Sales: (Title VI, Arts. 1458-1637)

Part I
SALES
(Title VI, Arts. 1458-1637)
INTRODUCTION
Governing law.
The provisions of the Code of Commerce relating to sales have
been repealed by the Civil Code. (Art.* 2270[2].) Today, sales are
governed by the provisions of the Civil Code on the subject. (Book
IV, Title VI, Arts. 1458-1637.) The distinction between the so-called
civil sales and commercial sales is eliminated.
The provisions of the Civil Code on Obligations (Title I, Arts.
1156-1304.) and Contracts (Title II, Arts. 1305-1422.) are applicable
to the contract of sale, but Articles 1458 to 1637 are special rules
which are peculiar to sales alone.
Sources of our law on sales.
(1) The Philippine law on sales, as it exists today, is an admixture
of civil law and common law principles. According to the
Code Commission:
“A majority of the provisions of the Uniform Sales Law
which is in force in 31 States and Territories of the American
Union have been adopted in the Civil Code with modifications
to suit the principles of Philippine Law.” (Report of the Code
Commission, p. 60.)
*Unless otherwise indicated, refers to article in the Civil Code.
2 SALES
In incorporating some provisions of the Uniform Sales Act of
the United States, the Commission states:
“This incorporation of a goodly number of American rules
on sale of goods has been prompted by these reasons:
(1) The present [old] Code does not solve questions arising
from certain present-day business practices. Among them
are: the sale of “future goods” (Art. 1482.); sale of goods by
description or by sample (Art. 1501.); when goods are delivered
“on sale or return” (Art. 1522.); sale of goods by negotiation
or transfer of a document of title (Arts. 1527 to 1540.); and
the rights of the unpaid seller of goods. (Arts. 1545 to 1555.)1
(2) The present Code fails to regulate many incidents and
aspects of delivery and acceptance of goods, of warranty of
title and against hidden defects, and of payment of the price.
(3) It is probable that a considerable portion of the foreign
trade of the Philippines will continue for many years with the
United States. In order to lessen misunderstanding between
the merchants on both sides of the Pacific, their transactions
should, as far as possible, be governed by the same rules. This
desirable condition will not only facilitate trade but will also
perpetuate sentiments of esteem and goodwill between the
two peoples. It is but a truism to say that fair and mutually
beneficial trade incalculably enhances international friendship.”
(Ibid., pp. 60-61.)
(2) In addition:
“The Title on ‘Sales’ has been enriched by the addition of new
provisions based on the opinions of commentators (Arts. 1479,
1480, 1481, 1485, 1490, 1491, 1497, 1498, 1512, 1516, 1558, 1561,
1569, 1570, 1571.2) and on judicial decisions (Arts. 1486, 1487.3) and
of new rules adopted with modifications to suit the philosophy
and framework of Philippine Law, from the Uniform Sales Act of
1The articles mentioned are now Arts. 1462, 1481, 1502, 1507-1520, 1525-1935, respectively,
in the new Code.
2Now, Arts. 1459, 1460, 1461, 1465, 1470, 1471, 1477, 1478, 1492, 1496, 1538, 1541,
1549, 1550, 1551, respectively.
3Now, Arts. 1466, 1467, respectively.
3
the United States, Arts. 1482 to 1484, 1494, 1496, 1501, 1503, 1514,
1522 to 1526, 1527 to 1540, 1541 to 1543, 1545 to 1555, 1565, 1566,
1567, 1582 to 1585, 1602 to 1608, 1614 to 1617, 1618 to 1619, 16574
x x x.”
Many of the original articles were also amended for clarification
or improvement.” (Ibid., p. 141.)
— oOo —
4Now, Arts. 1462 to 1464, 1474, 1476, 1481, 1483, 1494, 1502-1506, 1507-1520, 1521-
1523, 1525-1535, 1545, 1546, 1547, 1562-1565, 1582-1586, 1594-1597, 1598-1599, 1637, respectively.
INTRODUCTION
4 SALES
Chapter 1
NATURE AND FORM OF THE
CONTRACT
ART. 1458. By the contract of sale one of the contracting
parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the
other to pay therefor a price certain in money or its
equivalent.
A contract of sale may be absolute or conditional.
(1445a)
Concept of contract of sale.
The contract of sale is an agreement whereby one of the parties
(called the seller or vendor) obligates himself to deliver something
to the other (called the buyer or purchaser or vendee) who, on
his part, binds himself to pay therefor a sum of money or its
equivalent (known as the price).
Under the Spanish Civil Code, the contract was referred to as
a contract of “purchase and sale.” As every “sale” necessarily
presupposes a “purchase,” this name was regarded as redundant.
Hence, the name of Title VI has been simplified by calling it “sales”
and the name of the contract has been changed for the same reason
to “contract of sale.” (Report of the Code Commission, p. 141.)
“It is required in the proposed Code that the seller transfers
the ownership of the thing sold. (Arts. 1458, 1459, 1495,
1547.) In the present Code (Art. 1445.), his obligation is merely
to deliver the thing, so that even if the seller is not the owner,
he may validly sell, subject to the warranty (Art. 1474.) to
maintain the buyer in the legal and peaceful possession of the
4
5
thing sold. The Commission considers the theory of the
present law unsatisfactory from the moral point of view.”
(Ibid.)
Characteristics of a contract of sale.
The contract of sale is:
(1) Consensual, because it is perfected by mere consent without
any further act;
(2) Bilateral,1 because both the contracting parties are bound
to fulfill correlative obligations towards each other — the seller,
to deliver and transfer ownership of the thing sold and the buyer,
to pay the price;
(3) Onerous, because the thing sold is conveyed in consideration
of the price and vice versa (see Gaite vs. Fonacier, 2 SCRA 820
[1961].);
(4) Commutative, because the thing sold is considered the
equivalent of the price paid and vice versa. (see Ibid.) However,
the contract may be aleatory2 as in the case of the sale of a hope
(e.g., sweepstakes ticket);
(5) Nominate, because it is given a special name or designation
in the Civil Code, namely, “sale”; and
(6) Principal, because it does not depend for its existence and
validity upon another contract.
ILLUSTRATIVE CASES:
1. Trial Court decided that there was no payment by buyer of
lumber covered by invoices of seller but Court of Appeals held that
1Obligations are bilateral when both parties are mutually bound to each other. They
are reciprocal when the performance one is designed to be the equivalent and the condition
for the performance of the other. In a contract of sale, in the absence of any stipulation,
the obligations of the seller and buyer are reciprocal, the obligation or promise of
each party is the cause or consideration for the obligation or promise by the other. The
reciprocal obligations would normally be, in the case of the buyer, the payment of the
agreed price and in the case of the seller, the fulfillment of certain express warranties.
2Art. 2010. By an aleatory contract, one of the parties or both reciprocally bind themselves
to give or to do something in consideration of what the other shall give or do
upon the happening of an event which is uncertain, or which is to occur at an indeterminate
time.
Art. 1458 NATURE AND FORM OF THE CONTRACT
6 SALES
delivery of lumber was not duly proved because counter-receipts issued
by buyer merely certified to receipt of certain statement on claims
for the lumber allegedly delivered.
Facts: S filed a complaint for collection of a sum of money
against B for lumber purchased on credit and received by B. B
denied all the material allegations of the complaint. The trial
court rendered judgment in favor of S. On appeal, the Court of
Appeals reversed the judgment on the ground that the delivery
of the lumber to B was not duly proved.
S asserts that the case having been tried and decided by
the trial court on the issue of whether or not there was payment
by B of the lumber covered by invoices of S and counterreceipts
issued by B, it is alone on this issue that the Court of
Appeals should have decided the case and not on the issue of
whether or not there was delivery of the lumber in question.
The Court of Appeals found that the counter-receipts merely
certified the fact of having received from S certain statements
on claims for lumber allegedly delivered.
Issue: Did the Court of Appeals decide the case on a new
issue not raised in the pleadings before the lower court?
Held: No. The issue of delivery is no issue at all. For delivery
and payment in a contract of sale, or for that matter in quasicontracts,
are so interrelated and interwined with each other
that without delivery of the goods there is no corresponding
obligation to pay. The two complement each other. (see Art.
1458, par. 1.) It is clear that the two elements cannot be dissociated,
for the contract of purchase and sale is, essentially, a bilateral
contract, as it gives rise to reciprocal obligations. (Pio
Barretto Sons, Inc. vs. Compania Maritima, 62 SCRA 167 [1975].)
——— ———— ———-
2. To secure payment of the balance of the purchase price of
iron ore, buyer executed a surety bond in favor of seller, the buyer,
however, claiming that such payment was subject to a suspensive
condition — the sale of the iron ore by buyer.
Facts: B, owner of a mining claim, appointed S as attorneyin-
fact to enter into a contract with any individual or juridical
person for the exploration and development of said claim on a
royalty basis. S himself embarked upon the exploitation of the
claim.
Art. 1458
7
Subsequently, B revoked the authority granted by him to S
who assented thereto subject to certain conditions. As a result,
a document was executed wherein S transferred to B all of S’s
rights and interests over the “24 tons of iron ore, more or less”
that S had already extracted from the mineral claims in consideration
of the sum of P75,000.00, P10,000.00 of which was paid
upon the signing of the agreement, and “the balance of
P65,000.00 will be paid from and out of the first letter of credit
covering the first shipment of iron ores and of the first amount
derived from the local sale of iron ore” from said claims.
To secure the payment of the balance, B executed in favor
of S a surety bond. No sale of approximately 24,000 tons of iron
ore had been made nor had the balance of P65,000.00 been paid
to S.
Issue: Is the shipment or local sale of the iron ore a condition
precedent (or suspensive condition) to the payment of the
balance, or only a suspensive period or term?
Held: (1) Obligation of B one with a term. — The words of the
contract express no contingency in the buyer’s obligation to
pay. There is no uncertainty that the payment will have to be
made sooner or later; what is undetermined is merely the exact
date at which it will be made. By the very terms of the contract,
therefore, the existence of the obligation to pay is recognized;
only its maturity or demandability is deferred.
Furthermore, to subordinate B’s obligation to the sale or
shipment of the ore as a condition precedent would be tantamount
to leaving the payment at his discretion (Art. 1182.), for
the sale or shipment could not be made unless he took steps to
sell the ore.
(2) A contract of sale is normally commutative and onerous. —
In a contract of sale, not only does each one of the parties assume
a correlative obligation, but each party anticipates performance
by the other from the very start.
Nothing is found in the record to evidence that S desired
or assumed to run the risk of losing his right over the ore without
getting paid for it, or that B understood that S assumed any
such risk. This is proved by the fact that S insisted on a bond to
guarantee the payment of the P65,000.00 and the fact that B did
put such bond, indicated that he admitted the definite existence
of his obligation to pay the balance of P65,000.00. The only
8 SALES
rational view that can be taken is that the sale of the ore to B
was a sale on credit, and not an aleatory contract, where the
transferor, S, would assume the risk of not being paid at all by
B. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)
Essential requisites of a contract of sale.
The rules of law governing contracts in general are applicable
to sales. Like every contract, “sale” has the following requisites
or elements:
(1) Consent or meeting of the minds. — This refers to the consent
on the part of the seller to transfer and deliver and on the
part of the buyer to pay. (see Art. 1475.) The parties must have
legal capacity to give consent and to obligate themselves. (Arts.
1489, 1490, 1491.) The essence of consent is the conformity of the
parties on the terms of the contract, the acceptance by one of the
offer made by the other. The contract to sell is a bilateral contract.
Where there is merely an offer by one party without the acceptance
of the other, there is no consent. (Salonga vs. Farrales, 105
SCRA 359 [1981].) The acceptance of payment by a party is an
indication of his consent to a contract of sale, thereby precluding
him from rejecting its binding effect. (Clarin vs. Rulova, 127 SCRA
512 [1984].)
There may, however, be a sale against the will of the owner in
case of expropriation (see Art. 1488.) and the three different kinds
of sale under the law, namely: an ordinary execution sale (see
Rules of Court, Rule 39, Sec. 15.), judicial foreclosure sale (Ibid.,
Rule 68.), and extra-judicial foreclosure sale. (Act No. 3135,
as amended.) A different set of law applies to each class of sale
mentioned. (see Fiestan vs. Court of Appeals, 185 SCRA 751
[1990].)
The sale of conjugal property requires the consent of both the
husband and the wife. The absence of the consent of one renders
the sale null and void (see Art. 124, Family Code.) while the vitiation
thereof (see Art. 1390.) makes it merely voidable. (Guiang vs.
Court of Appeals, 95 SCAD 264, 290 SCRA 372 [1998].)
(2) Object or subject matter. — This refers to the determinate thing
which is the object of the contract. (Art. 1460.) The thing must be
Art. 1458
9
determinate or at least capable of being made determinate because
if the seller and the buyer differ in regard to the thing sold, there
is no meeting of the minds; therefore, there is no sale. The subject
matter may be personal or real property. The terms used in the
law are “thing” (e.g., Art. 1458), “article” (Art. 1467), “goods” (e.g.,
Art. 1462), “personal property” (e.g., Art. 1484), “property” (e.g.,
Art. 1490), “movable property” (e.g., Art. 1498), “real estate” (e.g.,
Art. 1539), “immovable” (e.g., Ibid.), “immovable property” (e.g.,
Art. 1544), and “real property.” (Art. 1607.)
A buyer can only claim right of ownership over the object of
the deed of sale and nothing else. Where the parcel of land described
in the transfer certificate of title is not in its entirety the
parcel sold, the court may decree that the certificate of title be
cancelled and a correct one be issued in favor of the buyer, without
having to require the seller to execute in favor of the buyer an
instrument to effect the sale and transfer of the property to the
true owner. (Veterans Federation of the Philippines vs. Court of
Appeals, 138 SCAD 50, 345 SCRA 348 [2000].)
The sale of credits and other incorporeal rights is covered by
Articles 1624 to 1635; and
(3) Cause or consideration. — This refers to the “price certain
in money or its equivalent” (Art. 1458.) such as a check or a promissory
note, which is the consideration for the thing sold. It does
not include goods or merchandise although they have their own
value in money. (see Arts. 1468, 1638.) However, the words “its
equivalent” have been interpreted to mean that payment need not
be in money, so that there can be a sale where the thing given as
token of payment has “been assessed and evaluated and [its] price
equivalent in terms of money [has] been determined.” (see Republic
vs. Phil. Resources Dev. Corp., 102 Phil. 968 [1958].)
The price must be real, not fictitious; otherwise, the sale is void
although the transaction may be shown to have been in reality a
donation or some other contract. (Art. 1471.) A seller cannot render
invalid a perfected contract of sale by merely contradicting the
buyer’s allegation regarding the price and subsequently raising
the lack of agreement as to the price. (David vs. Tiongson, 111
SCAD 242, 313 SCRA 63 [1999].)
10 SALES
The absence of any of the above essential elements negates
the existence of a perfected contract of sale.3 Sale, being a consensual
contract (see Art. 1475.), he who alleges it must show its existence
by competent proof. (Dizon vs. Court of Appeals, 302
SCRA 288 [1999].)
Natural and accidental elements.
The above are the essential elements of a contract of sale or
those without which no sale can validly exist. They are to be distinguished
from:
(1) Natural elements or those which are deemed to exist in certain
contracts, in the absence of any contrary stipulations, like
warranty against eviction (Art. 1548.) or hidden defects (Art.
1561.); and
(2) Accidental elements or those which may be present or absent
depending on the stipulations of the parties, like conditions,
interest, penalty, time or place of payment, etc.
ILLUSTRATIVE CASES:
1. Supposed sale was evidenced by a receipt acknowledging receipt
of P1,000.00.
Facts: B bought on a partial payment of P1,000.00, evidenced
by a receipt, a portion of a subdivision from S, administrator of
the testate estate of his deceased spouse. Subsequently, S was
authorized by the court to sell the subdivision. In the meantime,
PT Co. became the new administrator. It sold the lot to
another which sale was judicially approved.
B files a complaint which seeks, among other things, for
the quieting of title over the lot in question.
Issue: Was there a valid and enforceable sale to B?
Held: No. An examination of the receipt reveals that the
same can neither be regarded as a contract of sale nor a prom-
3When a contract of sale is void, the possessor is entitled to keep the fruits during
the period for which he held the property in good faith. Good faith of the possessor
ceases when an action to recover possession of the property is filed against him and he
is served summons therefor. (Development Bank of the Phils. vs. Court of Appeals, 316
SCRA 650 [1999]; see Arts. 526, 528.)
Art. 1458
11
ise to sell. There was merely an acknowledgment of the sum
P1,000.00. There was no agreement as to the total purchase price
of the land nor to the monthly installments to be paid by B. The
requisites for a valid contract of sale are lacking. (Leabres vs.
Court of Appeals, 146 SCRA 158 [1986].)
———— ———— ————
2. Buyer did not sign draft of Contract to Sell because it covered
seven (7) lots instead of six (6), but sent to seller five (5) checks
as down payment which the seller did not encash.
Facts: B Company and S, subdivision developer, agreed to
enter into a new Contract to Sell whereby S will sell seven (7)
lots at P423,250.00 with a down payment of P42,325.00 and the
balance payable in 48 monthly installments of P7,395.94. The
draft of the Contract to Sell prepared by S was sent to B Company
but B’s president did not sign it although he sent five (5)
checks covering the down payment totalling P27,542.72. S received
the checks but did not encash it because B’s president
did not sign the draft contract, the reason given by the latter
was that the draft covered seven (7) lots instead of six (6).
Since no written contract was signed, S sued B to recover
possession of the lots still occupied by the latter.
Issues: (1) May the unsigned draft be deemed to embody
the agreement between the parties?
(2) May the receipt of the five (5) checks by S serve to produce
the effect of tender of down payment by B?
Held: (1) Based on the facts, the parties had not arrived at a
definite agreement. The only agreement they arrived at was
the price indicated in the draft contract. The number of lots to
be sold was a material component of the Contract to Sell. Without
an agreement on the matter, the parties may not in any way
be considered as having arrived at a contract under the law.
(2) Moreover, since the five (5) checks were not encashed,
B should have deposited the corresponding amount of the said
checks as well as the installments agreed upon. A contract to
sell, as in this case, involves the performance of an obligation,
not merely the exercise of a privilege or a right. Consequently,
performance or payment may be effected not by tender of payment
alone but by both tender and consignation. It is consignation
which is essential to extinguish B’s obligation to pay the
balance of the purchase price. (see Arts. 1256-1258.) B did not
12 SALES
even bother to tender and make consignation of the installments
or to amend the contract to reflect the true intention of the parties
as regards the number of lots to be sold. (People’s Industrial
Commercial Corp. vs. Court of Appeals, 88 SCAD 559, G.R. No.
112733, Oct. 24, 1997.)
Effect of absence of price/nonpayment
of price.
(1) There can be no sale without a price. (see Art. 1474.) Technically,
the cause in sale is, as to the seller, the buyer’s promise to
pay the price, and as to the buyer, the seller’s promise to deliver
the thing sold. A contract of sale is void and produces no effect
whatsoever where the same is without cause or consideration (Art.
1409[3].) in that the purchase price, which appears thereon as paid,
has, in fact, never been paid by the buyer to the seller. Such sale is
nonexistent and cannot be considered consummated. (Mapalo vs.
Mapalo, 17 SCRA 116 [1966]; Ladanga vs. Court of Appeals, 31
SCRA 361 [1984]; Castillo vs. Galvan, 85 SCRA 526 [1978].)
Where the figures referred to by the buyer as prices are mere
estimates given them by the seller of the condominium units in
question, the transaction lacks an essential requisite for the perfection
of the contract of sale. (Raet vs. Court of Appeals, 98 SCAD
584, 295 SCRA 677 [1998].)
(2) Non-payment of the purchase price is a resolutory condition
for which the remedy is either rescission or specific performance
under Article 1191 of the Civil Code. It constitutes a very
good reason to rescind a sale, for it violates the very essence of
the contract of sale. (Central Bank of the Philippines vs. Bachara,
328 SCRA 807 [2000].)
But the failure to pay the price in full within a fixed period
does not, by itself, dissolve a contract of sale in the absence of any
agreement that payment on time is essential (Ocampo vs. Court
of Appeals, 52 SCAD 610, 233 SCRA 551 [1994]; see Art. 1592.), or
make it null and void for lack of consideration, but results at most
in default on the part of the vendee for which the vendor may
exercise his legal remedies. (Balatbat vs. Court of Appeals, 73
SCAD 660, 261 SCRA 128 [1996].) It is incumbent upon the party
challenging the recital of a notarized deed of sale that the vendor
Art. 1458
13
has received the purchase price to prove his claim with clear and
convincing evidence. A notarized document is evidence of high
character. (Diaz vs. Court of Appeals, 145 SCRA 346 [1986].)
An action to declare a contract void or inexistent does not
prescribe. (Art. 1410.)
Transfer of title to property for a price,
essence of sale.
(1) Obligations to deliver and to pay. — The transfer of title to
property or agreement to transfer title for a price actually paid or
promised, not a mere physical transfer of the property, is the essence
of sale. (see Ker & Co., Ltd. vs. Lingad, 38 SCRA 524 [1971];
see Gardner vs. Court of Appeals, 131 SCRA 585 [1984]; Santos
vs. Court of Appeals, 337 SCRA 67 [2000].) But neither is the delivery
of the thing bought nor the payment of the price necessary
for the perfection of the contract of sale. Being consensual, it is
perfected by mere consent. (See Art. 1475.) However, where the
seller can no longer deliver the object of the sale to the buyer because
the latter has already acquired title and delivery thereof
from the rightful owner, such contract may be deemed to be inoperative
and may thus fall, by analogy, under Article 1409(5) of
the Civil Code: “those which contemplate an impossible service,’’
since delivery of ownership is no longer possible. (Nool vs. Court
of Appeals, 84 SCAD 941, 276 SCRA 149 [1997]; Heirs of San
Miguel vs. Court of Appeals, 364 SCRA 523 [2001].)
It is only upon the existence of the contract of sale that the
seller is obligated to transfer ownership to the buyer and the buyer,
to pay the purchase price to the seller. (Chua vs. Court of Appeals,
401 SCRA 54 [2003].) In defining the contract of sale, Article
1458 merely specifies the obligations of the parties to transfer
ownership and to pay under the contract. The parties will have
these obligations even without Article 1458.
ILLUSTRATIVE CASE:
Spouses exchanged their properties for no par shares of a corporation
as a result of which they gained control of the corporation.
Facts: Spouses H & W, stockholders of DT Corporation, conveyed
to said DT a parcel of land leased to E, in exchange for
14 SALES
2,500 shares of stock equivalent to 55% majority in the corporation.
E questioned the transaction on the ground that it was not
given the first option to buy the leased property pursuant to
the proviso in the lease agreement.
Issue: Is the “deed of exchange” a contract of sale which, in
effect, prejudiced E’s right of first refusal over the leased property?
Held: No. In effect, DT Corporation is a business conduit of
H and W. What they really did was to invest their properties
and change the nature of their ownership from unincorporated
to incorporated form by organizing DT to take control of their
properties and at the same time save on inheritance taxes. The
deed of exchange cannot be considered a contract of sale. There
was no transfer of actual ownership interests by H and W to a
third party. They merely changed their ownership from one
form to another. The ownership remained in the same hands.
Hence, E has no basis for its claim of a right of first refusal under
the lease contract. (Delpher Trades Corporation vs. Intermediate
Appellate Court, 157 SCRA 349 [1988].)
(2) Where transfer of ownership not intended by the parties. —
A contract for the sale or purchase of goods/commodity to be
delivered at a future time, if entered into without the intention
of having any goods/commodity pass from one party to another,
but with an understanding that at the appointed time,
the purchaser is merely to receive or pay the difference between
the contract and the market prices, is illegal. Such contract falls
under the definition of what is called “futures” in which the
parties merely gamble on the rise or fall in prices and is declared
null and void by law.4 (Onapal Philippines Commodities,
Inc. vs. Court of Appeals, 218 SCRA 281 [1993].)
Kinds of contract of sale.
(1) As to presence or absence of conditions. — A sale may be
either:
4Art. 2018. If a contract which purports to be for the delivery of goods, securities or
shares of stock is entered into with the intention that the difference between the price
stipulated and the exchange or market price at the time of the pretended delivery shall
be paid by the loser to the winner, the transaction is null and void. The loser may recover
what he has paid.
Art. 1458
15
(a) Absolute. — where the sale is not subject to any condition
whatsoever and where title passes to the buyer upon
delivery of the thing sold. Thus, it has been held that a deed
of sale is absolute in nature although denominated as a “Deed
of Conditional Sale” in the absence of any stipulation that the
title to the property sold is reserved in the vendor until full
payment of the purchase price nor a stipulation giving the
vendor the right to unilaterally rescind the contract the moment
the vendee fails to pay within a fixed period. (Dignos vs.
Court of Appeals, 158 SCRA 375 [1988]; Pingol vs. Court of
Appeals, 44 SCAD 498, 226 SCRA 118 [1995]; People’s Industrial
and Commercial Corporation vs. Court of Appeals, 88
SCAD 559, 281 SCRA 206 [1997].) In such case, ownership of
the property sold passes to the vendee upon the actual or constructive
delivery thereof. (see Art. 1497.)
Payment of the purchase price is not essential to the transfer
of ownership as long as the property sold has been delivered.
Such delivery (see Art. 1497.) operates to divest the vendor
of title to the property which may not be regained or recovered
until and unless the contract is resolved or rescinded
in accordance with law (Philippine National Bank vs. Court
of Appeals, 82 SCAD 472, 272 SCRA 291 [1997].); or
(b) Conditional. — where the sale contemplates a contingency
(Arts. 1461, 1462, par. 2; Art. 1465.), and in general,
where the contract is subject to certain conditions (see Art.
1503, par. 1.), usually, in the case of the vendee, the full payment
of the agreed purchase price (Art. 1478; see People’s
Homesite & Housing Corp. vs. Court of Appeals, 133 SCRA
777 [1984].) and in the case of the vendor, the fulfillment of
certain warranties, e.g., the timely eviction of squatters on the
property sold. (Romero vs. Court of Appeals, 65 SCAD 621,
250 SCRA 223 [1995].)
In sales with assumption of mortgage, the assumption of
mortgage is a condition to the seller-mortgagor’s consent to
the sale so that without approval by the mortgagee no sale is
perfected and the seller remains the owner and mortgagor of
the subject property with the right to redeem in the case of
foreclosure. (Ramos vs. Court of Appeals, 87 SCAD 24, 279
SCRA 118 [1997].)
16 SALES
However, a sale denominated as a “Deed of Conditional
Sale’’ is still absolute where the contract is devoid of any proviso
that title is reserved or the right to unilaterally rescind is
stipulated, e.g., until or unless the price is paid. (Heirs of Juan
San Andres vs. Rodriguez, 332 SCRA 769 [2000].)
The delivery of the thing sold does not transfer title until
the condition is fulfilled. Where the condition is imposed, instead,
upon the perfection of the contract the failure of such
condition would prevent such perfection (Galang vs. Court of
Appeals, 43 SCAD 737, 225 SCRA 37 [1993]; Roque vs. Lapuz,
96 SCRA 741 [1980]; Babasa vs. Court of Appeals, 94 SCAD 679,
290 SCRA 532 [1998].) or the juridical relation itself from coming
into existence.
If the condition is imposed on an obligation of a party (e.g.,
ejection by the vendor of squatters within a certain period
before delivery of property) not upon the perfection of the
contract itself, which is not complied with, the other party may
either refuse to proceed or waive said condition. (see Art. 1545;
Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223
[1995].) The stipulation that the “payment of the full consideration
[of a parcel of land] shall be due and payable in five
(5) years from the execution of a formal deed of sale’’ is not a
condition which affects the efficacy of the contract of sale. It
merely provides the manner by which the full consideration
is to be computed and the time within which the same is to be
paid. (Heirs of Juan San Andres vs. Rodriguez, supra.) Similarly,
the mere fact that the obligation of the buyer to pay
the balance of the purchase price was made subject to the
condition that the seller first deliver the reconstituted title of
the house and lot sold does not make the contract a contract
to sell for such condition is not inconsistent with a contract of
sale. (Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643
[2000].)
(2) Other kinds. — There are, of course, other kinds of sale
depending on one’s point of view, e.g., as to the nature of the subject
matter (real or personal, tangible or intangible), as to manner
of payment of the price (cash or installment), as to its validity
(valid, rescissible, unenforceable, void), etc.
Art. 1458
17
Contract of sale and contract to sell
with reserved title distinguished.
At this stage, it would be desirable to point out that there are
distinctions between the two contracts.
(1) Transfer of title. — In a contract of sale, title passes to the
buyer upon delivery of the thing sold, while in a contract to sell
(or of “exclusive right and privilege to purchase”), where it is
stipulated that ownership in the thing shall not pass to the purchaser
until he has fully paid the price (Art. 1478.), ownership is
reserved in the seller and is not to pass until the full payment of
the purchase price. In the absence of such stipulation, especially
where the buyer took possession of the property upon execution
of the contract, indicates that what the parties contemplated is a
contract of absolute sale.
(2) Payment of price. — In the first case, non-payment of the
price is a negative resolutory condition (see Art. 1179.), and the
remedy of the seller is to exact fulfillment or to rescind the contract
(see Arts. 1191, 1592.), while in the second case, full payment
is a positive suspensive condition, the failure of which is not a
breach, casual or serious, of the contract but simply an event that
prevents the obligation of the vendor to convey title from acquiring
binding force. (Manvel vs. Rodriguez, 109 Phil. 1 [1960]; Roque
vs. Lapuz, 96 SCRA 741 [1980]; Jacinto vs. Kaparaz, 209 SCRA 246
[1992]; Adelfa Properties, Inc. vs. Court of Appeals, 58 SCAD 462,
240 SCRA 565 [1995].) Where the seller promises to execute a deed
of absolute sale upon full payment of the purchase price, the agreement
is a contract to sell. (Rayos vs. Court of Appeals, 434 SCRA
365 [2004].)
(3) Ownership of vendor. — Being contraries, their effect in law
cannot be identical. In the first case, the vendor has lost and cannot
recover the ownership of the thing sold and delivered, actually
or constructively (see Art. 1497.), until and unless the contract
of sale itself is resolved and set aside. In the second case,
however, the title remains in the vendor if the vendee does not
comply with the condition precedent of making payment at the
time specified in the contract. (see Heirs of P. Escanlar vs. Court
of Appeals, 88 SCAD 532, 281 SCRA 176 [1997]; People’s Industrial
and Commercial Corporation vs. Court of Appeals, 281 SCRA
18 SALES
206 [1997]; Luzon Brokerage Co. vs. Maritime Bldg. Co., Inc., 43
SCRA 93 [1972] and 86 SCRA 305 [1978]; Katigbak vs. Court of
Appeals, 4 SCRA 243 [1962]; Lim vs. Court of Appeals, 182 SCRA
564 [1990]; Tuazon vs. Garilao, 152 SCAD 699, 362 SCRA 654
[2001].) There is no actual sale until and unless full payment of
the price is made (see Bowe vs. Court of Appeals, 220 SCRA 158
[1993].) and a contract of sale is entered into to consummate the
sale. If the vendor should eject the vendee for failure to meet the
condition precedent he is enforcing the contract and not rescinding
it. Article 11915 is not applicable. A contract to sell is commonly
entered into so as to protect the seller against a buyer who intends
to buy a property in installments by withholding ownership over
the property until the buyer effects full payment therefore. (City
of Cebu vs. Heirs of C. Rubi, 106 SCAD 61, 306 SCRA 408 [1999].)
A stipulation in a contract providing for automatic rescission
upon non-payment of the purchase price within the stipulated
period is valid. (see Art. 1191.) It is in the nature of an agreement
granting a party the right to rescind a contract unilaterally in case
of breach without need of going to court. (Pangilinan vs. Court
of Appeals, 87 SCAD 408, 279 SCRA 590 [1997].)
ILLUSTRATIVE CASES:
1. Vendor “sells, transfers, and conveys” a land to the vendee
who may sell or assign the land prior to full payment of all
installments.
Facts: The dispositive part of a deed entitled “Deed of Sale
of Real Property” states: “for and in consideration of the sum
of P140,000, payable under the terms and conditions stated in
the foregoing premises, the VENDOR sells, transfers and con-
5Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
(1124)
Art. 1458
19
veys unto the VENDEE x x x” the property in question as of
December 22, 1971, the date of said document.”
In paragraph 5 thereof, it is provided that “should the
VENDEE prior to the full payment of all the amounts aforementioned,
decide to sell or to assign part or all of the aforementioned
parcel of land, the VENDOR shall be informed in
writing and shall have the option to repurchase the property x
x x. Should the VENDOR herein decide to repurchase and the
property is sold or transferred to a third person, the balance of
the consideration herein still due to the VENDOR shall constitute
automatically a prior lien on the consideration to be paid
by the third person to herein VENDEE.”
Issue: Is the above instrument a contract to sell?
Held: No. (1) Title to land transferred to vendee. — “It is a deed
of sale in which title to the subject land was transferred to the
vendee as of the date of the transaction, notwithstanding that
the purchase price had not yet been fully paid at that time.
Under the first-cited stipulation, what is deferred is not the
transfer of ownership but the full payment of the purchase price,
which is to be made in installments, on the dates indicated.
Under the second stipulation, it is recognized that the vendee
may sell the property even ‘prior to full payment of all the
amounts aforementioned,’ which simply means that although
the purchase price had not yet been completely paid, the vendee
had already become the owner of the land. As such, he could
sell the same subject to the right of repurchase reserved to the
vendor.”
(2) Right of vendor where land sold by vendee. — “In fact, the
contract also provides for the possibility of the vendee selling
the property to a third person, in which case the vendor, if she
wishes to repurchase the land, shall have a lien on any balance
of the consideration to be paid by the third person to the
vendee.” (Filoil Marketing Corp. vs. Intermediate Appellate Court,
169 SCRA 293 [1989].)
———— ———— ————
2. The sale of scrap iron is subject to the condition that the
buyer will open a letter of credit in favor of the seller for P250,000.00
on or before May 15, 1983.
Facts: In May 1, 1983, B (buyer) and S (seller) entered into a
contract entitled “Purchase and Sale of Scrap Iron” whereby S
20 SALES
bound itself to sell the scrap iron upon the fulfillment by B of
his obligation to make or indorse an irrevocable and unconditional
letter of credit not later than May 15, 1983.
On May 17, 1983, B, through his men, started to dig and
gather scrap iron at S’s premises. S cancelled the contract because
of B’s alleged non-compliance with the essential preconditions
among which is the opening of the letter of credit. It
appeared that the opening of the letter of credit was made on
May 26, 1983 by a corporation which was not a party to the
contract, with a bank not agreed upon, and was not irrevocable
and unconditional, for it was without recourse and stipulated
certain conditions.
In his complaint, B, private respondent, prayed for judgment
ordering S, petitioner corporation, to comply with the
contract and to pay damages.
Issue: Is the transaction between S and B a mere contract to
sell or promise to sell, and not a contract of sale?
Held: (1) The contract is not one of sale. — “The petitioner
corporation’s obligation to sell is unequivocally subject to a
positive suspensive condition, i.e., the private respondent’s
opening, making or indorsing of an irrevocable and unconditional
letter of credit. The former agreed to deliver the scrap
iron only upon payment of the purchase price by means of an
irrevocable and unconditional letter of credit. Otherwise stated,
the contract is not one of sale where the buyer acquired ownership
over the property subject to the resolutory condition that
the purchase price would be paid after delivery. Thus, there
was to be no actual sale until the opening, making or indorsing
of the irrevocable and unconditional letter of credit. Since what
obtains in the case at bar is a mere promise to sell, the failure of
the private respondent to comply with the positive suspensive
condition cannot even be considered a breach — casual or serious
— but simply an event that prevented the obligation of
petitioner corporation to convey title from acquiring binding
force.”
(2) The obligation of the petitioner corporation to sell did not
arise. — “Consequently, the obligation of the petitioner corporation
to sell did not arise; it, therefore, cannot be compelled by
specific performance to comply with its prestation. In short,
Article 1191 of the Civil Code does not apply; on the contrary,
pursuant to Article 1597 of the Civil Code, the petitioner cor-
Art. 1458
21
poration may totally rescind, as it did in this case, the contract.’’
Since the refusal of petitioner to deliver the scrap iron was
founded on the “non-fulfillment by the private respondent of a
suspensive condition,’’ it cannot be held liable for damages.
(Visayan Sawmill Company, Inc. vs. Court of Appeals, 219 SCRA
381 [1993].)
Romero, J., dissenting:
(1) The contract reached the stage of perfection. — “Evidently,
the distinction between a contract to sell and a contract of sale
is crucial in this case. Article 1458 has this definition: x x x. Article
1475 gives the significance of this mutual undertaking of
the parties, thus: x x x. Thus, when the parties entered into the
contract entitled “Purchase and Sale of Scrap Iron” on May 1,
1983, the contract reached the stage of perfection, there being a
meeting of the minds upon the object which is the subject matter
of the contract and the price which is the consideration.
Applying Article 1475 from that moment, the parties may reciprocally
demand performance of the obligations incumbent upon
them, i.e., delivery by the vendor and payment by the vendee.
(2) The seller has placed the goods in the control and possession
of the vendee. — From the time the seller gave access to the buyer
to enter his premises, manifesting no objection thereto but even
sending 18 or 20 people to start the operation, he has placed
the goods in the control and possession of the vendee and delivery
is effected. For, according to Article 1497, “The thing sold
shall be understood as delivered when it is placed in the control
and possession of the vendee.”
(3) That payment of the price in any form was not yet effected is
immaterial to the transfer of ownership. — “That payment of the
price in any form was not yet effected is immaterial to the transfer
of the right of ownership. In a contract of sale, the nonpayment
of the price is a resolutory condition which extinguishes
the transaction that, for a time, existed and discharges the obligations
created thereunder. x x x.
“Consequently, in a contract of sale, after delivery of the
object of the contract has been made, the seller loses ownership
and cannot recover the same, unless the contract is rescinded.
But in the contract to sell, the seller retains ownership and the
buyer’s failure to pay cannot even be considered a breach,
whether casual or substantial, but an event that prevented the
seller’s duty to transfer title to the object of the contract.”
22 SALES
(4) The transaction is an absolute contract of sale and not a contract
to sell. — “The phrase in the contract ‘on the following
terms and conditions’ is standard form which is not to be construed
as imposing a condition, whether suspensive or resolutory,
in the sense of the happening of a future and uncertain
event upon which an obligation is made to depend. There must
be a manifest understanding that the agreement is in what may
be referred to as “suspended animation” pending compliance
with provisions regarding payment. The reservation of title to
the object of the contract in the seller is one such manifestation.
Hence, it has been decided in the case of Dignos vs. Court of
Appeals (158 SCRA 375 [1988].) that, absent a proviso in the contract
that the title to the property is reserved in the vendor until
full payment of the purchase price or a stipulation giving
the vendor the right to unilaterally rescind the contract the
moment the vendee fails to pay within the fixed period, the
transaction is an absolute contract of sale and not a contract to
sell.”
Contract to sell and conditional sale
distinguished.
A contract to sell may be defined as a bilateral contract
whereby the prospective seller, while expressly reserving the
ownership of the subject property despite delivery thereof to the
prospective buyer, binds himself to sell the said property exclusively
to the prospective buyer upon fulfillment of the condition
agreed upon, that is, full payment of the purchase price.
(1) Transfer of title to the buyer. — A contract to sell as defined
above may not even be considered as a conditional contract of sale
where the seller may likewise reserve title to the property subject
of the sale until the fulfillment of the suspensive condition, because
in a conditional contract of sale, the first element of consent
is present, although it is conditioned upon the happening of
a contingent event which may or may not occur. If the suspensive
condition is not fulfilled, the perfection of the contract of sale is
completely abated. (cf. Homesite and Housing Corp. vs. Court of
Appeals, 133 SCRA 777 [1984].) However, if the suspensive condition
is fulfilled, the contract of sale is thereby perfected, such
that if there had already been previous delivery of the property
subject of the sale to the buyer, ownership thereto automatically
Art. 1458
23
transfers to the buyer by operation of law without any further act
having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive
condition which is the full payment of the purchase price, ownership
will not automatically transfer to the buyer although the
property may have been previously delivered to him. The prospective
seller still has to convey title to the prospective buyer by
entering into a contract of absolute sale to consummate the transaction.
(2) Sale of subject property to a third person. — It is essential to
distinguish between a contract to sell and a conditional contract
of sale specially in cases where the subject property is sold by the
owner not to the party the seller contracted with, but to a third
person. In a contract to sell, there being no previous sale of the
property, a third person buying such property despite the
fulfillment of the suspensive condition such as the full payment
of the purchase price, for instance, cannot be deemed a buyer in
bad faith and the prospective buyer cannot seek the relief of reconveyance
of the property. There is no double sale in such case.
Title to the property will transfer to the buyer after registration
because there is no defect in the owner-seller’s title per se, but the
latter, of course, may be sued for damages by the intending buyer.6
In a conditional contract of sale, however, upon the fulfillment
of the suspensive condition, the sale becomes absolute and this will
definitely affect the seller’s title thereto. In fact, if there had been
previous delivery of the subject property, the seller’s ownership
or title to the property is automatically transferred to the buyer,
such that the seller will no longer have any title to transfer to any
third person. Applying Article 1544 of the Civil Code, such second
buyer of the property who may have had actual or constructive
knowledge of such defect in the seller’s title, or at least was
charged with the obligation to discover such defect, cannot be a
registrant in good faith. Such second buyer cannot defeat the first
buyer’s title. In case a title is issued to the second buyer, the first
6A prior contract to sell made by a decedent during his lifetime prevails over a
subsequent sale made by an administrator without probate court approval. The estate is
bound to convey the property upon full payment of the consideration. (Liu vs. Loy, Jr.,
438 SCRA 244 [2004].)
24 SALES
buyer may seek reconveyance of the property subject of the sale.
(Coronel vs. Court of Appeals, 75 SCAD 141, 263 SCRA 15 [1996].)
Other cases of contract to sell.
(1) Where the subject matter is not determinate (Arts. 1458,
1460.) or the price is not certain (Art. 1458.), the agreement is
merely a contract to sell. (Yu Tek vs. Gonzales, 29 Phil. 384 [1915];
Ong & Jang Chuan vs. Wise & Co., 33 Phil. 339 [1916].) For purposes
of the perfection of a contract of sale (see Art. 1475.), there
is already a price certain where the determination of the price is
left to the judgment of a specified person or persons (see Art. 1469,
par. 1.), and notwithstanding that such determination has yet to
be made.
(2) A sale of future goods (see Art. 1462.) even though the
contract is in the form of a present sale operates as a contract to
sell the goods.
(3) Where the stipulation of the parties is that the deed of sale
and corresponding certificate of sale would be issued only after
full payment of the purchase price, the contract entered into is a
contract to sell and not a contract of sale. (David vs. Tiongson,
111 SCAD 242, 313 SCRA 63 [1999].)
It has been held that the act of the vendor of delivering the
possession of the property (land) to the vendee contemporaneous
with the contract (deed of sale in a private instrument) was
an indication that an absolute contract of sale was intended by
the parties and not a contract to sell. (Dignos vs. Court of Appeals,
158 SCRA 375 [1988].)
ILLUSTRATIVE CASE:
Seller of interest in a business claims the profits derived by business
before the price thereof was fixed by appraisers designated by the
parties in the contract.
Facts: S sold to B his interest in a company, the price to be
ascertained by three (3) appraisers. After six (6) months, the
appraisers rendered their report at which time S signed a document
whereby he acknowledged receipt of the price arrived at
and relinquished any claim that he had in the business. The
Art. 1458
25
report of the appraisers did not contain any segregation of the
assets of the business from the accumulated profits.
S is now claiming the profits from B from the time of the
execution of the sale to the time he acknowledged receipt of
the price on the ground that before the price was fixed by the
appraisers, the contract was not a sale but merely a contract to
sell.
Issue: Is this contention of S tenable?
Held: No. The contract of sale is perfected when the parties
agree upon the thing sold and upon the price (see Art. 1475.), it
being sufficient for the price to be certain that its determination
be left to the judgment of a specified person. (Barretto vs.
Sta. Maria, 26 Phil. 200 [1913].)
ART. 1459. The thing must be licit and the vendor
must have a right to transfer the ownership thereof at
the time it is delivered. (n)
Requisites concerning object.
(1) Things. — Aside from being (a) determinate (Arts. 1458,
1460.), the law requires that the subject matter must be (b) licit or
lawful, that is, it should not be contrary to law, morals, good customs,
public order, or public policy (Arts. 1347, 1409[1, 4].), and
should (c) not be impossible. (Art. 1348.) In other words, like any
other object of a contract, the thing must be within the commerce of
men.
If the subject matter of the sale is illicit, the contract is void
and cannot, therefore, be ratified. (Art. 1409.) In such a case, the
rights and obligations of the parties are determined by applying
the following articles of the Civil Code:
“Art. 1411. When the nullity proceeds from the illegality of
the cause or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted. Moreover,
the provisions of the Penal Code relative to the disposal of
effects or instruments of a crime shall be applicable to the things
or the price of contract.
This rule shall be applicable when only one of the parties is
26 SALES
guilty; but the innocent one may claim what he has given, and
shall not be bound to comply with his promise.”
“Art. 1412. If the act in which the unlawful or forbidden
cause consists does not constitute a criminal offense, the following
rules shall be observed:
(1) When the fault is on the part of both contracting parties,
neither may recover what he has given by virtue of the
contract, or demand the performance of the other’s undertaking;
(2) When only one of the contracting parties is at fault, he
cannot recover what he has given by reason of the contract, or
ask for the fulfillment of what has been promised him. The
other, who is not at fault, may demand the return of what he
has given without any obligation to comply with his promise.”
(2) Rights. — All rights which are not intransmissible or personal
may also be the object of sale (Art. 1347.), like the right of
usufruct (Art. 572.), the right of conventional redemption (Art.
1601.), credit (Art. 1624.), etc.
Examples of intransmissible rights are the right to vote, right
to public office, marital and parental rights, etc.
No contract may be entered upon future inheritance except
in cases expressly authorized by law. (Art. 1347, par. 2.) While
services may be the object of a contract (Art. 1347, par. 3.), they
cannot be the object of a contract of sale. (Art. 1458; see Art. 1467.)
Kinds of illicit things.
The thing may be illicit per se (of its nature) or per accidens (because
of some provisions of law declaring it illegal).
Article 1459 refers to both. Decayed food unfit for consumption
is illicit per se, while lottery tickets (Art. 195, Revised Penal
Code.) are illicit per accidens. Land sold to an alien is also per accidens
because the sale is prohibited by the Constitution.7 The rule
7A sale of land in violation of the constitutional prohibition against the transfer of
lands to aliens (Art. XII, Sec. 7, Constitution.) is void (see Art. 1409[1, 7].) and the seller
or his heirs may recover the property. But where a land is sold to an alien, who later sold
it to a Filipino, the sale to the latter cannot be impugned. (Herrera vs. Tuy Kim Guan, 1
SCRA 406 [1961]; Godinez vs. Fong Pak Luen, 120 SCRA 223 [1983].)
Art. 1459
27
is well-settled that the mortgagor (or pledgor) continues to be the
owner of the property mortgaged, and, therefore, has the power
to alienate the same; however, he is obliged, under pain of penal
liability, to secure the consent of the mortgagee. (Service Specialist,
Inc. vs. Intermediate Appellate Court, 174 SCRA 80 [1989].)
Right to transfer ownership.
(1) Seller must be owner or authorized by owner of thing sold. —
It is essential in order for a sale to be valid that the vendor must
be able to transfer ownership (Art. 1458.) and, therefore, he must
be the owner or at least must be authorized by the owner of the
thing sold. This rule is in accord with a well-known principle of
law that one can not transmit or dispose of that which he does
not have — nemo dat quod non-habet. Accordingly, one can sell only
what one owns or is authorized to sell, and the buyer can acquire
no more than what the seller can transfer legally. (Azcona vs.
Reyes & Larracas, 59 Phil. 446 [1934]; Manalo vs. Court of Appeals,
366 SCRA 752 [2001]; Tangalin vs. Court of Appeals, 159 SCAD
343, 371 SCRA 49 [2001]; for exceptions, see Art. 1505.)
Thus, a sale of paraphernal (separate) property of the deceased
wife by the husband who was neither an owner nor administrator
of the property at the time of sale is void ab initio. Such being
the case, the sale cannot be the subject of ratification by the administrator
or the probate court. (Manotok Realty, Inc. vs. Court
of Appeals, 149 SCRA 372 [1987].) Only so much of the share of
the vendor-co-owner can be validly acquired by the vendee even
if he acted in good faith in buying the shares of the other co-owners.
(Segura vs. Segura, 165 SCRA 368 [1988].) Where the sale from
one person to another was fictitious as there was no consideration,
and, therefore, void and inexistent, the latter has no title to
convey to third persons. (Traders Royal Bank vs. Court of Appeals,
80 SCAD 12, 269 SCRA 15 [1997].)
(2) Right must exist at time of delivery. — Article 1459, however,
does not require that the vendor must have the right to transfer
ownership of the property sold at the time of the perfection of the
contract. (Martin vs. Reyes, 91 Phil. 666 [1952].) Perfection per se
does not transfer ownership which occurs upon the actual or constructive
delivery of the thing sold. Sale, being a consensual con-
28 SALES
tract, it is perfected by mere consent (see Art. 1475.), and ownership
by the seller of the thing sold is not an element for its perfection.
It is sufficient if the seller has the “right to transfer the ownership
thereof at the time it is delivered.” Thus, the seller is
deemed only to impliedly warrant that “he has a right to sell the
thing at the time when the ownership is to pass.” (Art. 1547[1].)
The reason for the rule is obvious. Since future goods (Arts.
1461, par. 1; 1462 par. 1.) or goods whose acquisition by the seller
depends upon a contingency (Art. 1462, par. 2.) may be the subject
matter of sale, it would be inconsistent for the article to require
that the thing sold must be owned by the seller at the time
of the sale inasmuch as it is not possible for a person to own a
thing or right not in existence. An agreement providing for the
sale of property yet to be adjudicated by a court is thus valid and
binding. (Republic vs. Lichauco, 46 SCRA 305 [1972].)
(3) Where property sold registered in name of seller who employed
fraud in securing his title. — Although generally a forged or fraudulent
deed is a nullity and conveys no title, there are instances when
such a document may become the root of a valid title. One such
instance is where the certificate of title was already transferred
from the name of the true owner to the forger, and while it remained
that way, the land was subsequently sold to an innocent
purchaser for value. Where there is nothing in the certificate to
indicate any cloud or vice in the ownership of the property, or any
encumbrance thereon, or in the absence of any fact or circumstance
to excite suspicion, the purchaser is not required to explore further
than what the Torrens title upon its face indicates in quest
for any hidden defect or inchoate right that may subsequently
defeat his right thereto.
