PLEDGE
ask for the proportionate extinguishment of the pledge or mortgage
CHAPTER 1
Provisions Common to Pledge and Mortgage
Article 2085. The following requisites are essential to the contracts of
pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the
free disposal of their property, and in the absence thereof, that they
be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
(1857)
Article 2086. The provisions of article 2052 are applicable to a pledge
or mortgage. (n)
Article 2087. It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor.
(1858)
Article 2088. The creditor cannot appropriate the things given by way
of pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void. (1859a)
Article 2089. A pledge or mortgage is indivisible, even though the
debt may be divided among the successors in interest of the debtor
or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot
as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of the
other heirs who have not been paid.
From these provisions is excepted the case in which, there being
several things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of
the pledge or mortgage as the portion of the debt for which each
thing is specially answerable is satisfied. (1860)
Article 2090. The indivisibility of a pledge or mortgage is not affected
by the fact that the debtors are not solidarily liable. (n)
Article 2091. The contract of pledge or mortgage may secure all kinds
of obligations, be they pure or subject to a suspensive or resolutory
condition. (1861)
Article 2092. A promise to constitute a pledge or mortgage gives rise
only to a personal action between the contracting parties, without
prejudice to the criminal responsibility incurred by him who defrauds
another, by offering in pledge or mortgage as unencumbered, things
which he knew were subject to some burden, or by misrepresenting
himself to be the owner of the same. (1862)
 Definition Prohibition Refers to Stipulation Authorizing Automatic Appropriation
Pledge is a contract by virtue of which the debtor delivers to What is prohibited by Art. 2088 in connection with pacto
the creditor or to a third person a movable or document evidencing commissorio is the automatic appropriation by the creditor of the
incorporeal rights for the purpose of securing the fulfilment of a thing pledged or mortgaged upon failure of the debtor to pay the
principal obligation with the understanding that when the obligation debt within the period agreed upon by virtue of the authority or right
is fulfilled, the thing delivered shall be returned with all its fruits and previously given the creditor.
accessions. The prohibition does not include a subsequent voluntary act of
the debtor making cession of the property mortgaged in payment of
Kinds of Pledge the debt which amounts in legal effect to a novation of the original
1) Voluntary or conventional one created by agreement of the contract and to a voluntary sale of the said property for the amount
parties. of the debt [Ocampo et.al., vs. Potenciano, et.al., (CA) 48 O.G. 2230];
2) Legal one created by operation of law. nor to a promise to assign or sell said property in payment of the
obligation if, upon its maturity, it is not paid because the title thereto
Characteristics of Pledge remains in the debtor. The promise is merely a personal obligation
1) Real contract and does not in any way bind the property (Dulay vs. Aquiatin &
2) Accessory contract Maximo, 47 Phil. 951; Guerrero vs. Yuigo & CA, 96 Phil. 77).
3) Unilateral contract
4) Subsidiary contract Pledge or Mortgage is Indivisible
Pledge or mortgage is indivisible as to the contracting parties.
Essential Elements of Pledge and Mortgage The rule applies even if the obligation is joint and not solidary.
1) Constituted to secure fulfilment of a principal obligation;
2) Pledgor or mortgagor is absolute owner of the thing pledged or All Kinds of Obligation Can Be Secured by Pledge or Mortgage
mortgaged; Any kind of obligation, whether pure or conditional, may be
3) Pledgor or mortgagor has free disposal of property or has legal secured by a contract of pledge or mortgage. The same applies in
authority to dispose of the same; guaranty which may also secure a conditional obligation.
4) Thing pledged or mortgaged may be alienated;
5) Thing pledged must be delivered to the creditor or a third person by Promise to Constitute Pledge or Mortgage Not a Real Right
common agreement. A promise to constitute pledge or mortgage, if accepted, gives
rise only to a personal right binding upon the parties and creates NO
Right of Creditor to Appropriate Thing Pledged or Mortgaged real right in the property.
The property given in pledge or mortgage stands as security for
the fulfilment of the principal obligation. If the debtor fails to comply Criminal Responsibility of Pledgor or Mortgagor
with the obligation at the time it falls due, the creditor is merely Under the RPC, estafa is committed by a person who,
entitled to move for the sale of the thing pledged with the formalities pretending to be the owner of any real property, shall convey, sell,
required by law. encumber, or mortgage the same, or knowing that the real property
is encumbered, shall dispose of the same as unencumbered. It is
essential that fraud or deceit be practiced upon the vendee at the
time of the sale.
CHAPTER
Provisions applicable only to pledge
Article 2093. In addition to the requisites prescribed in article 2085, it
is necessary, in order to constitute the contract of pledge, that the
thing pledged be placed in the possession of the creditor, or of a third
person by common agreement. (1863)
Actual transfer of possession essential in pledge
A pledge is a real contract which requires delivery for its perfection.
1316- Real contracts, such as deposit, pledge and commodatum, are
not perfected until the delivery of the object of the obligation.
An agreement to constitute a pledge only gives rise to a personal
action between the contracting parties. (2092)
1. Unless the movable given as security by way of pledge be delivered
to and placed in the possession of the creditor or a third person
designated by common agreement, the creditor acquires no right to
the property.
Pledge is merely a lien (legal claim on a piece of property) and
possession is indispensable (absolutely necessary) to the right of lien.
2. Delivery of possession that is essential to the validity of the pledge
ACTUAL possession. Mere symbolic delivery may not be sufficient.
Article 2094. All movables which are within commerce may be
pledged, provided they are susceptible of possession. (1864)
Subject matter of pledge (or chattel mortgage)
-confined and limited to personal property and it cannot be extended
or made to apply to real property.
2 416- The ff things are deemed to be personal property:
1. Those movables susceptible of appropriation which are not
included in the preceding article (immovables);
2. Real property which by any special provision of law is
considered as personalty;
3. Forces of nature which are brought under control by science;
and
4. In general, all things which can be transported from place to
place without impairment of the real property to which they
are fixed.
417- The ff are also considered as personal property:
1. Obligations and actions which have for their object movables
or demandable sums; and
2. Shares of stock of agricultural, commercial and industrial
entities, although they may have real estate.
chattel n. an item of personal property which is movable, as
distinguished from real property (land and improvements).
A chattel mortgage is a loan arrangement with movable personal
property as the security for the loan
Article 2095. Incorporeal rights, evidenced by negotiable instruments,
bills of lading, shares of stock, bonds, warehouse receipts and similar
documents may also be pledged. The instrument proving the right
pledged shall be delivered to the creditor, and if negotiable, must be
indorsed. (n)
Incorporeal rights evidenced by documents whether negotiable or
not may also be pledged.
If negotiable must be indorsed in favor of the creditor
*indorse - To sign a paper or document, thereby making it possible for
the rights represented therein to pass to another individual
Title to goods may be conveyed by either the transfer (1514) or
negotiation (1513) of the document of title.
Article 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not
appear in a public instrument. (1865a)
Public instrument necessary to bind third person
-in addition to the delivery of the thing pledged, the contract of
pledge shall be embodied in a public instrument wherein shall
appear:
1. the description of the thing pledged
2. the date of the pledge.
-to forestall fraud debtor may attempt to conceal his property from
his creditors when he sees it in danger of execution by simulating a
pledge thereof with an accomplice
Article 2097. With the consent of the pledgee, the thing pledged may
be alienated by the pledgor or owner, subject to the pledge. The
ownership of the thing pledged is transmitted to the vendee or
transferee as soon as the pledgee consents to the alienation, but the
latter shall continue in possession. (n)
Alienation by pledgor of thing pledged
The pledgor retains his ownership of the thing pledged.
He may sell the same provided the pledgee consents to the sale.
As soon as the pledgee gives his consent, the ownership of the thing
pledged is transferred to the vendee subject to the rights of the
pledgee:
1. The thing sold may be alienated to satisfy the obligation
(2112)
2. The pledgee must continue in possession during the
existence of the pledge (2093, 2098)
The pledge would not bind or adversely affect third persons unless
2096 has been followed.
2112- The creditor to whom the credit has not been satisfied in due
time, may proceed before a Notary Public to the sale of the thing
pledged. This sale shall be made at a public auction, and with
notification to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public sale is to be
held. If at the first auction the thing is not sold, a second one with the
same formalities shall be held; and if at the second auction there is no
sale either, the creditor may appropriate the thing pledged. In this
case he shall be obliged to give an acquittance for his entire claim.
(1872a)
Alienation- the legal transfer of title of ownership to another party
Article 2098. The contract of pledge gives a right to the creditor to
retain the thing in his possession or in that of a third person to whom
it has been delivered, until the debt is paid. (1866a)
Right of pledgee to retain the thing pledged
-possession of the pledge constitutes his security
-debtor cannot demand its return until the debt secured by it is paid
-right of retention is LIMITED only to the fulfillment of the principal
obligation for which the pledge was created
2105- The debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid the debt
and its interest, with expenses in proper case.
