. 4.)
ART. 1597. Where the goods have not been
delivered to the buyer, and the buyer has repudiated
the contract of sale, or has manifested his inability to
perform his obligations thereunder, or has committed
a breach thereof, the seller may totally rescind the
contract of sale by giving notice of his election so to
do to the buyer. (n)
Seller’s right of rescission before delivery.
The above article specifies the cases when the seller may rescind a
contract of sale of goods which have not yet been delivered to the buyer.
They are:
(1) when the buyer has repudiated the contract of sale;
47 Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which
has been violated or invaded by the defendant, may be vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss suffered by him.
362
SALES
Art. 1597
(2) when the buyer has manifested his inability to perform his
obligations thereunder; and
(3) when the buyer has committed a breach of the contract of sale.
Article 1481 provides for a special cause for rescission of the
contract of sale of goods. Article 1534 (2nd par.) speaks of the
rescission of title.
In a case, the seller was not allowed to totally rescind a contract to
sell two lots, it appearing that the installments paid by the buyer were
more than the value of one lot. The conveyance to the buyer of one of
the two lots was ordered. (Legarda Hermanos vs. Saldana, 55 SCRA
324 [1974].)
If the goods have been delivered, the seller may recover the value
of what he has given. (Art. 1595.)
Giving of notice required.
The right granted to the seller follows the general rule in reciprocal
obligations that a party to a contract injured by nonfulfillment, may
rescind the contract and at the same time ask for damages. (Art. 1191.)
It should be noted that the seller is required to give notice of his
election to seek rescission. The way in which election must be
manifested may vary in different cases. Formal notice is certainly not a
requisite, and bringing an action promptly for restitution is sufficient.
Seller’s right of rescission for breach of
contract.
Article 1191 (Civil Code) establishes the principle that all
reciprocal obligations are rescindable in the event that one of the parties
bound should fail to perform that which is incumbent upon him. In the
contract of sale, the obligation to pay the price is correlative to the
obligation to deliver the thing sold. Non-performance by one of the
parties authorizes the other to exercise the right conferred upon him by
the law, to elect to demand the performance of the obligation or its
rescission, together with damArt. 1598
ACTIONS FOR BREACH OF CONTRACT
OF SALE OF GOODS
363
ages in either event. Rescission abrogates the contract from its inception
and requires a mutual restitution of benefits received.
The right of the seller to rescind the sale for non-performance on
the part of the buyer is not absolute.
(1) The law subordinates it to the rights of third persons who are
legally in the possession of the object of the contract and to whom bad
faith is not imputable. (Ocejo Perez & Co. vs. International Bank, 37
Phil. 631 [1918]; see Art. 1385.)
(2) Moreover, the general rule is that rescission of a contract will
not be permitted for a slight or casual breach but only for such
substantial breach as would defeat the very object of the parties in
making the agreement. (Song Fo & Co. vs. Hawaiian-Phil. Co., 47 Phil.
821 [1925].) The question of whether a breach of a contract is
substantial depends upon the attendant circumstances. (Corpus vs.
Alikpala, 22 SCRA 104 [1968]; see Angel vs. Calasanz,
135 SCRA 323 [1985].)
(3) Except as provided in Article 1597, and in the absence of express
stipulation authorizing the seller to extrajudicially rescind a contract of
sale, the seller cannot unilaterally and extrajudicially rescind the
contract. It has been held that where a vendor agreed to the resale of the
property by the original vendee to another person despite the failure of
said vendee to comply with his obligation under the original sale, the
vendor is deemed to have effectively waived its right to rescind the sale.
(Ayala Corporation vs. Rosa-Diana Realty and Development
Corporation, 139 SCAD 74, 346 SCRA 663 [2000].)
ART. 1598. Where the seller has broken a contract
to deliver specific or ascertained goods, a court may,
on the application of the buyer, direct that the
contract shall be performed specifically, without
giving the seller the option of retaining the goods on
payment of damages. The judgment or decree may be
unconditional, or upon such terms and conditions as
to damages, payment of the price and otherwise, as
the court may deem just. (n)
364
SALES
Art. 1599
Buyer’s right to specific performance.
The article applies only where the goods to be delivered are specific
or ascertained. (see Art. 1636[1].)
In reciprocal obligations, it is the injured party who has a right to
choose between fulfillment (see Art. 1165, par. 1.) and rescission, with
the payment of damages in either case. (Art. 1191.) Consequently, the
right of the injured party to demand specific performance cannot be
defeated by the guilty party’s choice to rescind the contract.
This is also the rule in Article 1598 which grants to the buyer, as a
matter of right, the remedy of specific performance in case the seller
should violate his obligation to make delivery. The seller cannot retain
the goods on payment of damages because damages are imposed by law
to insure fulfillment of contract and not to substitute for it. In granting
specific performance, the court may impose such terms and conditions
as to damages, payment of the price and otherwise, as it may deem just.
ART. 1599. Where there is a breach of warranty by
the seller, the buyer may, at his election:
(1)
Accept or keep the goods and set up
against the seller, the breach of warranty by way of
recoupment in diminution or extinction of the price;
(2)
Accept or keep the goods and maintain an
action against the seller for damages for the breach
of warranty;
(3)
Refuse to accept the goods, and maintain
an action against the seller for damages for the
breach of warranty;
(4)
Rescind the contract of sale and refuse to
receive the goods or if the goods have already been
received, return them or offer to return them to the
seller and recover the price or any part thereof which
has been paid.
When the buyer has claimed and been granted a
remedy in any one of these ways, no other remedy
Art. 1599
ACTIONS FOR BREACH OF CONTRACT
OF SALE OF GOODS
can thereafter be granted, without prejudice to the
provisions of the second paragraph of article 1191.
Where the goods have been delivered to the
buyer, he cannot rescind the sale if he knew of the
breach of warranty when he accepted the goods
without protest, or if he fails to notify the seller within
a reasonable time of the election to rescind, or if he
fails to return or to offer to return the goods to the
seller in substantially as good condition as they were
in at the time the ownership was transferred to the
buyer. But if deterioration or injury of the goods is
due to the breach 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.
Where the buyer is entitled to rescind the sale and
elects to do so, he shall cease to be liable for the price
upon returning or offering to return the goods. If the
price or any part thereof has already been paid, the
seller shall be liable to repay so much thereof as has
been paid, concurrently with the return of the goods,
or immediately after an offer to return the goods in
exchange for repayment of the price.
Where the buyer is entitled to rescind the sale and
elects to do so, if the seller refuses to accept an offer
of the buyer to return the goods, the buyer shall
thereafter be deemed to hold the goods as bailee for
the seller, but subject to a lien to secure the payment
of any portion of the price which has been paid, and
with the remedies for the enforcement of such lien
allowed to an unpaid seller by Article 1526.
(5) In the case of breach of warranty of quality,
such loss, in the absence of special circumstances
showing proximate damage of a greater amount, is
the difference between the value of the goods at the
time of delivery to the buyer and the value they would
365
366
SALES
Art. 1599
have had if they had answered to the warranty. (n)
Remedies of buyer for breach of warranty by seller.
This article applies both to implied warranties and to express
warranties, whether of quality or of title.
The remedies allowed to the buyer when the seller has been guilty
of a breach of promise or warranty are:
(1) accept the goods and set up the seller’s breach to reduce or
extinguish the price;
(2) accept the goods and maintain an action for damages for the
breach of the warranty;
(3) refuse to accept the goods and maintain an action for damages
for the breach of the warranty; and
(4) rescind the contract of sale by returning or offering the return
of the goods, and recover the price or any part thereof which has been
paid. (Nos. 1-4.)
The remedies open to the buyer under the article may be grouped
into three, to wit: (a) recoupment (No. 1.); (b) action (No. 3.) or
counterclaim for damages (No. 2.); and (c) rescission. (No. 4.)
Nos. (1) and (2) should be read in connection with Article 1586.
The general measure of damage in case of breach of warranty of quality
is provided in No. (5) of Article 1599. It is similar to the measure of
damages under Article 1596, par. 2.
Remedies alternative.
The above remedies are alternative. Once a remedy has been
granted to the buyer, no other remedy can thereafter be exercised or
granted.
The only exception is when after the buyer has chosen fulfillment,
it should become impossible, in which case he may also sue for
rescission. (Art. 1191, par. 2.)
Recoupment in diminution of
the price.
The theory of recoupment is that the seller’s damages are cut
Art. 1599
ACTIONS FOR BREACH OF CONTRACT
OF SALE OF GOODS
367
down to an amount which will compensate him for the value of what he
has given.
In view of the breach of warranty by the seller, the buyer is not
bound to perform the contract on his part, but the buyer has received
something of value for which he ought to pay. By means of recoupment,
the buyer is allowed to avoid the contract and substitute in its stead a
quasi-contractual obligation for the value of what he has received. The
word is nearly though not quite synonymous with discount, reduction
or deduction.
EXAMPLE:
S sold to B 50 boxes of apples for P20,000.00. Upon examination,
it was discovered that apples equivalent to 15 boxes were rotten.
In an action by S against B for the purchase price, B can set up
the breach by S of his warranty by way of recoupment in diminution
of the price of P20,000.00. In other words, from the purchase price of
P20,000.00 shall be deducted the amount of P6,000.00, the value of
the 15 boxes of apples. So B is liable only for P14,000.00, the value
of the apples received.
Action or counterclaim for damages.
The law provides that the buyer may “refuse to accept the goods,
and maintain an action against the seller for damages for the breach of
warranty.” (No. 3.) It is fundamental that the breach of an obligation
gives rise to an action for damages. It is, therefore, unnecessary to
discuss so plain a point.
Acceptance with knowledge of the breach of warranty does
preclude rescission but it does not necessarily preclude a right to
recoupment or damages. (3 Williston, op. cit., p. 362.)
Recoupment
distinguished.
and
counterclaim,
The right of recoupment is to be distinguished from set-off or
counterclaim.
By means of counterclaim, both sides of the contract are enforced
in the same litigation. The defendant (buyer) does not seek to avoid his
obligation under the contract but seeks to enforce the plaintiff’s
368
SALES
Art. 1599
(seller’s) obligation and to deduct it from his liability for the price for
breach of the warranty. (see No. 2.)
When rescission by the buyer not
allowed.
The remedy of rescission is allowed on broad principles of justice.
The basis of the remedy is that the buyer has not received what he has
bargained for.
It cannot be availed of, however, in the following cases:
(1) if the buyer accepted the goods knowing of the breach of
warranty without protest;
(2) if he fails to notify the seller within a reasonable time of his
election to rescind; and
(3) if he fails to return or offer to return the goods in substantially
as good condition as they were in at the time of the transfer of ownership
to him. But where the injury to the goods was caused by the very defect
against which the seller warranted, the buyer may still rescind the sale.
(par. 3.)
Rights and obligations of buyer
in case of rescission. They are
as follows:
(1) In case of rescission, the buyer shall cease to be liable for the
price, his only obligation being to return the goods;
(2) If he has paid the price or any part thereof, he may recover it
from the seller (par. 4; see Embee Transportation Corp. vs. Camacho,
80 SCRA 477 [1977].);
(3) He has the right to hold the goods as bailee for the seller should
the latter refuse the return of the goods; and
(4) He has the right to have a lien on the goods for any portion of
the price already paid which lien he may enforce as if he were an unpaid
seller. (par. 5.)
— oOo —
369
Chapter 7 EXTINGUISHMENT
OF SALE
ART. 1600. Sales are extinguished by the same
causes as all other obligations, by those stated in the
preceding articles of this Title, and by conventional or
legal redemption. (1506)
Causes for extinguishment of sale.
The modes or causes of extinguishing the contract of sale may be
classified into:
(1) Common or those causes which are also the means of
extinguishing all other contracts like payment, loss of the thing,
condonation, etc. (see Art. 1231.);
(2) Special or those causes which are recognized by the law on
sales (such as those covered by Articles 1484, 1532, 1539, 1540, 1542,
1556, 1560, 1567, and 1591.); and
(3) Extra-special or those causes which are given special
discussion by the Civil Code and these are conventional redemption and
legal redemption. (see 10 Manresa 300, 303.)
— oOo —
379
SECTION 1. — Conventional Redemption
ART. 1601. Conventional redemption shall take
place when the vendor reserves the right to
370
SALES
repurchase the thing sold, with the obligation to
comply with the provisions of article 1616 and other
stipulations which may have been agreed upon.
(1507)
Conventional redemption defined.
Conventional redemption is the right which the vendor reserves to
himself, to reacquire the property sold provided he returns to the vendee
the price of the sale, the expenses of the contract, any other legitimate
payments made therefor and the necessary and useful expenses made on
the thing sold (Art. 1616.), and fulfills other stipulations which may
have been agreed upon.
Subject matter of conventional redemption.
Both real and personal property may be the subject matter of pacto
de retro sales or sales with right to repurchase although there are certain
articles (Arts. 1607, 1611, 1612, 1613, 1614, 1617, 1618.) which are
applicable only to immovables.
Nature of conventional redemption.
(1) It is purely contractual because it is a right created, not by
mandate of the law, but by virtue of an express contract. (Ordoñez vs.
Villaroman, 78 Phil. 116 [1947].)
(2) It is an accidental stipulation and, therefore, its nullity cannot
affect the sale itself since the latter might be entered into without said
stipulation. (Alojado vs. Lim Siongco, 51 Phil. 339 [1927].)
380
Art. 1601
(3) It is a real right when registered, because it binds third persons.
(Art. 1608; see Mortera vs. Martinez, 14 Phil. 541 [1909].)
(4) It is potestative because it depends upon the will of the vendor.
(see Art. 1182.)
(5) It is a resolutory condition because when exercised, the right of
ownership acquired by the vendee is extinguished. (see Art. 1179; see
EXTINGUISHMENT OF SALE
Conventional Redemption
371
Aquino vs. Deal, 63 Phil. 582 [1936]; Heirs of Francisco Parco vs. Haw
Pia, 45 SCRA 164 [1972].) In a pacto de retro sale, the title or
ownership of the property sold is immediately vested in the vendee a
retro, subject only to the resolutory condition of repurchase by the
vendor a retro within the stipulated period. (Solid Homes, Inc. vs. Court
of Appeals, 81 SCAD 546, 275 SCRA 267 [1997].)
(6) It is not an obligation but a power or privilege that the vendor
has reserved for himself. (Ocampo vs. Potenciano, [C.A.] 48 O.G.
2230.)
(7) It is reserved at the moment of the perfection of the contract for
if the right to repurchase is agreed upon afterwards, there is only a
promise to sell which produces different rights and effects and is
governed by Article 1479. (Diamante vs. Court of Appeals, 206 SCRA
52 [1992].)
(8) The person entitled to exercise the right of redemption
necessarily is the owner of the property sold and not any third party.
(see Quimson vs. Phil. National Bank, 36 SCRA 26 [1970].) Unlike a
debt which a third person may satisfy even against the debtor’s will (see
Art. 1237.), the right of repurchase may be exercised only by the vendor
in whom the right is recognized by contract or by any person in whom
the right may have been transferred. (Gallar vs. Husain, 20 SCRA 186
[1967].)
(9) It gives rise to reciprocal obligation that of returning the price
of sale and other expenses, on the part of the vendor (Art. 1616.); and
that of delivering the property and executing a deed of sale therefor, on
the part of the vendee. The plea that the vendee made delivery of the
property to a third person whom he believed was better entitled to
possess it, cannot serve as an excuse for the failure to comply with said
obligation. (Pandaquilla vs. Gaza, 12 Phil.
663 [1909].)
Art. 1601
ILLUSTRATIVE CASE:
When period for exercise of right of repurchase expired,
constitutional prohibition against aliens owning lands was already in
force.
372
SALES
Facts: S, vendor a retro, sold to B, a Chinese, vendee a retro, a
parcel of land. The sale was made in 1932, before the adoption of the
old Constitution. No repurchase was made by S. At the expiration of
the right of repurchase, the 1935 Constitution (Art. XIII, Sec. 5
thereof.) contains a prohibition against aliens owning lands save in
cases of hereditary succession.
Issue: Does the prohibition apply to B, an alien who acquired the
land by sale with pacto de retro before the 1935 Constitution became
effective?
Held: No. The nature of a sale with right of repurchase is such
that the ownership over the thing sold is transferred to the vendee upon
the execution of the contract assuming the requirements as to delivery
to be present, subject only to the resolutory condition that the vendor
exercises his right of repurchase within the period agreed upon by the
parties or prescribed by law. (Heirs of Francisco Parco vs. Haw Pia,
45 SCRA 164 [1972].)
Option to buy and right of repurchase
distinguished.
An option to buy is different and distinct from the right of
repurchase which must be reserved by the vendor by stipulation to that
effect in the contract of sale. This is clear from Article 1601.
(1) The right of repurchase is not a right granted the vendor by the
vendee in a subsequent instrument, but a right reserved by the vendor
in the same instrument of sale as one of the stipulations of the contract.
(2) Once the instrument of absolute sale is executed, the vendor no
longer reserves 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.
(a)
Accordingly, a deed of absolute sale and an option
tobuy together, cannot be considered as evidencing a contract of
sale with pacto de retro. Such option does not evidence a right to
repurchase, the extension of the period for the exercise of
Art. 1602
EXTINGUISHMENT OF SALE
Conventional Redemption
373
which (option) does not fall under No. 3 of Article 1602. (Villarica
vs. Court of Appeals, 26 SCRA 189 [1968]; Vda. de Zulueta vs.
Octaviano, 121 SCRA 314 [1983]; Vda. de Cruzo vs. Carriaga, Jr.,
174 SCRA 330 [1989]; see Vasquez vs. Court of Appeals, 199
SCRA 102 [1991]; Torres vs. Court of Appeals, 216 SCRA 287
[1992].)
(b)
Similarly, in an early case, it has been held that an
agreement to repurchase becomes a promise to sell when made after
an absolute sale because where the sale is made without such an
agreement, the purchaser acquires the thing sold absolutely, and if
he afterwards grants the seller the right to repurchase, it is a new
contract entered into by the purchaser, as absolute owner already of
the object. (Ramos vs. Icasiano, 51 Phil. 343 [1927]; Vda. de Cruzo
vs. Carriaga, Jr., supra; Diamante vs. Court of Appeals, 206 SCRA
52 [1992].)
Right to redeem and right of repurchase
distinguished.
The right to redeem becomes functus officio on the date of its expiry,
and its exercise after the period is not really one of redemption but a
repurchase.
Distinction must be made because redemption is by force of law;
the purchaser at public auction is bound to accept redemption.
Repurchase, however, of foreclosed property, after redemption period,
imposes no such obligation. After expiry, the purchaser may or may not
re-sell the property but no law will compel him to do so. And, he is not
bound by the bid price; it is entirely within his discretion to set a higher
price, for after all, the property already belongs to him as owner.’’ (Vda.
De Urbano vs. GSIS, 157 SCAD 133, 367 SCRA 672 [2001], citing
Natino vs. Intermediate Appellate Court, 397 SCRA 323 [2001].)
ART. 1602. The contract shall be presumed to be
an equitable mortgage, in any of the following cases:
(1)
When the price of a sale with right to
repurchase is unusually inadequate;
374
SALES
Art. 1602
(2)
When the vendor remains in possession as
lessee or otherwise;
(3)
When upon or after the expiration of the
right to repurchase another instrument extending the
period of redemption or granting a new period is
executed;
(4)
When the purchaser retains for himself a
part of the purchase price;
(5)
When the vendor binds himself to pay the
taxes on the thing sold;
(6)
In any other case where it may be fairly
inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the
performance of any other obligation.
In any of the foregoing cases, any money, fruits or
other benefits to be received by the vendee as rent or
otherwise shall be considered as interest which shall
be subject to the usury laws. (n)
Equitable mortgage defined.
An equitable mortgage is one which lacks the proper formalities,
form or words, or other requisites prescribed by law for a mortgage, but
shows the intention of the parties to make the property subject of the
contract as security for a debt and contains nothing impossible or
contrary to law. (41 C.J. 303; Cachola vs. Court of Appeals, 208 SCRA
496 [1992]; Ceballos vs. Intestate Estate of the Late E. Mercado, 430
SCRA 323 [2004].)
The “pacto de retro” problem.
Article 1602 is a new provision and is one of the suitable remedies
(see Arts. 1603-1607.48) sponsored by the Code Commission to provide
48
Other remedies:
Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but
the instrument states that the property is sold absolutely or with a right of repurchase, reformation
of the instrument is proper.
Art. 1602
EXTINGUISHMENT OF SALE
Conventional Redemption
375
safeguards and restrictions against the evils of sales with a right of
repurchase, commonly called pacto de retro sales.
The policy of the law is to discourage pacto de retro sales and
thereby prevent the circumvention of the prohibition against usury (see
note, infra.) and pactum commissorium2 (Ching Sen Ben vs. Court of
Appeals, 112 SCAD 698, 314 SCRA 762 [1999].)
“One of the gravest problems that must be solved is that raised
by the contract of sale with right of repurchase or pacto de retro.
The evils arising from this contract have festered like a sore on the
body politic.” (Report of the Code Commission, p. 61.)
“It is a matter of common knowledge that in practically all of
the so-called contracts of sale with right of repurchase, the real
intention of the parties is that the pretended purchase price is money
loaned, and in order to secure the payment of the loan, a contract
purporting to be a sale with pacto de retro is drawn up. It is, thus,
that the provisions obtained in Articles 1859 and 1958 [now
Articles 2087 and 2088.] of the present [old] Civil Code which
respectively prohibit the creditor from appropriating the things
given in pledge or mortgage and ordering that said things be sold or
alienated when the principal obligations become due are
circumvented.
Furthermore, it is well-known that the practice in these socalled
contracts of sale with pacto de retro is to draw up another contract
purporting to be a lease of property to the supposed vendor, who
pays in money or in crops a so-called rent. It is, however, no secret
to anyone that this simulated rent is in truth and in fact interest on
the money loaned. In many instances, the interest is usurious. Thus,
the usury law is also circumvented.” (Ibid., p. 63.)
Note: The Usury Law (Art. 2655, as amended.) is now “legally
inexistent” as the lender and borrower can agree on any interest
Art. 1454. If an absolute conveyance of property is made in order to secure the performance
of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the
Art. 1450. If the price of a sale of property is loaned or paid by one person for the benefit of
another and the conveyance is made to the lender or payor to secure the payment of the debt, a
trust arises by operation of law in favor of the person to whom the money is loaned or for whom
it is paid. The latter may redeem the property and compel a conveyance thereof to him.
376
SALES
Art. 1602
fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the
reconveyance of the property to him.
2Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage,
or dispose of them. Any stipulation to the contrary is null and void. (1859a)
that may be charged on the loan under Central Bank Circular No. 905
approved by the Monetary Board in Resolution No. 224 dated
December 3, 1982. (see Verdejo vs. Court of Appeals, 157 SCRA 743
[1988].)
“Pacto
de
retro”
distinguished.
and
mortgage,
The following are the distinctions:
(1) In pacto de retro, ownership is transferred but the ownership is
subject to the condition that the seller might recover the ownership
within a certain period of time,49 while in mortgage, ownership is not
transferred but the property is merely subject to a charge or lien as
security for the compliance of a principal obligation, usually a loan;
(2) If the seller does not repurchase the property upon the very day
named in the contract, he loses all interest thereon, while the mortgagor
does not lose his interest in the property if he fails to pay the debt at its
maturity; and
(3) In the case of a pacto de retro, there is no obligation resting
upon the purchaser to foreclose. Neither does the vendor have any right
to redeem the property after the maturity of the debt. On the other hand,
it is the duty of the mortgagee to foreclose the mortgage if he wishes to
secure a perfect title thereto, and after the maturity of the debt secured
by the mortgage and before foreclosure, the mortgagor has a right to
redeem. (Basilio vs. Encarnacion, 5 Phil. 360 [1905]; Borromeo vs.
Vda. de Gonzales, [C.A.] 6200 O.G. 3775; see Heirs of Arches vs. De
Diaz, 50 SCRA 440 [1973].)
A vendor who decides to redeem or repurchase a property sold with
pacto de retro in a sense stands as the debtor and the vendee as the
creditor of the repurchase price. (Catangcatang vs. Legayada, 84 SCRA
51 [1978]; Rivero vs. Rivero, 80 Phil. 802 [1948].)
49
The essence of a pacto de retro sale is that title to the property sold is immediately vested
in the vendee a retro, subject to the resolutory condition of repurchase by the vendor a retro within
the stipulated period. (De Guzman, Jr. vs. Court of Appeals, 156 SCRA [1987].)
Art. 1602
EXTINGUISHMENT OF SALE
Conventional Redemption
377
ILLUSTRATIVE CASES:
1. It is stipulated that upon failure of owner to redeem land by
returning the loan, title thereto shall vest in the lender.
Facts: In the instrument wherein the words “mortgage with
conditional sale” are used, it is stipulated (1) that S reserves the right
to redeem the parcel of land in question after the period of five (5)
years from the date of the instrument by paying back and returning the
loan of P5,000 to B and (2) that on his failure to exercise the said right,
the title to the property shall pass to, and become vested, absolutely,
in B.
There is no period after the five (5) years within which S may
redeem the property.
Issue: Is the second stipulation a mortgage or a sale with pacto de
retro?
Held: If the stipulation be construed as giving B the right to own
the property upon failure of S to pay the loan on the stipulated time —
which is not provided — that would be pactum commissorium50 which
is unlawful and void. The clause is conclusive proof that it is a
mortgage and not a sale with pacto de retro because if it were the
latter, title to the parcel of land would pass unto the vendee upon the
execution of the sale and not later as stipulated. (Guerrero vs. Ynigo
and Court of Appeals, 96 Phil. 37 [1954].)
———— ———— ————
2. Under the contract, if the first party failed to redeem the land
“sold as by mortgage,” the other party may sell it to another.
Facts: S executed in favor of B a private document which states
that he “has sold as by mortgage” a parcel of land and that in case of
non-fulfillment of certain conditions, B may eject S, and further states
that if S be unable to redeem the mortgage, B may sell the land to
another.
As S failed to redeem the land, B sold the land to C who took
possession. S now seeks the recovery of the land claiming that the
contract is a mortgage.
Issue: Is the contract a mortgage or a sale with pacto de retro?
50 Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage,
or dispose of them. Any stipulation to the contrary is null and void.
378
SALES
Art. 1602
Held: It is a sale with pacto de retro. The right to repurchase and
the obligation to resell contained in a contract of pacto de retro are
not the same as those in a mortgage agreement to secure a principal
obligation, nor are they to be considered as inherent in or annexed to
the mortgage. A mortgagee cannot appropriate or dispose of the
mortgaged property, while a purchaser under pacto de retro, as soon
as the right of dominion is consolidated as prescribed by law (see Art.
1607.), may dispose of the same as his own property without
restriction. (Tuazon vs. Gaduco, 23 Phil. 342 [1912].)
———— ———— ————
3. Vendor a retro failed to exercise his right of repurchase while
vendee a retro failed to pay balance of purchase price.
Facts: S sold his land to B for the sum of P1,400 with the right to
repurchase it within five (5) years. The period expired without S
having availed himself of his right of repurchase. B paid only P1,200
of the purchase price and never paid the balance of P200. On the other
hand, although the land was supposed to have an area of 8.8 hectares,
its actual area was only more than five (5) hectares or a deficiency of
more than three (3) hectares.
B filed an action to recover the deficiency. S, in his counterclaim,
asked for rescission of the sale.
Issue: What is the effect of the discrepancies, i.e., failure of B to
pay the full price and the failure of S to deliver the total area sold?
Held: The failure of B to pay the balance did not suspend the
running of the redemption period as there is nothing to indicate that
the agreement of the parties is to suspend the period until the full
payment of the purchase price. (Catangcatang vs. Legayada, 84 SCRA
51 [1978].)
Note: The Supreme Court affirmed the decision of the Court of
First Instance (now Regional Trial Court) dismissing both B’s
complaint seeking recovery of the deficiency, having found that the
parcel of land sold was described by metes and bounds, having an
actual area less than that stated in the tax declaration and S’s
counterclaim.
R.C. Aquino, J., dissenting: In view of those discrepancies, the
contract ceased to be a true pacto de retro sale and it became a loan
secured by the delivery of the land to the creditor, a sort of
Art. 1602
EXTINGUISHMENT OF SALE
Conventional Redemption
379
antichresis,51 wherein the creditor’s enjoyment of the fruits of the land
served as payment of the interest on the land.
Subsequent sale of property by
vendor a retro.
The sole right of the vendor under a pacto de retro agreement is that
of redemption. He has no other interest left in the property which he can
transfer. (Davis vs. Neyra, 24 Phil. 417 [1913].) But a sale subsequently
made by the vendor to an innocent purchaser for value could defeat the
vendee’s title and right to possession if the latter’s right is not properly
registered or annotated.
When contract with right to repurchase
presumed an equitable mortgage.
