TOPIC: CONTRACT TO SELL (NATURE AND EFFECTS) (1997, 1999, 2001)

I
Arturo gave Richard a receipt which states:
Receipt
Received from Richard as down payment
For my 1995 Toyota Corolla with
Plate No. XYZ-123 --------------------------------------P50,000.00
Balance payable: 12/30/01 ----------------------------P50,000.00
September 15, 2001.
(Sgd.) Arturo
Does this receipt evidence a contract to sell? Why? (2001)
ANSWER:
It is a contract of sale because the seller did not reserve ownership until he was fully paid.
II
State the basic difference (only in their legal effects)
A. Between a contract to sell, on the one hand, and a contract of sale, on the other;
B. Between a conditional sale, on the one hand, and an absolute sale, on the other
hand. (1997)
ANSWERS:
A. In a contract of sale, ownership is transferred to the buyer upon delivery of the object to him
while in a contract to sell, ownership is retained by the seller until the purchase price is fully
paid. In a contract to sell, delivery of the object does not confer ownership upon the buyer. In
a contract of sale, there is only one contract executed between the seller and the buyer,
while in a contract to sell, there are two contracts, first the contract to sell (which is
conditional or preparatory sale) and a second, the final deed of sale or the principal contract
which is executed after full payment of the purchase price.
B. A conditional sale is one where the vendor is granted the right to unilaterally rescind the
contract predicated on the fulfillment or non-fulfillment, as the case may be, of the
prescribed condition. An absolute sale is one where the title to the property is not reserved to
the vendor or if the vendor is not granted the right to rescind the contract based on the
fulfillment or non-fulfillment, as the case may be, of the prescribed condition.

QUESTION No.2: Orlando obtained a loan from Philippine Savings bank payable within a
period
of one year in quarterly installments of P29,190.28. The said loan was secured by a real
estate
mortgage covering Orlandos property.
On December 26, 1985, Orlando, as vendor, and Rogelio as vendee executed a Deed of
Sale with Assumption of Mortgage over the said property. A month later, Orlando
executed a
Contract to Sell involving the same property in favor of Rogelio for P250,000.00. In the
said

document, he obliged himself to execute a deed of absolute sale over the property in
favor of
Rogelio upon the full payment of the purchase price thereof. The contract futher obliged
Rogelio to pay the said amount to PSB as part of the purchase price.
Rogelio paid the first, second and third quarterly installments in Orlandos name with
PSB. However, on November 27, 1986, Orlando was notified by PSB that his loan would
mature
on December 24 of that year. Fearing that Rogelio would not be able to pay the last
installment, Orlando was compelled to pay the same. Orlando sent a notice to Rogelio
that he
was ready to execute the deed of absolute sale and turn over the title to the property
upon
latters remittance of the amount which Orlando paid to PSB.
On December 24, 1986, Rogelio went to PSB to pay the last installment and informed
the latter that Orlando had executed a deed of sale with assumption of mortgage in his
favor.
PSB however refused to accept the payment and informed Rogelio that it was not bound
by the
said deed.
Rogelio thereafter filed a complaint for specific performance against Orlando.
a) What is the nature of the contract entered into between Orlando and Rogelio?
b) What is the effect of Rogelios failure in paying the last installment to PSB?
c) What remedy, if any, is available to Rogelio?
ANSWERS:
a) CONTRACT TO SELL. It bears stressing that Orlando and Rogelio executed two interrelated contracts,
vis: the Deed of Sale with Assumption of Mortgage and the Contract to Sell. To determine the intention of the
parties, the two contracts must be read and interpreted together. Under the two contracts, Orlando bound and
obliged himself to execute a deed of absolute sale over the property and transfer title thereon to Rogelio after
the payment of the full purchase price of the property, inclusive of the quarterly installments due on the
petitioners loan with PSB. Construing the contracts together, it is evident that the parties executed a contract
to sell and not a contract of sale. It is well established that where the seller promised to execute a deed of
absolute sale upon completion of payment of the purchase price by the buyer, the agreement is contract to
sell.
b) In contracts to sell, where ownership is retained by the seller until the payment of the price in full, such
payment is a positive suspensive condition , failure of which is not really a breach but an event that prevents
the obligation of the vendor Orlando to convey title in accordance with Article 1184 of the Civil Code. The nonfulfillment by Rogelio of his obligation to pay, which is a suspensive condition to the obligation of Orlando to
sell and deliver the title to the property, rendered the contract to sell ineffective and without force and
effect. The parties stand as if the conditional obligation had never existed. Article 1191 will not apply because
it presupposes an obligation already extant. There can be no rescission of an obligation that is still nonexisting, the suspensive condition not having happened.
c) Rogelio may reinstate the contract to sell by paying the amount paid by Orlando to PSB when the latter
settled the last installment, and Orlando may agree thereto and accept Rogelios late payment. In this case,
Orlando had already decided before and after Rogelio filed the complaint to accept the payment and to