Article 2099. The creditor shall take care of the thing pledged with
the diligence of a good father of a family; he has a right to the
reimbursement of the expenses made for its preservation, and is
liable for its loss or deterioration, in conformity with the provisions
of this Code. (1867)
Obligation of pledgee to take due care of thing pledged
-the pledgee must return the thing pledged upon the fulfillment of
the principal obligation
-having possession of the property, he has the obligation to take care
of it with the diligence of a good father of a family (1163)
-he is, however, entitled to reimbursement of the expenses
incurred for its preservation
In case of loss or deterioration of the thing pledged due to fortuitous
event, the pledgee cannot be held responsible. (1174)
He is liable for loss or deterioration by reason of fraud, negligence,
delay or violation of the terms of the contract. (1170)
Article 2100. The pledgee cannot deposit the thing pledged with a
third person, unless there is a stipulation authorizing him to do so.
The pledgee is responsible for the acts of his agents or employees
with respect to the thing pledged. (n)
Obligation of pledge not to deposit thing pledged with another
While the pledge is entitled to retain the possession of thing pledged
until the debt is paid, he is not authorized to transfer possession to a
third person.
EXCEPTION: when there is a stipulation authorizing him to do so
The pledgee is responsible for the acts of his agents or employees
with respect to the thing pledged because their acts are, in legal
effect, deemed his.
Article 2101. The pledgor has the same responsibility as a bailor in
commodatum in the case under article 1951. (n)
Liability to pay damages for known hidden flaws
1951. The bailor, who, knowing the flaws of the thing loaded, does
not advise the bailee of the same, shall be liable to the latter for
damages which he may suffer by reason thereof.
Requisites which must concur for the application of 1951:
1. There is a flaw or defect in the thing loaned;
2. The flaw or defect is hidden;
3. The bailor is aware thereof;
4. He does not advise the bailee of the same; and
5. The bailee suffers damages by reason of said flaw or defect.
*commodatum is gratuitous (bailee acquires the use of the thing
loaned but not its fruits)
Article 2102. If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate what he
receives with those which are owing him; but if none are owing him,
or insofar as the amount may exceed that which is due, he shall apply
it to the principal. Unless there is a stipulation to the contrary, the
pledge shall extend to the interest and earnings of the right pledged.
In case of a pledge of animals, their offspring shall pertain to the
pledgor or owner of animals pledged, but shall be subject to the
pledge, if there is no stipulation to the contrary. (1868a)
Right of pledgee to compensate earnings of pledge with debt
The pledge has no right to use the thing pledged or to appropriate the
fruits thereof without the authority of the owner (2104)
1977- The depositary cannot make use of the thing deposited without
the express permission of the depositor
Otherwise, he shall be liable for damages
But the pledgee can apply the fruits, income, dividends, or interest
earned or produced by the thing pledged to the payment of the
interest, if owing, and thereafter to the principal of his credit. (2132-
antichresis)
Unless there is a stipulation to the contrary, the interest and earnings
of the right pledged and in the case of animals, their offsprings
(2127), are included in the pledge.
Article 2103. Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to the
owner of the thing pledged in order to recover it from, or defend it
against a third person. (1869)
Right of pledgee against third persons
The creditor to whom the property pledged has been delivered is
obliged to take care of it with the diligence of a good father of a
family(2099). Hence, he is authorized to bring such actions as pertain
to the owner in order to recover it or defend it against claims of third
persons. Unless given the right, the creditor might be prejudiced by
the negligence of the owner.
The right of a pledgee is a real right enforceable against third persons
but it is necessary that the contract of pledge be embodied in a public
instrument which shall contain the description of the thing pledged
and the date of the pledge (2096)
Article 2104. The creditor cannot use the thing pledged, without the
authority of the owner, and if he should do so, or should misuse the
thing in any other way, the owner may ask that it be judicially or
extrajudicially deposited. When the preservation of the thing pledged
requires its use, it must be used by the creditor but only for that
purpose. (1870a)
Obligation of pledgee not to use thing pledged
-no right to make use of it without permission from the owner
-same rule as in deposit
-In consequence of the fact that the pledgor, in parting with his
property, transmits only the possession but not ownership.
Cases when the owner may to ask that thing pledged be deposited
judicially or extrajudicially:
1. If the creditor uses the thing without authority;
2. If he misuses the thing in any other way; or
3. If the thing is in danger of being lost or impaired because of
the negligence or willful act of the pledgee (2106)
Article 2105. The debtor cannot ask for the return of the thing
pledged against the will of the creditor, unless and until he has paid
the debt and its interest, with expenses in a proper case. (1871)
Right of debtor to demand return of thing pledged
The thing pledged stands as security for the fulfillment of the
pledgors obligation. Hence, he cannot ask for its return until such
obligation is fully paid including interest due thereon and expenses
incurred for its preservation (2099)
EXCEPTION: the pledgor is allowed to substitute the thing pledged
which is in danger of destruction or impairment with another thing of
the same kind and quality (2107)
Article 2106. If through the negligence or wilful act of the pledgee,
the thing pledged is in danger of being lost or impaired, the pledgor
may require that it be deposited with a third person. (n)
Right of pledgor to ask for deposit of thing pledged
Pledge preserve due diligence
If the thing should be exposed to loss or impairment through the
negligence or willful act of the pledge, the pledgor may demand that
it be deposited with a third person. The pledgor may also require such
deposit should the pledge use the thing without authority or misuse it
in any other way (2104)

Article 2107. If there are reasonable grounds to fear the destruction
or impairment of the thing pledged, without the fault of the pledgee,
the pledgor may demand the return of the thing, upon offering
another thing in pledge, provided the latter is of the same kind as the
former and not of inferior quality, and without prejudice to the right
of the pledgee under the provisions of the following article.
The pledgee is bound to advise the pledgor, without delay, of any
danger to the thing pledged. (n)
Right of pledgor to substitute thing pledged
2 remedies granted by 2107:
1. To the pledgor, the right to demand the return of the thing
pledged upon offering another thing in pledge
2. To the pledgee, the right to cause the same to be sold at a
public sale (2108)
Requisites for the application of 2107:
1. The pledgor has reasonable grounds to fear the destruction or
impairment of the thing pledged;
2. There is no fault on the part of the pledgee;
3. The pledgor is offering in place of the thing another thing in
pledge which is of the same kind and quality as the former;
and
4. The pledgee does not choose to exercise his right to cause the
thing pledged to be sold at public auction.
Article 2108. If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing pledged,
he may cause the same to be sold at a public sale. The proceeds of
the auction shall be a security for the principal obligation in the same
manner as the thing originally pledged. (n)
Right of pledgee to cause sale of thing pledged
The pledgees right to have the thing pledged sold at public sale
granted under 2108 is superior to that given to the pledgor to
substitute the thing pledged under 2107.
2107-says the pledgor is given the right without prejudice to the
right of the pledge
**The sale must be a public sale.
*The pledge shall keep the proceeds of the sale as security for the
fulfillment of the principal obligation.
Article 2109. If the creditor is deceived on the substance or quality of
the thing pledged, he may either claim another thing in its stead, or
demand immediate payment of the principal obligation. (n)
Right of the pledge to demand substitute or immediate payment
2 remedies to the pledgee in case he is deceived as to the substance
or quality of the thing pledged:
1. To claim another thing in pledge; and
2. To demand immediate payment of the principal obligation.
^Remedies are alternative - only one, not both.
Article 2110. If the thing pledged is returned by the pledgee to the
pledgor or owner, the pledge is extinguished. Any stipulation to the
contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the
possession of the pledgor or owner, there is a prima facie
presumption that the same has been returned by the pledgee. This
same presumption exists if the thing pledged is in the possession of a
third person who has received it from the pledgor or owner after the
constitution of the pledge. (n)
Extinguishment of pledge by return of thing pledged
-object be placed in possession of the creditor, or of a third person by
common agreement one the essential requisites of pledge (2093)
-pledge is extinguished if the object is returned by the pledgee
 -TRUE, notwithstanding any stipulation that the pledge would The principal debt, however, is not affected by the waiver of the
continue although the pledgee is no longer in possession. pledge. But the waiver of the principal obligation carries with it that
of the pledge (1273)
Presumption where thing pledged in possession of pledgor or owner
subsequent to the perfection of pledge 1273 the renunciation of the principal debt shall extinguish the
-prima facie presumption that the thing has been returned, and accessory obligations; but the waiver of the latter shall leave the
therefore, the pledge has been extinguished former in force.