For a presumption of an equitable mortgage to arise, there are two
(2) requisites, namely: that the parties entered into a contract
denominated as a contract of sale with a right of repurchase or
purporting to be an absolute sale (Art. 1604.) and that their intention
was to secure an existing debt by way of mortgage. (Lustan vs. Court of
Appeals, 78 SCAD 351, 266 SCRA 663 [1997]; Reyes vs. Court of
Appeals, 339 SCRA 97 [2000]; San Pedro vs. Lee, 430 SCRA 338
[2004].)
Article 160252 enumerates six distinct and separate circumstances
the presence of any (not a concurrence) of which is sufficient to give
rise to the presumption that a contract, regardless of its nomenclature,
is an equitable mortgage in consonance with the rule that the law favors
the last transmission of property rights. (Art. 1378.)53 (see Santos vs.
51 Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits
of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if
owing, and thereafter to the principal of his credit.
52 Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the
preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the
least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be
settled in favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a way that it cannot be
known what may have been the intention or will of the parties, the contract shall be null and void.
(1289)
53 This provision was applied retroactively to cases arising prior to the effectivity of the new
Civil Code since it is remedial in nature. (Magtira vs. Court of Appeals, 96 SCRA 680 [1980];
380
SALES
Art. 1602
Duata, 14 SCRA 1041 [1965]; Villarica vs. Court of Appeals, 26 SCRA
189 [1968]; Quinga vs. Court of Appeals, 3 SCRA 66 [1961]; Claravall
vs. Court of Appeals, 190 SCRA 439 [1990]; Misena vs. Rongavilla,
303 SCRA 749 [1999]; Aguirre vs. Court of Appeals, 119 SCAD 561,
323 SCRA 771 [2000]; Hilado vs. Heirs of R. Medalla, 377 SCRA 257
[2002].) They are inconsistent with the vendee’s acquisition of the right
of ownership under a true sale subject only to the vendor’s right to
redeem, and belie the truthfulness of the sale a retro. In case of doubt,
a contract purporting to be a sale with right of repurchase shall be
construed as an equitable mortgage. (Art. 1603.) These cases
are the following:
(1) Price of the sale is unusually inadequate. (see Cabigao vs. Lim,
50 Phil. 844 [1927]; Dapiton vs. Veloso, 93 Phil. 39 [1953]; Quinga vs.
Court of Appeals, supra; Labasan vs. Lacuesta, 86 SCRA 16 [1978];
Serrano vs. Court of Appeals, 139 SCRA 179 [1985].) It is common
knowledge borne out by experience that in nearly all cases, the zonal
valuations of the Bureau of Internal Revenue hardly approximate the
fair market values of real property. (Zamora vs. Court of Appeals, 72
SCAD 833, 260 SCRA 10 [1996].) But the mere disproportion of the
price to the value of the property, in the absence of other circumstances
incompatible with the contract of purchase and sale, cannot alone justify
the conclusion that the transaction is a pure and simple loan. (Bruce vs.
Court of Appeals, 157 SCRA 330 [1988].) Inadequacy is not sufficient
to set aside a sale unless it is grossly inadequate or purely shocking to
the conscience (Cachola vs. Court of Appeals, 208 SCRA 496 [1992];
Adapo vs. Court of Appeals, 327 SCRA 180 [2000].); or is such that
the mind revolts at it and such that a reasonable man would neither
directly or indirectly be likely to consent to it (Vda. de Alvarez vs. Court
of Appeals, 23 SCRA 309 [1968], citing A. Tolentino, Commentaries
and Jurisprudence on the Civil Code of the Phils., Vol. V, [1992], pp.
156-158.);
(2) Vendor remains in possession. (see Ibid.; Garcia vs. De
Arijona, 97 Phil. 997 [1955]; Lanuza vs. De Leon, 20 SCRA 369
[1967]; Tan vs. Valdehueza, 66 SCRA 61 [1975]; Quinga vs. Court of
Appeals, supra; Lao vs. Court of Appeals, 81 SCAD 845, 275 SCRA
Balatero vs. Intermediate Appellate Court, 154 SCRA 530 [1987]; Olea vs. Court of Appeals, 63
SCAD 579, 247 SCRA 274 [1995].)
Art. 1602
EXTINGUISHMENT OF SALE
Conventional Redemption
381
237 [1997].) Where the contract also provides that “It is agreed that the
vendor shall have the right to possess [e.g., as lessee], use and build on
the property during the period of redemption,” there is here an
acknowledgment by the vendee of the right of the vendor to retain
possession of the property, making the contract one of loan guaranteed
by mortgage, not a conditional sale or an option to repurchase.
(Bundalian vs. Court of Appeals, 129 SCRA 645 [1984].) If the
transaction is an absolute sale of property, particularly land, the vendee
ordinarily would assume immediate possession after the execution of
the deed of sale (Capulong vs. Court of Appeals, 130 SCRA 245
[1984].) Well-settled to the point of being elementary is the doctrine
that where the vendor remains in physical possession of the land sold
as lessee or otherwise, the contract should be treated as an equitable
mortgage. The real intention of the parties is determinative of the true
nature of the transaction. (Ramirez vs. Court of Appeals, 97 SCAD 612,
294 SCRA 512 [1998].) The vendor’s continued possession of the
property allegedly sold taken together with other circumstances, may
even cast a serious doubt on the due execution and genuineness of a
contested deed of sale. (Domingo vs. Court of Appeals, 156 SCAD 819,
367 SCRA 368 [2001].)
In a case, the vendor, under the agreement shall remain in
possession of the property for only one year. It was held that this “did
not detract from the fact that the possession of the property an indicium
of ownership, was retained by the private respondent as the alleged
vendor. The period of time may be deemed as actually the time allotted
for private respondent for fulfilling its part of the agreement by paying
its indebtedness x x x as may be gleaned from paragraph (f) x x x of the
agreement.’’ (Oronce vs. Court of Appeals, 100 SCAD 277, 298 SCRA
133 [1998].)
(3) Period of redemption is extended after expiration (see Umali
vs. Fernandez, 28 Phil. 89 [1914]; Lizares, Jr. vs. Court of Appeals, 44
SCAD 492, 226 SCRA 112 [1993]; Lacorte vs. Court of Appeals,
91 SCAD 446, 286 SCRA 24 [1998].);
(4) Purchaser retains part of the price (see Camus vs. Court of
Appeals, 41 SCAD 796, 222 SCRA 612 [1993].)
In the cited case of Oronce vs. Court of Appeals (supra.), paragraph
(f) of the deed of sale with assumption of mortgage states that the “full
382
SALES
Art. 1602
title and possession’’ of the property “shall vest upon the VENDEES
upon the full compliance by them with all the terms and conditions
herein set forth.’’ It “also evidences the fact that the agreed “purchase
price’’ of fourteen million pesos (P14,000,000.00) was not handed over
by petitioners to private respondent upon the execution of the
agreement. Only P5,400,000.00 was given by petitioners to private
respondent, as the balance thereof was to be dependent upon the private
respondent’s satisfaction of its mortgage obligation to China Banking
Corporation. Notably, the MTC found that petitioners gave private
respondent the amount of P8,500,000.00 that should be paid to the bank
to cover the latter’s obligation, thereby leaving the amount of
P100,000.00 (P5,400,000.00 + P8,500,000.00 = P13,900,000.00) of the
purchase price still unpaid in the hands of petitioners, the alleged
‘vendees.’ Held: “Hence, two of the circumstances enumerated in
Article 1602 are manifest in the Deed of Sale with Assumption of
Mortgage, namely: (a) the vendor would remain in possession of the
property (No. 2), and (b) the vendees retained a part of the purchase
price (No. 4). On its face, therefore, the document subject of
controversy, is actually a contract of equitable mortgage.’’
(5) Vendor binds himself to pay taxes on the thing sold (see Aquino
vs. Deala, 63 Phil. 583 [1936]; Dalandan vs. Julio, 10 SCRA 400
[1964].) or the alleged vendee never declared in his name for taxation
purposes the land sold. (Labasan vs. Lacuesta, supra.) But the sole
circumstance that the land sold continued to be registered and all the tax
declarations thereon were made in the name of the vendor cannot be
invoked to support the finding that a deed of sale with the right of
repurchase is an equitable mortgage. At best, it may demonstrate
neglect on the part of the vendee. (Bollozos vs. Yu Tieng Su, 155 SCRA
506 [1987].)
In a case, although the tax declarations for the property in question
have been transferred to the vendee’s name and he has been
continuously paying the realty taxes thereon, the fact that he has made
no move for 30 years to oust the vendor and his heirs from their
possession of the property was taken as a circumstance which clearly
falls within the ambit of Article 1602 as a badge of an equitable
mortgage. (Dapiton vs. Court of Appeals, 83 SCAD 82, 272 SCRA 95
[1997].)
Art. 1602
EXTINGUISHMENT OF SALE
Conventional Redemption
383
(6) The parties really intended an equitable mortgage instead of a
sale, i.e., that the transaction shall secure the payment of a debt or the
performance of any other obligations. (see Bautista vs. Ping, 90 Phil.
409 [1952]; Macoy vs. Trinidad, 95 Phil. 192 [1954]; Gloria Diaz vs.
Court of Appeals, 84 SCRA 483 [1978].) The intention of the parties is
the decisive factor in evaluating whether or not the agreement is a
simple loan accommodation secured by a mortgage. This intention is
shown not necessarily by the terminology used but by all the
surrounding circumstances. (Molina vs. Court of Appeals, 398 SCRA
97 [2002].)
The terms of the document itself can aid in arriving at the true nature
of the transaction. Thus, where the contract contains a stipulation that
upon payment by the vendor of the purchase price within a certain
period, the document shall become null and void and have no legal force
and effect, the purported sale should be considered a mortgage contract.
In pacto de retro sale, the payment of the repurchase price does not
merely render the document null and void but there is the obligation on
the part of the vendee to sell back the property. (Olea vs. Court of
Appeals, 63 SCAD 579, 247 SCRA 274 [1995], citing A.M. Tolentino,
Civil Code of the Phils., 19th ed., Vol. V, p. 159.) The same
presumption applies when the vendee was given the right to appropriate
the fruits thereof in lieu of receiving interest on the loan. (Adrid vs.
Morga,
108 Phil. 927 [1960]; Olea vs. Court of Appeals, supra.)
In the above cases, the repurchase price paid by the apparent vendor
is considered the principal of the loan and any money, fruits or other
benefit received thereafter by the apparent vendee, are considered as
interest on said loan and are subject to the Usury Law. 54 The
denomination of the contract as a deed of sale is not binding as to its
nature. The decisive factor in evaluating such an agreement is the
intention of the parties as shown, not necessarily by the terminology
used in the contract, but by their conduct, words, actions and deeds prior
to, during, and immediately after executing the agreement. (see Art.
1371.) Even a conveyance accompanied by the registration of the same
and the issuance of a new certificate of title in favor of the transferee is
54 Rates of interest on loans or forebearances of money are no longer subject to any ceiling
prescribed under the Usury Law. (see C.B. Resol. No. 224, Dec. 3, 1982.)
384
SALES
Art. 1602
no more secured from the operation of the equitable doctrine than the
most informal conveyance that could be devised. Equity looks through
the form and considers the substance. (Oronce vs. Court of Appeals, 100
SCAD 277, 298 SCRA 133 [1998]; see Tolentino and Mauni vs.
Gonzales, 50 Phil. 158 [1927].)
Documentary and parol evidence55 is competent and admissible to
prove that the contract does not express the true intention of the parties
and may be introduced to show that the agreement is, in fact, merely a
mortgage given merely as a security for the repayment of a loan,
masquerading as a sale. (Vda. de Alvarez vs. Court of Appeals, 49
SCAD 663, 231 SCRA [1994]; Misena vs. Rongavilla, 303 SCRA 749
[1999]; Lapat vs. Rosario, 110 SCAD 896, 312 SCRA 539 [1999];
Reyes vs. Court of Appeals, 339 SCRA 97 [2000].)
Intention to execute mortgage may
be fairly inferred.
A contract should be construed as a mortgage or a loan instead of a
pacto de retro sale when its terms are ambiguous (see Art. 1603.) or
when other circumstances rather than any of the specific cases defined
in Nos. (1) to (5) of Article 1602, may be indicative that the real
intention of the parties is to enter into a contract of loan with mortgage.
Thus:
(1) Vendor in urgent need of money. — Taking into account the
surrounding circumstances, a pacto de retro sale may be deemed an
equitable mortgage where it appears that it was executed due to the
urgent necessity for money of the vendor, notwithstanding that he was
aware of the contents of the contract. Necessitous men are not, truly
speaking, free men; but to answer a present emergency will submit to
any terms that the crafty may impose upon them. (Labasan vs. Lacuesta,
supra; Claravall vs. Court of Appeals, 190 SCRA 439 [1990]; see
Camus vs. Court of Appeals, supra; Lao vs. Court of Appeals, 81 SCAD
845, 275 SCRA 239 [1997]; Matanguihan vs. Court of Appeals, 84
55 Section 7, Rule 130 of the Rules of Court provides: “When the terms of an agreement have
been reduced to writing, it is to be considered as containing all such terms, and, therefore, there
can be, between the parties and their successors in interest, no evidence of the terms of the
agreement other than the contents of the writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the true intent
and agreement of the parties, x x x.’’
Art. 1602
EXTINGUISHMENT OF SALE
Conventional Redemption
385
SCAD 463, 275 SCRA 380 [1997]; Lorbes vs. Court of Appeals, 143
SCAD 490, 351 SCRA 716 [2001].)
Among the circumstances considered in a case, namely, the
vendee’s unequivocal recognition of the vendor as the owner and lessor
of the property even after the alleged sale had been executed and his
clear offer to sell back the property thereafter to the vendor who was
then admittedly in grave financial crisis which the vendee took undue
advantage of, were held more than enough indicia of the true intention
of the parties to treat the contract as an equitable mortgage. (Zamora vs.
Court of Appeals, 72 SCAD 833, 260 SCRA 10 [1996].)
(2) Automatic appropriation by vendee of property sold stipulated.
— The stipulation in pacto de retro sale that the ownership over the
property sold would automatically pass to the vendee in case no
redemption was effected within the stipulated period, is contrary to the
nature of a true pacto de retro sale under which the vendee acquires
ownership of the thing sold immediately upon the execution of the sale,
subject only the vendor’s right of redemption. The said stipulation is
pactum commissorium which enables the mortgagee to acquire
ownership of the mortgaged property without foreclosure. It is void. Its
insertion in the contract is an avowal of the intention to mortgage, rather
than to sell the property. (Lanuza vs. de Leon, 20 SCRA 369 [1969].)
(3) Vendee given possession of certificate of title. — In a case, the
Supreme Court, in holding that the conclusion of the trial court that the
deeds of sale in question were mere contracts of loan or, properly
speaking, a security arrangement, was not far-fetched, said: “This court
takes cognizance of the common practice of individual money lenders
of taking physical possession of the certificate of title or other
documents evidencing ownership of real estate by the debtor to ensure
his faithful compliance with the obligation to pay the loan.” (Rodriguez
vs. Toreno, 79 SCRA 351 [1977].)
(4) Escalation of purchase price every month stipulated. — It has
also been ruled that a stipulation in a contract sharply escalating the
repurchase price every month enhances the presumption that the
transaction is an equitable mortgage. Its purpose is to secure the return
of the money invested with substantial profit or interest, a common
characteristic of loans. (Bundalian vs. Court of Appeals, 129 SCRA 645
[1984].)
386
SALES
Art. 1602
(5) Vendor borrowed from vendee money used in buying property
sold. — The same presumption arises from a statement in a deed of sale
with right to repurchase that the vendor borrowed from the vendee the
money used in buying the property from the original owner. And the
admission by the vendor that she “accepted” the transaction knowing it
to be a contract of sale with right to repurchase is not a sufficient ground
to arrive at such conclusion where the vendor was in urgent need of
money. Vendors covered by Article 1602 are usually in no position to
bargain with the vendees and will sign onerous contracts to get the
money they need. It is precisely this evil which the law guards against.
It is not the knowledge of the vendors that they are executing a contract
of sale pacto de retro, which is the issue, but whether or not the real
contract was one of sale or a loan disguised as a pacto de retro sale.
(Ibid.; Lao vs. Court of Appeals, 81 SCAD 845, 275 SCRA 237
[1997].)
(6) Vendor of low intelligence and illiterate. — In subsequent case,
an alleged sale of a land by a father who was of low intelligence,
illiterate and could not even sign his name, having affixed his
thumbmark in the document in question entitled: “Sanglaan ng isang
Lupa na Patuluyang Ipaaari” was declared null and void, it appearing
that the execution of the document was made without giving notice to
the son who was not even a witness to the document, that the old man
would not understand the meaning of its contents even if it were read to
him, that the contract was so written that anyone could believe he was
only giving his property by way of mortgage, not as a sale, and that the
money which he had been receiving from the alleged vendee a retro
came from the subject property so that, in effect, there was no
consideration for the transfer of the property — be it sale or mortgage.
(Aguinaldo vs. Esteban, 135 SCRA 645 [1985].)
(7) Vendor continued to pay monthly interest; property not
transferred to vendee; etc. — In another case, the Supreme Court
considered the supposed deed of sale an equitable mortgage in view of
the following circumstances: the vendor remained in possession of the
property; the property was not transferred to the supposed vendee for
taxation purposes; the supposed vendor continued to pay monthly
interests; and the debt of the supposed vendor continued to pile up
notwithstanding the alleged sale, the loan of P6,000 having earned an
interest of more than P13,000. (Dimalanta vs. Court of Appeals, 148
Art. 1602
EXTINGUISHMENT OF SALE
Conventional Redemption
387
SCRA 534 [1987]; see Lazatin vs. Court of Appeals, 211 SCRA 129
[1992].)
(8) Vendor continued to be indebted. — A test to determine
whether a conveyance is a sale or merely a security for the payment of
a loan is the continued existence of a debt or liability on the part of the
alleged mortgagor. If such a relationship exists, the transaction is a
mortgage; otherwise, it is a contract of sale. (Cuyugan vs. Santos, 34
Phil. 100 [1915]; Vda. de Alvarez vs. Court of Appeals, 49 SCAD 663,
231 SCRA 309 [1994].)
(9) Vendor mortgaged property sold to a bank; paid taxes thereon;
etc. — In a later case, the following circumstances existed to prove that
the alleged contract of sale was an equitable mortgage: the vendor
remained undisturbed in the possession of the parcel of land sold, paid
the taxes thereon, and mortgaged it to a bank; and the price was
unusually inadequate. The fact that the vendee subsequently executed
an affidavit to consolidate his right of ownership over the subject
property was held of no consequence. His alleged “constructive
possession” did not ripen into ownership because the contract was not
a contract of sale. (Balatero vs. Intermediate Appellate Court, 154
SCRA 60 [1987].)
ILLUSTRATIVE CASES:
1. Circumstances indicate contract was an equitable mortgage.
Facts: S and B entered into a transaction which purported to be a sale
of a lot and building by S with the right to repurchase.
Issue: Whether the contract was really an equitable mortgage.
Held: The following circumstances were held as indicating that
the transaction was intended by the parties to secure the payment of a
debt (Art. 1602[6].):
(a)
S did not intend in any way to sell his lot and building;
(b)
S was greatly alarmed when B registered the deed
andhad a new title issued in B’s name;
(c)
The money that S borrowed from B was partly to finish
the construction of the building; and
(d)
S made a strong remonstrance to B when the
documentwas explained to him by his interpreter, but B assuaged him
that it made no difference as he could get back his property within
388
SALES
Art. 1602
eight (8) years if he had the money. (Bautista vs. Ping, 90 Phil. 409
[1951].)
———— ———— ————
2.
Circumstances indicate contract was not an equitable
mortgage.
Facts: S sold to B a lot for P35,000.00 in 1951. It appeared that
B sold the lot in 1953 for P47,000.00. B allowed S to collect the
monthly rent on the land for five (5) months. Subsequent to the date
of absolute sale, B gave S an option to buy the property, and S paid
the back taxes thereon up to the date of the sale.
Issue: Should the instrument of absolute sale be presumed an
equitable mortgage?
Held: No, in view of the following:
(a)
In selling the land to B, S made a profit of P15,000.00
inone year, without having invested his money in buying the land, as
he just borrowed the part payment (P7,400.00) of the price thereof
(P20,000.00) which he made to its previous owner. The price of
P35,000.00 is not inadequate;
(b)
S did not remain in possession of the land sold as lessee
or otherwise. On his request, in order to help him in the expenses of
his children in Manila, he was merely allowed by B to collect the
monthly rents, on the understanding that the amounts so collected
would be charged against him. After five (5) months, B was the one
who collected the monthly rents from the tenants;
(c)
An option is different from the right of repurchase; 56and
(d)
S had the obligation to pay the back taxes because
hesold the land free from all liens and encumbrances. The taxes due
after the sale were paid by B. (Villarica vs. Court of Appeals, 26 SCRA
189 [1968].)
———— ———— ————
3.
Circumstances show contract was a pacto de retro sale.
Facts: S entered into a contract with B. The contract stipulates a
sale by S of an agricultural land with right of repurchase. It does not
contain any other condition to indicate that a different transaction was
intended by the parties. No extraneous evidence was presented by S
to show that a mortgage or antichresis was the real purpose of the
56
See “Option to buy and right of repurchase distinguished,” under Article 1601.
Art. 1602
EXTINGUISHMENT OF SALE
Conventional Redemption
instrument. Nor was there any proof offered by S that the purchase
price was ever repaid by him.
B, the vendee, was placed in possession of the land immediately
after the execution of the contract and this possession was continued
by B’s heirs without any objection from S or his heirs. Issue: Do these
circumstances exemplify a contract of sale with pacto de retro?
Held: Yes. All the above facts justify the conclusion that the
contract was indeed a sale subject to right of repurchase and that S
failed to exercise such right. (Vda. de Luna vs. Valle, 48 SCRA 36
[1972].)
———— ———— ————
4.
Circumstances show contract was an equitable mortgage.
Facts: S sold to B (in 1965) a two-storey house made of strong
materials with an assessed value of P4,000.00 built on a lot (in Tondo,
Manila) leased from X, together with the leasehold rights to the lot, a
television set, and a refrigerator in consideration of the sum of P3,000
under a document entitled “Deed of Sale with Right to Repurchase.”
The deed recites among others, that “if (S) fails to pay the said amount
of P3,000.00 within the stipulated period of three (3) months, his right
to repurchase the said properties shall be forfeited and the ownership
thereto automatically passes to B x x x without any court intervention
and they can take possession of the same.”
When the original period of redemption expired, the parties
extended it by another period of three (3) months. The document was
not recorded. After the execution of the instrument, S mortgaged the
house in favor of C, which mortgage was registered under Act No.
3344.
Issue: Is the contract a pacto de retro sale or an equitable
mortgage?
Held: The following circumstances indubitably show an equitable
mortgage:
(a)
S, the supposed vendor, remained in possession of
theproperty sold, and when the three-month period of redemption
expired the parties extended it;
(b)
The price is grossly inadequate;
(c)
S did not really transfer his ownership of the properties
in question to B. What was agreed was that ownership of the things
supposedly sold would vest in B only if S failed to pay P3,000.00. In
fact, the emphasis is on S’s payment of the amount rather than on the
389
390
SALES
Art. 1602
redemption of the things supposedly sold. This stipulation is contrary
to the nature of a true pacto de retro sale under which the vendee
acquires ownership of the thing sold immediately upon execution of
the sale, subject only to the vendor’s right of redemption. Indeed, what
the parties established by this stipulation is an odious pactum
commissorium which enables the mortgagee to acquire ownership of
the mortgaged properties without need of foreclosure proceedings.
Such a stipulation is a nullity, being contrary to the provisions of
Article 2088 of the Civil Code. Its insertion in the contract of the
parties is an avowal of an intention to mortgage rather than to sell; and
(d)
S remained in possession even long after he had losthis
right of redemption. B brought action for consolidation of ownership
(see Art. 1607.) after more than one (1) year, and only after C, who
holds a registered mortgage, asked for the extra-foreclosure of his
mortgage. Under Article 2155, the equitable mortgage while valid
between S and B as the immediate parties thereto, cannot prevail over
the registered mortgage of C. (Lanuza vs. De Leon, 20 SCRA 369
[1967].)
———— ———— ————
5. Other circumstances indicate contract was an equitable
mortgage.
Facts: S obtained a series of loans from B, the aggregate of which
amounted to P16,250.00, secured by a continuing mortgage on S’s
land. S failed to liquidate the mortgage upon maturity. An absolute
deed of sale was executed by S whereby title to the property was
transferred to B for P21,300.00, which amount was P1,000.00 more
than S’s mortgage indebtedness.
In another document executed on the same day, S was given an
option to purchase the property for the same price of P21,300.00. S
failed to exercise the option in due time, and her efforts to secure an
extension of time proved futile. B subsequently sold the land to his
brother.
Issue: Should the “Pagbibilihang Tulayan ng Bakuran” be
treated as an equitable mortgage?
Held: Yes, in view of the following:
(a)
This case must be differentiated from the Villarica case
under Article 1607 (supra.), where the ruling was based on a particular
set of facts. In the latter, the option to buy back the property was
executed six (6) days after the execution of the deed of sale and the
Art. 1602
EXTINGUISHMENT OF SALE
Conventional Redemption
option to buy was interpreted to be only an afterthought. Here, the
intent of the parties to circumvent the provision discouraging pacto de
retro sales is very apparent. The deed of absolute sale and the
document giving the right to repurchase were, in fact, only one
transaction of pacto de retro sale which must be construed as an
equitable mortgage.
(b)
Another factor is the sale of the property to B’s
brother,thus interposing a supposed innocent third party between the
parties to the contract. The records show that this sale and the issuance
of a new transfer certificate of title on the same date as the sale cannot
be deemed to be bona fide.
(c)
The records show that over a six-month period, S
borrowed money on no less than 10 separate occasions from B, and
when her total borrowings of P13,000.00 were added to what S
claimed were usurious interests amounting to P3,250.00, the cited
total of P16,250.00 were made to appear as the P21,300.00 purchase
price for the lot when actually no money outside of the 10 earlier loan
transactions were exchanged between the parties.
(d)
The added fact that S remained in actual possession
ofthe land and enjoyed the fruits thereof confirms the real intention of
the parties to secure the payment of the loans with the land as security.
B waited for the period of redemption to expire before taking
possession of the land. Had S really executed an absolute sale in favor
of B, the land should have been delivered to B and he would have
assumed possession after the execution of the questioned deed of sale.
The deed of sale, together with the companion “right to redeem”
contract, being only an equitable mortgage, B could not validly sell
the land to his brother. (Capulong vs. Court of Appeals, 130 SCRA 245
[1984].)
———— ———— ————
6. Vendee a retro, after execution of “deed of sale with pacto de
retro,” gave several additional amounts and consented that they be
aggregated to the price of redemption.
Facts: The following facts are undisputed: In the first document,
Exh. “A” (deed of sale with pacto de retro), the consideration was for
P3,600; then a second document of exactly the same tenor was
executed hardly seven (7) months later, adding the sum of P200 that
had been later on received as addition to the price, making the
redemption price P3,800; then four (4) years later, because an
additional amount of P400 was again received, a new document was
391
392
SALES
Art. 1602
once more executed, raising the redemption price to P4,200; and then
a year later, because another sum of P300 had been received, still
another document of the same tenor was once more executed, raising
the redemption price to P4,500.
Issue: In the light of the above admitted facts, should the
transaction be deemed an equitable mortgage?
Held: Yes. If Exh. “A” was a true deed of sale with pacto de retro,
the price was P3,600, nothing not even a centavo more, the only right
of the vendor a retro would have been to redeem at that price. If the
vendee a retro himself gave afterwards several additional amounts
and himself consented that they be aggregated to the price of
redemption, that was absolutely inconsistent with the designation of
the agreement. The case falls under the 6th circumstance or badge of
equitable mortgage listed in Article 1602. (Gloria Diaz vs. Court of
Appeals, 84 SCRA 483 [1978].)
Price in pacto de retro sales usually
lower.
It should be noted that in a contract of sale with pacto de retro, the
price usually is less than in absolute sale for the reason that in
EXTINGUISHMENT OF SALE
Conventional Redemption
393
Arts. 1603-1604
the former, the vendor expects to reacquire or redeem the property sold
(Amigo and Amigo vs. Teves, 96 Phil. 255 [1954].), or else he may sell
his right to redeem and thus recover the loss he claims suffered by
reason of the inadequacy of the price. (see Barrozo vs. Macaraeg, 83
Phil. 381 [1949]; Tolentino vs. Agcaoili, 91 Phil. 917 [1952].)