execute the deed of absolute sale over the property and cause the transfer of the title of the subject property
to Rogelio. (Rayos
vs Court of Appeals, GR No. 135528, July 14, 2004)

ABSOLUTE AND CONDITIONAL SALES

A deed of sale, even though denominated as a Deed of Conditional Sale is absolute in nature in the absence
of stipulation that the title to the property sold is reserved in the vendor or that the latter has the right to
unilaterally rescind the contract upon the non-payment within a fixed period. (Dignos vs. Court of Appeals,
158 SCRA 375)

OBJECT OF A CONTRACT OF SALE

Lands acquired by free or homestead patent shall not only be incapable of being encumbered or alienated
except in favor of the government, but shall not also be liable to the satisfaction of debt within the prohibitive
period of five (5) years. This prohibition is mandatory and any sale made in violation thereof is null and void.
This is true even if the sale involved is not voluntary, such as a judicial sale. For the purpose of compliance
with the law, it is immaterial that the satisfaction of debt by alienation or encumbrance was made voluntarily
or not. (Artates vs.
Urbi, 37 SCRA 395)
A bilateral promise to buy and sell and the agency to sell, entered into within five (5) years from the date of
the issuance of the homestead patent is in violation of the Public Land Law although the execution of the sale
was deferred until after the expiration of the five-year prohibitory period. To all intents and purposes, there
was an actual sale perfected during the period of prohibition except that it was reciprocally demandable
thereafter. The stipulation deferring the effects of the sale was merely a device to circumvent the prohibition.
Thereafter, a
compromise agreement wherein a grantee of a public land promised to sell the same and entered into within
the prohibitory period of five years is null and void ab initio. (Heirs of Enrique Zambales vs. CA, 120 SCRA
897)
A contract of sale or purchase of goods to be delivered at a future time, if entered into
without the intention of having any goods 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 futures in which the parties merely gamble on the rise or fall in
prices and is declared null and void by law. (Art. 2018, NCC) (Onapal Phil. Commodities,
Inc. vs. CA [1993])

CONTRACT OF SALE vs. AGENCY TO SELL

When one undertakes to deliver a thing at a stipulated price to another who is to pay the price in a moment
agreed upon, such constitutes the essential features of a contract of sale and excludes the legal conception of
an agency or order to sell. The contract entered into by the parties was that the plaintiff was to furnish the
defendant with the beds which the latter might order at a stipulated price and that the defendant was to pay

the price in the manner agreed upon. This contract contains the essential features of a contract of sale unlike
in an agency whereby the 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 it, returns it.
(Quiroga vs. Parsons Hardware Company, 38 Phil 501)

CONTRACT OF SALE vs. CONTRACT FOR A PIECE OF WORK

Selling or distribution is an essential ingredient of manufacturing. Manufacture, thereof, of products for the
general market involves the sale and distribution thereof and cannot be regarded as contract for a piece of
work, which the manufacturing of goods especially upon the special order of customers, and not for the
general market. A contract for the sale of an article which the vendor in the ordinary course of his business
manufactures or procures for the general market, whether the same is on hand at the time or not is a contract
for the sale of goods (Concrete Aggregates, Inc. vs. Court Of Tax Appeals, 185 SCRA 461).
PERFECTION OF CONTRACT OF SALE