-may be REBUTTED by evidence to the contrary (e.g. the
return was merely for the substitution of the thing pledged (2105) or Other causes of extinguishment of pledge:
the thing was stolen and given by the thief to the pledgor or owner) -prescription
-loss of the thing
When the thing pledged is later found in the hands of the pledgor or -merger
the owner, only the accessory obligation of pledge is presumed -compensation
remitted, not the principal obligation itself (1274) -novation

1274- it is presumed that the accessory obligation of pledge has been 1231 obligations are extinguished:
remitted when the thing pledged, after its delivery to the creditor, is 1. By payment or performance
found in the possession of the debtor, or of a third person who owns 2. By the loss of the thing due
the thing. 3. By the condonation or remission of the debt
4. By the confusion or merger of the rights of creditor and debter
Article 2111. A statement in writing by the pledgee that he renounces 5. By compensation
or abandons the pledge is sufficient to extinguish the pledge. For this 6. By novation
purpose, neither the acceptance by the pledgor or owner, nor the Other causes:
return of the thing pledged is necessary, the pledgee becoming a -annulment
depositary. (n) -rescission
-fulfillment of a resolutory condition
Extinguishment of pledge by renunciation or abandonment -prescription
The pledge is a personal right of the pledgee which may be waived.
Under 2111, renunciation or abandonment must be in writing to
extinguish the pledge, and such renunciation is not conditioned upon
the acceptance by the pledgor or owner nor upon the return of the
thing pledged.
The waiver transforms the pledge into a depositary with the rights
and obligations of one.
Article 2112. The creditor to whom the credit has not been satisfied
in due time, may proceed before a Notary Public to the sale of the
thing pledged. This sale shall be made at a public auction, and with
notification to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public sale is to be
held. If at the first auction the thing is not sold, a second one with the
same formalities shall be held; and if at the second auction there is no
sale either, the creditor may appropriate the thing pledged. In this
case he shall be obliged to give an acquittance for his entire claim.
(1872a)
Right of pledgee to cause sale of thing pledged
The object pledged may be alienated for the payment to the creditor
when the principal obligation becomes due (2087) one of the
essential requisites of pledge
Formalities required for such sale:
1. The debt is due and unpaid;
2. The sale must be at a public auction;
3. There must be notice to the pledgor and owner, stating the
amount due; and
4. The sale must be made with the intervention of a notary
public
Right of pledgee to appropriate the thing pledged
-can be availed if after the first and second auctions, the thing is not
sold
-if creditor appropriates the thing, it shall be considered as full
payment for his entire claim, and is thus obliged to give an
acquittance for the same (2115)
Article 2113. At the public auction, the pledgor or owner may bid. He
shall, moreover, have a better right if he should offer the same terms
as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the
only bidder. (n)
Article 2114. All bids at the public auction shall offer to pay the
purchase price at once. If any other bid is accepted, the pledgee is
deemed to have been received the purchase price, as far as the
pledgor or owner is concerned. (n)
Right of pledgor and pledgee to bid at public sale
If the debt is not paid and a public sale takes place, both the pledgor
and pledgee may bid.
The pledgor shall be preferred if he offers the same terms as the
highest bidder, for after all, the thing belongs to him.
To avoid fraud, the pledgee is not allowed to acquire the thing
pledged if he is the only bidder.
ALL BIDS, including that of the pledgor, must be for CASH.
If the pledge accepts a bid other than for cash, the pledgor or owner
has the right to consider that the pledge has received that purchase
price in cash.
Article 2115. The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and expenses
in a proper case. If the price of the sale is more than said amount, the
debtor shall not be entitled to the excess, unless it is otherwise
agreed. If the price of the sale is less, neither shall the creditor be
entitled to recover the deficiency, notwithstanding any stipulation to
the contrary. (n)
Effect of sale of thing pledged
-extinguishes the principal obligation whether the price of the sale is
more or less than the amount due
1. if the price of the sale is more than the amount due, the debtor is
not entitled to the excess, unless the contrary is provided.
2. in the same way, if the price of the sale is less, neither is the
creditor entitled to recover the deficiency. A contrary stipulation is
VOID.
a. REASON: to compel the creditor to hold an honest public
sale
b. furthermore, the creditor should see to it, which he usually
does, that he loans only as much as he is likely to realize at a public
sale.
Right of debtor to excess
GENERAL RULE: the debtor is not entitled to the excess unless there is
an agreement to the contrary
-rather unfair since the obligation is fully satisfied
-in effect, the rule would amount to a pacto comisorio which is
prohibited
Under the Chattel Mortgage Law, the mortgagor is entitled to recover
the excess of the proceeds of the sale in foreclosure proceedings.
Right of creditor to recover deficiency
-creditor not entitled to recover deficiency in all cases
-by electing to sell the thing pledged, instead of suing on the principal
obligation, the creditor waives any other remedy, and must abide by
the results of the sale.
-creditor may sue on the principal obligation instead of electing to sell
the thing pledged, and in such case, he may recover the deficiency
from the debtor.
Article 2116. After the public auction, the pledgee shall promptly
advise the pledgor or owner of the result thereof. (n)
Obligation of pledge to advise pledgor or owner of result of sale
PURPOSE OF 2116: to enable the pledgor or owner to take steps for
the protection of his rights where he has reasonable grounds to
believe that the sale was not an honest one.
Article 2117. Any third person who has any right in or to the thing
pledged may satisfy the principal obligation as soon as the latter
becomes due and demandable. (n)
Right of third person to satisfy obligation
GENERAL RULE: creditor is not bound to accept payment or
performance by a third person who has NO interest in the fulfillment
of the obligation (1236, unless there is a stipulation to the contrary)
A third person who has any right in or to the thing pledged (as when
the pledgor has contracted to sell it to him) may pay the debt as soon
as it becomes due and demandable and the creditor cannot refuse to
accept the payment.
Article 2118. If a credit which has been pledged becomes due before
it is redeemed, the pledgee may collect and receive the amount due.
He shall apply the same to the payment of his claim, and deliver the
surplus, should there be any, to the pledgor. (n)
Right of pledge to collect and receive amount due on credit pledged.
It would seem that under this article, it is not obligatory for the
pledgee to collect and receive the amount due on the credit pledged
but he is merely given the right to do so.
However, in view of article 2009 which imposes upon him the
obligation to take care of the thing pledged with the diligence of a
good father of a family, he has duty to collect if delay would
endanger the recovery of the credit.
Article 2119. If two or more things are pledged, the pledgee may
choose which he will cause to be sold, unless there is a stipulation to
the contrary. He may demand the sale of only as many of the things
as are necessary for the payment of the debt. (n)
Right of pledgee to choose which one of several things pledged shall
be sold
-limited only by stipulation
-after sufficient property has been sold to satisfy the obligation plus
interests and expenses (2115), NO MORE shall be sold
USUALLY, the value of the property pledged EXCEEDS the amount of
the debt guaranteed.
ARTICLE 2120. If a third party secures an obligation by pledging his
own movable property under the provisions of article 2085 he shall
have the same rights as a guarantor under articles 2066 to 2070, and
articles 2077 to 2081. He is not prejudiced by any waiver of defense
by the principal obligor. (n)
Right of third person who pledged his own property
A third person who is not a party to the principal obligation may
secure the latter by pledgin his own property (2085 par 2) The law
grants him the same rights as a guarantor (2066-2070, 2077-2081)
and he cannot be prejudiced by any waiver of defense by the
principal debtor.
Article 2121. Pledges created by operation of law, such as those
referred to in articles 546, 1731, and 1994, are governed by the
foregoing articles on the possession, care and sale of the thing as well
as on the termination of the pledge. However, after payment of the
debt and expenses, the remainder of the price of the sale shall be
delivered to the obligor. (n)
Article 2122. A thing under a pledge by operation of law may be sold
only after demand of the amount for which the thing is retained. The
public auction shall take place within one month after such demand.
If, without just grounds, the creditor does not cause the public sale to
be held within such period, the debtor may require the return of the
thing. (n)
Instances of legal pledges (pledges which are created by operation of
law)
1. Article 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.
2. Article 1731 he who has executed work upon a movable has
a right to retain it by way of pledge until he is paid.