The practice is to fix a relatively reduced price to afford the vendor
a retro every facility to redeem the property. In an absolute sale where
the vendor is permanently giving away his property, he tries to get as
compensation its real value. Hence, the inadequacy of repurchase price
of itself cannot be considered a ground for annulling the contract or
justify the conclusion that the contract is one of equitable mortgage. 57
(Claridad vs. Novella, 105 Phil. 756 [1959]; Lacson vs. Granada, 1
SCRA 876 [1961]; Ignacio vs. Court of Appeals, 62 SCAD 731, 246
SCRA 242 [1995].)
ART. 1603. In case of doubt, a contract purporting
to be a sale with right to repurchase shall be
construed as an equitable mortgage. (n)
ART. 1604. The provisions of Article 1602 shall
also apply to a contract purporting to be an absolute
sale. (n)
Presumption in case of doubt.
(1) Doubt resolved in favor of equitable mortgage. — Whether the
sale is absolute or pacto de retro, it shall be presumed to be an equitable
mortgage even if only one of the circumstances mentioned in Article
1602 is present. This is so because pacto de retro sales, with the
stringent and onerous effects that accompany them, are not favored.
(Olea vs. Court of Appeals, 63 SCAD 579, 247 SCRA 274 [1995].) In
57 In an extra-judicial foreclosure sale, when there is a right to redeem, inadequacy of the
price is also of no moment for the reason that the mortgagor has always the chance to redeem and
reacquire the mortgaged property sold at the foreclosure sale. The property may be sold for less
than the fair market value precisely because the lesser the price the easier for the owner to effect a
redemption. (Valmonte vs. Court of Appeals, 103 SCAD 509, 303 SCRA 287 [1999].)
394
SALES
case of doubt, a contract purporting to be a sale with right to repurchase
shall still be regarded as an equitable
Arts. 1603-1604
mortgage. (see De la Paz vs. Garcia, 18 SCRA 779 [1966].) A contract
of reconveyance is but a necessary consequence of the exercise of a
party’s right to repurchase the property subject of a contract of sale with
a right of repurchase or of an equitable mortgage. (Lacorte vs. Court of
Appeals, 91 SCAD 446, 286 SCRA 24 [1998].)
The failure of the alleged vendee to take steps to consolidate
ownership of real property after the vendor failed to redeem within the
period agreed upon, may be taken as a factor in construing a sale a retro
an equitable mortgage. (Lacuesta vs. Labasan, 86 SCRA 16 [1978].)
Where the contract is deemed an equitable mortgage, ownership of the
property cannot be consolidated until after foreclosure of the mortgage
has been undertaken. (Republic vs. Intermediate Appellate Court, 43
SCAD 101, 224 SCRA 285 [1993].)
(2) Presumption, an exception to general rule. — Article 1603 is
an exception to the rule that doubts affecting an onerous contract shall
be settled in favor of the greatest reciprocity of interests. (Art. 1378,
par. 1.) An equitable mortgage effects a lesser transmission of rights
and interests than a contract of sale, since the debtor does not surrender
all rights to his property but simply confers upon the creditor the right
to collect what is owing from the value of the thing given as security.
(see Lacuesta vs. Labasan, supra; Uy vs. Court of Appeals, 49 SCAD
176, 230 SCRA 664 [1994]; Reyes vs. Court of Appeals, 739 SCRA 97
[2002]; Cruz vs. Court of Appeals, 412 SCRA 614 [2003].)
(3) Parol evidence admissible. — Parol evidence is admissible to
show that a transaction purporting to be an absolute or a pacto de retro
sale is really one of loan with a security and, therefore, a mortgage.
(Serrano vs. Court of Appeals, 139 SCRA 179 [1985]; see Art. 1604.)
Thus, it has been 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 performance are
incompatible or inconsistent with the theory that it is a sale.
Accordingly, 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
EXTINGUISHMENT OF SALE
Conventional Redemption
395
contract is really a loan with mortgage by raising as an issue the fact
that the document does not
Arts. 1603-1604
express the true intent and agreement of the parties; and upon proof of
the truth of such allegation, the court will enforce the agreement in
consonance with the true intent of the parties at the time of the execution
of the contract. This principle is applicable even if the purported pacto
de retro sale was registered in the name of the transferee and a new
certificate of title was issued in the name of the latter. (Olea vs. Court
of Appeals, supra; Lustan vs. Court of Appeals, 78 SCAD 351, 266
SCRA 663 [1997].)
The admission of parol testimony to prove that a deed of sale
absolute in form, was in fact given and accepted to secure the payment
of a debt or the performance of any other obligation, does not violate
the rule against the admission of evidence to vary or contradict the terms
of the contract. (Ignacio vs. Chua Hong, 52 Phil. 940 [1929]; Aguinaldo
vs. Esteban, 135 SCRA 645 [1985]; Serrano vs. Court of Appeals, 139
SCRA 179 [1985]; Ramos vs. Court of Appeals, 180 SCRA 635 [1989];
Reyes vs. Court of Appeals, 339 SCRA 97 [2000].)
(4) Where contract appears to be a genuine sale. — If from all
indications, the contract appears to be a genuine sale with right of
repurchase (or an absolute sale) and none of the suspicious
circumstances mentioned in Article 1602 is present, the true agreement
will be upheld. (see De Luna vs. Valle, 48 SCRA 361 [1972]; Villarica
vs. Court of Appeals, 26 SCRA 189 [1968]; De Bayquen vs. Baleoro,
143 SCRA 412 [1986]; Cachola vs. Court of Appeals, 208 SCRA 496
[1992].)
The contract of sale with right of repurchase must be interpreted
according to its literal sense and held to be such a contract.
In a case (there was no trace of any circumstances showing that the
transaction was an equitable mortgage), the following were held evident
manifestation of a genuine sale with right of repurchase: adequate price;
immediate delivery of the land to the vendee who cultivated the same
to rice and has since then been improving the property to the exclusion
of the vendor; religious payment of all the land taxes by the vendee;
neglect of the vendor to pay the taxes; and vendor’s inaction to redeem
396
SALES
the property for a period of eight (8) years from the date of execution of
the deed of sale. (Bagadiong vs. Vda. de Abundo, 165 SCRA 459
[1988].)
Arts. 1603-1604
Effect where contract held as an equitable
mortgage.
(1) Formal requirements of mortgage deemed complied with. —
When a contract purporting to be sale with a right to repurchase is held
as an equitable mortgage, the same shall be given effect as if it has
complied with the formal requirements of mortgage. (see Zubiri vs.
Quijano, 74 Phil. 47 [1942].) The supposed vendee (in reality the
creditor) has the right to recover the amount loaned. (Arches vs. Dias,
50 SCRA 440 [1973].)
(2) Contract subordinate to a subsequent registered mortgage. —
The equitable mortgage, while valid as between the immediate parties
thereto, cannot, however, prevail over a subsequent registered
mortgage. (see Art. 2125.)
(3) Title of property remains in supposed vendor. — The
circumstance that the original transaction is subsequently declared to be
an equitable mortgage means that the title to the mortgaged property
which had been transferred to the supposed vendee actually remained
or is transferred back to the supposed vendor as ownermortgagor
conformably to the well-established doctrine that the mortgagee does
not become the owner of the mortgaged property because the ownership
remains with the mortgagor. (Art. 2088.)
(4) Remedy of creditor is to foreclose. — Accordingly, it is not
proper for a court to declare the property as already owned by the
mortgagee upon failure of the mortgagor to pay his obligation within
the required period, as it would produce the same effect as a pactum
commissorium, a forfeiture clause that has traditionally been held as
contrary to good morals and public policy and, therefore, void. The
proper remedy to enforce a transaction declared to be a mortgage is not
an action for consolidation of ownership (see Art. 1607.) but to
foreclose the mortgage and sell the property at public auction.
(Montevirgen vs. Court of Appeals, 112 SCRA 641 [1982]; see Ching
Sen Ben vs. Court of Appeals, 112 SCAD 698, 314 SCRA 762 [1999].)
EXTINGUISHMENT OF SALE
Conventional Redemption
397
(5) Conveyance of land not to affect mortgagor’s right of
redemption. — Neither is a person’s right as a mortgagor in equity
affected by the fact that the subject property was already titled in the
name of the supposed vendee based on the mistaken notion
Art. 1605
that the property was sold a retro. The equitable doctrine that deems a
conveyance intended as a security for a debt to be, in effect, an equitable
mortgage, operates regardless of the form of the agreement chosen by
the contracting parties. Equity looks through the form and considers the
substance. No conveyance of land, even if accompanied by registration
in the name of the transferee and the issuance of a new certificate, can
be allowed which will enable a party to escape from the operation of
this equitable doctrine. (ibid.)
“Pacto de retro’’ sales not favored.
Sales with a right to repurchase, as defined by the Civil Code (Art.
1602.), are not favored, and the contract will be construed as a mere
loan unless the court can see that, if enforced according to its terms, it
is not an unconscionable one. (Aquino vs. Deala, 63 Phil. 582 [1936].)
The presumption, however, that the contract is an equitable
mortgage may be overcome by proof to the contrary (see Vda. de Luna
vs. Valle, 48 SCRA 361 [1972].), and the fact that a document is entitled
as a mortgage (i.e., “Kasulatang Sanlaan”) is not controlling where the
body of said document shows that is a deed with right to repurchase as
revealed by the words (i.e., “aking inilipat, ipinagbili nang biling
mabibiling muli”) used by the parties. (Magtira vs. Court of Appeals,
96 SCRA 680 [1980].)
ART. 1605. In the cases referred to in articles 1602
and 1604, the apparent vendor may ask for the
reformation of the instrument. (n)
When vendor may ask for reformation.
Article 1604 seeks to prevent a circumvention of Article 1602 by
making the contract of loan appear as an absolute sale.
398
SALES
Reformation is that remedy granted by law by means of which a
written instrument is made or construed so as to express or conform to
the real intention of the parties when such intention is not expressed in
the instrument. (see Art. 1359.) If the parties really intended a mortgage
but the instrument states that the property is sold absolutely or with a
right of repurchase, the same may
Art. 1606
EXTINGUISHMENT OF SALE
Conventional Redemption
399
be reformed (Art. 1365.) so that the contract should appear to be a
mortgage and not an absolute sale or a pacto de retro sale.
In reformation, there has been a meeting of the minds between the
parties, but the written instrument purporting to embody their agreement
does not express their true intention by reason, for instance, of mistake
or fraud. (Art. 1359.) Where there has been no meeting of the minds,
the remedy is annulment. (Art. 1390.)
EXAMPLES:
(1)
As security for a loan, S mortgaged his house to B. Both
parties intended to enter into a mortgage contract but the instrument
as written states that the house is sold by S to B with a right to
repurchase. In this case, the remedy of reformation is proper.
(2)
If, in the same example, S was borrowing money from
B, with mortgage of his house as security, and B was buying the house
of S with right of S to repurchase, the remedy is annulment. Either
way, reformation cannot make the instrument express the real
intention of the parties.
ART. 1606. The right referred to in article 1601, in
the absence of an express agreement, shall last four
years from the date of the contract.
Should there be an agreement, the period cannot
exceed ten years.
However, the vendor may still exercise the right to
repurchase within thirty days from the time final
judgment was rendered in a civil action on the basis
that the contract was a true sale with right to
repurchase. (1508a)
Period for exercise of right of redemption.
Article 1606 refers to conventional redemption. It does not apply
where the contract is not one of sale with right of repurchase. (Baluran
vs. Navarro, 79 SCRA 309 [1977].)
For conventional redemption to take place, the vendor should
reserve, in no uncertain terms, the right to repurchase the thing sold.
400
SALES
Art. 1606
(see Art. 1601.) Thus, the right to redeem must be expressly stipulated
in the contract of sale in order that it may have legal existence.
Accordingly, where the contract provides: “In case of sale” by the buyer
of the property (sold) to the seller, the Supreme Court held that the
stipulation does not grant the right of repurchase. The quoted phrase
should be construed to mean “should the buyer wish to sell” which is
the plain and simple import of the words, and not “the buyer should
sell.” (Leal vs. Intermediate Appellate Court, 155 SCRA 394 [1987].)
(1) No agreement granting right. — If there is no agreement in a
contract of sale (see Umale vs. Fernandez, 28 Phil. 89 [1914].) granting
the vendor the right to redeem, there is no right of redemption since the
sale should be considered an absolute sale.
(2) Agreement merely grants right. — If the parties agreed only on
the right to redeem on the part of the vendor but there is a total absence
of express stipulation as to the time within which the repurchase should
be made, then the period of redemption shall be four (4) years from the
date of the contract. (par. 1.)
(3) Definite period of redemption agreed upon. — If the parties
agreed on a definite period of redemption, then the right to redeem must
be exercised within the period fixed provided it does not exceed 10
years. (par. 2.) It has been held that the non-payment by the vendee a
retro of the balance of the purchase price does not suspend the running
of the period of redemption agreed upon (5 years) in the absence of a
stipulation to that effect. A sale is consummated upon the execution of
the document and the delivery of the subject matter thereof to the
vendee. Failure to pay part of the price does not in any way affect the
cause or consideration of the contract. (Catangcatang vs. Legayada, 84
SCRA 51 [1978].)
(4) Period agreed upon exceeds ten years. — Where the agreed
period exceeds 10 years, the vendor a retro has 10 years from the
execution of the contract to exercise his right of redemption. (Anchuelo
vs. Intermediate Appellate Court, 147 SCRA 434 [1987].)
(5) Period of redemption not specified. — If the parties agreed that
the vendor shall have a right to redeem and they intend a period which,
however, is not specified, then the redemption period is 10 years. In
order to be applicable, paragraph 2 of Article 1606 requires the
existence of an agreement, not a definite and clear agreement on the
Art. 1606
EXTINGUISHMENT OF SALE
Conventional Redemption
401
period. The mere fact that the agreement is obtained by inference does
not argue in favor of its non-existence. (Tumaneng vs. Abad, 92 Phil.
18 [1952].)
(6) Final judgment that contract is pacto de retro. — “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,” the vendor a retro has
30 days within which to exercise the right to repurchase. (par. 3; see
Gonzales vs. De Leon, 4 SCRA 332 [1962]; Gerardino vs. The Hon.
Judge, 80 SCRA 646 [1977]; Gloria Diaz vs. Court of Appeals, 84
SCRA 483 [1978].)
(a)
As set forth in this provision, there must be an
expressfinding that the transaction is one of pacto de retro. (Tapas
vs.
Court of Appeals, 69 SCRA 369 [1976].)
The application of the third paragraph of Article 1606 is
predicated upon the bona fides of the vendor a retro. It must appear
that there was belief on his part, founded on facts attendant upon
the execution of the contract, honestly and sincerely entertained,
that it was in reality a mortgage, one not intended to affect the title
to the property sold, but merely to give it as security for a loan or
other obligation (Felicen, Sr. vs. Orias, 156 SCRA 586 [1987].),
and because of such belief, he had not redeemed the property within
the proper period. (Leonardo vs. Court of Appeals, 220 SCRA 254
[1993].) In short, the judgment was rendered in a civil action where
the issue was whether the contract entered into by the parties was a
pacto de retro sale or an equitable mortgage.
(b)
The thirty-day period is peremptory because the policy
of the law is not to leave the purchaser’s title in uncertainty beyond
the said period. It is not a prescriptive period but is more a requisite
or condition precedent to the exercise of the right of legal
redemption. (Pangilinan vs. Ramos, 181 SCRA 359 [1990]; Caro
vs. Court of Appeals, 113 SCRA 10 [1982].)
(c)
The grant of the right of repurchase in accordance with
the third paragraph of Article 1606 is not found in the old Civil
Code. The legislative intent behind this article, along with Articles
1602-1605 and 1607, is “to accord the vendor a retro the
maximum safeguards for the protection of his legal rights under
402
SALES
Art. 1606
the true agreement of the parties. Experience has demonstrated too
often that many sales with right of repurchase have been devised
only to circumvent or ignore our usury laws and for this reason,
the law looks upon them with disfavor.’’ (Agan vs. Heirs of Sps.
A. Nueva and D. Nueva, 418 SCRA 421 [2003].)
EXAMPLES:
(1)
A and B entered into a contract whereby A shall reap the
fruits of the riceland of B while B shall have a right to build a house
on the residential lot of A. The agreement provides that neither party
shall encumber nor alienate their respective properties without the
consent of the other and that in the event that any of the children of A
shall decide to build his house on the lot, B shall be obliged to return
the same.
Is the right to recover the lot subject to the prescriptive period of
four (4) years provided in Article 1606 (par. 1.)? No. Article 1606 is
not applicable. The agreement is not one of sale with right of
repurchase but is one of or akin to usufruct (see Art. 562.), where the
parties transferred the use or material possession of each other’s
property. (Baluran vs. Navarro, supra.)
(2)
S sold to B a parcel of land. There was no express
stipulation reserving to S the right to repurchase. In this case, the land
is not subject to redemption as the sale is an absolute and
unconditional sale.
(3)
If there was an express agreement granting S the right to
redeem within three (3) years from the date of the contract, S must
exercise the right within said period; but if no period for redemption
was stipulated, the law supplies it by providing that it shall be four (4)
years from the date of the contract. S may grant a renewal or extension
of the period provided it does not exceed the balance of 10 years.
(4)
Suppose it was agreed that S could redeem the land only
within eight (8) years, then S may redeem the land only within that
period. If the agreement was that A could redeem within 12 years, the
right to repurchase cannot be exercised after 10 years, the stipulation
with respect to the excess (2 years) over the term of 10 years being
null and void. (Montiero vs. Salgado, 27 Phil. 631 [1914].)
A stipulation not to repurchase within 10 years following the
execution of the sale is contrary to law. This fact, however, does not
in itself convert the contract into a mere evidence of indebtedness and
Art. 1606
EXTINGUISHMENT OF SALE
Conventional Redemption
much less of mortgage, for it would at most be considered as one
where the repurchase is to be made within the period not exceeding
10 years from the date of the sale. (Tayao vs. Dulay, 13 SCRA 758
[1965].)
(5)
If the right of redemption shall not be exercised “within
three (3) years from the date of sale,” and nothing is said as to how
long the right to redeem shall continue, its duration is seven (7) years
from the date of the contract. (Rosales vs. Reyes and Ordovesa, 25
Phil. 495 [1913].) Where the condition as to the exercise of the right
of repurchase is that it shall not be made “until after three (3) years
from this date,” the duration of the right, once effective is four (4)
years or the balance of the 10 years limit allowed by law. (Lucido vs.
Calupitan, 27 Phil. 148 [1914].)
Suppose the stipulation was that S may repurchase the property
“at any time he has the money,” the right of repurchase may be
exercised within the period of 10 years from the date of the execution
of the contract a time having been expressly stipulated, which is “any
time” which, however, is indefinite or unlimited. (Soriano vs. Abalos,
92 Phil. 18 [1952].)
Similarly, where the instrument says that S “may repurchase the
property in the month of March of any year,” S may make the
repurchase within 10 years, there being a period agreed upon for the
exercise of the right which, however, is not specified. (Bandang vs.
Austria, 21 Phil. 479 [1912].) It has been held, however, that the
stipulation that S could repurchase the land “when he has established
a certain business” does not stipulate a period for the repurchase, but
the suspension of the right of repurchase until the establishment of the
business and, therefore, the repurchase should be made within 4, not
10, years from the date of the contract. (Medel vs. Francisco, 51 Phil.
367 [1927]; see example No. 3.)
(6)
Suppose the nature of the contract is the subject of
controversy in a civil action between S and B. B claims that the
contract is a sale with a right to repurchase. (Art. 1601.) On the other
hand, S contends that the contract is an equitable mortgage. (Art.
1602.) Subsequently, the court renders judgment holding that the
contract is really one with the right of repurchase.
Under the 3rd paragraph, S has 30 days from the date of final
judgment to redeem the property. If the case is appealed, the 30-day
period shall begin to run from the day the judgment of the higher court
becomes final. (see Gavina Perez vs. Zulueta, 106 Phil. 264 [1959].)
403
404
SALES
Art. 1606
When Article 1606, par. 3, not applicable.
(1) Contract found to be an absolute sale. — Article 1606,
paragraph 3 is not applicable where the contract is found to be an
absolute deed of sale, pure and simple. There could not even be a period
of redemption. It refers to cases involving a transaction where the seller
contests or denies that the true agreement is one of sale with right to
repurchase and claims that the real intention was a loan with equitable
mortgage, but the court decides otherwise. (Tapas vs. Court of Appeals,
69 SCRA 349 [1976].)
(2) Sale known and admitted by vendor as pacto de retro. —
Neither is said provision applicable where the sale is admittedly one
with pacto de retro. If the rule were otherwise, it would be within the
power of every vendor a retro to set at naught a pacto de retro or
resurrect an expired right of repurchase, by simply instituting an action
to reform the contract — known to him to be in truth, a sale with pacto
de retro — into an equitable mortgage. (Felicen, Sr. vs. Orias, 156
SCRA 586 [1987].) The issue or controversy between the parties must
concern or involve the juridical nature or character of the contract in
question and the court makes an express finding that the contract is one
of pacto de retro. (see Tapia vs. Court of Appeals, supra.)
ILLUSTRATIVE CASE:
Lower court held Article 1606, par. 3 as applicable to a vendor a
retro who failed to redeem under a deed of sale which, as expressly
stipulated by the parties, is admittedly one with right of repurchase.
Facts: S executed in favor of B a deed of sale of a parcel of land
with right to repurchase within one (1) year from the date of the sale.
B afterwards sold the property to C who, in turn, sold the same to D.
Since the first sale S, who had not redeemed the land from B within
the stipulated period, never relinquished the possession thereof. D
brought suit to recover possession from S.
The court held that the deed of sale between S and B should be
given the effect of a mere pacto de retro sale and S should be
permitted to exercise the right of repurchase in accordance with the
third paragraph of Article 1606.
Issue: Is the third paragraph of Article 1606 applicable?
Art. 1606
EXTINGUISHMENT OF SALE
Conventional Redemption
405
Held: No, because the sale is expressly one with right of
repurchase. As the stipulated period has expired without S having
redeemed the land in question, B had irrevocably acquired ownership
over the property in accordance with Article 1509 of the old Civil
Code which was in force at the time of the transaction in dispute.
(Adorable vs. Inacala, 103 Phil. 481 [1958].)
Note: Under Article 1607 of the new Civil Code, the
consolidation of ownership in the vendee shall not be recorded
without a judicial order.
(3) Party abandoned position that transaction an equitable
mortgage after judicial declaration of transaction as a pacto de retro
sale. — In Abilla vs. Goboseng, Jr. (172 SCAD 437, 374 SCRA 51
[2002].), it has been respondents’ consistent claim that the transaction
subject hereof was an equitable mortgage and not a pacto de retro sale
or a sale with option to buy. Even after the Court of Appeals declared
the transaction to be a pacto de retro sale, respondents maintained their
view that the transaction was an equitable mortgage. Seeing the chance
to turn the decision in their favor, however, respondents abandoned their
theory that the transaction was an equitable mortgage and adopted the
finding of the Court of Appeals that it was in fact a pacto de retro sale.
Respondents now insist that they are entitled to exercise the right to
repurchase pursuant to the third paragraph of Article 1606. Under the
facts of the case, the respondents were not allowed to exercise the right
of repurchase.
In the parallel case of Vda. de Macoy vs. Court of Appeals (206
SCRA 244 [1992].), the petitioners raised the defense that the contract
was not a sale with right to repurchase but an equitable mortgage. They
further argued as an alternative defense that even assuming the
transaction to be a pacto de retro sale, they can nevertheless repurchase
the property by virtue of Article 1606, third paragraph of the Civil Code.
It was held that the said provision was inapplicable, thus: “The
application of the third paragraph of Article 1606 is predicated upon the
bona fides of the vendor a retro. It must appear that there was a belief
on his part, founded on facts attendant upon the execution of the sale
with pacto de retro, honestly and sincerely entertained, that the
agreement was in reality a mortgage, one not intended to affect the title
to the property ostensibly sold, but merely to give it as security for a
loan or other obligation. In that event, if the matter of the real nature of
406
SALES
Art. 1606
the contract is submitted for judicial resolution, the application of the
rule is meet and proper; that the vendor a retro be allowed to repurchase
the property sold within 30 days from rendition of final judgment
declaring the contract to be a true sale with right to repurchase. x x x’’
In Abilla, the Court of Appeals correctly noted that if respondents
really believed that the transaction was indeed an equitable mortgage,
as a sign of good faith, they should have, at the very least, consigned
with the trial court the amount of P896,000.00, representing their
alleged loan, on or before the expiration of the right to repurchase x x
x.’’
Date from which period reckoned.
(1) Date of contract. — Under paragraphs 1 and 2 of Article 1606,
the date from which the period must be counted is the date of the
contract. The date, however, of the contract must not be taken in a very
material sense. The date of the contract referred to must be that from
which the contract produces its effects, as for example, if the
contracting parties agreed on a suspensive condition to determine the
effectiveness of the contract, the period within which the right to
repurchase must be exercised must not be counted from the date of the
contract itself but from the time of the fulfillment of the suspensive
condition.
(2) Date of finality of judgment. — Under paragraph 3 of Article
1606, it has been held that the period to redeem is reckoned from the
time the judgment becomes final; and a judgment becomes final after
the period to appeal had lapsed without one having been perfected. The
date of finality of a decision is entirely distinct from the date of its entry
and the delay in the latter does not affect the effectivity of the former,
as such is counted from the expiration of the period of appeal. (Muñez
vs. Court of Appeals, 152 SCRA 197 [1987].)
Effect of stipulation extending period of
repurchase.
(1) After expiration of period of redemption. — It is legally
impossible to speak of extension because that which is extinguished
cannot be extended and because the ownership in the vendee is already
consolidated, and becomes absolute.
Art. 1606
EXTINGUISHMENT OF SALE
Conventional Redemption
407
(2) Before the expiration of the period of redemption. — The
original term may be extended provided that the extension, including
the original term, shall not extend beyond 10 years; otherwise, the
extension is void as to the excess.
Reason for limiting period of redemption.
The question of the period within which the repurchase may be
made is unanimously considered as a question of public interest. It is
not a good thing that the title to property should be left for a long period
of time subject to indefinite conditions of this nature. For this reason,
the intention of the law is restrictive and limitative. (10 Manresa 302.)
“A long term for redemption renders the tenure of property
uncertain and redounds to its detriment, for neither does the
precarious holder cultivate the ground with the same interest as the
owner, nor does he properly attend to the preservation of the
building, and owing to the fact that his enjoyment of the property is
temporary, he endeavors above all to derive the greatest benefit
therefrom, economizing to that end even the most essential
expenses.” (23 Scaevola 667.)
Validity of penal clause providing automatic termination of
redemption period.
In a contract of sale with pacto de retro, the parties may legitimately
fix any period they please, not in excess of ten (10) years, for the
redemption of the property sold by the vendor. The determination of the
right of redemption may be made to depend upon the delinquency of the
vendor. (Dimatulac vs. Coronel, 40 Phil.
686 [1919].)
408
Art. 1607
SALES
ILLUSTRATIVE CASE:
Penal clause provides that in case of failure of vendor a retro,
who will remain in possession as lessee, to pay the agreed rentals, the
lease shall automatically be terminated and ownership of vendee shall
become absolute.
Facts: S sold to B a parcel of land. It is stipulated in the deed of
sale that S can repurchase the property within a period of 18 months
from the date of the sale and that S will remain in possession of the
land as lessee for the same period of 18 months. The lease covenant
contained in the deed of sale with pacto de retro provides also, among
others, that in case of failure of the vendor-lessee (S) to pay the rentals
agreed upon, the lease shall automatically terminate and the right of
ownership of the vendee (B) shall become absolute.
Issue: Is the penal clause valid?
Held: Yes. The lease that S executed on the property may be
considered as a means of delivery or tradition by constitutum
possessorium. (see Art. 1500.) While the lease covenant may be
onerous or may work hardship on S because of its clause providing
for the automatic termination of the period of redemption, however,
the same is not contrary to law, morals, or public order which may
serve as basis for its nullification. Rather than being obnoxious or
oppressive, it is a clause common in a sale with pacto de retro and as
such it received the sanction of our courts. (see Amigo vs. Teves, 96
Phil. 252 [1954].)
The consequences of such provision are not worse than such as
follow from many other forms of agreement to which contracting
parties may lawfully attach their signatures. Nevertheless, the court
should not hesitate to relieve the vendor from its effects whenever this
can be done consistently with established principles of law.
(Dimatulac vs. Coronel, supra.)
ART. 1607. In case of real property, the
consolidation of ownership in the vendee by virtue of
the failure of the vendor to comply with the provisions
of Article 1616 shall not be recorded in the Registry
of Property without a judicial order, after the vendor
has been duly heard. (n)
EXTINGUISHMENT OF SALE
Conventional Redemption
409
Art. 1607
Judicial order for recording of consolidation of
ownership.