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A definite agreement on the manner of payment of the price is an essential element in the formation of a
binding and enforceable contract of sale. This is so because the agreement as to the manner of payment goes
into the price such that a difference or disagreement in the manner of payment is tantamount to a failure to
agree on the price. Definiteness as to the price is an essential element of a binding agreement to sell personal
property. In the case, nothing on the agreement mentioned about the full purchase price and the manner the
installments were to be paid. (Toyota Shaw, Inc. vs. Court Of Appeals, 244 SCRA 321)
EQUITABLE MORTGAGE
One which lacks the proper formalities, form of 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
(Cachola vs. CA 208 SCRA 496)

PROMISE TO BUY AND SELL VS ACCEPTED UNILATERAL PROMISE TO BUY OR TO SELL

While it is true that under Art. 1324 of the Civil Code, the general rule regarding offer and acceptance is that,
hen the offeror gives to the offeree a certain period to accept, the offer may be withdrawn at anytime before
acceptance when the option is not founded upon consideration distinct from price. This general rule must be
interpreted as modified by the provision of Article 1479 which applies to a promise to buy and sell
specifically. This rule requires that a promise to sell to be valid, must be supported by a consideration distinct
from the price, which means that the option can still be withdrawn, even if accepted, if the same is not
supported by any consideration. (Southwestern Sugar and Molasses Co. vs. Atlantic Gulf And Pacific,
Co., 97 SCRA 249)
The acceptance of an offer to sell a determinate thing for a price certain creates a bilateral contract to sell
and to buy. The offer, upon acceptance, ipso facto assumes the obligations of a purchaser. If an option is given
without consideration, it is a mere offer of contract of sale, which is not binding until accepted. If, however,
acceptance is made before a withdrawal, it constitutes a binding contract of sale even though the option was
not supported by a sufficient consideration. (Atkins, Kroll and Company vs, Cua Hian Tek, 102 SCRA
948)

There is no conflict between Articles 1324 and 1479. An accepted unilateral promise to sell partakes the nature
of an option, which, although not binding as contract in itself because of lack of separate consideration,
generates a bilateral contract of purchase and sale upon acceptance. Article 1324 of the Civil Code which
presumes the existence of a consideration in every contract applies to contracts in general, whereas the
second paragraph of Article 1479 thereof refers to sales in particular and more specifically to an accepted
unilateral promise to buy or to sell. (Sanchez vs. Rigos, 45 SCRA 368)
An extension of the period to redeem the property after the redemption period granted by the President and
Manager of a bank after the expiration of the redemption period could only relate to the matter of resale of
the property, not redemption. Even if it were to be understood as an extension of the period of redemption,
the bank is not bound by the promise not only because it was not approved or ratified by the Board of Directors
but also because, and more distinctively, it was a promise not supported by a consideration distinct from the
repurchase price. (Natino vs. Intermediate Appellate Court, 197 SCRA 323)
In a unilateral promise to sell, where the debtor fails to withdraw the promise before the acceptance by the
creditor, the transaction becomes a bilateral contract to sell and to buy because upon the acceptance by the
creditor of the offer to sell by the debtor, there is already a meeting of the minds of the parties as to the thing
which is determinate and the price which is certain. In which case, the parties may reciprocally demand
performance. An optional contract is a privilege existing only in one party the buyer. For a separate
consideration paid, he is given the right to purchase or not, a certain merchandise or property, at any time
within the agreed period, at a fixed price. It is the duty of the vendor to remain open the offer until the
agreed period expires.
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The purchaser is then given the option to decide to purchase or not and may not be compelled to exercise the
option to buy before the term expires. (Serra vs. Court of Appeals, 229 SCRA 60)