3. Article 1914 the agent may retain in pledge the things which
are the object of the agency until the principal effects the
reimbursement and pays the indemnity set forth in the two
preceding articles
4. Article 1707 the laborers wages shall be a lien on the goods
manufactured or the work done
Article 1994 refers to a depositary
Article 2004 also an instance of a legal pledge and refers to a hotel-
keeper
Rules in case of pledge by operation of law
1. The provisions on the possession (2098), care (2099) and sale
of the thing pledged (2112) as well as on the extinguishment
of the pledge (2110, 2111) governing conditional pledges are
applicable to pledges created by operation of law. Unlike,
however, in conventional pledge, the debtor is not entitled to
the excess unless it is otherwise agreed (2115)
In legal pledge, the remainder of the price of the sale after
payment of the debt and expenses, shall be delivered to the
debtor (2121)
 2. In legal pledge, there is no definite period for the payment of
the principal obligation. The pledge must, therefore, make a
demand for the payment of the amount due him. Without
such demand, he cannot exercise his right of sale at public
auction (2112) The pledge must proceeds with the sale within
one month otherwise the debtor may require him to return
the thing returned (2122)
Article 2123. With regard to pawnshops and other establishments,
which are engaged in making loans secured by pledges, the special
laws and regulations concerning them shall be observed, and
subsidiarily, the provisions of this Title. (1873a)
Rules as to pawnships and other establishments
*TITLE- title XVI on pledge, mortgage, and antichresis (articles 2085 to
2141)
Actual Transfer of Possession Essential in Pledge
A pledge is a real contract which requires delivery for its
perfection. An agreement to constitute a pledge only gives rise to a
personal action between the contracting parties.
The delivery of possession essential to the validity of a pledge
means actual possession of the property pledged, and a mere
symbolic delivery is not sufficient.
Subject Matter of Pledge
A pledge is confined and limited to personal property. It
cannot be extended or made to apply to real property. Incorporeal
rights evidenced by documents whether negotiable or not may also
be pledged. If negotiable, the document must be indorsed in favour
of the creditor.
Public Instrument Necessary to Bind Third Persons
The contract of pledge is not effective against third persons
unless in addition to the delivery of the thing pledged, it is embodied
in a public instrument wherein shall appear (1) the description of the
thing pledged, and (2) the date of the pledge.
Alienation of Thing Pledged
The pledgor retains his ownership of the thing pledged. He may
sell the same provided the pledgee consents to the sale.
Right of Pledgee to Retain Thing Pledged
The possession of the pledgee constitutes his security. Hence,
the debtor cannot demand for its return until the debt secured by it is
paid.
Obligation of Pledgee to Take Due Care of thing Pledged
Upon fulfilment of the principal obligation, the pledge must
return the thing pledged. Having possession of the property, he has
the obligation to take care of the same with the diligence of a good
father of a family.
Obligation of Pledgee Not to Deposit Thing Pledge With Another
The pledge is not authorized to transfer possession of the thing
pledged to a third person, except when there is a stipulation
authorizing him to do so.
Responsibility of Pledgor for Flaws of the Thing Pledged
Art. 1951
The bailor, who, knowing the flaws of the thing loaned, does
not advise the bailee of the same, shall be liable to the latter for the
damages which he may suffer by reason thereof.
Requisites:
1) There is a flaw or defect in the thing loaned/pledged;
2) The flaw or defect is hidden;
3) The bailor/pledgor is aware thereof;
4) He does not advise the bailee/pledge of the same; and
5) The bailee/pledgee suffers damages by reason of said flaw or defect.
 Right of Pledgee to Compensate Earnings of Pledge With Debt
The pledgee has no right to use the thing pledged or to
appropriate the fruits thereof without the authority of the owner. But
the pledge can apply the fruits, income, dividends, or interest earned
or produced by the thing pledged to the payment of interest, if
owing, and thereafter to the principal of his credit.
Right of Pledgee Against Third Persons
The creditor to whom the property pledged has been delivered
is obliged to take care of it with the diligence of a good father of a
family. Hence, he is authorized to bring such actions as pertains to the
owner in order to recover it or defend it against claims of third
persons.
Obligation of Pledgee Not to Use Thing Pledged
The pledge who is in possession of the thing pledged has no
right to make use of it without permission from the owner. This is the
same rule in deposit.
Right of Debtor to Demand Return of Thing Pledged
The thing pledged stands as security for the fulfilment of the
debtors obligation. Hence, he cannot ask for its return until said
obligation is fully paid including interest thereon and expenses
incurred for its preservation.
Right of Pledgor to Ask for Deposit of Thing Pledged
The pledge has the duty to preserve the thing pledged with the
diligence of a good father of a family. If the thing should be exposed
to loss or impairment through the negligence or wilful act of the
pledgee, the pledgor may demand that it be deposited with a third
person.
Right of Pledgor to Substitute Thing Pledged
Requisites:
1) The pledgor has reasonable grounds to fear the destruction or
impairment of the thing pledged;
2) There is no fault on the part of the pledgee;
3) The pledgor is offering in place of the thing another thing in pledge
which is of the same kind and quality as the former; and
4) The pledgee does not choose to exercise his right to cause the thing
pledged to be sold at public auction.
Right of Pledgee to Cause Sale of Thing Pledged
The pledgees right to have the thing pledged sold at public
sale granted under Art. 2108 is superior to that given to the pledgor
to substitute the thing pledged under Art. 2107.
Right of Pledgee to Demand Substitute or Immediate Payment
The two (2) alternative remedies granted to the pledgee in
case he is deceived as to the substance or quality of the thing
pledged:
1) To claim another thing in pledge; and
2) To demand immediate payment of the principal obligation.
Extinguishment of Pledge by Return of Thing Pledged
Notwithstanding contrary stipulation, the pledge is
extinguished if the object is returned by the pledgee.
Presumption Where Thing Pledged in Possession of Pledgor or
Owner
The possession of the thing pledged by the debtor or owner
subsequent to the perfection of the pledge gives rise to a prima facie
presumption that the thing has been returned and, therefore, the
pledge has been extinguished. The presumption may be rebutted by
evidence to the contrary. When the thing pledged is later found in the
hands of the pledgor or the owner, only the accessory obligation of
pledge is presumed remitted, not the principal obligation.
Extinguishment of Pledge by Renunciation or Abandonment
Renunciation or abandonment must be in writing to extinguish
the pledge, and such renunciation is not conditioned upon the
acceptance by the pledgor or owner nor upon the return of the thing
 pledged. The waiver transforms rhe pledge into a depositary with the
rights and obligations of one. The principal debt, however, is not
affected by the waiver of the pledge. But the waiver of the principal
obligation carries with it that of the pledge.
Right of Pledgee to Cause Sale of Thing Pledged
One of the essential requisites of pledge is that the object
pledged may be alienated for the payment to the creditor when the
principal obligation becomes due. The formalities required for such
sale are:
1) The debt is due and unpaid;
2) The sale must be at a public auction;
3) There must be notice to the pledgor and owner, stating the amount
due; and
4) The sale must be made with the intervention of a notary public.
Right of Pledgee to Appropriate Thing Pledged
The pledgee may appropriate the thing pledged if after the first
and second auctions, the thing is not sold. If the creditor appropriates
the thing, it shall be considered as full payment for his entire claim.
Right of Pledgor and Pledgee to Bid at Public Sale
Both the pledgor and the pledgee may bid. The pledgor shall
be preferred if he offers the same terms as the highest bidder, for
after all, the thing belongs to him. To avoid fraud, the pledgee is not
allowed to acquire the thing pledged if he is the only bidder.
Effect of Sale of Thing Pledged
The sale of the thing pledged extinguishes the principal
obligation whether the price of the sale is more or less than the
amount due. If the price of the sale is more than the amount due, the
debtor is NOT entitled to the excess unless the contrary is provided. If
the price of the sale is less, neither is the creditor entitled to recover
the deficiency. A contrary stipulation is void.
The reason is to compel the creditor to hold an honest public
sale. Furthermore, the creditor should see to it, which he usually
does, that he loans only as much as he is likely to realize at a public
sale.
Obligation of Pledgee to Advise Pledgor or Owner of Result of Sale
This is to enable the pledgor or owner to take steps for the
protection of his rights where he has reasonable grounds to believe
that the sale was not an honest one.
Right of Third Person to Satisfy Obligation
As a general rule, the creditor is not obliged to accept payment
or performance by a third person who has no interest in the
fulfilment of the obligation. However, a third person who has any
right in or to the thing pledged (as when the pledgor has contracted
to sell it to him) may pay the debt as soon as it becomes due and
demandable and the creditor cannot refuse to accept the payment.
Right of Pledgee to Collect and Receive Amount Due on Credit
Pledged
It is not obligatory for the pledge to collect and receive the
amount due on credit pledged but he is given merely the right to do
so.
Right of Pledgee to Choose Which One of Several Things Pledged
Shall Be Sold
The right of choice given to the pledge as to which of the things
pledged he shall cause to be sold is limited only by stipulation. After
sufficient property has been sold to satisfy the obligation plus interest
and expenses, no more shall be sold.
Right of Third Person Who Pledged His Own Property
A third person who is not a party to the principal obligation
may secure the latter by pledging his own property. The law grants
him the same rights as a guarantor and he cannot be prejudiced by
any waiver of defense by the principal debtor.