(1) Necessity. — If real property is involved and the vendor failed
to redeem within the period agreed upon, the vendee’s title becomes
irrevocable but the consolidation of ownership in the vendee shall not
be recorded in the Registry of Property without a judicial order and until
after the vendor has been duly heard. The reason is that the transaction
may not be a genuine pacto de retro but only an equitable mortgage.
(2) Purpose. — The requirement provides additional safeguards to
debtors. The purpose is not only to have all doubts over the true nature
of the transaction speedily ascertained and decided, but also to prevent
the interposition of buyers in good faith while such determination is
being made. (Teodoro vs. Arcenas, 110 Phil. 222 [1960]; Cruz vs. Leis,
122 SCAD 693, 327 SCRA 570 [2000].)
(3) Former method. — Under the former method of consolidation
by a mere extra-judicial affidavit of the buyer a retro, the latter could
easily cut off any claims of the seller by disposing of the property after
such consolidation to strangers in good faith and without notice. The
chances of the seller a retro to recover his property would thus be
nullified, even if the transaction were really proved to be a mortgage
and not a sale. (Ibid.)
(4) Acquisition of ownership by vendee a retro. — It is plain from
Article 1607 that the acquisition of ownership by a vendee a retro is
automatic (Oviedo vs. Garcia, 40 SCRA 17 [1971].), i.e., once there is
failure to redeem within the stipulated period, ownership of the property
sold becomes vested or consolidated by operation of law on the vendee.
Any other interpretation would be violative of the sanctity of the
contract between the parties. (Rosario vs. Rosario, 110 Phil. 394
[1960].) The needed judicial hearing contemplated by Article 1607
refers not to the consolidation itself, but merely for the purpose of
registering the consolidation (De Bayquen vs. Baleoro, 156 SCRA 412
[1986].) or the consolidated title. (De Guzman, Jr. vs. Court of Appeals,
156 SCRA 701 [1987].)
410
SALES
(5) Effect of failure to comply with the requirement. — The only
effect of the failure of the vendee a retro to comply with Article 1607
Art. 1607
is that the absolute ownership of the vendee a retro cannot be recorded
in the Registry of Property. It does not impair his title or ownership for
the method prescribed under Article 1607 as mentioned above is merely
for the purpose of registering the consolidated title. The nature of a sale
with the right of repurchase is such that the ownership over the thing
sold is transferred to the vendee upon execution of the contract, subject
only to the resolutory condition that the vendor exercises his right of
repurchase within the period agreed upon. (Heirs of Francisco Parco vs.
Haw Pia, 45 SCRA 164 [1972]; see Flores vs. So, 162 SCRA 117
[1988]; Cruz vs. Leis, supra.)
Action to consolidate ownership.
(1) Ordinary civil actions. — The consolidation shall be effected
through an ordinary civil action cognizable by the Regional Trial Court
wherein the vendor a retro is made a party defendant. The petition to
consolidate ownership under Article 1607 does not partake of the nature
of a motion, it not being merely an incident to an action or proceeding.
Article 1607 contemplates a contentious proceeding wherein the
vendor a retro must be named respondent in the caption and title of the
petition for consolidation of ownership and duly summoned and heard.
The failure on the part of the court to cause the service of summons as
prescribed (in Rule 14, Rules of Court) is sufficient cause for attacking
the validity of the judgment and subsequent orders on jurisdictional
grounds. (Yturralde vs. Court of Appeals, 43 SCRA 313 [1972];
Ongoco vs. Judge, CFI of Bataan, 15 SCRA 30 [1965]; Crisologo vs.
Centeno, 26 SCRA 68 [1968]; Ramos vs. Court of Appeals, 180 SCRA
635 [1989].)
(2) Registration proceedings. — Where the land has been sold
under pacto de retro, the vendor a retro may file an application for the
original registration of the land. However, should the period for
redemption expire during the pendency of the registration proceedings
and ownership to the property consolidated in the vendee a retro, the
latter shall be substituted for the applicant and may continue the
proceedings. (Sec. 14, par. 2, Pres. Decree No.
EXTINGUISHMENT OF SALE
Conventional Redemption
411
1529 [Property Registration Decree].)
Art. 1608
ART. 1608. The vendor may bring his action
against every possessor whose right is derived from
the vendee, 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 Land Registration Law with respect to
third persons. (1510)
Nature of right to redeem.
(1) A right, not an obligation. — The right to redeem is what it is:
a right, not an obligation; therefore, consignation (Art. 1256.) is not
required to preserve the right to redeem. Thus, the allegation that the
offer to redeem was not sincere because there was no consignation of
the purchase price is devoid of merit. But to actually redeem, there
must, of course, be payment or consignation. (Immaculate vs. Navarro,
160 SCRA 211 [1988].)
(2) A real right. — By virtue of the provision of this article, it can
be concluded that the right to repurchase is of a real character and
should not be considered personal. Exception is, however, made to the
provisions of the Mortgage Law and the Land Registration Law with
respect to third persons. (10 Manresa 314.) This means that the vendor
a retro cannot exercise his right of redemption against a subsequent
transferee for value and in good faith if his right is not properly
registered or annotated. (see Art. 1544; see Lucido vs. Calupitan, 27
Phil. 148 [1914]; Alarcon vs. Esteva, 16 SCRA 123 [1966].)
Note: The Spanish Mortgage Law has been discontinued by
Presidential Decree No. 892. The discontinuance is reiterated by
Presidential Decree No. 1529, the latter being the new Property
Registration Decree which superseded Act No. 196, as amended, the
Land Registration Law.
EXAMPLE:
S sold his land (not registered) to B with a right to repurchase
within 2 years to B. If before 2 years B sold the same land to C, a
412
SALES
purchaser for value and in good faith. S may still repurchase the
property from C even if in the sale between B and C no mention was
made of the right of S.
Arts. 1609-1610
If the land, however, is registered under the Torrens System (Pres.
Decree No. 1529.) and the right of S was not annotated on B’s
certificate of title, S cannot exercise his right to redeem against C who
registered the land free from all liens and encumbrances not noted on
the certificate of title.
ART. 1609. The vendee is subrogated to the
vendor’s rights and actions. (1511)
Rights acquired by vendee a retro.
(1) Vendee subrogated to vendor’s rights. — Subrogation transfers
to the person subrogated the credit with all the rights thereto
appertaining. (Art. 1303.) The above article is logical because a pacto
de retro sale transfers ownership to the vendee although subject to the
condition of repurchase. As owner, the vendee, for example, may
transfer or alienate his right to a third person, mortgage the property,
enjoy the fruits thereof, recover the property against every possessor,
and perform all other acts of ownership subject only to the right of
redemption of the vendor. Of course, the vendor cannot transfer
ownership if he is not the real owner.
(2) Right to eject vendor. — Prior possession by the vendee a retro
of the property is not a condition precedent in an unlawful detainer
action against the vendor a retro who, after having failed to redeem,
and title in the vendee a retro had been consolidated, refused to vacate
the property. (Pharma Industries, Inc. vs. Pajarillaga, 100 SCRA 339
[1980].)
ART. 1610. The creditors of the vendor cannot
make use of the right of redemption against the
vendee, until after they have exhausted the property
of the vendor. (1512)
Right of vendor’s creditors to redeem.
EXTINGUISHMENT OF SALE
Conventional Redemption
413
This article is a practical application of Article 1177 permitting
creditors to exercise the rights and actions of their debtor after
exhausting his properties to satisfy their claims. (see Manresa 331.) The
right to redeem being property, it is answerable for the debts
Art. 1611
of the vendor provided the vendor’s properties are first exhausted. The
exhaustion must be established to the satisfaction of the vendee.12
Article 1610 refers to all kinds of creditors, whether ordinary or
preferred, except those in whose favor exists a mortgage or antichresis
upon the very property sold recorded prior to the sale. They need not
exhaust. All these latter creditors have to do is to foreclose their rights,
ignoring the rights of the vendee. (see 10
Manresa 325-326.)
ART. 1611. In a sale with a right to repurchase, the
vendee of a part of an undivided immovable who
acquires the whole thereof in the case of article 498,
may compel the vendor to redeem the whole property,
if the latter wishes to make use of the right of
redemption. (1513)
Redemption in sale of part of undivided
immovable.
The purpose of the above article (and Arts. 1612-1615.) is to
discourage co-ownership which is recognized as undesirable, since it
does not encourage the improvement of the property coowned.
(1) A co-owner may demand the partition of the thing owned in
common insofar as his share is concerned. (Art. 494.)
(a) If the thing is essentially indivisible, it may be allotted to the
co-owner who shall indemnify the others.
12Art.
2059. This excussion shall not take place:
(1)
If the guarantor has expressly renounced it;
(2)
If he has bound himself solidarily with the debtor;
(3)
In case of insolvency of the debtor;
414
SALES
(4)
When he has absconded, or cannot be sued within the Philippines unless he
has left a manager or representative;
(5)
If it may be presumed that an execution on the property of the principal
debtor would not result in the satisfaction of the obligation.
Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must set
it up against the creditor upon the latter’s demand for payment from him, and point out to the
creditor available property of the debtor within Philippine territory, sufficient to cover the amount
of the debt.
Arts. 1612-1613
(b) If the co-owners cannot agree that the thing be allotted to
one of them, it shall be sold and its proceeds distributed.
(Art. 498.)
(2) In either case, the vendee who acquires the whole of an
undivided immovable a part of which is subject to a right to repurchase,
has a right to demand that the vendor a retro, who likes to exercise his
right of redemption, redeem the whole property.
EXAMPLE:
A, B, and C are co-owners of an undivided parcel of land. A sold
his undivided portion to D with the right to repurchase. As a result of
a partition, D, who is now one of the co-owners, acquired the whole
land after paying the portions belonging to B and C.
If A would like to repurchase the portion sold by him, D may
compel him to redeem the entire parcel of land so that the property
will not revert again to a state of co-ownership.
ART. 1612. 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. (1514)
ART. 1613. In the case of the preceding article, the
vendee may demand of all the vendors or co-heirs
that they come to an agreement upon the repurchase
EXTINGUISHMENT OF SALE
Conventional Redemption
415
of the whole thing sold; and should they fail to do so,
the vendee cannot be compelled to consent to a
partial redemption. (1515)
Redemption in joint sale by co-owners/ coheirs of undivided immovable.
(1) The co-owners of an undivided immovable sold by them jointly
or collectively and in the same contract with the right to
Arts. 1612-1613
repurchase, can exercise such right only as regards their respective
shares. (Art. 1612, par. 1.)
(2) Similarly, the co-heirs of the vendor of an undivided
immovable can exercise the right of redemption only for the respective
portions they have inherited. (Ibid., par. 2.)
(3) The vendee a retro can refuse partial redemption; he may
require all the vendors or all the heirs to redeem the entire property or
to agree to its redemption by any one of them. (Art. 1613.) This right is
given to the vendee in line with the object of the law (see Art. 1620.) to
put an end to co-ownerships whenever possible.
(4) Under Article 1620 (infra.), the right of a co-owner who
chooses not to redeem accrues to the benefit of the others. The extent
of the share of the redeeming co-owner is not taken into account except
as provided in the second paragraph thereof.
EXAMPLE:
A, B, and C are co-owners of a parcel of land. If they should
sell the property to D with the right to repurchase in the contract,
each one of them may exercise that right only as regards his own
share or for one-third portion of the property.
The same rule applies if X were the sole owner of the land and
he sold it with right to repurchase to D and he should die and leave
A, B, and C as heirs. Each one of them can only exercise the right
of redemption for the one-third portion he has inherited.
416
SALES
But D can demand that they come to an agreement upon the
repurchase of the whole property by all of them or any one of them.
If they do not do so, D cannot be compelled to assent to a partial
redemption. (see Art. 1611.)
Effect of redemption by co-owner of
entire property.
Under Article 1612, a co-owner cannot redeem more than his share
in the co-ownership. The redemption by a co-owner of the property in
its entirety, shouldering the expenses therefor, does
Arts. 1612-1613
not make him the owner of all of it. In other words, it does not put to
end the existing state of co-ownership.
Article 1613 does not provide for a mode of terminating a
coownership nor does the fact that the redeeming co-owner has
succeeded in securing title over a parcel of land in his name terminate
the existing co-ownership. Registration of property is not a means of
acquiring ownership. It operates as a mere notice of existing title, that
is, if there is one. (Adill vs. Court of Appeals, 157 SCRA 455 [1988];
see Paulmian vs. Court of Appeals, 215 SCRA
866 [1992].)
ILLUSTRATIVE CASE:
The entire property sold by the deceased was redeemed by one of
the heirs.
Facts: Two (2) days before her death, M (mother) sold a parcel
of unregistered land with a right of repurchase within seven (7) years.
D (daughter) and her husband, H, redeemed the property within the
redemption period. The tax declaration on the land in favor of M was
cancelled and another one was issued in the name of H; and since then,
the real estate taxes had been paid by D and H.
The other children of M invoked the right to the disputed property
as co-owners thereof by right of intestate succession.
Issue: Under the deed of repurchase, was the ownership of the
land in dispute vested in D and H or in all of the heirs of M? Held: In
all of the heirs. The repurchase could not have been made by D and H
by themselves alone because the right belonged in common to the
EXTINGUISHMENT OF SALE
Conventional Redemption
417
heirs of M. This was true even if it were assumed that the vendee a
retro had intended to sell back the land to D and H only as the
repurchase was subject to the limitations under Article 1612 and the
stipulations in the original contract, to wit, that the repurchase was to
be made by the vendor (M) or her successors. D was not the only
successor, and H was not even an heir of M.
A sale during the period of redemption to any other person other
than the heirs of the deceased mother, as co-owners of the subject land,
could not have been made by the vendee a retro. Any of the co-owners
could have successfully invalidated such a transaction. (De Guzman
vs. Court of Appeals, 148 SCRA 75 [1987].)
Arts. 1614-1615
ART. 1614. 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 vendee
cannot compel him to redeem the whole property.
(1516)
Redemption in separate sales by co-owners of
undivided immovable.
Although it is the policy of the law to avoid indivision, it would be
unjust, if the sale was made separately and independently, to require the
co-owners to come to an agreement with regard to the repurchase of the
thing sold, and certainly, it would be worse to deprive them of their right
in case they fail to agree.
The very purpose of the article is to prevent such injustice. (10
Manresa 332.)
EXAMPLE:
In the preceding example, if A, B, and C sold their respective
shares to D with the right of repurchase in separate instruments and at
different dates, each one of them may exercise his right independently
of the others and D cannot compel him to redeem the whole property.
418
SALES
ART. 1615. If the vendee should leave several
heirs, the action for redemption cannot be brought
against each of them except for his own share,
whether the thing be undivided, or it has been
partitioned among them.
But if the inheritance has been divided, and the
thing sold has been awarded to one of the heirs, the
action for redemption may be instituted against him
for the whole. (1517)
Redemption against heirs of vendee.
The vendor a retro can exercise the right to redeem against the heirs
of the vendee a retro with respect only to their respective
Art. 1616
shares, whether the thing be undivided or it has been partitioned among
them.
However, if by partition the entire property has been adjudicated to
one of the heirs, the vendor can exercise the right to redeem against said
heir for the whole.
EXAMPLE:
A sold his parcel of land to B with a right to repurchase. Then B
died leaving C, D, and E, his children, as heirs.
In this case, the right of redemption by A is against each of the
heirs only for his respective share or for one-third of the property.
If the property has been awarded to C by partition, then the action
for redemption may be instituted against him for the entire property.
ART. 1616. The vendor cannot avail himself of the
right of repurchase without returning to the vendee
the price of the sale, and in addition:
(1)
The expenses of the contract, and any
other legitimate payments made by reason of the
sale;
EXTINGUISHMENT OF SALE
Conventional Redemption
419
(2)
The necessary and useful expenses made
on the thing sold. (1518)
Obligation of vendor a retro in
case of redemption.
Article 1616 defines the obligations of the vendor who desires to
exercise his right of repurchase. (see Gargallo vs. Duero, 1 SCRA 134
[1961].) He must return to the vendee a retro:
(1) The price. — The law speaks of “price of the sale” and not the
value of the thing. It is lawful, however, for the parties to agree that the
price to be returned will be more or less than the original sum paid by
the vendee (10 Manresa 338-339.);
(2) Expenses of contract and other legitimate expenses. — If the
expenses for the execution and registration of the sale were paid by the
vendee, the same shall be reimbursed by the vendor. (see
Art. 1616
Art. 1497.) But they need not be paid at the very time of the exercise of
the right since they are unknown amounts. They may be paid later. The
same is true of necessary and useful expenses (Decision of Supreme
Court of Spain, Dec. 31, 1897; 10 Manresa 338.); and
(3) Necessary and useful expenses. — The first are expenses
incurred for the preservation of the thing or those which seek to prevent
the waste, deterioration or loss of the thing, while the second are which
increase the value of the thing or create improvements thereon, such as
a house.
(a)
The necessary expenses which must be repaid to
thevendee are not those which are ordinary and simple expenses of
preservation because these expenses are incident to the enjoyment
of the thing and should be borne by the vendee. (10 Manresa 339342.)
(b)
Useful expenses are refunded to the vendee a retro
because he is considered a possessor in good faith. (Art. 546, par.
2.)
(c)
The vendor a retro is given no option to require the
vendee a retro to remove the useful improvements on the land
420
SALES
subject of the sale a retro, unlike that granted the owner of a land
under Articles 546 and 54758 of the Civil Code.
(d)
The vendor a retro must pay for the useful
improvements introduced by the vendee a retro; otherwise, the
latter may retain possession of the land until reimbursement is
made. (Gargollo vs. Duero, 1 SCRA 1311 [1961].) It has been held,
however, that considering the purpose of the law on homesteads
(Public Land Act, C.A. No. 141, as amended.), which is to conserve
ownership in the hands of the homeArt. 1616
steader and his family, Article 1616 should be construed in
conjunction with Articles 546 and 547. To allow a vendee a retro
of a homestead the right of retention until payment of useful
expenses is made by the redemptioner would be to render nugatory
the right of repurchase granted by law to a homesteader because all
a vendor a retro can do to prevent repurchase is to build something
on the homestead beyond the capacity to pay of the homesteader
who seeks to repurchase. (Calagan vs. CFI of Davao, 95 SCRA 498
[1980].)
(e)
The payment of land tax has been as neither
necessarynor useful. It is a charge against the property. The object
of the land tax is to contribute to the expenses of the government in
the protection of the vendee’s right as owner and it is but just that
he should bear said charges. (Cabigao vs. Valencia, 53 Phil. 646
[1929].) Taxes on the property may be considered necessary
expenses in the sense that if they are not paid, the property may be
sold for tax delinquency or forfeited to the government.
ILLUSTRATIVE CASE:
58
Art. 546. Necessary expenses shall be refunded to every possessor; but only the possessor
in good faith may retain the thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with the same right of
retention, the person who has defeated him in the possession having the option of refunding the
amount of the expenses or of paying the increase in value which the thing may have acquired by
reason thereof.
Art. 547. If the useful improvements can be removed without damage to the principal thing,
the possessor in good faith may remove them, unless the person who recovers the possession
exercises the option under paragraph 2 of the preceding article.
EXTINGUISHMENT OF SALE
Conventional Redemption
421
Property subject to right of repurchase was embargoed by the
government and vendor a retro redeemed the property from the
government and not from vendee a retro who subsequently sold the
property.
Facts: S sold in December, 1897 to B a property with right to
repurchase within six (6) months. S was not able to effect the
repurchase in May, 1898 by reason of the fact that B was absent from
his place of residence on account of the war. About that time the
revolution broke out and the property was seized by the revolutionary
government from B.
The property was redeemed by S from said government in
November, 1898. Subsequently, B sold the property to C. S brought
action against C to recover the property.
Issue: Was the sale made by the revolutionary government to S
valid, with the result that B had no right to transfer to C the property
in question?
Held: No. What S did was to attempt to reacquire the ownership
of the property transferred to B from a third person to whom the
property had not been transferred by B in any manArt. 1616
ner whatsoever. Therefore, the payment made by S to the
revolutionary government which should have been made to B in order
to redeem the property, could not have extinguished the obligation
incurred by him in favor of the latter. (Panganiban vs. Cuevas, 7 Phil.
477 [1907].)
Offer to redeem and tender of payment
generally required.
(1) Offer to redeem must be bona fide. — The mere declaration of
the vendor of his intention to exercise the right of repurchase is not
sufficient to preserve the right of redemption. The law requires that the
offer must be a bona fide one and accompanied by an actual and
simultaneous tender of payment or consignation of the full amount
agreed upon for repurchase. (see Torrijos vs. Crisologo, 6 SCRA 1984
[1962]; Catangcatang vs. Legayada, 84 SCRA 51 [1978].) Thus, the
mere sending of letters by the vendor expressing his desire to
repurchase without an accompanying tender of the redemption price
422
SALES
falls short of the requirement of the law. (Uy Lee vs. Court of Appeals,
68 SCRA 196 [1975]; see State Investment House, Inc. vs. Court of
Appeals, 215 SCRA 734 [1992].)
(2) When tender of payment not necessary. — Neither is it
necessary to tender payment of the repurchase price if the vendee has
already flatly refused to reconvey. (Gonzaga vs. Go, 69 Phil. 778
[1940]; Catalan vs. Rivera, [C.A.] 45 O.G. 4538; Torrijos vs. Crisologo,
supra; Lafont vs. Pascasio, 5 Phil. 391 [1905]; Fructo vs. Fuentes, 15
Phil. 362 [1910].) This rule is premised on the ground that under such
circumstance the vendee will also refuse the tender of payment. (Uy Lee
vs. Court of Appeals, 68 SCRA 196 [1975].) Where the vendor a retro
had consigned or deposited in court the redemption price when the
action was filed, prior tender could be excused. (see De la Cruz vs.
Marcelino, 84 Phil. 709 [1949]; Torio vs. Del Rosario, 93 Phil. 800
[1953]; Torrijos vs. Crisologo, supra.)
If the tender is made after the period of repurchase has expired, its
acceptance would amount only to a promise to sell on the part of the
vendee because the right of repurchase having expired, there was no
more right that could have been preserved.
(Tan Queto vs. Vda. de Maquiling, 2 C.A. Rep. 150.)
Art. 1617
Consignation of price generally not
required.
It is not a legal requisite for the vendor to make a consignation or
judicial deposit of the price if the offer or tender is refused. (Canuto vs.
Mariano, 37 Phil. 849 [1918]; see Rumbaoa vs. Arzaga, 84 Phil. 812
[1949].) He is not a debtor. He has a right, not an obligation, to
repurchase. (Villegas vs. Capistrano, 9 Phil. 416 [1907].) It is enough
that a sincere and genuine tender of payment is made and refused,
although consignation may serve to provide additional security for the
vendor and to indicate the veracity of his desire to exercise the right of
repurchase. (Legaspi vs. Court of Appeals, 142 SCRA 82 [1986].)
(1) Where right of repurchase judicially declared. — Where the
right of the vendor a retro to repurchase had been judicially declared to
exist, the effect of the judgment is to definitely fix the relation of the
vendor a retro and the vendee a retro, as that of debtor and creditor,
respectively, in the amount and within the period fixed in the judgment.
EXTINGUISHMENT OF SALE
Conventional Redemption
423
Should the vendee (creditor) refuse to accept the amount of the
redemption price offered, the vendor (debtor) must deposit it in court.
(Torrijos vs. Crisologo, supra.)
(2) In case of absence of the vendee a retro. — In such case, the
right of redemption may still be exercised as a vendor who decides to
redeem a property sold with pacto de retro, in a sense, stands as the
debtor and the vendee as the creditor of the purchase price. The vendor
can and should exercise his right of redemption against the vendee by
filing a suit against him and making a consignation with the court of the
amount due for redemption (Catangcatang vs. Legayada, supra; Rivero
vs. Rivero, 80 Phil. 802 [1948].), not that deposit or consignation is
legally essential to preserve his reserved right of redemption but
because he should be regarded as having done that which should have
been done to terminate the right of the vendee over the property where
the redemption price is already due and payable. (Rumbaoa vs. Arzaga,
supra; see Legaspi vs. Court of Appeals, supra.)
ART. 1617. If at the time of the execution of the
sale there should be on the land, visible or growing
fruits, there shall be no reimbursement for or
prorating
Art. 1617
of those existing at the time of redemption, if no
indemnity was paid by the purchaser when the sale
was executed.
Should there have been no fruits at the time of the
sale, and some exist at the time of redemption, they
shall be prorated between the redemptioner and the
vendee, giving the latter the part corresponding to the
time he possessed the land in the last year, counted
from the anniversary of the date of the sale. (1519a)
Right of parties as to fruits of land.
This article applies only when the parties have not provided for any
sharing arrangement with respect to the fruits existing at the time of
424
SALES
redemption. (Almeda vs. Daluro, 79 SCRA 327 [1977].) It refers only
to natural and industrial fruits. Civil fruits are deemed to accrue daily
and belong to the vendee in that proportion.14
(1) If there were fruits at the time of the sale and the vendee paid
for them, he must be reimbursed at the time of redemption as the
payment forms part of the purchase price.
(2) If no indemnity was paid by the vendee for the fruits, there shall
be no reimbursement for those existing at the time of redemption. (par.
1.)
(3) If the property had no fruits at the time of the sale and some
exist at the time of redemption, they shall be apportioned
proportionately between the redemptioner and the vendee, giving the
latter a share in proportion to the time he possessed the
14Art. 442. Natural fruits are the spontaneous products of the soil, and the young and other
products of animals.
Industrial fruits are those produced by lands of any kind through cultivation or labor.
Civil fruits are the rents of buildings, the price of leases of lands and other property and the
amount of perpetual or life annuities or other similar income.
Art. 544. A possessor in good faith is entitled to the fruits received before the possession is
legally interrupted.
Natural and industrial fruits are considered received from the time they are gathered or
severed.
Civil fruits are deemed to accrue daily and belong to the possessor in good faith in that
proportion.
Art. 1618
property during the last year counted from the anniversary of the date
of the sale (par. 2.) to compensate the vendee for his expense. (see
Lustado vs. Pinol, [unrep.] 102 Phil. 1164 [1958].)
The same rule, it is believed, is also applicable if there were fruits
at the time of the sale and the vendee paid for them.
EXAMPLE:
S sold to B with the right of repurchase for P500,000.00 a parcel
of land on June 5, 2001 with a three-year redemption period. At the
time of the sale, there were existing crops on the land for which B paid
an additional amount of P50,000.00.
EXTINGUISHMENT OF SALE
Conventional Redemption
425
(1)
If S should exercise his right of redemption, he must
return to B the amount of P550,000.00 as the price of the sale.
(2)
If B did not pay for the crops, he is not entitled to
reimbursement for crops existing at the time of the redemption.
(3)
If there were no crops at the time of the sale and some
exist at the time of redemption on June 5, 2004, B is entitled to the
crops during the last year, that is, from June 5, 2003 to June 5, 2004.
(4)
If there were crops at the time of the sale and B paid for
them, B is entitled to reimbursement, or to the fruits for the last year,
because having paid for them, the effect is the same as if there were
no crops on the land when it was sold.
ART. 1618. The vendor who recovers the thing
sold shall receive it free from all charges or
mortgages constituted by the vendee, but he shall
respect the leases which the latter may have executed
in good faith, and in accordance with the customs of
the place where the land is situated. (1520)
Right of vendor a retro to recover thing sold
free from charges.
The vendee a retro may alienate, encumber, or perform other acts
of ownership over the thing sold. But his ownership being revocable
upon redemption, all acts done by him are also revocable. Thus, he may
borrow money and mortgage the property but when the vendor a retro
redeems, the vendee a retro is obliged to
Art. 1618
redeem the mortgage. The vendor has the right to receive the property
in the same condition in which it was at the time of the sale.
The law, however, establishes an exception with respect to leases
which the vendee may have entered into in good faith according to the
426
SALES
custom of the place where the land is located.59 The exception is dictated
by public convenience in the interest of agriculture.
— oOo —
59 Art. 1676. The purchaser of a piece of land which is under a lease that is not recorded in
the Registry of Property may terminate the lease, save when there is a stipulation to the contrary
in the contract of sale, or when the purchaser knows of the existence of the lease.
427
SECTION 2. — Legal Redemption
ART. 1619. Legal redemption is the right to be
subrogated, upon the same terms and conditions
stipulated in the contract, in the place of one who
acquires a thing by purchase or dation in payment, or
by any other transaction whereby ownership is
transmitted by onerous title. (1521a)
Legal redemption defined.
Article 1619 gives the definition of legal redemption. As the word
“thing” is employed without qualification, the right applies to both
movable and immovable property. (U.S. vs. Caballero, 23 Phil. 65
[1912].)
Transfer of ownership by onerous title.