OBLIGATION OF THE VENDEE TO PAY THE PRICE

A grace period granted the vendee in case of failure to pay the amount/s due is a right not an obligation. The
grace period must not be likened to an obligation, the non-payment of which, under Article 1169 of the Civil
Code, would still generally require judicial or extra-judicial demand before default can be said to arise
(Bricktown Devt Corp vs. Amor Tierra Devt Corp. 57SCRA437)

RIGHT OF FIRST REFUSAL

In the instant case, the right of first refusal is integrated in the contract of lease. Thus, it is incorrect to say
that there is no consideration in an agreement of right of first refusal. The contractual stipulation is part and
parcel of the whole contract of lease. Hence, the consideration for the lease includes the consideration for the
right of first refusal. 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. (Equatorial Realty Development vs. Mayfair Theater Inc., 264 SCRA 483)
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. Only after the optionee fails to exercise its right of first priority under the same terms and
within the period contemplated, could the owner validly offer to sell the property to a third person, again,
under the same terms as offered to the optionee. (Paranaque Kings Enterprises, Inc. v. CA GR No.
111538, February 26, 1997)

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. (Riviera Filipina, Inc. v. CA GR No. 117355, April 5, 2002)

WHO BEARS THE RISK OF LOSS

The disappearance or loss of property which the owner intended or attempted to sell can only interest the
owner, who should suffer the loss, and not a third party who has acquired no rights nor incurred any liability
with respect thereto. In the case, the sale was not perfected for failure of the owner to comply with the
condition. It follows that the loss of the vessel should be borne by the owner. (Roman vs. Grimalt, 6 Phil 96)
The issuance of sales invoice does not prove transfer of ownership of the thing sold either actually or
constructively. In all forms of delivery, it is necessary that the act of delivering whether constructive or actual
be coupled with the intention to transfer ownership and to deliver the thing. Article 1496 of the Civil Code
which provides that in the absence of an express assumption of risk by the buyer, the things sold remain at the
sellers risk until the ownership thereof is transferred to the buyer. (Norkis Distributors, Inc. vs. CA, 193
SCRA 694)

RECTO LAW
In sales on installments, where the action instituted is for specific performance and the mortgaged property is
subsequently attached and sold, the sale thereof does not amount to a foreclosure of the mortgage, hence, the
seller-creditor is entitled to deficiency judgment. The attachment and subsequent sale on public auction of the
property was merely an incident to an ordinary civil action and cannot be considered as equivalent to the
remedy of foreclosure. (Southern Motors, Inc. vs. Moscoso, 2 SCRA 163)
If the guarantor should be compelled to pay the balance of the purchase price, the guarantor will in turn be
entitled to recover what she has paid from the debtor-vendee pursuant to Article 2066 of the Civil Code, so
that ultimately, it would 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. Thus, the protection given by Article 1484 would be
indirectly subverted, and public policy overturned. Therefore, foreclosure of the chattel mortgage releases the
guarantor. (Pascual vs. Universal Motors Corp., 61 SCRA 121)
DELIVERY AS A MODE OF TRANSFERRING OWNERSHIP
The execution of a public instrument is equivalent to the delivery of the thing which is the object of the
contract, but in order that this symbolic delivery may produce the effect of tradition, it is necessary that the
vendor shall have had such control over the thing sold that, at the moment of the sale, its material delivery
could have been made. (Addison vs. Felix and Tioco, 38 Phil 404)
Ownership is not transferred by perfection of the contract of sale but by delivery, either actual or constructive.
This is true even if the purchase has been made on credit or payment of the purchase price is not essential to
the transfer of ownership as long as the property sold has been delivered. Ownership is acquired from the
moment the thing sold was delivered to the vendee, as when it is placed in his control and possession.
(Sampaguita Pictures, Inc. vs. JalwindorManufacturers Inc., 43 SCRA 420)