Instances of Legal Pledges
A legal pledges is created by operation of law. Examples below:
Article 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.
Article 1731. He who has executed work upon a movable has a
right to retain it by way of pledge until he is paid.
Article 1914. The agent may retain in pledge the things which
are the object of the agency until the principal effects the
reimbursement and pays the indemnity set forth in the two preceding
articles.
Article 1707. The laborers wages shall be a lien on the goods
manufactured or the work done.
Others:
Article 1994 legal pledge involving depository
Article 2004 legal pledge involving hotel-keeper
Rules in Case of Pledges by Operation of Law
The provisions on the possession (Art. 2098), care (Art. 2099),
and sale of the thing pledged (Art/ 2112) as well as the
extinguishment of pledge (Art. 2110) governing conventional pledges
are applicable to pledges created by operation of law. Unlike,
however, in conventional pledge, the debtor is not entitled to the
excess unless sit is otherwise agreed. In legal pledge, the remainder
of the price of the sale after payment of the debt and expenses shall
be delivered to the debtor.
In legal pledge there is no definite period for the payment of
the principal obligation. The pledge, therefore, must make a demand
for the payment of the amount due him. Without such demand, he
cannot exercise the right of sale at public auction. The pledgee must
proceed with the sale within one (1) month after demand otherwise
the debtor may require him to return the thing retained.
REVIEW QUESTIONS
BQ (1915, 1916, 1917, 1948, 1951)
Define pledge. What are the essential requisites of a contract
of pledge?
Answer:
Pledge is an accessory, real and unilateral contract by virtue of
which the debtor or a third person delivers to the creditor or to a
third person movable property as security for the performance of the
principal obligation, upon the fulfilment of which the thing pledged,
with all its accessions and accessories, shall be returned to the debtor
or to the third person.
The essential requisites of a contract of pledge are as follows:
1) It must be constituted to secure the performance of a principal
obligation;
2) The pledgor must be the absolute owner of the thing pledged;
3) The pledgor should have the free disposal of the thing pledged, and
in the absence thereof, he should be legally authorized for the
purpose;
4) When the principal obligation becomes due, the thing pledged may
be alienated for the payment of such obligation;
5) The thing pledged must be placed in the possession of the creditor or
of a third person by common agreement (Art. 2085, 2087, 2093, NCC)
**********

Q. What is pactum commissorium? Is there an exception to this
rule?
Answer:
Pactum commissorium is an agreement in a contract of pledge,
mortgage, or antichresis by virtue of which if the debtor cannot fulfil
his obligation, the creditor can appropriate or dispose of the thing
given by way of pledge, mortgage, or antichresis. Such an agreement
is prohibited by law. (Art.2088, NCC)
The only exception is in the case of contract of pledge, but
even then, certain conditions should be complied with. In pledge, if
the debtor is unable to pay his obligation, the creditor has a right to
have the thing pledged sold at public auction for the payment of his
credit. If the thing is not sold, a second public auction should be
held. If still it is not sold, then he may appropriate the thing (Art.
2112, NCC).
**********
Q. D borrowed P500 from C. As security for the payment of the
debt, the former pledged to the latter a diamond ring valued at
P2,000. It was expressly stipulated in the contract that if D cannot pay
his debt when it matures, the debt of P500 shall be considered as full
payment of the diamond ring without further action. D was unable
to pay when the debt matured. Can C now appropriate the ring?
Reasons.
Answer:
C cannot appropriate the ring. The agreement stated in the
contract constitutes pactum commissorium which is prohibited under
Art. 2088 of the Civil Code, which states xxx 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. The
prohibition has been interpreted by the Supreme Court to refer only
to those cases where upon failure of redemption, the ownership of
the thing which is pledged or mortgaged automatically passes to the
creditor. The above case falls squarely within the purview of this
interpretation. (Reyes vs. Nebrija, 52 Off. Gaz. 1928)
Q. Suppose in the above problem, the agreement is to the effect
that in case of non-payment when the debt matures, the same shall
be paid with the ring given as security, or the debtor shall execute
a deed of absolute sale of the ring in favour of the creditor, would
your answer be the same?
Answer:
No. In both cases, there is no automatic transmission of the
right of ownership over the ring which is given by way of pledge, but
merely a promise to constitute an assignment of property. What is
prohibited by law is the stipulation that would have the effect of
giving to the creditor automatic ownership over the property.
**********
Q. May the thing pledged be alienated by the pledgor or owner?
If so, when does the vendee acquire ownership of the thing pledges?
Answer:
With the consent of the pledgee the thing pledged may be
alienated by the pledgor or owner, subject to the pledge. The
ownership of the thing pledged is transmitted to the vendee of
transferee as soon as the pldegee consents to the alienation, but the
latter shall continue in possession. (Art. 2097, NCC)
**********
 Republic of the Philippines
SUPREME COURT
Manila EN BANC
G.R. No. L-10881 September 30, 1958
EULOGIO DEL ROSARIO, AURELIO DEL ROSARIO, BENITO DEL
ROSARIO, BERNARDO DEL ROSARIO, ISIDRA DEL ROSARIO,
DOMINGA DEL ROSARIO and CONCEPCION BORROMEO, plaintiff-
appellees,
vs.
PRIMITIVO ABAD and TEODORICO ABAD, defendants-appellants.
Baustita and Bautista for appellees.
Agustin C. Bagasao for appellants.
PADILLA, J.:
Appeal from a judgment rendered by the Court of First Instance of
Nueva Ecija in civil case No. 1084.
The facts are undisputed, the parties having entered into an agreed
statement thereof, the pertinent and materials part of which are: The
plaintiffs are the children and heirs of the late Tiburcio del Rosario.
On 12 December 1936, the Secretary of Agriculture and Commerce,
by authority of the President of the Commonwealth of the
Philippines, issued under the provisions of the Public Land Act (Act
No. 2874) homestead patent No. 40596 to Tiburcio del Rosario. The
homestead with an area of 9 hectares, 43 ares and 14 centares is
situated in barrio San Mauricio, municipality of San Jose, province of
Nueva Ecija. On 11 February 1937, the Registrar of Deeds in and for
the province of Nueva Ecija issued original certificate of title No. 4820
in the name of the homesteader (Annex A, stipulation of facts, pp. 25-
30, Rec. on App.). On 24 February 1937, Tiburcio del Rosario obtained
a loan from Primitivo Abad in the sum of P2,000 with interest at the
rate of 12% per annum, payable on 31 December 1941. As security
for the payment thereof he mortgaged the improvements of the
parcel of land in favor of the creditor (Annex B, complaint, pp. 10-13,
Rec. on App.). On the same day, 24 February, the mortgagor executed
an "irrevocable special power of attorney coupled with interest" in
favor of the mortgagee, authorizing him, among others, to sell and
convey the parcel of land (Annex A, complaint, pp. 7-9, Rec. on App.).
Thereafter the mortgagor and his family moved to Santiago, Isabela,
and there established a new residence. Sometime in December 1945
the mortgagor died leaving the mortgage debt unpaid. On 9 June
1947, Primitivo Abad, acting as attorney-in-fact of Tiburcio del
Rosario, sold the parcel of land to his son Teodorico Abad for and in
consideration of the token sum of P1.00 and the payment by the
vendee of the mortgage debt of Tiburcio del Rosario to Primitivo
Abad (Annex C, complaint, pp. 13-16, Rec. on App.). The vendee took
possession of the parcel of land. Upon the filing and registration of
the last deed of sale, the Registrar of Deeds in and for the province of
Nueva Ecija cancelled original certificate of title No. 4820 in the name
of Tiburcio del Rosario and in lieu thereof issued transfer certificate of
title No. 1882 in favor of the vendee Teodorico Abad.
On 29 December 1952 the plaintiffs brought suit against the
defendants to recover possession and ownership of the parcel of
land, damages, attorney's fees and costs. The defendants answered
the complaint and prayed for the dismissal thereof, damages,
attorney's fees and costs.
On 25 October 1954, after the parties had submitted the case upon a
stipulation of facts, the Court rendered judgment, the dispositive part
of which is:
WHEREFORE, the deed of sale executed by Primitivo Abad in
favor of Teodorica Abad, Annex C, is hereby declared null and
void; and Teodorico Abad is hereby ordered to execute a deed
of reconveyance of the land originally with OCT No. 4820, now
covered by Transfer Certificate of Title No. 1880, in favor of
the plaintiffs. No pronouncement as to costs.
The defendants appealed to the Court of Appeals, which certified the
case to this Court as no question of fact is involved.