If the rule were otherwise, the efficacy and conclusiveness of
the certificate of title which the Torrens System seeks to insure
would entirely be futile and nugatory. The established rule is that
the rights of an innocent purchaser for value must be respected
and protected, notwithstanding the fraud employed by the seller
in securing his title. The proper recourse of the true owner of the
property who was prejudiced and fraudulently dispossessed of
the same is to bring an action for damages against those who
caused or employed the fraud, and if the latter are insolvent, an
Art. 1459
29
action against the Treasurer of the Philippines may be filed for
recovery of damages against the Assurance Fund. (Fule vs. Legare,
7 SCRA 351 [1951]; Pino vs. Court of Appeals, 198 SCRA 434 [1991];
Phil. National Bank vs. Court of Appeals, 187 SCRA 735
[1990]; Eduarte vs. Court of Appeals, 68 SCAD 179, 256 SCRA 391
[1996].)
(4) Where properly sold in violation of a right of first refusal of
another person. — The prevailing doctrine is that a contract of sale
entered into in violation of a right of first refusal of another person,
while valid is rescissible. (Guzman, Bocaling and Co. vs.
Bonnevie, 206 SCRA 668 [1992]; Conculada vs. Court of Appeals,
156 SCAD 624, 367 SCRA 164 [2001].) A right of first refusal is
neither “amorphous nor merely preparatory’’ and can be executed
according to its terms. In contracts of sale, the basis of the right of
first refusal must be the current offer of the seller to sell or the
offer to purchase of the prospective buyer. Only after the grantee
fails to exercise his right under the same terms and within the
period contemplated can the owner validly offer to sell the property
to a third person, again, under the same terms as offered to
the grantee. (Polytechnic University of the Philippines vs. Court
of Appeals, 368 SCRA 691 [2001]; Equatorial Realty Development,
Inc. vs. Mayfair, Inc., 76 SCAD 407, 264 SCRA 483 [1996];
Parañaque King’s Enterprises, Inc. vs. Court of Appeals, 79 SCAD
936, 268 SCRA 727 [1997].) Where, however, there is no showing
of bad faith on the part of the vendee, the contract of sale may not
be rescinded (see Arts. 1380-1381[3].), and the remedy of the person
with the right of first refusal is an action for damages against
the vendor. (Rosencor Development Corporation vs. Inquing, 145
SCAD 484, 354 SCRA 119 [2001].)
(5) Where real property, subject of unrecorded sale, subsequently
mortgaged by seller which mortgage was registered. — The mortgagee’s
registered mortgage right over the property is inferior to that
of the buyer’s unregistered right. The unrecorded sale between
the buyer and the seller is preferred for the reason that if the seller
the original owner, had parted with his ownership of the thing
sold then, he no longer had ownership and free disposal of that
thing so as to be able to mortgage it again. Registration of the
mortgage is of no moment since it is understood to be without
prejudice to the better right of third parties. (State Investment
30 SALES
House, Inc. vs. Court of Appeals, 69 SCAD 135, 254 SCRA 368
[1996]; Dela Merced vs. GSIS, 154 SCAD 816, 365 SCRA 1 [2001].)
ART. 1460. A thing is determinate when it is particularly
designated or physically segregated from all
others of the same class.
The requisite that a thing be determinate is satisfied
if at the time the contract is entered into, the thing
is capable of being made determinate without the necessity
of a new or further agreement between the
parties. (n)
Subject matter must be determinate.
(1) When thing determinate. — A thing is determinate or specific
(not generic) when it is particularly designated or physically
segregated from all others of the same class. (see Art. 1636[1].) This
requisite that the object of a contract of sale must be determinate
is in accordance with the general rule that the object of every contract
must be determinate as to its kind. (Art. 1349.) A determinate
thing is identified by its individuality, e.g., my car (if I have
only one); the watch I am wearing; the house located at the corner
of Rizal and Del Pilar Streets, etc.;
(2) Sufficient if subject matter capable of being made determinate.
— It is not necessary that the thing sold must be in sight at the
time the contract is entered into. It is sufficient that the thing is
determinable or capable of being made determinate without the
necessity of a new or further agreement between the parties (Art.
460, par. 2; see Melliza vs. City of Iloilo, 23 SCRA 477 [1968].) to
ascertain its identity, quantity, or quality. The fact that such an
agreement is still necessary constitutes an obstacle to the existence
of the contract (Art. 1349.) and renders it void. (Art. 1409[3].)
Thus, a person may validly sell all the cavans of rice in a particular
bodega or a parcel of land located at a particular street but
if the bodega is not specified and the seller has more than one
bodega or owns more than one parcel of land at the particular
street, and it cannot be known what may have been sold, the contract
shall be null and void. (Arts. 1378, par. 2; 1409[6].) Similarly,
an obligation by a person to sell one of his cars is limited to the
Art. 1460
31
cars owned by him. The subject matter is determinable; it becomes
determinate the moment it is delivered.
In a case, the respondent purchased a portion of a lot containing
345 square meters, which portion is located in the middle of
another lot with a total area 854 square meters, and referred to in
the receipt as the “previously paid lot.’’ held: “Since the lot subsequently
sold to respondent is said to adjoin the ‘previously paid
lot’ on three sides thereof, the subject lot is capable of being determined
without the need of any new contract. The fact that the
exact area of these adjoining residential lots is subject to the result
of a survey does not detract from the fact that they are determinate
or determinable.’’ (Heirs of Juino San Andres vs.
Rodriguez, 337 SCRA 769 [2000].)
ILLUSTRATIVE CASES:
1. Tobacco factory sold was specifically pointed out. — A tobacco
factory with its contents having been specifically pointed
out by the parties and distinguished from all other tobacco factories
was held sold under a contract which did not provide for
the delivery of the price of the thing until a future time.
(McCullough vs. Aenille Co., 13 Phil. 284 [1909].)
——— ———— ———-
2. Payment of price was withheld pending proof by vendor of
his ownership. — A sale of a specific house was held perfected
between the vendor and the vendee, although the delivery of
the price was withheld until the necessary documents of ownership
were prepared by the vendee. (Borromeo vs. Franco, 5 Phil.
49 [1905].)
———— ———— ————
3. Purchase price agreed upon had not yet been paid. — A quantity
of hemp delivered by the vendor into the warehouse of the
vendee and thus set apart and distinguished from all other
hemp was held sold, although the purchase price which had
been agreed upon had not yet been paid. (see Tan Leoncio vs. Go
Inqui, 8 Phil. 531 [1907].)
———— ———— ————
4. Subject matter is sugar of specified quantity and given quality.
— A contract whereby a party obligates himself to sell for a
32 SALES
price certain (P3,000.00) a specified quantity of sugar (600 piculs)
of a given quality (of the first grade and second grade) without
designating a particular lot of sugar, is not perfected until the
quantity agreed upon has been selected and is capable of being
physically designated and distinguished from all other sugar.
(Yu Tek & Co. vs. Gonzales, 29 Phil. 348 [1915]; De Leon vs. Aquino,
87 Phil. 193 [1950].)
In this case, the contract is merely an executory contract to
sell, its subject matter being a generic or indeterminate thing. A
thing is generic when it is indicated only by its kind and cannot
be pointed out with particularity.
———— ———— ————
5. Subject matter is flour of a certain brand and specified quantity.
— Similarly, the undertaking of a party to sell 1,000 sacks
of “Mano” flour at P11.05 per barrel, 500 to be delivered in September
and 500, in October, is a promise to deliver a generic
thing and not a determinate thing within the meaning of Article
1460. Hence, there is no perfected sale. (Ong & Jang Chuan
vs. Wise & Co., 33 Phil. 339 [1916].)
———— ———— ————
6. Subject matter are palay grains produced in the farmland.
— Where S initially offered to sell palay grains in his farmland
to NFA and the latter accepted to buy 2,640 cavans, there was
already a meeting of the minds between the parties. The object
of the contract, being the palay grains produced in S’s farmland
and the NFA was to pay the same depending upon its
quality. The fact that the exact number of cavans of palay to be
delivered has not been determined does not affect the perfection
of the contract.
In this case, there was no need for NFA and S to enter into
a new contract to determine the exact number of cavans of palay
to be sold. S can deliver so much of his produce as long as it
does not exceed 2,640 cavans. (National Grains Authority vs. Intermediate
Appellate Court, 171 SCRA 131 [1989].)
———— ———— ————
7. Lots sold were described by their lot numbers and area and
as the ones needed according to a named development plan. — The
deed of sale describes the four parcels of land sold by their lot
numbers and area; and then it goes on to further describe not
only those lots already mentioned but the lots object of the sale,
Art. 1460
33
by stating that said lots are the ones needed for the construction
of the City Hall site, avenues and parks according to the
Arellano Plan, the development plan of the city, which was then
in existence.
It was held that the specific mention of some of the lots
plus the statement that the lots object of the sale are the ones
needed, etc., according to the aforementioned plan, sufficiently
provide a basis, as of the time of the execution of the contract,
for rendering determinate said lots without the need of a new
and further agreement of the parties. (Melliza vs. City of Iloilo,
23 SCRA 477 [1968].)
———— ———— ————
8. Receipt issued stated that the lot being purchased was the
one earlier earmarked for the buyer’s sister. — B presented the following
receipt signed by S, seller, as evidence of payment: “Received
from B the sum of P500.00 as additional partial payment
for the lot which is the portion formerly earmarked for T
wherein she already paid the sum of P1,500; hence, by agreement
of B and T, who are sisters, the sum of P1,500.00 is applied
as additional payment for and in behalf of B, thereby
making the total payments made by B to said lot in the sum of
P2,000.00.’’ The subject lot is adequately described in the receipt,
or at least can be easily determinable. Any mistake in the
designation of the lot does not vitiate the consent of the parties
or affect the validity and binding effect of the contract of sale.
(David vs. Tiongson, 111 SCAD 242, 313 SCRA 63 [1999].)
———— ———— ————
9. Sugar quota of certain number of piculs sold without specification
of the land to which it relates. — Section 4 of R.A. No. 1825
(An Act to Provide for the Allocation, Reallocation and Administration
of the Absolute Quota of Sugar) reads: “The production
allowance or quota corresponding to each piece of land
under the provisions of this Act shall be deemed to be an improvement
attaching to the land entitled thereto.
The intangible property that is the sugar quota should be
considered as real property by destination, an improvement
attaching to the land entitled thereto.” Sugar quota allocations
do not have existence independently of any particular tract of
land. There can be no sale simply of sugar quota of a certain
number of piculs without specification of the land to which it
34 SALES
relates. Such a sale would be void for want of a determinate
subject matter. (Compania General De Tabacos De Filipinos vs. Court
of Appeals, 185 SCRA 284 [1990].)
ART. 1461. Things having a potential existence may
be the object of the contract of sale.
The efficacy of the sale of a mere hope or expectancy
is deemed subject to the condition that the thing
will come into existence.
The sale of a vain hope or expectancy is void. (n)
Sale of things having potential existence.
Even a future thing (Arts. 1461, par. 1; 1347, par. 1.) not existing
at the time the contract is entered into may be the object of
sale provided it has a potential or possible existence, that is, it is
reasonably certain to come into existence as the natural increment
or usual incident of something in existence already belonging to
the seller, and the title will vest in the buyer the moment the thing
comes into existence.
Thus, a valid sale may be made of “the wine a vine is expected
to produce; or the grain a field may grow in a given time;
or the milk a cow may yield during the coming year; or the wool
that shall thereafter grow upon a sheep; or what may be taken at
the next cast of a fisherman’s net; or the goodwill of a trade, or
the like. The thing sold, however, must be specific and identified.
They must be also owned by the vendor at the time.” (Sibal vs.
Valdez, 50 Phil. 522 [1927]; Pichel vs. Alonzo, 111 SCRA 341 [1982];
see 46 Am. Jur. 223.)
Sale of a mere hope or expectancy.
The efficacy of the sale of a mere hope or expectancy is deemed
subject to the condition that the thing contemplated or expected
will come into existence. (par. 2.)
The sale really refers to an “expected thing” which is not yet
in existence, and not to the hope or expectancy which already
exists, in view of the condition that the thing will come into existence.
But the sale of a mere hope or expectancy is valid even if the
Art. 1461
35
thing hoped or expected does not come into existence, unless the
hope or expectancy is vain in which case, the sale is void. (par. 3.)
A plan whereby prizes can be obtained without any additional
consideration (when a product is purchased at the usual price plus
the chance of winning a prize) is not a lottery. (Phil. Refining Co.
vs. Palomar, 148 SCRA 313 [1987].)
EXAMPLES:
(1) S binds himself to sell for a specified price to B a parcel
of land if he wins a case for the recovery of said land pending
in the Supreme Court.
Here, the obligation of S to sell will arise, if the “expected
thing,’’ the land, will come into existence, i.e., if he wins the
case.
Before a decision is rendered, there is only “the mere hope
or expectancy’’ that the thing will come into existence.
(2) B buys a sweepstakes ticket in the hope of winning a
prize. Here, the object of the contract is the hope itself. The sale
is valid even if B does not win a prize because it is not subject
to the condition that the hope will be fulfilled.
Sale of thing expected and sale of hope
itself distinguished.
Emptio rei speratae (sale of thing expected) is the sale of a thing
not yet in existence subject to the condition that the thing will exist
and on failure of the condition, the contract becomes ineffective
and hence, the buyer has no obligation to pay the price. On the
other hand, emptio spei is the sale of the hope itself that the thing
will come into existence, where it is agreed that the buyer will pay
the price even if the thing does not eventually exist.
(1) In emptio rei speratae, the future thing is certain as to itself
but uncertain as to its quantity and quality. Such sale is subject to
the condition that the thing will come into existence (see Art. 1545,
par. 2.), whatever its quantity or quality. In emptio spei (like the
sale of a sweepstake ticket), it is not certain that the thing itself
(winning a prize) will exist, much less its quantity and quality.
(2) In the first, the contract deals with a future thing, while in
36 SALES
the second, the contract relates to a thing which exists or is present
— the hope or expectancy.
(3) In the first, the sale is subject to the condition that the thing
should exist, so that if it does not, there will be no contract by
reason of the absence of an essential element. On the other hand,
the second produces effect even though the thing does not come
into existence because the object of the contract is the hope itself,
unless it is a vain hope or expectancy (like the sale of a falsified
sweepstake ticket which can never win).
Presumption in case of doubt.
In case of doubt, the presumption is in favor of emptio rei
speratae which is more in keeping with the commutative character
of the contract. (see 10 Manresa 29-30.)
ILLUSTRATIVE CASE:
Buyer executed a surety bond in favor of seller to secure payment
of the balance of purchase price of iron ore, which balance shall be
paid out of amount derived from sale by buyer of the iron ore.
Facts: S embarked upon the exploration and development
of mining claims belonging to B. Later, they executed a document
wherein S transferred to B all of S’s rights and interest
over the 24,000 tons of iron ore, “more or less” that S had already
extracted from the mineral claims in consideration of a
down payment of P10,000.00, and the balance of P65,000.00
which will be paid out of the “first shipment of iron ore and of
the first amount derived from the local sale of iron ore made”
from said claims, which amount was secured by a surety bond
executed by B in favor of S.
No sale of the approximately 24,000 tons of iron ore had
been made nor had the P65,000.00 been paid.
Issue: Is the obligation of B to pay the remaining P65,000.00
subordinated to the sale or shipment of the ore as a condition
precedent?
Held: No. A contract of sale is normally commutative and
onerous (see Art. 1458.): not only does each one of the parties
assume a correlative obligation (the seller to deliver and transfer
ownership of the thing sold and the buyer to pay the price),
Art. 1461
37
but such party anticipates performance by the other from the
very start.
(1) Contingent character of obligation to pay must clearly appear.
— Where in a sale, the obligation of one party can be lawfully
subordinated to an uncertain event, so that the other understands
that he assumes that risk of receiving nothing for
what he gives as in the case of a sale of hopes or expectations
(emptio spei), it is not in the usual course of business to do so,
hence, the contingent character of the obligation must clearly
appear.
(2) Surety bond negates such contingent character. — In the
case at bar, nothing is found in the record to evidence that S
desired or assumed to run the risk of losing his rights over the
ore without getting paid for it, or that B understood that S assumed
any such risk. This is proven by the fact that S insisted
on a bond by a surety company to guarantee payment of the
P65,000.00; and the fact that B did put up such bond indicates
that he admitted the definite existence of his obligation to pay
the balance of P65,000.00. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)
ART. 1462. The goods which form the subject of a
contract of sale may be either existing goods, owned
or possessed by the seller, or goods to be manufactured,
raised, or acquired by the seller after the perfection
of the contract of sale, in this Title called “future
goods.”
There may be a contract of sale of goods, whose
acquisition by the seller depends upon a contingency
which may or may not happen. (n)
Goods which may be the object of sale.
Goods which form the subject of a contract of sale may be either:
(1) Existing goods or goods owned or possessed by the seller;
or
(2) Future goods or goods to be manufactured (like the sale of
milk bottles to be manufactured with the name of the buyer
pressed in the glass), raised (like the sale of the future harvest of
38 SALES
palay from a ricefield), or acquired (like the sale of a definite parcel
of land the seller expects to buy).8 (Art. 1460.)
Future goods as object of sale.
A sale of future goods, even though the contract is in the form
of a present sale, is valid only as an executory contract to be fulfilled
by the acquisition and delivery of the goods specified.
In other words, “property or goods which at the time of the
sale are not owned by the seller but which thereafter are to be
acquired by him, cannot be the subject of an executed sale but may
be the subject of a contract for the future sale and delivery thereof,”
even though the acquisition of the goods depends upon a contingency
which may or may not happen. In such case, the vendor
assumes the risk of acquiring the title and making the conveyance,
or responding in damages for the vendee’s loss of his bargain.
(Martin vs. Reyes, 91 Phil. 666 [1952]; 77 C.J.S. 604.)
Paragraph 1 of Article 1462 does not apply if the goods are to
be manufactured especially for the buyer and not readily saleable
to others in the manufacturer’s regular course of business. The
contract, in such case, must be considered as one for a piece of
work. (Art. 1467.)
Article 1462 contemplates a contract of sale of specific goods
where one of the contracting parties binds himself to transfer the
ownership of and deliver a determinate thing and the other to pay
therefor a price certain in money or its equivalent. The said article
requires that there be delivery of goods, actual or constructive, to
be applicable. It does not apply to a transaction where there was
no such delivery; neither was there any intention to deliver a determinate
thing. Thus, a “futures” contract where the parties
merely speculate on the rise and fall on the price of the goods
subject matter of the transaction is a form of gambling was declared
null and void by Article 2018 of the Civil Code. (see note 2.)
Art. 1462
8Art. 751. Donations cannot comprehend future property. By future property is understood
anything which the donor cannot dispose of at the time of the donation. (635)
Art. 1347. x x x No contract may be entered into upon future inheritance except in
cases expressly authorized by law. x x x.
39
ART. 1463. The sole owner of a thing may sell an
undivided interest therein. (n)
Sale of undivided interest in a thing.
The sole owner of a thing may sell the entire thing; or only a
specific portion thereof; or an undivided interest therein and such
interest may be designated as an aliquot part of the whole.
The legal effect of the sale of an undivided interest in a thing
is to make the buyer a co-owner in the thing sold. As co-owner,
the buyer acquires full ownership of his part and he may, therefore,
sell it. Such sale is, of course, limited to the portion which
may be allotted to him in the division of the thing upon the termination
of the co-ownership. (Article 493.)9 This rule operates
similarly with respect to ownership of fungible goods. (Art. 1464.)
Article 1463 covers only the sale by a sole owner of a thing of
an undivided share or interest thereof.
EXAMPLE:
S is the owner of a parcel of land with an area of 1,000 square
meters. As the sole owner, S can sell to B the entire portion; or
only 500 square meters of the land by metes and bounds in
which case he becomes the sole owner of the remaining 500
meters and B the portion sold; or he may sell an undivided half
of the land without specially designating or identifying the
portion sold, in which case they become co-owners.
As a co-owner, S or B can convey or transfer only the title
pertaining to the undivided half of the land, for vital to the
validity of a contract of sale is that the vendor be the owner of
the thing sold. (Art. 1459.)
ART. 1464. In the case of fungible goods, there may
be a sale of an undivided share of a specific mass,
though the seller purports to sell and the buyer to buy
9Art. 493. Each co-owner shall have the full ownership of his part and of the fruits
and benefits pertaining thereto, and he may therefore alienate, assign or mortgage it,
and even substitute another person in its enjoyment, except when personal rights are
involved. But the effect of the alienation or the mortgage, with respect to the co-owners,
shall be limited to the portion which may be allotted to him in the division upon the
termination of the co-ownership. (399)
Arts. 1463-1464 NATURE AND FORM OF THE CONTRACT
40 SALES
a definite number, weight or measure of the goods in
the mass, and though the number, weight or measure
of the goods in the mass is undetermined. By such a
sale the buyer becomes owner in common of such a
share of the mass as the number, weight or measure
bought bears to the number, weight or measure of the
mass. If the mass contains less than the number,
weight or measure bought, the buyer becomes the
owner of the whole mass and the seller is bound to
make good the deficiency from goods of the same kind
and quality, unless a contrary intent appears. (n)
Sale of an undivided share of a specific mass.
The Civil Code classifies movable goods into consumable or
non-consumable (Art. 418.), thereby discarding the old classification
(Art. 334, old Civil Code.) into fungible and non-fungible.
This change of classification seems to be in name only as the definition
of fungible goods as those which cannot be used without
being consumed under the old Civil Code is precisely that of consumable
goods. Article 1464, however, still speaks of fungible
goods.
(1) Meaning of fungible goods. — It means goods of which any
unit is, from its nature or by mercantile usage, treated as the
equivalent of any other unit (Uniform Sales Act, Sec. 76.), such as
grain, oil, wine, gasoline, etc.
(2) Effect of sale. — The owner of a mass of goods may sell only
an undivided share thereof, provided the mass is specific or capable
of being made determinate. (Art. 1460.)
(a) By such sale, the buyer becomes a co-owner with the
seller of the whole mass in the proportion in which the definite
share bought bears to the mass.
(b) It must follow that the aliquot share of each owner can
be determined only by the measurement of the entire mass. If
later on it be discovered that the mass of fungible goods contains
less than what was sold, the buyer becomes the owner
of the whole mass and furthermore, the seller shall supply
Art. 1464
41
whatever is lacking from goods of the same kind and quality,
subject to any stipulation to the contrary.
(3) Risk of loss. — If the buyer becomes a co-owner, with the
seller, or other owners of the remainder of the mass, it follows that
the whole mass is at the risk of all the parties interested in it, in
proportion to their various holdings.
(4) Subject matter. — Take note that in the sale of an undivided
share, either of a thing (Art. 1463.) or of that of mass of goods (Art.
1464.), the subject matter is an incorporeal right. (Art. 1501.) Here,
ownership passes to the buyer by the intention of the parties.
EXAMPLE:
S owns 1,000 cavans of palay stored in his warehouse. If S
sells to B 250 cavans of such palay which cavans are not segregated
from the whole mass, B becomes a co-owner of the said
mass to the extent of 1/4. If the warehouse happens to contain
only 200 cavans, S must deliver the whole 200 cavans and supply
the deficiency of 50 cavans of palay of the same kind and
quality.
In the same example, the number of cavans in the warehouse
may be unknown or undetermined and S may sell only
1/4 share of the contents. The legal effect of such a sale is to
make B a co-owner in that proportion. It is obvious that in such
case, the obligation of the seller “to make good the deficiency”
will not arise.
(5) Applicability of Article 1464 to non-fungible goods. — Although
Article 1464 speaks of “fungible goods,” nevertheless it
may also apply to goods not strictly fungible in nature. “Indeed,
the earliest case in which the doctrine was applied related to barrels
of flour. Though flour of the same grade is fungible in the
strictest sense, barrels of flour are necessarily so. Other cases also
have applied the doctrine to goods in barrels. So it has been applied
to bales of cotton and even to cattle or sheep. It is obvious
that all cattle are not alike and that some cattle in a herd are more
valuable than the others. But in the cases under consideration, the
parties had virtually agreed to act on the assumption that all were
alike and it can be seen that this is really the essential thing.” (1
Williston on Sales, 3rd ed., pp. 421-423.)
42 SALES
ART. 1465. Things subject to a resolutory condition
may be the object of the contract of sale. (n)
Sale of thing subject to a resolutory condition.
A resolutory condition is an uncertain event upon the happening
of which the obligation (or right) subject to it is extinguished.
Hence, the right acquired in virtue of the obligation is also extinguished.
(see Arts. 1179, 1181.)
EXAMPLES:
(1) S (vendor a retro) sold a parcel of land to B (vendee a
retro) subject to the condition that S can repurchase the property
within two years from the date of sale. If S exercises the
right to repurchase, then the sale made by B to C before the
lapse of the two (2)-year period falls.
The rule, however, that a vendor cannot transfer to his
vendee a better right than he had himself, suffers an exception
in case of property with Torrens title. (see Hernandez vs.
Katigbak Vda. de Salas, 69 Phil. 748 [1940].)
(2) For failure to pay his debt, the land of S (mortgagor)
was sold to B, the highest bidder and purchaser in an extrajudicial
foreclosure of a real estate mortgage.
Under the law (Act No. 3135, as amended.), the mortgagor
may redeem the property at any time within one year from and
after the date of the registration of the sale. If S redeems the
property, then the sale made to B is extinguished.
One of the obligations of the vendor is to transfer the ownership
of the thing object of the contract. (Art. 1458.) If the resolutory
condition attaching to the object of the contract, which
object may include things as well as rights (Arts. 1427, 1347, par.
1.), should happen, then the vendor cannot transfer the ownership
of what he sold since there is no object.
ART. 1466. In construing a contract containing provisions
characteristic of both the contract of sale and
of the contract of agency to sell, the essential clauses
of the whole instrument shall be considered. (n)
Arts. 1465-1466
43
Sale distinguished from agency to sell.
By the contract of agency, a person binds himself to render some
service or to do something in representation or on behalf of another,
with the consent or authority of the latter. (Art. 1868.)
In order to classify a contract, due regard must be given to its
essential clauses. A contract is what the law defines it to be, and
not what it is called by the contracting parties. (Quiroga vs. Parson
Hardware Co., 38 Phil. 501 [1918]; Baluran vs. Navarro, 79
SCRA 309 [1977].) Sale may be distinguished from an agency to
sell, as follows:
(1) In a sale, the buyer receives the goods as owner; in an
agency to sell, the agent receives the goods as the goods of the
principal who retains his ownership over them and has the right
to fix the price and the terms of the sale and receive the proceeds
less the agent’s commission upon the sales made;
(2) In a sale, the buyer has to pay the price; in an agency to
sell, the agent has simply to account for the proceeds of the sale
he may make on the principal’s behalf;
(3) In a sale, the buyer, as a general rule, cannot return the
object sold; in an agency to sell, the agent can return the object in
case he is unable to sell the same to a third person;
(4) In a sale, the seller warrants the thing sold (see Arts. 1547,
1548, 1561.); in an agency to sell, the agent makes no warranty
for which he assumes personal liability as long as he acts within
his authority and in the name of the seller; and
(5) In a sale, the buyer can deal with the thing sold as he
pleases being the owner; in an agency to sell, the agent in dealing
with the thing received, must act and is bound according to the
instructions of his principal.10
10An agreement that the buyer shall deal exclusively with the products of the seller
— a well-known practice in the business world — is not inconsistent with the contract
of sale, much less convert it into one of agency; and where the entire control and direction
of the business operation remains with the dealer, the latter cannot be considered a
mere alter ego of the manufacturer. (Asbestos Integrated Manufacturing, Inc. vs. Peralta,
155 SCRA 213 [1987].)
44 SALES
ILLUSTRATIVE CASES:
1. One given exclusive right to sell beds furnished by manufacturer,
agreed to pay discounted invoice price at a certain period.
Facts: S granted B the exclusive right to sell the former’s
beds in Visayas. S was to furnish B with the beds which the
latter might order. The price agreed upon was the invoice price
of the beds in Manila with a discount of from 20% to 25%. Payment
was to be made at the end of sixty days.
Issue: S claimed that the contract was an agency to sell while
B maintained that it was a sale.
Held: The stipulations are precisely the essential features of
a contract of purchase and sale. There was the obligation on
the part of S to supply the beds and on the part of B, to pay
their price.
These features exclude the legal conception of an agency
or order to sell whereby the mandatory or agent receives the
thing to sell it and does not pay its price but delivers to the
principal the price he obtains from the sale of the thing to a
third person, and if he does not succeed in selling, he returns it.
By virtue of the contract between S and B, the latter, on receiving
the beds was necessarily obliged to pay their price within
the terms fixed without any other consideration and regardless
as to whether he had sold the beds. (Quiroga vs. Parson
Hardware Co., 38 Phil. 501 [1918].)
———— ———— ————
2. Partial payments were made without mention of goods unsold
and without stipulation for their return.
Facts: B received from S 350 pairs of shoes, the price of which
is stated as P2,450.00 or P7.00 per pair. B made partial payments
on account thereof.
Issue: On the issue of the nature of the transaction, S claimed
that it was an absolute sale and not a consignment.
Held: The transaction was an absolute sale. In making
said partial payments, B made no mention whatsoever of the
number of shoes sold by him and the number of shoes remaining
unsold which he should have done had the sale been
on the consignment basis. He merely mentioned the balance
of the purchase price after deducting the several payments
made by him.
Art. 1466
45
Furthermore, if the sale had been on consignment, a stipulation
as to the period of time for the return of the unsold shoes
should have been made but that had not been done and B kept
the shoes unsold more or less indefinitely. (Royal Shirt Factory,
Inc. vs. Co Bon Tic, 94 Phil. 994 [1954].) It has been held that
where a foreign company has an agent here selling its goods
and merchandise, the same agent could not very well act as
agent for local buyers because the interests of his foreign principal
and those of the buyers would be in direct conflict. He
could not serve two masters at the same time. (G. Puyat & Sons,
Inc. vs. Arco Amusement, 72 Phil. 402 [1941]; see Far Eastern Export
& Import Co. vs. Lim Teck Suan, 97 Phil. 171 [1955].)
Contract creating both a sale and an agency
relationship.
The transfer of title or agreement to transfer it for a price paid
or promised is the essence of sale. If such transfer puts the transferee
in the position of an owner and makes him liable for the
agreed price, the transaction is a sale. On the other hand, the essence
of an agency to sell is the delivery to an agent, not as his
property, but as the property of his principal, who remains the
owner and has the right to control sales, fix the price and terms,
demand and receive the proceeds less the agent’s commission
upon sales made. (Ker & Co., Inc. vs. Lingad, 38 SCRA 524 [1971];
Schmid and Oberly, Inc. vs. RJL Martinez Fishing Corp., 166 SCRA
493 [1988].)
In some circumstances, however, a contract can create both a
sale and an agency relationship. For example: An automobile
dealer receives title to the cars he orders from the manufacturer
and that transaction is a sale; but he is an agent to the extent that
he is authorized to pass on to the ultimate purchaser the limited
warranty of the manufacturer. In any event, the courts must look
at the entire transaction to determine if it is a principal-agent relationship
or a buyer-seller relationship. (1 Williston on Sales, 4th
ed., pp. 16-17.)
ART. 1467. A contract for the delivery at a certain
price of an article which the vendor in the ordinary
course of his business manufactures or procures for
46 SALES
the general market, whether the same is on hand at
the time or not, is a contract of sale, but if the goods
are to be manufactured specially for the customer and
upon his special order, and not for the general market,
it is a contract for a piece of work. (n)
Sale distinguished from contract
for a piece of work.
By the contract for a piece of work the contractor binds himself
to execute a piece of work for the employer, in consideration of a
certain price or compensation. The contractor may either employ
his labor or skill, or also furnish the material. (Art. 1713.)
The distinction between a contract of sale and one for work,
labor or materials or for a piece of work is tested by the inquiry
whether the thing transferred is one not in existence and which
never would have existed but for the order of the party desiring
to acquire it, or a thing which would have existed and been the
subject of sale to some other person, even if the order had not been
given.
(1) In the first case, the contract is one for work, labor and
materials and in the second, one of sale. (Inchausti & Co. vs.
Cromwell, 20 Phil. 345 [1911]; see Celestino Co. & Co. vs. Coll., 99
Phil. 841 [1956]; Comm. vs. Engineering Equipment and Supply
Co., 64 SCRA 590 [1975]; Comm. vs. Arnoldus Carpentry Shop,
Inc., 159 SCRA 199 [1988]; Engineering & Machinery Corp. vs.
(2) In the first case, the risk of loss before delivery is borne by
the worker or contractor, not by the employer (the person who
ordered). (Arts. 1717, 1718.) A contract is for a piece of work if
services dominate that contract even though there is a sale of
goods involved. Where the primary objective of a contract is a sale
of a manufactured item, it is a sale of goods even though the item
is manufactured by labor furnished by the seller and upon previous
order of the customer. (see 1 Williston, 4th ed., p. 23.)
(3) The importance of marking the line that divides contracts
for a piece of work from contracts of sale arises from the fact that
the former is not within the Statute of Frauds. (see Art. 1483.)
Art. 1467
47
EXAMPLE:
If B is buying a pair of shoes of a particular style and size
from S which the latter ordinarily manufactures or procures
for the general market but the same is not available, an order
for one would be a contract of sale, since the article would have
existed and been the subject of sale to some other person even
if the order had not been given.
On the other hand, if B places an order for a pair of shoes of
a particular shape because his feet are deformed, the fact that
such kind of shoes is not suitable for sale to others in the ordinary
course of the seller’s business and is to be manufactured
especially for B and upon his special order, makes the contract
one for a piece of work.
ART. 1468. If the consideration of the contract consists
partly in money, and partly in another thing, the
transaction shall be characterized by the manifest intention
of the parties. If such intention does not clearly
appear, it shall be considered a barter if the value of
the thing given as a part of the consideration exceeds
the amount of the money or its equivalent; otherwise,
it is a sale. (1446a)
Sale distinguished from barter.
By the contract of barter or exchange, one of the parties binds
himself to give one thing in consideration of the other’s promise
to give another thing. (Art. 1638.) On the other hand, in a contract
of sale, the vendor gives a thing in consideration for a price
in money. (Art. 1458.)
(1) The above distinction is not always adequate to distinguish
one from the other. Hence, the rule in Article 1468 for those
cases in which the thing given in exchange consists partly in
money and partly in another thing.
(a) In such cases, the manifest intention of the parties is
paramount in determining whether it is one of barter or of sale
and such intention may be ascertained by taking into account
the contemporaneous and subsequent acts of the parties. (Art.
1371.)
48 SALES
(b) If this intention cannot be ascertained, then the last sentence
of the article applies. But if the intention is that the contract
shall be one of sale, then such intention must be followed
even though the value of the thing given as a part consideration
is more than the amount of the money given.
(2) The only point of difference between the two contracts is
in the element which is present in sale but not in barter, namely:
“price certain in money or its equivalent.” (see Art. 1641.)
EXAMPLES:
(1) S, a sugar miller, and B, a manufacturer and dealer of
whisky, entered into an agreement whereby S was to deliver
sugar worth P20,000.00 to B who was to give 100 bottles of
whisky worth also P20,000.00. This is a contract of barter.
(2) Suppose at the date of delivery, B had only 25 bottles
of whisky. With the consent of S, S paid the difference of P15,000
in cash. In this case, the contract is still barter. The consideration
for the sugar is not cash but the whisky, and the amount of
P15,000.00 paid by B is in consideration for the 75 bottles of
liquor.
(3) Suppose, in the same example, B had no whisky at the
stipulated date of delivery and he paid S P20,000.00 instead of
giving whisky. Did the contract become one of sale? No, because
the payment is in consideration of the value of the whisky,
and not of the sugar. The manifest intention of the parties was
to enter into a contract of barter. But if B had whisky at the date
of delivery and he paid P20,000.00 with the consent of S, the
contract would become one of sale.
(4) Assume now that the contract between S and B was for
S to deliver sugar to B who agreed to give 100 bottles of whisky
or to pay P20,000.00 cash. If B, instead of whisky, paid P20,000.00
cash, it is clear that the resulting contract is that of sale, and not
barter.
(5) If the obligation of B is to deliver 50 bottles of whisky
and pay P10,000.00 cash, or 75 bottles of whisky and P5,000.00
cash, or 25 bottles of whisky and P15,000.00 cash, the transaction
shall be considered a barter or sale depending on the manifest
intention of the parties. Under Article 1468, if such intention
does not clearly appear, the contract shall be considered a
Art. 1468
49
barter, where the cash involved is P5,000.00, or a sale, in case it
is P15,000.00, or either in case it is P10,000.00.
Sale distinguished from lease.
In the lease of things, one of the parties binds himself to give to
another the enjoyment or use of a thing for a price certain and for
a period which may be definite or indefinite. (Art. 1643.) In other
words, in a lease, the landlord or lessor transfers merely the temporary
possession and enjoyment of the thing leased. In a sale,
the seller transfers ownership of the thing sold.
Sale distinguished from dation in payment.
Dation in payment (or dacion en pago) is the alienation of property
to the creditor in satisfaction of a debt in money. (see Art.
1619.) It is governed by the law on sales. (Art. 1245.) As such the
essential elements of a contract of sales, namely, consent: object
certain, and cause or considerations, must be present.
The distinctions are the following:
(1) In sale, there is no preexisting credit, while in dation in
payment, there is;
(2) In sale, obligations are created, while in dation in payment,
obligations are extinguished;
(3) In sale, the cause is the price paid, from the viewpoint of
the seller, or the thing sold, from the viewpoint of the buyer, while
in dation in payment, the extinguishment of the debt, from the
viewpoint of the debtor, or the object acquired in lieu of the credit,
from the viewpoint of the creditor;11
(4) In sale, there is more freedom in fixing the price than in
dation in payment; and
(5) In sale, the buyer has still to pay the price, while in dation
in payment, the payment is received by the debtor before the contract
is perfected. (see 10 Manresa 16-17.)
11What actually takes place in dation in payment is an objective novation of the
obligation where the thing offered as an accepted equivalent of the performance of an
obligation is considered as the purchase price. (see Art. 1291[1], Civil Code.)
50 SALES
EXAMPLE:
S owes B P10,000.00. To pay his debt, S, with the consent of
B, delivers a specific television set. If the value of the television
set, however, is only P8,000.00, S is still liable for P2,000.00 unless
the parties have considered the conveyance as full payment.
ART. 1469. In order that the price may be considered
certain, it shall be sufficient that it be so with
reference to another thing certain, or that the determination
thereof be left to the judgment of a specified
person or persons.
Should such person or persons be unable or
unwilling to fix it, the contract shall be inefficacious,
unless the parties subsequently agree upon the price.
If the third person or persons acted in bad faith or
by mistake, the courts may fix the price.
Where such third person or persons are prevented
from fixing the price or terms by fault of the seller or
the buyer, the party not in fault may have such remedies
against the party in fault as are allowed the seller
or the buyer, as the case may be. (1447a)
When price considered certain.
The price in a contract of sale ought to be settled for there can
be no sale without a price. (see Borromeo vs. Borromeo, 98 Phil.
432 [1955].) It must be certain or capable of being ascertained in
money or its equivalent; and money is to be understood as currency,
and its equivalent means promissory notes, checks and
other mercantile instruments generally accepted as representing
money.
The fact that the exact amount to be paid for the thing sold is
not precisely fixed, is no bar to an action to recover such compensation,
provided the contract, by its terms furnishes a basis or
measure for ascertaining the amount agreed upon. (Majarabas vs.
Leonardo, 11 Phil. 272 [1908]; Villanueva vs. Court of Appeals, 78
SCAD 484, 267 SCRA 89 [1997].)
Art. 1469
51
Under the above article, the price is certain if:
(1) The parties have fixed or agreed upon a definite amount;
or
(2) It be certain with reference to another thing certain (see
Art. 1472; Majarabas vs. Leonardo, 11 Phil. 272 [1908].); or
(3) The determination of the price is left to the judgment of a
specified person or persons and even before such determination.
(see Barretto vs. Sta. Maria, 26 Phil. 200 [1913], under Art.
1458.)
It must be understood that the last two cases are applicable
only when no specific amount has been stipulated by the parties.
ILLUSTRATIVE CASES:
1. Price was fixed at 10% below the price in the inventory, at
the invoice price, and in accordance with the price list less 20% discount.
Facts: S sold to B a tobacco and cigarette factory together
with the trademark “La Maria Cristina,” the stocks of tobacco,
machinery, labels, wrappers, etc. for a sum subject to modification,
in accordance with the result shown by the inventory to
be drawn up. In this inventory the value of each individual
price of furniture was fixed at 10% below the price in the partnership
inventory. The value of the tobacco, both in leaf and in
process of manufacture, was fixed at the invoice price.
The value of tobacco made up into cigars was fixed in accordance
with the price list of the company less 20% discount.
Issue: Under the terms of the agreement, may the price of
the property sold be considered certain within the meaning of
the law?
Held: The price may be considered certain. The articles
which were the subject of the sale were definitely and finally
agreed upon. The price for each article was fixed. It is true that
the price of the tobacco, for example, was not stated in pesos
and centavos. But by its terms B agreed to pay therefor the
amount named in the invoices then in existence. The price could
be made certain by a mere reference to these invoices.
(McCullough vs. Aenille & Co., 13 Phil. 258 [1909].)
———— ———— ————
52 SALES
2. Price was fixed at a certain amount subject to modifications
based on known factors.
Facts: S contracted to sell large quantity of coal to B. The
basic price fixed in the contract was P9.45 per long ton but it
was stipulated that the price was subject to modifications “in
proportion to variations in calories and ash content and not
otherwise.”
Issue: Is the price certain within the meaning of the law?
Held: By stipulation, the price could be made certain by the
application of known factors (Art. 1469.), and for the purposes
of this case, it may be assumed that the price was fixed at P9.45
per long ton. (Mitsui Bussan Kaisha vs. Manila B.R.R. and L. Co.,
39 Phil. 624 [1919].)
———— ———— ————
3. Price (compensation) promised was the cost of maintenance.
Facts: X rendered services as wet nurse and governess to
Y’s infant daughter. Y promised to compensate X for the services,
providing for the maintenance of X, her husband and her
children during all the time that the services were required.
Y contends that there was no valid contract of lease of services
because the price thereof was not fixed.
Issue: Does the contract furnish a basis or measure by which
the amount of compensation may be ascertained?
Held: Yes. In this case, the cost of maintenance determines
the compensation according to the agreement of the parties.
(Majarabas vs. Leonardo, supra.)
———— ———— ————
4. Price was fixed at “not greater than P210.00 per square meter.”
Facts: Under the contract of lease with option to buy entered
into in 1975, the lessee was given the option to purchase
the parcel of land lease within a period of 10 years from the
date of signing of the contract “at a price not greater than P210.00
per square meter.”
Issue: Is the price certain or definite?
Held: Yes, given the circumstances of the case. “Contracts
are to be construed according to the sense and meaning of the
terms which the parties themselves have used. In the present
Art. 1469
53
dispute, there is evidence to show that the intention of the parties
is to peg the price of P210 per square meter. This was confirmed
by the petitioner [lessor] himself in his testimony as follows.
xxx
Moreover by his subsequent acts of having the land titled
under the Torrens System, and in pursuing the back [lessee]
manager to effect the sale immediately means that he understood
perfectly well the terms of the contract. He even had the
same property mortgaged to the respondent back sometime in
1979, without the slightest hint of wanting to abandon his offer
to sell the property at the agreed price of P210 per square meter.’’
(Serra vs. Court of Appeals, 47 SCAD 55, 229 SCRA 60 [1994].)
Effect where price fixed by third person
designated.
As a general rule, the price fixed by a third person designated
by the parties is binding upon them. There are, however, exceptions
such as:
(1) When the third person acts in bad faith or by mistake as
when the third person fixed the price having in mind not the thing
which is the object of the sale, but another analogous or similar
thing in which case the court may fix the price. But mere error in
judgment cannot serve as a basis for impugning the price fixed;
and
(2) When the third person disregards specific instructions or
the procedure marked out by the parties or the data given him,
thereby fixing an arbitrary price. (see 10 Manresa 53-54.)
EXAMPLE:
S sold to B a diamond ring. The determination of the price
was left to C whom the parties thought was a jeweler.
If C acted by mistake, as when he is incompetent to know
the price of the diamond ring, or in bad faith, as when he connived
with S, the court may fix the price.
ILLUSTRATIVE CASE:
Price was fixed on the basis of a certain proportion of total net
value of business to be ascertained by appraisers.
54 SALES
Facts: S executed a document whereby he agreed to transfer
to B “the whole of the right, title, and interest” in a business.
This whole was 4/173 of the entire net value of the business.
The parties agreed that the price should be 4/173 of the total
net value. The ascertainment of such net value was left unreservedly
to the judgment of the appraisers.
Issue: Is the price certain?
Held: Yes, for the minds of the parties have met on the thing
and the price. Nothing was left unfinished and all questions
relating thereto were settled. This is an example of a perfected
sale. (Barretto vs. Santa Maria, 26 Phil. 200 [1913].)
Effect where price not fixed by third
person designated.
(1) If the third person designated by the parties to fix the price
refuses or cannot fix it (without fault of the seller and the buyer),
the contract shall become ineffective, as if no price had been agreed
upon unless, of course, the parties subsequently agree upon the
price. (par. 2.)
(2) If such third person is prevented from fixing the price by
the fault of the seller or the buyer, the party not in fault may obtain
redress against the party in fault (par. 2.) which consists of a
choice between rescission or fulfillment, with damages in either
case. (Art. 1191, par. 2; see Art. 1594.) If the innocent party chooses
fulfillment, the court shall fix the price.
ART. 1470. Gross inadequacy of price does not
affect a contract of sale, except as it may indicate a
defect in the consent, or that the parties really intended
a donation or some other act or contract. (n)
Effect of gross inadequacy of price
in voluntary sales.
(1) General rule. — While a contract of sale is commutative,
mere inadequacy of the price or alleged hardness of the bargain
generally does not affect its validity when both parties are in a
position to form an independent judgment concerning the transaction.
(Askav vs. Cosalan, 46 Phil. 79 [1924]; Ereñeta vs. Bezore,
Art. 1470
55
54 SCRA 13 [1973]; Auyong Hian vs. Court of Appeals, 59 SCRA
110 [1974]; see Ong vs. Ong, 139 SCRA 133 [1985].) This rule holds
true in voluntary contracts of sale otherwise free from invalidating
defects. A valuable consideration, however small or nominal,
if given or stipulated in good faith is, in the absence of fraud,
sufficient. (Rodriguez vs. Court of Appeals, 207 SCRA 553 [1992].)
In determining whether the price is adequate or not, the price
obtaining at the date of the execution of the contract, not those
obtaining a number of years later, should be considered.
(Siopongco vs. Castro, [C.A.] No. 12448-R, Jan. 18, 1957.)
(2) Where low price indicates a defect in the consent. — The inadequacy
of price, however, may indicate a defect in the consent such
as when fraud, mistake, or undue influence is present (Art. 1355.)
in which case the contract may be annulled not because of the
inadequacy of the price but because the consent is vitiated. Contracts
of sale entered into by guardians or representatives of absentees
are rescissible whenever the wards or absentees whom
they represent suffer lesion by more than 1/4 of the value of the
things which are the object thereof. (Art. 1381[1, 2].)
The unsupported claim that the sale of property was made
for an inadequate price is a mere speculation which has no place
in our judicial system. Since every claim must be substantiated
by sufficient evidence, such a conjectural pretension cannot be
entertained. Allegation of inadequacy of price must be proven.
(Ng Cho Cio vs. Ng Diong, 1 SCRA 275 [1961].)
(3) Where price so low as to be “shocking to conscience”. — While
it is true that mere inadequacy of price is not a sufficient ground
for the cancellation of a voluntary contract of sale, it has been held
that where the price is so low that “a man in his senses and not
under a delusion” would not accept it, the sale may be set aside
and declared an equitable mortgage to secure a loan. (Aguilar vs.
Rubiato, 40 Phil. 570 [1919]; De Leon vs. Salvador, 36 SCRA 507
[1970]; Art. 1602[1].) But where the price paid is much higher than
the assessed value of the property and the sale is effected by a
father to his daughter in which filial love must be taken into account,
the price is not to be construed “as so inadequate to shock
the court’s conscience.” (Alsua-Bett vs. Court of Appeals, 92 SCRA
332 [1979]; Jocson vs. Court of Appeals, 170 SCRA 333 [1989].)
56 SALES
ILLUSTRATIVE CASES:
1. Selling price is 1/26 of value of property.
Facts: S sold to B with pacto de retro (right to repurchase) a
land valued at P26,000 for only P1,000.00.
Issue: May the contract be construed as an equitable mortgage?
(see Arts. 1602, 1603.)
Held: As the price is so grossly inadequate, the contract will
be interpreted to be one of loan with equitable mortgage with
the price paid as principal of said loan and the land given merely
as security. (Aguilar vs. Rubiato, 40 Phil. 570 [1919].)
———— ———— ————
2. Purchaser of property earned greater profit by its subsequent
resale than that earned by seller by the sale to such purchaser.
Facts: S bought a land for P870.00. One year later, he sold
the same land to B for P1,125.00. Subsequently, B sold 1/20 of
the land for P681.00. S brought action to have the sale annulled,
claiming that the price of the land was “so inadequate as to
shock the conscience of men’’ as shown by B’s sale of 1/20 of
the land for more than half of what was paid to S.
Issue: Is the price of P870.00 grossly inadequate?
Held: Having sold the land to B for the sum of P1,125.00
one year after he had purchased it for P870.00 at a profit of
about 28%, S had no ground for complaint. A sale may not be
annulled simply because the purchaser subsequently resold the
property or a part of it at a greater profit than that earned by
his vendor. (Alarcon vs. Kasilag, [C.A.] 40 O.G. [Supp. 11] 203.)
———— ———— ————
3. Conveyance of property is for P1.00 and other valuable considerations.
Fact: S, for and in consideration of P1.00 and other valuable
considerations, executed in favor of B then a minor, a
Quitclaim Deed whereby she transferred to B all her rights and
interests in the 1/2 undivided portion of a parcel of land. Later,
S claimed that the deed is null and void as it is equivalent to a
Deed of Donation, acceptance of which by the donee is necessary
to give it validity.
lssue: Is the Quitclaim Deed a conveyance of property with
a valid cause or consideration?
Art. 1470
57
Held: Yes. The cause or consideration is not the P1.00 alone
but also other valuable considerations. Although the cause is
not stated in the contract it is presumed that it is existing unless
the debtor proves the contrary. (Art. 1354.) This presumption
cannot be overcome by a simple assertion of lack of consideration
especially when the contract itself states that consideration
was given, and the same has been reduced into a
public instrument with all due formalities and solemnities.
Moreover, even granting that the Quitclaim Deed is a donation,
Article 741 of the Civil Code provides that the requirement
of the acceptance of the donation in favor of a minor by
parents or legal representatives applies only to onerous and
conditional donations where the donee may have to assume
certain charges or burdens. (Ong vs. Ong, 139 SCRA 133 [1985].)
Effect of gross inadequacy of price
in involuntary sales.
(1) General rule. — A judicial or execution sale is one made by
a court with respect to the property of a debtor for the satisfaction
of his indebtedness.12
Like in a voluntary sale, mere inadequacy of price is not a
sufficient ground for the cancellation of an execution sale if there
is no showing that in the event of a resale, a better price can be
obtained. It has been held that the public sale of a lot valued at
P40,500.00 for P12,000.00 cash “does not appear to be inadequate.”