Subrogation transfers to the person subrogated the rights pertaining
to another. (Art. 1303.) Note that legal redemption may take place not
only in purchase or dation in payment but in any other transfer of
ownership by onerous title. It has been held, however, that it cannot take
place in barter and in the transmission of property by hereditary title.
(Decision of the Supreme Court of Spain, July 9, 1903 and June 7, 1915;
10 Manresa 319.)
Evidently, the right is not available where there is only a mortgage
or lease.
Dation in payment defined.
Dation in payment or dacion en pago is the transmission of the
ownership of a thing by the debtor to the creditor as the accepted
equivalent of the performance of an obligation. (8 Manresa 314; see Art.
1245.) In this special mode of payment, the debtor offers
435
another thing to the creditor who accepts it as equivalent of payment of
an outstanding debt.
428
SALES
Art. 1619
Nature of dation in payment.
(1) Sale of thing. — The undertaking partakes in one sense of the
nature of sale,60 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 essential elements of a contract of sale, namely,
consent, object certain, and cause or consideration must be present. It
is, therefore, governed by the law of sales.61
(2) Novation of an obligation. — 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. (Filinvest
Credit Corporation vs. Phil. Acetylene Co., Inc., 111 SCRA 421
[1982].)
Basis and nature of right of legal redemption.
(1) The nature of conventional and legal rights of redemptionis
identical, except for the source of the right. While conventional
redemption arises from the voluntary agreement of the parties, legal
redemption proceeds from law. (see Alarcon vs. Esteva, 16 SCRA 123
[1966].)
The concept of legal redemption may be converted into one of
conventional redemption. Thus, where there was voluntary agreement
of the parties, consisting of extensions of the redemption period granted
at the request of the vendors followed by commitment by them to pay
the redemption price at a fixed date, it was held that the concept of legal
redemption is converted by the parties into one of conventional
redemption such that it generated binding contracts when approved by
the vendee. In such case, the period of redemption is that agreed upon
by the parties. (Lazo vs. Republic Surety & Insurance Co., Inc., 31
SCRA 329 [1970].)
(2) The right of legal redemption is not predicated on proprietary
right but on a bare statutory privilege to be exercised only by the person
60
See distinctions between dation in payment and sale under Article 1486.
Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction
of a debt in money, shall be governed by the law of sales.
61
Art. 1619
EXTINGUISHMENT OF SALE
Legal Redemption
429
named in the statute. In other words, the statute does not make actual
ownership at the time of sale or redemption a condition precedent, the
right following the person and not the property. (Magno vs. Viola and
Sotto, 61 Phil. 80 [1934].) Under the law (Rules of Court, Rule 39, Sec.
30.), the property sold subject to redemption may be redeemed by the
judgment debtor or his successor-in-interest in the whole or any part of
the property. In an extra-judicial foreclosure sale, the mortgagor, his
successorsin-interest, judgment creditor or any person having a lien on
the property subsequent to the mortgage, may redeem the same. (Act
No. 3155, Sec. 6.)
(3) Legal redemption is in the nature of a mere privilege created
partly for reason of public policy and partly for the benefit and
convenience of the redemptioner to afford him a way out of what might
be a disagreeable or inconvenient association into which he has been
thrust. It is intended to minimize co-ownership. (Basa vs. Aguilar, 117
SCRA 128 [1982]; Tan vs. Court of Appeals, 172 SCRA 660 [1989].)
It works only one way in favor of the redemptioner. Not having parted
with anything, he can compel the purchaser to sell, but cannot be
compelled by him to buy. (Villasor vs. Medel, [C.A.] No. 8677, Sept.
29, 1948.)
Instances of legal redemption.
(1) Under the Civil Code, the instances of legal redemption are
found in Articles 1620, 1621, 1622, 1634 (infra.), and 1088.
Article 1088 provides:
“Should any of the heirs sell his hereditary rights to a stranger
before the partition, any or all of the co-heirs may be subrogated to
the rights of the purchaser by reimbursing him for the price of the
sale, provided they do so within the period of one month from the
time they were notified in writing of the sale of the vendor.”
Article 1088 refers to sale of hereditary rights, and not to specific
properties, for the payment of the debts of the decedent’s estate. In the
administration and liquidation of the estate of a deceased person, sales
ordered by the probate court for payment of debts are final and not
subject to legal redemption. Unlike in ordinary execution sales, there is
no legal provision allowing redemption in the sale of property for the
430
SALES
Art. 1619
payment of debts of a deceased person. (Plan vs. Intermediate Appellate
Court, 135 SCRA 270 [1985].)
(2) Under special laws, the following are instances of legal
redemption:
(a)
Redemption by owner of real property sold for
delinquent taxes. The period is within one year from the date of sale
(R.A. No. 7160 [Local Government Code], Sec. 261.);
(b)
Repurchase by homesteader of homestead sold
underthe Public Land Act. The period is five years (Com. Act No.
141 [Public Land Law], Sec. 119; see Tupas vs. Damasco, 132
SCRA 593 [1984].);
(c)
Redemption by judgment debtor or redemptioner
ofreal property sold on execution. The period is twelve months
(Rules of Court, Rule 39, Sec. 30.);
(d)
Redemption by mortgagor after mortgaged propertyhas
been judicially foreclosed and sold. The period is ninety days but
before confirmation of sale by the court. (Ibid., Rule 68, Sec. 3.) In
all cases of extra-judicial foreclosure sale, the mortgagor may
redeem the property within one year from the date of registration of
the sale (see Act No. 3135, Sec. 6); and
(e)
Redemption by an agricultural lessee of
landholdingsold by the landowner. The period is 180 days from
notice in writing which shall be served by the vendee on all lessees
affected and the Department of Agrarian Reform upon the
registration of the sale. (R.A. No. 3844, as amended [Code of
Agrarian Reform], Sec. 12.) This right has priority over any other
right of redemption, like the right of redemption of a coowner under
Article 1620.
ILLUSTRATIVE CASE:
Redemption of property sold under execution was effected by
means of a check for the amount due.
Facts: Pursuant to a judgment to pay damages, the sheriff levied
upon two parcels of land registered in the name of S, one of which had
already been purchased by B but had not yet been registered in the
latter’s name. The two lots were sold at public auction to P
(petitioners).
Art. 1619
EXTINGUISHMENT OF SALE
Legal Redemption
431
Before the expiration of the period of redemption, B issued to the
sheriff a check as the redemption price for the two lots. The sheriff
acknowledged receipt of the check on the same date and issued the
following day a certificate of redemption, in favor of B and S.
Issue: The central issue is whether or not redemption had been
validly effected by B and S in view of Article 124962 of the Civil Code
which, according to B and S, private respondents, was applicable in
case of redemption under Section 30, Rule 39 of the Rules of Court.
Held: “It is contended by the private respondents that Article
1249 is inapplicable as it ‘deals with a mode of extinction of debts’
(Golez vs. Camara, 101 Phil. 363 [1957].) while the ‘right to redeem
is not an obligation, nor is it intended to discharge a pre-existing
debt.’ (Paez vs. Magno, 83 Phil. 403 [1949].)
They rely on Javellana vs. Mirasol (40 Phil. 761 [1920].) where
the Supreme Court held that ‘a redemption of property sold under
execution is not rendered invalid by reason of the fact that the payment
to the sheriff for the purpose of redemption is effected by means of a
check for the amount due.’
The petitioners, on the other hand, invoke Belisario vs. Natividad
(60 Phil. 156 [1934].), where it was held that “even if the check had
been good, the defendant was not legally bound to accept it because
such a check does not satisfy the requirements of a legal tender.” They
also cite Villanueva vs. Santos (67 Phil. 648 [1939].), Legarda vs.
Miailhe (88 Phil. 637 [1951].), New Pacific Timber and Supply Co.,
Inc. vs. Seneris (101 SCRA 686 [1980].), and Philippine Air Lines vs.
Court of Appeals (181 SCRA 557 [1990].), all of which, they claim,
have overruled Javellana.
“It would appear from a study of the jurisprudence invoked by the
parties that the case applicable to the present controversy is Javellana
vs. Mirasol.
The cases cited by the petitioners do not involve redemption by
check. The check tendered in Belisario was in the exercise of an option
62 Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if
it is not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when through
the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
(1170)
432
SALES
Art. 1619
to repurchase; in Villanueva, in connection with a pacto de retro; in
Legarda and New Pacific, as payment of a mortgage indebtedness;
and in the PAL case, in satisfaction of a judgment.
Tolentino vs. Court of Appeals (106 SCRA 513 [1981].), besides
citing Javellana, stresses the liberality of the courts in redemption
cases. On the issue of the applicability of Article 1249 of the Civil
Code and the validity of the tender of payment through a crossed
check, this Court held:
‘x x x the aforequoted Article should not be applied in the
instant case x x x
To start with, the Tolentinos are not indebted to BPI, their
mortgage indebtedness having been extinguished with the
foreclosure and sale of the mortgaged properties. After said
foreclosure and sale, what remains is the right vested by law in
favor of the Tolentinos to redeem the properties within the
prescribed period. This right of redemption is an absolute
privilege, the exercise of which is entirely dependent upon the
will and discretion of the redemptioners. There is, thus, no legal
obligation to exercise the right of redemption. Said right, can in
no sense, be considered an obligation, for the Tolentinos are
under no compulsion to exercise the same. Should they choose
not to exercise it, nobody can compel them to do so nor will such
choice give rise to a cause of action in favor of the purchaser at
the auction sale. In fact, the relationship between said purchaser
and the redemptioners is not even that of creditor and debtor.
On the other hand, if the redemptioners choose to exercise
their right of redemption, it is the policy of the law to aid, rather
than to defeat, the right of redemption. It stands to reason,
therefore, that redemptions should be looked upon with favor and
where no injury is to follow, a liberal construction will be given
to our redemption laws as well as to the exercise of the right of
redemption. In the instant case, the ends of justice would be better
served by affording the Tolentinos the opportunity to redeem the
properties in question other than the homestead land, in line with
the policy aforesaid. x x x x x x
x x x And the redemption is not rendered invalid by the fact
that the said officer accepted a check for the amount necessary to
make the redemption instead of requiring payment in money. It
goes without saying that if he had seen fit to do so, the officer
could have required payment to be made in lawful money, and he
undoubtedly, in accepting a check, placed himself in a position
Art. 1619
EXTINGUISHMENT OF SALE
Legal Redemption
where he could be liable to the purchaser at the public auction if
any damage had been suffered by the latter as a result of the
medium in which payment was made. But this cannot affect the
validity of the payment. The check as a medium of payment in
commercial transactions is too firmly established by usage to
permit of any doubt upon this point at the present day. No
importance may thus be attached to the circumstance that a stoppayment order was issued against the check the day following the
deposit, for the same will not militate against the right of the
Tolentinos to redeem, in the same manner that a withdrawal of
the redemption money being deposited cannot be deemed to have
forfeited the right to redeem, such redemption being optional and
not compulsory. Withal, it is not clearly shown that said stoppayment order was made in bad faith. x x x’
In the United States, it has also been held and recognized that a
payment by check or draft or bank bills or currency which is not legal
tender is effective if the officer accepts such payment. (93 C.J.S.
Executions 258.) If in good faith the redemptioner pays, and the
officer receives before the expiration of the time of redemption an
ordinary banker’s check, the payment is regarded as sufficient. (Ibid.)
We are not, by this decision, sanctioning the use of a check for
the payment of obligations over the objection of the creditor. What we
are saying is that a check may be used for the exercise of the right of
redemption, the same being a right and not an obligation. The tender
of a check is sufficient to compel
433
434
SALES
Art. 1620
redemption but is not in itself a payment that relieves the redemptioner
from his liability to pay the redemption price. In other words, while
we hold that the private respondents properly exercised their right of
redemption, they remain liable, of course, for the payment of the
redemption price.’’ (Fortunado vs. Court of Appeals, 196 SCRA 269
[1991].)
ART. 1620. A co-owner of a thing may exercise the
right of redemption in case the shares of all the other
co-owners or of any of them, are sold to a third
person. If the price of the alienation is grossly
excessive, the redemptioner shall pay only a
reasonable one.
Should two or more co-owners desire to exercise
the right of redemption, they may only do so in
proportion to the share they may respectively have in
the thing owned in common. (1522a)
Right of legal redemption of co-owner.
The right of legal redemption among co-owners presupposed of
course, the existence of a co-ownership. The following are the requisites
for the right to exist:
(1)
There must be co-ownership of a thing;
(2)
There must be alienation of all or of any of the shares
of the other co-owners;
(3)
The sale must be to a third person or stranger (Art.
1620.),
i.e., a non-co-owner; and
(4) The sale must be before partition.
The right of a co-owner to legal redemption is based on his status
as such independently of the size of his share. (Butte vs. M. Uy & Sons,
Inc., 4 SCRA 527 [1961].) It can no longer be invoked where there had
been an actual partition of the property so that co-ownership no longer
exists. (Salantandol vs. Reyes, 162 SCRA 568 [1988].) Redemption by
a co-owner within the period prescribed by law (see Art. 1623.) inures
EXTINGUISHMENT OF SALE
Legal Redemption
435
to the benefit of all the other co-owners. (Mariano vs. Court of Appeals,
41 SCAD 927, 222 SCRA 736 [1993].)
Art. 1620
EXAMPLES:
(1)
A, B, and C are co-owners of an undivided property
valued at P500,000.00. A sells his interest to D for P200,000.00.
B or C may exercise the right of redemption by reimbursing D the
price of the sale. If both B and C redeem the interest sold by A, each
of them shall pay P100,000.00 to D, which is the proportion of their
respective shares in the co-ownership. If the price of P200,000.00 is
grossly excessive, the same may be equitably reduced by the court.
(2)
The property inherited by A, B, and C, heirs, were
mortgaged by X, decedent, during his lifetime, to D. The redemption
of the whole property by C with his own personal funds does not vest
in him sole ownership over said property but will inure to the benefit
of all co-owners. In other words, it will not put an end to the lasting
state of co-ownership. Redemption is not a mode of terminating a coownership. (Mardeno vs. Court of Appeals, supra.)
ILLUSTRATIVE CASE:
The sale was made by the father, a co-owner, to the wife of one of
his children, the other co-owners.
Facts: Spouses H and W owned a small lot. After W died
intestate, H sold one-half of the lot to T, wife of S, H’s son. T refused
to allow redemption by X, etc., other children of H and W. The lower
court disallowed redemption because it considered T, the vendee, a
co-heir, being married to S, and held the conveyance valid since it was
in favor of the conjugal partnership of T and S in the absence of any
statement that the property was paraphernal in character.
Issue: Should X, etc. be allowed to exercise their right to redeem
the property sold to T?
Held: Yes. A co-ownership exists. Within the meaning of Article
1620, the term “third person” or “stranger” refers to all persons who
are not heirs in succession, and by heirs are meant only those who are
called either by will or the law to succeed the deceased and who
actually succeeds. In short, a third person is any one who is not a coowner. (Villanueva vs. Florendo,
436
SALES
139 SCRA 329 [1985]; see dissenting opinion.)
Art. 1620
By whom and against whom right may
be exercised.
(1) A co-owner has the legal right to sell, assign, or mortgage his
ideal share in the property held in common. (see Art. 493.) By the very
nature of the right of legal redemption, a co-owner’s right to redeem is
invoked only after the shares of the other co-owners are sold to a third
party or stranger.
(2) Co-owners have no right of legal redemption against each other
to whom the law grants the same privilege, but only against a third
person. (Estrada vs. Reyes, 33 Phil. 31 [1915]; Reyes vs. Concepcion,
190 SCRA 171 [1990].) A third person, within the meaning of Article
1620, is anyone who is not a co-owner. Article 1620 is intended to
minimize co-ownership. (Basa vs. Aguilar, 117 SCRA 128 [1982].)
(3) Should any of the heirs sell his hereditary right to a stranger
before partition, any or all of the co-heirs may be subrogated to the
rights of the purchaser by reimbursing him for the purchase price,
provided it be done within the period of one (1) month to be counted
from the time they were notified in writing of the sale by the vendor.
(Art. 1088.) Once the portion corresponding to each heir is fixed, the
co-heirs turn into co-owners and their right of legal redemption should
be governed by Articles 1620 and 1623. (Saturnino vs. Paulino, 97 Phil.
51 [1955].)
(4) The right of legal redemption is not granted solely and
exclusively to the original co-owners but applies to those who
subsequently acquire their respective shares while the community
subsists. (see Felices vs. Colegado, 35 SCRA 173 [1970].) There is
nothing in Article 1620 which, expressly or by inference, limits the right
of redemption to the original co-owners. Moreover, this interpretation
is in accordance with the spirit of the law. (Viola and Roura vs. Tecson,
43 Phil. 808 [1922].)
When right cannot be invoked.
Article 1620 applies only if the co-ownership still exists. (see
Mendoza vs. Court of Appeals, 199 SCRA 778 [1992]; Abalos vs. Court
EXTINGUISHMENT OF SALE
Legal Redemption
437
of Appeals, 42 SCAD 569, 223 SCRA [1993].) It presupposes the
existence of a co-ownership at the time the conveyance is made by a coowner and when it is demanded by the other co-owner
Art. 1620
or co-owners. (Uy vs. Court of Appeals, 63 SCAD 243, 246 SCRA 703
[1995].)
(1) Thing owned in common partitioned. — The right given to a
co-heir or co-owner by Article 1620 in case any of the other coheirs or
co-owners sells his share to a third person cannot be invoked where the
sale was made after the properties owned in common had been
partitioned, judicially or extra-judicially. (Umengan vs. Butacan, 7
SCRA 311 [1963].) If a plan of partition has been agreed upon though
not approved at the time of the sale, its approval by the court relates
back to the date of the plan, and property sold after such date is not
subject to legal redemption. (De Jesus vs. Daza, 77 Phil. 152 [1946].)
(2) Shares of all co-owners sold. — The provision covers the case
where some or one of the co-owners sell(s) their/his share(s) in the
property owned in common but not the case where all the coowners
have sold their shares. (Tan Queto vs. Candongo, 106 SCRA 199
[1981].)
(3) Thing owned in common had been offered for sale by all coowners. — Neither can the right be invoked where the petitioners,
together with the other co-owners, had previously offered for sale the
entire property and after the respondent agreed to purchase the same
and advanced a considerable amount of money, said petitioners wanted
to renege on their agreement to sell and instead, offered to redeem from
the respondent portion of the property sold by the other co-owners to
the respondent. (Dominguez vs. Lee, 155 SCRA 703 [1987].)
Price of redemption.
(1) Reasonable price. — The law requires the redemptioner to pay
only a reasonable price if the price of the alienation is grossly excessive.
This is to prevent collusion between the buyer and the selling co-owner.
The right of the redemptioner to pay a reasonable price under Article
1620 does not excuse him from the duty to make proper tender of the
price that can be honestly deemed reasonable under the circumstances,
438
SALES
without prejudice to final arbitration by the courts, nor does it authorize
said redemptioner to demand that the vendee accept payment by
installments. (Torrijos vs. Crisologo, 6 SCRA 186 [1962].) There is no
legal re-
EXTINGUISHMENT OF SALE
Legal Redemption
439
demption in case of a mere least. (De La Cruz vs. Marcelino, 84 Phils.
709 [1949]; Fernandez vs. Terun, 391 SCRA 653 [2002].)
(2) Price stated in the deed of sale. — The practice of understating
the consideration of transactions for the purpose of evading taxes and
fees due the government is violative of public policy and injurious to
public interest and must be condemned and the parties guilty thereof
must be made to suffer the consequences of their ill-advised agreements
to defraud the State. In a case where only P30,000 was the price stated
in the deed of sale of the interest of a co-owner in a piece of land “to
minimize the payment of the registration fees, stamps and sales tax,”
the court ruled that the co-owner exercising the right of legal
redemption should pay only P30,000, although much more had been
paid by the buyer. (Doromal vs. Court of Appeals, 66 SCRA 575
[1975].)
(3) Amount actually paid by the buyer. — On the other hand, if by
false representations the buyer obtains from the redemptioner an
amount (e.g., P100,000) greater than the price which he actually paid
(e.g., P80,000), the co-owner who made the repurchase can recover
from the buyer the difference (P20,000) in an appropriate action. (see
Lim Tuico vs. Cu Unjieng, 21 Phil. 493 [1912].)
Purpose of the grant of right to
co-owners.
The purpose of the law in establishing the right of legal redemption
between co-owners is to reduce the number of participants until the
community is done away with, as being a hindrance to the development
and better administration of the property. This reason exists while the
community subsists and the participants continue to be so whether they
be the original coowners or their successors. (Viola and Roura vs.
Tecson, 43 Phil. 808 [1922]; see Estrada vs. Reyes, 33 Phil. 31 [1915];
Caram vs. Court of Appeals, 101 Phil. 315 [1957].)
ART. 1621. The owners of adjoining lands shall
also have the right of redemption when a piece of
rural land, the area of which does not exceed one
hectare, is alienated, unless the grantee does not own
any rural land.
Art. 1621
440
SALES
Art. 1621
This right is not applicable to adjacent lands
which are separated by brooks, drains, ravines, roads
and other apparent servitudes for the benefit of other
estates.
If two or more adjoining owners desire to exercise
the right of redemption at the same time, the owner of
the adjoining land of smaller area shall be preferred;
and should both lands have the same area, the one
who first requested the redemption. (1523a)
Right of legal redemption of adjacent owners
of rural lands.
The following are the requisites for the exercise of the right under
this article:
(1) Both the land of the one exercising the right of redemption and
the land sought to be redeemed must be rural;
(2) The lands must be adjacent;
(3) There must be an alienation;
(4) The piece of rural land alienated must not exceed one (1)
hectare;
(5) The grantee or vendee must already own any other rural land;
and
(6) The rural land sold must not be separated by brooks, drains,
ravines, roads and other apparent servitudes from the adjoining lands.
The lands mentioned in paragraph 2 of Article 1621 are not really
adjacent.
When the land exceeds one (1) hectare, the adjacent owners are not
given the right of legal redemption because this may lead to the creation
of big landed estates. (10 Manresa 372.) The right cannot be exercised
against a vendee if he is also an adjacent owner. The last paragraph of
Article 1621 refers to a situation where the vendee of a piece of rural
land is not an adjoining owner.
ILLUSTRATIVE CASES:
1. Party who has the burden of proving existence of barrier between land
sought to be redeemed and land of one who wants to redeem.
EXTINGUISHMENT OF SALE
Legal Redemption
441
Facts: It is not disputed that the land sought to be redeemed adjoins that
of X, who seeks to repurchase the property in the exercise of his legal right of
redemption in accordance with first paragraph of Article 1621, that it is rural
and has an area of not more than one (1) hectare, and that its purchaser already
owns or is a co-owner of another rural land.
Issue: Is it incumbent upon X to prove that his land and the one he seeks
to redeem are not separated by any of the barriers mentioned in the second
paragraph of Article 1621?
Held: No. Having proved that his land and that which he seeks to redeem
are contiguous, X should not be called upon to prove the contrary by showing
that the two estates are separated by a brook, drain, ravine, etc. The one called
upon to prove the existence of a barrier between two estates is he who wants
to defeat the right of redemption on the ground that the two estates are not
contiguous to each other. (Maturan vs. Gullas, 94 Phil. 701 [1954].)
———— ———— ————
2. Right of redemption by adjacent owner against vendee who is also an
adjacent owner.
Facts: S sold to B, an adjacent owner, a parcel of rural land. B bought
the land for the purpose of having an egress from his land to a road. C,
another adjacent owner, seeks to redeem the land sold to B.
Issue: Has C the right to exercise the right of redemption granted to an
adjacent owner?
Held: No. The right of redemption of adjacent owners cannot be exercised
by any of them among themselves, but only by them against a stranger, who
acquires from any one of them by purchase or gift, in payment, or by any other
title for value, a rural estate of the area fixed by law. (Del Pilar vs. Catindig,
35 Phil. 263 [1916].)
Note: The last paragraph of Article 1523 of the old Civil Code, except for
a slight change in wordings, is the same as that of Article 1621 of the new Civil
Code. The Supreme Court
Art. 1621
adopted decisions of the Supreme Court of Spain on the same issue.
(See, however, rulings with respect to urban lands under Article 1622,
last par., infra.)
Meaning of rural lands.
442
SALES
Art. 1621
The word “rural” has been defined as relating to or constituting
tenement in land adopted and used for agricultural or pastoral purposes.
It is one which, regardless of site, is principally used for the purpose of
obtaining products from the soil as opposed to urban lands, which are
principally for the purpose of residence. (Fabia vs. Intermediate
Appellate Court, 133 SCRA 364 [1984], citing 3 Castan 124.)
Use of property a determining factor.
The above definition is correct insofar as the word is ordinarily and
commonly used or understood. However, in giving an adjoining owner
the right to redeem “a piece of rural land,” the word “rural,” as used in
Article 1621, must be construed in consonance with the meaning
intended by the framers of the law. The reason for the law in question
is to foster the development of agricultural areas by adjacent owners
who may desire the increase for the improvement of their own land.
(infra.)
In view of the legislative objective, the “use” of property for
agricultural purposes is essential in order that the same may be
characterized as rural land for purposes of legal redemption under
Article 1621. The use and destination of the land and the customs of
each town will be the data that ought to be taken into account in order
to decide firmly the cases where the qualification appears doubtful.
(Ibid., citing 10 Manresa 372.)
Preference as between two or more adjacent
owners of rural lands.
In case two or more adjacent owners desire to exercise the right of
redemption, the law gives preference to the owner of the adjoining land
of smaller area but if both lands have the same area, to the one who first
requested the redemption.
Under Article 1620, the co-owners exercise their right of
redemption pro rata.
Purpose of the grant of right to owners of
adjoining rural lands.
(1) To benefit adjacent owners and public weal as well. — The
object of the lawmaker in allowing the redemption by adjacent owners
is to prevent an adjoining real estate belonging to another owner or
owners, the area of which does not exceed one hectare, from passing
EXTINGUISHMENT OF SALE
Legal Redemption
443
into the hands of a person other than someone among the adjacent
owners whereby the property of the latter would be divided without
benefit to the public weal and perhaps to the prejudice of the adjacent
owners themselves who are interested in preserving the integrity of their
respective properties and making use of the alienated property for the
improvement and development of their own lands. (Del Pilar vs.
Catindig, 35 Phil. 263 [1916].)
(2) To avoid difficulties in cultivation. — “An estate of not more
than a hectare in area does not, as a general rule, produce enough to
keep one family; its cultivation cannot be accomplished economically,
as the agricultural implements used have to be brought in across lands
belonging to other owners, and the same may be said with regard to the
gathering and transportation of the produce. All these difficulties
disappear if on the sale of the estate, it is purchased by one of the
adjacent owners whereby the public interest is favored, because the
production increases, the private interests of the redemptioner are
respected, and no ostensible harm is occasioned either on the vendor or
the purchaser.” (Ibid., quoting 10 Manresa 358.)
(3) To protect agriculture. — The intention of the law in giving the
right of redemption is to protect agriculture, by the union of small
agricultural lands and those adjoining thereto under one single owner
for their better exploitation. If the land adjacent to that which is sought
to be redeemed is not agricultural, then the redemption is in vain — it
does not answer the purpose behind the law. (Cortes vs. Flores, 47 Phil.
992 [1925]; Fabia vs. Intermediate Appellate Court, 133 SCRA 364
[1984].) Both the land of the one exercising the right and the adjacent
property sought to be redeemed should be rural or destined for
agricultural exploitation; otherwise, there is no right of redemption.
Art. 1622
In short, the purpose is to encourage the maximum development and
utilization of agricultural lands. (Ortega vs. Orcine, 38
SCRA 276 [1971].)
ART. 1622. Whenever a piece of urban land which
is so small and so situated that a major portion
thereof cannot be used for any practical purpose
444
SALES
Art. 1621
within a reasonable time, having been bought merely
for speculation, is about to be re-sold, the owner of
any adjoining land has a right of pre-emption at a
reasonable price.
If the re-sale has been perfected, the owner of the
adjoining land shall have a right of redemption, also
at a reasonable price.
When two or more owners of adjoining lands wish
to exercise the right of pre-emption or redemption,
the owner whose intended use of the land in question
appears best justified shall be preferred. (n)
Rights of pre-emption and legal redemption of
adjacent owners of urban lands.
(1) Meaning. — Article 1622 recognizes two rights; namely:
(a)
Pre-emption, which has been defined as the act or right
of purchasing before others. (72 C.J.S. 478.) It is exercised before
the sale or resale against the would-be vendor; and
(b)
Redemption, which is exercised after the sale has been
perfected against the vendee. The recognition of the right of
redemption will result in the rescission of the sale.
(2) Requisites. — The conditions or requisites for the exercise of
the right of pre-emption or redemption, as the case may be, are the
following:
(a)
owner;
The one exercising the right must be an adjacent
(b)
The piece of land sold must be so small and so situated
that a major portion thereof cannot be used for any practical purpose
within a reasonable time; and
EXTINGUISHMENT OF SALE
Legal Redemption
445
Art. 1622
(c)
Such urban land was bought by its owner merely
forspeculation.