Section 116 of the Public Land Act (Act No. 2874), under which the
homestead was granted to the appellees' father, provides:
Lands acquired under the free patent or homestead provisions
shall not be subject to encumbrance or alienation from the
date of the approval of the application and for a term of five
years from and after the date of the issuance of the patent or
grant, nor shall they become liable to the satisfaction of any
debt contracted prior to the expiration of said period; but the
improvements or crops on the land may be mortgaged or
pledged to qualified persons, associations, or corporations.
The encumbrance or alienation of lands acquired by free patent or
homestead in violation of this section is null and void.1
There is no question that the mortgage on the improvements of the
parcel of land executed by Tiburcio del Rosario in favor of Primitivo
Abad (Annex B, complaint, pp. 10-13, Rec. on App.) is valid.
The power of attorney executed by Tiburcio del Rosario in favor of
Primitivo Abad (Annex A, complaint, pp. 7-9, Rec. on App.) providing,
among others, that is coupled with an interest in the subject matter
thereof in favor of the said attorney and are therefore irrevocable,
and . . . conferring upon my said attorney full and ample power and
authority to do and perform all things reasonably necessary and
proper for the due carrying out of the said powers according to the
true tenor and purport of the same, . . ." does not create an agency
coupled with an interest nor does it clothe the agency with an
irrevocable character. A mere statement in the power of attorney
that it is coupled with an interest is not enough. In what does such
interest consist must be stated in the power of attorney. The fact that
Tiburcio del Rosario, the principal, had mortgaged the improvements
of the parcel of land to Primitivo Abad, the agent, (Annex B,
complaint, pp. 10-13, Rec. on App.) is not such an interest as could
render irrevocable the power of attorney executed by the principal in
favor of the agent. In fact no mention of it is made in the power of
attorney. The mortgage on the improvements of the parcel of land
has nothing to do with the power of attorney and may be foreclosed
by the mortgagee upon failure of the mortgagor to comply with his
obligation. As the agency was not coupled with an interest, it was
terminated upon the death of Tiburcio del Rosario, the principal,
sometime in December 1945, and Primitivo Abad, the agent, could no
longer validly convey the parcel of land to Teodorico Abad on 9 June
1947. The sale, therefore, to the later was null and void. But granting
that the irrevocable power of attorney was lawful and valid it would
subject the parcel of land to an encumbrance. As the homestead
patent was issued on 12 December 1936 and the power of attorney
was executed on 24 February 1937, it was in violation of the law that
prohibits the alienation or encumbrance of land acquired by
homestead from the date of the approval of the application and for a
term of five years from and after the issuance of the patent or grant.
Appellants contend that the power of attorney was to be availed of
by the agent after the lapse of the prohibition period of five years,
and that in fact Primitivo Abad sold the parcel of land on 9 June 1947,
after the lapse of such period. Nothing to that effect is found in the
power of attorney.
Appellants claim that the trial court should have directed the
appellees to reimburse Teodorico Abad for what he had paid to
Primitivo Abad to discharge the mortgage in the latter's favor as part
of the consideration of the sale. As the sale to Teodorico Abad is null
and void, the appellees can not be compelled to reimburse Teodorico
Abad for what he had paid to Primitivo Abad. The former's right of
action is against the latter, without prejudice to the right of Primitive
Abad to foreclose the mortgage on the improvements of the parcel of
land if the mortgage debt is not paid by the appellees, as heirs and
successors-in-interest of the mortgagor.
The judgment appealed from is affirmed, with costs against the
appellants.
Paras, C. J., Bengzon, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., and Endencia, JJ.,concur.
Republic of the Philippines
SUPREME COURT
Manila EN BANC
DECISION
February 2, 1916
G.R. No. L-9184
MACONDRAY & CO., INC., plaintiff-appellee,
vs.
GEORGE S. SELLNER, defendant-appellant.
D.R. Williams for appellant.
Haussermann, Cohn and Fisher for appellee.
Carson, J.:
This action was brought to recover the sum of P17, 175 by way of
damages alleged to have been suffered by the plaintiff as a result of
the sale of a parcel of land which it is alleged was made by the
defendant for and on behalf of the plaintiff after authority to make
the sale had been revoked. Judgment was rendered in favor of the
plaintiff for the sum of P3,435, together with interest at 6 per cent
per annum from the date of the institution of this action. From this
judgment defendant appealed, and brought the case have on his duly
certified bill of exceptions.
Early in 1912 the defendant, a real estate broker, sold the parcel of
land described in the complaint to the plaintiff company for P17,175.
The formal deed of sale was not executed and accepted until July 29,
1912, the agreement to purchase being conditioned on the delivery
of a Torrens title, which was not secured until early in that month. In
the meantime the land was flooded by high tides, and the plaintiff
company became highly dissatisfied with its purchase. When the final
transfer was made the plaintiff company informed defendant that the
land was wholly unsuited for use as a coal-yard, for which it had been
purchased, and requested him to find another purchaser. At that time
it was expressly understood and agreed that the plaintiff company
was willing to dispose of the land for P17,175, and that defendant
was to have as his commission for securing a purchaser anything over
that amount which he could get.
A short time thereafter, defendant reported to plaintiff that he had a
purchaser for the land in the person of Antonio M. Barretto, who was
willing to pay P2.75 per square meter, or a total of P18,892.50.
Plaintiff thereupon executed a formal deed of conveyance which,
together with the certificate of title (Torrens), was delivered to
defendant, with the understanding that he was to conclude the sale,
deliver the title-deed and certificate to Barretto, and received from
him the purchase price. The deed was dated August 21, 1912.
Thereafter defendant advised Barretto that plaintiff had executed the
title-deed and that he was ready to close the deal. Barretto agreed to
accept the land if, upon examination, the title and the deed should
prove satisfactory; and defendant left the deed of conveyance with
him, with the understanding that if the title and the deed of
conveyance were as represented, Barretto would give him his check
for the amount of the purchase price. Defendant retained possession
of the Torrens certificate of title. A few days afterwards Barretto was
compelled to go to Tayabas on business and was detained by a
typhoon which delayed his return until the 31st of August.
During Barrettos absence the plaintiff company advised defendant
that he must consummate the sale and collect the purchase money
without delay upon Barrettos return to Manila. On the arrival of
Barretto on Saturday, August 31st, defendant called upon him and
informed him that the plaintiff company desired to close up the
transaction at once, and Barretto, who was somewhat indisposed
from his trip, promised to examine the papers as soon as he could get
to them, and assured the defendant that he would send his check for
the purchased price in a day or two if he found the documents in
proper shape. These assurance were reported to Young, the plaintiff
companys general manager and representative throughout the
transaction, on Monday morning, September 2d. Young then formally
notified defendant that unless the purchase price was paid before
five oclock of that same afternoon the deal would be off. Defendants
again called upon Barretto, who informed him that if he would turn
over the Torrens certificate of title he would let him have a check for
the purchase price. Defendant sent the certificate as requested, but
did not receive the check until thirty-six hours afterwards, on
Wednesday morning. On receipt of Barrettos check he immediately
tendered plaintiff company a check for the agreed selling price,
P17,175. Plaintiffs manager refused to accept the check and soon
thereafter filed this action, claiming that the sale had been
cancelled upon the failure of defendant to turn over the purchase
price on the afternoon of Monday, September 2nd.
The following is a copy of plaintiff companys letter to defendant
advising him that the sale would be cancelled unless the purchase
price was paid at five oclock of the day on which it was written.
SEPT. 2, 1912.
Mr. GEO. C. SELLNER, Manila.
DEAR SIR: In accordance with our conversation today, this is to notify
you that we consider the sale of our lot in Nagtajan to Antonio M.
Barretto as cancelled in view of the nonpayment of the purchase
price before five oclock this afternoon.
Please confirm.
Yours very truly,
MACONDRAY & CO., INC.,
(Sgd.) CARLOS YOUNG,
General Manager.
As to the facts just narrated there is practically no dispute, the only
matters of facts as to which there is any real contention in the record
being limited to question as to the value of the land, and as to the
original instructions to defendant in regard to the delivery of the title
deeds.
Plaintiffs manager testified that as he had no confidence in Barretto,
he expressly instructed defendant not to deliver the title deeds until
Barretto turned over the purchase price. Defendant swore that he
had received no such instruction. Upon this conflict of testimony we
do not deem it necessary to make an express finding, because, as we
view the transaction, it could in no event affect our disposition of this
appeal.
We are of opinion that the disputed evidence clearly discloses that on
August 21st the plaintiff company, through the defendant real estate
broker, agreed to sell the land to Barretto for P18,892.50, and that
Barretto agreed to buy the land at that price on the usual condition
precedent that before turning over the purchase price the title deeds
and deed of transfer from the company should be found to be in due
and legal form. That for the purpose of consummating the sale the
plaintiff company turned over to the defendant a deed of transfer to
Barretto, together with a Torrens title certificate to the land,
executed as of the day when the agreement to sell was entered into.