(see Cu Bie vs. Court of Appeals, 15 SCRA 306 [1965]; Pascua vs.
Heirs of Segundo Simeon, 161 SCRA 1 [1988].)
(2) Where price so low as to be “shocking to the conscience.” — If
the “price is so inadequate as to shock the conscience of the Court”,
“such that the mind revolts at it and such that a reasonable mind
would neither directly or indirectly be likely to consent to it,’’ a
judicial sale, say, of real property, will be set aside. (National Bank
vs. Gonzales, 45 Phil. 693 [1923]; Warnes, Barnes & Co. vs. Santos,
12There are three (3) types of sale arising from failure to pay a mortgage debt, namely,
the extra-judicial foreclosure sale, the judicial foreclosure sale, and the ordinary execution
sale. They are governed by three (3) different laws which are, respectively, Act No.
3135, Rule 68, and Rule 39 of the Rules of Court. (Abaca Corporation of the Phils. vs.
58 SALES
15 Phil. 446 [1910]; Paras vs. Court of Appeals, 91 Phil. 389 [1952];
Cometa vs. Court of Appeals, 143 SCAD 90, 351 SCRA 294 [2001].)
Thus, where a land with an assessed value of more than P60,000.00
was sold for only P867.00, the sale was set aside. (Director of Lands
vs. Abarca, 61 Phil. 70 [1934]; Jalandoni vs. Ledesma, 64 Phil. 1058
[1937].)
Similarly, an execution sale whereby 33 hectares of land were
ceded to the judgment creditor to satisfy a liability for 146 cavans
of palay was held void for inadequacy of price. (Singson vs.
Babida, 79 SCRA 111 [1977].) So, also the price of the sale of properties
at around 10% of their value was held to be grossly inadequate.
(Provincial Sheriff of Rizal vs. Court of Appeals, 68 SCRA
329 [1975].)
(3) Where seller is given the right to repurchase. — The validity
of the sale is not necessarily affected where the law gives to the
owner the right to redeem, as when a sale is made at public auction,
upon the theory that the lesser the price, the easier it is for
the owner to effect the redemption. (De Leon vs. Salvador, 36
SCRA 567 [1970]; Ravanera vs. Imperial, 93 SCRA 589 [1979];
Ramos vs. Pablo, 146 SCRA 24 [1986]; Francia vs. Intermediate
Appellate Court, 162 SCRA 753 [1988]; Abaca Corporation of the
Phils. vs. Garcia, 81 SCAD 635, 272 SCRA 475 [1997].) He may
reacquire the property or also sell his right to redeem and thus
recover the loss he claims he suffered by reason of the price obtained
at the execution sale. (Tolentino vs. Agcaoli, [unrep.] 91 Phil.
917 [1952]; Barrozo vs. Macaraeg, 83 Phil. 378 [1949]; Velasquez
vs. Coronel, 5 SCRA 985 [1962]; Dev. Bank of the Phils. vs. Moll,
43 SCRA 82 [1972].)
ART. 1471. If the price is simulated, the sale is void,
but the act may be shown to have been in reality a
donation, or some other act or contract. (n)
Effect where price is simulated.
(1) If the price is simulated or false such as when the vendor
really intended to transfer the thing gratuitously, then the sale is
void but the contract shall be valid as a donation. (Arts. 1471, 1345,
1353.)
Art. 1471
59
EXAMPLE:
S sold to B a parcel of land worth P50,000.00 for only
P30,000.00. This contract of sale is valid although the price is
grossly inadequate. However, if it is shown that B induced S to
sell the land through fraud, mistake, or undue influence, the
contract may be annulled on that ground.
If the price is simulated, B may prove another consideration
like the liberality of S and if such liberality is proved, then
the contract is valid as a donation; or B may prove that the act
is in reality some other contract, like barter and, therefore, the
transfer of ownership is unaffected.
(2) If the contract is not shown to be a donation or any other
act or contract transferring ownership because the parties do not
intend to be bound at all (Art. 1345, ibid.), the ownership of the
thing is not transferred. The contract is void and inexistent. (Art.
1409[2].) The action or defense for the declaration of the inexistence
of a contract does not prescribe. (Art. 1410; see Catindig vs.
Heirs of Catalina Roque, 74 SCRA 83 [1976].)
(3) Simulation occurs when an apparent contract is a declaration
of a fictitious will deliberately made by agreement of the
parties, in order to produce, for the purpose of deception, the
appearance of a juridical act which does not exist or is different
from that which was really executed. Its requisites are (a) an outward
declaration of will different from the will of the parties; (b)
the false appearance must have been intended by mutual agreement;
and (c) the purpose is to deceive third persons. (Tongoy vs.
Court of Appeals, 123 SCRA 99 [1983]; Bayongayong vs. Court of
Appeals, 430 SCRA 210 [2004].)
The fact that the seller continues to pay realty taxes on the land
sold even after the execution of the contract to sell does not necessarily
prove ownership, much less simulation of said contract.
The non-payment of the price does not prove simulation; at most,
it gives the seller the right to sue for collection. Generally, in a
contract of sale, payment of the price is a resolutory condition and
the remedy of the seller is to exact fulfillment or, in case of a substantial
breach, to rescind the contract. (Villaflor vs. Court of
Appeals, 87 SCAD 778, 280 SCRA 297 [1997].) The non-payment
of the price by the supposed buyer, a minor, when taken into ac-
60 SALES
count together with the many intrinsic defects of the deed of sale,
may, however, show that the price is simulated, making the sale
void. (Lebagela vs. Santiago, 371 SCRA 360 [2001].)
ART. 1472. The price of securities, grain, liquids,
and other things shall also be considered certain,
when the price fixed is that which the thing sold would
have on a definite day, or in a particular exchange or
market, or when an amount is fixed above or below
the price on such day, or in such exchange or market,
provided said amount be certain. (1448)
Price on a given day at particular market.
The above provision follows the principle in Article 1469 that
a price is considered certain if it could be determined with reference
to another thing certain.
Note the last phrase of the above article: “provided said
amount be certain.” When an amount is fixed above or below the
price on a given day or in a particular exchange or market, the
said amount must be certain; otherwise, the sale is inefficacious
(Art. 1474.) because the price cannot be determined.
This article is especially applicable to fungible things like securities,
grain, liquids, etc. the price of which are subject to fluctuations
of the market.
ART. 1473. The fixing of the price can never be left
to the discretion of one of the contracting parties.
However, if the price fixed by one of the parties is accepted
by the other, the sale is perfected. (1449a)
Fixing of price by one of the contracting
parties, not allowed.
The reason for the rule is obvious.
(1) If consent is essential to a contract of sale, the determination
of the price cannot be left to the discretion of one of the contracting
parties; otherwise, it cannot be said that the other consented
to a price he did not and could not previously know. (see
Arts. 1472-1473
61
ART. 1474. Where the price cannot be determined
in accordance with the preceding articles, or in any
other manner, the contract is inefficacious. However,
if the thing or any part thereof has been delivered to
and appropriated by the buyer, he must pay a reasonable
price therefor. What is a reasonable price is a
question of fact dependent on the circumstances of
each particular case. (n)
Effect of failure to determine price.
(1) Where contract executory. — If the price cannot be determined
in accordance with Articles 1469 and 1472, or in any other
manner, and the bargain is still executory, the contract is without
effect. Price certain is an essential element of the contract of sale.
(Art. 1458.) Consequently, there is no obligation on the part of the
vendor to deliver the thing and on the part of the vendee to pay.
(2) Where delivery has been made. — If the thing or any part
thereof has already been delivered and appropriated by the buyer,
the latter must pay a reasonable price therefor. This obligation of
the buyer is sometimes contractual (if the agreement omits any
reference to price), and sometimes, quasi-contractual (if the agreement
provides that the parties are thereafter to agree on the price).
(see Art. 2142.)
(a) If a buyer, for example, orders a cavan of rice from a
store, nothing being said as to the price, the parties intend and
understand that a reasonable price shall be paid. The obligation
here is contractual. The law merely enforces the intention
of the parties.
10 Manresa 6061.) The validity or compliance of the contract cannot
be made to depend upon the will of one party. (Art. 1308.)
(2) Moreover, to be just, the price must be determined impartially
by both parties (Art. 1458.) or left to the judgment of a specified
person or persons. (Art. 1469.)
However, where the price fixed by one party is accepted by
the other, the contract is deemed perfected because in this case,
there exists a true meeting of minds upon the price. (Art. 1475.)
62 SALES
(b) Article 1474 applies only where the means contemplated
by the parties for fixing the price have, for any reason,
proved ineffectual. In this case, the obligation of the buyer to
pay a reasonable price is an obligation imposed by law as distinguished
from a contractual obligation. It is based on the
fundamental principle that no one should enrich himself at the
expense of another. (Ibid.) In case, however, the parties do not
intend to be bound until after the price is settled, the buyer
must return any goods already received or if unable to do so,
must pay their reasonable value at the time of delivery, and
the seller must return any portion of the amount received.
Concept of reasonable price.
The reasonable price or value of goods is generally the market
price at the time and place fixed by the contract or by law for
the delivery of the goods. Under special circumstances of unnatural
conditions in the market, the market price does not furnish
the only test. In the leading case upon this point, the court said:
“A reasonable price may or may not agree with the current
price of the commodity at the port of shipment when such
shipment is made. The current price of the day may be highly
unreasonable from accidental circumstances, as on account of
the commodity having been purposely kept back by the vendor
himself, or with reference to the price at the other ports in
the immediate vicinity, or from various other causes. This
doctrine has been applied in cases where the market has been
monopolized.” (1 Williston,13 op. cit., p. 447.)
Determination of fair market value.
Offers to sell are not competent evidence of the fair market
value of a property, because they are no better than offers to buy,
which have been held to be inadmissible as proof of said values.
(City of Manila vs. Estrada, 25 Phil. 208 [1913]; Manila Railroad
Co. vs. Aguilar, 35 Phil. 118 [1913].)
“In discussing the term ‘market value’, the author of a wellknown
treatise on the subject of damages observes that to make a
13Ifnot indicated, the 3rd edition thereof.
Art. 1474
63
market there must be both buying and selling; and the ‘market
value’ is that ‘reasonable’ sum which property would bring on a
fair sale by a man willing but not obliged to sell to a man willing
but not obliged to buy.” (Sedgewick on Damages, Sec. 245, cited
in Compagnie Franco-Indo Chinoise vs. Deutsch-Australiache, 39
Phil. 474 [1919]; Perez vs. Araneta, 6 SCRA 457 [1962].)
ART. 1475. The contract of sale is perfected at the
moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.
From that moment, the parties may reciprocally
demand performance, subject to the provisions of the
law governing the form of contracts. (1450a)
Perfection of contract of sale.
This article follows the general rule that contracts are perfected
by mere consent. (Art. 1315.) The contract of sale being consensual,
it is perfected at the moment of consent without the necessity
of any other circumstances. From the moment there is a meeting
of minds upon the thing which is the object of the contract
and upon the price (see Art. 1624.), the reciprocal obligations of
the parties arise even when neither has been delivered. (see Pacific
Oxygen & Acetylene Co. vs. Central Bank, 37 SCRA 685
[1971]; Villongco Realty Co. vs. Bormacheco, Inc., 65 SCRA 352
[1975]; Vargas Plow Factory, Inc. vs. Central Bank, 27 SCRA 84
[1969]; Xentrex Automotive, Inc. vs. Court of Appeals, 94 SCAD
923, 290 SCRA 66 [1998].) The essence of consent is the conformity
of the parties on the term of the contract, the acceptance by
one of the offer made by the other. (Salonga vs. Farrales, 105 SCRA
359 [1981]; Firme vs. Buklod Enterprises and Dev. Corp., 414 SCRA
190 [2003].)
(1) Conduct of the parties. — Appropriate conduct by the parties
may be sufficient to establish an agreement. While there may
be instances where interchanged correspondence does not disclose
the exact point at which the deal was closed, the actions of the
parties may indicate that a binding obligation has been undertaken.
(Maharlika Publishing Corp. vs. Tagle, 142 SCRA 553
[1986].) There is, however, no perfected sale where it is conditional
64 SALES
(e.g., approval by higher authorities) and the condition is not fulfilled.
(see People’s Homesite & Housing Corp. vs. Court of Appeals,
133 SCRA 777 [1984].)
(2) Transfer of ownership. — The ownership is not transferred
until the delivery of the thing. (Arts. 1496, 1164.14) The parties,
however, may stipulate that the ownership in the thing, notwithstanding
its delivery, shall not pass to the purchaser until after he
has fully paid the purchase price thereof. (Arts. 1478, 1306.)
(3) Form of contract. — Generally, a contract of sale is binding
regardless of its form. (Art. 1356.) However, in case the contract
of sale should fall within the provisions of the Statute of Frauds
(Art. 1403[2].) or of any other applicable statute which requires a
certain form for its enforceability or validity (Art. 1356.), then that
form must be complied with. (Art. 1483.) A contract of sale may
be in a private instrument; the contract is valid and binding between
the parties upon its perfection and a party may compel the
other to execute a public instrument embodying the contract. (see
Arts. 1357, 1358.)
A sale of real estate, whether made as a result of a private transaction
or of a foreclosure or execution sale, becomes legally effective
against third persons only from the date of its registration.
(Campillo vs. Phil. National Bank, 28 SCRA 720 [1969].)
In a case, a letter-offer to buy a particular property for a specified
price was received by the offeree who annotated on the copy
the phrase “Received original, 9-4-89’’ beside which appears his
signature. Held: The receipt can neither be regarded as a contract
of sale nor a promise to sell. Such an annotation by the offeree
amounts to neither a written nor an implied acceptance of the
offer. It is merely a memorandum of the receipt by him of the offer.
The requisites of a valid contract of sale are lacking in said
receipt. (Jovan Land, Inc. vs. Court of Appeals, 79 SCAD 428, 268
SCRA 160 [1997].)
(4) Consent reluctantly given. — There is no difference in law
where a person gives his consent reluctantly and even against his
Art. 1475
14Art. 1164. The creditor has a right to the fruits of the thing from the time the
obligation to deliver it arises. However, he shall acquire no real right over it until the
same has been delivered to him.
65
good sense and judgment as when he acts voluntarily and freely.
(Acasio vs. Corp. de los PP. Dominicos de Filipinas, 100 Phil. 253
[1956].)
(5) Notarized deed of sale states receipt of price. — The unsupported
verbal claim of the seller that the sale of a motor vehicle
was not consummated for failure of the purchaser to pay the purchase
was held insufficient to overthrow a notarized deed of sale
wherein it is recited that the seller “sold, transferred and conveyed”
the motor vehicle to the purchaser “for and in consideration
of the amount of P10,000 and other valuable considerations,
receipt of which is hereby acknowledged.”
To overcome a public document solemnly executed before a
notary public, the evidence to the contrary must be clear, strong,
and convincing. Parol evidence will not suffice to negate the clear
and positive recitals of a public document not otherwise tainted
with fraud or falsification. (Regalario vs. Northwest Finance Corporation,
117 SCRA 45 [1982].)
(6) Applicant’s qualification to buy still subject for investigation.
— In a case, the agreement denominated as “contract of sale” was
considered by the court as a mere application to buy the land in
question, and not a perfected contract of sale. Although it embodied
all the essential elements of a contract of sale by installment,
it appearing that “after the approval of such application it was
still necessary to have the [applicant’s] qualifications investigated
as well as whether or not he has complied with the provisions of
the law regarding the disposition of lands by the Board of Liquidators,”
the application was subject to revocation in case the applicant
was found not to possess the qualifications necessary.
(Alvarez vs. Board of Liquidators, 4 SCRA 95 [1962]; Galvez vs.
Tagle Vda. de Kangleon, 6 SCRA 162 [1962].)
(7) Chattel mortgage of car by mortgagor-buyer prior to transfer of
title to his name. — The fact that the chattel mortgage of a car by
the buyers in favor of the seller was executed on a date earlier
than the transfer of the registration certificate thereof in the name
of the buyers does not render the said mortgage made by the
buyers invalid, because the mortgagors were already the owner
of the car when the mortgage was executed, inasmuch as at the
time of the sale wherein the parties agreed over the car and the
66 SALES
price, the contract became perfected, and when part of the purchase
price was paid and the car was delivered, upon the execution
of the promissory note and the mortgage by the mortgagors,
the sale became consummated. The registration of the transfer of
automobiles and of the certificates of license for their use in the
Bureau of Land Transportation merely constitutes an administrative
proceeding which does not bear any essential relation to the
contract of sale entered into between the parties. (Montano vs. Lim
Ang, 7 SCRA 250 [1963].)
Registration of motor vehicles is required not because it is the
operative act that transfers ownership in vehicles (as in land registration
cases), but because it is the means to identify the owner
thereof in case of accident so that responsibility for the same can
be fixed. (De Peralta vs. Mangusang, 11 SCRA 598 [1964].)
(8) Non-fulfillment by one party of his obligation. — In case one
of the contracting parties should not comply with what is incumbent
upon him, the injured party may sue for fulfillment or rescission
with the payment of damages in either case. (Art. 1191,
pars. 1 and 2.) This right is predicated on the violation of the reciprocity
between the parties brought about by a breach of obligation
by one of them.
ILLUSTRATIVE CASES:
1. Purchase order form directed to seller asking delivery of a
piano carries the address of purchaser in Dipolog City while delivery
receipt form directed to purchaser carries address of seller in Cagayan
de Oro City.
Facts: B, an appliance center of Dipolog City, issued a purchase
order to S, an appliance center of Cagayan de Oro City,
directing the latter to furnish the former a Weinstein Accousticon
Piano. The order was honored by S, which issued a delivery
receipt for the item. B’s representative received the piano, and
signed the delivery receipt at Cagayan de Oro, and assumed
the responsibility and expenses of bringing it to Dipolog City.
Upon the refusal of B to pay, S filed a complaint for collection
with the City Court of Cagayan de Oro. B filed a motion to
dismiss alleging that there being no written agreement between
the parties specifying where the action arising out of the con-
Art. 1475
67
tract should be filed, the venue of the case properly falls in
Dipolog City under Section 1(b), Rule 4 of the Rules of Court.
Issue: Where is the place of the execution of the contract or
the place where there was meeting of the minds of the parties?
Held: The meeting of minds took place in Cagayan de Oro
City when S received the purchase order, agreed to its terms,
and acted upon it. As a matter of fact, it was not the meeting of
minds alone but also the consummation of the contract which
happened in Cagayan de Oro City.
Under the circumstances of the case, the documents evidencing
the contract show the place of execution to be Cagayan
de Oro City. The purchase order is the contract sued upon. By
itself, it was only an offer to buy directed to S with address at
Cagayan de Oro City. It was brought to said city to be acted
upon at that place. The delivery receipt indicates the acceptance
of the offer and the delivery of the piano also at Cagayan
de Oro City. The entry on the delivery receipt showing that the
purchased item was delivered to B of Dipolog City merely indicates
the name and address of the buyer but not the place of
the execution of the contract. (Raza Appliance Center vs. Villaraza,
117 SCRA 576 [1982].)
———— ———— ————
2. A co-owner sold 10 hectares portion of a land owned in common
which portion was to be surveyed, with acknowledgment of the
receipt of an initial payment.
Facts: S executed two documents: in the first, S agreed to
sell and B agreed to buy, for P2,500.00, 10 hectares of land, which
is part and parcel of a bigger lot owned in common by S and
his sister although the boundaries of the 10 hectares would be
delineated at a later date and in the second, S acknowledged
receipt as initial payment of P800.
Additional payments of P300 were made. B filed a complaint
for specific performance after S returned the amounts
paid.
Issue: Was there a perfected contract of sale between the
parties?
Held: Yes. While it is true that the two documents are in
themselves not contracts of sale, there are, however, clear evidence
that a contract of sale was perfected. S’s acceptance of
68 SALES
the initial payment of P800.00 clearly showed his consent to
the contract thereby precluding him from rejecting its binding
effect. With the contract being partially executed, the same is
no longer covered by the requirements of the Statute of Frauds
in order to be enforceable. As co-owner, S cannot dispose of a
specific portion of the land, but his share shall be bound by the
effect of the sale under Article 493 of the Civil Code. (Clarin vs.
Rulona, 127 SCRA 512 [1984].)
When definite agreement on manner
of payment essential.
As a consensual contract, a contract of sale becomes a binding
and valid contract upon the meeting of the minds of the parties
as to the price, despite the manner of payment, or even the
breach of that manner of payment. It is not the act of payment of
price that determines the validity of a contract of sale. (Buenaventura
vs. Court of Appeals, 416 SCRA 263 [2003].)
Where the parties, however, still have to meet and agree on
how and when the downpayment and installment payments are
to be made, it cannot be said that a contract of sale has been perfected.
Thus, in a case where the buyer is “to give a down-payment
of P10,000 to be followed by P20,000 and the balance of P70,000
would be paid in installments, the equal monthly amortization
of which has to be determined as soon as the P30,000 had been
completed,” it was held that the fact that the buyer delivered the
sum of P1,000 as part of the downpayment cannot be considered
as sufficient proof of the perfection of any purchase and sale agreement
between the parties under Article 1482. In this case, a definite
agreement on the manner of payment of the purchase price
is an essential element in the formation of a binding and enforceable
contract of sale. (Velasco vs. Court of Appeals, 51 SCRA 439
[1973]; Limketkai Sons Milling, Inc. vs. Court of Appeals, 69 SCAD
976, 255 SCRA 626 [1996]; see Navarro vs. Sugar Producers Corp.
Mktg. Assoc., 1 SCRA 1180 [1961]; Co vs. Court of Appeals, 286
SCRA 76 [1998].)
It appears, however, that the parties in the Velasco case agreed
on the purchase price of P100,000. It is believed that upon the
meeting of the minds of the parties on the thing which is the ob-
Art. 1475
69
ject of the contract and the price (P100,000), the contract of sale
must be deemed to have been perfected. (Art. 1475.) The terms
and conditions of payment are merely accidental, not essential,
elements of the contract of sale except where the parties themselves
clearly stipulate that in addition to the subject matter and
the price, they are essential or material to the contract. (see A.
Magsaysay, Inc. vs. Cebu Portland Cement Co., 100 Phil. 351
[1956].) A disagreement on the manner of payment is tantamount
to a failure to agree on the price. (Swedish Match, AB vs. Court of
Appeals, 441 SCRA 1 [2004].)
Article 119715 of our Civil Code authorizes courts to fix the
period or periods of payment where there is lack of agreement
regarding the same.
In Uraca vs. Court of Appeals (86 SCAD 734, 278 SCRA 702
[1997].), S sent a letter to B, offering to sell a lot and commercial
building for P1,050,000. B sent a reply-letter within the 3-day period
contained in the offer accepting the aforesaid offer. Later, B
was told by S that the price was P1,400,000 in cash or manager’s
check and not P1,050,000 as erroneously dated in the letter-offer.
B agreed to the price of P1,400,000 but counter-proposed that
payment be paid in installments, with a downpayment of
P1,000,000 and the balance of P400,000 to be paid in 30 days. It
was held that a contract of sale was perfected at the original price
of P1,050,000 but there was no agreement in the sale at the increased
price of P1,400,000. The qualified acceptance by B constitutes
a counter-offer and, in effect, a rejection of S’s offer. (Art.
1319.) Since there was no definite agreement on the manner of the
payment of the purchase price of P1,400,000, the first sale for
P1,050,000 remained valid and existing.
Although the law does not expressly state that the minds of
the parties must also meet on the terms or manner of payment of
15Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances
it can be inferred that a period was intended, the courts may fix the duration
thereof.
The courts shall also fix the duration of the period when it depends upon the will
of the debtor.
In every case, the courts shall determine such period as may under the circumstances
have been probably contemplated by the parties. Once fixed by the courts, the
period cannot be changed by them. (1128a)
70 SALES
the price, the same is needed. Agreement on the manner of payment
goes into the price such that a disagreement on the manner
of payment is tantamount to failure to agree on the price. (Toyota
Shaw, Inc. vs. Court of Appeals, 61 SCAD 310, 244 SCRA 320
[1995]; San Miguel Properties Philippines, Inc. vs. Huang, 130
SCAD 713, 336 SCRA 737 [2000].) An agreement on the price but
a disagreement on the manner of its payment will not result in
consent. This lack of consent is separate and distinct from lack of
consideration where the contract states that the price has been paid
when in fact it has never been paid. (Montecillo vs. Reyes, 170
SCAD 440, 385 SCRA 244 [2002], infra.)
ILLUSTRATIVE CASE:
The buyer, having failed to open a letter of credit as required by
the seller, claimed that there was no perfected contract of sale between
the parties.
Facts: B (buyer) established contact with S (seller) through
the Philippine Consulate General in Hamburg, West Germany,
because he wanted to purchase MAN bus spare parts from Germany.
On October 16, 1981, B submitted to S a list of the parts he
wanted to purchase, with specific parts number and description.
On December 17, 1971, S submitted its formal offer containing
the item number, quantity, part number, description,
unit price and total to B. On December 24, 1981, B informed S
of his desire to avail of the prices of the parts at that time and
enclosed its Purchase Order containing the item number, part
number and description. On December 29, 1981, B personally
submitted the quantities he wanted to the General Manager of
S in the Philippines. H, trading partner of S, sent a pro forma
invoice to be used by B in applying for a letter of credit; said
invoice required that said letter be opened in favor of J.
On February 16, 1982, S reminded B to open the letter of
credit to avoid delay in the shipment and payment of interest.
On October 18, 1982, S again reminded B of his order and advised
that the case may be endorsed to its lawyers. B replied that
he did not make any valid Purchase Order and that there was
no definite contract between him and S. Subsequently, S filed a
complaint for recovery of actual or compensatory damages,
unearned profits, interest, attorney’s fees and costs against B.
Art. 1475
71
Issue: The issue posed for resolution is whether or not a
contract of sale has been perfected between the parties.
Held: (1) A meeting of the minds has occurred. — “The offer by
petitioner [S] was manifested on December 17, 1981 when petitioner
submitted its proposal containing the item number, quantity,
part number, description, the unit price and total to private
respondent [B]. On December 24, 1981, private respondent
informed petitioner of his desire to avail of the prices of the
parts at that time and simultaneously enclosed its Purchase
Order No. 0101 dated December 14, 1981. At this stage, a meeting
of the minds between vendor and vendee has occurred, the
object of the contract being the spare parts and the consideration,
the price stated in petitioner’s offer dated December 17,
1981 and accepted by the respondent on December 24, 1981.
Although said purchase order did not contain the quantity
he wanted to order, private respondent made good his promise
to communicate the same on December 29, 1981. At this juncture,
it should be pointed out that private respondent was already
in the process of executing the agreement previously
reached between the parties.’’
(2) B has accepted S’s offer. — “There appears this statement
made by private respondent: “Note above P.O. will include a
3% discount. The above will serve as our initial P.O.” This notation
on the purchase order was another indication of acceptance
on the part of the vendee, for by requesting a 3% discount,
he implicitly accepted the price as first offered by the vendor.
The immediate acceptance by the vendee of the offer was impelled
by the fact that on January 1, 1982, prices would go up,
as in fact, the petitioner informed him that there would be a 7%
increase effective January 1982. On the other hand, concurrence
by the vendor with the said discount requested by the vendee
was manifested when petitioner immediately ordered the items
needed by private respondent from Schuback Hamburg which
in turn ordered from NDK, a supplier of MAN spare parts in
West Germany.”
(3) Contract was perfected on December 24, 1981. — “While
we agree with the trial court’s conclusion that indeed a perfection
of the contract was reached between the parties, we differ
as to the exact date when it occurred, for perfection took place,
not on December 29, 1981, but rather on December 24, 1981.
Although the quantity to be ordered was made determinate on
72 SALES
only December 24, 1991, quantity is immaterial in the perfection
of sales contract. What is of importance is the meeting of
the minds as to the object and cause, which from the facts disclosed,
show that as of December 24, 1981, these essential elements
had already concurred.”
(4) Opening of letter was not intended as a suspensive condition.
— “On the part of the buyer, the situation reveals that private
respondent failed to open an irrevocable letter of credit
without recourse in favor of Johannes Schuback of Hamburg,
Germany. This omission, however, does not prevent the perfection
of the contract between the parties, for the opening of a
letter of credit is not to be deemed a suspensive condition. The
facts herein do not show that petitioner reserved title to the
goods until private respondent had opened a letter of credit.
Petitioner, in the course of its dealings with private respondent,
did not incorporate any provision declaring their contract
of sale without effect until after the fulfillment of the act of opening
a letter of credit. The opening of a letter of credit in favor of
vendor in only a mode of payment. It is not among the essential
requirements of a contract of sale enumerated in Articles of
day of which will prevent the perfection of the contract from
taking place.” (Johannes Schuback & Sons Phil. Trading Corp. vs.
Effect of failure to pay price.
Failure to pay the consideration of contract is different from
lack of consideration; the former results in a right to demand
fulfillment or cancellation of the obligation under an existing valid
contract, while the latter prevents the existence of a valid contract.
(Montecillo vs. Reyes, 170 SCAD 440, 385 SCRA 244 [2002].)
(1) The failure to pay the stipulated price after the execution
of the contract does not convert the contract into one without cause
or consideration as to vitiate the validity of the contract, it not
being essential for the existence of cause that payment or full
payment be made at the time of the contract. (Puato vs. Mendoza,
64 Phil. 417 [1937].) Non-payment of the purchase price is not
among the instances where the law declares a contract of sale to
be null and void. (Peñalosa vs. Santos, 153 SCAD 531, 363 SCRA
545 [2001].) Such failure does not ipso facto resolve the contract in
the absence of any agreement to that effect. (De la Cruz vs.
Art. 1475
73
Legaspi, 98 Phil. 43 [1955]; Ocampo vs. Court of Appeals, 52 SCAD
610, 233 SCRA 551 [1994].)
The situation is rather one in which there is failure to pay the
consideration, with its resultant consequences. The vendor’s remedy
in such case is generally to demand specific performance or
rescission with damages in either case under Article 1191. (De la
Cruz vs. Legaspi, supra; Chua Hai vs. Kapunan, Jr., 103 Phil. 110
[1958]; Lebrilla vs. Intermediate Appellate Court, 180 SCRA 188
[1989].)
(2) But a contract of sale is null and void where the purchase
price, which appears thereon as paid, has, in fact, never been paid
by the buyer to the seller. In such case, the sale is without cause or
consideration. (Art. 1409[3].) Such sale is non-existent or cannot
be considered consummated. It produces no effect whatsoever.
(Mapalo vs. Mapalo, 17 SCRA 114 [1966]; Yu Bun Guan vs. Ong,
157 SCAD 38, 367 SCRA 559 [2001]; Montecillo vs. Reyes, supra.)
If the real price is not stated in the contract, then the contract
is valid but subject to reformation. If there is no meeting of the
minds of the parties as to the price, because the price stipulated
in the contract is simulated, then the contract is void. Article 1471
states that if the price is simulated, the sale is void. (Buenaventura
ILLUSTRATIVE CASES:
1. Seller is authorized by the contract, in case of buyer’s default,
to recover interest sold in property which was subsequently
damaged, and buyer defaulted.
Facts: S and B were the co-owners in equal shares of a motor
boat. By written contract, S sold her undivided interest in
the boat to B payable in three (3) equal installments. In case of
default “the buyer authorizes the seller to recover her one-half
participation of ownership of the boat without obligation to
reimburse the payments made by the buyer.” B defaulted after
P750.00 was paid. Later, the boat was damaged by a typhoon.
S filed action to recover the balance of the purchase price.
B answered that he had notified S to take over her half interest
in the boat, which she refused to do.
Issue: Under the contract, is B relieved of the obligation to
pay the purchase price?
74 SALES
Held: No. The sole fact that the contract of sale between the
parties only provides that in case of default “the buyer authorizes
xxx,” and is silent on the seller’s right to exact payment of
the outstanding balance, there being no other stipulations incompatible
therewith, does not import that the seller has thereby
lost the alternative right to demand full payment. (see Cui vs.
Sun Chuan, 41 Phil. 523.) This becomes more apparent from the
circumstance that the contract as written confers upon the seller
the right (“buyer authorizes the seller”) to rescind the sale and
recover her half interest, but does not obligate her to do so.
Since S chose to collect full payment as she is entitled to
do, the loss of the boat without fault of the buyer (B) is irrelevant
to the case. The generic obligation to pay monthly is not
excused by fortuitous loss of any specific property of the debtor.
(Ramirez vs. Court of Appeals, 98 Phil. 225 [1956].)
———— ———— ————
2. Subject matter of sale is “24,000 tons of iron ore, more or
less” already extracted, for a lump sum, and buyer, refusing to pay,
claims short-delivery and asks for damages.
Facts: S embarked upon the exploration and development
of mining claims belonging to B. Later, they executed a document
wherein S transferred to B all of S’s rights and interest
over the “24,000 tons of iron ore, more or less” that S had already
extracted from the mineral claims in consideration of a
downpayment of P10,000.00 and the balance of P65,000.00
which will be paid out of the “first shipment of iron ore and of
the first amount derived from the local sale of iron ore made”
from said claims, which amount was secured by a surety bond
executed by B in favor of S.
No sale of the approximately 24,000 tons of iron ore had
been made nor had the P65,000.00 been paid. S brought suit for
the recovery of the balance of the purchase price. B claims a
short delivery, and asks for damages. There is no charge that S
did not deliver to B all the ore found in the stockpiles in the
mining claims in question.
Issue: If there had been short delivery, as claimed by B, is
he entitled to the payment of damages?
Held: No. (1) Contract is sale of specific mass of tangible goods.
— “The sale between the parties is a sale of specific mass of
fungible goods because no provision was made in their con-
Art. 1475
75
tract for the measuring or weighing of the ore sold in order to
complete or perfect the sale nor was the price of P75,000.00
agreed upon based upon any such measurement. (Art. 1480,
par. 2.) The subject matter of sale is a determinate object, the
mass, for a single price or lump sum (the quantity ‘24,000 tons
of iron ore, more or less,’ being a mere estimate by the parties
of the total tonnage weight of the mass), and not the actual
number of units or tons contained therein so that all that was
required of S was to deliver in good faith to B all the ore found
in the mass, notwithstanding that the quantity delivered is less
than the amount estimated by them.’’
(2) Reasonable percentage of error considered. — “Even granting
the estimate of 21,889.7 tons made by B is correct, considering
that the actual weighing of each unit of the mass was practically
impossible, a reasonable percentage of error should be
allowed anyone making an estimate of the exact quantity in
tons found in the mass. In this case, both parties predicated
their respective claims only upon an estimated number of cubic
meters of ore multiplied by the average tonnage factor per
cubic meter. Furthermore, the contract expressly stated the
amount to be 24,000 tons more or less.’’ (Gaite vs. Fonacier, 2
SCRA 830 [1961].)
Right of owner to fix his own price.
(1) The owner of a thing has the right to quote his own price,
reasonable or unreasonable. It is up to the prospective buyer to
accept or reject it. He may even impose a condition hard to fulfill
and name a price quite out of proportion to the real value of the
thing offered for sale. (Cornejo vs. Calupitan, 87 Phil. 555 [1950].)
(2) He is also well within his right to quote a small or nominal
consideration (see Arts. 1470-1471.) and such consideration is
just as effectual and valuable a consideration as a larger sum stipulated
or paid. (see Pelacio vs. Adiosola, [C.A.] No. 7572-R, Sept.
10, 1952.)
ART. 1476. In the case of a sale by auction:
(1) Where goods are put up for sale by auction in
lots, each lot is the subject of a separate contract of
sale.
76 SALES
(2) A sale by auction is perfected when the auctioneer
announces its perfection by the fall of the hammer,
or in other customary manner. Until such announcement
is made, any bidder may retract his bid;
and the auctioneer may withdraw the goods from the
sale unless the auction has been announced to be
without reserve.
(3) A right to bid may be reserved expressly by or
on behalf of the seller, unless otherwise provided by
law or by stipulation.
(4) Where notice has not been given that a sale by
auction is subject to a right to bid on behalf of the
seller, it shall not be lawful for the seller to bid himself
or to employ or induce any person to bid at such
sale on his behalf or for the auctioneer, to employ or
induce any person to bid at such sale on behalf of the
seller or knowingly to take any bid from the seller or
any person employed by him. Any sale contravening
this rule may be treated as fraudulent by the buyer. (n)
Rules governing auction sales.
(1) Sales of separate lots by auction are separate sales. — Where
separate lots are the subject of separate biddings and are separately
knocked down, there is a separate contract in regard to each
lot. As soon as the hammer falls on the first lot, the purchaser of
that lot has a complete and separate bargain. He need not make
another. When a second lot is put up and knocked down to the
highest bidder, there is a separate complete contract as to the said
lot whether the bidder who secured the first lot or whether another
person happens to be the highest bidder. Such is the rule in
No. (1) though no doubt the parties may subsequently consolidate
all the purchases into one transaction — as by giving a single
note — for the aggregate price. (see 2 Williston on Sales [1948
Rev. Ed.], pp. 199-200.)
(2) Sale perfected by the fall of the hammer. — In putting up the
goods for sale, the seller is merely making an invitation to those
present to make offers which they do by making bids (Art. 1326.),
one of which is ultimately accepted. Each bid is an offer and the
Art. 1476
77
contract is perfected only by the fall of the hammer or in other
customary manner. It follows that the bidder may retract his bid
and the auctioneer may withdraw the goods from sale any time
before the hammer falls. However, if the sale has been announced
to be without reserve, the auctioneer cannot withdraw the goods
from sale once a bid has been made and the highest bidder has a
right to enforce his bid. (see 2 Williston, op. cit., pp. 200-201, 204-
205.)
(3) Right of seller to bid in the auction. — The seller or his agent
may bid in an auction sale provided: (a) such right was reserved;
(b) notice was given that the sale is subject to a right to bid on
behalf of the seller; and (c) the right to bid by the seller is not prohibited
by law or by stipulation.16
(a) Where no notice given of right to bid. — Where there is no
notice that the sale is subject to seller’s right to bid, it shall be
unlawful for the seller to bid either directly or indirectly or for
the auctioneer to employ or induce any person to bid on behalf
of the seller. (No. 4.) The purpose of the notice is to prevent
puffing or secret bidding by or on behalf of the seller by
people who are not themselves bound. The employment of a
puffer or by bidder to enhance or inflate the price of the goods
sold is a fraud upon the purchaser and a sufficient ground for
relieving him from his bid and avoiding the sale. (see Fisher
vs. Hersey, 17 Hun. [N.Y.] 370.) This is true although the employment
of the puffer by the auctioneer was without the
owner’s knowledge, since the auctioneer is the owner’s agent.
(b) Where notice of right to bid given. — Though bidding by
the seller or his agent is fraudulent, a right to bid may be expressly
reserved by or on behalf of the seller. (No. 3.) It is,
therefore, the secrecy of puffing which renders it a fraud upon
bidding. (2 Williston, op. cit., p. 208.) Where there is notice of
the intention to bid by the seller, the bidding in such a case
would not operate as a fraud.
16Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover,
have a better right if he should offer the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the only bidder.
Art. 2114. All bids at the public auction shall offer to pay the purchase price at once.
If any other bid is accepted, the pledgee is deemed to have received the purchase price,
as far as the pledgor or owner is concerned.
78 SALES
(4) Contract not to bid. — A sale may be fraudulent not only
because of conduct of the seller, but because of conduct of the
buyer. It is not permissible for intending buyers at auction or other
competitive sales to make an agreement for a consideration that
only one of them shall bid, in order that the property may be
knocked down at a low price. The bargain is fraudulent as regards
the seller though the agreement is without consideration, if it is
actually carried out, for the fraud against the seller is the same as
if there were considerations. (Ibid., pp. 209-219.)
(5) Advertisements for bidders. — They are simply invitations
to make proposals, and the advertiser is not bound to accept the
highest or lowest bidder, unless the contrary appears. (Art. 1326.)
Right of owner to prescribe terms
of public auction.
The owner of property which is offered for sale, either at public
or private auction, has the right to prescribe the manner, conditions,
and terms of such sale. He may provide that all of the purchase
price or any portion thereof should be paid at the time of
the sale, or that time will be given for that payment, or that any
or all bids may be rejected.
The conditions of a public sale announced by an auctioneer
or by the owner of the property at the time and place of the sale
are binding upon all bidders, whether they knew of such conditions
or not. (Leoquinco vs. Postal Savings Bank, 47 Phil. 772
[1925].)
ART. 1477. The ownership of the thing sold shall
be transferred to the vendee upon the actual or constructive
delivery thereof. (n)
ART. 1478. The parties may stipulate that ownership
in the thing shall not pass to the purchaser until
he has fully paid the price. (n)
Ownership of thing transferred
by delivery.
The delivery of the thing sold is essential in a contract of sale.
Without it, the purchaser may not enjoy the thing sold to him. It
Arts. 1477-1478
79
is only after the delivery of the thing sold that the purchaser acquires
a real right or ownership over it. (Arts. 1164, 1496-1497.)
In the absence of stipulation to the contrary, the ownership of
the thing sold passes on to the vendee upon delivery thereof. (see
Froilan vs. Pan Oriental Shipping Co., 12 SCRA 276 [1964]; Boy vs.
Court of Appeals, 427 SCRA 196 [2004].) This is true even if the
purchase has been made on credit. Payment of the purchase price
is not essential to the transfer of ownership, as long as the property
sold has been delivered. (Sampaguita Pictures, Inc. vs.
Jalwindor Manufacturers, Inc., 93 SCRA 420 [1979].) Non-payment
only creates a right to demand payment or to rescind the contract,
or to criminal prosecution in the case of bouncing checks. (EDCA
Publishing and Distributing Corp. vs. Santos, 184 SCRA 614
[1990].)
The delivery may be actual (Art. 1497.) or constructive. (Arts.
1498-1501.) The contract is consummated by the delivery of the
thing sold and of the purchase money.
In all forms of delivery, it is necessary that the act of delivery,
whether actual or constructive, should be coupled with the intention
of delivering the thing sold. The act without the intention is
insufficient; there is no tradition. (Union Motor Corporation vs.
Court of Appeals, 151 SCAD 714, 361 SCRA 506 [2001].) It has been
held that the issuance of a sales invoice does not prove transfer
of ownership of the thing sold to the buyer, an invoice being nothing
more than a detailed statement of the nature, quantity, and
cost of the thing sold, and considered not a bill of sale. (Ibid., citing
P.T. Cerna Corporation vs. Court of Appeals, 221 SCRA 19
[1993]; Norkis Distributor’s, Inc. vs. Court of Appeals, 93 SCRA
694 [1991].)
Exceptions to the rule.
(1) Contrary stipulation. — The ownership of things is transferred
by delivery, and not by mere payment. However, the parties
may stipulate that despite the delivery, the ownership of the
thing shall remain with the seller until the purchaser has fully paid
the price. (see Art. 1503.) In other words, non-payment of the price,
after the thing has been delivered, prevents the transfer of ownership
only if such is the stipulation of the parties. This stipula-
Arts. 1477-1478 NATURE AND FORM OF THE CONTRACT
80 SALES
tion is usually known as pactum reservati dominii or contractual
reservation of title, and is common in sales on the installment plan.
(Jovellanos vs. Court of Appeals, 210 SCRA 126 [1992].) A contract
which contains this kind of stipulation is considered a contract
to sell. The agreement may be implied. (Adelfa Properties,
Inc. vs. Court of Appeals, 58 SCAD 462, 240 SCRA 565 [1995].)
(a) Where in a contract of sale the seller agreed that the
ownership of the goods shall remain with the seller until the
purchase price shall have been fully paid, merely to secure the
performance by the buyer of his obligation, such stipulation
cannot make the seller liable in case of loss of the goods. (see
Lawyers Cooperative Publishing Co. vs. Tabora, 13 SCRA 762
[1965]; see Art. 1503, par. 2.)
(b) If there is doubt by the wording of the contract whether
the parties intended a suspensive condition (Art. 1478.) or a
suspensive period (Art. 1193, par. 1.) for the payment of the
stipulated price, the doubt shall be resolved in favor of the
greatest reciprocity of interests. (see Art. 1378.) There can be
no question that greater reciprocity will be obtained if the
buyer’s obligation is deemed to be actually existing, with only
its maturity (due date) postponed or deferred. Sale is essentially
onerous. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)
(c) A stipulation that ownership in the thing sold shall not
pass to the purchaser until after he has fully paid the price
thereof could only be binding upon the contracting parties,
their assigns, and heirs (see Art. 1311, par. 1.) but not upon third
persons without notice. Such a stipulation is only a kind of
security for the benefit of the vendor who has not been fully
paid.
(2) Contract to sell. — In contracts to sell, where ownership is
retained by the seller and is not to pass until the full payment of
the price, such payment is a positive suspensive condition, the failure
of which is not a breach, casual or serious, but simply an event
that prevents the obligation of the vendor to convey title from
acquiring binding force. To say that there is only a casual breach
is to proceed from the assumption that the contract is one of absolute
sale, where non-payment is a resolutory condition, which
is not the case. (Luzon Brokerage Co., Inc. vs. Maritime Bldg., Co.
Arts. 1477-1478
81
Inc., 43 SCRA 93 [1972] and 86 SCRA 305 [1978]; Manuel vs.
Rodriguez, 109 Phil. 1 [1960]; Roque vs. Lapuz, 96 SCRA 741
[1980]; see Art. 1184.)
(3) Contract of insurance. — A perfected contract of sale even
without delivery vests in the vendee an equitable title, an existing
interest over the goods sufficient to be the subject of insurance.
(see Sec. 14[a], Insurance Code.) Thus, a perfected contract of sale
between the vendee-consignee and the shipper of goods operates
to vest in the former an equitable title even before delivery or
before he performed the conditions of the sale, the contract of
shipment, whether under F.O.B., or C.I.F., or C & F, being immaterial
in the determination of whether the vendee has an insurable
interest or not in the goods. (Filipino Merchants Insurance
Co., Inc. vs. Court of Appeals, 179 SCRA 638 [1989].)
ART. 1479. A promise to buy and sell a determinate
thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon
the promissor if the promise is supported by a consideration
distinct from the price. (1451a)
Kinds of promise treated in Article 1479.
The above article refers to three kinds of promises, namely:
(1) An accepted unilateral promise to sell in which the promisee
(acceptor) elects to buy;
(2) An accepted unilateral promise to buy in which the promisee
(acceptor) elects to sell; and
(3) A bilateral promise to buy and sell reciprocally accepted
in which either of the parties chooses to exact fulfillment. (see 10
Manresa 71.)
Effect of unaccepted unilateral promise.
A unilateral promise or offer to sell or to buy a thing which is
not accepted creates no juridical effect or legal bond. Such
unaccepted imperfect promise or offer is called policitacion. A pe-
82 SALES
riod may be given to the offeree within which to accept the offer.
(infra.)
EXAMPLE:
S offers or promises to sell to B his car at a stated price and
B just let the promise go by without accepting it. Neither S nor
B is bound by any contract. Obviously, this is not the one contemplated
in Article 1479.
Meaning of option.
An option is a privilege existing in one person for which he
has paid a consideration which gives him the right to buy/sell,
for example, certain merchandise or certain specified property,
from/to another person, if he chooses, at any time within the
agreed period at a fixed price, or under, or in compliance with
certain terms and conditions.
Nature of option contract.
(1) An option is a contract. It is a preparatory contract, separate
and distinct from the main contract itself (subject matter of
the option) which the parties may enter into upon the consummation
of the option.
(2) It gives the party granted the option the right to decide,
whether or not to enter into a principal contract, while it binds
the party who has given the option, not to enter into the principal
contract with any other person during the agreed time and
within that period, to enter into such contract with the one to
whom the option was granted if the latter should decide to use
the option.17 (see Carceller vs. Court of Appeals, 103 SCAD 258,
302 SCRA 718 [1999]; Litonjua vs. L & R Corporation, 328 SCRA
796 [2000].)
(3) An option must be supported by a consideration distinct
from the price. (Co. vs. Court of Appeals, 312 SCRA 528 [1999];
Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643 [2000];
17In a right of first refusal, while the object might be made determinate, the exercise
of the right would be dependent not only on the grantor’s eventual intention to enter
into a binding juridical relation with another but also on terms, including the price, that
are yet to be firmed up. (Vasquez vs. Ayala Corporaton, 443 SCRA 218 [2004].)
Art. 1479
83
Abalos vs. Macatangay, Jr., 439 SCRA 649 [2004].) The promisee
has the burden of proving such consideration. (see Vasquez vs.
(4) A consideration of an option contract is just as important
as the consideration for any other kind of contract. (see Enriquez
de la Cavada vs. Diaz, 37 Phil. 982 [1918].) An option without
consideration is void; the effect is the same as if there was no
option.
Effect of accepted unilateral promise.
The second paragraph of Article 1479 refers to what is called
as “option” in the commercial world.
A unilateral promise to sell or to buy a determinate thing for
a price certain does not bind the promissor even if accepted and
may be withdrawn at any time. It is only if the promise is supported
by a consideration distinct and separate from the price that
its acceptance will give rise to a perfected contract.
The optionee (holder of the option), after accepting the option
and before he exercises it, has the right, but not the obligation, to
buy or sell, as the case may be. Once the option is exercised, i.e.,
offer is accepted before a breach of the option, a bilateral promise
to sell and to buy ensues and both parties are then reciprocally
bound to comply with their respective undertakings. It would be
a breach of the option for the optioner-offeror to withdraw the offer
during the agreed period. If in fact, he withdraws the offer before
its acceptance (exercise of the option) by the optionee-offeree, the
latter may not sue for specific performance on the proposed contract
since it has failed to reach its own stage of perfection. The
offeror, however, renders himself liable for damages for breach of
the option.18 (Asuncion vs. Court of Appeals, 56 SCAD 163, 238
SCRA 602 [1994].)
18An option imposes no binding obligation on the optionee, aside from the consideration
for the offer. Until accepted, it is not, properly speaking, treated as a contract.
(Tayag vs. Lacson, 426 SCRA 282 [2004]; Adelfa Properties, Inc. vs. Court of Appeals,
240 SCRA 565 [1995].) When the consideration given, for what otherwise would have
been an option, partakes the nature in reality of a part payment of the purchase price
(termed as earnest money [Art. 1482.] and considered as an initial payment thereof), an
actual contract of sale is deemed entered into and enforceable as such. (Asuncion vs.
Court of Appeals, supra.)
84 SALES
Consideration in an option contract may be anything of value,
unlike in sale where it must be the price certain in money or its
equivalent. Lacking any proof of such consideration, the option
is unenforceable. (San Miguel Properties Philippines, Inc. vs.
Huang, 130 SCAD 713, 336 SCRA 737 [2000].) A contract of option
to buy is separate from the contract to sell, and both contracts
need separate and distinct considerations for validity. (Dijamco
EXAMPLE:
In the preceding example, even if B accepts the promise of
S (this is a case of an accepted unilateral promise to sell), S is
not bound to sell his car to B because there is no promise, in
turn, on the part of B to buy.
However, if the promise is covered by a consideration distinct
from the price of the car, as when B paid or promised to
pay a sum of money to S for giving him the right to buy the car
if he chooses within an agreed period at a fixed price, its acceptance
produces consent or meeting of the minds. A legally binding
and independent contract of option is deemed perfected.