ARTICLE 1491

The prohibition mandated by paragraph 2 of Article 1491 in relation to Article 1409 of the Civil Code 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 Act no. 3135, as amended. Under Section 5 of such Act, the title of the
mortgagee-creditor over the property cannot be impeached or defeated on the ground that the mortgagee
cannot be a purchaser of his own sale. (Fiestan vs. CA,, 185 SCRA 757)

ARTICLES 1506 AND 559

The right of the owner to recover personal property acquired in good faith by another is based on his being
dispossessed without his consent. The common law principle that where one of the two innocent persons must
suffer by a fraud perpetrated by another, the law imposes upon the party who by his misplaced confidence, has
enabled the fraud to be committed cannot be applied to a person unlawfully deprived covered by an express
provision of the Civil Code specifically Article 559. Between a common law principle and a statutory provision,
the latter must prevail. (Concurring opinion of Justice Teehankee)
Unlawful deprivation is not merely contained in the specific sense of deprivation by robbery or theft but
extends to all cases where there has been no valid transmission of ownership, including depositary or lessee
who sold the same. It extends to all cases where there has been no valid transmission of ownership. (Dizon vs.
Suntay, 47 SCRA 160)
Possession of movable property acquired in good faith is equivalent to a title. Hence, where there was a
perfected contract of sale, it cannot be said that there is unlawful deprivation so as to warrant recovery from a
purchaser in good faith without reimbursement. (EDCA Publishing And Distributing Corp. vs. Santos, 184
SCRA 614)
DOUBLE SALE
The first purchaser is necessarily a purchaser in good faith. Such good faith subsists and continues to
exist even if the first purchaser subsequently is informed of the existence of a second sale. The governing
principle here is first in time, stronger in right. The knowledge gained by the first buyer of the second
sale cannot defeat the first buyers good faith and the right to register first. But conversely, knowledge gained
by the buyer of the first sale defeats his rights even if he be the one to register first as he then acts in bad
faith. It has to be noted that knowledge is tantamount to registration. (Carbonell vs. Court Of Appeals, 69
SCRA 99)

Red Notes in Civil Law

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Where one of two conflicting sales of a piece of land was executed before the land was registered, while the
other was an execution sale made after the land had been registered, what should apply is Section 35, Rule
39 (not Article 1544) which provides that purchaser of execution sale acquires only the rights of the judgment
debtor to the property as of the time of the levy. Therefore, a prior sale, although unregistered cannot be
deemed to be automatically cancelled upon subsequent issuance of the Torrens title over the land. (Dagupan
Trading Co. vs. Macam, 14 SCRA 99)
Knowledge of a prior transfer of a registered property by a subsequent purchaser makes him a purchaser in bad
faith which vitiates his title and creates no right as against the first purchaser. The knowledge contemplated
here must be continuing- from the time of acquisition until the title is transferred to him by registration a
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. (Cruz vs. Cabana, 129 SCRA 656)