That the defendant, with full authority from plaintiff company, agreed
to deliver the deed and certificate to Barretto on payment of the
purchase price. That from the very nature of the transaction it was
understood that the purchaser should have a reasonable time in
which to examine the deed of transfer and the other documents of
title, and that defendant exercising an authority impliedly if not
expressly conferred upon him, gave the purchaser a reasonable time
in which to satisfy himself as to the legality and correctness of the
documents of title. That the company through its manager Young,
acquiesced in and ratified what had been done by defendant in this
regard when, with full knowledge of all the facts, Young advised the
defendant, during Barrettos absence in Tayabas, that the deal must
be closed up without delay on Barrettos return to Manila.
No reason appears, nor had any reason been assigned for the
demand by the plaintiff company for the delivery of the purchase
price at the hour specified under threat in the event of failure to
make payment at that hour it would decline to carry out the
agreement, other than that the manager of the plaintiff company had
been annoyed by the delays which occurred during the earlier stage
of the negotiations, and had changed his mind as to the desirability of
making the sale at the price agreed upon, either because he believed
that he could get a better price elsewhere, or that the land was worth
more to his company than the price he had agreed to take for it. It is
very evident that plaintiff companys manager hoped that by setting a
limit of a few hours upon the time within which he would receive the
money, his company would be relieved of the obligation to carry out
its contract.
Upon the question of the value of the land we think that the evidence
clearly discloses that at the date of the sale its actual and its true
market value was not more than the amount paid for it by Barretto,
that is to say, P18,892.50. The evidence discloses that it had been in
the hands of an expert real estate agent for many months prior to the
sale, with every inducement to him to secure the highest cash price
which could be gotten for it. That he actually sold it to the plaintiff
company, a few months prior to the sale to Barretto, for P17,175.
That the plaintiff company was highly dissatisfied with its purchase,
and readily agreed to resell at that price. That the defendant, in his
company was highly dissatisfied with its purchase, and readily agreed
to resell at that price. That the defendant, in his capacity as a real
estate agent, with a personal and direct interest in securing the
highest possible price for the land, sold it to Barretto for P18,892.50.
The only evidence in the record tending to prove that the land had a
higher market value than the price actually paid for it under such
circumstances is the testimony of a rival real estate broker, who had
never been on the land, but claimed that he was familiar with its
general location from maps and description, and asserted that in his
opinion it was worth considerably more than the price actually paid
for it, and that he thought he could have sold the land for P3 a meter,
or approximately P20,610. Of course an expert opinion of this kind,
however sincere and honest the witness may have been in forming it,
is wholly insufficient to maintain a finding that the land was worth
any more than it actually brought when sold under the conditions
above set forth.
It may be that the land has a speculative value much higher than the
actual market value at the time of the sale, so that if held for an
opportune turn in the market, or until a buyer of some special need
for it happened to present himself, a price approximating that
indicated by this witness might be secured for it. But the question of
fact ruled upon is the actual market value of the land at the time of its
sale to Barretto, and not any speculative value which might be
assigned to it in anticipation of unknown, indefinite and uncertain
contingencies.
Among other definitions of market value to be found in Words and
Phrases, vol. 5, p. 4383, and supported by citation of authority, are
the following:
The market value of property is the price which the property will
bring in a fair market after fair and reasonable efforts have been
made to find a purchaser who will give the highest price for it.
xxx xxx xxx
The market value of land is the price that would in all probability
result form fair negotiations where the seller is willing to sell and the
buyer desires to buy.
Upon the foregoing statement of the facts disclosed by the record, we
are of opinion that the judgment entered in the court below should
be reversed and the complaint dismissed without costs in this
instance.
1. Even were we to admit, which we do not, that the plaintiff
company had the right to terminate the negotiations at the time
indicated by its manager, and to direct its real estate not make the
sale of Barretto after the hour indicated, nevertheless we would be
compelled to hold, upon the evidence before us, that the plaintiff
company has no cause of action for monetary damages against the
defendant real estate agent.
The measure of the damages which the plaintiff would be entitled to
recover from the real estate agent for the unauthorized sale of its
property would be the actual market value of the property, title to
which had been lost as a result of the sale. We are not now
considering any question as to the right of the owner, under such
circumstances, to recover the property from the purchaser, or
damages for its detention or like; but merely his right to recover
monetary damages from his agent should he elect, as the plaintiff
company did in this case, to ratify the sale and recoup from the agent
any loss resulting from his alleged unauthorized consummation of the
sale.
The market value of the land in question was P18,892.50. Of this the
plaintiff company has received P17,175, leaving a balance of
P1,717.50 unpaid. But, whatever may be the view which should taken
as to the right of the plaintiff company to terminate the negotiations
for the sale of the property to Barretto at the time fixed by it in its
letter to the defendant real estate agent, there can be no question as
to the liability of the plaintiff company to the real estate agent, in the
event that it did so terminate the negotiations, for the amount of the
commission which it agreed to pay him should he find a purchaser for
the land at the price agreed upon in his agency contract. The
commission agreed upon was all over P17,175 which the defendant
could secure from the property, and it is clear that allowing the
defendant this commission, and offsetting it against the unpaid
balance of the market value of the land, the plaintiff company is not
entitled to a money judgment against defendant.
We do not mean to question the general doctrine as to the power of
a principal to revoke the authority of his agent at will, in the absence
of a contract fixing the duration of the agency (subject, however, to
some well defined exceptions). Our ruling is that at the time fixed by
the manager of the plaintiff company for the termination of the
negotiations, the defendant real estate agent had already earned the
commissions agreed upon, and could not be deprived thereof by the
arbitrary action of the plaintiff company in declining to execute the
contract of sale for some reason personal to itself.
The question as to what constitutes a sale so as to entitle a real estate
broker to his commissions is extensively annotated in the case of
Lunney vs. Healey (Nebraska) 56313 reported in 44 Law Rep. Ann.,
593 [Note], and the long line of authorities there cited support the
following rule:
The business of a real estate broker or agent, generally, is only to find
a purchaser, and the settled rule as stated by the courts is that, in the
absence of an express contract between the broker and his principal,
the implication generally is that the broker becomes entitled to the
usual commissions whenever he brings to his principal a party who is
able and willing to take the property and enter into a valid contract
upon the terms then named by the principal, although the particulars
may be arranged and the matter negotiated and completed between
the principal and the purchaser directly.
In the case of Watson vs. Brooks (17 Fed. Rep., 540; 8 Sawy., 316), it
was held that a sale of real property entitling a broker to his
commissions, was an agreement by the vendor for a certain valuable
consideration then or thereafter to be paid, and was complete
without conveyance, although the legal title remained in the vendor.
The rights of a real estate broker to be protected against the arbitrary
revocation of his agency, without remuneration for services rendered
in finding a suitable purchaser prior to the revocation, are clearly and
forcefully stated in the following citation form the opinion in the case
of Blumenthal vs. Goodall (89 Cal., 251).
The act of the agent in finding a purchaser required time and labor for
its completion, and within three days of the execution of the contract,
and prior to its revocation, he had placed the matter in the position
that success was practically certain and immediate, and it would be
the height of injustice to permit the principal then to withdraw the
authority and terminate the agency as against an express provision of
the contract, and perchance reap the benefit of the agents labors,
without being liable to him for his commissions. This would be to
make the contract an unconscionable one, and would offer a
premium for fraud by enabling one of the parties to take advantage
of his own wrong and secure the labor of the other without
remuneration.
2. We are of opinion that under all the circumstances surrounding the
negotiations as disclosed by the practically undisputed evidence of
record, the plaintiff company could not lawfully terminate the
negotiations at the time it attempted to do so and thereafter decline
to convey the land to Barretto, who had accepted an offer of sale
made to him by the plaintiffs duly authorized agent, subject only to
an examination of the documents of title, and stood ready to pay the
purchase price upon the delivery of the duly executed deed of
conveyance and other necessary documents of title. We are not now
considering the right or the power of the plaintiff company to
terminate or revoke the agency of the defendant at that time. The
revocation of the agents authority at that time could in no wise
relieve the plaintiff company of its obligation to sell the land to
Barretto for the price and on the terms agreed upon before the
agency was revoked.
If we are correct in our conclusions in this regard, it follows, of course
that no matter hat was the actual value of the land, the plaintiff
company suffered no damage by the delivery of the title deeds to
Barretto, and the consummation of the sale by the defendant upon
the terms and at the price agreed upon prior to the revocation of his
agency.