ILLUSTRATIVE CASE:
Stipulation in mortgage deed gives mortgagees option to purchase
mortgaged property within a certain period at an agreed price.
Facts: A provision in a mortgage deed states: “That it has
likewise been agreed that if the financial condition of the mortgagees
will permit, they may purchase said land absolutely on
any date within the two-year term of this mortgage at the agreed
price of P3,900.” The mortgagors contend that as such, they
cannot be deprived of the right to redeem the mortgaged property
because such right is inherent in and inseparable from this
kind of contract.
Issue: Having reasonably advised the mortgagors that they
had decided to buy the land in question pursuant to the
aforequoted provision, are the mortgagees entitled to specific
performance consisting of the execution by the mortgagors of
the corresponding deed of sale?
Held: Yes. The added special provision renders the mortgagors’
right to redeem defeasible at the election of the mortgagees.
There is nothing illegal or immoral in this. It is simply an
Art. 1479
85
option to buy sanctioned by Article 1479. In this case, the mortgagors’
promise to sell is supported by the same consideration
as that as the mortgage itself, which is distinct from that which
would support the sale, an additional amount having been
agreed upon, to make up the entire price of P3,900, should the
option be exercised. The mortgagors’ promise was in the nature
of a continuing offer, non-withdrawable during a period
of two years which, upon acceptance by the mortgagees, gave
rise to a perfected contract of purchase and sale. (Soriano vs.
Bautista, 6 SCRA 946 [1962]; see Direct Funders Holdings Corp.
vs. Laviña, 373 SCRA 645 [2002].)
Full payment of price not necessary
for exercise of option to buy.
The obligations under an option to buy are reciprocal obligations
— the performance of one obligation is conditioned upon
the simultaneous fulfillment of the other obligation. (Art. 1169.)
In an option to buy, the party who has an option may validly
and effectively exercise his right by merely notifying the owner
of the former’s decision to buy and expressing his readiness to
pay the stipulated price.
The notice need not be coupled with actual payment of the
purchase price so long as this is delivered to the owner of the
property upon the execution and delivery by him of the deed of
sale. The payment of the price is contingent upon the delivery of
the deed of sale. Unless and until the owner shall have done this,
the buyer who has the option is not and cannot be held in default
in the discharge of his obligation to pay. (Nietes vs. Court of Appeals,
46 SCRA 654 [1972].) Consequently, since the obligation to
pay is not yet due, consignation19 in court of the purchase price is
not required. (Heirs of Luis Bacus vs. Court of Appeals, 341 SCRA
2295 [2003].)
An option to buy is not, of course, a contract of purchase and
sale. (Kilosbayan, Inc. vs. Morato, 63 SCAD 97, 246 SCRA 540
[1995].)
19Consignation is the act of depositing the thing or sum due with the proper court
whenever the creditor cannot accept or refuses to accept payment. It generally requires
a prior tender of payment. Where no debt is due and owing, consignation is not proper.
(see Arts. 1256, 1257, 1258; Legaspi vs. Court of Appeals, 142 SCRA 82 [1986].)
86 SALES
Article 1479 and Article 1324 compared.
Article 1324 of the Civil Code provides as follows:
“When the offerer has allowed the offeree a certain period
to accept, the offer may be withdrawn at any time before acceptance
by communicating such withdrawal, except when
the option is founded upon a consideration, as something paid
or promised.”
Under the above-quoted article, the general rule regarding
offer and acceptance (see Art. 1319.) is that, when the offerer has
allowed the offeree a certain period within which to accept the
offer, the offer may be withdrawn as a matter of right at any time
before acceptance. But if the option is founded upon a separate
consideration, the offerer cannot withdraw his offer, even if the
same has not yet been accepted, before the expiration of the stipulated
period. Regardless of whether it is supported by a consideration
or not, the offer, of course, cannot be withdrawn after acceptance
of the offer.
This general rule as embodied in Article 1324 was interpreted
as modified by the provision of Article 1479 which applies specifically
to a promise “to buy or to sell.” As already stated, this
rule requires that for a promise to sell to be valid, it must be supported
by a consideration distinct from the price. American authorities
which hold that an offer, once accepted, cannot be withdrawn,
regardless of whether or not it is supported by a consideration
(62 Am. Jur. 528.), uphold the general rule applicable to
offer and acceptance as contained in our Civil Code. (Art. 1319;
see Southern Sugar & Mollasses Co. vs. Atlantic Gulf & Pacific
Co., 97 Phil. 249 [1955]; Mendoza vs. Comple, 15 SCRA 162 [1965].)
In a later case (Sanchez vs. Rigos, 45 SCRA 368 [1972], infra.),
the Supreme Court abandoned the view adhered to in Southwestern
Sugar (supra.) which holds that an option to sell can still be
withdrawn, even if accepted, if the same is not supported by any
consideration, and reaffirmed the doctrine in Atkins, Kroll & Co.,
Inc. vs. Cua Hian Tek (102 Phil. 948 [1958], infra.), holding that it
could no longer be withdrawn after acceptance. In other words,
if acceptance is made before withdrawal, it constitutes a binding
contract of sale although the option is given without considera-
Art. 1479
87
tion. Before acceptance, the offer may be withdrawn as a matter
of right.20 Be that as it may, the offerer cannot revoke, before the
period has expired, in an arbitrary or capricious manner the offer
without being liable for damages which the offeree may suffer
under Article 19 of the Civil Code.
ILLUSTRATIVE CASES:
1. Promissor withdrew an option to sell, which is not supported
by any consideration, after its acceptance by promisee.
Facts: S and B executed an instrument, entitled “Option to
Purchase,” whereby S agreed, promised, and committed “x x x
to sell” to B for a certain sum a parcel of land within two (2)
years with the understanding that said option shall be deemed
“terminated and elapsed” if B shall fail to exercise the right to
buy the property “within the stipulated period.’’
Inasmuch as several tenders of payment made by B were
rejected by S, the former commenced an action for specific performance.
Issue: Can the promissor withdraw an option to sell, after
acceptance, if the option is not supported by any consideration?
20Article 1324 may be interpreted to refer to a bilateral promise (e.g., to buy and
sell). Hence, the offer (to sell or buy) may not be withdrawn after acceptance of the offer.
The offer may be withdrawn before acceptance since there is no meeting of minds yet,
unless an option supported by a consideration has been granted. A unilateral promise to
sell or buy does not bind the offerer even after acceptance except where the promise is
supported by a consideration distinct from the price.
In Rural Bank of Parañaque vs. Remolado (135 SCRA 409 [1985].), the commitment by
a bank to resell a property within a specified period, although accepted by the party in
whose favor it was made, was considered an option not supported by a consideration
distinct from the price and, therefore, not binding upon the promissor. Lacking such
consideration, the option was held void pursuant to Southwestern Sugar and Molasses Co.
case.
To the same effect is the recent case of Natno vs. Intermediate Appellate Court. (179
SCRA 323 [1991].) Citing Rural Bank of Parañaque, Inc. case, the Supreme Court held that
the promise made by the President of a bank to allow the petitioners to buy (or to re-sell
to them) the foreclosed property (not redeemed since the offer took place after the expiration
of the redemption period) at any time they have money is not binding on the
bank because it was a promise unsupported by a consideration distinct from the repurchase
price.
In Diamante vs. Court of Appeals (206 SCRA 52 [1992].), the Option to Repurchase
executed by the vendee after the sale in favor of the vendor was held merely a promise
to sell governed by Article 1479, sale in the absence of a separate consideration was not
binding upon the promissor (vendee) even if the promise was accepted.
88 SALES
Held: No. (1) Acceptance resulted in perfected contract of sale.
— “Since there may be no valid contract without cause or consideration,
the promissor (S) is not bound by his promise and
may accordingly withdraw it. Pending notice of its withdrawal,
his accepted promise partakes, however, of the nature of an
offer to sell which, if accepted, results in a perfected contract of
sale. This view has the advantage of avoiding a conflict between
Article 1324 (on the general principles on contracts) and Article
1479 (on sales) of the Civil Code, in line with the cardinal
rule of statutory construction that, in construing different provisions
of one and the same law or code, such interpretation
should be favored as will reconcile or harmonize said provisions
and avoid a conflict between the same.’’
(2) Exceptions not favored. — “Moreover, the decision in the
Southwestern case (supra.), in effect, considers Article 1479 as an
exception to Article 1324, and exceptions are not favored unless
the intention to the contrary is clear, and it is not so insofar
as said two (2) articles are concerned. What is more, the reference,
in both the second paragraph of Article 1479 and Article
1324, to an option or promise supported by or founded upon a
consideration, strongly suggests that the two (2) provisions intended
to enforce or implement the same principle.
The doctrine laid down in the Atkins case (supra.) is reaffirmed,
and, insofar as inconsistent therewith, the view adhered
to in Southwestern case should be deemed abandoned or modified.
21 (Sanchez vs. Rigos, supra.)
———— ———— ————
21Inthe case of Cronico vs. J.M. Tuazon & Co., Inc. (78 SCRA 331 [1977].), the Supreme
Court said: “In order that a unilateral promise may be binding upon a promissor, Article
1479 . . . requires the concurrence of the condition that the promise be supported by a
consideration distinct from the price.” To the same effect is Montilla vs. Court of Appeals
(161 SCRA 167 [1988].) and Salame vs. Court of Appeals, 57 SCAD 631, 239 SCRA 356
(1994).
In an earlier case, the Supreme Court, in rejecting the holding of the Court of Appeals,
“that Isabel Ariolas’ promise (to sell) does not bind Rowena Teodoro (petitioner)
because it is not supported by a consideration distinct from the price pursuant to Article
1479, held: “That consideration is expressed in Exhibit ‘A’ under which the petitioners
shouldered all rental expenses payable by Ariola for her occupation of the property
(leased and subsequently sold to her by the former owner). This should be distinguished
from a sublease arrangement in which the sublessee’s responsibility as and for rents
due the lessor is subsidiary. But here, the petitioners bound themselves primarily to
answer for the rents. That is enough consideration to support Ariola’s promise.” (Teodoro
Art. 1479
89
2. The Deed of Option which was in the same document does
not provide for the period within which the parties may demand the
performance of their respective undertakings.
Facts: R, owner of a 600-meter lot, sold a portion of 300
square meters of the lot to spouses V, for P21,000.00 or P70.00
per square meter. Subsequently, R, with the consent of her husband,
executed a Deed of Option in favor of V in which the
remaining 300 square meters portion of the property would be
sold to V under the conditions stated therein. The Court of
Appeals ruled that the Deed of Option was void for lack of
consideration.
Issue: The pivotal issue to be resolved is the validity of the
Deed of Option whereby the private respondents (R and her
husband) agreed to sell their lot to petitioners (spouses V)
“whenever the need of such sale arises” on the part of either
parties.
Held: (1) Option supported by a consideration. — “As expressed
in Gonzales vs. Trinidad (67 Phil. 682 [1939].), consideration is
‘the why of the contract, the essential reason which moves the
contracting parties to enter into the contract’. The cause or the
impelling reason on the part of private respondent in executing
the deed of option as appearing in the deed itself is the
petitioners’ having agreed to buy the 300 square meters of private
respondents’ land at P70.00 per square meter portion
‘which was greatly higher than the actual reasonable prevailing
price’. This cause or consideration is clear from the deed
which stated: ‘That the only reason why the spouses-vendees
Julio Villamor and Marina V. Villamor agreed to buy the said
one-half portion at the above-stated price of about P70.00 per
square meter, is because I, and my husband Roberto Reyes, have
agreed to sell and convey to them the remaining one-half portion
still owned by me x x x.’
The respondent appellate court failed to give due consideration
to petitioners’ evidence which shows that in 1969 the
Villamor spouses bought an adjacent lot from the brother of
Macaria Labing-isa for only P18.00 per square meter which the
private respondents did not rebut. Thus, expressed in terms of
money, the consideration for the deed of option is the difference
between the purchase price of the 300-square meter portion
of the lot in 1971 (P70.00 per sq.m.) and the prevailing reasonable
price of the same lot in 1971. Whatever it is (P25.00 or
P18.00), though not specifically stated in the deed of option,
90 SALES
was ascertainable. Petitioners’ allegedly paying P52.00 per
square meter for the option may, as opined by the appellate
court, be improbable but improbabilities do not invalidate a
contract freely entered into by the parties.”
(2) Private respondents as well were granted an option to sell.
— “The ‘deed of option’ entered into by the parties in this case
had unique features. Ordinarily, an optional contract is a privilege
existing in one person, for which he had paid a consideration
and which gives him the right to buy, for example, certain
merchandise or certain specified property, from another person,
if he chooses, at any time within the agreed period at a fixed
price. (Enriquez de la Cavada vs. Diaz, 37 Phil. 982 [1918].) If
we look closely at the ‘deed of option’ signed by the parties, we
will notice that the first part covered the statement on the sale
of the 300-square-meter portion of the lot to Spouses Villamor
at the price of P70.00 per square meter ‘which was higher than
the actual reasonable prevailing value of the lands in that place
at that time (of sale).’
The second part stated that the only reason why the
Villamor spouses agreed to buy the said lot at a much higher
price is because the vendor (Reyeses) also agreed to sell to the
Villamors the other half-portion of 300 square meters of the land.
Had the deed stopped there, there would be no dispute that the
deed is really an ordinary deed of option granting the Villamors
the other half-portion of 300 square meters of the lot in consideration
of their having agreed to buy the other half of the land
for a much higher price. But, the ‘deed of option’ went on and
stated that the sale arises, either on our (Reyeses) part or on the
part of the Spouses Julio Villamor and Marina V. Villamor. It
appears that while the option to buy was granted to the
Villamors, the Reyeses were likewise granted an option to sell.
In other words, it was not only the Villamors who were granted
an option to buy for which they paid a consideration. The
Reyeses as well were granted an option to sell should the need
for such sale on their part arises.”
(3) Offer to sell had been accepted. — “In the instant case, the
option offered by private respondents had been accepted by
the petitioner, the promisee, in the same document. The acceptance
of an order to sell for a price certain created a bilateral
contract to sell and buy and upon acceptance, the offeree ipso
facto assumes obligations of a vendee. (see Atkins, Kroll & Co.
vs. Cua Hian Tek, 102 Phil. 948 [1958].) Deman dability may be
exercised at any time after the execution of the deed. In Sanchez
Art. 1479
91
vs. Rigos (45 SCRA 368 [1972].), We held: ‘In other words, since
there may be no valid contract without a cause of consideration,
the promissor is not bound by this promise and may accordingly
withdraw it. Pending notice of its withdrawal, his accepted
promise partakes, however, of the nature of an offer to sell which,
if accepted, results in a perfected contract of sale.”
(4) Acceptance created a perfected contract of sale. — A contract
of sale is, under Article 1475 of the Civil Code, perfected
at the moment there is a meeting of minds upon the thing which
is the object of the contract and upon the price. From that moment,
the parties may reciprocally demand performance, subject
to the provisions of the law governing the form of contracts.
Since there was, between the parties, a meeting of minds upon
the object and the price, there was already a perfected contract
of sale. What was, however, left to be done was for either party
to demand from the other their respective undertakings under
the contract. It may be demanded at any time either by the private
respondents, who may compel the petitioners to pay for
the property or the petitioners, who may compel the private
respondents to deliver the property.”
(5) Action to enforce contract had prescribed. — “However,
the Deed of Option did not provide for the period within which
the parties may demand the performance of their respective
undertakings in the instrument. The parties could not have contemplated
that the delivery of the property and the payment
thereof could be made indefinitely and render uncertain the
status of the land. The failure of either parties to demand performance
of the obligation of the other for an unreasonable
length of time renders the contract ineffective.
Under Article 1144(1) of the Civil Code, actions upon a written
contract must be brought within ten (10) years. The Deed of
Option was executed on November 11, 1971. The acceptance,
as already mentioned, was also accepted in the same instrument.
The complaint in this case was filed by the petitioners on
July 13, 1987, seventeen (17) years from the time of the execution
of the contract. Hence, the right of action had prescribed.’’
(Villamor vs. Court of Appeals, 202 SCRA 607 [1991].)
———— ———— ————
3. The contract of lease gives the lessee 30-day exclusive option
to purchase the leased premises
Facts: A contract of lease in paragraph 8 provides: “x x x
that if the lessor [R] should desire to sell the leased premises,
92 SALES
the LESSEE [E] shall be given 30 days exclusive option to the
same. In the event, however, that the leased premises is sold to
someone other than the LESSEE, the LESSOR is bound and
obligated, as it hereby binds and obligates itself, to stipulate in
the Deed of Sale thereof that the purchaser shall recognize this
lease and be bound by all the terms and conditions thereof.’’
The lessor later sold his property including the leased
premises located thereon to petitioner (P).
Rereading the law on the matter of sales and option contracts,
respondent Court of Appeals differentiated between
Article 1324 and Article 1479 of the Civil Code, analyzed their
application to the facts of this case, and concluded that since
paragraph 8 of the two lease contracts does not state a fixed
price for the purchase of the leased premises, which is an essential
element for a contract of sale to be perfected, what paragraph
8 is, must be a right of first refusal and not an option
contract. Besides the ruling that paragraph 8 vests in E the right
of first refusal as to which the requirement of distinct consideration
indispensable in an option contract has no application,
respondent appellate court also addressed the claim of R that
assuming arguendo that the option is valid and effective, it is
impossible of performance because it covered only the leased
premises and not the entire property of R whose offer to sell
pertained to the entire property in question.
Issue: Does the contractual stipulation provide for an option
clause or an option contract?
Held: (1) Contractual stipulation is an option clause. — “We
agree with the respondent Court of Appeals that the aforecited
contractual stipulation provides for a right of first refusal in
favor of Mayfair [E]. It is not an option clause or an option contract.
It is a contract of a right of first refusal.
As early as 1916, in the case of Beaumont vs. Prieto (41 Phil.
670.), unequivocal was our characterization of an option contract
as one necessarily involving the choice granted to another
for a distinct and separate consideration as to whether or not
to purchase a determinate thing at a predetermined fixed price.
xxx
The rule so early established in this jurisdiction is that the
deed of option or the option clause in a contract, in order to be
valid and enforceable, must, among other things, indicate the
Art. 1479
93
definite price at which the person granting the option is willing
to sell.
Notably, in one case we held that the lessee loses his right
to buy the leased property for a named price per square meter
upon failure to make the purchase within the time specified
(Tuazon, Jr. vs. De Asis, 107 Phil. 131 [1960].); in one other case
we freed the landowner from her promise to sell her land if the
prospective buyer could raise P4,500.00 in three weeks because
such option was not supported by a distinct consideration
(Mendoza vs. Comple, 15 SCRA 162 [1965].); in the same vein
in yet one other case, we also invalidated an instrument entitled,
“Option to Purchase’’ a parcel of land for the sum of
P1,510.00 because of lack of consideration (Sanchez vs. Rigor,
45 SCRA 368 [1972].); and as an exception to the doctrine enumerated
in the two preceding cases, in another case, we ruled
that the option to buy the leased premises for P12,000.00 as
stipulated in the lease contract, is not without consideration
for in reciprocal contracts, like lease, the obligation or promise
of each party is the consideration for that of the other. (Vda. de
Quirino vs. Palanca, 29 SCRA 1 [1969].) In all these cases, the
selling price of the object thereof is always predetermined and
specified in the option clause in the contract or in the separate
deed of option. x x x.
In the light of the foregoing disquisition and in view of the
wording of the questioned provision in the instant case, we so
hold that no option to purchase in contemplation of the second
paragraph of Article 1479 of the Civil Code, has been granted
to E under the lease contract.
Respondent Court of Appeals correctly ruled that the said
paragraph 8 grants the right of first refusal to E and is not an
option contract. It also correctly reasoned that as such, the requirement
of a separate consideration for the option has no applicability
in the instant case.’’
(2) Right of first refusal is an integral part of the contract of
lease. — “An option is a contract granting a privilege to buy or
sell within an agreed time and at a determined price. It is a
separate and distinct contract from that which the parties may
enter into upon the consummation of the option. It must be
supported by consideration. In the instant case, the right of first
refusal is an integral part of the contract of lease. The consideration
is built into the reciprocal obligations of the parties.
94 SALES
To rule that a contractual stipulation such as that found in
paragraph 8 of the contract is governed by Article 1324 on withdrawal
of the offer or Article 1479 on promise to buy and sell
would render ineffectual or “inutile’’ the provisions on right of
first refusal so commonly inserted in leases of real estate nowadays.
The Court of Appeals is correct in stating that paragraph
8 was incorporated into the contract of lease for the benefit of E
which wanted to be assured that it shall be given the first crack
or the first option to buy the property at the price which R is
willing to accept. It is not also correct to say that there is no
consideration in an agreement of right of first refusal. The stipulation
is part and parcel of the entire contract of lease. The consideration
for the lease includes the consideration for the right
of first refusal. Thus, E is in effect stating that it consents to
lease the premises and to pay the price agreed upon provided
the lessor also consents that, should it sell the leased property,
then, E shall be given the right to match the offered purchase
price and to buy the property at that price.’’
(3) Consequential rights, obligations and liabilities of R, E, and
P. — “It is undisputed that R did recognize this right of E, for it
informed the latter of its intention to sell the said property in
1974. There was an exchange of letters evidencing the offer and
counter-offers made by both parties. R, however, did not pursue
the exercise to its logical end. While it initially recognized
E’s right of first refusal, R violated such right when without
affording its negotiation with E the full process to ripen to at
least an interface of a definite offer and a possible corresponding
acceptance within the “30-day exclusive option’’ time
granted E, R abandoned negotiations, kept a low profile for
some time, and then sold, without prior notice to E, the entire
Claro M. Recto property to Equatorial (P).
Since P is a buyer in bad faith, this finding renders the sale
to it of the property in question rescissible. We agree with respondent
Appellate Court that the records bear out the fact that
P was aware of the lease contract because its lawyers had, prior
to the sale, studied the said contract. As such, P cannot tenably
claim to be a purchaser in good faith, and, therefore, rescission
lies.
xxxxxx
Since E has a right of first refusal, it can execise the right
only if the fraudulent sale is first set aside or rescinded. All of
these matters are now before us and so there should be no piece-
Art. 1479
95
meal determination of this case and leave festering sores to
deteriorate into endless litigation. The facts of the case and considerations
of justice and equity require that we order rescission
here and now.
xxxxxx
This Court has always been against multiplicity of suits
where all remedies according to the facts and the law can be
included. Since R sold the property for P11,300,000.00 to P, the
price at which E could have purchased the property is, therefore,
fixed. It can neither be more nor less. There is no dispute
over it. The damages which E suffered are in terms of actual
injury and lost opportunities. The fairest solution would be to
allow E to exercise its right of first refusal at the price which it
was entitled to accept or reject which is P11,300,000.00.
xxxxxx
Under the Ang Yu Asuncion vs. Court of Appeals (57 SCAD
163, 238 SCRA 602 [1994].) decision, the Court stated that there
was nothing to execute because a contract over the right of first
refusal belongs to a class of preparatory juridical relations governed
not by the law on contracts but by the codal provisions
on human relations. This may apply here if the contract is limited
to the buying and selling of the real property. However,
the obligation of R to first offer the property to E is embodied
in a contract. It is Paragraph 8 on the right of first refusal which
created the obligation. It should be enforced according to the
law on contracts instead of the panoramic and indefinite rule
on human relations. The latter remedy encourages multiplicity
of suits. There is something to execute and that is for R to comply
with its obligation to the property under the right of the
first refusal according to the terms at which they should have
been offered then to E, at the price when that offer should have
been made. Also, E has to accept the offer. This juridical relation
is not amorphous nor it is merely preparatory.
On the question of interest payments on the principal
amount of P11,300,000.00, it must be borne in mind that both R
and P acted in bad faith. R knowingly and deliberately broke a
contract entered into with E. x x x On the part of P, it cannot be
a buyer in good faith because it bought the property with notice
and full knowledge that E had a right to or interest in the
property superior to its own. R and P took unconscientious
advantage of E.
96 SALES
Neither may R and P avail of considerations based on equity
which might warrant the grant of interests. The vendor
received as payment from the vendee what, at the time, was a
full and fair price for the property. It has used the P11,300,000.00
all these years earning income or interest from the amount. P,
on the other hand, has received rents and otherwise profited
from the use of the property turned over to it by R. In fact,
during all the years that this controversy was being litigated, E
paid rentals regularly to the buyer who had an inferior right to
purchase the property. E is under no obligation to pay any interest
arising from the judgment to either R and P.’’ (Equatorial
Realty Development, Inc. vs. Mayfair Theater, Inc., 76 SCAD 407,
264 SCRA 483 [1996].)
———— ———— ————
4. Lessee with right of first refusal, offered to buy leased property
at P5.000 per square meter, which property was sold by the lessor-
owner to another for P5,300 per sq. meter.
Facts: Under the contract of lease executed by defendant
Reyes (lessor) with plaintiff Riviera (lessee), the “Lessee shall
have the right of first refusal should the lessor decide to sell the
property during the term of the lease.’’
Since the beginning of the negotiation between the plaintiff
and defendant Reyes for the purchase of the property, in
question, the plaintiff was firm and steadfast in its position,
expressed in writing by its President Vicente Angeles, that it
was not willing to buy the said property higher than P5,000.00,
per square meter, which was far lower than the asking price of
defendant Reyes for P6,000.00, per square meter, undoubtedly,
because, in its perception, it would be difficult for other parties
to buy the property, at a higher price than what it was offering,
since it is in occupation of the property, as lessee, the term of
which was to expire after about four (4) years more.
In the petition at bar, Riviera posits the view that its right
of first refusal was totally disregarded or violated by Reyes by
the latter’s sale of the subject property to Cypress and Cornhill
at P5,300 per square meter. It contends that the right of first
refusal principally amounts to a right to match in the sense that
it needs another offer for the right to be exercised.
Issue: Has Riviera lost its right of first refusal?
Held: Yes. (1) Concept and interpretation of the right of first
refusal. — “The concept and interpretation of the right of first
Art. 1479
97
refusal and the consequences of a breach thereof evolved in
Philippine juristic sphere only within the last decade. It all
started in 1992 with Guzman, Bocaling & Co. vs. Bonnevie (206
SCRA 668 [1992].), where the Court held that a lease with a
proviso granting the lessee the right of first priority ‘all things
and conditions being equal’ meant that there should be identity
of the terms and conditions to be offered to the lessee and
all other prospective buyers, with the lessee to enjoy the right
of first priority. A deed of sale executed in favor of a third party
who cannot be deemed a purchaser in good faith, and which is
in violation of a right of first refusal granted to the lessee is not
voidable under the Statute of Frauds but rescissible under Articles
1380 to 1381(3) of the New Civil Code.
Subsequently in 1994, in the case of Ang Yu Asuncion vs.
Court of Appeals (238 SCRA 602 [1994].), the Court en banc departed
from the doctrine laid down in Guzman, Bocaling & Co.
vs. Bonnevie and refused to rescind a contract of sale which violated
the right of first refusal. The Court held that the so-called
“right of first refusal” cannot be deemed a perfected contract
of sale under Article 1458 of the new Civil Code and, as such, a
breach thereof decreed under a final judgment does not entitle
the aggrieved party to a writ of execution of the judgment but
to an action for damages in a proper forum for the purpose.
In the 1996 case of Equatorial Realty Development, Inc. vs.
Mayfair Theater, Inc. (264 SCRA 483 [1996].), the Court en banc
reverted back to the doctrine in Guzman Bocaling & Co. vs.
Bonnevie stating that rescission is a relief allowed for the protection
of one of the contracting parties and even third persons
from all injury and damage the contract may cause or to protect
some incompatible and preferred right by the contract.
Thereafter in 1997, in Parañaque Kings Enterprises, Inc. vs.
Court of Appeals (268 SCRA 727 [1997].), the Court affirmed the
nature of and the concomitant rights and obligations of parties
under a right of first refusal. The Court, summarizing the rulings
in Guzman, Bocaling & Co. vs. Bonnevie and Equatorial Realty
Development, Inc. vs. Mayfair Theater, Inc., held that in order
to have full compliance with the contractual right granting petitioner
the first option to purchase, the sale of the properties
for the price for which they were finally sold to a third person
should have likewise been first offered to the former. Further,
there should be identity of terms and conditions to be offered
to the buyer holding a right of first refusal if such right is not to
98 SALES
be rendered illusory. Lastly, the basis of the right of first refusal
must be the current offer to sell of the seller or offer to purchase
of any prospective buyer.’’
(2) Prevailing doctrine. — “Thus, the prevailing doctrine is
that a right of first refusal means identity of terms and conditions
to be offered to the lessee and all other prospective buyers
and a contract of sale entered into in violation of a right of
first refusal of another person, while valid, is rescissible. However,
we must remember that general propositions do not decide
specific cases. Rather, laws are interpreted in the context
of the peculiar factual situation of each proceeding. Each case
has its own flesh and blood and cannot be ruled upon on the
basis of isolated clinical classroom principles. Analysis and construction
should not be limited to the words used in the contract,
as they may not accurately reflect the parties’ true intent.
The court must read a contract as the average person would
read it and should not give it a strained or forced construction.’’
(3) Riviera intractable in its position. — “As clearly shown
by the records and transcripts of the case, the actions of the
parties to the contract of lease, Reyes and Riviera, shaped their
understanding and interpretation of the lease provision ‘right
of first refusal’ to mean simply that should the lessor Reyes
decide to sell the leased property during the term of the lease,
such sale should first be offered to the lessee Riviera. And that
is what exactly ensued between Reyes and Riviera, a series of
negotiations on the price per square meter of the subject property
with neither party, especially Riviera, unwilling to budge
from his offer, as evidenced by the exchange of letters between
the two contenders.
It can clearly be discerned from Riviera’s letters dated December
2, 1988 and February 4, 1989 that Riviera was so intractable
in its position and took obvious advantage of the knowledge
of the time element in its negotiations with Reyes as the
redemption period of the subject foreclosed property drew near.
Riviera strongly exhibited a ‘take-it or leave-it’ attitude in its negotiations
with Reyes. It quoted its ‘fixed and final’ price as Five
Thousand Pesos (P5,000.00) and not any peso more. It voiced out
that it had other properties to consider so Reyes should decide
and make known its decision ‘within fifteen days.’ x x x.”
(4) Reyes under no obligation to Riviera to disclose his offer to
another. — “Nary a howl of protest or shout of defiance spewed
Art. 1479
99
forth from Riviera’s lips, as it were, but a seemingly whimper
of acceptance when the counsel of Reyes strongly expressed in
a letter dated December 5, 1989 that Riviera had lost its right of
first refusal. Riviera cannot now be heard that had it been informed
of the offer of Five Thousand Three Hundred Pesos
(P5,300.00) of Cypress and Cornhill it would have matched said
price. Its stubborn approach in its negotiations with Reyes
showed crystal-clear that there was never any need to disclose
such information and doing so would be just a futile effort on
the part of Reyes. Reyes was under no obligation to disclose
the same. Pursuant to Article 1339 of the New Civil Code, silence
or concealment, by itself, does not constitute fraud, unless
there is a special duty to disclose certain facts, or unless
according to good faith and the usages of commerce the communication
should be made. We apply the general rule in the
case at bar since Riviera failed to convincingly show that either
of the exceptions are (sic) relevant to the case at bar.’’ (Riviera
Filipina, Inc. vs. Court of Appeals, 380 SCRA 245 [2002].)
———— ———— ————
5. Petitioner claims that there was a perfected contract to sell
while respondents argue that what was perfected between them was a
mere option.
Facts: The Receipt that contains the contract between petitioner
L and respondent spouses H and W, provides substantially
as follows:
“Received from L the sum of P20,000 as earnest money with
option to purchase a parcel of land owned by H located at x x x
with an area of x x x. Should the transaction not materialize
without the fault of the buyer [L], I [H] obligate myself to return
the P20,000; if through the fault of the buyer the said
amount shall be forfeited. I guarantee to notify L or her representative
and get her conformity should I sell or encumber the
property to a third person. The option to buy is good within 10
days x x x.
Issue: Is the agreement between the parties a contract of
option or a contract to sell?
Held: (1) Contract of option. — “The above Receipt really
shows that respondent spouses and petitioner only entered into
a contract of option; a contract by which respondent spouses
agreed with petitioner that the latter shall have the right to buy
the former’s property at a fixed price of P34.00 per square me-
100 SALES
ter within ten (10) days from 31 July 1978. Respondent spouses
did not sell their property; they did not also agree to sell it; but
they sold something, i.e., the privilege to buy at the election or
option of petitioner. The agreement imposed no binding obligation
on petitioner, aside from the consideration for the offer.’’
(2) Option money. — “The consideration of P20,000.00 paid
by petitioner to respondent spouses was referred to as ‘earnest
money.’ However, a careful examination of the words used indicates
that the money is not earnest money but option money.
‘Earnest money’ and ‘option money’ are not the same but distinguished
thus: (a) earnest money is part of the purchase price,
while option money is the money given as a distinct consideration
for an option contract; (b) earnest money is given only
where there is already a sale, while option money applies to a
sale not yet perfected; and (c) when earnest money is given,
the buyer is bound to pay the balance, while when the wouldbe
buyer gives option money, he is not required to buy (De Leon,
Comments and Cases on Sales, 1986 Rev. Ed., p. 67.), but may
even forfeit it depending on the terms of the option.
(3) Contents of Receipt. — “There is nothing in the Receipt
which indicates that the P20,000.00 was part of the purchase
price. Moreover, it was not shown that there was a perfected
sale between the parties where earnest money was given. Finally,
when petitioner gave the ‘earnest money,’ the Receipt did
not reveal that she was bound to pay the balance of the purchase
price. In fact, she could even forfeit the money given if
the terms of the option were not met. Thus, the P20,000.00 could
only be money given as consideration for the option contract.
That the contract between the parties is one of option is buttressed
by the provision therein that should the transaction of
the property not materialize without fault of petitioner as buyer,
respondent Lorenzo de Vera obligates himself to return the full
amount of P20,000.00 “earnest money” with option to buy or
forfeit the same on the fault of petitioner. It is further bolstered
by the provision therein that guarantees petitioner that she or
her representative would be notified in case the subject property
was sold or encumbered to a third person. Finally, the Receipt
provided for a period within which the option to buy was
to be exercised, i.e., ‘within ten (10) days’ from 31 July 1978.
(4) Absence of acceptance by L. — “Doubtless, the agreement
between respondent spouses and petitioner was an ‘option con-
Art. 1479
101
tract’ or what is sometimes called an ‘unaccepted offer.’ During
the option period the agreement was not converted into a
bilateral promise to sell and to buy where both respondent
spouses and petitioner were then reciprocally bound to comply
with their respective undertakings as petitioner did not
timely, affirmatively and clearly accept the offer of respondent
spouses. x x x But there is nothing in the acts, conduct or words
of petitioner that clearly manifest a present intention or determination
to accept the offer to buy the property of respondent
spouses within the 10-day option period. The only occasion
within the option period when petitioner could have demonstrated
her acceptance was on 5 August 1978 when, according
to her, she agreed to meet respondent spouses and the Ramoses
at the Office of the Register of Deeds of Makati. Petitioner’s
agreement to meet with respondent spouses presupposes an
invitation from the latter, which only emphasizes their persistence
in offering the property to the former. But whether that
showed acceptance by petitioner of the offer is hazy and dubious.
On or before 10 August 1978, the last day of the option
period, no affirmative or clear manifestation was made by petitioner
to accept the offer. Certainly, there was no concurrence
of private respondent spouses’ offer and petitioner’s acceptance
thereof within the option period. Consequently, there was
no perfected contract to sell between the parties.
xxxxxx
The option period having expired and acceptance was not
effectively made by petitioner, the purchase of subject property
by respondent SUNVAR was perfectly valid and entered
into in good faith.” (Limson vs. Court of Appeals, 147 SCAD 887,
357 SCRA 209 [2001].)
———— ———— ————
6. Under a contract to sell a parcel of land, full payment was
not made by the vendee because of the non-fulfillment of a suspensive
condition, which property was later sold absolutely by the vendor to
another.
Facts: S and B entered into a contract to sell a parcel of land
evidenced by a memorandum of agreement which stipules, inter
alia, that S, vendor, reserves to herself ownership and possession
of the property until full payment of the purchase price
by B and that the balance thereof was payable within six (6)
months from the date S would notify B that the certificate of
102 SALES
title of the property could be transferred to B. Subsequently, S
executed a deed of absolute sale of the property in favor of T.
It appeared that S exerted efforts to register the property
and B had no intention to buy the property and was only interested
in dealing with other buyers to make a profit. S even
pleaded with him several times to purchase the property, less
the expenses of registration, as there were other interested buyers.
Issue: Is the memorandum of agreement contract of sale, an
option to purchase, or a contract to sell?
Held: (1) Contract to Sell. — “An examination of said Memorandum
of Agreement shows that it is neither a contract of sale
nor an option to purchase, but it is a contract to sell. An option
is a contract granting a privilege to buy or sell at a determined
price within an agreed time, the specific length or duration of
which is not present in the Memorandum of Agreement. In a
contract to sell, the title over the subject property is transferred
to the vendee only upon the full payment of the stipulated consideration.
Unlike in a contract of sale, the title in a contract to
sell does not pass to the vendee upon the execution of the agreement
or the Delivery of the thing sold. x x x
The agreement was in the nature of a contract to sell as the
vendor, Encarnacion Diaz Vda. de Reston, clearly reserved to
herself ownership and possession of the property until full payment
of the purchase price by the vendees, such payment being
a positive suspensive condition, the failure of which is not
considered a breach, casual or serious, but simply an event
which prevented the obligation from acquiring obligatory
force.’’
(2) No perfected sale. — “Petitioners, however, argue that
their obligation to pay the balance of the purchase price had
not arisen as the Memorandum of Agreement stipulated that
the balance of P18,042.00 was payable within six (6) months
from the date the vendor would notify them that the certificate
of title of the property could already be transferred in their
names. Said argument, however, does not change the nature of
the contract they entered into, being a contract to sell, so that
there was no actual sale until full payment was made by the
vendees, and that on the part of the vendees, no full payment
would be made until a certificate of title was ready for transfer
in their names.’’ (Buot vs. Court of Appeals, 148 SCAD 615, 357
SCRA 846 [2001].)
Art. 1479
103
Effect of bilateral promise to buy
and sell.
When the promise is bilateral, that is, one party accepts the
other’s promise to buy and the latter, the former’s promise to sell
a determinate thing for a price certain, it has practically the same
effect as a perfected contract of sale since it is reciprocally demandable.
EXAMPLE:
S promised to sell his car to B and B promised to buy the
said car for P100,000.00. The parties are bound by their contract
so that in case one of them should not comply with what
is incumbent upon him, the other has the right to choose between
the fulfillment and the recission of the obligation, with
the payment of damages in either case. (Art. 1191, par. 2.)
ILLUSTRATIVE CASE:
Promissor withdrew an option to sell which is not supported by
any consideration, after its acceptance by promisee.
Facts: S wrote B making a “firm offer for the sale” at a definite
price of a determinate quantity of sardines. B accepted the
offer unconditionally.
Issue: Is there a perfected contract of sale?
Held: Yes, as the promise is bilateral, i.e., a promise to buy
and sell. Before accepting the promise of S and before exercising
his option, B is not bound to buy. Upon accepting S’s offer,
a bilateral promise to sell and to buy ensues; B assumes ipso
facto the obligations of a purchaser, and not merely the right
subsequently to buy or not to buy. The concurrence of both acts
— the offer and the acceptance — generates a binding contract
of sale. (see Atkins, Kroll & Co., Inc. vs. Cua Hian Tek, 102 Phil.
948 [1958].)
ART. 1480. Any injury to or benefit from the thing
sold, after the contract has been perfected, from the
moment of the perfection of the contract to the time
of delivery, shall be governed by articles 1163 to 1165,
and 1262.
104 SALES
This rule shall apply to the sale of fungible things,
made independently and for a single price, or without
consideration of their weight, number, or measure.
Should fungible things be sold for a price fixed
according to weight, number, or measure, the risk shall
not be imputed to the vendee until they have been
weighed, counted, or measured, and delivered, unless
the latter has incurred in delay. (1452a)
Risk of loss or deterioration.
Four rules may be given regarding risk of loss:
(1) If the thing is lost before perfection, the seller and not the
one who intends to purchase it bears the loss (see Roman vs.
Grimalt, 6 Phil. 96 [1906].) in accordance with the principle that
the thing perishes with the owner (res perit domino);
(2) If the thing is lost at the time of perfection, the contract is
void or inexistent. (Art. 1409[3].) The legal effect is the same as
when the object is lost before the perfection of the contract of sale
(see Art. 1493.);
(3) If the thing is lost after perfection but before its delivery, that
is, even before the ownership is transferred to the buyer, the risk
of loss is shifted to the buyer as an exception to the rule of res perit
domino (Arts. 1480, pars. 1 and 2, 1538, 1189, and 1269.); and
(4) If the thing is lost after delivery, the buyer bears the risk of
loss following the general rule of res perit domino.
Scope of Article 1480.
Article 1480 contemplates two rules:
(1) The first rule — where the thing is lost after perfection but
before its delivery (see Rule No. 3, supra.) — applies to non-fungible
things (par. 1.) and fungible things sold independently and
for a single price or for a price fixed without consideration of their
weight, number, or measure. (par. 2.)
Under this rule, which follows the Roman Rule, the risk of the
thing sold passes to the buyer, even though the thing has not yet
been delivered to him. Therefore, if a house (sold) be destroyed
Art. 1480
105
wholly or partly by fire the loss falls upon the buyer who must
pay the price, even though he has not received the thing. For the
seller is not liable for anything which happens without his fraud
or negligence. But if after the sale any alluvion has accrued to the
land, the benefit goes to the buyer for the benefit ought to belong
to him who has the risk. (Sherman, Inchiridion Romani Juris, Sec.
296.) In other words, the buyer assumes the risk of loss caused by
fortuitous event (Art. 1174.) without the fault of the seller (Art.
1262.), that is, in spite of the exercise of due diligence on his part
(Art. 1163.) and before he has incurred in delay (Arts. 165, 1170,
1262.) after the perfection of the contract to the time of delivery.
(Art. 1480, par. 1.) With respect to the fruits, the buyer has a right
to the same from the time the obligation to deliver the thing arises.
(Art. 1164.) If the risk ought to belong to the buyer before delivery,
the benefit ought to belong to him who has the risk. (see Arts.
1538, 1189[5].)
Article 1480, paragraph 1 is applicable only where the thing
is determinate. (Art. 1460.) It also applies to fungible things sold
for a price not fixed in relation to weight, number, or measure
because in such case the fungible things have been “particularly
designated or physically segregated.” (Ibid., par. 2.)
Is Article 1480 above in conflict with Article 1504 (infra.)?
(2) The second rule relates to fungible things sold for a price
fixed in relation to weight, number, or measure. Under the third
paragraph, “the risk shall not be imputed to the vendee until they
have been weighed, counted, or measured, and delivered.” (see U.S.
vs. De Vera, 43 Phil. 1001 [1922].) Paragraph 3 is an exception to
the rule that the vendee bears the loss after the perfection of the
contract and before delivery. However, the vendee assumes the
risk if he has incurred in delay in receiving the goods sold. (North
Negros Sugar Co., Inc. vs. Compania General Tabacos de Filipinas,
100 Phil. 1103 [1957].)
ILLUSTRATIVE CASES:
1. The sugar which the seller intended to deliver was destroyed
by flood.
Facts: B advanced P3,000 to S in payment of 600 piculs of
sugar. The written contract did not specify that the sugar was
106 SALES
to come from the crop on S’s land which was destroyed by a
flood.
Issue: S claimed that the fortuitous cause excused non-performance
by him of the contract.
Held: S promised to deliver a generic thing. Any sugar of
the quality stipulated, regardless of origin or however acquired,
(lawfully) would be obligatory on the part of B to receive and
would discharge the obligation. It seems, therefore, plain that
the sugar to be sold not having been segregated, the sale was
not perfected and the loss of the crop even through force majeure,
did not extinguish S’s obligation to deliver the sugar.
Flood, like other catastrophes, was a contingency, a collateral
incident, which S should have provided for by proper stipulations.
Genus nunquam perit (genus never perishes). (Yu Tek &
Co. vs. Gonzales, 29 Phil. 384 [1915]; De Leon vs. Soriano, 87 Phil.
193 [1950]; Bunge Corp. vs. Camenforte & Co., 91 Phil. 861
[1954].)
———— ———— ————
2. Buyer denies liability for price of tobacco delivered to its agent
by seller for inspection, grading and weighing, because it was burned
before it could be inspected, graded, and weighed.
Facts: S (vendor) delivered the tobacco in question to the
redrying plant of A, trading agent of B (vendee). The tobacco
was burned while awaiting inspection, grading, and weighing.
It appeared that S directed, supervised, and controlled A in
receiving shipments of tobacco and in the performance of its
activities, and that shipments, once received from trading entities
like S, were under B’s control, and not subject to withdrawal
without its authority.
Issue: Should B be considered as having accepted the tobacco
shipments as of the fire and, therefore, should bear the
loss?
Held: Yes. The contract of sale has been perfected at the time
of the loss (see Art. 1475.) and the shipment was placed in the
control and possession of B. The technical defect that the tobacco
in question “were still to be inspected, graded and
weighed” cannot suffice to overturn the decision. Aside from
raising an issue of fact (for B’s own fieldmen had the responsibility
of such tobacco being graded, weighed, baled and loaded
on trucks duly sealed for transportation to its redrying plant
Art. 1480
107
and that responsibility was fulfilled according to the trial court),
the delay was traceable to the fault of B and A and that A was
negligent in causing the fire, whereas S had done everything
that was required of him by B’s regulations in order to have the
tobacco inspected and paid for.
Furthermore, for sometime after the conflagration, there
was no question raised by B as to its liability. It would, therefore,
be the height of injustice to deny S’s claim for payment.
(Phil.-Virginia Tobacco Adm. vs. De Los Angeles, 87 SCRA 9 [1978].)
Dissenting opinion by R.C. Aquino, J.: The judgment is erroneous.
The sale was not consummated because there was no
tradition or delivery to B of the tobacco which was lost when it
was still owned by S. A was merely an agent of B. Even as agent,
A had not yet accepted delivery of the tobacco before it was
lost during the fire. There was no acceptance of delivery because
the tobacco, at the time it was lost, had not yet been properly
inspected, graded and weighed. Under the contract between
B and A, the latter’s responsibility as agent of the former
begins from the moment the tobacco had been delivered, received
and accepted from the trading entities (like S) and the
same had been properly graded and weighed.
These requirements had not yet been satisfied at the time
the tobacco was lost in A’s redrying plant. Inasmuch as B did
not become the owner of the lost tobacco and as S was still the
owner thereof, the loss should be borne by S, not by B. Res perit
domino. Hence, B was not obligated to pay for the tobacco. S’s
cause of action was really against A. S did not appeal from the
lower court’s judgment absolving A. Under the contract between
B and A, the latter was supposed to advance to the trading
entities the payment for the tobacco delivered to A, and B
would then reimburse A for its advances. No such advances
were made by A, a circumstance which may signify that the
sale was not consummated.
Author’s Note: The buyer assumes the risk of loss caused by
fortuitous event after the perfection of the contract even before
the delivery of the thing sold. (see Rule 3 under “Risk of loss or
deterioration.”) In the mind of the author, the opinion of Justice
Aquino is that no contract of sale was perfected between S
and B; neither was there delivery of the tobacco to B before it
was lost. The opinion expresses its conformity to the following
excerpts, among others, from the brief of the Solicitor General
for PVTA (B):
108 SALES
“Viewed thus, the conclusion is inescapable that the
tobacco shipments brought to the redrying plant to be inspected,
graded, and weighed are considered not delivered
and sold in legal contemplation, until after grading and
weighing where the ‘meeting of minds’ takes place because
the price or consideration is determined by the grade and
weight thereof. And without agreement as to price, the sale
is not perfected. It is worth emphasizing that before the tobacco
shipments were graded and weighed, they remained
properties of the respondent trading entities (S and others)
subject to their control and possession, and at their risk;
consequently, respondents shall bear the loss which occurred
prior to the grading and weighing of the tobaccos.”
———— ———— ————
3. Bales of tobacco were lost while in the control and possession
of buyers’ agent before they were graded and weighed.
Facts: PVTA, a government corporation, entered into a contract
of procuring, redrying and servicing with FVTR for the
1963 tobacco trading operation. Petitioners ATC shipped to
FVTR bales of tobacco. Not all the bales of tobacco were graded
and weighed because some officers and employees in the
premises of FVTR asked for money to have the remaining bales
graded and weighed. The remaining ungraded and unweighed
bales were lost while they were in the possession of FVTR.
Having learned of such loss, ATC demanded for their value
and the application of the same to ATC’s merchandising loan
with PVTA but both the latter and the FVTR refused to heed
said demands.
Issue: Was the contract of sale between ATC and PVTA perfected
by ATC’s delivery of all bales of tobacco to FVTR, a
contractee of PVTA, so as to hold PVTA liable for the loss of
said bales while in the possession of FVTR?
Held: (1) Delivery to buyer’s agent (FVTR) proven. — “Under
the Santiago Virginia Tobacco Planters Assoc. vs. PVTA (31 SCRA
528 [1970].) case, shipping documents and checklists which are
accomplished prior to delivery do not prove actual delivery. To
prove such delivery, documents such as the weigher’s tally sheet
and the warehouse receipts which are accomplished when the
actual delivery is made, are necessary. The factual circumstances
extant in this case are different from those in the Santiago case.
Art. 1480
109
In said case, there was a need to prove actual delivery because
the petitioner therein demanded for the payment of tobacco
shipments which were allegedly delivered to the FVTR. In other
words, the actual physical delivery of the shipments was not
proven. On the other hand, in this case, the lower court established
from the testimonies of witnesses the fact that petitioner
entrusted to the FVTR a total of 263 bales of tobacco, 89 bales of
which were even actually weighed and graded in the redrying
plant. However, for reason beyond the control of the petitioner,
the FVTR refused to weigh and grade the remaining 174 bales.
On top of this, the FVTR also refused to grant petitioner’s request
to withdraw the unweighed and ungraded shipments.
As it turned out later, said shipments were lost while in the
custody of FVTR, thereby placing the petitioner in a ‘no win’
situation.’’
(2) Seller (ATC) lost possession and control over shipment. —
“The Civil Code provides that ownership of the thing sold shall
be transferred to the vendee upon the actual or constructive
delivery thereof. (Art. 1477.) There is delivery when the thing
sold is placed in the control and possession of the vendee. (Art.
1497.) Indeed, in tobacco trading, actual delivery plays a pivotal
role. The peculiar procedure undergone in trading, which
procedure was set out at length in both the Santiago and the
PVTA vs. De los Angeles (87 SCRA 197 [1978].) cases, reveals that
delivery seals the contract of sale because the trader loses not
only possession but also control over the shipment. Outlined
by the PVTA pursuant to its power ‘to take over and assume,
and, therefore, exclusively direct, supervise and control, all functions
and operations with respect to the processing, warehousing,
and trading of Virginia tobacco, the provisions of any existing
law to the contrary notwithstanding, the procedure is
observed by everyone involved in the trade.’”