The above requisites must be alleged by the adjoining owner in his
complaint and proved by him. (Del Rosario vs. Bansil, 149 SCRA 662
[1989].)
(3) Price. — The price to be paid is a reasonable price. In a case,
an adjoining owner was held not entitled to redeem a lot (612 sq.
meters) which was much bigger area-wise, than the lot (140 sq.
meters) owned by him. (Tañedo vs. Bernad, 165 SCRA 86 [1988].)
(4) Preference as between two or more adjacent owners. — In case
two or more adjoining owners desire to exercise the right of legal
redemption, the law prefers him whose intended use of the land appears
best justified. (last par.) The determinative factor is the intended use
that appears best justified, and not whether the land was acquired for
speculative purposes.
ILLUSTRATIVE CASES:
1. The land in question is intended to be used by an educational
institution whose existing site is not enough for its needs.
Facts: The City of Manila and Arellano University entered into
the contract of exchange whereby 5 parcels of land belonging to the
city were ceded to the university for 3 parcels belonging to the latter.
X brought suit, claiming the right of redemption and for preemption over one of the 5 city parcels with an area of 221.50 square
meters, adjoining X’s property and lots of the university.
Issue: Does X have the right of legal redemption under Article
1622?
Held: No. The existence of the two conditions (Nos. 2 and 3)
mentioned in Article 1622 must be alleged and proved. X not only
failed to allege them but could not have proved them because, in the
first place, the parcel of land in question consists of 221.50 square
meters, an area bigger than the average size of lots in Manila as found
by the trial court, and in the second place, the City of Manila did not
acquire the lot by purchase.
446
SALES
Furthermore, it was alleged by the university that, as an
educational institution whose existing site was not enough for
Art. 1622
its needs, it could devote the said parcel to serve public interest, which
intended use entitled the university to preference under the last
paragraph of Article 1622. (De Santos vs. City of Manila, 45 SCRA 40
[1972]; see De la Cruz vs. Cruz, 32 SCRA 307 [1970]; Soriente vs.
Court of Appeals, 8 SCRA 750 [1963]; Ortega vs. Orcine, 38 SCRA
276 [1971].)
———— ———— ————
2. Part of adjoining owner’s house occupies without his fault
adjoining lot sold to another adjoining owner.
Facts: Having discovered that part of her ancestral house was
erected on an adjoining lot of 59 square meters, X wanted to exercise
her right of pre-emption but the lot owner asked for the exorbitant sum
of P9,000. Later, the 59 square meter lot was sold to another adjoining
owner for only P1,500.
Issue: Who has a better right to the lot, X or the other adjoining
owner?
Held: X, because her intended use of the land appears best
justified. Her house was occupying the lot through no fault on her part.
(Legaspi vs. Court of Appeals, 69 SCRA 360 [1976].)
Note: In the above cases, the right of legal redemption was sought
to be exercised by an adjoining owner against the vendee who is also
an adjoining owner. (see ruling in Del Pilar case, supra, as to rural
lands.)
Meaning of urban land.
The term “urban,” as used in Article 1622, does not necessarily refer
to the nature of the land itself sought to be redeemed nor to the purpose
to which it is somehow devoted, but to the character of the community
or vicinity in which it is found. In this sense, even if the land is somehow
dedicated to agriculture, it is still urban in contemplation of Article
1622, if it is located within the center of population or the more or less
populated portion of a city or town. (Ortega vs. Orcine, 38 SCRA 276
[1971].)
Urban and rural lands distinguished.
EXTINGUISHMENT OF SALE
Legal Redemption
447
As it is not easy to fix with exactitude as to furnish a sure norm for
all cases the line that separates the rural from the urban, the law has
avoided any definition on this point.
Art. 1622
(1) As to location. — “Rural” means of, or pertaining to, the
country as distinguished from a city or town. The word “urban” is
defined as of, or belonging to, a city or town. And “rural property” is to
be determined from the character of the locality, the streets, lots,
buildings, improvements, and the market value of the property as also
of the neighboring and surrounding properties. (Enriquez vs.
Devanadera, [C.A.] 32 O.G. 1486; see Ortega vs. Orcine, supra.)
(2) As to purpose. — Urban lands are distinguished from rural
lands by their purpose or being for dwelling, industry or commerce, and
not for agricultural, fishing or timber exploitation.
A land is urban if it is principally used for residential purposes. The
character of the locality, the streets, the neighboring and surrounding
properties give a clear picture of a residential area. Truly, a residential
home lot is not converted into agricultural land by the simple
reservation of a plot for the cultivation of garden crops or the planting
of bananas and some fruit trees. Nor can an orchard or agricultural land
be considered residential simply because a portion thereof has been
criss-crossed with asphalt and cement roads with buildings here and
there.
The rule of reason based on the specific facts of each case must be
applied. (Fabia vs. Intermediate Appellate Court, 133 SCRA 364
[1984].)
Meaning of “to speculate.’’
According to Webster’s International Dictionary (2nd edition, p.
2417.), “to speculate” means: “To enter into a business transaction or
venture from which the profits or return are conjectural because the
undertaking is outside the ordinary course of business, to purchase or
sell with the expectation of profiting by anticipated, but conjectural
fluctuations in price. Often in a somewhat depreciative sense, to engage
in a hazardous business transaction for the chance of an unusually large
448
SALES
profit; as to speculate in coffee, in sugar, or in bank stock.” (cited in
Ortega vs. Orcine, supra.)
ILLUSTRATIVE CASE:
In less than eight (8) months from date of its purchase, vendee
developed land into a subdivision for resale.
Art. 1623
EXTINGUISHMENT OF SALE
Legal Redemption
449
Facts: S sold to B a 4,452-square-meter parcel of land (in Iriga,
Camarines Sur). C, adjoining owner of a parcel of land used as a
school site, brought suit for the purpose of enforcing his right of legal
redemption. The land in question has been filled with earth, developed
and subdivided into small lots for residential purposes by B in less
than eight (8) months from the date when he bought it.
Issue: Is C entitled to the right of redemption under Article 1622?
Held: No. An owner of an urban land may not redeem an
adjoining urban property where he does not allege in his complaint
much less prove at the trial that the latter is so small and so situated
that a major portion thereof cannot be used for any practical purpose
within a reasonable time, having been bought merely for speculation.
Considering the area of the land in question which is far from being
“so small and so situated that a major portion thereof cannot be used
for any practical purpose” for, quite the contrary, it has been made a
subdivision, and also that it cannot be said that B bought the same
“merely for speculation” since in less than eight (8) months from the
date when he bought it he had developed the same into a subdivision
for resale, which shows that he must have had that definite purpose in
mind in buying the same, C cannot invoke Article 1622. Such purpose
cannot be held as speculative. (Ortega vs. Orcine, supra.)
Purpose of the grant of right to owners of
adjoining urban lands.
Whereas, the objective of the right of redemption of adjoining rural
land is to encourage the maximum development and utilization of
agricultural lands, the evident purpose of Article 1622 is to discourage
speculation in real estate and the consequent aggravation of the housing
problems in centers of population.
(Ibid.)
ART. 1623. The right of legal pre-emption or
redemption shall not be exercised except within thirty
days from the notice in writing by the prospective
vendor, or by the vendor, as the case may be. The
deed of sale shall not be recorded in the Registry of
Property, unless accompanied by an affidavit of the
vendor that he has given written notice thereof to all
possible redemptioners.
450
SALES
Art. 1623
The right of redemption of co-owners excludes
that of adjoining owners. (1524a)
Exercise of right of pre-emption or redemption.
Article 1623 stresses the need for notice in writing in the three (3)
species of legal redemption mentioned in Articles 1620, 1621, and
1622.
While the co-owner’s right of legal redemption is a substantial right,
it is exceptional in nature, limited in its duration and subject to strict
compliance with legal requirements. One of these is that the
redemptioner should tender payment of the redemption money within
30 days from written notice of the sale by the co-owner. (Caro vs. Court
of Appeals, 113 SCRA 10 [1982].)
One who purchases an undivided interest in a property is charged
with notice that this acquisition is subject to redemption by any other
co-owner within the statutory 30-day period. (Butte vs. M. Uy & Sons,
Inc., 4 SCRA 527 [1962].) The right of redemption of co-owners (Art.
1620.) is preferred over that of adjoining owners. (Arts. 1621, 1622.) In
other words, the law attaches more importance to the necessity to put an
end to tenancy in common than to the purpose of encouraging the
development of agriculture.
Under Article 484 of the Civil Code, there is co-ownership
whenever the ownership of an undivided thing or right belongs to
different persons. There is no longer co-ownership when the different
portions owned by different people are already concretely determined
and separately identifiable, even if not yet technically described. This
situation makes inapplicable the provision on the right of redemption of
a co-owner under Article 1623. (Si vs. Court of Appeals, 342 SCRA
653 [2002].)
Period for exercise of right.
(1) Absolute and non-extendible — The period provided in the
above article is absolute. It is peremptory and non-extendible. (Cabrera
vs. Villanueva, 160 SCRA 672 [1988].) In fact, there is much stronger
reason against relaxing the period in favor of a legal redemptioner than
in favor of a vendor with pacto de retro. In the latter transaction, there
Art. 1623
EXTINGUISHMENT OF SALE
Legal Redemption
451
is a contractual relation founded on valuable consideration, a contract
by which the party from whom the repurchase is sought has been
benefited. The right of a legal redemption is a pure creature of the law,
regulated by law, and works only one way in favor of the redemptioner.
Even if the person entitled to redeem is a minor, the running of the
period is not interrupted. (Villasor vs. Medel, 81 Phil. 546 [1948].)
(2) A condition precedent. — The thirty-day period 63 is not a
prescriptive period but is more a requisite or condition precedent to the
exercise of the right of legal redemption. (Caro vs. Court of Appeals,
supra.) It is a period set by law to restrict the right of the payor
exercising the right of legal redemption. It is not one of prescription.
(Hermoso vs. Court of Appeals, 300 SCRA 516 [1999].) In other words,
if no offer is made within the prescribed period, no action will be
allowed to enforce the right of redemption. (Cabrera vs. Villanueva,
supra.)
(3) Reason for rule. — The fundamental policy of the law is to
discourage the keeping for a long time of property in a state of
uncertainty, beyond the thirty-day period, a situation which obviously
is unjust to the purchaser and prejudicial to public interest. (Ibid.;
Manaois vs. Zamora, [C.A.] 48 O.G. 5362; Daza vs. Tomacruz, 58 Phil.
414 [1933]; Lim Tuico vs. Cu Unjieng, 21 Phil. 493 [1912].)
63 Under the Code of Agrarian Reform (R.A. No. 3844, as amended, Sec. 11.), the right of
pre-emption of an agricultural lessee may be exercised within 180 days from notice in writing
which shall be served by the landowner (vendor) on all lessees affected and the Department of
Agrarian Reform. The lessee who agrees with the terms and conditions of the sale must give notice
in writing to the lessor his intention to exercise his right within the balance of 180 days. The period
for the exercise of the right of legal redemption is also 180 days from notice in writing. (Sec. 12
thereof, supra.) The Code of Agrarian Reform gives agricultural lessees a substantially longer
period than that provided by the Civil Code in view of the fact that because of their economic
status, they may not be able to avail of the right without securing funds from other sources, and
the longer period is given precisely to enable them to obtain legal and financial support from the
Department of Agrarian Reform and the Land Bank and other sources as provided by the Code
itself. (Lusung vs. Vda. de Santos, 118 SCRA 669 [1982].) There is no legal provision suspending
or interrupting the period for exercising the lessee’s right of pre-emption or redemption. The right
is not a matter of intent, but of making the proper payment or tender of the price within the
specified period. How the lessee will raise the money for the purpose is immaterial. Timeliness of
the payment or tender is what matters. (De la Merced vs. De Guzman, 160 SCRA 87 [1988].)
Note: Presidential Decree No. 27 (Tenants Emancipation Decree.) impliedly repealed the
provisions of the Code of Agrarian Reform on pre-emption and redemption insofar as rice and
corn lands above seven (7) hectares are concerned. The excess areas are covered by Operation
Land Transfer the objective of which is to distribute land transfer certificates to the tenant farmers
pursuant to the Decree.
452
SALES
Art. 1623
Nevertheless, in the interpretation of Articles 1620, 1621, and 1622, it
is always tilted in favor of the re-demptioner and against the vendee.
The purpose is to reduce the number of participants until the community
is terminated being a hindrance to the development and better
administration of the property. It is a one-way street. It is always in
favor of the redemptioner since he can compel the vendee to sell to him
but he cannot be compelled by the vendee to buy the alienated property.
(Hermoso vs. Court of Appeals, 300 SCRA 516 [1999].)
Notice by vendor or prospective vendor.
The period of thirty (30) days is counted from the notice in writing
given by the prospective vendor or by the vendor, as the case may be,
and not by the vendee.
(1) Reasons for rule. — The reasons for requiring the vendor to
give the notice are easy to see. The seller of an undivided interest is in
the best position to know who are his co-owners that under the law must
be notified of the sale. Also, the notice by the seller removes all doubts
as to the fact of the sale, its perfection, and its validity, the notice being
a reaffirmation thereof; so that the party notified need not entertain
doubt that the seller may still contest the alienation. This assurance
would not exist if the notice should be given by the buyer. (Butte vs. M.
Uy & Sons, Inc., supra; Salantadol vs. Reyes, 162 SCRA 568 [1988].)
(2) Notice must be in writing. — The written notice required under
Article 1088 (supra.) and Article 1623 is indispensable. Any other kind
of notice such as verbal or by registration, or the mere knowledge of the
sale, acquired in some other manner by the legal redemptioner, does not
satisfy the statute. The written notice was obviously exacted by the law
to remove all uncertainty as to the sale, its terms and its validity and to
quiet any doubts that the alienation is not definitive. (Conejero vs. Court
of Appeals, 16 SCRA 407 [1978]; Mariano vs. Court of Appeals, 41
SCAD 927, 222 SCRA 736 [1993]; see, however, Alonzo vs.
Intermediate Appellate Court, 150 SCRA 259 [1987], infra.)
(3) Form of written notice. — Jurisprudence affirms the need for
notice but its form has been the subject of varying interpretations.
Article 1623 does not prescribe any particular form of notice so long as
the reasons for a written notice are present or otherwise satisfied. So
long, therefore, as the redemptioner is informed in writing of the sale
Art. 1623
EXTINGUISHMENT OF SALE
Legal Redemption
453
and the particulars thereof, the 30 days for redemption start running.
(Ibid.)
(a)
Accordingly, the mere furnishing of the deed of sale
isequivalent to giving of written notice, in a more authentic manner
than any other writing could have done. (Ibid., Badillo vs. Ferrer, 152
SCRA 407 [1987]; see Castillo vs. Samonte, 106 Phil. 1023 [1960];
Garcia vs. Calaliman, 172 SCRA 201 [1989].) But the mere statement
in a deed of sale to the effect that the vendor has complied with the
provisions of Article 1623 does not comply with the required written
notice where the holder of the right of pre-emption or redemption is
not a party to the deed of sale. (Primary Structures Corp. vs. Valencia,
409 SCRA 371 [2003].)
(b)
The court must not adopt a stand of having to sacrifice
substance to technicality. More so where the vendor stated under oath
in the deed of sale that notice of the sale had been given to prospective
redemptioners in accordance with Article 1623. “A sworn statement
or clause in a deed of sale to the effect that a written notice of sale
was given to possible redemptioners or co-owners might be used to
determine whether an offer to redeem was made on or out of time, or
whether there was substantial compliance with the requirement of
Article 1623.” (Etcuban vs. Court of Appeals, 148 SCRA 507
[1987].)
(c)
Similarly, although Article 1623 has provided “a
particular method of giving notice and that notice must be deemed
exclusive” (Butte vs. M. Uy & Sons, Inc., supra.), an exception to the
rule may be adopted, in view of the peculiar circumstances of the
case, to prevent manifest injustice. The only purpose of the written
notice is to ensure that all the co-owners shall be actually notified of
the sale and to remove all doubt as to the perfection of the sale. Thus,
in a case where the co-owner was actually present and even acted as
an active intermediary in the consummation of the sale of the
property, it was held that he was and must be considered to have had
actual notice of the sale. A written notice to him as required by Article
1623 was no longer necessary since he was actually aware of the sale.
(Distrito vs. Court of Appeals, 197 SCRA 606 [1991].) Where the
buyer took possession of the property sold immediately after the
execution of the deed of sale in his favor and continued to possess the
454
SALES
Art. 1623
same and the fact of such possession had not been questioned by any
of the co-owners, the requirement in Article 1623 had been rendered
inutile thereby as the latter should be deemed to have knowledge of
the sale. (Pilapil vs. Court of Appeals, 66 SCAD 178, 250 SCRA 566
[1995].)
(d)
In a case, it appears that the executor of the
deceasedwho had petitioned the court for authority to sell the property
in question was granted such authority with the conformity of all the
heirs. It was held that the heirs’ conformity was “actually a waiver of
their right of pre-emption; and, in the least, it was notice of the
intention of the heirs to sell their shares, sufficient to supplement the
written notice required by Article 1623 of the Civil Code.”
(Seechung-Federis vs. Sunga, 134 SCRA 16 [1985].)
(e)
In a civil case for collection of a share in the rentals
byan alleged buyer of a co-owned property, the receipt of a summons
by a co-owner has been held to constitute actual knowledge of the
sale. On that basis, the co-owner may exercise the right of redemption
within 30 days from finality of the decision. (Francisco vs. Boiser,
127 SCAD 198, 332 SCRA 792 [2000].) Similarly, a co-owner was
deemed to have been given notice of sale to the respondents by the
execution and signing of the deed of extra-judicial partition and
exchange of shares. (Fernandez vs. Tarun, 391 SCRA 653 [2002].)
(f)
The written notice of sale is mandatory.
Notwithstanding actual knowledge of a co-owner, the latter is still
entitled to a written notice from the selling co-owner in order to
remove all uncertainties about the sale, its terms and conditions, as
well as its efficacy and status. (see Cabrera vs. Villanueva, 160 SCRA
672 [1988]; Cornejero vs. Court of Appeals, supra.) Even in Alonzo
vs. Intermediate Appellate Court (infra.), the Supreme Court made it
clear that it was not reversing the prevailing jurisprudence but merely
adopting an exception to the general rule in view of the peculiar
circumstances of the case. In Alonzo, the right to legal redemption
was invoked several years, not just days or months after the
consummation of the contract of sale. The complaint for legal
redemption itself was filed more than 30 years after the sale was
concluded. (Verdad vs. Court of Appeals, 70 SCAD 482, 256 SCRA
Art. 1623
EXTINGUISHMENT OF SALE
Legal Redemption
455
593 [1996]; see Primary Structures Corp. vs. Valencia, 409 SCRA
371 [2003].)
In Si vs. Court of Appeals (135 SCAD 754, 342 SCRA 653 [2000].),
the Supreme Court, made a contrary ruling, to wit: “Co-owners with
actual notice of the sale are not entitled to written notice. A written
notice is a formal requisite to make certain that the coowners have actual
notice of the sale to enable them to exercise their right of redemption
within the limited period of thirty days. But where the co-owners had
actual notice of the sale at the time thereof and/or afterwards, a written
notice of a fact already known to them, would be superfluous. The
statute does not demand what is unnecessary.’’
(4) Contents of written notice of sale. — The notice in writing
which Article 1623 requires to be made is a notice not only of a
perfected sale but of the actual execution and delivery of the deed of
sale. This is implied from the second sentence of Article 1623. A sale
may not be presented to the register of deeds for registration unless it
be in the form of a duly executed public instrument. Moreover, the law
prefers that all the terms and conditions of the sale should be definite
and in writing. (see Doromal vs. Court of Appeals, 66 SCRA 575
[1975].) Note that Article 1623 merely provides that a deed of sale shall
not be recorded in the Registry of Property unless accompanied by an
affidavit that a written notice has been given to all possible
redemptioners. It does not state that by reason of such lack of notice the
sale shall become void. (Fernandez vs. Tarun, 391 SCRA 653 [2002].)
(5) Notice by any other insufficient. — The notice required by
Article 1623 must be given by the vendor (or prospective vendor) and
by nobody else. This is clear from Article 1623 unlike Article 1524 of
the former Civil Code which did not specify who must give the notice.
ILLUSTRATIVE CASE:
Notice of sale of co-owner’s share in a property was sent by the
vendee and not by the co-owner-vendor.
Facts: A, B, C, D, and E are co-owners of four (4) parcels of land.
E without the knowledge of the other co-owners, sold on August 8,
1986 her 1/5 share for P10,000.00 to respondent X. On August 5,
1992, petitioner D received summons, with a copy of the complaint
filed by X demanding her share in the rentals being collected by D
456
SALES
Art. 1623
from the tenants of the property. D then informed X that she was
exercising her right of redemption as co-owner of the subject property.
Issue: Whether the letter of May 30, 1992 sent by X to D on the
same date notifying her of the sale on August 8, 1986 of F’s 1/5 share
of the property to X, containing a copy of the deed of sale, can be
considered sufficient compliance with the notice requirement of
Article 1623 for the purpose of legal redemption, and, therefore, the
30-day period of redemption should be counted from said date and
from August 5, 1992.
Held: (1) Notice must be given by the vendor. — The notice sent
by the vendee (X) to a co-owner (D) cannot substitute for that required
to be given by the vendor (E) or prospective vendor.
“In Etcuban vs. Court of Appeals (48 SCRA 507 [1987].), notice
to the co-owners of the sale of the share of one of them was given by
the vendees through their counterclaim in the action for legal
redemption. Despite the apparent meaning of Art. 1623, it was held in
that case that it was ‘of no moment’ that the notice of sale was given
not by the vendor but by the vendees. ‘So long as the [co-owner] is
informed in writing of the sale and the particulars thereof, the 30 days
for redemption start running, and the redemptioner has no cause to
complain,’ so it was held. The contrary doctrine of Butte vs. Manuel
Uy and Sons, Inc. was thus overruled sub silencio.
However, in the later case of Salatandol vs. Retes, decided a year
after the Etcuban case, the Court expressly affirmed the ruling in Butte
that the notice required by Art. 1623 must be given by the vendor. In
Salatandol, the notice given to the redemptioner by the Register of
Deeds of the province where the subject land was situated was held to
be insufficient.’’
(2)
Return to ruling in Butte vs. Manuel Uy & Sons, Inc.,
proper. — “There was thus a return to the doctrine laid down in Butte.
That ruling is sound. In the first place, reversion to the ruling in Butte is
proper. Art. 1623 of the Civil Code is clear in requiring that the written
notification should come from the vendor or prospective vendor, not from
any other person. There is, therefore, no room for construction. Indeed, the
principal difference between Art. 1524 of the former Civil Code and Art.
1623 of the present one is that the former did not specify who must give
the notice, whereas the present one expressly says the notice must be given
by the vendor. Effect must be given to this change in statutory language.
In the second place, it makes sense to require that the notice required in
Art. 1623 be given by the vendor and by nobody else. As explained by this
Art. 1623
EXTINGUISHMENT OF SALE
Legal Redemption
457
Court through Justice J.B.L. Reyes in Butte, the vendor of an undivided interest
is in the best position to know who are his co-owners who under the law must
be notified of the sale. It is likewise the notification from the seller, not from
anyone else, which can remove all doubts as to the fact of the sale, its
perfection, and its validity, for in a contract of sale, the seller is in the best
position to confirm whether consent to the essential obligation of selling the
property and transferring ownership thereof to the vendee has been given.’’
(3)
Notice, however, by vendor no longer necessary. —
“Now, it is clear that by not immediately notifying the co-owner, a vendor
can delay or even effectively prevent the meaningful exercise of the right
of redemption. In the present case, for instance, the sale took place in 1986,
but it was kept secret until 1992 when vendee (herein respondent) needed
to notify petitioner about the sale to demand 1/5 rentals from the property
sold. Compared to serious prejudice to petitioner’s right of legal
redemption, the only adverse effect to vendor Adela Blas and respondentvendee is that the sale could not be registered. It is non-binding, only
insofar as third persons are concerned. It is, therefore, unjust when the
subject sale has already been established before both lower courts and
now, before this Court, to further delay petitioner’s exercise of her right of
legal redemption by requiring that notice be given by the vendor before
petitioner can exercise her right. For this reason, we rule that the receipt
by petitioner of summons in Civil Case No. 15510 on August 5, 1992
constitutes actual knowledge on the basis of which petitioner may now
exercise her right of redemption within 30 days from finality of this
decision.’’
(4)
Need for written notification may be dispensed with. —
“Our ruling is not without precedent. In Alonzo vs. Intermediate Appellate
Court (150 SCRA 259 [1987].), we dispensed with the need for written
notification considering that the redemptioners lived on the same lot on
which the purchaser lived and were thus deemed to have actual knowledge
of the sales. We stated that the 30-day period of redemption started, not
from the date of the sales in 1963 and 1964, but sometime between those
years and 1976, when the first complaint for redemption was actually filed.
For 13 years, however, none of the co-heirs moved to redeem the property.
We thus ruled that the right of redemption had already been extinguished
because the period for its exercise had already expired.’’
(5)
Receipt by D of summons amounted to actual knowledge.
— “In the present case, as previously discussed, receipt by petitioner of
summons in Civil Case No. 15510 on August 5, 1992 amounted to actual
knowledge of the sale from which the 30day period of redemption
commenced to run. Petitioner had until September 4, 1992 within which
458
SALES
Art. 1623
to exercise her right of legal redemption, but on August 12, 1992 she
deposited the P10,000.00 redemption price. As petitioner’s exercise of
said right was timely, the same should be given effect.’’ (Francisco vs.
Boiser, 127 SCAD 198, 332 SCRA 792 [2000].)
How right exercised.
(1) Consignation in court. — In exercising the right to redeem, the
redemptioner may go to the court directly, and practically make the
offer to repurchase through it. The reason for this is that the
redemptioner might not know the vendee’s whereabouts or the latter
might even conceal himself to prevent redemption. (see De la Cruz vs.
Marcelino, 84 Phil. 709 [1949]; Torio vs. Del Rosario, 93 Phil. 800
[1953].)
Consignation is not required to preserve the right of redemption as
a mere tender of payment is enough if made on time. It is not necessary
because the tender of payment is not made to discharge an obligation
but to enforce or exercise a right. (Moreno vs. Court of Appeals, supra.)
There is actually no prescribed form for an offer to redeem to be
properly effected. Hence, 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.
Either of the two modes is a condition precedent to a valid exercise of
the right of legal redemption. (Lee Chuy Realty Corp. vs. Court of
Appeals, 66 SCAD 203, 250 SCRA 596 [1995].)
(2) Tender of price. — That the legal redemptioner is only required
to pay a reasonable price is no obstacle to the requirement of tender.
The statutory period fixed for the exercise of the right of legal
redemption would be rendered meaningless and of easy evasion, unless
the redemptioner is required to make an actual tender in good faith of
what he believes to be the reasonable price of the land sought to be
redeemed.
Unless tender or consignation is made requisite to the valid exercise
of the right to redeem everytime redemption is attempted, a case must
be filed in court to ascertain the reasonable price. On the other hand, a
prior tender by the redemptioner of the price he considers reasonable
affords an opportunity to avoid litigation, for the landowner may well
decide to accept a really reasonable offer, considering that he would
Art. 1623
EXTINGUISHMENT OF SALE
Legal Redemption
459
thereby save the attorney’s fees and the expenses of protracted
litigation. (see Basbas vs. Entena, 28 SCRA 665 [1969].)
ILLUSTRATIVE CASES:
1. Co-heirs with actual notice of sales invoked right of redemption
14 years after the sales.
Facts: A, B, C, D, and E, brothers and sisters, inherited in equal
pro indiviso shares a parcel of land. On March 15, 1963, A sold his
undivided share to E and F by way of absolute sale. One year later, on
April 22, 1964, B sold her own share to the same vendees who
afterwards occupied an area corresponding to the portions sold to
them, enclosing the same with a fence. In 1975, with the consent of E
and F, their son H and his wife built a semi-concrete house on a part
of the enclosed area.
On May 22, 1977, C filed her complaint invoking her right of
redemption. C lived on the same lot, which consisted of only 604
square meters, including the portions sold to E and F and knew that
the area occupied by the petitioners had been purchased by them from
the other co-heirs, A and B.
Issue: In the absence of a written notice, did the actual knowledge
of the sales satisfy the requirements of Article 1623?
Held: Yes. Strictly applied and interpreted, Articles 1088 (supra.) and
1623 can lead to only one conclusion, to wit: that in view of such deficiency,
the 30-day period for redemption had not begun to run, much less expired in
1977.