Without considering any of the disputed questions of fact it clearly
appears that before the manager of the plaintiff company wrote the
letter dated September 2, 1912, which is set forth in the foregoing
statement of facts, and before the conversation was had to which
that letter refers, the defendant real estate agent had offered to sell
the land to Barretto for P18,892.50 and that he did so with the
knowledge and consent, and under the authority of the plaintiff
company. It further clearly appears that this offer had been duly
accepted by Barretto, who stood ready and willing to pay over the
agreed purchase price, upon the production and delivery of the
necessary documents of title, should these documents be found,
upon examination, to be executed in due and legal form. The only
question, then, which we need consider, is whether the plaintiff
company could lawfully cancel or rescind this agreement for the
sale and purchase of the land, on the sole ground that the purchase
price was not paid at the hour designated in the letter to the
defendant.
The only reasons assigned for the sudden and arbitrary demand for
the payment of the purchase price which was made with the manifest
hope that it would defeat the agents deal with Barretto, are that the
plaintiff companys manager had become satisfied that the land was
worth more than he had agreed to accept for it; and that he was
piqued and annoyed at the delays which marked the earlier stages of
the negotiations.
Time does not appear to have been of the essence of the contract.
The agreement to sell was made without any express stipulation as to
the time within which the purchase price was to be paid, except that
the purchaser reserved the right to examine the documents of title
before making payment of the purchase price, though it was
understood that the sale was for cash upon the delivery of the
documents of title executed in due form. Under the agreement with
the agent of the plaintiff company, the purchaser had a perfect right
to examine the documents of title; and in the absence of an express
agreement fixing the time to be allowed therefore, he was clearly
entitled to such time as might be reasonably necessary for that
purpose.
The plaintiff company, through its agent, had given Barretto an
opportunity to examine the documents of title, with the express
understanding that if they were satisfactory he would hand the agent
his check for the purchase price, and it is very clear that the plaintiff
company could not arbitrarily, and for its own convenience, deprive
Barretto of this opportunity to make such examination of the
documents as might be reasonably necessary.
Of course we are not to be understood as denying the right of the
vendor to couple his agreement to sell with a stipulation that the
purchase price must be paid at a specific day, hour and minute; nor
that the obligation to pay over the purchase price forthwith may not
be inferred from all the circumstances surrounding the transaction in
a particular case. Time may be, and often is of the very essence of the
contract. But in a contract for the sale of real estate, where no
agreement to the contrary appears, it may fairly be assumed that it
was the intention of the parties to allow a reasonable time for the
examination of the documents of title; and in any case in which time
has been expressly allowed for that purpose, the vendor cannot
arbitrarily demand the payment of the purchase price before the
expiration of the time reasonably necessary therefor.
The doctrine supported by citation of authority is set forth as follows
on page 165, Maupin on Marketable Title to Real Estate:
The contract of sale usually specifies a time in which the purchaser
may examine the title before completing the purchase. If no time be
specified, he will be entitled to a reasonable time for that purpose,
but cannot keep the contract open indefinitely so as to avail himself
of a rise in the value of the property or escape loss in case of
depreciation. He cannot be required to pay the purchase money
before he has examined the abstract, unless he has expressly
stipulated so to do. It has been held that if the contract provide that
the purchaser shall be furnished an abstract of title, and shall have a
specified time in which to examine the title and pay the purchase
money, the purchaser must determine in that time whether he will
take the title, and that he cannot tender the purchase money after
that time, even though no abstract of the title was furnished.
The purchaser is entitled to a reasonable time within which to
determine by investigation the validity of apparent liens disclosed by
the record. After the purchaser has examined the abstract, or
investigated the title in the time allowed for that purpose, it is his
duty to point out or make known his objections to the title, if any, so
as to give the vendor an opportunity to remove them.
In the case of Hoyt vs. Tuxbury (70 Ill., 331, 332), the rule is stated as
follows:
Where the purchase of land is made upon condition the title is found
good, the purchaser is only entitled to a reasonable time in which to
determine whether he will take the title the vendor has, or reject it.
He cannot keep the contract open indefinitely, so as to avail of a rise
in the value of the property, or relieve himself in case of a
depreciation.
In the case of Easton vs. Montgomery (90 Cal., 307), the rule is set
forth as follows:
A contract for the sale of land which provides title to prove good or
no sale, without specifying the time within which the examination is
to be made, implies a reasonable time.
In 39 Cyc., 1332, the general rule, supported by numerous citations, is the consummation of the agreement by the acceptance of the
set forth as follows: stipulated purchase price by the defendant real estate agent.

If the contract of sale does not specify the time of performance, a
reasonable time will be implied. In other words a reasonable time for
performance will be allowed, and performance within a reasonable
time will be required. What is a reasonable time necessarily depends
upon the facts and circumstances of the particular case. The rule
permitting and requiring performance within a reasonable time
applies both to the time for making and executing the conveyance by
the vendor, and to the time for making or tendering payment by the
purchaser; and where some precedent act or demand is necessary,
the rule applies to the time of performance after such act is done, or
after such demand has been made. It also applies to the time within
which any conditions precedent is to be performed, or within which a
contingency upon which the transaction depends is to happen, and to
the performance of various acts by the parties such as the furnishing
of an abstract of title, or making a survey, or any act which is to
precede or may affect the time of conveyance or payment, or which
one of the parties may do at his option which may affect the rights of
the parties under the contract. If the purchaser is entitled to an
examination of the title a reasonable time therefor will be implied.
Perhaps we should indicate that in arriving at these conclusions we
have not found it necessary to pass upon the disputed question of
fact, as to whether or not the plaintiff companys manager instructed
the defendant not to deliver the title-deed until he had received the
purchase price. On this point there is a direct conflict of evidence. But
as we understand the transaction, it was clearly understood that the
purchaser would have a reasonable opportunity to inspect and
examine the documents of title before paying over a large sum of
money in exchange therefor, whether the agent did or did not have
the authority to make actual delivery of the title deed for that
purpose.
Twenty days hereafter let judgment be entered reversing the
judgment entered in the court below without costs in this instance,
and directing the dismissal of the complaint with the costs in first
instance against the plaintiff company, and ten days thereafter let the
record be returned to the court wherein it originated. So ordered.
Arellano, C.J., Torres, Moreland, Trent and Araullo, JJ., concur.

Under all the circumstances surrounding the transaction in the case

at bar, as they appear from the evidence of record, we have no
hesitation in holding that the plaintiff companys letter of September
2, 1912 demanding payment before five oclock of the afternoon of
that day, under penalty of the cancellation of its agreement to sell,
was an arbitrary unreasonable attempt to deny to the purchaser the
reasonable opportunity to inspect the documents of title, to which he
was entitled by virtue of the express agreement of the plaintiff
companys agent before any attempt was made to revoke his agency.
It follows that Barrettos right to enforce the agreement to sell was in
no wise affected by the attempt of the plaintiff company to cancel
the agreement; and that the plaintiff company suffered no damage by
 Obligations and liabilities of principals to agents

How is agency extinguished?

Macondray v. Sellner

Del Rosario v. Abad, 104 Phil. 648

-purchaser has a perfect right to examine the
d o c u m e n t s ; i t w a s understood that the purchaser should
-PoA does not create an agency coupled with an
have a reasonable time; also, time does not appear to be of the
i n t e r e s t n o r d o e s i t clothe the agency with
essence to the contract- c o m p a n y s l e t t e r d e m a n d i n g
an irrevocable character; therefore, agency was terminated
i m m e d i a t e p a y m e n t u n d e r p e n a l t y o f cancellation
upon death of principal- A m e r e s t a t e m e n t i n P o A t h a t
of the agreement was an unreasonable attempt to deny
a g e n c y i s c o u p l e d w i t h a n i n t e r e s t i s n o t enough;
purchaser reasonable opportunity to inspect docs.- R e a l
such interest must be stated in the PoA- S a l e o f t h e
estate agent already earned commissions and
property was void since alienation of land
c o u l d n o t b e deprived thereof - C o m p a n y c o u l d n o t
a c q u i r e d b y f r e e patent is void
lawfully terminate negotiations at the time it
attempted to do so

Macondray & Co. v. Sellner - Our ruling is that at the time

fixed by the manager of the plaintiff company for the
termination of the negotiations, the defendant real estate
agent had already earned the commissions agreed upon, and
could not be deprived thereof by the arbitrary action of the
plaintiff company in declining to execute the contract of sale
for some reason personal to itself.

In Macondray & Co. v. Sellner, the Court recognized the right of a broker to
his commission for finding a suitable buyer for the sellers property even
though the seller himself consummated the sale with the buyer. The Court
held that it would be in the height of injustice to permit the principal to
terminate the contract of agency to the prejudice of the broker when he
had already reaped the benefits of the brokers efforts.