(3) Tobacco traders placed at a disadvantage. — “Verily, the
tobacco trading procedure conceived and formulated by the
PVTA is akin to a contract of adhesion wherein only one party
has a hand in the determination of the terms. But observance
of the procedure more often than not renders a trader at a disadvantage.
The moment the shipment is placed in the hands of
the PVTA or its representative and it is lost, the trader is left
empty-handed. While the flaw may not really be in the procedure
itself, the same way may be found in the persons charged
with the implementation of the procedure. Some personnel
110 SALES
mishandle the shipment to the detriment of the trader. Some
demand grease money to facilitate the trading process. Sadly,
this is what happened in this case.”
(4) Delivery considered effective delivery to seller (PVTA). —
“Hence, while under an ideal situation, there would have been
merit in respondent PVTA’s contention that the contract of sale
could not have been perfected pursuant to Article 1475 because
to determine the price of the tobacco traded, the shipment
should first be inspected, graded and weighed, a strict interpretation
of the provision may result in adverse effects to small
planters who would not be paid for the lost products of their
toil. Such situation was what the ruling in PVTA vs. De los Angeles
sought to avoid.
Equity and fair dealing, the anchor of said case, must once
more prevail. Since PVTA had virtual control over the lost
tobacco bales, delivery thereof to the FVTR should also
be considered effective delivery to the PVTA.” (Alliance Tobacco,
Inc. vs. Phil. Virginia Tobacco Administration, 179 SCRA 336
[1989].)
ART. 1481. In the contract of sale of goods by description
or by sample, the contract may be rescinded
if the bulk of the goods delivered do not correspond
with the description or the sample, and if the contract
be by sample as well as by description, it is not sufficient
that the bulk of goods correspond with the sample
if they do not also correspond with the description.
The buyer shall have a reasonable opportunity of
comparing the bulk with the description or the sample.
(n)
Sale of goods by description
and/or sample.
The above article covers a sale of goods by description, by
sample, and by sample as well as by description. It provides a
cause for rescission distinct from those stated in Article 1597.
(1) Sale by description. — Sale by description occurs where a
seller sells things as being of a particular kind, the buyer not know-
Art. 1481
111
ing whether the seller’s representations are true or false, but relying
on them as true; or, as otherwise stated, where the purchaser
has not seen the article sold and relies on the description given
him by the vendor, or has seen the goods but the want of identity
is not apparent on inspection. (77 C.J.S. 1170.)
The reason for the rule is that a dealer who sells an article
describing it as the kind of an article of commerce the identity of
which is not known to the purchaser, must understand that such
purchaser relies upon the description as a representation by the
seller that it is the thing described. (55 C.J. 739.) If the bulk of the
goods delivered do not correspond with the description, the contract
may be rescinded. (Art. 1481.) But if the thing delivered is as
described, the fact that the buyer cannot use the thing sold for the
purpose for which it was intended without the seller’s fault does
not exempt the buyer from paying the purchase price agreed
upon. (see Pacific Commercial Co. vs. Ermita Market & Cold
Stores, 55 Phil. 617 [1931].)
(2) Sale by sample. — To constitute a sale by sample, it must
appear that the parties contracted solely with reference to the
sample, with the understanding that the bulk was like it. But a
mere exhibition of a sample by the seller in the absence of any
showing that it was an inducement of the sale or formed the sole
basis thereof, does not amount to a sale by sample as where the
quality of the articles to be furnished is expressly described in the
contract without reference to the sample or the parties agree that
the goods ordered shall differ from the sample in some particular
matter. Whether a sale is by sample is determined by the intent
of the parties as shown by the terms of the contract and the
circumstances surrounding the transaction. (77 C.J.S. 925.) In a sale
by sample, the vendor warrants that the thing sold and to be delivered
by him shall conform with the sample in kind, character,
and quality. (77 C.J.S. 1169; see Art. 1565.)
A sale by sample is really a species of sale by description. The
sample is employed instead of words to communicate to the buyer
the characteristics of the goods being sold. It is itself a tacit assertion
of the qualities of the bulk it represents.
(3) Sale by description and sample. — When a sale is made both
by sample and by description, the goods must satisfy all the
112 SALES
warranties (see Art. 1565.) appropriate to either kind of sale, and
it is not sufficient that the bulk of the goods correspond with the
sample if they do not also correspond with the description, and
vice versa. (77 C.J.S. 1172.)
Meaning of bulk of goods.
In this article, the term “bulk of goods” is not used to designate
the greater portion of the goods. Rather, it is used to denote
the goods as distinguished from the sample with which they must
correspond. The word “goods” in the phrase is an oppositional
genitive defining “bulk.” In other words “bulk of goods” mean
the same as “goods” which, as a whole body, must correspond
substantially with the sample and description. (see 77 C.J.S. 1172.)
The buyer is given a reasonable opportunity of comparing the
bulk with the description or the example. (Art. 1481, par. 2.)
ART. 1482. Whenever earnest money is given in a
contract of sale, it shall be considered as part of the
price and as proof of the perfection of the contract.
(1454a)
Meaning of earnest money.
Earnest money is something of value given by the buyer to the
seller to show that the buyer is really in earnest, and to bind the
bargain. It is actually a partial payment of the purchase price and
is considered as proof of the perfection of the contract. (see
Villongco Realty vs. Bormaecheco, 65 SCRA 352 [1975]; Topacio
vs. Court of Appeals, 211 SCRA 291 [1992]; see Laforteza vs.
Machuca, 127 SCAD 798, 333 SCRA 643 [2000].) Since earnest
money constitutes an advance payment, it must be deducted from
the total price.22
22Hence, it cannot be forfeited in case the buyer should fail to pay the balance of the
price, especially in the absence of a clear and express agreement thereon. In a case, by
reason of its failure to make payment, petitioner, through its agent, informed private
respondents that it would no longer push through with the sale. In other words, petitioner
resorted to extra-judicial rescission of the contract with private respondents who
did not interpose any objection to the rescission. (Golden, Ltd., Inc. vs. Court of Appeals,
299 SCRA 141 [1998].)
Art. 1482
113
Note: By agreement of the parties, the amount given may be
merely a deposit of what would eventually become earnest money
or downpayment should a contract of sale be made by them, not
as a part of the purchase price and as proof of the perfection of
the contract of sale but only as a guarantee that the buyer would
not back out of the sale. Thus, it is not really the giving of earnest
money but the proof of the concurrence of all the essential elements
of a contract which establishes the existence of the perfected
contract. There is no sale where the parties still have to agree on
the acceptable terms of payment. (San Miguel Properties Philippines,
Inc. vs. Huang, 130 SCAD 713, 336 SCRA 737 [2000].) The
earnest money forms part of the consideration only if the sale is
consummated upon full payment of the purchase price. (Chua vs.
Under Article 145423 of the old Civil Code, it has been held
that the delivery of part of the purchase price should not be understood
as constituting earnest money to bind the agreement in
the absence of something in the contract showing that such was
the intention of the parties. (Salas Rodriguez vs. Leuterio, 47 Phil.
818 [1925].)
Earnest money and option money
distinguished.
They may be distinguished as follows:
(1) Earnest money is part of the purchase price, while option
money (see Art. 1479, par. 2.) is the money given as distinct consideration
for an option contract;
(2) Earnest money is given only where there is already a sale,
while option money applies to a sale not yet perfected; and
(3) When earnest money is given, the buyer is bound to pay
the balance, while the would-be buyer who gives option money
is not required to buy. (Adelfa Properties, Inc. vs. Court of Appeals,
58 SCAD 962, 240 SCRA 565 [1995] and Limson vs. Court
23In this article, it is declared that “When earnest money or a pledge had been given
to bind a contract of purchase and sale, the contract may be rescinded if the vendee
should be willing to forfeit the earnest money or pledge or the vendor to return double
the amount.”
114 SALES
of Appeals, 357 SCRA 209 [2001], quoting De Leon, Comments and
Cases on Sales, 1986 rev. ed., p. 67.)
But option money may become earnest money if the parties
so agree.
ART. 1483. Subject to the provisions of the Statute
of Frauds and of any other applicable statute, a
contract of sale may be made in writing, or by word of
mouth, or partly in writing and partly by word of mouth,
or may be inferred from the conduct of the parties. (n)
Form of contract of sale.
(1) General rule. — The form of a contract refers to the manner
in which it is executed or manifested. As a general rule, a contract
may be entered into in any form provided all the essential
requisites for its validity are present. (Art. 1356.) It may be in
writing; it may be oral; it may be partly in writing and partly oral.
It may even be inferred from the conduct of the parties. Sale is a
consensual contract and is perfected by mere consent. (Art. 1475.)
(2) Where form is required in order that a contract may be enforceable.
— In case the contract of sale should be covered by the Statute
of Frauds, the law requires that the agreement (or some note
or memorandum thereof) be in writing subscribed by the party
charged, or by his agent; otherwise, the contract cannot be enforced
by action. (see Art. 1403[2].)
Under the Statute of Frauds (Art. 1403[2, a, d, e].) of the Civil
Code, the following contracts must be in writing; otherwise, they
shall be unenforceable by action:
(a) Sale of personal property at a price not less than
P500.00;
(b) Sale of real property or an interest therein regardless
of the price involved; and
(c) Sale of property not to be performed within a year
from the date thereof regardless of the nature of the property
and the price involved.
The purpose of the Statute of Frauds is to prevent fraud and
perjury in the enforcement of obligations depending for their
Art. 1483
115
evidence upon the unassisted memory of witnesses by requiring
certain enumerated contracts and transactions to be evidenced in
writing. (Claudel vs. Court of Appeals, 199 SCRA 113 [1991], citing
4 Tolentino, Civil Code of the Phils., p. 580 [1973].) Contracts
infringing the Statute of Frauds are ratified when the defense fails
to object to the introduction of parol evidence, or asks questions
on cross-examination, which elicits evidence proving the existence
of a perfected contract of sale. (Limketkai Sons Milling, Inc.
vs. Court of Appeals, 66 SCAD 136, 250 SCRA 523 [1995].)
The Statute of Frauds refers to specific kinds of transactions
and cannot apply to any other transaction that is not enumerated
therein. The application of the Statute presupposes the existence
of a perfected contract. A right of first refusal is not among those
listed as unenforceable under the statute. At best, it is a contractual
grant not of the sale of the property involved, but of the right
of first refusal over the property sought to be sold. Hence, a right
of first refusal need not be written to be enforceable and may be
proven by oral evidence. (Rosencor Development Corporation vs.
Inquing, 145 SCAD 484, 354 SCRA 119 [2001].)
(3) Where form is required in order that a contract may be valid. —
Where the “applicable statute” requires that the contract of sale
be in a certain form for its validity, the required form must be
observed in order that the contract may be both valid and enforceable.
(see Art. 1356.)
(4) Where form is required only for the convenience of the parties.
— In certain cases, a certain form (e.g., public instrument) is required
for the convenience of the parties in order that the sale may
be registered in the Registry of Deeds to make effective as against
third persons the right acquired under such sale. As between the
contracting parties, the form is not indispensable since they are
allowed by law to compel each other to observe that form. (Arts.
1357, 1358[1].) Hence, the fact that the deed of sale of a parcel of
land still had to be signed and notarized does not mean that no
contract had already been perfected. A sale of land is valid regardless
of the form it may have been entered into as long as the requisites
for a valid contract of sale are present.
On the other hand, the fact that a deed of sale is a notarized
document does not necessarily justify the conclusion that the said
116 SALES
sale is a true conveyance to which the parties thereto are irrevocably
bound. Though its notarization vests in its favor the presumption
of regularity and due execution (Manzano vs. Perez, 152
SCAD 473, 362 SCRA 430 [2001].), it is not the function of the
notary public to validate and make binding an instrument never
intended by the parties to have any binding legal effect upon them.
The intention of the parties still and always is the primary consideration
in determining the true nature of the contract. (Suntay
vs. Court of Appeals, 66 SCAD 711, 251 SCRA 430 [1995];
Nazareno vs. Court of Appeals, 343 SCRA 637 [2000].) Where the
vendor did not personally appear before the notary public, such
fact raises doubt regarding the vendor’s consent to the sale notwithstanding
that the deed states the contrary. (Tan vs. Mandap,
429 SCRA 711 [2004].)
An invalidly notarized deed of sale must be considered merely
as a private document. Even if validly notarized, the deed would
still be classified as a private document if it is merely subscribed
and sworn to by way of jurat but was not properly acknowledged.
(Tigno vs. Aquino, 444 SCRA 61 [2004].)
Sale of real property or an interest
therein.
(1) A sale of a piece of land or interest therein when made
through an agent is void unless the agent’s authority is in writing.
(Art. 1874; see Copon vs. Umali, 87 Phil. 91 [1950].)
(2) For the sale of real property to be effective against third
persons, the sale must be registered in the Registry of Deeds (or Property)
of the province or city where the property is located. The
sale must be in a public document (e.g., acknowledged before a
notary public or any public officer authorized by law to administer
oath) for otherwise, the registration will be refused.
(3) The real purpose of registration of a contract of sale being
to give notice to third persons and to protect the buyer against
claims of third persons arising from subsequent alienations by the
vendor, it is certainly not necessary to give efficacy to the deed of
sale, as between the parties to the contract (Phil. Suburban Dev.
Corp. vs. The Auditor General, 63 SCRA 397 [1975].) and their
privies because actual notice is equivalent to registration. It is set-
Art. 1483
117
tled that registration is not a mode of acquiring ownership.
(Bollozo vs. Yu Tieng Su, 155 SCRA 50 [1987].)
(4) The sale of land in a private instrument is valid and binding
upon the parties, for the time-honored rule is that even a verbal
contract of sale of real estate produces legal effects between the
parties (Bucton vs. Gabar, 55 SCRA 499 [1974]; Gallar vs. Husain,
20 SCRA 186 [1967].), since sale is a consensual contract and is
perfected by mere consent. (Carbonell vs. Court of Appeals, 69
SCRA 99 [1976].)
(5) The fact that the notarization of a deed of sale of real property
is false is of no consequence, for it need not be notarized; it is
enough that it be in writing. (Heirs of Amparo del Rosario vs.
Santos, 108 SCRA 43 [1981].)
EXAMPLES:
(1) S orally sold to B a parcel of land. The sale is valid (Art.
1356; Lopez vs. Alvarez, 9 Phil. 28 [1907]; Guerrero vs. Raquel,
10 Phil. 52 [1908].) but it is unenforceable because the law requires
that it be in writing to be enforceable. (Art. 1403[e].)
(2) If the contract of sale above is in private writing, then
it is valid and binding but only as between the parties and their
privies (Soriano vs. Latoño, 87 Phil. 757 [1950]; Gallar vs.
Husain, supra.) and not as against third persons without notice
until the sale is registered in the Registry of Property. B has the
right to compel S to put the contract in a public instrument so
that it can be registered to affect third persons. (Art. 1357; see
Carbonell vs. Court of Appeals, supra; Mahilum vs. Court of
Appeals, 17 SCRA 482 [1966].)
Modes of satisfaction of the Statute
of Frauds.
The statute specifies three ways in which contracts of sales of
goods within its terms may be made binding, namely:
(1) the giving of a memorandum;
(2) acceptance and receipt of part of the goods (or things in
action) sold and actual receipt of the same (see Art. 1585.); and
(3) payment or acceptance at the time some part of the purchase
price.
118 SALES
The requirement of a memorandum is obviously suitable either
for a contract to sell or a sale. The other two modes of satisfaction
seem more naturally to apply to sales than to executory
contracts. (Williston, op. cit., Sec. 73.)
The Statute of Frauds applies not only to goods but to things
in action as well. (see Art. 1403[2, d].) Thus, an assignment of credit
(Art. 1624.) at a price not less than P500.00 is within the operation
of the Statute.
Statute of Frauds applicable only
to executory contracts.
The Statute of Frauds is applicable only to executory contracts
(where no performance, i.e., delivery and payment, has as yet been
made by both parties) and not to contracts which are totally (consummated)
or partially performed. (see Vda. de Espiritu vs. CFI
of Cavite, 47 SCRA 354 [1972].) It does not forbid oral evidence to
prove a consummated sale. (Diama vs. Macalebo, 74 Phil. 70
[1942].)
(1) Reason for the rule. — The reason is that partial performance
like the writing, furnishes reliable evidence of the intention
of the parties or the existence of the contract. A contrary rule
would result in injustice or unfairness to the party who has performed
his obligation, and would promote fraud or bad faith on
the part of the party who has not performed his obligation, for it
would enable him to keep the benefits already derived by him
from the transaction and at the same time, evade the responsibilities
or liabilities assumed or contracted by him. (Carbonnel vs.
Poncio, 103 Phil. 655 [1958]; Art. 1405.)
Thus, where a parol contract of sale is adduced not for the
purpose of enforcing it, but as a basis of the possession of the
person claiming to be the owner, the Statute of Frauds is not applicable,
in the same way that it does not apply to contracts which
are either totally or partially performed upon the theory that there
is a wide field for the commission of frauds in executory contracts
which can only be prevented by requiring them to be in writing,
a fact which is reduced to a minimum in executed contracts because
the intention of the parties become apparent by their execution.
(Pascual vs. Realty Invest., Inc., 91 Phil. 257 [1952].)
Art. 1483
119
(2) Circumstances indicating partial performance. — Where there
is partial performance of a parol contract of sale of realty, the principle
excluding evidence of such contract does not apply.
Other circumstances indicating partial performance of an oral
contract of sale of realty are relinquishment of rights, continued
possession by a purchaser who is already in possession, building
of improvements, tender of payment, rendition of services, payment
of taxes, surveying of the land at the vendee’s expense
(Ortega vs. Leonardo, 103 Phil. 870 [1958]; see 49 Am. Jur. 44, 755-
756, 772.), and acceptance of initial payment. (Clarin vs. Rulona,
127 SCRA 512 [1984].)
The application of the Statute of Frauds presupposes the existence
of a perfected contract and requires only that a note or
memorandum subscribed by the party charged or by his agent
be executed in order to compel judicial enforcement. Where there
is no perfected contract, there is no basis for the application of
the Statute. (Villanueva vs. Court of Appeals, 78 SCAD 484, 267
SCRA 89 [1997].) Thus, the annotation on the letter-offer of the
phrase “Received original, 9-4-89,’’ beside which appears the signature
of the addressee, can neither be regarded as a contract of
sale nor a promise to sell. It is merely a memorandum of the receipt
of the offer. Hence, the alleged transaction is unenforceable
as the requirements under the Statute of Frauds have not been
complied with. (Jovan Land, Inc. vs. Court of Appeals, 79 SCAD
428, 268 SCRA 160 [1997].)
Legal recognition of electronic data messages
and electronic documents.
The following are the pertinent provisions of the implementing
rules and regulations of R.A. No. 8792, otherwise known as
the “Electronic Commerce Act.’’
(1) Validity and enforceability. — Information shall not be denied
validity or enforceability solely on the ground that it is in
the form of an electronic data message or electronic document,
purporting to give rise to such legal effect. Electronic data messages
or electronic documents shall have the legal effect, validity
or enforceability as any other document or legal writing. In particular,
subject to the provisions of R.A. No. 8792 and the Rules:
120 SALES
(a) A requirement under law that information is in writing
is satisfied if the information is in the form of an electronic
data message or electronic document.
(b) A requirement under law for a person to provide information
in writing to another person is satisfied by the provision
of the information in an electronic data message or electronic
document.
(c) A requirement under law for a person to provide information
to another person in a specified non-electronic form
is satisfied by the provision of the information in an electronic
data message or electronic document if the information is
provided in the same or substantially the same form.
(d) Nothing limits the operation of any requirement under
law for information to be posted or displayed in specified
manner, time or location; or for any information or document
to be communicated by a specified method unless and until a
functional equivalent shall have been developed, installed,
and implemented. (Sec. 7, Rules.)
(2) Incorporation by reference. — Information shall not be denied
validity or enforceability solely on the ground that it is not
contained in an electronic data message or electronic document
but is merely incorporated by reference therein. (Sec. 8, Ibid.)
(3) Writing. — Where the law requires a document to be in
writing, or obliges the parties to conform to a writing, or provides
consequences in the event information is not presented or retained
in its original form, an electronic document or electronic data
message will be sufficient if the latter:
(a) maintains its integrity and reliability; and
(b) can be authenticated so as to be usable for subsequent
reference, in that:
1) It has remained complete and unaltered, apart
from the addition of any endorsement and any authorized
change, or any change which arises in the normal
course of communication, storage and display; and
2) It is reliable in the light of the purpose for which it
was generated and in the light of all relevant circumstances.
(Sec. 10, Ibid.)
Art. 1483
121
(4) Original. — Where the law requires that a document be
presented or retained in its original form, that requirement is met
by an electronic document or electronic data message if:
(a) There exists a reliable assurance as to the integrity of
the electronic document or electronic data message from the
time when it was first generated in its final form and such
integrity is shown by evidence aliunde (that is, evidence other
than the electronic data message itself) or otherwise; and
(b) The electronic document or electronic data message is
capable of being displayed to the person to whom it is to be
presented.
(c) For the purposes of No. (1) above:
1) The criteria for assessing integrity shall be whether
the information has remained complete and unaltered,
apart from the addition of any endorsement and any
change which arises in the normal course of communication,
storage and display; and
2) The standard of reliability required shall be assessed
in the light of the purpose for which the information
was generated and in the light of all relevant circumstances.
An electronic data message or electronic document meeting
and complying with the requirements of Section 6 or 7 of R.A. No.
8792 shall be the best evidence of the agreement and transaction
contained therein. (Sec. 11, Ibid.)
(5) Solemn contracts. — No provision of the R.A. No. 8792 shall
apply to vary any and all requirements of existing laws and relevant
judicial pronouncements respecting formalities required in
the execution of documents for their validity. Hence, when the
law requires that a contract be in some form in order that it may
be valid or enforceable, or that a contract is proved in a certain
way, that requirement is absolute and indispensable. (Sec. 12, Ibid.)
Legal recognition of electronic signatures.
rules and regulations:
122 SALES
An electronic signature relating to an electronic document or
electronic data message shall be equivalent to the signature of a
person on a written document if the signature:
(1) is an electronic signature as defined in Section 6(g) of the
Rules; and
(2) is proved by showing that a prescribed procedure, not
alterable by the parties interested in the electronic document or
electronic data message, existed under which:
(a) A method is used to identify the party sought to be
bound and to indicate said party’s access to the electronic
document or electronic data message necessary for his consent
or approval through the electronic signature;
(b) Said method is reliable and appropriate for the purpose
for which the electronic document or electronic data
message was generated or communicated, in the light of all
circumstances, including any relevant agreement;
(c) It is necessary for the party sought to be bound, in
order to proceed further with the transaction, to have executed
or provided the electronic signature; and
(d) The other party is authorized and enabled to verify the
electronic signature and to make the decision to proceed with
the transaction authenticated by the same.
The parties may agree to adopt supplementary or alternative
procedures provided that the requirements of paragraph
(b) are complied with. (Sec. 13, Rules.)
Communication of electronic data messages
and electronic documents.
rules and regulations:
(1) Formation and validity of electronic contracts. — Except as
otherwise agreed by the parties, an offer, the acceptance of an offer
and such other elements required under existing laws for the formation
and perfection of contracts may be expressed in, demonstrated
and proved by means of electronic data message or electronic
documents and no contract shall be denied validity or en-
Art. 1483
123
forceability on the sole ground that it is in the form of an electronic
data message or electronic document, or that any or all of
the elements required under existing laws for the formation of the
contracts is expressed, demonstrated and proved by means of
electronic documents. (Sec. 21, Rules.)
(2) Consummation of electronic transactions with banks. — Electronic
transactions made through networking among banks, or
linkages thereof with other entities or networks, and vice versa,
shall be deemed consummated under rules and regulations issued
by the Bangko Sentral ng Pilipinas, upon the actual dispensing of
cash or the debit of one account and the corresponding credit to
another, whether such transaction is initiated by the depositor or
by an authorized collecting party. The obligation of one bank,
entity, or person similarly situated to another arising therefrom
shall be considered absolute and shall not be subjected to the process
of preference of credits. The foregoing shall apply only to transactions
utilizing the Automated Teller Machine switching network.
Without prejudice to the foregoing, all electronic transactions
involving banks, quasi-banks, trust entities, and other institutions
which under special laws are subject to the supervision of the
Bangko Sentral ng Pilipinas shall be covered by the rules and regulations
issued by the same pursuant to its authority under Section
59 of R.A. No. 8791 (The General Banking Act), R.A. No. 7653
(the Charter of the Bangko Sentral ng Pilipinas) and Section 20,
Article XII of the Constitution. (Sec. 22, Ibid.)
(3) Recognition by parties of electronic data message. — As between
the originator and the addressee of an electronic data message
or electronic document, a declaration of will or other statement
shall not be denied legal effect, validity or enforceability
solely on the ground that it is in the form of an electronic data
message or electronic document. (Sec. 23, Ibid.)
ART. 1484. In a contract of sale of personal property
the price of which is payable in installments, the
vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the
vendee fail to pay;
124 SALES
(2) Cancel the sale, should the vendee’s failure to
pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing
sold; if one has been constituted, should the vendee’s
failure to pay cover two or more installments. In this
case, he shall have no further action against the purchaser
to recover any unpaid balance of the price.
Any agreement to the contrary shall be void. (1454-Aa)
Remedies of vendor in sale of personal
property payable in installments.
The vendor of personal property payable in installments may
exercise any of the following remedies:
(1) elect fulfillment upon the vendee’s failure to pay; or
(2) cancel the sale, if the vendee shall have failed to pay two
or more installments; or
(3) foreclose the chattel mortgage, if one has been constituted,
if the vendee shall have failed to pay two or more installments.
Remedies alternative.
These remedies are alternative and are not to be exercised
cumulatively or successively and the election of one is a waiver
of the right to resort to the others. (Pacific Commercial Co. vs. De
la Rama, 62 Phil. 380 [1935]; Erlanger & Galinger, Inc. vs. Flor,
[C.A.] 57 O.G. 482; Cruz vs. Filipinas Invest. & Finance Corp., 23
SCRA 791 [1968]; Filipinas Invest. & Finance Corp. vs. Ridad, 30
SCRA 564 [1969]; Industrial Finance Corp. vs. Tobias, 78 SCRA 28
[1977]; Nonato vs. Intermediate Appellate Court, 140 SCRA 255
[1985].)
Thus, where from the prayer of the vendor in its brief, it asks
the appellate court to order the vendee to pay the remaining unpaid
sum under the promissory note, it thereby waives the other
remedies. (Servicewide Specialists, Inc. vs. Intermediate Appellate
Court, 174 SCRA 80 [1989].) To file an action containing the
three remedies: to collect the purchase price; to seize the property
purchased by suing for replevin; and to foreclose the mort-
Art. 1484
125
gage executed thereon, is not only irregular but is a flagrant circumvention
of the prohibition of the law. (Luneta Motor Co. vs.
Dimagiba, 3 SCRA 884 [1961].)
Applicability of Article 1484.
The law is aimed at those sales of personal property where
the price is payable in several installments.
(1) Sale of personal property not payable in installments. — Article
1484 does not apply to a sale of personal property on straight
term or partly in cash and partly in term. Where the balance, after
payment of the initial sum, should be paid in its totality at the
time specified, the transaction is not by installment as contemplated
in Article 1484. (Levi Hermanos, Inc. vs. Gervacio, 69 Phil.
52 [1939].)
(2) Sale or mortgage of real estate. — Neither does the article
apply to sale of immovable property nor to real estate mortgage.
Under Article 1484, the creditor is given the right or option to seize
the chattel and dispose of the same in accordance with the Chattel
Mortgage Law, while the mortgage on real property may only
be foreclosed in conformity with the provisions of the Rules of
Court, or those of Act No. 3135, if a special power to sell is granted
to the creditor under the contract. (Pacific Commercial Co. vs.
Jocson, [C.A.] 39 O.G. 1859.)
(3) Action of replevin. — It does not also apply to an action of
replevin. (Universal Motors Corp. vs. Dy Hian Tat, 28 SCRA 161
[1969].) An action by the mortgagee for recovery of possession of
personal property with replevin as a provisional remedy is not
an action for collection much less for foreclosure (extra-judicial)
of chattel mortgage. It is a preliminary step to foreclosure which
should be conducted in accordance with Section 14 of Act No.
1508. (Universal Motors Corp. vs. Velasco, 98 SCRA 545 [1980];
PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals, 109
SCAD 7, 310 SCRA 281 [1999].)
Right of vendor to recover unpaid balance
of purchase price.
(1) Remedy of specific performance. — The vendor who has chosen
to exact the fulfillment of the obligation is not limited to the
126 SALES
proceeds of the sale of the mortgaged goods. He may still recover
from the purchaser the unpaid balance of the price, if any (see
Tajanlangit vs. Southern Motors, Inc., 101 Phil. 606 [1957]; Vda.
de Quimba vs. Manila Motor Co., Inc., 3 SCRA 444 [1961].), on
the real and personal properties of the purchaser not exempt by
law from attachment or execution. (Southern Motors, Inc. vs.
Magbanua, 101 Phil. 155 [1957].) The mere fact that the seller secures
possession of the personal property through an attachment
after filing an action for collection of the unpaid balance, with a
prayer for an issuance of a writ of preliminary attachment does
not necessarily mean that he intends to resort to a foreclosure of
the mortgage. Unlike in a judicial foreclosure sale, there is no need
for the court to confirm the sale on execution. (Palma vs. Court of
(2) Remedy of cancellation. — If the vendor chooses rescission
or cancellation of the contract upon the vendee’s failure to pay
two or more installments, the latter can demand the return of
payments already made unless there is a stipulation about forfeiture.
(see Art. 1486.) In a case, for failure of the buyer to pay two
or more installments, the vendor-mortgagee (or his assignee) repossessed
the car. The receipt issued by the vendor’s assignee to
the vendee when it took possession of the vehicle states that the
vehicle could be redeemed within 15 days, meaning that should
the vendee fail to redeem within the said period by paying the
balance of the purchase price, the assignee would retain permanent
possession of the vehicle as it did in fact. It was held that by
this act, the vendor exercised its option to cancel the contract of
sale, barring it from exacting payment of the balance of the purchase
price. “It cannot have its cake and eat it too.” (Nonato vs.
Intermediate Appellate Court, 140 SCRA 255 [1985].)
(3) Remedy of foreclosure. — If the vendor has chosen the third
remedy of foreclosure of the chattel mortgage if one has been given
on the property, he is not obliged to return to the vendee the
amount of the installments already paid should there be an agreement
to that effect. (Ibid.) But he shall have no further action
against the vendee for the recovery of any unpaid balance of the
price remaining after the foreclosure and actual sale of the mortgaged
chattel, and any agreement to the contrary is void. (Zayas,
Art. 1484
127
Jr. vs. Luneta Motor Company, 117 SCRA 726 [1982]; PAMECA
Wood Treatment Plant, Inc. vs. Court of Appeals, 310 SCRA 281
[1999].)
(a) Recovery by mortgagee of other than unpaid balance of purchase
price. — Article 1484(3) is inapplicable where the amounts
adjudged in favor of the vendor-mortgagee were not part of
the unpaid balance of the purchase price or in the concept of
a deficiency judgment but were expenses of the suit. (Universal
Motors Corp. vs. Velasco, 98 SCRA 545 [1980], infra.) Where
the mortgagor plainly refuses to deliver the chattel subject of
the mortgage upon his failure to pay two or more installments
or if he conceals the chattel to place it beyond the reach of the
mortgagee it logically follows as a matter of common sense,
that the necessary expenses incurred in the prosecution by the
mortgagee in the prosecution of the action for replevin so that
he can regain possession of the chattel, should be borne by the
mortgagor. Recoverable expenses would include expenses
properly incurred in effecting seizure of the chattel and attorney’s
fees in prosecuting the action for replevin. (Agustin vs.
(b) Recourse of mortgagee against guarantor of vendee. — Neither
can the vendor after the foreclosure of the chattel mortgage
proceed against any third party who may have guaranteed
the vendee’s performance of his obligation, for “if the
guarantor should be compelled to pay the balance of the purchase
price, the guarantor will, in turn, be entitled to recover
what he has paid from the debtor-vendee (Art. 2066.); so that
ultimately, it will be the vendee who will be made to bear the
payment of the balance of the price, despite the earlier foreclosure
of the chattel mortgage given by him. Thus, the protection
given by Article 1484 (to the unpaid vendor) would be
indirectly subverted, and public policy overturned.” (Cruz vs.
Filipinas Invest. & Finance Corp., 23 SCRA 791 [1968]; Pascual
vs. Universal Corporation, 61 SCRA 121 [1974].)
(c) Recourse of assignee against mortgagee. — When the vendor
assigns his credit to another person, the latter is likewise
bound by the same law. Accordingly, when the assignee forecloses
on the mortgage, there can be no further recovery of the
128 SALES
deficiency and the seller-mortgagee is deemed to have renounced
any right thereto. (Borbon II vs. Servicewide Specialists,
Inc., 72 SCAD 111, 258 SCRA 634 [1996].) Article 1484(3),
however, does not bar one to whom the seller-mortgagee has
assigned on a with-recourse basis his credit against the buyer
from recovering from the seller the assigned credit in full although
the seller may have no right of recovery against the
buyer for the deficiency. (Filipinas Invest. & Finance Corp. vs.
Vitug, Jr., 28 SCRA 658 [1969].)
ILLUSTRATIVE CASE:
Seller-mortgagee assigned on a recourse basis a promissory note
covering purchase price of motor vehicle executed by buyer-mortgagor
who defaulted, and assignee seeks to recover from assignor unpaid
balance remaining after foreclosure.
Facts: B delivered to S a promissory note covering the purchase
price of a motor vehicle bought by B from S, secured by a
chattel mortgage over such automobile. S negotiated the note
to C, assigning all S’s rights to the same, the assignment including
the right of recourse against S.
B defaulted. The car was sold at public auction but the proceeds
still left a deficiency.
Issue: After the foreclosure and sale by C, could it hold S
liable for the payment of the outstanding balance, plus attorney’s
fees and costs?
Held: Yes. Article 1483 is not applicable. The transaction between
S and C was purely an ordinary discounting transaction.
The remedy sought by C is not against the buyer (B) of the car
but against the seller (S), independent of whether or not S may
have a right of recovery against B, which in this case, he does
not have. What Article 1484(3) seeks to protect are only the
buyers on installment. Surely, Congress could not have intended
to impair and much less to do away with the right of the seller
to make commercial use of his credit against the buyer, provided
said buyer is not burdened beyond what the law allows.
The contention by S that since what were assigned to C
were only whatever rights it had against B (the buyer), it should
follow that inasmuch as S has no right to recover from B beyond
the proceeds of the foreclosure sale, C, as assignee, should
Art. 1484
129
have also no right to recover any deficiency is untenable. The
very fact that C was given the right of recourse against S negates
the idea that the parties contemplated to limit the recovery
of C to only the proceeds of the mortgage sale. (Ibid.)
Note: In the case of Cruz vs. Filipinas Invest. & Finance Corp.
(supra.), the Supreme Court broadened the scope of the Recto
Law (now Art. 1484.) beyond its letter and held that within its
spirit, a seller of goods on installments does not have any right
of action against a third party who, in addition to the buyer’s
mortgage of the goods sold, furnishes additional security for
the payment of said installment or the purchase price of said
goods. That case is entirely different from the one at bar. In that
case, the corporation was trying to recover from the guarantor
of the buyer, whereas in the present case, it is precisely stipulated,
in effect, that C had a right of recourse against the seller
should the buyer failed to pay the assigned credit in full. (Ibid.)
Meaning of certain terms as used
in Article 1484.
(1) “Exercise.” — In a case, the issue was “whether the plaintiff
(mortgagee) is precluded to press for collection of an account
secured by a chattel mortgage, after it shall have informed the
defendant (mortgagor) of its intention to foreclose on the same
mortgage and the voluntary acceptance of such step (foreclosure)
by the defendants.”
The Supreme Court held that such desistance of the plaintiff,
on its own initiative, from proceeding with the auction sale without
gaining any advantage or benefit, and without causing any
disadvantage or harm to the defendant-mortgagor, rendered useless
its previous choice to foreclose, and for this reason, it could
not be considered as having “exercised” (the Code uses the word
“exercise”) the remedy of foreclosure because of its incomplete
implementation. Therefore, the plaintiff was not barred from suing
on the unpaid account. In desisting from a foreclosure of chattel
mortgage, and suing instead for the unpaid balance, the creditor
does not assume really inconsistent positions, nor is he
estopped considering that detriment to the opposing party is a
prerequisite to the operation of estoppel. (Radiowealth, Inc. vs.
Lavin, 7 SCRA 804 [1963].)
130 SALES
(2) “Action.” — Considering the purpose for which the prohibition
contained in Article 1484 was intended, the word “action”
used therein may be construed as referring to any judicial or extra-
judicial proceeding by virtue of which the vendor may lawfully
be enabled to exact recovery of the supposed unsatisfied
balance of the purchase price from the purchaser or his privy.
(Cruz vs. Filipinas Investment and Finance Corp., 23 SCRA 791
[1968].)
(3) “Any unpaid balance.” — The phrase should be interpreted
as having reference to the deficiency judgment to which the mortgagee
may be entitled where, after the mortgaged chattel is sold
at public auction, the proceeds obtained therefrom are insufficient
to cover the full amount of the secured obligation. It includes all
other claims that may likewise be called for such as interest on
the principal, attorney’s fees, expenses of collection, and the costs.
Were it the intention of the legislature to limit its meaning to the
unpaid balance of the principal, it would have so stated.
(Macondray & Co., Inc. vs. Eustaquio, 64 Phil. 446 [1937].) Thus,
where the mortgagor unjustifiably refused to surrender the chattel
subject of the mortgage upon failure of two or more
installments, or if he concealed the chattel to place it beyond the
reach of the mortgagee, that thereby constrained the latter to seek
court relief, the expenses incurred for the prosecution of the case,
such as attorney’s fees, could rightly be awarded. (Borbon II vs.
Servicewide Specialists, Inc., 72 SCAD 111, 258 SCRA 634 [1996].)
(4) “Foreclosure.” — Article 1484(3), in referring to foreclosure
of a chattel mortgage given to secure payments in installments of
the purchase price of the thing sold, means foreclosure by the
usual methods including sale of the thing at public auction.
(a) Where there is no sale because the sheriff released the
property without proceeding to sell the same and the sale was
not rescinded by the vendor, the latter was not precluded from
suing the vendee for the balance of the purchase price. (Pacific
Commercial Co. vs. De La Rama, 72 Phil. 380 [1941].)
(b) Similarly, where the action instituted is for specific performance
and the mortgaged property is subsequently attached
and sold by virtue of an execution, the sale thereof does
not amount to a foreclosure of the mortgage; hence, the seller-
Art. 1484
131
creditor is entitled to deficiency judgment (Southern Motors,
Inc. vs. Moscoso, 2 SCRA 168 [1961].) and for an alias writ of
execution for the portion of the judgment that has not been
satisfied. (Industrial Finance Corp. vs. Ramirez, 77 SCRA 152
[1977].)
(c) Under the law, the delivery by the mortgagor of the
possession of the mortgaged chattel to the mortgagee preparatory
for its foreclosure sale can only operate to extinguish the
mortgagor’s liability if the mortgagee had actually caused the
foreclosure of the property when it recovered possession
thereof. It is the fact of foreclosure and actual sale of the mortgaged
chattel that bars the recovery by the vendor of the balance
of the vendee’s outstanding obligation not satisfied by
the sale. Accordingly, if the vendor desisted, on his own initiative,
from consummating the auction sale when it discovered
that foreclosure would be impractical, such desistance
would operate as a timely disavowal of the remedy of foreclosure,
and the vendor can still sue for specific performance.
The mortgagee who accepted delivery of the mortgaged property
is not estopped from demanding payment of the unpaid
obligation in the absence of clear consent on his part to accept
the delivery in full satisfaction of the mortgaged debt in the
concept of dacion en pago.24 (Filinvest Credit Corp. vs. Phil.
Acetylene Co., Inc., 111 SCRA 421 [1982]; see De la Cruz vs.
Asian Consumer & Industrial Finance Corp., 214 SCRA 103
[1992].)
(d) In ordinary alternative obligations, a mere choice categorically
and unequivocally made and then communicated
by the person entitled to exercise the option concludes the
parties. The creditor may not thereafter exercise any other
option, unless the chosen alternative proves to be ineffectual
or unavailing due to no fault on his part. This rule, in essence,
is the difference between alternative obligations, on the one
hand, and alternative remedies, upon the other hand, where,
in the latter case, the choice generally becomes conclusive only
24Art. 1245. Dation in payment, whereby property is alienated to the creditor in
satisfaction of debt in money, shall be governed by the law on sales.
132 SALES
upon the exercise of the remedy. For instance, in one of the
remedies expressed in Article 1484 of the Civil Code, it is only
when there has been a foreclosure of the chattel mortgage that
the vendee-mortgagor would be permitted to escape from a
deficiency liability. Thus, if the case is one for specific performance,
even when this action is selected after the vendee has
refused to surrender the mortgaged property to permit an
extrajudicial foreclosure, that property may still be levied on
execution and an alias writ may be issued if the proceeds
thereof are insufficient to satisfy the judgment credit. So, also,
a mere demand to surrender the object which is not heeded by
the mortgagor will not amount to a foreclosure, but the repossession
thereof by the vendor-mortgagee would have the effect
of foreclosure. (Borbon II vs. Servicewide Specialists, Inc.,
supra.)
(e) Actual sale in accordance with the Chattel Mortgage
Law (Act No. 1508, Sec. 14.) resulting in a deficiency of the
mortgaged chattel is the foreclosure contemplated by law.
(Manila Motor Co. vs. Fernandez, 99 Phil. 782 [1956]; Northern
Motors, Inc. vs. Sapinoso, 33 SCRA 356 [1970]; Industrial
Finance Corp. vs. Tobias, 78 SCRA 28 [1977]; see Vda. de
Quiambao vs. Manila Motor Co., 3 SCRA 444 [1961].) But the
taking by the mortgagee of the mortgaged chattel without
proceeding to the sale of the same at public auction is not lawful.
The express purpose of taking the mortgaged property is
to sell the same and/or foreclose the mortgage constituted
thereon either judicially or extra-judicially and thereby liquidate
the indebtedness in accordance with law. (Esguerra vs.
ILLUSTRATIVE CASES:
1. Defaulting buyer-mortgagor was given by assignee the option
to pay unpaid balance of truck brought on installments or to
surrender the same, and the assignee, having learned after buyer exercised
the second option that the truck had met an accident, filed suit
for recovery of unpaid balance of price.
Facts: B bought a truck on installments from S. Payment
was secured by a chattel mortgage. The promissory note and
the mortgage was assigned by S to C. B defaulted on the
Art. 1484
133
installment payments. As a consequence, C demanded payment
of the entire unpaid balance of the price or surrender of the
truck. B replied that he was voluntarily surrendering the truck
to C. He said the truck was being repaired at the shop of S as it
had met with an accident, that there was too much delay in the
repair, and that he was not satisfied with the repair of the finished
portions.
C decided not to get the truck. It filed a suit for the recovery
of the balance of the obligation.
Issue: Is C estopped to insist on its claim on the balance of
the promissory note when it demanded the return or surrender
of the truck?
Held: No. C did not know about the accident. Even B cannot
expect C to accept the term of surrender because aside from
the fact that the truck being surrendered met an accident, C
was not satisfied with the repair of the finished portions of the
truck in question. C, therefore, was justified in refusing to accept
such surrender and in bringing suit to recover the balance
of the purchase price.
Since the case involves the sale of personal property on
installments, Article 1484 of the Civil Code should apply. The
remedies provided for in Article 1484 are considered alternative,
not cumulative such that the exercise of one would bar the
exercise of the others. Here, C has not cancelled the sale, nor
has it exercised the remedy of foreclosure. Foreclosure, judicial
or extrajudicial, presupposes something more than a mere demand
to surrender possession of the object of the mortgage.
Since C has not availed itself of the remedy of cancelling the
sale of the truck in question or of foreclosing the chattel
mortgage on said truck, C is still free to avail of the remedy of
exacting fulfillment of the obligation of B, the vendee of the
truck in question. (Industrial Finance Corp. vs. Tobias, 78 SCRA
28 [1977].)
———— ———— ————
2. In a suit for recovery of unpaid balance of purchase price of
mortgaged truck sold on installments, seller caused the attachment
and subsequent sale of the vehicle.
Facts: B bought from S a truck on installment basis. Upon
making a downpayment, B executed a promissory note for the
unpaid balance of the purchase price to secure the payment of
which a chattel mortgage was constituted on the truck in favor
134 SALES
of S. B failed to pay S installments on the balance. S filed a complaint
for recovery of the unpaid balance. Pursuant to a writ of
attachment, the truck and other properties of A were attached.
B contends that S had availed of the third remedy provided
in Article 1484, viz., the foreclosure of the chattel mortgage on
the truck. On the other hand, S claims that in filing the complaint,
it availed of the first remedy, i.e., to exact fulfillment of
the obligation (specific performance).
Issue: Do the attachment and subsequent sale of the mortgaged
truck amount to a foreclosure of the mortgage, hence, S
(seller-creditor) is not entitled to deficiency judgment?
Held: No. There is nothing unlawful or irregular in B’s act
of attaching the mortgaged truck. Since S has chosen to exact
the fulfillment of B’s obligation, it may enforce execution of the
judgment that may be favorably rendered thereon, on all personal
and real properties of B not exempt from execution sufficient
to satisfy such judgment. (Southern Motors, Inc. vs. Moscoso,
2 SCRA 168 [1961].)
Note: There is a substantial difference between the effect of
foreclosing a chattel mortgage and attaching the mortgaged
chattel. The variance lies in the ability of the debtor to retain
possession of the property attached by giving a counterbond
and thereby discharging the attachment. This remedy the debtor
does not have in the event of foreclosure. (Reyes, J.B.L., J., concurring.)
———— ———— ————
3. Seller brought suit to recover mortgaged truck sold on
installment basis preparatory to foreclosure, and lower court held that
expenses of suit adjudged in his favor may be enforced only against
proceeds of the vehicle.
Facts: B brought from S a truck on installment basis. To secure
the balance of the purchase price B executed a promissory
note and a chattel mortgage. B defaulted in his payments. S
asked him to surrender the vehicle in accordance with the chattel
mortgage contract, but B failed to surrender the truck. S filed
an action to recover the truck preparatory to foreclosure of the
mortgage. By virtue of a writ of replevin, S was able to repossess
the truck. The parties submitted a stipulation of facts which
mentioned, among other things, the expenses incurred by S in
securing possession of the vehicle.
Art. 1484
135
On the basis of the stipulation, the lower court rendered a
decision which said, among other things, that the sums adjudged
in S’s favor may be enforced only against the proceeds
of the vehicle mortgaged.
Issue: Is the third paragraph of Article 1484 applicable to
the case at bar?
Held: No. First, the action instituted in the court a quo was
not for foreclosure of the chattel mortgage but for replevin; and
second, the amounts adjudged in favor of the plaintiff were
not part of the unpaid balance of the purchase price or in
the concept of deficiency judgment but were for the expenses
of the suit. (Universal Motors Corp. vs. Velasco, 98 SCRA 545
[1980].)
———— ———— ————
4. Chattel mortgage covers not only the personal property sold
on installment payments but other personal property of the vendeemortgagor.
Facts: B purchased from S two Ford sedans payable in
installments. B executed a promissory note and a deed of chattel
mortgage covering not only the two new cars but also an
old car and his certificate of public convenience for the operation
of a taxicab fleet. With the conformity of B, S assigned its
rights to the note and the mortgage to F. Due to the failure of B
to pay the installments, F foreclosed the chattel mortgage extra-
judicially. At the public auction, F was the purchaser. Another
auction sale was held because B’s obligation was not fully
satisfied by the sale of the vehicles. At the second sale, the franchise
to operate the taxicab service was sold to F. B filed an
action for annulment of the contract of mortgage. The trial court
held the chattel mortgage was null and void insofar as the taxicab
franchise and the old car were concerned.
Issue: Is the chattel mortgage valid insofar as the franchise
and the subsequent sale thereof are concerned?
Held: The resolution of said issue is unquestionably governed
by the provisions of Article 1484 of the Civil Code. Under
the article, the vendor of personal property the purchase
price of which is payable in installments, has the right, should
the vendee default in the payment of two or more of the agreed
installments, to exact fulfillment by the purchaser of the obligation,
or to cancel the sale, or to foreclose the mortgage on the
136 SALES
purchased personal property, if one was constituted. Whichever
right the vendor elects, he cannot avail of the other, these
remedies being alternative, not cumulative. Furthermore, if the
vendor avails himself of the right to foreclose his mortgage,
the law prohibits him from further bringing an action against
the vendee for the purpose of recovering whatever balance of
the debt secured not satisfied by the foreclosure sale.
Consequently, the lower court rightly declared the nullity
of the chattel mortgage in question insofar as the taxicab franchise
and the used car of B are concerned. F has to content himself
with the proceeds of the sale at the public auction of the
two cars which were sold on installment and mortgaged to S,
his assignor. To allow the sale of other properties would be
equivalent to obtaining a writ of execution against B concerning
said properties which are separate and distinct from those
which were sold on installment. This would be contrary to public
policy and the very spirit and purpose of the law limiting
the vendor’s right to foreclose the chattel mortgage only on the
thing sold. (Ridad vs. Filipinas Investment and Finance Corp., 120
SCRA 246 [1983]; see Levi Hermanos, Inc. vs. Pacific Commercial,
71 Phil. 587 [1941].)
Recovery of deficiency after foreclosure
prohibited.
(1) Purpose of prohibition. — The principal object of Article 1484
(3) is to remedy the abuses committed in connection with foreclosure
of chattel mortgages. This amendment prevents mortgagees
from seizing the mortgaged property, buying it at foreclosure sale
for a low price and then bringing suit against the mortgagor for a
deficiency judgment. The almost invariable result of this procedure
was that the mortgagor found himself minus the property and still
owing practically the full amount of his original indebtedness. In
other words, in all proceedings for the foreclosure of chattel mortgages,
the mortgagee is limited to the property included in the
mortgage. (Bachrach Motor Co. vs. Milan, 61 Phil. 409 [1935];
Manila Trading & Supply Co. vs. Reyes, 62 Phil. 461 [1935].) He has
no more cause of action against the purchaser or his guarantor.
(Luneta Motor Co. vs. Salvador, 108 Phil. 1057 [1960].) “Although,
of course, the purchaser must suffer the consequences of his imprudence
and lack of foresight, the chastisement must not be to the
Art. 1484
137
extent of ruining him completely and, on the other hand, enriching
the vendor in a manner which shocks the conscience.” (Manila
Trading and Supply Co. vs. Reyes, supra.)
(2) Prohibition not affected by assignment by vendor of his rights.
— The assignment by the vendor of his rights to the sale of personal
property on installment basis covered by Article 1484 of the
Civil Code does not change the nature of the transaction between
the parties — the vendor and the vendee. It remains the same.
Hence, the assignee can have no better rights than the assignor.