As between two purchasers, the one who registered the sale in his favor has a preferred right over the other
who has not registered his title, even if the latter is in actual possession of the immovable property. (Tanedo
vs. Court Of Appeals, 252 SCRA 80)
Article 1544 does not apply to land not registered under the Torrens system. The provisions in Act No. 3344
should be made applicable, which states that registration of instruments affecting unregistered lands is without
prejudice to a third party with a better right. This is because the purchaser of unregistered land at a sheriffs
execution sale only steps into the shoes of the judgment debtor, and merely acquires the latters interest in
the property sold as of the time the property was levied upon. (Radiowealth Finance Co. vs. Palileo, 197
SCRA 245)
Where a person claims to have superior proprietary rights over another on the ground that he derived his title
from a sheriff's sale registered in the Registry of Property, Article 1544 of the Civil Code will apply only if said
execution sale of real estate is registered under Act 496. Unfortunately, the subject property was still untitled
when it was already acquired by bank (first buyer) by virtue of a final deed of conveyance. On the other hand,
when the second buyer purchased the same property, it was covered under the Torrens System. At the time of
the
execution and delivery of the sheriff's deed of final conveyance the disputed property was already covered by
the Land Registration Act and the Original Certificate of Title was likewise already entered in the registration
book of the Register of Deeds as of April 17, 1984. Thus, from said date, the subject property was already
under the operation of the Torrens System. Under the said system, registration is the operative act that gives
validity to the transfer or creates a lien upon the land. Moreover, the issuance of a certificate of title had the
effect of
relieving the land of all claims except those noted thereon. Accordingly, the second buyer in dealing with the
subject registered land, were not required by law to go beyond the register to determine the legal condition of
the property. They were only charged with notice of such burdens on the property as were noted on the
register or the certificate of title. To have required them to do more would have been to defeat the primary
object of the Torrens System which is to make the Torrens Title indefeasible and valid against the whole world.
(Naawan Community Rural Bank v. CA)
BREACH OF WARRANTY
As a general rule, there is no implied warranty in a sale of second hand goods. However, this general rule is not
without exceptions. Article 1562 of the Civil Code states that 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 relied on the sellers skill or judgment, there is an implied warranty that the goods shall be reasonably
fit for such purpose. In the certification that the machine was in A1 condition must be considered an express
warranty and their binding on the seller. Such condition or certification was a condition sine qua non for the
release of the petitioners loan which was used for the payment of the purchase price. Seller must be bound by
it. (Moles vs. Intermediate Appellate Court, 169 SCRA 777)

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While it is true that Article 1571 of the Civil Code provides for a prescriptive period of six months for a
rehibitory action, a cursory of the preceding ten articles will reveal that said rule may be applied only in case
of implied warranties. In case of express warranty, the prescriptive period is the one specified in the warranty
and in the absence of such period, the general rule on rescission of contracts which is four (4) years shall apply.
(Villostas vs. Court Of Appeals, 210 SCRA 490)
RIGHT OF REDEMPTION
Where the true intention of the parties show that the transaction shall secure the payment of the debt, such a
transaction shall be presumed to be an equitable mortgage under paragraph 6 of Article 1602. Settled is the

rule that to create the presumption enunciated by Article 1602, the existence of one circumstance is enough.
(Ramos vs. Court Of Appeals, 180 SCRA 635)
While in ordinary sales for reason and equity a transaction may be invalidated on the ground of inadequacy of
price or when such inadequacy shocks ones conscience as to justify the courts to interfere, such does not
follow when the law gives to the owner the right to redeem as when a sale is made at public auction, upon the
theory that the lower the price, the easier it is for the owner to effect the redemption. And so it was aptly said
that when there is the right to redeem, inadequacy of the price should not be material because the judgment
debtor may redeem the property. (De Leon vs. Salvador, 36 SCRA 567)
Co-heirs may redeem the shares sold by any of their co-heirs within 30 days from written notice of the sale.
However, strict application of this legal mandate would amount to injustice when there is an actual knowledge
though no written notice is given. In such case, mere technicality should not defeat the purpose of the law, i.e.
to notify the redemptioners whose actual knowledge is equivalent to notice. (Alonzo vs. Intermediate
Appellate Court, 150 SCRA 259)
A formal offer to redeem, accompanied by a bona fide tender of payment of redemption price is not essential
where the right to redeem is exercised through a judicial action within the redemption period and
simultaneously depositing the redemption price. The filing of action itself is equivalent to a formal offer
to redeem. There is actually no prescribed form for an offer to redeem to be properly effected, what is
paramount is the availment of the right to legally redeem within the fixed period. (Lee Chuy Realty Corp.
vs. Court Of Appeals, 250 SCRA 596)
While it is true that written notice by the vendor is required by law under Article 1623, it is equally true that
the same Article 1623 does not prescribe any distinctive method for notifying the redemptioner so long,
therefore, as the latter is informed in writing of the sale and the particulars thereof, the 30 days for
redemption starts running and the redemptioner has no real cause to complain. (Etcuban vs. Court Of
Appeals, 148 SCRA 587)