It is a cardinal rule that in seeking the meaning of the law, the concern of
the judge should be to discover in its provisions the intent of the lawmaker.
Unquestionably, the law should never be interpreted in such a way as to cause
injustice as this is never within the legislative intent. To be sure, there are some
laws that, while generally valid, may seem arbitrary when applied in a
particular case because of its peculiar circumstances. In such a situation, the
court is not bound to apply them just the same, in slavish obedience to their
language. What it must do instead is find a balance, a balance between the word
and the will, that justice may be done even as the law is obeyed. While a court
may not read into the law a purpose that is not there, it nevertheless has the
right to read out of it the reason for its enactment. As courts both of law and
justice, courts apply the law with justice.
In requiring written notice, the law seeks to insure that the redemptioner
is properly notified of the sale and to indicate the date of such notice as the
starting time of the 30-day period of redemption. Considering the shortness of
460
SALES
Art. 1623
the period, it is really necessary, as a general rule, to pinpoint the precise date
it is supposed to begin, to obviate any problem of alleged delays, sometimes
consisting of only a day or two. The instant case presents no such problem
because the right of redemption was invoked not days but years after the sales
were made in 1963 and 1964, 13 years after the first sale and 14 years after the
second. The co-heirs were undeniably informed of the sales although no notice
in writing was given them. The 30-day period began and ended during the 14
years between the sales in question and the filing of the complaint for
redemption in 1977, without the co-heirs exercising their right of redemption.
By requiring written proof of such notice, the court would be closing its
eyes to the obvious truth in favor of their palpably false claim in ignorance,
thus exalting the letter of the law over its purpose. They were actually
informed, although not in writing, of the sales made in 1963 and 1964, and
such notice was sufficient. The De Cornejo and Butte doctrines are not
abandoned. An exception is simply adopted in view of the peculiar
circumstances of the case. (Alonzo vs. Intermediate Appellate Court, 150 SCRA
259 [1987].)
———— ———— ————
2. Petitioners orally offered to redeem within the period fixed by law but
their lawyer, coursed through a lawyer, offering to redeem was made several
months after notice of the sale.
Facts: The land in question is owned in common by CH who owns 2/3
and the heirs of EH. There has been no subsequent distribution among the coheirs of their specific shares. Neither was there a deed of partition among the
co-owners. Two of the heirs (who are brothers) executed a deed of sale
covering their undivided shares in favor of BP, describing themselves as ‘coowners’ who “have agreed to sell, transfer and convey x x x all our shares,
rights and interests over the abovedescribed parcel of land.’’ The petitioners
(co-heirs, their mother and sister) who are their mother and sister had notice of
the sale in January, 1984 and considering that their letter, offering to redeem
the property was made only in September 1984, the Court of Appeals was of
the view that the action to enforce redemption had prescribed. As found,
however, by the trial court, the petitioners immediately started negotiations
with B.P. to redeem the alienated shares. At this time, BP had not yet
completed payment for the shares.
Issue: Could the petitioners still exercise the right of redemption?
Held: Yes. (1) Period of legal redemption not a prescriptive period. — “It
was error for the respondent court to rule that the right of the petitioners to
redeem the alienated share had long prescribed. This finding fails to take into
account that the period of legal redemption is not a prescriptive period. It is a
Art. 1623
EXTINGUISHMENT OF SALE
Legal Redemption
461
condition precedent to the exercise of the right of redemption. It is a period set
by law to restrict the right of the person exercising the right of legal
redemption. It is not one of prescription.’’
(2) Sale was deliberately hidden from petitioners. — “The written notice
required by Article 1623 of the Civil Code was enacted to remove all doubts
and uncertainty that the alienation may not be definite. The co-owners must
know with certainty the circumstances of the sale by his co-owners and the
terms and the validity of the alienation. Only after said knowledge is the coowner required to exercise the right of redemption given to him by law.
While the law requires that the notice must be in writing, it does not state
any particular form thereof, so long as the reasons for a written notice are
present. The records of the case show that the sale of the brothers’ share was
deliberately hidden from the petitioners. For sometime after the sale, the
petitioners were ignorant about its execution. When they somehow heard
rumors about it, they had to take one step after another to find out if the
information was true. x x x Far from giving the notice required by law or giving
information on the history and details of the sale, Agustinito and Danilo gave
the petitioners the run-around until the brothers were practically forced to
admit it and the petitioners immediately went to see Ben Palaganas. In their
dialogue with Ben Palaganas, petitioners offered to redeem the property, but
this time, unlike the first, the offer was rejected.’’
(3) Petitioners orally offered to redeem within the period fixed by law. —
“When the petitioners offered to redeem within the period fixed by law, they
complied with the condition precedent to the exercise of their right. The filing
of an action to enforce the redemption is not the determining point in time. In
Conejero vs. Court of Appeals (16 SCRA 775 [1966].), this Court ruled that a
consignation of the tendered price is not necessary as long as a valid tender is
present. However, the offer to redeem is indispensable. Considering the
indignation and the wrath of the petitioners directed at the two brothers for
their acts of alienating an undivided portion of the property, despite the earlier
redemption of the sale sold in 1979, there can be no question about the
willingness and capability of the petitioners to buy back the shares sold in
1980.’’
(4) Interpretation in applying Article 1623. — “In applying Article 1623
of the Civil Code on the exercise of legal redemption to certain facts, the
interpretation must be in favor of justice and equity. This Court explained ––
‘x x x. We test a law by its result. A law should not be interpreted so as not to
cause an injustice x x x. There are laws which are generally valid but may seem
arbitrary when applied in a particular case because of its peculiar
circumstances. We are not bound to apply them in slavish obedience to their
language.’
462
SALES
Art. 1623
Whether it is the vendees who will prevail as in the Alonzo doctrine, or the
redemptioners as in this case, the righting of justice is the key to the resolution
of the issues.
The standards and conditions of legal redemption provided under Article
1623 of the Civil Code have not been met in this petition. Furthermore, there
is the fact that justice and equity, as the law provides, are also on the side of
the petitioners. As we said, the righting of an injustice is the key to the
resolution of this case and thus would be the end result of our decision.’’
(5) Petitioners made investigation to confirm their hearsay knowledge
about the transaction. — “From the records, one gets the impression that the
two brothers, Agustinito and Danilo, were irresponsible and self-centered,
failing to consider the wishes of their mother. x x x Again, we reiterate the
salient fact that Clarita Carin, their mother, and Victoria Hermoso, their sister,
were kept in the dark about the sale. Considering the factual background of this
case, the honorable and expected step for the Palaganas was to inform the
petitioners about the action taken by Agustinito and Danilo. Instead, as the
record reveals the parties to the sale concealed the transaction from petitioners
for four (4) years. It was only after hearing rumors about the sale when
petitioners started to investigate and search for evidence to confirm their
hearsay knowledge about the transaction. Even then, the two brothers and the
Palaganases gave them a hard time.’’
(6) BP clan were in bad faith. — “The Palaganas clan knew all along the
strong feelings of the petitioners against the alienation of share in the still
undivided property. This was their second attempt to buy the property. As a
matter of fact, they knew that in 1979 when the land was first sold, the
petitioners immediately took steps to cancel the sale upon discovery thereof.
In 1980, the private respondents and Ben Palaganas still did exactly what the
petitioners vigorously opposed and did not want to happen. They also hid the
sale from the petitioners until confronted with facts that they could no longer
hide or deny. x x x There can be no doubt that the Palaganas clan were in bad
faith at the time they bought the disputed property from the Hermoso brothers.
We cannot thus close our eyes to the injustice which would befall the
petitioners considering that this is not the first time that they have expressed
their desire to redeem the property sold by the Hermoso brothers. Under the
circumstances, it is just and equitable to rule in favor of the exercise of legal
redemption.’’ (Hermoso vs. Court of Appeals, 300 SCRA 516 [1999].)
— oOo —
ASSIGNMENT OF CREDITS AND OTHER
INCORPOREAL RIGHTS
463
Chapter 8 ASSIGNMENT OF CREDITS AND
OTHER INCORPOREAL RIGHTS
ART. 1624. An assignment of credits and other
incorporeal rights shall be perfected in accordance
with the provisions of article 1475. (n)
Assignment of credit defined.
Assignment of credit is a contract by which the owner (assignor/
creditor) of a credit and other incorporeal rights transfers, either
onerously or gratuitously, to another (assignee) his rights and actions
against a third person (debtor).
It is the process of transferring the right of the assignor to the
assignee who would then be allowed to proceed against the debtor64 for
the enforcement or satisfaction of the credit to the same extent as the
assignor could.
Where the assignment is on account of pure liberality on the part of
the assignor, the rules on donation would be pertinent; where valuable
consideration is involved, the assignment partakes of the nature of a
contract of sale or purchase. (Nyco Sales Corporation vs. BA Finance
Corporation, 200 SCRA 637 [1991]; Project Builders, Inc. vs. Court of
Appeals, 149 SCAD 322, 358 SCRA 626 [2001].)
Nature of assignment of credit.
(1) Assignment of credit and other incorporeal rights is a
consensual, bilateral, onerous, and commutative or aleatory contract.
470
64 Assignment of receivables is a commonplace commercial transaction today. It is an
activity or operation that permits the assignee to monetize or realize the value of receivables before
the maturity thereof. (Atok Finance Corporation vs. Court of Appeals, 41 SCAD 450, 222 SCRA
232 [1993].)
464
Art. 1624
SALES
(2) The assignment involves no transfer of ownership but merely
effects the transfer of rights which the assignor has at the time to the
assignee. (Casabuena vs. Court of Appeals, 91 SCAD 933, 286 SCRA
594 [1998].) As a consequence of the assignment, the third party
(assignee) steps into the shoes of the original creditor (assignor) as a
subrogee of the latter. (see South City Homes, Inc. vs. BA Finance
Corporation, 159 SCAD 880, 371 SCRA 603 [2001].)
(3) It may be done gratuitously (i.e., by donation) or onerously. If
done onerously (i.e., exchange, dacion en pago), whatever may be the
legal cause, it is really a sale. Thus, the subject matter is the credit or
right assigned; the consideration is the price paid for the credit or right;
and the consent is the agreement of the parties to the assignment of the
credit or right at the agreed price. Hence, Article 1475 is made
applicable.
(a)
There is, however, one important difference and, thatis,
after the transfer, a definite third person is obliged; whereas in sale,
the subject obliged is the whole world which must respect the title
to the buyer. (10 Manresa 376.)
(b)
In assignments, a consideration is not always a
requisite, unlike in sales. Thus, an assignee may maintain an action
based on his title and is immaterial whether or not he paid any
consideration therefor. Furthermore, in an assignment, title is
transferred but possession need not be delivered. (Philippine
National Bank vs. Court of Appeals, 82 SCAD 472, 272 SCRA 291
[1997].)
(c)
As a general rule, all principles governing sales
alsoapply to this transaction. As in sale, the assignee cannot acquire
a greater right than that pertaining to the assignor. Hence, the act of
assignment cannot operate to erase liens or restrictions burdening
the right assigned. (Gonzales vs. Land Bank of the Philippines, 183
SCRA 520 [1990].)
Perfection of contract for assignment of
credit.
ASSIGNMENT OF CREDITS AND OTHER
INCORPOREAL RIGHTS
465
The contract for the assignment or transfer of credit and other
incorporeal rights is perfected from the moment the parties agree
Art. 1625
upon the credit or right assigned and upon the price even if neither has
been delivered. (see Art. 1475.)
However, the assignee will acquire ownership only upon delivery.
(see Arts. 1498, par. 2 and 1501.)
Assignment distinguished from other terms.
(1) Renunciation is the abandonment of a right without a transfer
to another. (see Art. 1270.)
(2) Agency involves representation, not transmission wherein the
agent acts for the principal.
(3) Substitution is the change of a new debtor for the previous
debtor with the credit remaining in the same creditor. (see 10 Manresa
377.)
(4) Subrogation is the change in the person of the creditor with the
credit being extinguished. (see 8 Manresa 400.)
ART. 1625. An assignment of a credit, right or
action shall produce no effect as against third
persons, unless it appears in a public instrument, or
the instrument is recorded in the Registry of Property
in case the assignment involves real property. (1526)
Binding effect of assignment.
(1) As between the parties, the assignment is valid although it
appears only in a private document so long as the law does not require
a specific form for its validity. (see Art. 1356.)
(2) To affect third persons, the assignment must appear in a public
instrument, and in case it involves real property, it is indispensable that
it be recorded in the Registry of Property. (see Lopez vs. Alvarez, 9
Phil. 28 [1908].)
466
SALES
(3) The assignee merely steps into the shoes of the assignor, the
former acquiring the credit subject to defenses (e.g., fraud, prescription,
etc.) available to the debtor against the assignor. The assignee is deemed
subrogated to the rights as well as to the obligations of the seller. He
cannot acquire greater rights than those
Art. 1626
pertaining to the assignor. (Koa vs. Court of Appeals, 219 SCRA 541
[1993].) Hence, the act of assignment cannot operate to efface liens or
restrictions burdening the right assigned. (Casabuena vs.
Court of Appeals, 91 SCAD 933, 286 SCRA 594 [1998].)
ART. 1626. The debtor who, before having
knowledge of the assignment, pays his creditor shall
be released from the obligation. (1527)
Consent of debtor to assignment not
required.
In an assignment of credit, the consent of the debtor is not essential
in order that it may produce legal effects. Hence, the duty to pay does
not depend on the consent of the debtor; otherwise, all creditors would
be prevented from assigning their credits because of the possibility of
the debtors’ refusal to give consent. (Sison vs. Yap Tico, 37 Phil. 587
[1918]; Rodriguez vs. Court of Appeals, 207 SCRA 553 [1992].)
The law speaks not of consent but of notice to the debtor. The
purpose of the notice by the assignee is to inform the debtor that from
the date of the assignment he should make payment to the assignee and
not to the original creditor. (Ibid.)
Effect of payment by debtor after assignment
of credit.
(1) Before notice. — The notice is thus for the protection of the
assignee because before the said notice, payment to the original creditor
is valid. (Elizalde & Co., Inc. vs. Biñan Transportation Co., [C.A.] 56
O.G. 5886.) “No man is bound to remain a debtor; he may pay to him
with whom he contracted to pay; and if he pay before notice that his
debt has been assigned, the law holds him exonerated, for the reason
that it is the duty of the person who has acquired a will by transfer to
ASSIGNMENT OF CREDITS AND OTHER
INCORPOREAL RIGHTS
467
demand payment of the debt to give debtor notice.” (Sison vs. Yaptico,
supra.) In such case, the assignee has a right of action against the
assignor, the original creditor. In the absence of notice, the burden of
proving that the debtor had knowledge of the assignment is on the
interested party which is the assignee. (see 10 Manresa 377.)
Arts. 1627-1628
It has been held that since the law does not require the registration
of an assignment of a chattel mortgage, its registration does not ipso
facto operate as constructive notice to the mortgagor. (Sison vs. Yap
Tico, supra.)
(2) After notice, or before notice but debtor had knowledge of
assignment. — Payment by the debtor to the original creditor after the
former had received notice of the assignment, whether or not he
consented, is not valid as against the assignee. Even without notice, the
debtor will not also be released from his obligation should he pay the
creditor after having had knowledge of the assignment of the obligation.
He thereby acts in bad faith. He can be made to pay again by the
assignee.
ART. 1627. The assignment of a credit includes all
the accessory rights, such as a guaranty, mortgage,
pledge or preference. (1528)
Extent of assignment of credit.
The assignment of credit includes not only the credit itself but also
all rights accessory thereto. (see Art. 1537.) This follows the familiar
rule that the accessory follows the principal. But the parties may
stipulate that the accessory rights shall not be included in the
assignment.
EXAMPLE:
D owes C P1,000.00, with G as guarantor. C assigns his credit to
T with notice given to D.
In case D fails to pay T, the latter may enforce the guaranty of G
unless the credit was transferred with express stipulation that G shall
be released from his obligation.
468
SALES
ART. 1628. The vendor in good faith shall be
responsible for the existence and legality of the credit
at the time of the sale, unless it should have been sold
as doubtful; but not for the solvency of the debtor,
unless it has been so expressly stipulated or unless
the insolvency was prior to the sale and of common
knowledge.
Art. 1628
Even in these cases he shall only be liable for the
price received and for the expenses specified in No. 1
of Article 1616.
The vendor in bad faith shall always be
answerable for the payment of all expenses, and for
damages. (1529)
Warranties of the assignor of credit.
In dation in payment or dacion en pago, as a special mode of
payment, the debtor offers another thing to the creditor who accepts it
as equivalent of payment of an outstanding debt. (see Art. 1245.) the
undertaking really partakes of the nature of sale. As such, the vendor in
good faith shall be responsible for the existence and legality of the
credit. An assignment credit which is in the nature of sale of personal
property produces the effects of a dation in payment which may
extinguish the obligation. However, as in any other contract of sale, the
vendor or assignor is bound by certain warranties. More specifically,
they are provided in Article 1628 (par. 1.). (Lo vs. KJS Eco-Formwork
System, Phil., Inc., 413 SCRA 182 [2003].)
(1) When a creditor assigns his credit, he warrants only the (a)
existence and (b) legality of the credit at the perfection of the contract.
He is not even liable for the warranty if the credit had been sold as
doubtful.
(2) There is no warranty as to the solvency of the debtor unless it
is expressly stipulated or unless the insolvency was already existing and
of public knowledge at the time of the assignment.
If there be any breach of the above warranties, the assignorvendor shall be held answerable therefor.
ASSIGNMENT OF CREDITS AND OTHER
INCORPOREAL RIGHTS
469
Liabilities of the assignor of credit.
(1) For violation of the above warranties, the liability of the vendor
(assignor) in good faith is limited only to the price received and to the
expenses of the contract, and any other legitimate payments by reason
of the assignment. (Art. 1616, par. 1.)
(2) The assignor in bad faith is liable not only for the payment of
the price and all expenses, but also for damages. An assignor in bad
faith is one who has knowledge of any of the circumstances
Art. 1629
mentioned above (i.e., non-existence or illegality of the credit,
insolvency of the debtor, etc.) while an assignor in good faith is one
who is ignorant of them.
EXAMPLE:
D owes C P20,000.00, which represents the purchase price of a
car bought by D. C assigns the credit to T.
C is liable to T if at the time of the assignment the credit has
already prescribed, or has been paid, or is annullable and its nullity is
subsequently declared because C warrants the existence and legality
of the credit.
But C is not liable if D cannot fulfill his obligation due to
insolvency because insolvency has nothing to do with the existence
and legality of the credit unless it has been so expressly stipulated, or
the insolvency of D was existing prior to the assignment and of
common or public knowledge although it was not known to C (for C
is conclusively presumed to have known of the same), or known to C
although it was not of common knowledge.
If C lacks sufficient data to determine whether the credit is still
enforceable or not, as for instance, whether the period of prescription
was interrupted and there is a full disclosure of such fact when the
credit was assigned, he cannot be held responsible even for the
existence and legality of the credit.
ART. 1629. In case the assignor in good faith
should have made himself responsible for the
solvency of the debtor, and the contracting parties
should not have agreed upon the duration of the
470
SALES
liability, it shall last for one year only, from the time of
the assignment if the period had already expired.
If the credit should be payable within a term or
period which has not yet expired, the liability shall
cease one year after the maturity. (1530a)
Duration of assignor’s liability where debtor’s
solvency guaranteed.
This provision does not apply if the assignor acted in bad faith.
(see Art. 1628.)
Art. 1629
In case the assignor has expressly warranted the solvency of the
debtor,65 the duration of the assignor’s liability shall be as follows:
(1) If there is a stipulation, then for the term or period fixed;
(2) If there is no stipulation:
(a)
for one year from the assignment of the credit whenthe
period for payment of the credit has expired; or
(b)
for one year after its maturity, when such period
forpayment has not yet expired.
EXAMPLE:
D owes C P50,000.00 payable on July 1, 2004. C assigns his
credits to T with C making himself responsible for the solvency of D.
(1)
If the agreement is that the duration of C’s liability shall
last for two years from July 1, 2004, then his guaranty shall last as
agreed upon.
65
The liability of the assignor under Article 1629 is ex lege; it rests on the breach of the
warranty of solvency. Where the liability is ex contractu, the limiting period set out in Article 1629
is not applicable. Thus, in a case, although the assignor warrants the solvency of the debtors under
the deed of assignment, it also binds itself to become solidarily liable with the other respondents
in case of non-payment by the debtors. “The effect of non-payment by the original trade debtors
was a breach of warranty of solvency by [the assignor], resulting in turn in assumption of solidary
liability by [it] under the receivables assigned. In other words, the assignor becomes a solidary
debtor under the terms of the receivables covered and transferred by virtue of the Deed of
Assignment.’’ (Atok
Finance Corporation vs. Court of Appeals, 41 SCAD 450, 222 SCRA 232 [1993].)
ASSIGNMENT OF CREDITS AND OTHER
INCORPOREAL RIGHTS
471
(2)
If there is no stipulation, and the assignment was made
on August 1, 2004, the liability is limited to one year from the
assignment.
(3)
However, if the assignment was made on June 1, 2004,
the responsibility shall cease exactly one year after July 1, 2004 or one
year after the maturity of the debt.
Reasons for the rule.
There are two reasons for the rule contained in Article 1629.
First, to prevent fraud which may be committed by feigning the
solvency of the debtor at the time of the assignment when in fact he is
insolvent; and
Art. 1630
Second, to oblige the assignee to exert efforts in the recovery of the
credit and thereby avoid that by his oversight, the assignor may suffer.
(10 Manresa 400-401.)
ART. 1630. One who sells an inheritance without
enumerating the things of which it is composed, shall
only be answerable for his character as an heir. (1531)
Sale of successional or hereditary rights.
This article refers to the sale of successional right or the right to an
inheritance before partition.
(1)
Subject of sale is hereditary right, not objects which
make up inheritance. — An inheritance may be sold either with
specification of the properties to be alienated or without
enumerating the things comprising it, that is to say, the hereditary
rights only. (Arts. 1630, 1632.) What the law prohibits is the sale of
a future inheritance, upon which no contract can be made other than
those making a division inter vivos of an estate in accordance with
Article 1347 of the Civil Code. (Abella vs. Cinco, [C.A.] 37, O.G.
924.) Hereditary rights in an estate under judicial settlement can be
validly sold without need for approval by the probate court. (Heirs
of P. Escanlar vs. Court of Appeals, 88 SCAD 532, 281 SCRA 176
[1997].)
472
SALES
(2)
Warranties of seller. — The seller of an inheritance
warrants only the fact of his heirship but he does not warrant the
objects which make up his inheritance. The sale is, therefore, a sort
of an aleatory contract because the assignee bears the risk that the
estate may not be sufficient to pay the obligations of the deceased.
(10 Manresa 404; see Art. 2010.)
EXAMPLE:
H and I are the heirs of the estate left by D, deceased. Before
partition and without specifying his definite share in the inheritance,
H sold his share to B for P100,000.00.
In this case, H only warrants the fact that he is an heir to D. He
is not liable to B should his share after partition be less than
P100,000.00.
Art. 1631
(3)
Limitation. — There is no law which prohibits an heir from
selling his interests in an inheritance before partition (see Art. 1088.)
except that any such sale must be deemed subject to the result of the
administration proceedings and any pending litigation. (Beltran vs.
Soriano, 32 Phil. 66 [1916].) Pursuant to Article 774 (Civil Code), “the
rights to the succession are transmitted from the moment of the death of
the decedent.” In other words, the person concerned is an heir and may
exercise his rights as such, from the very moment of the death of the
decedent. (Saturnino vs. Paulino, 97 Phil. 50 [1955].)
(4)
Distinguished from a waiver of hereditary rights. — There
is a marked difference between a sale of hereditary rights and a waiver of
hereditary rights. The first presumes the existence of a contract of deed of
sale between the parties. The second is, technically speaking, 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 other persons who are co-heirs in the
succession. (Acap vs. Court of Appeals, 66 SCAD 359, 251 SCRA 30
[1995].)
ART. 1631. One who sells for a lump sum the
whole of a certain rights, rents, or products, shall
comply by answering for the legitimacy of the whole
in general; but he shall not be obliged to warrant each
ASSIGNMENT OF CREDITS AND OTHER
INCORPOREAL RIGHTS
473
of the various parts of which it may be composed,
except in the case of eviction from the whole or the
part of greater value. (1532a)
Sale of whole of certain rights, rents, or
products.
In the sale of the whole of certain rights, rents, or products for a
lump sum, the subject matter is the totality of such rights, rents, or
products. As a consequence, the vendor warrants only the legitimacy of
the whole and not the various parts of which it may be composed. The
vendor is not liable for eviction of each of the various parts unless the
eviction involves the whole or the part of greater value.
Arts. 1632-1633
EXAMPLE:
P is a partner in a partnership. He sells all his interests to B for the
lump sum of P150,000.00. Upon the dissolution of the partnership, B
received the share of P in its assets consisting of P50,000.00, some
office equipment and a car. Subsequently, the car was recovered by C,
a creditor of the partnership.
P is not liable to B because P does not warrant each of the various
parts of his interest in the partnership but only the legitimacy of his
rights as partner taken as a whole. But if the value of the car exceeds
P75,000.00, P will be liable because B is evicted from “the part of
greater value.”
ART. 1632. Should the vendor have profited by
some of the fruits or received anything from the
inheritance sold, he shall pay the vendee thereof, if
the contrary has not been stipulated. (1533)
Liability of vendor of inheritance for
fruits received.
Unless otherwise stipulated, the fruits of an inheritance are included
in the sale thereof. (see Art. 1537.) If the vendor merely received the
fruits, he must deliver them to the vendee; if they have been consumed,
474
SALES
he must reimburse the vendee; if they have been sold, he must deliver
the price of the sale. (see 10 Manresa
406.)
The liability of the vendor for anything received from the
inheritance sold is subject to any agreement to the contrary.
ART. 1633. The vendee shall, on his part,
reimburse the vendor for all that the latter may have
paid for the debts of and charges on the estate and
satisfy the credits he may have against the same,
unless there is an agreement to the contrary. (1534)
Liability of vendee for debts of and
charges on estate.
Since under Article 1632 the vendor is obliged to pay the vendee
the fruits or anything received from the inheritance, it is
Art. 1634
also just that the vendee be required to reimburse the vendor for
whatever the latter has paid for the debts of and charges on the estate.
The liability of the vendee for the debts and charges is likewise
subject to any contrary agreement.
ART. 1634. When a credit or other incorporeal
right in litigation is sold, the debtor shall have a right
to extinguish it by reimbursing the assignee for the
price the latter paid therefor, the judicial costs,
incurred by him, and the interest on the price from the
day on which the same was paid.
A credit or other incorporeal right shall be
considered in litigation from the time the complaint
concerning the same is answered.
The debtor may exercise his right within thirty
days from the date the assignee demands payment
from him. (1535)
ASSIGNMENT OF CREDITS AND OTHER
INCORPOREAL RIGHTS
475
Legal redemption in sale of credit or other
incorporeal right in litigation.
This article is an instance of legal redemption.
The following are the requisites before the right of legal redemption
can be exercised:
(1) There must be a sale or assignment of a credit. The concept of
sale must be understood in its restricted sense. The right cannot be
exercised if the transaction is exchange or donation (see 10 Manresa
416.);
(2) There must be a pending litigation at the time of the assignment.
The complaint by the assignor must have been filed and answered by
the creditor before the sale of the credit. Article 1634 applies only to a
claim in litigation the meaning of which is not a claim open to litigation,
but one which is actually litigated; that is to say, disputed or contested,
which happens only after an answer interposed in a suit (Robinson vs.
Garry, 8 Phil. 275 [1907].);
(3) The debtor must pay the assignee:
Art. 1634
(a) the price paid by him;
(b) the judicial costs incurred by him; and
(c) the interest on the price from the date of payment; and
(4) The right must be exercised by the debtor within thirty (30)
days from the date the assignee demands (judicially or extra-judicially)
payment from him. A debtor who has paid the full amount of a litigated
credit to one who has purchased such litigated credit cannot
counterclaim the difference between the amount paid by such debtor
and the amount paid by the purchaser of such litigated credit unless such
debtor shall make use of his right to do so within the prescribed period.
ILLUSTRATIVE CASES:
1. Mortgagee assigned its rights as such and as highest bidder in
foreclosure sale of mortgaged land while there was a pending case
between unpaid seller of the land and mortgagor (buyer).
476
SALES
Facts: S sold several lots to B, who, after securing registration of
said lots in her name, mortgaged them to C (bank). B failed to
complete payment of the purchase price. The sale was rescinded by
the court without prejudice to the right of C, which was adjudged a
mortgagee in good faith. C foreclosed the mortgage. At the public
auction, C was the highest bidder. Subsequently, C assigned its rights
as mortgagee and as the highest bidder to D (NIDC).