Accordingly, where the obligation of the vendee had already been
discharged by sale at public auction of the property subject of the
chattel mortgage, no deficiency amount can be recovered by the
assignee. To rule otherwise would pave the way for subverting
the policy underlying Article 1484 on the foreclosure of chattel
mortgages over personal property sold on installment basis.
(Zayas, Jr. vs. Luneta Motor Company, 117 SCRA 726 [1982].)
Sale or financing of real estate
on installment payments.
(1) Rights of buyer. — In transactions or contracts involving the
sale or financing of real estate on installment payments (see Appendix
“B.”), including residential condominium apartments, the
following are the rights given to the buyer who has paid at least
two (2) years of installments in case he defaults in the payment of
succeeding payments:
(a) To pay without additional interest, the unpaid
installments due within the total grace period earned by him
fixed at the rate of one (1)-month grace period for every one
(1) year of installment payments made. This right however,
shall be exercised by him only once in every five (5) years of
the life of the contract and its extension, if any; and
(b) If the contract is cancelled, the seller shall refund to the
buyer the cash surrender value of the payments on the property
equivalent to 50% of the total payments made and, after
five (5) years of installments, an additional 5% every year but
not to exceed 90% of the total payments made. (Sec. 3, R.A. No.
6552 [Realty Installment Buyer Protection Act]; see Layug vs.
138 SALES
(c) The buyer has the right to sell his right or assign the
same before actual cancellation of the contract (see Sec. 5, R.A.
No. 6552.) and to pay in advance any unpaid installment
anytime without interest and to have such full payment of the
purchase price annotated in the certificate of title covering the
property. (see Sec. 6, ibid.)
(2) Conditions for cancellation of sale by seller. — The actual cancellation
shall take place after 30 days from receipt by the buyer
of the notice of cancellation or the demand for rescission by a
notarial act and upon full payment of the cash surrender value to
the buyer. Down payments, deposits or options on the contract
shall be included in the computation of the total number of
installment payments made. (Sec. 3, Ibid.; see McLaughlin vs.
In case the defaulting buyer has paid less than two (2) years
of installments, the seller shall give him a grace period of not less
than 60 days from the date the installment became due. If he fails
to pay the installments due at the expiration of the grace period,
the seller may cancel the contract after 30 days from receipt by
the buyer of the notice of cancellation or the demand for rescission
of the contract by a notarial act. (Sec. 4, R.A. No. 6552.)
(3) Installment sales not covered. — The Act excludes from its
operation sales on installments of industrial lots, commercial
buildings, and sales to tenants under the Code of Agrarian Reforms.
25 (Ibid.) In other words, in the case of such kind of property,
the Act recognizes the vendor’s right unqualifiedly to cancel
the sale upon the buyer’s default. (Luzon Brokerage Co., Inc.
vs. Maritime Bldg. Co., Inc., 86 SCRA 305 [1978]; see Art. 1592.)
(4) Purpose of the law. — The purpose is to protect buyers of
real estate on installment payments against onerous and oppressive
conditions. (Sec. 2, R.A. No. 6552.)
In a case, the petitioner claims that he is entitled to a conveyance
of at least eight (8) of the 12 lots subject of the conditional
sale, on the theory that since the total price of the 12 lots was
P120,000, each lot then had a value of P10,000 and, therefore, with
25R.A. No. 3844, as amended; now, R.A. No. 6657, the Comprehensive Agrarian
Reform Law of 1988.
Art. 1484
139
his P80,000.00, he had paid in full the price for the 8 lots. In support
of his claim, he invokes earlier rulings in Legarda Hermanos
vs. Saldaña (55 SCRA 324 [1978].) and Calasanz vs. Angeles. (135
SCRA 323 [1985].)
In the first case, the contract of sale provided for payment of
the price of two (2) subdivision lots at P1,500.00 each, exclusive
of interest, in 120 monthly installments and at time of default, the
buyer had already paid P3,582.00, inclusive of interest; and in the
second, the agreement had a price of P3,720.00 with interest at 7%
per annum, and at time of default, the buyer had paid installments
totaling P4,533.38, inclusive of interest. Upon considerations of
justice and equity and in the light of the general provisions of the
civil law, the Supreme Court resolved in the first case to direct
the conveyance of one of the lots to the buyer since he had already
paid more than the value thereof, and in the second, to disallow
cancellation by the seller and direct transfer of title to the buyer
upon payment of the first installments yet unpaid.
In both cases, the Supreme Court equitably allocated the benefits
and losses between the parties to preclude undue enrichment
by one at the expense of the other. It was held that the cited precedents
are not applicable. The petitioner cannot be permitted to
claim that all his payments should be credited to him in their
entirety, without regard whatever, to the damages his default
might have caused to the seller. In any event, it is no longer possible
to apply the rulings in the said cases to the case at bar, i.e., to
resort to principles of equity and the general provisions of the Civil
Code in the resolution of the present controversy, because at the
time of the execution of the contract in question and the breach
thereof, R.A. No. 6552 was already in force and applicable thereto.
It precludes resort to equity and analogous provisions of the Civil
Code, it being axiomatic that where there is an adequate remedy
at law available to the parties, equity should not come into play.
(Layug vs. Intermediate Appellate Court, 167 SCRA 627 [1988].)
ART. 1485. The preceding article shall be applied
to contracts purporting to be leases of personal property
with option to buy, when the lessor has deprived
the lessee of the possession or enjoyment of the thing.
(1454-A-a)
140 SALES
Lease of personal property
with option to buy.
(1) Nature of transaction. — Leases of personal property with
option to buy on the part of the lessee who takes possession or
enjoyment of the property leased are really sales of personalty
payable in installments. Accordingly, the rules provided in Article
1484 are equally applicable to the so-called leases of personal
property. Sellers desirous of making conditional sales of their
goods but do not wish openly to make a bargain in that form, for
one reason or another, have frequently resorted to the device of
making contracts in the form of leases either with option to the
buyer to purchase for small consideration at the end of the term
provided the so-called rent has been duly paid, or with the stipulation
that if the rent throughout the term is paid, the title shall
thereupon vest on in the lessee. (Filinvest Credit Corp. vs. Court
of Appeals, 178 SCRA 188 [1989].)
(2) Purpose of provision. — The evident purpose of Article 1485
is to prevent vendors from resorting to this form of contract which
usually is in reality contract of sale of personal property payable
in installments in contravention of the provisions of Article 1484.
Through the set-up, the vendor by retaining ownership over the
property in the guise of being the lessor, retains likewise the right
to repossess the same, without going through the process of foreclosure,
in the event the vendee-lessee defaults in the payment of
the installments. There arises, therefore, no need to constitute a
chattel mortgage over the movable sold. More important, the
vendor, after repossessing the property and, in effect, cancelling
the contract of sale, gets to keep all the installments-cumrental
already paid. (Filinvest Credit Corp. vs. Court of Appeals, 178
SCRA 188 [1989].)
EXAMPLE:
B entered into a contract called “contract of lease” with S
whereby B leased the car of S. It is stipulated that B, the alleged
lessee, shall pay P10,000.00, upon signing the contract,
and on or before the 5th day of every month, P2,000.00 by
way of rental.
The contract fixed the value of the vehicle to be
P100,000.00. It also provided that B has the option to pur-
Art. 1485
141
chase the car for the said amount and the payment made by
way of rentals shall be deducted from the amount agreed in
the option and upon the full value fixed being paid, the lease
would terminate and title to the leased property would be
transferred to B; and S would have the right to terminate the
contract and repossess the vehicle should B fail to make payments
on the dates specified, and in such event, the payments
theretofore made should remain the property of S and not
be recoverable by B.
There can hardly be any question that the contract in this
case is one of sale on installments and not lease, with the socalled
monthly rentals being in truth monthly amortizations
on the price of the car, and is, therefore, subject to the provision
that “when the lessor had deprived the lessee of the enjoyment
or possession” of the personal property, he shall have no further
action against the lessee “to recover any unpaid balance”
owing by the latter, “any agreement to the contrary being void.”
In choosing the alternative remedy of depriving the lessee of
the enjoyment of the leased property, the lessor, in such case,
waives the right to bring an action for unpaid rentals on the
said vehicle. (see U.S. Commercial vs. Halili, 93 Phil. 271 [1953];
Manila Gas Corporation vs. Calupitan, 66 Phil. 646 [1938]; see
Elisco Tool Manufacturing Corp. vs. Court of Appeals, 307 SCRA
731 [1999].)
(3) Repossession by lessor need not be through court action. —
Even where the lessee voluntarily delivers the property to the
lessor, the case is not taken out of the purview of Article 1485 if
he does so in obedience to the lessor’s demands. The article
does not require that the deprivation of the enjoyment of the
property be brought about through court action. Specially where
the contract specifically authorizes the lessor to repossess the
property whenever the lessee defaults in the payment of rent,
court action for such purpose is not essential. (U.S. Commercial
Co. vs. Halili, supra.)
ART. 1486. In the cases referred to in the two preceding
articles, a stipulation that the installments or
rents paid shall not be returned to the vendee or lessee
shall be valid insofar as the same may not be unconscionable
under the circumstances. (n)
142 SALES
Stipulation authorizing the forfeiture
of installments or rents paid.
In sales of personal property by installments or leases of personal
property with option to buy, the parties may stipulate that
the installments or rents paid are not to be returned. Such a stipulation
is valid “insofar as the same may not be unconscionable
under the circumstances’’; otherwise, the court has the power to
order the return of a portion of the total amount paid in
installments or rents. (Zaragosa vs. Dimayuga, [C.A.] 62 O.G. 7028;
see Art. 1229.)
Thus, in a case, where the monthly installment payable by
defendants (buyers) was P774.00 and the P5,655.92 installment
payments corresponded only to seven (7) monthly installments,
the treatment of the installment as rentals as stipulated in the
contract of sale for failure of the defendants to comply with the
terms thereof, was held not unconscionable, since they admitted
having used the air-conditioners sold for 22 months, meaning they
did not pay 15 monthly installments on the said air-conditioners
and were thus using the same free for said period to the prejudice
of the plaintiff (seller). (Delta Motor Sales Corp. vs. Nui Kim
Duan, 213 SCRA 259 [1992].) In another case, the forfeiture of the
installments paid as rentals, was applied only to the purchase
price of P3,556 which was considered as fair and reasonable rental
for the period in which the property was under the control of the
awardee of the homelot but not to the overpayment of the amount
of P8,244.00 for “a contrary ruling would unjustly enrich the vendor
to the prejudice of the vendee.’’ (Gomez vs. Court of Appeals,
134 SCAD 206, 340 SCRA 720 [2000].)
ART. 1487. The expenses for the execution and
registration of the sale shall be borne by the vendor,
unless there is a stipulation to the contrary. (1455a)
Expenses for execution and registration.
Under this article, the vendor has the duty to pay not only the
expenses for the execution of the sale but also for the registration
of the same in the absence of any agreement between the parties
to the contrary.
Art. 1487
143
Expenses incurred subsequent to the transfer of title are to be
borne by the buyer, unless caused by the fault of the seller.
ILLUSTRATIVE CASES:
(1) Vendee assumed liability for taxes and other expenses.
Facts: In the Deed of Absolute Sale, B, buyer, assumed liability
for taxes and other expenses “relative to the execution
and/or implementation” of the Deed “including, among others,
documentation, documentary and service stamps, expenses
for registration and transfer of titles.’’
Issue: Is B liable for overdue real estate taxes?
Held: No. The interpretation that B assumed a liability in
overdue real estate taxes for the years prior to the contract of
sale when he was neither the owner nor the beneficial owner of
the property is incongruent to the tax policy that the user of the
property bears the tax, because there was no immediate transfer
of possession of the property previous to the full payment
of the purchase price. If he intended to assume liability, the contract
should have specifically stated “real estate taxes” due for
the previous years. The payments made under protest cannot
be construed to be an admission of liability. Hence, the tax assessed
and collected should be refunded. (Estate of C.T. Lim vs.
City of Manila, 182 SCRA 482 [1990].)
———— ———— ————
2. The Decision commands the petitioner (seller) to “execute a
Deed of Absolute Sate in favor of private respondents (buyers) and
deliver the corresponding certificate of title to them.”
Facts: See above.
Issue: Can it be inferred from these directives that petitioner
should also pay for the expenses in notarizing the deed and
obtaining a new certificate of title?
Held: No. “The obligation to pay for such expenses is unconnected
with and distinct from the obligations to execute and
deliver the deed of absolute and the certificate of title. Since
there is no qualification that the duties to execute and to deliver
shall also compel petitioner to assume the expenses for
transferring the pertinent title in favor of private respondents,
the ordinary and literal meaning of the words ‘execute’ and
144 SALES
‘deliver’ should prevail, that is, for petitioner to perform all
necessary formalities of the deed of sale and give or cede the
res of the certificate of title (that certificate which naturally must
be in their possession since petitioner cannot give what it does
not have) to the actual or constructive control of private respondents.
Needless to stress, petitioner can actually discharge
these obligations without settling for its own account the expenses
which private respondents are demanding. In this regard,
petitioner can appear before the notary public for
notarization of the deed of absolute sale and assist in the cancellation
of the certificate of title in its name by giving this certificate
together with the deed of absolute sale to private respondents
for presentation at the Registry of Deeds, which it
has several times expressed willingness to do so.’’ (Jose Clavano,
Inc. vs. Housing and Land Use Regulatory Board, 378 SCRA 172
[2002].)
ART. 1488. The expropriation of property for public
use is governed by special laws. (1456)
Expropriation of property for public use.
The procedure for the exercise of the power of eminent domain
is provided for in Rule 67 of the Rules of Court. Expropriation
must be decreed by competent authority and for public use
and always upon payment of just compensation. (Art. 435, par. 1,
Civil Code; Art. III, Sec. 9, Constitution.)
— oOo —
Art. 1488
145
Chapter 2
CAPACITY TO BUY OR SELL
ART. 1489. All persons who are authorized in this
Code to obligate themselves, may enter into a contract
of sale, saving the modifications contained in
the following articles.
Where necessaries are sold and delivered to a
minor or other person without capacity to act, he must
pay a reasonable price therefor. Necessaries are those
referred to in article 290. (1457)
Person who may enter into a contract
of sale.
As a general rule, all persons, whether natural or juridical, who
can bind themselves have also legal capacity to buy and sell. There
are exceptions to this rule in those cases when the law determines
that a party suffers from either absolute or relative incapacity.
Kinds of incapacity.
Such incapacity is absolute in the case of persons who cannot
bind themselves; and relative where it exists only with reference
to certain persons or a certain class of property. (Wolfson vs. Estate
of Martinez, 20 Phil. 340 [1911].) Persons who are merely relatively
incapacitated are mentioned in Articles 1490-1491.
There are no incapacities except those provided by law and
such incapacities cannot be extended to other cases by implication
for the reason that such construction would be in conflict with
the very nature of Article 1489. (Ibid.)
145
146 SALES
Liability for necessaries of minor or other
person without capacity to act.
Necessaries are those things which are needed for sustenance,
dwelling, clothing, medical attendance, education and transportation
according to the financial capacity of the family of the incapacitated
person. (see Art. 194, Family Code.) Whether the nature
of the contract is such that it can under any circumstances,
be regarded as a contract for necessaries, is a question which depends
upon the facts of the particular case.
Generally, the contracts entered into by a minor and other
incapacitated persons (e.g., insane or demented persons, deafmutes
who do not know how to write), are voidable. (Arts. 1327,
1390.) However, where necessaries are sold and delivered to him
(without the intervention of the parent or guardian), he must pay
a reasonable price therefor. (Art. 1489, par. 2.) The contract is, therefore,
valid but the minor has the right to recover any excess above
a reasonable value paid by him.
Sale by minors.
The courts have laid down the rule that the sale of real estate
effected by minors who have already passed the ages of puberty
and adolescence and are now in the adult age, when they pretended
to have already reached their majority, while in fact they
have not, is valid, and they cannot be permitted afterwards to
excuse themselves from compliance with the obligations assumed
by them or to seek their annulment. (see Mercado and Mercado
vs. Espiritu, 37 Phil. 265 [1917].)
The doctrine is entirely in accord with the provisions of the
Rules of Court (see Rule 131, Sec. 1.) and the Civil Code (see Art.
1431.) which determine cases of estoppel.
ART. 1490. The husband and the wife cannot sell
property to each other, except:
(1) When a separation of property was agreed
upon in the marriage settlements; or
Art. 1490
147
(2) When there has been a judicial separation of
property under article 191.* (1458a)
Relative incapacity of husband
and wife.
(1) The husband and the wife are prohibited by the above
article from selling property to each other. A sale between husband
and wife in violation of Article 1490 is inexistent and void from
the beginning because such contract is expressly prohibited by law.
(Art. 1409[7]; Uy Siu Pin vs. Chua Hue vs. Cantollas, 70 Phil. 55
[1940]; Camia de Reyes vs. Reyes de Ilano, 63 Phil. 629 [1936];
Medina vs. Collector of Internal Revenue, 1 SCRA 302 [1961].)
(2) They are also prohibited from making donations to each
other during the marriage except moderate gifts on the occasion
of any family rejoicing. (Art. 87, Family Code.) However, if there
has been a separation of property agreed upon in the marriage
settlements, or when there has been a judicial separation of property
decreed between them by the court, the sales between husband
and wife are allowed. They have, therefore, in the two cases
mentioned, capacity to buy from or to sell to each other.
Incidentally, a marriage settlement (also called “ante-nuptial
contract”) is an agreement entered into by persons who are about
to be united in marriage, and in consideration thereof, for the
purpose of fixing the property relations that would be followed
by them for the duration of the marriage. (see Arts. 74-80, Ibid.)
Reason for prohibition under Article 1490.
The reason for the law is not based so much on the union of
the personality of the husband and wife nor on the weakness of
the sex and on the possibility that the husband will induce his wife
to engage in ruinous operations, but primarily, for the protection
of third persons1 who, relying upon supposed property of either
*Now, Art. 135, Family Code.
1The husband cannot alienate or encumber any real property of the conjugal partnership
without the wife’s consent. (Art. 166.) An action to annul the questioned transaction
may be instituted by the wife during the marriage and within 10 years from the
transaction. (Art. 173.) The lack of consent makes the transaction merely voidable. The
Art. 1490 CAPACITY TO BUY OR SELL
148 SALES
spouse, enters into a contract with either of them only to find out
that the property relied upon was transferred to the other spouse.
(see 10 Manresa 95-96.)
Persons permitted to question sale.
(1) Although certain transfers between husband and wife are
prohibited under Article 1490, such prohibition can be taken advantage
of only by persons who bear such relation to the parties
making the transfer or to the property itself that such transfer
interferes with their rights or interests. Unless such a relationship
appears, the transfer cannot be attacked. Thus, the heirs of either
spouse, as well as creditors at the time of the transfer, can attack
the validity of the sale but not creditors who became such only
after the transaction. (Cook vs. McMicking, 27 Phil. 10 [1914].)
(2) The government is always an interested party in all matters
involving taxable transactions. It is competent to question
their validity or legitimacy whenever necessary to block tax evasion.
It can impugn sales between husband and wife. (Medina vs.
Collector of Internal Revenue, supra.)
ART. 1491. The following persons cannot acquire
by purchase, even at a public or judicial auction, either
in person or through the mediation of another:
(1) The guardian, the property of the person or
persons who may be under his guardianship;
(2) Agents, the property whose administration or
sale may have been entrusted to them, unless the
consent of the principal has been given;
(3) Executors and administrators, the property of
the estate under administration;
(4) Public officers and employees, the property of
the State or of any subdivision thereof, or of any govlegal
prohibition against the disposition of conjugal property by one spouse without the
consent of the other has been established for the benefit, not of third persons, but only of
the other spouse for whom the law desires to save the conjugal partnership from damages
that might be caused. (Villaranda vs. Villaranda, 423 SCRA 571 [2004]; Papa vs.
Montenegro, 54 Phil. 331 [1930].)
Art. 1491
149
ernment owned or controlled corporation, or institution,
the administration of which has been entrusted
to them; this provision shall apply to judges and government
experts who, in any manner whatsoever, take
part in the sale;
(5) Justices, judges, prosecuting attorneys, clerks
of superior and inferior courts, and other officers and
employees connected with the administration of justice,
the property and rights in litigation or levied upon
an execution before the court within whose jurisdiction
or territory they exercise their respective functions;
this prohibition includes the act of acquiring
by assignment and shall apply to lawyers, with respect
to the property and rights which may be the object of
any litigation in which they may take part by virtue of
their profession;
(6) Any others specially disqualified by law.
(1459a)
Incapacity by reason of relation
to property.
The above article enumerates the persons who, by reason of
the relation of trust with the persons under their charge or their
peculiar control over the property, are prohibited from acquiring
said property either directly or indirectly and whether in private
or public sale. They are the: (1) guardians; (2) agents; (3) executors
and administrators; (4) public officers and employees; (5)
judicial officers, employees and lawyers; and (6) others especially
disqualified by law. (Rubias vs. Batiller, 51 SCRA 120 [1973].)
The persons disqualified to buy referred to in Articles 1490
and 1491 are also disqualified to become lessees of the things
mentioned thereon. (Art. 1646.)
Reason for prohibitions under
Article 1491.
The disqualifications imposed by Article 1491 on the person
enumerated is grounded on public policy considerations which
disallow the transactions entered into by them, whether directly
150 SALES
or indirectly, in view of the fiduciary relationship involved or the
peculiar control exercised by these individuals over the properties
or rights covered. (Mananquil vs. Villegas, 189 SCRA 335
[1990].)
The prohibitions seek to prevent frauds on the part of such
persons and minimize temptations to the exertion of undue and
improper influence. The fear that greed might get the better of
the sentiments of loyalty and disinterestedness is the reason underlying
Article 1491. The law does not trust human nature to
resist the temptations likely to arise out of antagonism between
the interest of the seller and buyer. (23 Scaevola 403; Gregorio
Araneta, Inc. vs. Tuazon de Paterno, 91 Phil. 786 [1952].)
Prohibition with respect to guardians.
The relation between guardian and ward is so intimate, the
dependence so complete and the influence so great that any transaction
between the two parties entered while the relationship
exists are, in the highest sense, suspicious and presumptively
fraudulent. This influence is presumed to last while the guardian’s
functions are to any extent still unperformed, while the property
is still under his control and until the accounts have been finally
settled. (39 Am. Jur. 2d 160.)
Prohibition with respect to agents.
The agent’s incapacity to buy his principal’s property rests on
the fact that the agent and the principal form one juridical person.
Like the guardian, the agent stands in a fiduciary relation with
his principal. A sale made by an agent to himself, directly or indirectly,
without the permission of the principal is ineffectual. (see
Gregorio Araneta, Inc. vs. Tuazon de Paterno, supra; Barton vs.
Leyte Asphalt and Mineral Co., 46 Phil. 938 [1924].) The consent
of the principal removes the transaction out of the prohibition
contained in Article 1491(2). (Distajo vs. Court of Appeals, 132
SCAD 577, 339 SCRA 52 [2000].)
(1) The incapacity of the agent is only against buying the property
he is required to sell during the existence of the relationship.
Therefore, an agent can buy for himself the property after the ter-
Art. 1491
151
mination of the agency (Valera vs. Velasco, 51 Phil. 695 [1928].) or
other properties different from those he has been commissioned
to sell. (Moreno vs. Villonea, [C.A.] 40 O.G. 2322.)
(2) Of course, the agent may buy property placed in his hands
for sale or administration if the principal gives his consent thereto.
(Cui vs. Cui, 100 Phil. 913 [1957].)
(3) The prohibition does not apply where the sale of the property
in dispute was made under a special power inserted in or
attached to the real estate mortgage pursuant to Section 5 of Act
No. 3135, as amended, a special law which governs extra-judicial
foreclosure of real estate mortgage. The power to foreclose is not an
ordinary agency that contemplates exclusively the representation
of the principal by the agent but is primarily an authority conferred
upon the mortgagee for the latter’s own protection. By virtue
of the exception, the title of the mortgagee-creditor over the
property cannot be impeached or defeated on the ground that the
mortgagee cannot be a purchaser at his own sale. (Fiestan vs.
Prohibition with respect to executors
and administrators.
The prohibition refers only to properties under the administration
of the executor or administrator at the time of the acquisition
and does not extend, therefore, to property not falling within
this class.
Executors do not administer the hereditary rights of any heir.
Such rights do not form part of the property delivered to the executor
for administration. Consequently, the prohibition in No.
(3) of Article 1491 does not apply to a purchase by an executor of
such hereditary rights (e.g., 1/10 interest in the estate), even in
those cases in which the executor administers the property pertaining
to the estate. (Naval vs. Enriquez, 3 Phil. 669 [1904]; see
Garcia vs. Rivera, 95 Phil. 831 [1954].)
ILLUSTRATIVE CASE:
Administrator sold certain properties of the estate to his son for a
grossly low price.
152 SALES
Facts: S, administrator of the estate of his deceased mother,
was authorized by the court to sell certain described properties
of the estate to settle its outstanding obligations at the best price
obtainable. The sale was made to B, S’s son, for P75,000. On the
same date, B executed a deed of sale of the same property for
P80,000 in favor of C. Z, etc., heirs of X, filed an action for the
annulment/revocation of the two sales. C claimed that the actual
consideration was P225,000 and being a purchaser in good
faith and for value, his title to the property is indefeasible pursuant
to law. It appears that S entered into a “mutual agreement
of promise to sell’’ to spouses H and W the property already
sold to C for P220,000 for which they paid P70,000 as
earnest money.
H and W alleged that both sales to B and C were simulated
and fictitious, made to defraud the estate and other heirs, and
that C supplied the consideration of the sale to B who was not
gainfully employed. After several hearings, the court allowed
all the interested parties to bid for the property. C offered to
buy for P280,000. H and W counter-offered at P282,000, spot
cash, which was increased to P300,000. Later all the parties,
except H and W and B, submitted an amicable settlement seeking
approval of the two sales and accepting the offer of C. H
and W questioned the court’s approval of the amicable settlement
and the non-acceptance of their offer.
Issue: Did the assent of practically all the heirs to the compromise
agreement justify its approval by the court?
Held: No. (1) Sale is illegal, irregular and fictitious. — As administrator,
S occupies a position of the highest trust and confidence.
In the discharge of his functions, an administrator should
act with utmost circumspection to preserve the estate and guard
against its dissipation so as not to prejudice its creditors and
the heirs of the decedent who are entitled to the net residue
thereof. In the case at bar, the sale was made necessary “in order
to settle other existing obligations of the estate, but it was
made, of all people, to his son B, and for a grossly low price of
only P75,000. B had no income whatsoever, was, in fact, still a
dependent of his father, and not a single centavo of the consideration
was ever accounted for nor reported by B to the probate
court. It was only after the sales were questioned in court
by H and W that B was compelled to admit that the actual consideration
of the sale to C was P200,000.
Art. 1491
153
The sale to B was not submitted to the probate court for
approval as mandated by the order authorizing S to sell. The
sale was indubitably illegal, irregular, and fictitious, and the
court’s approval of the assailed compromise agreement violated
Article 1409 and “cannot work to ratify a fictitious contract
which is non-existent and void from the very beginning.”
(2) Consent of heirs not a ground for court’s approval of sale. —
The assent of the parties-signatories “to such an illegal scheme
does not legalize the same nor does it impose an obligation upon
the court to approve the same to the prejudice not only of the
creditors of the estate, and of the government by the non-payment
of the correct amount of taxes legally due from the estate.”
(3) Offer of H and W more advantageous. — The offer of H
and W “is decidedly more beneficial and advantageous not only
to the estate, the heirs of the decedent, but more importantly, to
its creditors for whose account and benefit the sale was made.
No satisfactory and convincing reason appeared given for the
rejection and non-acceptance of said offer, thus giving rise to a
well-grounded suspicion that a collusion of some sort exists
between the administrator and the heirs to defraud the creditors
and the government.” (Lao vs. Genato, 137 SCRA 77 [1985].)
Prohibition with respect to public officials
and employees.
The prohibition refers only to properties: (1) belonging to the
State, or of any subdivision thereof, or of any government-owned
or -controlled corporation or institution, (2) the administration of
which has been entrusted to the public officials or employees.
Thus, a provincial governor or treasurer entrusted with the administration
of property belonging to a province cannot buy said
property while the school superintendent who has no charge of
the same is not within the scope of the prohibition.
Note that the prohibition includes judges and government
experts who, in any manner, take part in the sale.
ILLUSTRATIVE CASE:
Land foreclosed by GSIS was sold by it at public auction to the
wife of a GSIS official.
Facts: For failure to comply with the conditions of sale, GSIS
cancelled the sale of a parcel of land to MPC and later sold the
154 SALES
property at public auction to T (as the highest bidder), the wife
of the Chief, Retirement Division, GSIS. MPC questioned the
validity of the sale to T.
Issue: Does the sale fall under the prohibited transactions
under Article 1491?
Held: Yes. (1) GSIS official with influence or authority. — “Public
officers who hold positions of trust may not bid directly or
indirectly to acquire properties foreclosed by their offices and
sold at public auction. A division chief of the GSIS is not an
ordinary employee without influence or authority. The mere
fact that the husband of T exercises ample authority with respect
to a particular activity, i.e., retirement, shows that his influence
cannot be lightly regarded. The point is that he is a
public officer and his wife acts for and in his name in any transaction
with the GSIS.
(2) Sale is void. — If he is allowed to participate in the public
bidding of properties foreclosed or confiscated by the GSIS
there will always be the suspicion among other bidders and
the general public that the insider official has access to information
and connections with his fellow GSIS officials as to allow
him to eventually acquire the property. It is precisely the
need to forestall such suspicions and to restore confidence in
the public service that the Civil Code declares such transactions
to be void from the beginning and not merely voidable.
(3) Reasons for prohibition. — The reasons are grounded on
public order and public policy.2 Assuming the transaction to be
fair and not tainted with irregularity, it is still looked upon with
disfavor because it places the officer in a position which might
become antagonistic to his public duty. (Maharlika Broadcasting
Corp. vs. Tagle, 142 SCRA 553 [1986].)
Note: Here, the GSIS official was not entrusted with the administration
of the property in question.
Prohibition with respect to judges, etc.,
and lawyers.
The prohibition in Article 1491(5) applies only to the sale or
assignment of property which is the subject of litigation to the
2Art. 1409. The following contracts are inexistent and void from the beginning: (1)
those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy; x x x.
Art. 1491
155
persons disqualified therein. For the prohibition to operate, the
sale or assignment must take place during the pendency of the
litigation involving the property. (Laig vs. Court of Appeals, 86
SCRA 641 [1978]; Valencia vs. Cabanteng, 196 SCRA 302 [1991].)
The prohibition applies when, for example, a lawyer has not paid
for the property and it was merely assigned to him in consideration
of legal services rendered at a time when the property is still
subject of a pending case. (Ordonio vs. Eduarte, 207 SCRA 229
[1992].) The prohibition on purchase is all embracing to include
not only sales to private individuals but also public or judicial
sales. (Ramos vs. Ngaseo, 445 SCRA 529 [2004].)
(1) When property considered “in litigation.” — For property to
be considered “in litigation,” it is not required that some contest
or litigation over the property should have been tried by the judge.
Such property is “in litigation” from the moment it became subject
to the judicial action of the judge who afterwards purchased
it. Hence, a purchase made by judge at a public auction of a property
pursuant to an order of execution issued by said judge is
within the prohibition whether or not the property had been the
subject of litigation in his court. (Gontingco vs. Pobinguit, 35 Phil.
81 [1911].)
There is no violation of the prohibition (although it may be
improper under the Canons of Judicial Ethics) where the judge
purchased the property in question after the decision involving
the property had already become final because none of the parties
therein filed an appeal within the reglementary period; hence,
the same was no longer in litigation. (Macariola vs. Asuncion, 114
SCRA 77 [1982].)
(2) Where property acquired by lawyer in foreclosure sale after termination
of case. — A lawyer cannot purchase, directly or indirectly,
the property or rights which are the subject of litigation in which
he takes part by virtue of his profession. (see Rubias vs. Satiller,
51 SCRA 120 [1973].) The fact that the property in question was
first mortgaged by the client to his lawyer and only subsequently
acquired by the latter in a foreclosure sale long after the termination
of the case will not remove it from the scope of the prohibition
for at the time the mortgage was executed the relationship of
lawyer and client still existed, the very relation of trust and confidence
sought to be protected by the prohibition, when a lawyer
156 SALES
occupies a vantage position to press upon or dictate terms to a
harassed client. To rule otherwise would be to countenance indirectly
what cannot be done directly. (Fornilda vs. Regional Trial
Court, 166 SCRA 281 [1988].)
(3) Liability of lawyer for violation of prohibition. — A violation
of the prohibition constitutes a breach of professional ethics and
malpractice for which the lawyer may be reprimanded, suspended
or disbarred from the practice of the legal profession. Good faith
is not a defense. (In re Attorney Melchor E. Ruste, 70 Phil. 243
[1940]; Hernandez vs. Villanueva, 40 Phil. 775 [1920]; Mananquil
vs. Villegas, 189 SCRA 335 [1990].)
(4) Where lawyer member of law firm involved. — Contracts of
sale or lease where the vendee or lessee is a partnership, of which
a lawyer is a member, over a property involved in a litigation in
which he takes by virtue of his profession are covered by the prohibition.
(5) Cases not covered. — The prohibition does not include sale
of the property of the client effected before it became involved in
the action (Gregorio Araneta, Inc. vs. Tuazon de Paterno, 91 Phil.
786 [1952].); nor does it apply to an assignment of the amount of
a judgment made by a person to his attorney in payment of professional
services in other cases (Municipal Council of Iloilo vs.
Evangelista, 55 Phil. 290 [1930].); nor to the sale of a parcel of
land, acquired by a client to satisfy a judgment in his favor, to his
attorney as long as the property was not the subject of the litigation.
(Daroy vs. Abecia, 100 SCAD 376, 298 SCRA 239 [1998].) It
has also been held that the law does not prohibit a lawyer from
charging a contingent fee (to be given in a case the suit is won)
based on a certain percentage of the value of the property in litigation
(Recto vs. Harden, 100 Phil. 427 [1954].), because the payment
of said fee is not made during the pendency of the litigation
but only after judgment has been rendered in the case handled
by the lawyer. In fact, under the 1988 Code of Professional
Responsibility (Rule 16.03, Canon 10 thereof.), a lawyer may have
a lien over funds and property of his client and may apply so
much thereof as may be necessary to satisfy his lawful fees and
disbursements. (Fabillo vs. Intermediate Appellate Court, 195
SCRA 28 [1991].)
Art. 1491
157
Other persons especially disqualified.
Examples of persons especially disqualified by law are:
(1) aliens who are disqualified to purchase private agricultural
lands (Art. XII, Secs. 3, 7, Constitution; see Krivenko vs.
Register of Deeds, 79 Phil. 461 [1947].);
(2) an unpaid seller having a right of lien or having estopped
the goods in transitu, who is prohibited from buying the goods
either directly or indirectly in the resale of the same at a public or
private sale which he may make (Art. 1533, par. 5; Art. 1476[4].);
and
(3) The officer conducting the execution sale or his deputies
cannot become a purchaser, or be interested directly or indirectly
in any purchase at an execution sale. (Sec. 19, Rule 39, Rules of
Court.)
In the case of aliens, the disqualification is founded on express
provision of the Constitution and not by reason of any fiduciary
relationship. It has been held, however, that where a land is sold
to an alien who later sold it to a Filipino, the sale to the latter cannot
be impugned. In such case, there would be no more public
policy to be served in allowing the Filipino seller or his heirs to
recover the land as the same is already owned by a qualified person.
(Herrera vs. Tuy Kim Guan, 1 SCRA 406 [1961]; Godinez vs.
Fong Pak Luen, 120 SCRA 223 [1983].)
Effect of sale in violation of prohibition.
If the sale is made, would the transaction be void or merely
voidable?
(1) With respect to Nos. 1 to 3, the sale shall only be voidable
because in such cases only private interests are affected. (see
Wolfson vs. Estate of Martinez, 20 Phil. 340 [1911].) The defect can
be cured by ratification of the seller. (see Arts. 1392-1396.)
(2) With respect to Nos. 4 to 6, the sale shall be null and void,
public interests being involved therein. (see Art. 1409[1]; Rubias
vs. Batiller, 51 SCRA 120 [1973].)
In a case, the Supreme Court affirmed the decision of a lower
court declaring invalid the sale made by the client in favor of his
158 SALES
attorney. (Director of Lands vs. Abragat, 53 Phil. 147 [1929]; see
Fornilda vs. Regional Trial Court, 166 SCRA 281 [1988].)
Nullity of prohibited contracts
differentiated.
(1) Public officers, etc., justices, etc., and lawyers. — The nullity
of such prohibited contracts, i.e., by public officers and employees
of government property entrusted to them and by justices,
judges, fiscals, and lawyers of property and rights in litigations
submitted to or handled by them, under paragraphs (4) and (5) is
definite and permanent and cannot be cured by ratification. The
public interest and public policy remain paramount and do not
permit of compromise or ratification. In this aspect, their disqualification
is grounded on public policy.
(2) Guardian, agents, and administrators. — The disqualification
of public officers differs from the first three cases of guardians,
agents, and administrators, as to whose transactions, it has been
opined that they may be “ratified” by means of and in the form
of a new contract, in which case its validity shall be determined
only by the circumstances at the time of execution of such new
contract.
(a) The causes of nullity which have ceased to exist cannot
impair the validity of the new contract. Thus, the object
which was illegal at the time of the first contract, may have
already become lawful at the time of the ratification or second
contract; or the service which was impossible may have become
possible; or the intention which could not be ascertained
may have been clarified by the parties.
(b) The ratification or second contract could then be valid
from its execution; however, it does not retroact to the date of
the first contract. (Director of Lands vs. Abragat, supra.)
ART. 1492. The prohibitions in the two preceding
articles are applicable to sales by virtue of legal redemption,
compromises and renunciations. (n)
Art. 1492
159
Prohibition extends to sales in legal
redemption, etc.
(1) The relative incapacity provided in Articles 1490 and 1491
applies also to sales by virtue of legal redemption (see Art. 1619.),
compromises, and renunciations.
(a) Compromise is a contract whereby the parties, by reciprocal
concessions, avoid a litigation or put an end to one already
commenced. (Art. 2028.) It is the amicable settlement of
a controversy.
(b) By renunciation, a creditor gratuitously abandons his
right against his creditor. The other terms used by the law are
condonation and remission. (see Art. 1270.)
(2) The persons disqualified to buy referred to in Articles 1490
and 1491 are also disqualified to become lessees of the things
mentioned therein. (Art. 1646.)
— oOo —
160 SALES
Chapter 3
EFFECTS OF THE CONTRACT WHEN
THE THING SOLD HAS BEEN LOST
ART. 1493. If at the time the contract of sale is perfected,
the thing which is the object of the contract
has been entirely lost, the contract shall be without
any effect.
But if the thing should have been lost in part only,
the vendee may choose between withdrawing from
the contract and demanding the remaining part, paying
its price in proportion to the total sum agreed upon.
(1460a)
Effect of loss of thing at the time
of sale.
The loss or injury referred to in this article is one which has
taken place before or at the time the contract of sale is perfected.
It must be distinguished from the loss or injury mentioned in
Articles 1480 and 1504 which occurs after the contract is perfected
but prior to the time of delivery.
(1) Thing entirely lost. — Where the thing is entirely lost at the
time of perfection, the contract is inexistent and void (Art. 1409[3].)
because there is no object. (Art. 1318, par. 2.) There being no contract,
there is no necessity to bring an action for annulment.
(2) Thing only partially lost. — If the subject matter is only
partially lost, the vendee may elect between withdrawing from
the contract and demanding the remaining part, paying its proportionate
price. (Art. 1493, par. 2.)
160
161
EXAMPLES:
(1) S sold his car to B. Unknown to both of them, the car
has been totally destroyed before they agreed on the sale. In
this case, there is no valid contract of sale for lack of object. S,
as owner, bears the loss and B does not have to pay for the
price.
(2) If the car sold is only partially destroyed, there still remains
of the object. However, since it is not of the character or
in the condition contemplated by the parties, the buyer may
withdraw from the contract or demand the delivery of the car,
paying its proportionate price.
When a thing considered lost.
The thing is lost when it perishes or goes out of commerce or
disappears in such a way that its existence is unknown or it cannot
be recovered. (Art. 1189[2].)
The word “perishes” is sufficiently inclusive as to cover a case
where there has been material deterioration or complete change
in the nature of the thing in such a manner that it loses its former
utility taking into consideration the time the contract was entered
into. (see 10 Manresa 129.)
ART. 1494. Where the parties purport a sale of specific
goods, and the goods without the knowledge of
the seller have perished in part or have wholly or in a
material part so deteriorated in quality as to be substantially
changed in character, the buyer may at his
option treat the sale:
(1) as avoided; or
(2) as valid in all of the existing goods or in so
much thereof as have not deteriorated, and as binding
the buyer to pay the agreed price for the goods in
which the ownership will pass, if the sale was divisible.
(n)
Effect of loss in case of specific goods.
Article 1493 applies to a sale of specific thing. Article 1494, on
the other hand, applies to sales of goods, that is, the object of the
Art. 1494 EFFECTS OF THE CONTRACT WHEN THE THING
SOLD HAS BEEN LOST
162 SALES
sale consists of a mass of “specific goods” which means “goods
identified and agreed upon at the time a contract of sale is made.”
(Art. 1636.)
Both articles have actually the same essence providing two
alternative remedies to the buyer in case of deterioration or partial
loss of the object prior to the sale, namely: to rescind or withdraw
from the contract or to give it legal effect, paying the proportionate
price of the remaining object.
(1) Sale divisible. — The second option is available only if the
sale is divisible. (Art. 1494, par. 2.) A contract is divisible when its
consideration is made up of several parts. (see Art. 1420.) When
the consideration is entire and single, the contract is indivisible.
(2) Sale indivisible. — Suppose the sale is not divisible, what
price is the buyer to pay for the remaining goods if he elects to
continue with the sale? It is believed that the buyer should be
made to pay only the proportionate price of the remaining goods
as provided for in paragraph 2 of the preceding article. If the sale
is indivisible, the object thereof may be considered as a specific
thing.
EXAMPLE:
Suppose the subject matter sold was 100 cavans of rice in
the warehouse of S at P1,000.00 per cavan or for a total price of
P100,000.00. If 60 cavans of rice were lost, B may, at his option,
withdraw from the contract without the obligation to pay for
the rice; or demand the delivery of the 40 cavans, but binding
him to pay the agreed price thereof which is P40,000.00.
If the contract is indivisible, that is, the 100 cavans of rice
were sold for P100,000.00 fixed without consideration of the
number of cavans, B should be made to pay only the proportionate
price of 40 cavans which is also P40,000.00.
— oOo —
Art. 1494
163
163
Chapter 4
OBLIGATIONS OF THE VENDOR
SECTION 1. — General Provisions
ART. 1495. The vendor is bound to transfer the
ownership of and deliver, as well as warrant the thing
which is the object of the sale. (1461a)
Principal obligations of the vendor.
The principal obligations of a vendor are:
(1) to transfer the ownership of the determinate thing sold;
(2) to deliver the thing, with its accessions and accessories, if
any, in the condition in which they were upon the perfection of
the contract (Art. 1537.);
(3) to warrant against eviction and against hidden defects
(Arts. 1495, 1547.);
(4) to take care of the thing, pending delivery, with proper
diligence (see Art. 1163.); and
(5) to pay for the expenses of the deed of sale, unless there is
a stipulation to the contrary. (Art. 1487.)
Obligation to transfer ownership and deliver.
(1) Ownership by vendor at time of perfection of contract not essential.
— The vendor need not be the owner of the thing at the
time of perfection of the contract; it is sufficient that he has “a right
to transfer the ownership thereof at the time it is delivered.” (Art.
1459.) The obligation to transfer ownership and to deliver is really
implied in every contract of sale. (see Arts. 1458, 1459, 1547.)
164 SALES
One who sells something he does not yet own is bound by the
sale when he acquires it later. (Bucton vs. Gabar, 55 SCRA 499
[1974].)
When a property belonging to a person is unlawfully taken
by another, the former has the right of action against the latter for
the recovery of the property. Such right may be transferred by the
sale or assignment of the property and the transferee can maintain
such action against the wrongdoer. (Heirs of Q. Seraspi vs.
Court of Appeals, 331 SCRA 293 [2000]; Waite vs. Peterson, 8 Phil.
235 [1907].)
ILLUSTRATIVE CASE:
Goods which seller warranted as already on the way did not arrive.
Facts: B, vendee, gave his consent to the purchase and sale
of certain goods on the assertion of S, vendor, stated in the contract,
that the goods were already on the way. The goods did
not arrive.
Issue: Has S the right to demand from B the payment of the
price?
Held: No. The assertion made by S is a warranty (see Arts.
1545, 1546.), the non-fulfillment of which constitutes a breach
of contract and deprives him the right to demand of B the payment
of the price of the sale. Having elected to bind himself in
that way, S, as vendor, is responsible, even if the prompt transportation
of the goods does not depend upon him but upon the
importers, for he who contracts and assumes an obligation is
presumed to know the circumstances under which it can be
complied with. (Soler vs. Chesley, 43 Phil. 529 [1922].)
(2) Transfer not essential to perfection of contract. — The transfer
of ownership and the delivery of the thing sold are not essential
to the perfection of the contract. But if the seller does not deliver
at the time stipulated, the buyer may ask for the rescission
of the contract or fulfillment with the right to damages in either
case. (Art. 1191.)
(3) No obligation to make delivery during period of redemption. —
The purchaser in execution sales (see Rules of Court, Rule 39, Secs.
30, 35.), however, is not entitled to immediate possession of the
Art. 1495
165
property sold. The effective conveyance of the land is accomplished
by the deed which is issued only after the period of redemption
has expired. (Flores vs. Lim, 50 Phil. 738 [1927];
Gonzales vs. Calimbas and Poblete, 51 Phil. 355 [1927].) In other
words, the debtor is not obliged to make delivery during the period
of redemption. In all cases of extra-judicial foreclosure sale,
the mortgagor may redeem the real property sold within one year
from the date of registration of the sale. (see Act No. 3155, Sec. 6.)
In judicial foreclosure of real estate mortgage, the general rule is
that the mortgagor cannot exercise his right of redemption after
the sale is confirmed by the court. (see Rules of Court, Rule 68,
Sec. 3.)
(4) Right of vendee to transfer of certificate of title. — In a sale of
registered land, the vendee has a right to receive and the vendor
the corresponding obligation to transfer to him, not only the possession
and employment of the land but also the certificate of title.
(Gabila vs. Perez, 169 SCRA 517 [1989].)
(5) Right of buyer to recover the price paid. — The right of a party
to recover the amount given as a consideration has been passed
upon in a case where it was held that: “Whenever money is paid
upon the representation of the receiver that he has either a certain
title in property transferred in consideration of the payment
or a certain authority to receive the money paid, when in fact he
has no such title or authority, then, although there be no fraud or
intentional misrepresentation on his part, yet there is no consideration
for the payment. The money remains, in equity and good
conscience, the property of the payer and may be recovered by
him. (Development Bank of the Phils. vs. Court of Appeals, 65
SCAD 82, 249 SCRA 331 [1995], citing Leather Manufacturers
National Bank vs. Merchants National Bank, 128 U.S. 26; 9 S. C.T.
5; 32 L. ed., 362.) Therefore, the purchaser is entitled to recover
the money paid by him where the contract is set aside by reason
of the mutual material mistake of the parties as to the identity or
quantity of the land sold. And where the purchaser recovers the
purchase price from a vendor who fails or refuses to deliver the
title, he is entitled, as a general rule, to interest on the money paid
from the time of payment. (Ibid., citing Wolfinger vs. Thomas, 22
SD 57; 115 NW 100; Robinson vs. Bresslor, 122 Neb. 461; 240 NW
564.)
Art. 1495 OBLIGATIONS OF THE VENDOR
General Provisions
166 SALES
ART. 1496. The ownership of the thing sold is acquired
by the vendee from the moment it is delivered
to him in any of the ways specified in articles 1497 to
1501, or in any other manner signifying an agreement
that the possession is transferred from the vendor to
the vendee. (n)
Ways of effecting delivery.
The ownership of the thing sold shall be transferred to the
vendee upon the delivery thereof (see Art. 1477.) which may be
effected in any of the following ways or modes:
(1) by actual or real delivery (Art. 1497.);
(2) by constructive or legal delivery (Arts. 1498-1501.); or
(3) by delivery in any other manner signifying an agreement
that the possession is transferred to the vendee. (Arts. 1496-1499.)
In all the different modes of delivery, the critical factor which
gives legal effect to the act is the actual intention of the vendor to
deliver, and its acceptance by the vendee. The act, without the
intention, is insufficient. There is no tradition. (Norkis Distributors,
Inc. vs. Court of Appeals, 195 SCRA 694 [1991]; Santos vs.
Santos, 156 SCAD 97, 366 SCRA 395 [2001].) Although transfer of
ownership is the primary purpose of sale, delivery remains an
indispensable requisite as our law does not admit the doctrine of
transfer of ownership of property by mere consent. (People’s Industrial
& Commercial Corp. vs. Court of Appeals, 88 SCAD 559,
274 SCRA 597 [1997].) The delivery must be made to the vendee
or his authorized representative. Where the vendee did not name
any person to whom the delivery shall be made in his behalf, the
vendor is bound to deliver exclusively to him. (Lagon vs. Hooven
Comalco Industries, Inc., 141 SCAD 353, 349 SCRA 363 [2001].)
ILLUSTRATIVE CASE:
For rice sold, vendor was not paid by vendee who sold it to another,
the second vendee, the latter refusing to return the rice after he
was repaid by first vendee.
Facts: S agreed to sell 170 cavans of rice to B at the price of
P37.25 per cavan, delivery to be made at T’s store. After the
Art. 1496
167
goods were unloaded at T’s store, S’s driver tried to collect the
purchase price from T as B was nowhere to be found, but T
refused, stating that he had purchased the goods from B at
P33.00 per cavan and the price had already been paid to him.
This is a simple case of swindling perpetrated by B at the
expense of S and T. However, three days after delivery, T was
repaid by B.
Issue: Is T duty bound to return the 170 cavans of rice to S
or to pay its value?
Held: Yes. (1) Sale between B and T voluntarily rescinded by the
repayment. — There was a perfected sale. (Art. 1475.) Ownership
of the rice, too, was transferred to the vendee, B, upon its
delivery at the place stipulated (Art. 1521.), and pursuant to
Articles 1477 and 1496. At the very least, B had a rescissible
title to the goods for non-payment of the purchase price but
which had not been rescinded at the time of the sale to T. Having
been repaid the purchase price by B, the sale, as between B
and T, had been voluntarily rescinded, and T was thereby divested
of any claim to the rice. Technically, therefore, he should
return the rice to B.
(2) Rule against unjust enrichment applies. — Since the rice
had not been returned to B who was ready to return the rice to
S, it follows that T should return the rice to S. T cannot be allowed
to unjustly enrich himself at the expense of another by
holding on to property no longer belonging to him. (Art. 22.) In
law and in equity, therefore, S is entitled to recover the rice, or
the value thereof since he was not paid the price therefor. (Obaña
Ways of effecting constructive delivery.
(1) Equivalent to actual delivery. — Constructive delivery is a
general term comprehending all those acts which, although not
conferring physical possession of the thing, have been held by
construction of law equivalent to acts of real delivery. (Banawa
vs. Mirano, 97 SCRA 517 [1980]; Aguilar vs. Court of Appeals, 129
SCAD 274, 335 SCRA 308 [2000].) It may be effected in any of the
following ways:
(a) by the execution of a public instrument (Art. 1498,
par. 1.);
General Provisions
168 SALES
(b) by symbolical tradition or traditio symbolica (ibid., par.
2.);
(c) by traditio longa manu (Art. 1499.);
(d) by traditio brevi manu (Ibid.);
(e) by traditio constitutum possessorium (Art. 1500.); or
(f) by quasi-delivery or quasi-traditio. (Art. 1501.)
As a specie of constructive delivery, the execution of a public
document is also considered a form of symbolic delivery.
(2) Contrary may be stipulated. — The parties, however, may
stipulate that ownership in the thing shall pass to the purchaser
only after he has fully paid the price (Art. 1478.) or fulfilled certain
conditions. In a contract of absolute sale, ownership is transferred
simultaneously with the delivery of the thing sold. (Joseph
& Sons Enterprises, Inc. vs. Court of Appeals, 143 SCRA 663
[1986].)
— oOo —
Art. 1496
169
SECTION 2. — Delivery of the Thing Sold
ART. 1497. The thing sold shall be understood as
delivered, when it is placed in the control and possession
of the vendee. (1462a)
Concept of tradition or delivery.
Tradition is a derivative mode of acquiring ownership by virtue
of which one who has the right and intention to alienate a
corporeal thing, transmits it by virtue of a just title to one who accepts
the same. (10 Manresa 122.)
Importance of tradition.
(1) Transfer of ownership. — Article 1496 emphasizes the necessity
of tradition for the transfer of ownership of the thing sold.
Our law does not admit the doctrine of transfer of property by
mere consent. (Chua vs. Court of Appeals, 401 SCRA 54 [2003].)
(a) The ownership over it is not transferred by contract
merely but by delivery, actual or constructive. The critical factor
in all the different modes of effecting delivery which gives
legal effect to the act, is the actual intention of the creditor to
deliver, and its acceptance by the vendee. (Norkis Distributors,
Inc. vs. Court of Appeals, 195 SCRA 494 [1991].)
(b) Contracts only constitute titles or rights to the transfer
or acquisition of ownership, while delivery or tradition is
the method of accomplishing the same, the title and the
method of acquiring it being different in our law. (Gonzales
vs. Roxas, 16 Phil. 51 [1910].) But, there is no delivery as to
transfer ownership where the vendee takes possession of the
personal property subject matter of the contract of sale by
169
170 SALES
stealing the same while in the custody of the vendor or his
agent. (see Aznar vs. Yapdiangco, 13 SCRA 486 [1965].)
(c) It is during the delivery that the law requires the seller
to have the right to transfer ownership of the thing sold. In
general, a perfected contract of sale cannot be challenged on
the ground of the seller’s non-ownership of the thing sold at
the time of the perfection of the contract. (Alcantara-Daus vs.
De Leon, 404 SCRA 74 [2003].)
(2) Liability in case of loss. — When the thing subject of the sale
is placed in the control and possession of the vendee (Art. 1497.)
or his agent, the delivery is complete and the vendee cannot avoid
liability in case the thing is subsequently lost without the fault of
the vendor. (La Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217
[1968]; Phil. Virginia Tobacco Adm. vs. Delos Angeles, 87 SCRA
197 [1987]; see Chrysler Phils. Corp. vs. Court of Appeals, 133
SCRA 507 [1984].)
(3) Right of vendor to claim payment. — Delivery produces its
natural effects in law, the principal and most important of which
being the transfer of ownership without prejudice to the right of
the vendor to claim payment of the price. (Ocejo Perez & Co. vs.
International Banking Corp., 37 Phil. 631 [1918]; Municipality of
Victorias vs. Court of Appeals, 149 SCRA 32 [1987].)
Where the buyer has not become the owner for lack of delivery,
his action is not accion reinvidicatoria but one against the vendor
for specific performance or rescission, with damages in either
case. (Art. 1191.)
(4) Consummation of contract. — Delivery of the thing together
with the payment of the price, marks the consummation of the
contract of sale.1 (Phil. National Bank vs. Ling, 69 Phil. 611 [1940];
1In a deed of sale of a parcel of land with a deed of mortgage to secure payment of
the balance of the purchase price, where title has been transferred to the buyer, the relationship
between the parties is no longer one of buyer and seller because the contract of
sale has been perfected and consummated. It is already one of a mortgagor and a mortgagee.
In consideration of the buyer’s promise to pay on installment basis the balance of
the purchase price, the seller has accepted the mortgage as security for the obligation,
thereby becoming the mortgagee. The buyer’s (mortgagor’s) breach of the obligation
will not be with respect to the perfected contract of sale but the obligations created by
the mortgage contract. (Suria vs. Intermediate Appellate Court, 151 SCRA 661 [1987].)
Art. 1497
171
Froilan vs. Pan Oriental Shipping Co., 12 SCRA 276 [1964]; La
Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217 [1968].) Perfection
of the contract, on the other hand, relates to the moment when
the meeting of minds between the parties takes place. (Art. 1475.)
(5) Enjoyment of thing sold. — Delivery is also necessary to
enable the vendee to enjoy and make use of the property purchased.
Actual delivery of the thing sold.
(1) When deemed made. — There is actual delivery when the
thing sold is placed in the control and possession of the vendee
(Art. 1497.) or his agent. (see Alliance Tobacco Corp., Inc. vs. Phil.
Virginia Tobacco Administration, 179 SCRA 336 [1989].) This involves
the physical delivery of the thing and is usually done by
the passing of a movable thing from hand to hand.
ILLUSTRATIVE CASE:
Bank (pledgee) took possession, as security, of the sugar sold and
delivered by unpaid seller to buyer (pledgor) who subsequently became
insolvent.
Facts: S sold sugar to B. The sugar was delivered by S into
B’s warehouse, leaving it entirely subject to his control. B, however,
failed to make payment after completion of delivery as
per agreement. C, a bank, took possession of the sugar pursuant
to a contract of pledge entered into between the bank and B
to secure the latter’s indebtedness of P20,000. Subsequently, B
became insolvent.
Issue: Is S still the owner of the sugar as to entitle him to
recovery of its possession?
Held: No. When S delivered the sugar into B’s warehouse,
leaving it entirely subject to his control, it is difficult to see how
S could have divested himself more completely of the possession
of the sugar, or how he could have placed it more completely
under the control of the buyer. The fact that the price
has not yet been paid, in the absence of stipulation, was not,
nor could it be an obstacle to the acquisition of ownership by B,
without prejudice, of course, to the right of S to claim payment
of the sum due. (Ocejo Perez & Co. vs. International Bank, 37 Phil.
631 [1918].)
Delivery of the Thing Sold
172 SALES
(2) Not always essential to passing of title. — Actual or manual
delivery of an article sold is not always essential to the passing of
title thereto. (Art. 1475.) The parties to the contract may agree
when and on what conditions the ownership in the subject of the
contract shall pass to the buyer. As for example, the parties may
stipulate that ownership in the thing sold shall pass to the vendee
only after he has fully paid the price. (Art. 1478.)
ART. 1498. When the sale is made through a public
instrument, the execution thereof shall be equivalent
to the delivery of the thing which is the object of
the contract, if from the deed the contrary does not
appear or cannot clearly be inferred.
With regard to movable property, its delivery may
also be made by the delivery of the keys of the place
or depository where it is stored or kept. (1463)
Execution of a public instrument
or document.
(1) Possession transferred to buyer by notarized deed of conveyance.
— The execution of a public instrument (i.e., an instrument or
document attested and certified by a public officer authorized to
administer oath, such as a notary public) as a manner of delivery
applies to movable as well as immovable property since the law
does not make any distinction and it can be clearly inferred by
the use of the word “also” in paragraph 2 of Article 1498. This
manner of delivery is symbolic. The buyer may use the document
as proof of his ownership of the property sold (Florendo vs. Foz,
20 Phil. 388 [1911]; Municipality of Victorias vs. Court of Appeals,
149 SCRA 32 [1987]; see Dy, Jr. vs. Court of Appeals, 198 SCRA
826 [1991].), for purposes, for example, of mortgaging the same.
(Garcia vs. Court of Appeals, 312 SCRA 180 [1999].) Under Article
1498, possession is transferred to the vendee (or lessee) by
virtue of the notarized deed of conveyance (Ong Ching Po vs.
Court of Appeals, 57 SCAD 619, 239 SCRA 341 [1994].) (or lease)
including the incorporeal rights appurtenant thereto, e.g., right
to eject tenants or squatters from the property in question. Since
the execution of the deed of conveyance is deemed equivalent to
Art. 1498
173
delivery, prior physical delivery or possession is not legally required.
Thus, notwithstanding the presence of illegal occupants
on the subject property, transfer of ownership by symbolic delivery
under Article 1498 can still be effected through the execution
of the deed of conveyance. The key word is “control,’’ not possession,
of the property. (Sabio vs. International Corporate Bank,
154 SCAD 377, 364 SCRA 385 [2001].)
(2) Delivery presumptive only. — Under Article 1498, the mere
execution of the deed of sale in a public document is equivalent
to the delivery of the property “if from the deed the contrary does
not appear or cannot clearly be inferred.” Therefore, prior physical
delivery or possession is not required. (M.R. Dulay Enterprises,
Inc. vs. Court of Appeals, 44 SCAD 297, 225 SCRA 678 [1993].)
Article 1498, however, lays down the general rule. It confines itself
to providing that “the execution thereof shall be equivalent”
to delivery, which means that there is only a presumptive (not
conclusive) delivery which can be rebutted by evidence to the
contrary. (Montenegro vs. Roxas Gomez, 58 Phil. 723 [1932].) Such
presumption is destroyed when the delivery is not effected because
of a legal impediment. Nowhere in the Civil Code is it provided
that the execution of a deed of sale is a conclusive presumption
of delivery of the object of the sale. (Ten Realty and Development
Corp. vs. Cruz, 410 SCRA 484 [2003].)
(a) If it appears from the document or it can be inferred
therefrom that it was not the intention of the parties to make
delivery, no tradition can be deemed to have taken place. Such
would be the case, for instance, where a certain date is fixed
when the purchaser should take possession of the thing, or
where the vendor reserves the right to use and enjoy the property
until a certain period, or where it is stipulated that until
payment of the last installment is made, the title to the property
should not be deemed to have been transmitted, or where
the vendor has no control over the thing sold at the moment
of the sale, and, therefore, its material delivery could not have
been made. (Phil. Suburban Dev. Corp. vs. The Auditor General,
63 SCRA 397 [1975]; see 10 Manresa 129; Aviles vs. Arcega,
44 Phil. 924 [1923]; Addison vs. Felix, 38 Phil. 404 [1918];
Masallo vs. Gaspar, 39 Phil. 134 [1918].)
174 SALES
(b) Presumptive delivery by execution of public instrument
can also be negated by failure of the vendee to take
material possession of the land subject of the sale in the concept
of purchaser-owner. (Danguilan vs. Intermediate Appellate
Court, 158 SCRA 22 [1988]; Pasaqui vs. Villablanca, 68
SCRA 18 [1975].) The continued possession by the vendor of
the property sold may make dubious the contract of sale between
the parties. (Santos vs. Santos, 156 SCAD 47, 366 SCRA
395 [2001]; Alcos vs. Intermediate Appellate Court, 162 SCRA
823 [1988].)
ILLUSTRATIVE CASES:
1. After delivery of possession coupled with execution of the
deed of sale of real property embodied in a public instrument but before
its registration and payment of the price, buyer is being made
responsible for the payment of the realty tax.
Facts: S (PSDC) and B (PHHC, a government corporation)
entered into a contract of sale embodied in a public instrument
whereby S conveyed unto B two parcels of land subject to certain
terms and conditions among which that S should register
the deed of absolute sale and secure a new title in the name of
B before the latter can be compelled to pay the purchase price.
Prior to the signing of the deed, B had acquired possession
of the property with the consent of S. The provincial treasurer
requested B to withhold the amount of P30,000.00 from the purchase
price to be paid by it to S representing the realty tax due
on the property involved.
Issue: Who is liable to the payment of the real property tax,
S or B?
Held: B. When the sale of real property is made in a public
instrument the execution thereof is equivalent to the delivery
of the thing object of the contract, if from the deed the contrary
does not appear or cannot clearly be inferred.
(1) Vendee actually placed in possession. — In the case at bar,
there is no question that the vendor (S) had actually placed the
vendee (B) in possession and control over the property sold,
even before the date of the sale.
(2) Payment of price not essential to transfer of ownership. —
The condition that S should first register the deed of sale and
Art. 1498
175
secure a new title in the name of B before the latter shall pay
the purchase price, did not preclude the transmission of ownership.
In the absence of an express stipulation to the contrary,
the payment of the purchase price of the goods is not a condition
precedent to the transfer of title to the buyer, but title passes
by the delivery of the goods.
(3) Title transferred to vendee. — Since the delivery of possession
coupled with the execution of the deed of absolute sale,
had consummated the sale and transferred title to B, the payment
of the real estate tax after such transfer is the responsibility
of the purchaser.2 (Phil. Suburban Dev. Corp. vs. The Auditor
General, 63 SCRA 397 [1975].)
———— ———— ————
2. Lessor sold property leased to a third party in violation of
the “exclusive option to purchase the same,’’ given to lessee who filed
a suit for specific performance and annulment of the sale.
Facts: Respondent MT, Inc. leased portions of a commercial
building together with the land owned by CB, lessor, which
it used as a movie theater. Under two contracts of lease, inter
alia, MT, Inc. “shall be given 30-days exclusive option to purchase
the same,’’ if CB should desire to sell the leased premises.
CB sold the building to ERD, petitioner, which received
rents from MT, Inc. for sometime.
Subsequently, MT, Inc., claiming it had been denied its right
to purchase the leased property in accordance with the lease
contracts with CB, filed a suit for specific performance and annulment
of sale with prayer to enforce its “exclusive option to
purchase’’ the property.
The dispute between MT, Inc., CB and ERD reached the
Supreme Court (referred to as “Mother case’’) which rescinded
the absolute sale to ERD, ordered CB to return to ERD the purchase
price, directed ERD to execute the documents necessary
to return ownership of the disputed lots to CB, and ordered CB
to allow MT, Inc. to buy the said lots for P11,300,000. This decision
became final and executory on March 17, 1997.
MT, Inc. filed with the trial court a motion for execution
which was granted. Subsequently, the Clerk of Court of the
2Under Republic Act No. 1322 (Sec. 7 thereof.), however, the PHHC (now National
Housing Authority) was not subject to real property tax.
176 SALES
Manila Regional Trial Court, as Sheriff, executed a deed of conveyance
in favor of CB and a deed of sale in favor of MT, Inc.
On the basis of these documents, the Registry of Deeds of Manila
cancelled ERD’s titles and issued new certificates of title in
the name of MT, Inc.
On September 18, 1997, or after the execution of the decision
of the Supreme Court, ERD filed with the Regional Trial
Court an action for collection of a sum of money against MT, to
wit: (1) the sum of P11,548,941.76 plus legal interest, representing
the total amount of unpaid monthly rentals/reasonable
compensation from June 1, 1987 to July 31, 1997; (2) the sums of
P849,567.12 and P458,853.44 a month, plus legal interest as
rental/reasonable compensation for the use and occupation of
the property from August 1, 1997 to May 1, 1997; and (3) the
sum of P500,000 as and for attorney’s fees, plus other expenses
of litigation, and the costs of the suit.
Issue: Is ERD entitled to back rentals?
Held: No. (1) Rental, a civil fruit of ownership. — “Rent is a
civil fruit that belongs to the owner of the property producing
it by right of accession. Consequently and ordinarily, the rentals
that fell due from the time of the perfection of the sale to petitioner
until its rescission by final judgment should belong to
the owner of the property during that period.’’
(2) Ownership transferred by delivery. — “Ownership of the
thing sold is a real right, which the buyer acquires only upon delivery
of the thing to him ‘in any of the ways specified in articles
1497 to 1501, or in any other manner signifying an agreement
that the possession is transferred from the vendor to the vendee.’
This right is transferred, not by contract alone, but by tradition
or delivery. Non nudis pactis sed traditione dominia rerum
transferantur. And there is said to be delivery if and when the
thing sold ‘is placed in the control and possession of the vendee.’
Thus, it has been held that while the execution of a public instrument
of sale is recognized by law as equivalent to the delivery
of the thing sold, such constructive or symbolic delivery,
being merely presumptive, is deemed negated by the failure of
the vendee to take actual possession of the land sold.’’
(3) Concept of delivery. — “Delivery has been described as
a composite act, a thing in which both parties must join and the
minds of both parties concur. It is an act by which one party
parts with the title to and the possession of the property, and
Art. 1498
177
the other acquires the right to and the possession of the same.
In its natural sense, delivery means something in addition to
the delivery of property or title; it means transfer of possession.
In the Law on Sales, delivery may be either actual or constructive,
but both forms of delivery contemplate ‘the absolute
giving up of the control and custody of the property on the
part of the vendor, and the assumption of the same by the
vendee.’’’
(4) ERD never took actual control and possession of the property
sold to it. — “From the peculiar facts of this case, it is clear
that petitioner never took actual control and possession of the
property sold, in view of respondent’s timely objection to the
sale and the continued actual possession of the property. The
objection took the form of a court action impugning the sale
which, as we know, was rescinded by a judgment rendered by
this Court in the mother case. It has been held that the execution
of a contract of sale as a form of constructive delivery is a
legal fiction. It holds true only when there is no impediment
that may prevent the passing of the property from the hands of
the vendor into those of the vendee. When there is such impediment,
‘fiction yields to reality — the delivery has not been
effected.’
Hence, respondent’s opposition to the transfer of the property
by way of sale to ERD’s was a legally sufficient impediment
that effectively prevented the passing of the property into
the latter’s hands.’’
(5) Presumption of delivery by execution of public instrument
is only prima facie. — “The execution of a public instrument gives
rise, therefore, only to a prima facie presumption of delivery.
Such presumption is destroyed when the instrument itself expresses
or implies that delivery was not intended; or when by
other means it is shown that such delivery was not effected, because a
third person was actually in possession of the thing. In the latter
case, the sale cannot be considered consummated.’’
(6) ERD did not acquire rights to fruits of property. — “However,
the point may be raised that under Article 1164 of the Civil
Code, ERD, as buyer, acquired a right to the fruits of the thing
sold from the time the obligation to deliver the property to petitioner
arose. That time arose upon the perfection of the Contract
of Sale on July 30, 1978, from which moment the laws provide
that the parties to a sale may reciprocally demand per-
178 SALES
formance. Does this mean that despite the judgment rescinding
the sale, the right to the fruits belonged to, and remained
enforceable by, ERD?
Article 1385 of the Civil Code answers this question in the
negative, because ‘[r]escission creates the obligation to return
the things which were the object of the contract, together with
their fruits, and the price with its interest; x x x.’ Not only the
land and building sold, but also the rental payments paid, if
any, had to be returned by the buyer.’’
(7) Rental payments by MT, Inc. did not mean recognition of
ERD’s title. — “The fact that MT, Inc. paid rentals to ERD’s during
the litigation should not be interpreted to mean either actual
delivery or ipso facto recognition of ERD’s title. ERD as alleged
buyer of the disputed properties and as alleged successor-
in-interest of CB rights as lessor — submitted two ejectment
suits against MT, Inc. Filed in the Metropolitan Trial Court of
Manila, the first was docketed as Civil Case No. 121570 on July
9, 1987; and the second, as Civil Case No. 131944 on May 28,
1990. MT, Inc. eventually won them both. However, to be able
to maintain physical possession of the premises while awaiting
the outcome of the mother case, it had no choice but to pay
the rentals. The rental payments made by MT, Inc., should not
be construed as a recognition of ERD as the new owner. They
were made merely to avoid imminent eviction.’’
(8) General principle that rescissible contract is valid until rescinded
not applicable. — “At bottom, it may be conceded that,
theoretically, a rescissible contract is valid until rescinded. However,
this general principle is not decisive to the issue of whether
ERD ever acquired the right to collect rentals. What is decisive
is the civil law rule that ownership is acquired, not by mere
agreement, but by tradition or delivery. Under the factual environment
of this controversy as found by this Court in the mother
case, ERD was never put in actual and effective control or possession
of the property because of MT, Inc. timely objection.
As pointed out by Justice Holmes, general propositions do
not decide specific cases. Rather, ‘laws are interpreted in the
context of the peculiar factual situation of each case. Each case
has its own flesh and blood and cannot be decided on the basis
of isolated clinical classroom principles.’ ”
(9) Sale of ERD not consummated. — “In short, the sale to
ERD may have been valid from inception, but it was judicially
Art. 1498
179
rescinded before it could be consummated. Petitioner never acquired
ownership, not because the sale was void, as erroneously
claimed by the trial court, but because the sale was not
consummated by a legally effective delivery of the property sold.’’
(10) Benefits precluded by ERD’s bad faith. — “Furthermore,
assuming for the sake of argument that there was valid delivery,
petitioner is not entitled to any benefits from the ‘rescinded’
Deed of Absolute Sale because of its bad faith. This being the
law of the mother case decided in 1996, it may no longer be
changed because it has long become final and executory. x x x.’’
(Equatorial and Realty Development, Inc. vs. Mayfair Theater, Inc.,
158 SCAD 783, 370 SCRA 56 [2001].)
(3) Sale of thing not subject to control of vendor. — Symbolic
delivery by the execution of a public instrument is equivalent to
actual delivery only where the thing is subject to the control of
the vendor and there is no impediment that may prevent the passing
of the property from the hands of the vendor into those of the
vendee. Hence, the vendor who executes said public instrument
fails in his obligation to deliver it, if the vendee cannot enjoy its
material possession because of the opposition or resistance of a
third person (e.g., squatter) who is in actual possession. The legal
fiction yields to reality. It is not enough to confer upon the purchaser
the ownership and the right of possession. The thing sold must
be placed in his control in order that it can be said that delivery
has been effected. (Addison vs. Felix Tioco, 38 Phil. 404 [1918];
Power Commercial & Industrial Corp. vs. Court of Appeals, 84
SCAD 67, 274 SCRA 597 [1997].)
In other words, a seller cannot deliver constructively if he
cannot actually deliver even if he wants to. Of course, if the sale
had been made under the express agreement of imposing upon
the vendee the obligation to take the necessary steps to obtain the
material possession of the thing sold and if it were proven that
he knew that the thing was in the possession of a third person
claiming to have property rights thereon, such agreement would
be perfectly valid. (Ibid.)
(4) Sale of registered land. — The provisions of Article 1498 regarding
passing of title upon delivery by execution of a public
instrument must be deemed modified by the provisions of the
180 SALES
Property Registration Decree (Pres. Decree No. 1529.) insofar as
registered land is concerned. Section 51 of the decree is very clear
that no deed purporting to convey or affect registered land, shall
take effect as a conveyance or bind the land (as against third persons)
until its registration. In accordance with this section, no act
of the parties can transfer the ownership of real estate under the
Torrens System. That is done by the act of registration of the conveyance
which the parties have made. (see Tuazon vs. Raymundo,
28 Phil. 635 [1914]; Manuel vs. Rodriguez, 109 Phil. 1 [1960].)
(5) Possession of a part as constructive possession of whole. —
Where apart from the delivery de jure of a land sold by symbolic
tradition resulting from the execution of a public instrument of
sale, the evidence shows that the purchaser took actual possession
of the considerable portion of the land sold by the exercise
of possessory acts of clearing the area of trees and of cultivating
the same through tenants, such possession and cultivation of a
part is logically and legally constructive possession of the whole.
(Ramos vs. Director of Lands, 39 Phil. 175 [1918].)
Symbolic tradition.
Constructive delivery is symbolic when to effect the delivery,
the parties make use of a token symbol to represent the thing
delivered.
The delivery of the key where the thing sold is stored or kept
is equivalent to the delivery of the thing (par. 2.) because the key
represents the thing. Similarly, there is symbolic delivery of goods
to vendee upon delivery to him of delivery orders (see Art.
1636[1].) which would authorize him to withdraw the goods from
a warehouse. Upon withdrawal, there is actual delivery (supra.)
which consummates the sale. (Lim Yhi Luya vs. Court of Appeals,
99 SCRA 668 [1980].)
ART. 1499. The delivery of movable property may
likewise be made by the mere consent or agreement
of the contracting parties, if the thing sold cannot be
transferred to the possession of the vendee at the time
of the sale, or if the latter already had it in his possession
for any other reason. (1463a)
Art. 1499
181
Traditio longa manu.
The first part of Article 1499 refers to traditio longa manu.
This mode of delivery takes place by the mere consent or
agreement of the contracting parties as when the vendor merely
points to the thing sold which shall thereafter be at the control
and disposal of the vendee.
It should be noted that delivery “by the mere consent or agreement
of the contracting parties” is qualified by the phrase “if the
thing sold cannot be transferred to the possession of the vendee
at the time of the sale.”
Traditio brevi manu.
This mode of legal delivery happens when the vendee has
already the possession of the thing sold by virtue of another title
as when the lessor sells the thing leased to the lessee. Instead of
turning over the thing to the vendor so that the latter may, in turn,
deliver it, all these are considered done by action of law.
ART. 1500. There may also be tradition constitutum
possessorium. (n)
Traditio constitutum possessorium.
This mode of delivery is the opposite of traditio brevi manu.
It takes place when the vendor continues in possession of the
property sold not as owner but in some other capacity, as for example,
when the vendor stays as a tenant of the vendee. In this
case, instead of the vendor delivering the thing to the vendee so
that the latter may, in turn, deliver it back to the vendor, the law
considers that all these have taken place by mere consent or agreement
of the parties. (see Amig vs. Teves, 96 Phil. 252 [1954];
Bautista vs. Sioson, 39 Phil. 615 [1919]; Carbonell vs. Court of
Appeals, 69 SCRA 99 [1970]; see 10 Manresa 124.)
ART. 1501. With respect to incorporeal property,
the provisions of the first paragraph of article 1498
shall govern. In any other case wherein said provisions
are not applicable, the placing of the titles of
Arts. 1500-1501 OBLIGATIONS OF THE VENDOR
182 SALES
ownership in the possession of the vendee or the use
by the vendee of his rights, with the vendor’s consent,
shall be understood as a delivery. (1464)
Quasi-traditio.
Tradition can only be made with respect to corporeal things.
In the case of incorporeal things, delivery is effected:
(1) by the execution of a public instrument; or
(2) when that mode of delivery is not applicable, by the placing
of the titles of ownership in the possession of the vendee; or
(3) by allowing the vendee to use his rights as new owner with
the consent of the vendor.
This mode of delivery of incorporeal things or rights is known
as quasi-traditio. Thus, the delivery to a person of a negotiable
document of title in which it is stated that the goods referred to
therein will be delivered to the bearer amounts to delivery of the
goods to such person. (Arts. 1507, 1508.)
ILLUSTRATIVE CASES:
1. Property, title papers to which were delivered by debtor to
creditor as security for a debt, was included in the inventory of the
estate of debtor upon his death.
Facts: S owed B money and as security therefor delivered
to B the title papers over four parcels of land. It was orally agreed
that since S had no money, B was to have the land, permitting S
to cultivate upon condition that, after deducting expenses, 1/2
of the products was to go to B.
Then S died and the four parcels were included in the inventory
of the estate of S. B brought action to exclude them
from the inventory.
Issue: Is there delivery of the property in contemplation of
law?
Held: Yes. The land should have been excluded in the inventory.
The contract made between S and B although not in
writing, was valid and the delivery of the title deeds of the property
was equivalent in its effect to a delivery of the property
itself. (Marella vs. Reyes & Paterno, 12 Phil. 1 [1908].)
Art. 1501
183
———— ———— ————
2. Before the sale at public auction, the property in question
was sold by the owner who merely delivered the title deeds thereof to
the first purchaser.
Facts: The lot and warehouse standing thereon belonging
to S were sold at public auction by the sheriff to B. D claimed
that the property was sold by S long before the auction sale to
C who, in turn, sold it to D. S merely delivered the title deeds
to C but remained in possession as lessee. C also delivered the
title deeds to D. D brought action for the recovery of the lot
and warehouse.
Issue: Is there delivery of the property in contemplation of
law?
Held: Yes. Although there was no material delivery of the
property, “the placing of the titles of ownership in the possession
of the vendee or the use which he may make of his right
with the consent of the vendor shall be considered as delivery.”
(Tablante vs. Aquino, 28 Phil. 35 [1914].)
Note: The Supreme Court in both cases cited Article 1464 of
the Spanish Civil Code. (Art. 1501 of our Civil Code.) It is submitted
that Article 1501 refers to delivery merely of incorporeal
rights. The result arrived at, however, may be sustained in
that the delivery of the title deeds may be considered a symbolical
delivery, as the delivery of the key to a house constitutes
a delivery of said house.
Intention to deliver and to accept
a transfer of possession.
(1) In all the forms of delivery, it is necessary that the act be
coupled with the intention of delivering the thing. For instance,
there is no constructive delivery, where the keys to the place where
the thing is deposited are delivered to the vendee in order only
that he may examine it or the titles of ownership of property are
placed in the possession of the vendee for his study or inspection
but not with the intention of making the delivery. The act, without
the intention to deliver, is insufficient. (see 10 Manresa 132.)
Similarly, the issuance of a sales invoice does not prove transfer
of ownership of the thing sold to the buyer. An invoice is nothing
more than a detailed statement of the nature, quality and cost of
184 SALES
the thing sold and has been considered not a bill of sale. (Norkis
Distributors, Inc. vs. Court of Appeals, 193 SCRA 694 [1991]; P.T.
Cerna Corp. vs. Court of Appeals, 221 SCRA 19 [1993].)
(2) For the same reason, any act, although not provided for
in the preceding articles, but accompanied by the evident intention
of the vendor to deliver or of the vendee to receive the thing
sold, will be considered as constituting tradition. It is the intention
which is essential. (ibid.) It is a well-established rule that a
mere contract for the sale of goods, where nothing remains to be
made by the vendor, as when the parties agreed that the delivery
of the logs should be made alongside a vessel of the vendee and
that was done by the vendor, transfers the right of property although
the price has not been paid, nor the thing sold actually
delivered to the vendee whose employees attempted to load them
in the vessel but failed to do so for want of the proper loading
equipment. (Bean Admir vs. Cadwallader Co., 10 Phil. 606 [1908].)
In other words, in all the different modes of effecting delivery,
it is the real intention of the parties, to deliver on the part of
the vendor, and to accept on the part of the vendee, which gives
legal effect to the act. Without such intention, there is no tradition.
(see Abuan vs. Garcia, 14 SCRA 759 [1965]; Norkis Distributors,
Inc. vs. Court of Appeals, supra.)
ART. 1502. When goods are delivered to the buyer
“on sale or return” to give the buyer an option to
return the goods instead of paying the price, the ownership
passes to the buyer on delivery, but he may
revest the ownership in the seller by returning or tendering
the goods within the time fixed in the contract,
or, if no time has been fixed, within a reasonable time.
(n)
When goods are delivered to the buyer on approval
or on trial or on satisfaction, or other similar terms,
the ownership therein passes to the buyer.
(1) When he signifies his approval or acceptance
to the seller or does any other act adopting the transaction;
Art. 1502
185
(2) If he does not signify his approval or acceptance
to the seller, but retains the goods without giving
notice of rejection, then if a time has been fixed
for the return of the goods, on the expiration of such
time, and, if no time has been fixed, on the expiration
of a reasonable time. What is a reasonable time is a
question of fact. (n)
Contract of sale or return, and of sale on
trial or approval or satisfaction.
(1) In general. — It is evidently possible for the parties to agree
that the buyer shall temporarily take the goods into his possession
to see whether they are satisfactory to him and that if they
are not, he may refuse to become owner. It is clear also that the
same object may be attained by an agreement that the property
shall pass to the buyer on delivery but that he may return the
goods if they are unsatisfactory. The question is one of fact in every
case whether the parties intend to make approval a condition,
without which the ownership shall not pass, or whether their intent
is that the ownership shall pass at once with the right to return
the goods.3 (see 2 Williston, op. cit., pp. 30-33.)
The question of what is a reasonable time for the return of the
property is one of fact to be determined upon the particular circumstances
of the case. The duty of the buyer with regard to the
return of the goods requires, ordinarily, that they be returned in
the same or substantially the same condition in which they were
when the contract was made. Undoubtedly, if they are injured or
damaged substantially through negligence or misuse of the buyer,
his right to return is lost and the sale becomes absolute. (Ray vs.
Thompson, 12 Cush [Mass.] 281, 59 Am. Dec. 187.)
3“The provision in the Uniform Sales Act and the Uniform Commercial Code from
which Article 1502 was taken, clearly requires an express written agreement to make a
sales contract either a “sale or return” or a “sale on approval.” Parol or extrinsic testimony
could not be admitted for the purpose of showing that an invoice or bill of sale
that was complete in every aspect and purporting to embody a sale without a condition
or restriction constituted a contract of sale or return. If the purchaser desired to incorporate
a stipulation securing to him the right of return, he should have done so at the time
the contract was made. (Industrial Textile Manufacturing Co. vs. LPJ Enterprises, Inc.,
217 SCRA 322 [1993], citing 67 Am. Jur. 2d 733.)
186 SALES
(2) Sale or return. — It is a contract by which property is sold
but the buyer, who becomes the owner of the property on delivery,
has the option to return the same to the seller instead of paying
the price.
(a) Under this contract, the option to purchase or return
the goods rests entirely on the buyer without reference to the
quality of the goods. The buyer may revest the ownership in
the seller by returning or tendering the goods within the time
fixed in the contract, or, if no time has been fixed, within a
reasonable time (Art. 1502, par. 1.); otherwise, the sale becomes
absolute and the buyer is liable for the price. The seller cannot,
in this type of sale, prevent the revesting of title by refusing
to accept the return of the property.
(b) Since title passes to the buyer on delivery, the loss or
destruction of the property prior to the exercise of the buyer’s
option to return falls upon him and renders him responsible
to the seller for the purchase price or such part thereof as remains
unpaid. (Art. 1504; 46 Am. Jur. 647.) The word “return”
itself implies a previous transfer of title.
(3) Sale on trial or approval. — It is a contract in the nature of
an option to purchase if the goods prove satisfactory, the approval
of the buyer being a condition precedent. (77 C.J.S. 938.)
(a) In this kind of contract, the title shall continue in the
seller until the sale has become absolute either by the buyer’s
approval of the goods, or by his failing to comply with the
express or implied conditions of the contract as to giving notice
of dissatisfaction or as to returning the goods (Ibid., 655;
Art. 1502, Nos. 1 and 2.), or by his doing any other act adopting
the transaction such as mortgaging the property or selling
it to a third person.
(b) For the reason that the title to the goods does not pass
and the relationship between the seller and the purchaser is
that of bailor and bailee, the risk of loss or injury to the article
pending the exercise by the buyer of his option to purchase
or return it, is upon the seller except as the buyer may be at
fault in respect of the care and condition of the article, or may
have agreed to stand the loss. (see 67 Am. Jur. 2d 430-431.)
Art. 1502
187
(c) The buyer cannot accept part and reject the rest of the
goods since this falls outside the normal intent of the parties.
(Industrial Textile Manufacturing Co. vs. LPJ Enterprises, Inc.,
supra.)
“Sale or return” distinguished from sale on trial.
The distinctions are the following:
(1) “Sale or return” is a sale subject to a resolutory condition,
while sale on trial is subject to a suspensive condition;
(2) “Sale or return” depends entirely on the will of the buyer,
while sale on trial depends on the character or quality of the goods;
(3) In “sale or return,” the ownership of the goods passes to
the buyer on delivery and subsequent return of the goods reverts
ownership in the seller, while in sale on trial, the ownership remains
in the seller until the buyer signifies his approval or acceptance
to the seller; and
(4) In “sale or return,” the risk of loss or injury rests upon the
buyer, while in sale on trial, the risk still remains with the seller.
Note: Article 1502 uses the phrase “on sale or return.” If the
contract uses instead the phrase “for sale or return,” the intention
may be to enter into a contract of agency.
ART. 1503. Where there is a contract of sale of
specific goods, the seller may, by the terms of the
contract, reserve the right of possession or ownership
in the goods until certain conditions have been
fulfilled. The right of possession or ownership may
be thus reserved notwithstanding the delivery of the
goods to the buyer or to a carrier or other bailee for
the purpose of transmission to the buyer.
Where goods are shipped, and by the bill of lading
the goods are deliverable to the seller or his agent,
or to the order of the seller or of his agent, the seller
thereby reserves the ownership in the goods. But if,
except for the form of the bill of lading, the ownership
would have passed to the buyer on shipment of the
188 SALES
goods, the seller’s property in the goods shall be
deemed to be only for the purpose of securing performance
by the buyer of his obligations under the
contract.
Where goods are shipped, and by the bill of lading
the goods are deliverable to the order of the buyer
or of his agent, but possession of the bill of lading is
retained by the seller or his agent, the seller thereby
reserves a right to the possession of the goods as
against the buyer.
Where the seller of goods draws on the buyer for
the price and transmits the bill of exchange and bill of
lading together to the buyer to secure acceptance or
payment of the bill of exchange, the buyer is bound
to return the bill of lading if he does not honor the bill
of exchange, and if he wrongfully retains the bill of
lading he acquires no added right thereby. If, however,
the bill of lading provides that the goods are
deliverable to the buyer or to the order of the buyer,
or is indorsed in blank, or to the buyer by the consignee
named therein, on who purchases in good faith,
for value, the bill of lading, or goods from the buyer
will obtain the ownership in the goods, although the
bill of exchange has not been honored, provided that
such purchaser has received delivery of the bill of lading
indorsed by the consignee named therein, or of
the goods, without notice of the facts making the
transfer wrongful. (n)
When ownership not transferred
upon delivery.
This article relates to a sale of specific goods. (see Arts. 1494,
1636.) As a general rule, the ownership in the goods sold passes
to the buyer upon their delivery to the carrier. There are, however,
certain exceptions and they are:
(1) if a contrary intention appears by the terms of the contract
(Arts. 1523, par. 1; 1503, par. 1; see Art. 1478.);
Art. 1503
189
(2) in the cases provided in the second and third paragraphs
of Article 1523; and
(3) in the cases provided in the first, second, and third paragraphs
of Article 1503.
Transfer of ownership where goods sold
delivered to carrier.
(1) General rule. — As stated above, the general rule is that
delivery, be it only constructive, passes title in the thing sold (see
Art. 1496.); and delivery to the carrier is deemed to be a delivery
to the buyer. (Art. 1523, par. 1.) The risk of loss, therefore, as between
the buyer and the seller, falls upon the buyer. The theory
upon which the law is based is perfectly simple. If a seller consigns
goods to another specified person it indicates an intention
to deliver to the carrier as bailee for the person named, and, if such
shipment was authorized by that person as a buyer, the ownership
vests in him. The same result follows it, after the goods have
been shipped without a named consignee, the carrier at the consignor’s
request, agrees to deliver to a specified person.
(2) Where right of possession or ownership of specific goods sold
reserved. — On the other hand, if the seller directs the carrier to
redeliver the goods at their destination to the seller himself, or to
his order, it indicates an intention that the carrier shall be the bailee
for the seller and the ownership will remain in the latter. (see 2
Williston, op. cit., p. 147.) The seller may, by the terms of the contract,
reserve the right of possession or ownership in the goods
until certain conditions are fulfilled. (Art. 1505, par. 1.)
Where seller or his agent is consignee.
(1) Carrier becomes bailee for seller. — Where goods are shipped
and by the bill of lading4 (see Art. 1507.), the goods are deliver-
4Logically, since a bill of lading acknowledges receipt of goods to be transported,
delivery of the goods to the carrier normally precedes the issuance of the bill; or to some
extent, delivery of the goods and issuance of the bill are regarded in commercial practice
as simultaneous acts. However, except as may be prohibited by law, there is nothing
to prevent an inverse order of events, that is, the execution of the bill even prior to actual
possession and control by the carrier of the cargo to be transported. There is no such
law. (Saludo, Jr. vs. Court of Appeals, 207 SCRA 198 [1992].)
190 SALES
able to the seller or his agent or to the order of the seller or his
agent, the seller thereby reserves the ownership in the goods (par.
2.) and the carrier is a bailee for him and not the buyer. This principle
is applicable even though the goods are shipped on the buyer’s
vessel.
(2) Rights of seller. — The seller may not only retain the goods
until the buyer performs his obligation under the contract, but
he may, even in violation of the contract, dispose of them to third
persons. If the seller does this, of course, he is liable for damages
to the buyer but the second purchaser from the seller acquires a
better right. (see 2 Williston, op. cit., pp. 152-153.)
Where seller’s title only for purpose
of security.
(1) Form of bill of lading not conclusive. — The form in which
the bill of lading is taken is not always conclusive. The specification
in the bill of lading to the effect that the goods are deliverable
to the order of the seller or his agent does not necessarily
negate the passing of title to the goods upon delivery to the carrier.
(Butuan Sawmill, Inc. vs. Court of Tax Appeals, 16 SCRA 715
[1966].)
(2) Where ownership would have passed but for the form of bill of
lading. — The circumstances may be such that were it not for the
form of the bill of lading, the ownership would have passed to
the buyer or shipment of the goods. (par. 2, 2nd sentence.) This is
true when the object of the seller in reserving ownership is simply
to secure himself in regard to the performance by the buyer
of the latter’s obligation. By shipping the goods, the seller has
definitely lost all use of them to the buyer. If the shipper could be
perfectly sure that the buyer would fulfill his obligation, it can
hardly be doubted that he would have made a straight consignment
to the latter. (see 2 Williston, op. cit., pp. 155-156.)
Significance where title held
merely as security.
The importance of distinguishing between a title held merely
for the purpose of security and the ordinary case where the seller
retains ownership are two-fold:
Art. 1503
191
(1) Risk of loss on buyer. — In the first place, the beneficial
owner (buyer), not the one who holds for security (seller), will be
subject to the risk of loss or deterioration (see Lawyers Cooperative
Publishing Co. vs. Tabora, 13 SCRA 762 [1965].) from the time
the goods are delivered to the carrier even though the legal title
remains in the seller. That the risk should be borne by the buyer
if the seller retains title merely to secure performance by the buyer
of his obligations under the contract is a consequence of the theory
that such a bargain is, in effect, although not in form, a sale to the
buyer and a mortgage back by him of the goods to secure the price.
The title does not pass to the buyer until he receives the order bill
of lading properly indorsed. (2 Williston, op. cit., p. 219.)
(2) Buyer’s right of action based on ownership. — In the second
place, the buyer has more than a mere contract right in regards to
the goods. (Ibid., p. 157.) As beneficial owner, he may, as against
any one except an innocent purchaser for value of the bill of lading
from the consignee, bring an action based on ownership on
making tender of the price.
Where buyer or his agent is consignee
but seller retains order bill of lading.
Where goods are shipped and by the bill of lading the goods
are deliverable to the order of the buyer or of his agent, but possession
of the bill of lading is retained by the seller or his agent,
the seller thereby retains a right to the possession of the goods as
against the buyer. (par. 3.)
(1) Effect of retention. — Although the property in the goods
will ordinarily pass to the buyer on delivery, the latter is unable
to obtain the goods without the bill. The effect of the retention of
the bill of lading, under such circumstances, controlling as it does
the possession of the goods, is, therefore, closely analogous to the
retention of a lien by the seller after the property has passed to
the buyer. (Ibid., p. 163.)
(2) Surrender of order bill necessary. — The carrier cannot be
compelled to surrender possession of the goods until the order
bill (properly indorsed) has been surrendered. In an order bill, it
cannot with certainty be determined who is the person named to
192 SALES
whose order the goods are deliverable unless the bill of lading
itself is presented.
(3) Identification of consignee sufficient in case of straight bill. —
On the other hand, the shipper who issues a straight bill of lading
(goods are by its terms deliverable not to the order of the consignee
but to the consignee only) ordinarily does not require the
surrender of the bill by the consignee in order for the latter to get
the goods. The consignee need only to identify himself. Hence,
where the buyer is the consignee, the seller must use an order bill
of lading. (see Ibid., pp. 162-163.)
Where a third person who retains
the bill is consignee.
Two devices have already been considered by which the seller
of goods retains a hold upon them by means of the bill of lading
after he has shipped them; first, by consigning the goods to himself,
either by an order bill or a straight bill and second, by consigning
the goods to the order of the buyer and retaining possession
of the bill of lading.
A third method also in common use is to consign the goods
to a third person (usually a banker) requesting the latter to retain
the bill of lading or goods until payment of the price. When the
price is paid, the consignee of the goods indorses the bill or delivers
the goods to the buyer.
(1) Immaterial whether bill an order or straight bill. — For the
success of this third device, it is immaterial, so far as the protection
of the seller is concerned, whether the bill is a straight bill or
an order bill.
(a) If it is an order bill, the carrier will not deliver the goods
until the bill is surrendered and the buyer cannot get it so as
to make the necessary surrender except from the holder, the
consignee.
(b) Even if it is not an order bill, the carrier, though it may
not require the surrender of the bill of lading, will deliver only
to the consignee. Accordingly, the buyer in either event, is
unable to get them except by obtaining an order from the
holder of the bill of lading.
Art. 1503
193
(2) Legal title vested in third person. — By naming a third person
as consignee of the bill of lading, the seller vests a legal title
in the third person. This title is held merely for the benefit of the
seller if the third person is the seller’s agent only and has not
advanced money of his own to the seller. Frequently, however,
the third person is a banker and by discounting a draft drawn on
the buyer by the shipper, or under an arrangement with the buyer
by paying or accepting a draft drawn on himself, has acquired a
personal interest in the goods. (Ibid., pp. 164-165.)
(3) Risk of loss on buyer. — The buyer as is true where the seller
consigns the goods to himself, or his agent, or to a third person,
bears the risk of loss.
Where bill of lading sent forward
with draft attached.
Where the seller draws on the buyer for the price and transmits
the bill of exchange and the bill of lading together to the buyer
to secure acceptance or payment of the bill of exchange (par. 4.),
the title is regarded as retained in the seller until the bill of exchange
is paid. The fact that the bill of lading and a bill of exchange
are attached together indicates that the seller intends to make the
delivery of the goods conditional upon the payment or acceptance
of the draft.
(1) Duty of buyer if draft not paid. — The buyer is bound to return
the bill of lading if he does not honor the bill of exchange. If
he wrongfully retains the bill of lading, he acquires no additional
right thereby. In carrying out the device in question, it is customary
to send the bill of lading with the draft attached thereto to
some person other than the buyer, for if the bill of lading and the
draft are sent directly to the buyer, the latter may obtain the goods
without paying the draft and the seller, even if he has a good right
of action against the buyer on this account, is compelled to enter
upon litigation in order to enforce his rights, whereas if the bill of
lading and draft are sent through the third person, ordinarily a
bank, the buyer is unable to obtain the goods without paying the
price. (see Ibid., pp. 178-180.)
(2) Effect of buyer obtaining possession of bill of lading without
honoring draft. — As regard third persons, however, if the bill of
194 SALES
lading provides that the goods are deliverable to the buyer or to
the order of the buyer (Art. 1507.), or is indorsed in blank (Art.
1508[2].), or is indorsed to the buyer by the consignee named
therein (Art. 1509.), a purchaser in good faith for value of the bill
of lading or goods from the buyer will obtain the ownership in
the goods although the bill of exchange has not been honored.
Distinctions in regard to the form
of the bill of lading.
They must here be observed:
(1) If the seller has named the buyer as consignee, the property
has passed to the consignee or at least it seems to have been
so to one who inspects the document;
(2) If the bill of lading, though naming the seller as consignee,
is indorsed by him to the buyer or in blank, the possession of the
document by the buyer gives him, if not the actual title, at least
an apparent ownership; and
(3) If the bill of lading names the seller or a third person as
consignee and no indorsement of the document had been made,
possession by the buyer would not indicate that the buyer had
title.
Where the document gives the buyer apparent ownership and
a third person purchases the goods relying thereon, it seems clear
on broad principles of justice that since one of two innocent parties
must suffer, he should suffer whose act has brought about the
loss. Consequently, the seller ought not to be allowed to recover
the goods from the third person. (see Ibid., pp. 191-192.)
ART. 1504. Unless otherwise agreed, the goods
remain at the seller’s risk until the ownership therein
is transferred to the buyer, but when the ownership
therein is transferred to the buyer, the goods are at
the buyer’s risk whether actual delivery has been made
or not, except that:
(1) Where delivery of the goods has been made to
the buyer or to a bailee for the buyer, in pursuance of
the contract and the ownership in the goods has been
Art. 1504
195
retained by the seller merely to secure performance
by the buyer of his obligations under the contract,
the goods are at the buyer’s risk from the time of such
delivery;
(2) Where actual delivery has been delayed
through the fault of either the buyer or seller the goods
are at the risk of the party in fault. (n)
Risk of loss generally attends title.
As a general rule, if the thing is lost by fortuitous event, the
risk is borne by the owner of the thing at the time of the loss under
the principle of res perit domino. (see Chrysler Phils. Corp. vs.
Court of Appeals, 133 SCRA 567 [1984].) Article 1504 above states
the exceptions.
(1) Where the seller reserves the ownership of the goods
merely to secure the performance by the buyer of his obligations
under the contract, the ownership is considered transferred to the
buyer who, therefore, assumes the risk from the time of delivery.
(see Lawyers Cooperative Publishing Co. vs. Tabora, 13 SCRA 762
[1965].)
(2) Where actual delivery had been delayed through the fault
of either the buyer or seller, the goods are at the risk of the party
at fault with respect to any loss which might not have occurred
but for such fault. In this case, the law punishes the party at fault.
Risk of loss by fortuitous event after
perfection but before delivery.
(1) Conflict between Article 1480 and Article 1504. — Under
Article 1480, if the thing sold is lost after perfection of the contract
but before its delivery, that is, even before the ownership is
transferred to the buyer, the risk of loss by fortuitous event without
the seller’s fault is borne by the buyer as an exception to the
rule of res perit domino. Consequently, the buyer’s obligation to
pay the price subsists if he has not yet paid the same or if he had,
he cannot recover it from the seller although the latter’s obligation
to deliver the thing is extinguished by its loss.
196 SALES
However, the first paragraph of Article 1504 which has been
inserted in our Civil Code presents a contrary rule. Taken from
the American law on sales (Sec. 22 of the Uniform Sales Act.), it
provides that: “Unless otherwise agreed, the goods remain at the
seller’s risk until the ownership therein is transferred to the
buyer.” By Article 1480, as already pointed out, the risk of loss of
the thing after perfection is shifted from the seller to the buyer
even though the buyer has not yet acquired ownership thereof.
(2) Solution suggested to avoid conflict. — A solution has been
suggested to avoid the conflict, to wit: Article 1504 should be restricted
in its application to sale of “goods” as this term is defined
in Article 1636, and Article 1480, to sales of “things” which cannot
be called “goods,” as for the example, to sales of real estate.