S filed a motion to cancel the encumbrance of D from the
certificates of title concerned which was granted by the lower court on
the ground that C “should have submitted the deed of assignment for
approval of the court knowing that the subject matter of said deed is
in custodia legis and so that the consent of S could be taken.”
Issue: Upon the facts, has a valid assignment been made by C to
D of its rights over the lots in question?
Held: Yes. There is nothing in our statutes or jurisprudence which
prohibits a creditor without the consent of the debtor from making an
assignment of his credit and the rights accessory thereto; and,
certainly, an assignment of credit and its accessory rights does not at
all obliterate the obligation of the debtor to pay, but merely puts the
assignee in the place of his assignor. Indeed, Article 1634 definitely
recognizes the likeliArt. 1634
hood that credits and other incorporeal rights in litigation may be
assigned pendente lite and, in such event, provides that the debtor may
extinguish his obligation by making appropriate reimbursement to the
assignee.
In other words, an assignment of credit pendente lite does not
extinguish the credit or accessory rights assigned, but simply changes
the bag into which the debtor must empty the money in payment.
(National Investment & Development Corp. vs. De Los Angeles, 40
SCRA 487 [1971].)
———— ———— ————
2. Plaintiff in a case, who had previously assigned in favor of his
creditor his litigated credit in said case by a deed of assignment which
was duly submitted to the court, entered into a compromise agreement
thereafter releasing the defendant therein from his claim without
notice to his assignee.
Facts: T brought an action against M for the collection of a sum
of money. While the case was pending resolution, T assigned in favor
ASSIGNMENT OF CREDITS AND OTHER
INCORPOREAL RIGHTS
477
of L by way of securing or guaranteeing T’s obligation to L his
litigated credit against M duly submitted to the court with notice to
the parties. The lower court ruled in favor of T. Subsequently, pending
resolution of the appeal of M to the Court of Appeals, M entered into
a compromise agreement with T wherein T acknowledged that all his
claims against M had been settled.
After the Court of Appeals rendered a decision affirming in toto
the decision of the lower court, M filed a motion for reconsideration
praying that said decision be set aside, principally anchored upon the
ground that a compromise agreement was entered into between him
and T which, in effect, released M from liability. The validity of the
guarantee or the pledge in favor of L has not been questioned and it
appears that the deed of assignment fulfills the requisites of a valid
pledge or mortgage.
Issue: Is the compromise agreement valid?
Held: No. Although T (assignor) may validly alienate the litigated
credit under Article 1634, said provision should not be taken to mean
as a grant of an absolute right on the part of T to indiscriminately
dispose of the thing or the right given as security. It should be read in
consonance with Article 2097.66
Art. 1635
Although the pledgee or assignee (L) did not ipso facto become
the creditor of M, the pledge being valid, the incorporeal right
assigned by T in favor of L can only be alienated by T with due notice
to and consent of L or his duly authorized representative. To allow the
assignor to dispose or alienate the security without notice to and
consent of the assignee will render nugatory the very purpose of a
pledge or an assignment of credit.
Moreover, under Article 1634, the debtor (M) has a
corresponding obligation to reimburse the assignee (L) for the price
the latter paid or for the value given in consideration for the deed of
assignment. Failing in this, the alienation of the litigated credit made
by T in favor of M by way of a compromise agreement does not bind
L.
Furthermore, having knowledge of the assignment, M was
estopped from entering into a compromise agreement without notice
66 Art. 2097. With the consent of the pledgee, the thing pledged may be alienated by the
pledgor or owner, subject to the pledge. The ownership of the thing pledged is trans-
478
SALES
to and consent of L. More so, in the light of the fact that no
reimbursement has even made in favor of L as required under Article
1634. M acted in bad faith and in connivance with T so as to defraud
L in entering into the compromise agreement. (Estate of G. Litton vs.
Mendoza, 163 SCRA 246 [1988].)
Purpose of grant of right to debtor.
The above provision gives an advantage to the debtor because he
will pay less than the value of the credit assigned if he exercises his right
to redeem the same.
The object of the law in allowing the redemption by the debtor is to
avoid the purchase by the third person of credits in litigations merely
for speculation.
ART. 1635. From the provisions of the preceding
article shall be excepted the assignments or sales
made:
(1) To a co-heir or co-owner of the right
assigned;
(2) To a creditor in payment of his credit;
mitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter
shall continue in possession. (n)
Art. 1635
(3) To the possessor of a tenement or piece of
land which is subject to the right in litigation
assigned. (1536)
Exceptions to
redemption.
debtor’s
right
to
legal
Article 1635 enumerates three instances of assignments or sales as
exceptions to the provisions of Article 1634. (see Art. 1491[5].)
ASSIGNMENT OF CREDITS AND OTHER
INCORPOREAL RIGHTS
479
It must be emphasized that under both Articles 1634 and 1635, the
debtor cannot redeem if the credit or other incorporeal right is not in
litigation when the same is sold.
(1) Sale to a co-heir or co-owner. — This exception is based on
the desire to do away with co-ownership or pro-indivision. Moreover,
if the right of redemption is granted to the debtor, it would not terminate
litigation which is the purpose of this article because the co-owner or
co-heir may still sue the debtor for the share that corresponds to the
former in the credit. (10 Manresa 419.)
EXAMPLE:
D is indebted to B and C in the amount of P10,000.00. For failure
to pay his debt, B sues D.
If B transfers his credit to C during the pendency of the litigation,
D cannot redeem.
(2) Sale to a creditor. — There is a lawful basis for the assignment
as the assignee cannot be considered as a vendee of a right in litigation
and as a speculator. It really refers to a dation in payment. (see Art.
1245; 10 Manresa 419.)
EXAMPLE:
A
owes B the sum of P10,000.00 and B owes C P8,000.00.
If B assigns his credit against A to C then the subject of litigation
(between A and B), A has also no right of legal redemption.
Art. 1635
(3) Sale to the possessor of property in question. — The reason for
this exception is that the assignee is moved by a desire to preserve the
property and not to speculate at the expense of the debtor.
The example usually given is that where a vendee (assignee) of a
property subject to a mortgage acquires the mortgage credit of the
assignor (mortgage-creditor) against the vendor (mortgagedebtor). It
may also refer to a purchaser of property under attachment who
subsequently acquires the credit giving rise to the attachment. (Ibid.,
419-420.)
480
SALES
EXAMPLE:
A
owes B P10,000.00 which is secured by a mortgage on
aland owned by A.
If A sells the land to C and B assigns his credit in litigation against
A to C, A is not entitled to redeem.
— oOo —
481
Chapter 9 GENERAL PROVISIONS
ART. 1636. In the preceding articles in this Title
governing the sale goods, unless the context or subject
matter otherwise requires:
(1) “Document of title to 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 of 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 indorsement or
by delivery, goods represented by such document.
“Goods” includes all chattels personal but not things in
action or money of legal tender in the Philippines. The term
includes growing fruits or crops.
“Order” relating to documents of title means an order by
indorsement on the documents.
“Quality of goods” includes their state or condition.
“Specific goods” means goods identified and agreed
upon at the time a contract of sale is made.
An antecedent or pre-existing claim, whether for money
or not, constitutes “value” where goods or documents of
title are taken either in satisfaction thereof or as security
therefor.
487
Art. 1636
(2)
A person is insolvent within the meaning of
this Title who either has ceased to pay his debts in
the ordinary course of business or cannot pay his
debts as they become due, whether insolvency
proceedings have been commenced or not.
482
SALES
(3)
Goods are in a “deliverable state” within
the meaning of this Title when they are in such a state
that the buyer would, under the contract, be bound to
take delivery of them. (n)
Definition of terms.
This article defines or explains the various terms used in the
preceding articles governing the sale of goods. They hardly require
comment. The definitions in this article do not apply if the context or
subject matter of any particular portion of the law otherwise requires.
(1) Goods do not include things or choses in action or negotiable
instruments.
(a)
A chose in action is any claim or right which may be
pleaded in a suit at law, such as a claim of reparation for a tort or
quasi-delict, or a right acquired under a contract.
(b)
Stock certificates have been held to be goods within the
meaning of the U.S. Uniform Sales Act. (Babb & Martin, op. cit.,
p. 86.)
(c)
Real property is not the proper subject of a transaction
involving a sale of goods within the definition of the term.
However, growing crops or fruits which are agreed to be severed
under the contract of sale are treated as goods and not as interest in
realty.
(d)
The U.S. Uniform Commercial Code excludes
moneyfrom the term “goods” but only where money is the medium
of payment. Said another way, money in which the price is to be
paid for the goods involved, is not to be considered part of the goods
which are the subject matter of the transaction. Said Code (Sec. 2105 thereof.) specifically provides that money, when treated as a
commodity, is a good and the contract
Art. 1637
GENERAL PROVISIONS
formed out of the transaction is one for the sale of goods. (1
Williston, 4th ed., p. 152.)
(e)
Any transaction between the parties, even if in the form
of an unconditional contract to sell or even if in the form of present
483
sale, is excluded from a sale of goods if the parties to the transaction
intended that the transaction operate only as a security transaction;
but the provision on sales will govern the general sales aspects of
such transaction. (Ibid., p. 176.)
(2) Ascertained goods means goods that are identified and agreed
upon as forming the subject matter of the bargain.
(a)
They are specific if they are identified and agreed upon
at the time the contract of sale is made.
(b)
If identification takes place afterwards, the goods
arespecified but not specific.
(c)
Existing goods (owned or possessed by the seller) may
or may not be specific.
(d)
Future goods (to be manufactured or acquired by
theseller after the making of the contract to sell) cannot be specific.
(Ibid., pp. 101-102.)
EXAMPLES:
(1)
S sells to B one used X truck, Motor No. 12345. S and
B are on the truck when the bargain is made. The goods are existing,
ascertained, and specific.
(2)
B, a retail grocer, orders 6 dozen cans of X brand
tomatoes from S, a wholesale concern. S has the canned goods in
stock, and accepts the order but does not immediately set aside 6
dozen cans. The goods are existing and unascertained. When 6 dozen
cans have been set aside and earmarked for B, the goods have become
ascertained or specified — not specific. (Ibid.)
ART. 1637. The provisions of this Title are subject
to the rules laid down by the Mortgage Law and the
Land Registration Law with regard to immovable
property. (1537a)
Art. 1637
Sale of immovable subject to
registration law.
484
SALES
Under the Spanish Mortgage Law and the Land Registration Law,
the registration of documents or titles pertaining to immovable property
is the operative act that binds the property and serves as constructive
notice to the public. This means that the right of third persons are not
adversely affected by the sale of immovable property until after its
registration.
The Spanish Mortgage Law has been discontinued by Presidential
Decree No. 892. This discontinuance was reiterated in Presidential
Decree No. 1529, the Property Registration Decree, which superseded
Act No. 496, as amended, the Land Registration Law.
(1) Under the decree, “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.” (Sec. 51 thereof.)
(2) Every conveyance, if registered, shall be constructive notice to
all persons from the time of such registration. (Sec. 52 thereof.)
(3) “The registration shall be made in the office of the Register of
Deeds for the province or city where the land lies.” (Sec. 51 thereof.)
— oOo —
BARTER OR EXCHANGE
(Title VII, Arts. 1638-1641)
ART. 1638. By the contract of barter or exchange
one of the parties binds himself to give one thing in
consideration of the other’s promise to give another
thing. (1538a)
Barter defined.
The contract of barter is defined by Article 1638. It is similar to sale
with the only difference that instead of paying a price in money, another
thing is given in lieu thereof. (see Art. 1468.) A contract whereby one
person transfers the ownership of non-fungible things to another with
485
the obligation on the part of the latter to give things of the same kind,
quantity, and quality is considered a barter. (Art. 1954.)
The use of the term “barter” in describing a contract is not
controlling. (Baluran vs. Navarro, 79 SCRA 309 [1977].)
Perfection and consummation of
the contract.
(1) The contract of barter is perfected from the moment there is a
meeting of minds upon the things promised by each party in
consideration of the other. (see Art. 1475.)
(2) It is consummated from the time of mutual delivery by the
contracting parties of things they promised. (Tagaytay Dev. Co. vs.
Osorio, 69 Phil. 180 [1939]; Biagtan vs. Viuda de Oller, 62 Phil. 933
[1936].)
491
Art. 1638
ILLUSTRATIVE CASES:
1. A party to a barter issued a promissory note for the value of the
things he promised to give.
Facts: The agreement between A and B was for A to deliver sugar to
B, who was to give A 50 bottles of whisky for every picul of sugar.
Because at the time B had no whisky, he signed a promissory note for the
value of the whisky.
Issue: Did the contract become one of sale?
Held: The contract was still barter. The consideration for the sugar
was not cash but the whisky, and the note was executed in consideration
for the liquor. The Price Control Law (then in force) contemplated sales
payable in cash. Being in derogation of a natural right, it must be construed
strictly, barring collusions to evade its provisions. It appeared that the
transaction was bona fide and fair, B being a manufacturer of and dealer
in whisky on a large scale, and as such he needed large quantities of sugar
to carry on his business. (Herrerias vs. Javellana, 84 Phil. 609 [1949].)
———— ———— ————
2. In the contract entitled “barter,” the parties shall enjoy the
material possession, and neither shall alienate the property received, one
486
SALES
party even obliging himself to return the property should any of the children
of the other need it.
Facts: Spouses A and B executed a written document entitled “Barter”
whereby they agreed to “barter” and exchange their residential lot with the
riceland of spouses C and D. Under the agreement, the parties shall enjoy
the material possession of their respective properties. A and B shall reap
the fruits of the riceland, while C and D shall have the right to build their
house on the lot, subject to the condition that should any of the children of
A and B decide to reside in the municipality where the lot is located and
build his house on the lot, C and D shall be obliged to return the lot to such
children, and that neither party shall encumber, alienate or dispose of their
respective properties without the consent of the other. E, a son of A and B,
filed a complaint against C and D to recover the lot claiming that he needed
the property for the construction of his house thereon.
Issue: Did the contract of “barter” transfer the ownership of the lot to
C and D?
Arts. 1639-1640
BARTER OF EXCHANGE
Held: No. Contracts are not what the parties may see fit to call
them but what they really are as determined by the principles of law.
Thus, in the instant case, the use of the term “barter” in describing the
agreement is not controlling. The stipulations in the document are
clear enough to indicate that there was no intention at all on the part
of the signatories thereto to convey the ownership of their respective
properties. The agreement is not barter but one of or akin to usufruct
(see Art. 562.) in that all that was conveyed or transferred from one to
the other is only the use or material possession or enjoyment of each
other’s real property. (Baluran vs. Navarro, 79 SCRA 309 [1977].)
ART. 1639. If one of the contracting parties, having
received the thing promised him in barter, should
prove that it did not belong to the person who gave it,
he cannot be compelled to deliver that which he
offered in exchange, but he shall be entitled to
damages. (1539a)
Effect where giver not lawful owner of
thing delivered.
Under this provision, the aggrieved party cannot be compelled to
deliver the thing he has promised (see Biagtan vs. Viuda de Oller, 62
487
Phil. 933 [1936].) Moreover, he is entitled to claim damages. The rule
is analogous to Articles 1590 and 1591.
ART. 1640. One who loses by eviction the thing
received in barter may recover that which he gave in
exchange with a right to damages, or he may only
demand an indemnity for damages. However, he can
only make use of the right to recover the thing which
he has delivered while the same remains in the
possession of the other party, and without prejudice
to the rights acquired in good faith in the meantime
by a third person. (1540a)
Effect of eviction.
Each contracting party warrants to the other that he has right to
transfer ownership of the thing exchanged. (see Arts. 1547, 1548.)
Art. 1641
In case of eviction, the injured party is given the option either to
recover the property he has given in exchange with damages or only
claim an indemnity for damages. The right to recover is, however,
subject to the rights of innocent third persons. (see Art.
1385.)
ART. 1641. As to all matters not specifically
provided for in this Title, barter shall be governed by
the provisions of the preceding Title relating to sales.
(1541a)
Applicability of provisions on sales.
Barter is a mutual sale. Each party really is both a vendor and a
vendee. For this reason, the provisions on sales are also applicable to
barter.
— oOo —
488
SALES
THE BULK SALES LAW
(Act No. 3952, as amended.)
Section 1. This Act shall be known as “The Bulk
Sales Law.”
Purpose of the law.
The Bulk Sales Law is designed to prevent the defrauding of
creditors by the secret sale or disposal or mortgage in bulk of all or
substantially all of a merchant’s stock of goods. (37 C.J.S. 1320.)
Scheme of the law.
The general scheme of the law is to declare such bulk sales
fraudulent and void as to creditors of the vendor, or presumptively so,
unless specified formalities are observed, such as the demanding and
the giving of a list of creditors, the giving of actual or constructive
notice to such creditors, by record or otherwise, and the making of an
inventory. (Ibid.)
The effect of the law is to create a new type or kind of fraudulent
conveyance. (Ibid., 1324.)
Constitutionality of the law.
The Bulk Sales Law is constitutional. (Liwanag vs. Neng-hraj, 40
O.G. 1441.) It does not deprive persons of their property without due
process of law nor do they deny to such persons the equal protection of
the law.
While the Legislature may not constitutionally declare void that
which in its nature is, and under all circumstances, entirely honest and
harmless, yet it may, under its police powers, place such reasonable
restrictions on the right of an owner in relation
495
Sec. 2
489
to his property as it finds necessary to protect the interests of the public,
or prevent frauds among individuals. (MC Daniels vs. Connely Shoe
Co., 71 Pac. 37.)
Construction of the law.
The statute should be read as a whole for purposes of construction.
As the law is of a penal character and in derogation of the right to
alienate property without restriction, it is to be strictly construed against
the State and liberally in favor of the accused, and is not to be extended
by construction to situations not clearly intended thereby.
However, it should be construed and applied with a view to cure the
evil at which it is aimed, which is the defrauding of creditors by secret
bulk sales. (37 C.J.S. 1322; People vs. Wong Szu Tung, [C.A.] No.
9770-R, March 26, 1954.)
Sec. 2. Any sale, transfer, mortgage or assignment
of a stock of goods, wares, merchandise, provisions,
or materials otherwise than in the ordinary course of
trade and the regular prosecution of the business of
the vendor, mortgagor, transferor, or assignor, or any
sale, transfer, mortgage or assignment of all, or
substantially all, of the business or trade thereto
conducted by the vendor, mortgagor, transferor, or
assignor, or of all, or substantially all, of the fixtures
and equipment used in and about the business of the
vendor, mortgagor, transferor, or assignor, shall be
deemed to be a sale and transfer in bulk, in
contemplation of this Act: Provided, however, That if
such vendor, mortgagor, transferor, or assignor,
produces and delivers a written waiver of the
provisions of this Act from his creditors as shown by
certified statements, then, and in that case, the
provisions of this section shall not apply.
When sale or transfer in bulk.
A sale and transfer in bulk under the Bulk Sales Law is any sale,
transfer, mortgage, or assignment —
490
Sec. 2
SALES
(1) of a stock of goods, wares, merchandise, provisions, or
materials otherwise than in the ordinary course of trade and the regular
prosecution of the business; or
(2) of all or substantially all, of the business or trade; or
(3) of all or substantially all, of the fixtures and equipment used in
the business of the vendor, mortgagor transferor, or assignor. (Sec. 2.)
When sale or transfer in bulk not covered by
the Bulk Sales Law.
The Bulk Sales Law does not apply to the following:
(1) If the sale or transfer is in the ordinary course of trade and the
regular prosecution of the business of the vendor;
(2) If it is made by one who produces and delivers a written waiver
of the provisions of the Bulk Sales Act from his creditors
(Ibid.);
(3) If it is made by an executor, administrator, receiver, assignee in
insolvency, or public officer, acting under judicial process (Sec. 8.); and
(4) If it refers to properties exempt from attachment or execution.
(Rules of Court, Rule 39, Sec. 12.)
Meaning of stock.
The common use of the term stock when applied to goods in a
mercantile house refers to that which are kept for sale. (Albrecht vs.
Cudikee, 79 Pac. 628.)
Meaning of merchandise.
Merchandise must be construed to mean such things as are usually
bought and sold in trade by merchants. (People’s Savings Bank vs. Ban
Allsburg, 131 N.W. 101.) It means something that is sold everyday, and
is constantly going out of the store and being replaced by other goods.
(Boise Credit Men’s Assoc. vs. Ellis, 133 Pac. 6.)
It has been held that the sale of an entire foundry shop which does
not sell merchandise, but whose main business is to manuSec. 3
THE BULK SALES LAW
491
facture ironworks, or processes or casts metals, together with the
goodwill and credits, equipment, tools and machineries thereof, is not
covered by the law because the contents are not the “stock, goods,
wares, merchandise, provisions, or materials” in bulk contemplated in
Section 3 of the law. (People vs. Wong Szu Tung, [C.A.] L-9776-R,
March 26, 1954.) Neither are land and buildings “goods, wares and
merchandise” within the statute. (McMillan vs. Nelson, 181 N.W. 618.)
Meaning of fixtures.
The term fixtures refers to such articles of merchandise usually
possessed and annexed to the premises occupied by merchants to enable
them better to store, handle, and display their wares and which are
commonly known as trade fixtures, although removable without
material injury to the premises at or before the end of tenancy. (Brown
vs. Quigley, 130 N.W. 690.)
The law has reference to trade fixtures connected with the business
and not to the building in which the business is carried on. (Robbins vs.
Fuller, 229 S.W. 8.)
Sec. 3. It shall be the duty of every person who
shall sell, mortgage, transfer, or assign any stock of
goods, wares, merchandise, provisions or materials,
in bulk, for cash or on credit, before receiving from
the vendee, mortgagee, or his or its agents or
representatives any part of the purchase price
thereof, or any promissory note, memorandum, or
other evidence therefor, to deliver to such vendee,
mortgagee, or agent, or if the vendee, mortgagee, or
agent be a corporation, then to the president, vicepresident, treasurer, secretary or manager of said
corporation, or, if such vendee or mortgagee be a
partnership firm, then to a member thereof, a written
statement sworn to substantially as hereinafter
provided, of the names and addresses of all creditors
to whom said vendor or mortgagor may be indebted,
together with the amount of indebtedness due or
owing, or to become due or owing by said vendor or
mortgagor to each of
492
Sec. 4
SALES
said creditors, which statement shall be verified by an
oath to the following effect:
REPUBLIC OF THE PHILIPPINES PROVINCE/CITY
OF . . . . .
Before me, the undersigned authority, personally appeared . . .
. . . . . (vendor, mortgagor, agent or representative, as the case may
be), bearing Res. Cert. No. . . . . . . . . issued at . . . . . . . on the . . . .
. . day of . . . . . . . who, by me being first duly sworn, upon his oath,
deposes and states that the foregoing statement contains the names
of all of the creditors of . . . . . . (vendor, or mortgagor) together
with their address, and that the amount set opposite each of said
respective names, is the amount now due and owing, and which
shall become due and owing by . . . . . . . (vendor, or mortgagor) to
such creditors, and that there are no creditors holding claims due
or which shall become due, for or on account of goods, wares,
merchandise, provisions or materials purchased upon credit or on
account of money borrowed to carry on the business of which said
goods, wares, merchandise, provisions or materials are a part,
other than as set forth in said statement.
............
Subscribed and sworn to before me this . . . . . . . . . day of
. . . . . . . . 19 . . . . . . . at . . . . . . .
Sec. 4. Whenever any person shall sell, mortgage,
transfer, or assign any stock of goods, wares,
merchandise, provisions, or materials, in bulks, for
cash or on credit, and shall receive any part of the
purchase price, or any promissory note, or evidence
of indebtedness for said purchase price or advance
upon mortgage without having first delivered to the
vendee or mortgagee or to his or its agent or
representative, the sworn statement provided for in
Section three hereof, and without applying the
purchase or mortgage money of the said property to
THE BULK SALES LAW
493
the pro rata payment of the bona fide claim or claims
of the creditors of the vendor or mortgagor, as shown
upon such sworn stateSecs. 3-5
ment, he shall be deemed to have violated this Act,
and any such sale, transfer or mortgage shall be
fraudulent and void.
Sec. 5. It shall be the duty of every vendor,
transferor, mortgagor, or assignor, at least ten days
before the sale, transfer, or execution of a mortgage
upon any stock of goods, wares, merchandise,
provisions or materials, in bulk, to make a full detailed
inventory thereof and to preserve the same showing
the quantity and, so far as is possible with the
exercise of reasonable diligence, the cost price to the
vendor, transferor, mortgagor, or assignor of each
article to be included in the sale, transfer or mortgage,
and notify every creditor whose name and address is
set forth in the verified statement of the vendor,
transferor, mortgagor, or assignor at least ten days
before transferring possession thereof, personally by
or registered mail, of the price, terms and conditions
of the sale, transfer, mortgage, or assignment.
Protection accorded to creditors by
the law.
The law protects or benefits the creditors as follows:
(1) It requires the vendor, etc. to deliver to the vendee, etc. a sworn
written statement of the names and addresses of all creditors to whom
said vendor, etc. may be indebted together with the amount of
indebtedness due or to become due (Sec. 3.); and
(2) It requires the vendor, etc. at least ten (10) days before the sale,
etc., to make a full detailed inventory showing the quantity and the cost
price of the goods and to notify every creditor of the price, terms, and
conditions of the sale, etc. (Sec. 5.)
494
SALES
Creditors contemplated by law.
The statute contemplates not only creditors whose claims are due
but includes all persons who were creditors of the seller at the time of
the sale, although their claims had not been reduced to judgment, or
were not due. But creditors whose claims came
Secs. 3-5
into existence subsequent to the sale are not entitled to the benefits of
the statute. (37 C.J.S. 1532, 1535.)
Waiver and estoppel of creditors.
Creditors may waive the right to the benefit of the statute or estop
themselves to claim that the sale was invalid because the requirements
of statute were not complied with. (31 C.J.S. 1328.) Thus, a creditor
who consents to and participates in a bulk sale in the expectation that
the proceeds thereof are to be applied to his credits (Polo Sav. Bank vs.
Caneron, 168 N.W. 769.), or who affirms the sale thus making it his
own (Warren vs. Parlin, 206 S.W. 586.), or who, after he has been
notified of the sale, states that he will look to the seller for payment and
remains silent for two (2) years (Rice vs. West, 157, Pac. 1105.), cannot
be heard to say that the sale was void.
The benefit of the statute is for those who take the steps prescribed
thereby in order to protect their claims. But there is no estoppel unless
the conduct was relied on by the other party to his prejudice, in
accordance with the rule as to estoppel generally. (37 C.J.S. 1329; see
Arts. 1431, 1432.)
Effects of false statements in the schedule of
creditors.
(1) Without knowledge of buyer. — If the statement is fair upon its
face and the buyer has no knowledge of its incorrectness (as when the
seller misrepresents the amount of his indebtedness), and nothing to put
him on inquiry about it, he will be protected in its purchase.
(International Silver Co. vs. Hull, 79 S.E. 609.) In such case, the remedy
of the creditor is not against the goods but to prosecute the seller
criminally. (Seltzer vs. Peddi, 24 Pa. Dist. 456.) It would be
unreasonable to make the purchaser responsible for any incorrectness
in the list. (Glantz vs. Gardinc, 40 R.I. 367.)
THE BULK SALES LAW
495
(2) With knowledge or imputed knowledge of buyer. — If the
vendee has knowledge of the false statement or the statement is
defective on its face (as when it fails to give the addresses of the
creditors), the vendee accepts it at his peril. (Fitzhugh vs. Munnel, 179
Pac. 679.) The sale is valid only as between the vendor and the vendee
but void as against the creditors.
Secs. 3-5
(3) With names of certain creditors without notice omitted. — If
the list omits to name certain creditors who are not notified, the sale is
void as to such creditors, whether that omission was fraudulent or not.
(Williams vs. J.W. Crowdus Drug Co., 167 S.W. 187.) It has been held
that a sale made of all the effects in the vendor’s store without the buyer
being furnished a sworn list of creditors as required by Section 3 is null
and void irrespective of the good or bad faith of the buyer. (Chin Asing
vs. Gongco & Co., [C.A.] 40 O.G. 142.)
(4) With respect to an innocent purchaser for value from the
original purchaser. — But the creditor of the vendor who fails to
comply with the requirements of the statutes does not have the right to
pursue the property in whosoever hands it may fall. An innocent
purchaser for value from the original purchaser is protected. However,
if the circumstances are such as to bind the subsequent purchaser with
constructive notice that the sale to the vendor was fraudulent, the
property will be liable in his hands to creditors of the original vendor.
(37 C.J.S. 1356.)
Effect of violation of law on transfer.
(1) As between the parties. — The bulk sales law does not in any
way affect the validity of the transfer as between the intermediate
parties thereto. A sale not in compliance with the bulk sales statutes is
valid against all persons other than creditors. (see Ibid.)
(2) As a