This would make Article 1480 the general rule on risk of loss and
Article 1504, the exception. By this conclusion, it is claimed, the
cardinal rule of statutory construction that all provisions of a law
should, as much as possible, be given effect is satisfied; for to say
that there is an irreconcilable conflict between Article 1480 and
Article 1504 is to render either of them useless.
(3) Article 1480 states the correct rule. — It is submitted that
Article 1480 is the correct rule governing loss of thing sold after
the perfection of the contract in view of the following:
(a) The opinion of Manresa (an eminent Spanish commentator
on the Spanish Civil Code upon which our Civil Code is
based) that the obligation of the buyer to pay the price is not
extinguished by the loss of the thing before delivery is the settled
construction of Article 1452 (now Art. 1480.) and this opinion
is well known to the Code Commission which prepared
the draft of the Civil Code. It is to be presumed that Congress,
which passed the Civil Code, a majority of whose members
were lawyers, was likewise familiar with Manresa’s opinion.
Aside from Manresa, “many writers on the Spanish Civil Code
including Castan, Fabres, Von Tuhr, Bonet, and De Buen, believe
that the buyer bears the loss and he must pay the price”
(A.M. Tolentino, Civil Code of the Philippines, 1959 ed., Vol.
V, p. 22.);
(b) Article 1480 follows the Roman Law rule “that risk of
the thing sold passes to the buyer even though the thing has
not yet been delivered to the buyer”;
Art. 1504
197
(c) A reading of Article 1189 in relation to Article 1538 (infra.),
shows that Article 1480 is in consonance with Article 1189
(see Art. 1538.);
(d) Article 1504 cannot be reconciled with Articles 1480
and 1189, unless Article 1504 is applied only to sale of “goods.”
It must be noted, however, that Article 1480 applies also to sale
of fungible goods. (par. 2.) Furthermore, there is nothing to
justify the exclusion of “goods” from the sales of “things” as
the latter term is used in Article 1480 and several scattered
provisions of our present law on sales;
(e) In case of improvement, the rule is that it should pertain
to the buyer. (Art. 1189[5].) This is a counterpart of the risk
which the buyer assumes for the loss of the thing;
(f) Furthermore, under Article 1537 (infra.), the fruits pertain
to the vendee from the perfection of the contract. The same
right is given to the vendee under Article 1164 which together
with Articles 1165 and 1262, is referred to in Article 1480 as
governing the question being discussed;
(g) Article 1165, paragraph 3, states:
“If the obligor delays, or has promised to deliver the same
thing to two or more persons who do not have the same interest,
he shall be responsible for any fortuitous event until he
has effected the delivery.”
Arguing a contrario, if the obligor (seller) is not guilty of delay
and has not promised to deliver the thing sold to two or more
persons, he shall not be responsible for loss due to a fortuitous
event;
(h) Article 1262, paragraph 1, provides:
“An obligation which consists in the delivery of a determinate
thing shall be extinguished if it should be lost or destroyed
without the fault of the debtor and before he has incurred
in delay;
In this connection, Article 1269 (Civil Code) says:
“The obligation having been extinguished by the loss of
the thing, the creditor shall have the rights of action which the
debtor may have against third persons by reason of the loss.”
198 SALES
It is very clear that the creditor (buyer) may not have a right
of action against third persons unless he suffers a loss which is
the price he has paid or the price the law requires him to pay the
debtor (seller) if he has not paid the same.
(4) Contrary view. — On this question, a recognized authority
on Civil Law supports the contrary view as follows:
“A contrary view to that expressed above, is held by other
writers on the Spanish Civil Code, like Perez and Alguer, who say:
This solution is not absolutely certain and perhaps the contrary
view is more in harmony with equity and with the nature of reciprocal
obligations.”
To our mind, the latter view is really more logical: the vendor
in the case given, should bear the loss and the vendee should not
be bound to pay the price. The following arguments may be advanced
to support this view:
(a) It is fundamental in the Civil Code, expressed in Articles
1477 and 1496, that ownership is transferred by delivery;
hence, before delivery, the vendor owns the thing and should
suffer its loss: res perit domino. If he is allowed to recover the
price, he suffers no loss, which is imposed upon the vendee
who has not yet acquired ownership;
(b) The obligations of vendor and vendee are reciprocal,
and, therefore, one depends upon the other. If the obligation
of the vendor to deliver is extinguished, the correlative obligation
of the vendee to pay, which depends upon it, cannot
remain subsisting;
(c) Article 1480, paragraph 3, is not an exception but is an
expression of the general rule that the risk is not imputed to
the vendee until after delivery. That paragraph considers the
delivery completed only when the fungibles have been
weighed, counted, or measured because it is only then that the
thing becomes determinate. Before such completion of delivery,
the vendor bears the risk; and
(d) Purchase and sale is an onerous contract, where the
cause, with respect to the vendee, is the thing. If he cannot have
the thing, it is juridically illogical and unjust to make him pay
its price.
Art. 1504
199
In the French code, the risk of loss is upon the buyer from the
perfection of the contract, because ownership in that code is transferred
by mere contract, without need for delivery. Res perit domino.
The vendee suffers the loss and must pay the price of the thing
even if he does not receive it. But where the ownership is transferred
by delivery, as in our Code, the application of the axiom
res perit domino, imposes the risk of loss upon the vendor; hence,
if the thing is lost by fortuitous event before delivery, the vendor
suffers the loss and cannot recover the price from the vendee.
(A.M. Tolentino, op. cit., pp. 23-27.)
(5) Legislation necessary to avoid irreconcilable conflict. — The
contrary view is really “more in harmony with equity” considering
that, while the vendee has a mere contract right to the thing
sold, the vendor has not only the ownership but also the possession
or control of it and even the power to dispose of it to the
prejudice of the vendee; and having in mind also the reciprocal
character of the contract of sale, the vendor should, therefore, be
the one to shoulder the loss and not the vendee. But until the lawmaking
body adopts the contrary view, the correct rule, it is believed,
is that contained in Article 1480 under which the vendee
bears the risk of loss, and he is bound to pay the price which rule
has already been shown, is sustained and confirmed by other
provisions of the Civil Code.
ART. 1505. Subject to the provisions of this Title,
where goods are sold by a person who is not the owner
thereof, and who does not sell them under authority
or with the consent of the owner, the buyer acquires
no better title to the goods than the seller had, unless
the owner of the goods is by his conduct precluded
from denying the seller’s authority to sell.
Nothing in this title, however, shall affect:
(1) The provisions of any factors’ acts, recording
laws, or any other provision of law enabling the apparent
owner of goods to dispose of them as if he
were the true owner thereof;
(2) The validity of any contract of sale under statu-
200 SALES
tory power of sale or under the order of a court of
competent jurisdiction;
(3) Purchases made in a merchant’s store, or in
fairs, or markets, in accordance with the Code of Commerce
and special laws. (n)
Sale by a person not the owner.
It is a fundamental doctrine of law that no one can give what
he has not or transfer a greater right to another than he himself
has. Sale is a derivative mode of acquiring ownership and the
buyer gets only such rights as the seller had. (see Arts. 1458-1459.)
A derivative right cannot exist higher than its source.5 (Reyes vs.
Sierra, 73 SCRA 472 [1979].) The exceptions to the rule are given
below.
(1) Where the owner of the goods is, by his conduct, precluded from
denying the seller’s authority to sell. — Thus, where a parcel of land
is sold by one not the owner or the agent of the owner, but the
real owner thereof upon being questioned in a criminal case instituted
against the vendor states that he authorized such sales
so that the vendor was acquitted of the charge against him, a
purchaser in good faith acquires a valid title to the property as it
is not lawful nor permissible for said owner to deny or retract his
former sworn statement that he had consented to said sale.
(Gutierrez Hermanos vs. Orense, 28 Phil. 571 [1914]; see Arts. 1437,
1438.)
(2) Where the law enables the apparent owner to dispose of the goods
as if he were the true owner thereof. — The Philippines, unlike other
jurisdictions as England and several states of the United States,
has no such law as the Factors’ Act. The law referred to here, therefore,
must be found in the provisions of our Civil Code on agency.
(C. Alvendia, Law on Sales, 1950 ed., p. 153.)
5What the law requires is that the seller has the right to transfer ownership at the
time the thing sold is delivered. A perfected contract of sale (which is a consensual contract
perfected by mere consent) cannot be challenged on the ground of non-ownership
on the pact of the seller at the time of its perfection, hence the sale is still valid. (Quijada
Art. 1505
201
(a) Factors Acts are designed to protect third persons who
(under specified conditions) deal with an agent (e.g., a person
to whom the owner delivered goods for sale or as security, or
entrusted documentary evidence of title thereto) believing him
to be the owner of goods. (Babb & Martin, Business Law, 1952
ed., p. 117.)
(b) Examples of the recording laws which may have a bearing
on the validity of a sale made by a person who is not the
owner or the agent of the owner are: P.D. No. 1529 (Property
Registration Decree), R.A. No. 4136 (Land Transportation and
Traffic Code), and the Revised Administrative Code with regards
to the sale of large cattle (Sec. 529.) and sale of vessels.
(Sec. 1171.) Examples of “any other provision of law” referred
to in No. (1) are Act No. 2031 (Negotiable Instruments Law)
and Act No. 2137. (Warehouse Receipts Law) (see Arts. 1507-
1520.)
(c) In a case, the car in question which was acquired by
the respondent by purchase from its registered owner for a
valuable consideration under a notarial deed of absolute sale
was seized and impounded by land transportation agents as
stolen property. It was held that the acquirer or the purchaser
in good faith of a chattel or movable property is entitled to be
respected and protected in his possession as if he were the true
owner thereof until a competent court rules otherwise. In the
meantime, he cannot be compelled to surrender possession
nor to be required to institute an action for the recovery of the
chattel, whether or not an indemnity bond is issued in his
favor. The filing of an information charging that the chattel
was illegally obtained through estafa from its true owner by
the transferor of the bona fide possessor does not warrant disturbing
the possession of the chattel against the will of the
possessor. Finally, under Section 60 of R.A. No. 4136, the right
of the Land Transportation Commission to impound motor
vehicles is only good for the proper enforcement of lien upon
motor vehicles of unpaid fees for registration, re-registration,
or delinquent registration of motor vehicles. (Edu vs. Gomez,
129 SCRA 601 [1984].)
(d) With respect to real property, it has been ruled that a
“fraudulent and forged document of sale may become the root
202 SALES
of a valid title if the certificate of title has already been transferred
from the name of the true owner to the name indicated
by the forger.” Every person dealing in good faith and for
valuable consideration with registered land may safely rely
upon what appears in the certificate of title and does not have
to inquire further. If the rule were otherwise, the efficacy and
conclusiveness of Torrens Certificates of Titles would be futile
and nugatory.” (Duran vs. Intermediate Appellate Court,
138 SCRA 489 [1985].) The remedy of the person prejudiced is
to bring an action for damages against those who employed
the fraud, within four (4) years after the discovery of the deception
(see Art. 1391.), and if the latter are insolvent, an action
against the Treasurer of the Philippines may be filed for
recovery of damages against the Assurance Fund. (Veloso vs.
Court of Appeals, 73 SCAD 303, 260 SCRA 593 [1996]; Delos
Reyes vs. Court of Appeals, 285 SCRA 81 [1998].)
(3) Where the sale is sanctioned by statutory or judicial authority.
— According to Article 559 of the Civil Code, “the possession of
movable property acquired in good faith is equivalent to title.
Nevertheless, one who has lost any movable, or has been unlawfully
deprived therefor, may recover it from the person in possession
of the same. If the possessor of a movable lost or of which
the owner has unlawfully been deprived has acquired it in good
faith at a public sale, the owner cannot obtain its return without
reimbursing the price paid therefor.” (see Art. 1537, par. 2.)
Different laws apply to different types of forced or involuntary
sales under our jurisdiction, namely: (a) an ordinary execution sale,
which is governed by the pertinent provisions of Rule 39 of the
Rules of Court on Execution, Satisfaction and Effect of Judgments;
(b) judicial foreclosure sales, which are governed by Rule 68 of the
Rules of Court, captioned “Foreclosure of Mortgage’’; and (c) extra-
judicial foreclosure sales of real estate mortgages, which are
governed by Act No. 3135, as amended by Act No. 4118, otherwise
known as “An Act to Regulate the Sale of Property Under Special
Powers Inserted in or Annexed to Real Estate Mortgages.’’ (Supena
vs. De la Rosa, 78 SCAD 409, 267 SCRA 1 [1997].)
The government, however, does not warrant the title to properties
sold by the sheriff at public auction or judicial sales. (see
Art. 1570.)
Art. 1505
203
(4) Where the sale is made at merchant’s stores, fairs or markets.
— No. 3 of Article 1505 is a case of an imperfect or void title ripening
into a valid one as a result of some intervening due causes.
The sale is necessary not only to facilitate commercial sales on
movables but also to give stability to business transactions especially
in a country like the Philippines, where free enterprise prevails,
for a buyer cannot be reasonably expected to look behind
the title of every article when he buys at a store. (Sun Brothers
Co. vs. Velasco, [C.A.] 54 O.G. 5103.)
(5) Where the seller has a voidable title which has not been avoided
at the time of the sale. — See Article 1506.
(6) Where seller subsequently acquires title. — When a person
conveys property to another of which at the time he is not the
owner, his subsequent acquisition of title validates his previous
conveyance. (Llacer vs. Munoz, 12 Phil. 328 [1908]; Abella vs.
Gonzaga, 56 Phil. 132 [1931]; see Art. 1434.) This doctrine is equally
applicable to conveyance of usufructs as well as to transfers of
full ownership. (Feria vs. Silva, [C.A.] No. 6151-R, Aug. 10, 1951.)
ILLUSTRATIVE CASE:
Unpaid books were sold by the impostor-buyer to another who
acted in good faith and with proper care.
Facts: X, identifying himself as Professor JC, placed an order
by telephone with petitioner EDCA for 406 books payable
on delivery. EDCA, petitioner, prepared the corresponding invoice
and delivered the books for which X issued a personal
check covering the purchase price, which was dishonored. X
sold the books to Y who, after verifying the seller’s ownership
from the invoice X showed her, paid X.
Petitioner argues that the impostor acquired no title to the
books that he could have validly transferred to Y, the private
respondent. Its reason is that as the payment check bounced
for lack of funds, there was a failure of consideration that nullified
the contract of sale between it and X.
Issue: Has EDCA been unlawfully deprived of the books
because the check issued by the impostor X in payment therefor
was dishonored?
Held: No. (1) Contract of sale is consensual. — “The contract
of sale is consensual and is perfected once agreement is reached
204 SALES
between the parties on the subject matter and the consideration.
According to the Civil Code:
‘ART. 1475. The contract of sale is perfected at the moment
there is a meeting of minds upon the thing which is the object
of the contract and upon the price.
From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing the
form of contracts.
xxx
ART. 1477. The ownership of the thing sold shall be transferred
to the vendee upon the actual or constructive delivery
thereof.
ART. 1478. The parties may stipulate that ownership in the
thing shall not pass to the purchaser until he has fully paid the
price.’”
(2) Ownership of thing sold is transferred upon delivery. — “It
is clear from the above provisions, particularly the last one
quoted, that ownership in the thing sold shall not pass to the
buyer until full payment of the purchase price only if there is a
stipulation to that effect. Otherwise, the rule is that such ownership
shall pass from the vendor to the vendee upon the actual
or constructive delivery of the thing sold even if the purchase
price has not yet been paid.
Non-payment only creates a right to demand payment or
to rescind the contract, or to criminal prosecution in the case of
bouncing checks. But absent the stipulation above noted, delivery
of the thing sold will effectively transfer ownership to
the buyer who can in turn transfer it to another.”
(3) There is no unlawful deprivation of personal property. —
“In Asiatic Commercial Corporation vs. Ang (40 O.G.S. No. 15, p.
102.), the plaintiff sold some cosmetics to Francisco Ang, who,
in turn, sold them to Tan Sit Bin. Asiatic, not having been paid
by Ang, sued for the recovery of the articles from Tan, who
claimed he had validly bought them from Ang, paying for the
same in cash. Finding that there was no conspiracy between
Tan and Ang to deceive Asiatic, the Court of Appeals declared:
‘Yet the defendant invoked Article 464 (now Art. 559.) of
the Civil Code providing among other things that ‘one who
has been unlawfully deprived of personal property may recover
it from any person possessing it. We do not believe that the
Art. 1505
205
plaintiff has been unlawfully deprived of the cartons of Gloco
Tonic within the scope of this legal provision. It has voluntarily
parted with them pursuant to a contract of purchase and sale.
The circumstance that the price was not subsequently paid did
not render illegal a transaction which was valid and legal at
the beginning.
In Tagatac vs. Jimenez (53 O.G. No. 12, p. 3792.), the plaintiff
sold her car to Feist, who sold it to Sanchez, who sold it to
Jimenez. When the payment check issued to Tagatac by Feist
was dishonored, the plaintiff sued to recover the vehicle from
Jimenez on the ground that she had been unlawfully deprived
of it by reason of Feist’s deception. In ruling for Jimenez, the
Court of Appeals held:
‘The point of inquiry is whether plaintiff-appellant Trinidad
C. Tagatac has been unlawfully deprived of her car. At first
blush, it would seem that she was unlawfully deprived thereof,
considering that she was induced to part with it by reason of
the chicanery practiced on her by Warner L. Feist. Certainly,
swindling, like robbery, is an illegal method of deprivation of
property. In a manner of speaking, plaintiff-appellant was “illegally
deprived” of her car, for the way by which Warner L.
Feist induced her to part with it is illegal and is punished by
law. But does this unlawful deprivation come within the scope
of Article 559 of the New Civil Code?
x x x The fraud and deceit practiced by Warner L. Feist earmarks
this sale as a voidable contract. (Article 1390, N.C.C.)
Being a voidable contract, it is susceptible of either ratification
or annulment. If the contract is ratified, the action to annul it is
extinguished (Article 1392, N.C.C.) and the contract is cleansed
from all its defects (Article 1396, N.C.C.); if the contract is annulled,
the contracting parties are restored to their respective
situation before the contract and mutual restitution follows as
a consequence. (Article 1398, N.C.C.)
However, as long as no action is taken by the party entitled,
either that of annulment or of ratification, the contract of
sale remains valid and binding. When plaintiff-appellant Trinidad
C. Tagatac delivered the car to Feist by virtue of said voidable
contract of sale, the title to the car passed to Feist. Of course,
the title that Feist acquired was defective and voidable. Nevertheless,
at the time he sold the car to Felix Sanchez, his title on
the latter, provided he brought the car in good faith, for value
and without notice of the defect in Feist’s title. (Article 1506,
206 SALES
N.C.C.) There being no proof on record that Felix Sanchez acted
in bad faith, it is safe to assume that he acted in good faith.’
(4) JC acquired ownership over the books sold. — Actual delivery
of the books having been made, JC acquired ownership
over the books which could then validly transfer to the private
respondents. The fact that he had not yet paid for them to EDCA
was a matter between him and EDCA and did not impair the
title acquired by the private respondents to the books.
One may well imagine the adverse consequences if the
phrase “unlawfully deprived” were to be interpreted in the
manner suggested by the petitioner. A person relying on the
seller’s title who buys a movable property from him would have
to surrender it to another person claiming to be the original
owner who had not yet been paid the purchase price therefor.
The buyer in the second sale would be left holding the bag, so
to speak, and would be compelled to return the thing bought
by him in good faith without even the right to reimbursement
of the amount he had paid for it.”
(5) EDCA was negligent. — “It bears repeating that in the
case before us, Y took care to ascertain first that the books belonged
to X before she agreed to purchase them. The EDCA
invoice X showed her assured her that the books had been paid
for on delivery. By contrast, EDCA was less than cautious — in
fact, too trusting — in dealing with the impostor. Although it
had never transacted with him before, it readily delivered the
books he had ordered (by telephone) and as readily accepted
his personal check in payment. It did not verify his identity
although it was easy enough to do this. It did not wait to clear
the check of this unknown drawer. Worse, it indicated in the
sales invoice issued to him, by the printed terms thereon, that
the books had been paid for on delivery, thereby vesting ownership
in the buyer.”
(6) Private respondent acted in good faith and with proper care.
— “Surely, the private respondent did not have to go beyond
that invoice to satisfy herself that the books being offered for
sale by X belonged to him; yet she did. Although the title of X
was presumed under Article 559 by his mere possession of the
books, these being movable property, Y nevertheless demanded
more proof before deciding to buy them.
It would certainly be unfair now to make the private respondents
bear the prejudice sustained by EDCA as a result of
Art. 1505
207
its own negligence. We cannot see the justice in transferring
EDCA’s loss to Y who had acted in good faith, and with proper
care, when they bought the books from X.
While we sympathize with the petitioner for its plight, it is
clear that its remedy is not against the private respondent but
against X, who has apparently caused all this trouble.” (EDCA
Publishing & Distributing Corp. vs. Santos, 184 SCRA 614 [1990].)
ART. 1506. Where the seller of goods has a voidable
title thereto, but his title has not been avoided at
the time of the sale, the buyer acquires a good title to
the goods, provided he buys them in good faith, for
value, and without notice of the seller’s defect of title.
(n)
Sale by one having a voidable title.
(1) Requisites for acquisition of good title by buyer. — If the seller
has only a voidable title to the goods, the buyer acquires a good
title to the goods provided he buys them: (a) before the title of
the seller has been avoided; (b) in good faith for value; and (c)
without notice of the seller’s defect of title. (see Arts. 1385, 1388.)
(2) Basis of rule. — Article 1506 seems to be predicated on the
principle that where loss has happened which must fall on one of
two innocent persons, it should be borne by him who is the occasion
of the loss. It is similar to the rule in P.D. No. 1529 (Property
Registration Decree) referring to an innocent purchaser for value
in good faith (Sec. 51 thereof.) and to the rule in Act No. 2031
(Negotiable Instruments Law) referring to a holder in due course
to whom a negotiable instrument is negotiated for value and in
good faith. (see Sec. 57 thereof.)
EXAMPLES:
(1) S, a minor, sold his television set to B, a person of majority
age. Under the law (see Art. 1390, Civil Code.), the contract
is voidable or annullable because a minor is incapable of
giving consent to a contract. B, in turn, sold the television set to
C who acted in good faith.
208 SALES
In this case, C acquires a valid title to the television set after
its delivery if the contract had not yet been annulled by a
proper action in court.
(2) B bought in good faith for value a car which was stolen
from C, the lawful owner. As against B, C has a better right to
the car. Article 1506 is clearly inapplicable where the seller had
no title at all. (Aznar vs. Yapdiangco, 13 SCRA [1965].)
C may recover the car without paying any indemnity, except
when B acquired it in a public sale. (Art. 559, supra.)
ART. 1507. A document of title in which it is stated
that the goods referred to therein will be delivered to
the bearer, or to the order of any person named in
such document is a negotiable document of title. (n)
Definition of terms.
(1) Document of title to goods. — Includes any bill of lading,
dock warrant, “quedan,” or warehouse receipt or order for the
delivery of goods, or any other document used in the ordinary
course of business in the sale or transfer of goods, as proof of the
possession or control of the goods, or authorizing or purporting
to authorize the possessor of the document to transfer or receive,
either by indorsement or by delivery, goods represented by such
document. (Art. 1636[1].)
(2) Goods. — Included all chattels personal but not things in
action or money of legal tender in the Philippines. The term includes
growing fruits or crops. (ibid.)
(3) Order. — Relating to documents of title means an order
by indorsement on the documents. (ibid.)
Nature and function of documents of title.
(1) Receipts of, or orders upon, a bailee of goods represented. —
Documents of title refer to goods and not to money. They all have
this in common: that they are receipts of a bailee, or orders upon
a bailee. A different name is given in popular speech to the document
when it is issued by a carrier and when it is issued by a
warehouseman, but in substance the nature of the document is
the same in both cases. (see 2 Williston, op. cit., p. 505.)
Art. 1507
209
(2) Evidence of transfer of title and possession of the goods and contract
between the parties. — A document of title is symbol of the
goods covered by it, serving as evidence of (a) transfer of title and
(b) transfer of possession. It also serves as an evidence of the (c)
contract between the parties who are bound by its terms. So far
as concerns the transfer of property between the parties, their
intention would be effectual without the document, but where
third parties’ rights are involved, the form of the document (i.e.,
negotiable or non-negotiable) becomes important.
Most common forms of documents
of title.
There are three most common forms or documents of title,
namely:
(1) Bill of lading. — It is a contract and a receipt for the transport
of goods and their delivery to the person named therein, to
order, or to bearer. It usually involves three persons — the carrier,
the shipper, and the consignee. The shipper and the consignee
may be one and the same person. Its acceptance generally constitutes
the contract of carriage even though not signed.
Such instrument may be called a shipping receipt, a forwarder’s
receipt, or receipt for transportation. The designation, however,
is immaterial (Saludo, Inc. vs. Court of Appeals, 207 SCRA
498 [1992].);
(2) Dock warrant. — It is an instrument given by dock owners
to an importer of goods warehoused on the dock as a recognition
of the importer’s title to the said goods, upon production of the
bill of lading (see Bouvier’s Law Dictionary, p. 911.); and
(3) Warehouse receipt. — a contract or receipt for goods deposited
with a warehouseman containing the latter’s undertaking to
hold and deliver the said goods to a specified person, to order, or
to bearer. Quedan is a warehouse receipt usually for sugar received
by a warehouseman.
Laws governing documents of title.
The following laws govern documents of title:
(1) The Civil Code (in Arts. 1507 to 1520, 1532 [2nd par.], 1535
210 SALES
[2nd par.], and 1749.) primarily governs documents of title other
than warehouse receipts;
(2) The Warehouse Receipts Law (Act No. 2137.) primarily
governs warehouse receipts; and
(3) The Code of Commerce subsidiarily governs bills of lading
issued by common carriers (in Arts. 350 to 354 for land carriers
and in Arts. 706 to 718 for maritime carriers).
The provisions in the Civil Code on documents of title are
reproduced practically verbatim from the Uniform Sales Act which
is in force in many states in the United States.
Classes of documents of titles.
Documents of title may be either:
(1) Negotiable documents of title or those by the terms of which
the bailee undertakes to deliver the goods to the bearer and those
by the terms of which the bailee undertakes to deliver the goods
to the order of a specified person (Art. 1508.); or
(2) Non-negotiable documents of title or those by the terms of
which the goods covered are deliverable to a specified person.
(Art. 1511.)
ART. 1508. A negotiable document of title may be
negotiated by delivery:
(1) Where by the terms of the document the carrier,
warehouseman or other bailee issuing the same
undertakes to deliver the goods to the bearer; or
(2) Where by the terms of the document the carrier,
warehouseman or other bailee issuing the same
undertakes to deliver the goods to the order of a specified
person, and such person or a subsequent
indorsee of the document has indorsed it in blank or
to the bearer.
Where by the terms of a negotiable document of
title the goods are deliverable to bearer or where a
negotiable document of title has been indorsed in
blank or to bearer, any holder may indorse the same
Art. 1508
211
to himself or to any specified person, and in such case
the document shall thereafter be negotiated only by
the indorsement of such indorsee. (n)
Negotiation of negotiable document
by delivery.
A negotiable document of title is negotiable by delivery if the
goods are deliverable to the bearer, or when it is indorsed in blank
or to the bearer by the person to whose order the goods are deliverable
or by a subsequent indorsee. An indorsement is in blank
when the holder merely signs his name at the back of the receipt
without specifying to whom the goods are to be delivered.
If the document is specially indorsed, it becomes an order
document of title and negotiation can only be effected by the indorsement
of the indorsee. A special indorsement specifies the
person to whom or to whose order the goods are to be delivered.
Article 1508 is similar to Section 37 of the Warehouse Receipts
Law (Act No. 2137.) except that the latter treats only of a negotiable
receipt which may be issued by a warehouseman.
negotiated by the indorsement of the person to whose
order the goods are by the terms of the document
deliverable. Such indorsement may be in blank, to
bearer or to a specified person. If indorsed to a specified
person, it may be again negotiated by the indorsement
of such person in blank, to bearer or to another
specified person. Subsequent negotiations may be
made in like manner. (n)
Negotiation of negotiable document
by indorsement.
A negotiable document of title by the terms of which the goods
are deliverable to a person specified therein may be negotiated
only by the indorsement of such person.
(1) If indorsed in blank or to bearer, the document becomes
negotiable by delivery. (Art. 1508.)
212 SALES
(2) If indorsed to a specified person, it may be again negotiated
by the indorsement of such person in blank, to bearer, or to
another specified person. Delivery alone is not sufficient.
A party is liable only as guarantor and not as indorser if his
indorsement is made for the purpose of identification only. (see
American Bank vs. Macondray & Co., 4 Phil. 695 [1905].)
Law.
ART. 1510. If a document of title which contains
an undertaking by a carrier, warehouseman or other
bailee to deliver the goods to bearer, to a specified
person or order of a specified person or which contains
words of like import, has placed upon it the
words “not negotiable” “non-negotiable,” or the like,
such document may nevertheless be negotiated by
the holder and is a negotiable document of title within
the meaning of this Title. But nothing in this Title contained
shall be construed as limiting or defining the
effect upon the obligations of the carrier, warehouseman,
or other bailee issuing a document of title or
placing thereon the words “not negotiable,” “nonnegotiable,”
or the like. (n)
Negotiable documents of title marked
“non-negotiable.”
Under Article 1510, the words “not negotiable,” “non-negotiable”
and the like when placed upon a document of title in which
the goods are to be delivered to “order” or to “bearer” have no
effect and the document continues to be negotiable. (Roman vs.
Asia Banking Corp., 46 Phil. 705 [1924].)
Under the Warehouse Receipts Law, any provision inserted
in a negotiable receipt that it is non-negotiable is declared void.
(Sec. 5, par. 2.)
When the document of title is to order, the bailee is obliged to
take it up before delivering the goods. Accordingly, he is liable to
the holder of an order document if the goods are delivered to the
Art. 1510
213
consignee without surrender of the document even though the
latter was marked “not negotiable.”
Note: The first sentence of Article 1510 should read “to a specified
person or order or to the order of a specified person.” This is
how Section 30 of the Uniform Sales Act, from which Article 1510
was adopted, is worded.
ART. 1511. A document of title which is not in such
form that it can be negotiated by delivery may be transferred
by the holder by delivery to a purchaser or
donee. A non-negotiable document cannot be negotiated
and the indorsement of such a document gives
the transferee no additional right. (n)
Transfer of non-negotiable documents.
A non-negotiable document of title cannot be negotiated.
Nevertheless, it can be transferred or assigned by delivery. In such
a case, the transferee or assignee acquires only the rights stated
in Article 1514. Even if the document is indorsed, the transferee
acquires no additional right.
Article 1511 is exactly the same as Section 39 of the Warehouse
Receipts Law.
negotiated:
(1) By the owner thereof; or
(2) By any person to whom the possession or custody
of the document has been entrusted by the owner,
if, by the terms of the document the bailee issuing the
document undertakes to deliver the goods to the order
of the person to whom the possession or custody
of the document has been entrusted, or if at the time
of such entrusting the document is in such form that
it may be negotiated by delivery. (n)
Persons who may negotiate a document.
It will be noticed that the provision does not give a power to
negotiate documents of title equal to that allowed under the Ne-
214 SALES
gotiable Instruments Law (Act No. 2031.) in the case of bills of
exchange and promissory notes inasmuch as neither a thief nor a
finder is within the terms of the article. (but see Art. 1518.) However,
if the owner of the goods permits another to have the possession
or custody of negotiable receipts running to the order of
the latter or to bearer, it is a representation of title upon which
bona fide purchasers for virtue are entitled to rely despite breaches
of trust or violations of agreement on the part of the apparent
owner. As between two innocent persons, the loss must fall upon
him whose misplaced confidence made the loss possible. (Siy
Cong Bieng & Co. vs. Hongkong & Shanghai Banking Corp., 56
Phil. 598 [1932].)
Law. Compare this article with Article 1518.
ART. 1513. A person to whom a negotiable document
of title has been duly negotiated acquires
thereby:
(1) Such title to the goods as the person negotiating
the document to him had or had ability to convey
to a purchaser in good faith for value and also such
title to the goods as the person to whose order the
goods were to be delivered by the terms of the document
had or had ability to convey to a purchaser in
good faith for value; and
(2) The direct obligation of the bailee issuing the
document to hold possession of the goods for him
according to the terms of the document as fully as if
such bailee had contracted directly with him. (n)
Rights of person to whom document
has been negotiated.
This article specifies the rights of a person to whom a negotiable
document of title has been duly negotiated, either by delivery,
in the case of a document of title to bearer, or by indorsement
and delivery, in the case of a document of title to order. Such person
acquires:
Art. 1513
215
(1) The title of the person negotiating the document, over the
goods covered by the document;
(2) The title of the person (depositor or owner) to whose order
by the terms of the document the goods were to be delivered,
over such goods; and
(3) The direct obligation of the bailee (warehouseman or carrier)
to hold possession of the goods for him, as if the bailee had
contracted directly with him.
One who purchases, therefore, a negotiable document of title
issued to a thief acquires no right over the goods as the thief has
no right to transfer, notwithstanding that such purchaser is innocent.
But the purchaser acquires a good title where the owner, by
his conduct, is estopped from asserting his title.
A provision similar to Article 1513 is found in Section 41 of
the Warehouse Receipts Law.
ART. 1514. A person to whom a document of title
has been transferred, but not negotiated, acquires
thereby, as against the transferor, the title to the
goods, subject to the terms of any agreement with
the transferor.
If the document is non-negotiable, such person
also acquires the right to notify the bailee who issued
the document of the transfer thereof, and thereby to
acquire the direct obligation of such bailee to hold
possession of the goods for him according to the
terms of the document.
Prior to the notification to such bailee by the
transferor or transferee of a non-negotiable document
of title, the title of the transferee to the goods and the
right to acquire the obligation of such bailee may be
defeated by the levy of an attachment of execution
upon the goods by a creditor of the transferor, or by a
notification to such bailee by the transferor or a subsequent
purchaser from the transferor of a subsequent
sale of the goods by the transferor. (n)
216 SALES
Rights of person to whom document
has been transferred.
This article refers to the rights of a person to whom a negotiable
document of title (not duly negotiated) has been transferred
(par. 1.) or of the transferee of a non-negotiable document. (pars.
2 and 3.) Such person acquires:
(1) The title to the goods as against the transferor;
(2) The right to notify the bailee of the transfer thereof; and
(3) The right, thereafter, to acquire the obligation of the bailee
to hold the goods for him.
The right of the transferee is not absolute as it is subject to the
terms of any agreement with the transferor. He merely steps into
the shoes of the transferor.
Attachment of goods covered
by document transferred.
(1) The transfer of a non-negotiable document of title does not
effect the delivery of the goods covered by it. Accordingly, before
notification, the bailee is not bound to the transferee whose right
may be defeated by a levy of an attachment or execution upon
the goods by the creditor of the transferor or by a notification to
such bailee of the subsequent sale of the goods.
(2) If the document is negotiable, the goods cannot be attached
or be levied under an execution unless the document be first surrendered
to the bailee or its negotiation enjoined. (Art. 1519.)
Law.
Note: The word “of” between “attachment” and “execution”
in the third paragraph should more properly read “or”. This is
how Section 34 of the Uniform Sales Act, from which Article 1514
was adopted, is worded.
ART. 1515. Where a negotiable document of title
is transferred for value by delivery, and the indorsement
of the transferor is essential for negotiation, the
transferee acquires a right against the transferor to
Art. 1515
217
compel him to indorse the document unless a contrary
intention appears. The negotiation shall take effect
as of the time when the indorsement is actually
made. (n)
Transfer of order document without
indorsement.
This article specifies the rights of a person to whom an order
document of title, which may not properly be negotiated by mere
delivery, has been delivered, without indorsement. They are:
(1) The right to the goods as against the transferor (Art. 1514.);
and
(2) The right to compel the transferor to indorse the indorsement.
(see Art. 1357.)
If the intention of the parties is that the document should be
merely transferred, the transferee has no right to require the
transferor to indorse the document.
Rule where document subsequently
indorsed.
For the purpose of determining whether the transferee is a
purchaser for value in good faith without notice (see Arts. 1506,
1513.), the negotiation shall take effect as of the time when the
indorsement is actually made, not at the time the document is
delivered. The reason is that the negotiation becomes complete
only at the time of indorsement. So, if by that time the purchaser
already had notice that the title of the seller was defective, he cannot
be considered a purchaser in good faith though he had no such
notice when he bought the document.
A provision similar to Article 1515 is found in Section 43 of
the Warehouse Receipts Law. (Sec. 49 of the Negotiable Instruments
Law is to the same effect.)
ART. 1516. A person who for value negotiates or
transfers a document of title by indorsement or delivery,
including one who assigns for value a claim secured
by a document of title unless contrary intention
appears, warrants:
218 SALES
(1) That the document is genuine;
(2) That he has a legal right to negotiate or transfer
it;
(3) That he has knowledge of no fact which would
impair the validity or worth of the document; and
(4) That he has a right to transfer the title to the
goods and that the goods are merchantable or fit for
a particular purpose, whenever such warranties would
have been implied if the contract of the parties had
been to transfer without a document of title the goods
represented thereby. (n)
Warranties on sale of documents.
This article treats of the warranties or liabilities of a person
negotiating or transferring a document. They are similar to those
of a person negotiating an instrument by delivery or by a qualified
indorsement under the Negotiable Instruments Law. (see Sec.
65 thereof.) The liability is limited only to a violation of the four
warranties set forth in Article 1516. (see Art. 1517.) Thus, the person
negotiating or transferring a document could be held liable
as when, for example, the document was a forgery, or he had stolen
it, or he had knowledge that the document was invalid for
want of consideration, or that the goods had been damaged.
One who assigns for value a claim secured by a document of
title is also liable for the violation of the four warranties enumerated
unless a contrary intention appears.
It is the duty of every indorsee to know that all previous indorsements
are genuine; otherwise, he will not acquire a valid title
to the instrument. (Great Eastern Life Ins. Co. vs. Hongkong &
Shanghai Banking Corporation, 43 Phil. 678 [1922].) Under the
Negotiable Instruments Law, the last indorser warrants that all
previous indorsements are genuine. (see Secs. 65, 66 thereof.)
Law. (see Sec. 65 of the Negotiable Instruments Law, which is also
similar.)
Art. 1516
219
ART. 1517. The indorsement of a document of title
shall not make the indorser liable for any failure on
the part of the bailee who issued the document or previous
indorsers thereof to fulfill their respective obligations.
(n)
Indorser not a guarantor.
The indorsement of a negotiable instrument has a double effect.
It is at the same time a conveyance of the instrument and a
contract of the indorser with the indorsee that on certain conditions
the indorser will pay the instrument if the party primarily
liable fails to do so.
The indorsement of a document of title amounts merely to a
conveyance by the indorser, not a contract of guaranty. (see 2
Williston, op. cit., pp. 627-628.) Accordingly, an indorser of a document
of title shall not be liable to the holder if, for example, the
bailee fails to deliver the goods because they were lost due to his
fault or negligence.
Law.
ART. 1518. The validity of the negotiation of a negotiable
document of title is not impaired by the fact
that the negotiation was a breach of duty on the part
of the person making the negotiation, or by the fact
that the owner of the document was deprived of the
possession of the same by loss, theft, fraud, accident,
mistake, duress, or conversion, if the person to whom
the document was negotiated or a person to whom
the document was subsequently negotiated paid value
therefor in good faith without notice of the breach of
duty, or loss, theft, fraud, accident, mistaken, duress
or conversion. (n)
When negotiation not impaired by fraud,
mistake, duress, etc.
Under this article, a negotiable document may be negotiated
by any person in possession of the same, however such posses-
220 SALES
sion may have been acquired. (see National Bank vs. Producers’
Warehouse Association, 42 Phil. 608 [1922]; Hill vs. Veloso, 31 Phil.
160 [1915].) In other words, it may be negotiated even by a thief
or finder and the holder thereof would acquire a good title thereto
if he paid value therefor in good faith without notice of the seller’s
defect of title. (see Art. 1506.) It will be remembered that under
Article 1512, neither a thief nor a finder may negotiate a negotiable
document of title. The two provisions thus appear contradictory
to each other.
Under the Warehouse Receipts Law, it is provided:
“Sec. 47. When negotiation not impaired by fraud, mistake or
duress. — The validity of the negotiation of a receipt is not
impaired by the fact that such negotiation was a breach of duty
on the part of the person making the negotiation or by the fact
that the owner of the document was induced by fraud, mistake
or duress to entrust the possession or custody thereof to such person,
if the person to whom the document was negotiated or a
person to whom the document was subsequently negotiated
paid value therefor, without notice of the breach of duty or
fraud, mistake or duress.”
Clearly, under Section 40 (see Art. 1512.) and Section 47 of the
Warehouse Receipts Law, the negotiation is invalidated by the fact
that the owner of the document was deprived of its possession
by loss or theft.
It should be noted that Article 1518 speaks of theft of the document
and not of the goods covered by such document. In the latter
case, it needs no argument to show that even a bona fide holder of
a document issued over such stolen goods cannot acquire title.
(see Art. 1513.)
ART. 1519. If goods are delivered to a bailee by
the owner or by a person whose act in conveying the
title to them to a purchaser in good faith for value
would bind the owner and a negotiable document of
title is issued for them they cannot thereafter, while
in possession of such bailee, be attached by garnishment
or otherwise or be levied under an execution
Art. 1519
221
unless the document be first surrendered to the bailee
or its negotiation enjoined. The bailee shall in no case
be compelled to deliver up the actual possession of
the goods until the document is surrendered to him
or impounded by the court.
Attachment or levy upon goods covered
by a negotiable document.
The bailee has the direct obligation to hold possession of the
goods for the original owner or to the person to whom the negotiable
document of title has been duly negotiated. (see Art. 1513.)
While in the possession of such bailee, the goods cannot be attached
or levied under an execution unless the document be first
surrendered, or its negotiation prohibited by the court.
The bailee cannot be compelled to deliver up the possession
of the goods until the document is surrendered to him or impounded
by the court. This prohibition is for the protection of the
bailee since he could be made liable to a subsequent purchaser
for value in good faith.
Where depositor not owner.
The provisions of Article 1519 do not apply if the person depositing
is not the owner of the goods (like a thief) or one who
has no right to convey title to the goods binding upon the owner.
Neither does it apply to actions for recovery or manual delivery
of goods by the real owner nor to cases where the attachment is
made before the issuance of the negotiable document of title.
The rights acquired by attaching creditors cannot be defeated
by the issuance of a negotiable document of title thereafter. (see
International vs. Terminal Warehouse Co., 126 Atl. 902.)
A similar provision in the Warehouse Receipts Law is Section
25. (see also Sec. 54.)
ART. 1520. A creditor whose debtor is the owner
of a negotiable document of title shall be entitled to
such aid from courts of appropriate jurisdiction by
injunction and otherwise in attaching such document
222 SALES
or in satisfying the claim by means thereof as is allowed
at law or in equity in regard to property which
cannot readily be attached or levied upon by ordinary
legal process. (n)
Creditor’s remedies to reach negotiable
documents.
Inasmuch as the goods themselves cannot readily be attached
or levied upon by ordinary legal process, as limited by the preceding
article, this article expressly gives the court full power to
aid by injunction and otherwise a creditor seeking to get a negotiable
document covering such goods. However, if an injunction
is issued but the negotiable document of title is negotiated to an
innocent person, the transfer is nevertheless effectual.
Law.
ART. 1521. Whether it is for the buyer to take possession
of the goods or for the seller to send them to
the buyer is a question depending in each case on
the contract, express or implied, between the parties.
Apart from any such contract, express or implied, or
usage of trade to the contrary, the place of delivery is
the seller’s place of business if he has one, and if not,
his residence; but in case of a contract of sale of specific
goods, which to the knowledge of the parties
when the contract or the sale was made were in some
other place, then that place is the place of delivery.
Where by a contract of sale the seller is bound to
send the goods to the buyer, but no time for sending
them is fixed, the seller is bound to send them within
a reasonable time.
Where the goods at the time of sale are in the possession
of a third person, the seller has not fulfilled
his obligation to deliver to the buyer unless and until
such third person acknowledges to the buyer that he
holds the goods on the buyer’s behalf.
Art. 1521
223
Demand or tender of delivery may be treated as
ineffectual unless made at a reasonable hour. What is
a reasonable hour is a question of fact.
Unless otherwise agreed, the expenses of and incidental
to putting the goods into a deliverable state
must be borne by the seller. (n)
Place of delivery of goods sold.
Should the buyer take possession of the goods or should the
seller send them? In other words, where is the place of delivery?
The following are the rules:
(1) Where there is an agreement, express or implied, the place
of delivery is that agreed upon;
(2) Where there is no agreement, the place of delivery is that
determined by usage of trade;
(3) Where there is no agreement and there is also no prevalent
usage, the place of delivery is the seller’s place of business;
(4) In any other case, the place of delivery is the seller’s residence;
and
(5) In case of specific goods, which to the knowledge of the
parties at the time the contract was made were in some other place,
that place is the place of delivery, in the absence of any agreement
or usage of trade to the contrary. (see Art. 1251.)
From the above, it can be seen that the presumption is that
the buyer must take the goods from the seller’s place of business
or residence rather than the seller to deliver them to the buyer.
Wherever the proper place of delivery may be, either party
acquires a right of action by being ready and willing at that place
to perform his legal duty, if the other party is not there present or
even if present, is not prepared to perform in a proper manner
with what is incumbent upon him. (see Art. 1169, par. 3.) Where,
however, the delivery was not effected at the place specified in
the contract but the buyer accepted the goods nevertheless without
complaint, the buyer would be deemed to have waived the
seller’s failure to deliver according to the terms of the contract,
and would be liable to pay the price agreed upon. (Sullivan vs.
Gird, 22 Ariz. 332.)
224 SALES
Time of delivery of goods sold.
The time of delivery is also determined by the agreement of
the parties or, in the absence thereof, by the usage of trade.
(1) If no time is fixed by the contract, then the seller is bound to
send the goods to the buyer within a reasonable time. (par. 2.)
What is a reasonable time is properly a question of fact as it is
dependent upon the circumstances attending the particular transaction,
such as the character of the goods, the purpose for which
they are intended, the ability of the seller to produce the goods if
they are to be manufactured, the facilities available for transportation
and distance the goods must be carried, and the usual
course of business in the particular trade. (Smith Bell & Co. vs.
Sotelo Matti, 44 Phil. 874 [1923].) Thus, where the goods are to be
manufactured, the time reasonably necessary to manufacture and
deliver them furnishes the test. Where the goods are at the time
of the bargain in a deliverable state (see Art. 1636[3].) and perishable
in nature, a reasonable time for delivery would be a very short
time.
(2) If the contract provides a fixed time for performance, the question
is whether time is of the essence, and if so, whether correct
performance was offered within that time. (see Art. 1169, par. 2;
see Soler vs. Chesley, 43 Phil. 529 [1922].) If time is not of the essence,
the question is whether correct performance was offered
within a reasonable time. (2 Williston, op. cit., p. 714.)
(3) Where the contract does not specify the time for delivery so that
delivery is to be made within a reasonable time, time is not of the
essence. (MC Cutcheon vs. Kimbal, 135 Misc. 299, 238 N.Y.S. 192.)
In such case, the buyer cannot make time the essence of the contract
without giving the seller notice of his intention to cancel
unless delivery is made on or before a fixed time. (Robinson Day
Products Co. vs. Thatcher, 150 N.Y.S. 658.)
Delivery of goods in possession
of a third person.
It is important to observe a distinction between the delivery
which will satisfy the seller’s duty to the buyer and the delivery
which is necessary to protect the buyer against third persons.
Art. 1521
225
The seller can hardly be discharged from his obligation where
the goods are in the possession of a third person by simply telling
the buyer that they are there or by notifying the bailee to deliver
to the buyer. It is not enough to discharge the seller that the
bailee has become by operation of law the agent for the buyer. (2
Williston, op. cit., pp. 706-707.) To affect third persons, the person
holding the goods must acknowledge being the bailee for the
buyer.
Hour of delivery of goods sold.
The demand or tender of delivery to be effectual must be made
at a reasonable hour of the day. (par. 4.)
(1) What is a reasonable hour is a question of fact largely dependent
upon the circumstances. Generally, however, where all
that is required of the other party is to receive a payment or performance
which can readily be accepted, it seems probable that
any hour when the debtor could find the creditor would be reasonable
for that purpose.
(2) In case of goods which are bulky or needed special care,
an hour might be unreasonable which would not be so in an ordinary
payment of a small sum of money.
(3) Where the question is not merely one of tender but also of
demand, reasonableness will depend on the justifiable expectation
that the hour is reasonable for giving as well as receiving.
(Ibid., op. cit., pp. 711-712.)
Duty of seller to put goods in deliverable
condition.
Unless otherwise agreed, the seller bears the expenses to place
the thing in a deliverable state (par. 5.), that is, in such a state that
the buyer would, under the contract, be bound to take delivery
of them. (Art. 1636[2].) This provision is a necessary consequence
of the duty of the seller to deliver the goods bargained for. (see
Art. 1247.)
The buyer is not bound to make tender of payment until the
seller has complied with his obligations.
226 SALES
ART. 1522. Where the seller delivers to the buyer a
quantity of goods less than he contracted to sell, the
buyer may reject them, but if the buyer accepts or retains
the goods so delivered, knowing that the seller
is not going to perform the contract in full, he must
pay for them at the contract rate. If, however, the buyer
has used or disposed of the goods delivered before
he knows that the seller is not going to perform
his contract in full, the buyer shall not be liable for
more than the fair value to him of the goods so received.
Where the seller delivers to the buyer a quantity
of goods larger than he contracted to sell, the buyer
may accept the goods included in the contract and
reject the rest. If the buyer accepts the whole of the
goods so delivered he must pay for them at the contract
rate.
Where the seller delivers to the buyer the goods
he contracted to sell mixed with goods of a different
description not included in the contract, the buyer may
accept the goods which are in accordance with the
contract and reject the rest.
In the preceding two paragraphs, if the subject
matter is indivisible, the buyer may reject the whole
of the goods.
The provisions of this article are subject to any
usage of trade, special agreement, or course of dealing
between the parties. (n)
Delivery of goods less than quantity
contracted.
Where the seller is under a contract to deliver a specific quantity
of goods and he delivers a smaller quantity as full performance
of his obligation, the buyer may reject the goods so delivered.
(see Art. 1233.) The buyer may, however, accept the goods
in which case he must pay for their (1) price at the contract rate if
he knew that no more were to be delivered or (2) the fair value to
Art. 1522
227
him of the goods, if he did not know that the seller is going to be
guilty of a breach of contract. (par. 1.)
“Fair value to him” should be interpreted to mean the benefit
which the buyer may have received from the goods. It is not necessarily
the market value. Since the defaulting seller is the wrongdoer,
the buyer is not required to pay the contract price if such
price for the goods is more than fair value to him of the goods.
EXAMPLE:
S sold to B 200 cavans of rice at P1,000.00 per cavan or for a
total price of P200,000.00, delivery to be made at the place of
business of B.
If S delivers only 120 cavans, B can refuse to accept them. If
he accepts them knowing that B is not going to perform the
contract in full, he is liable to pay at the rate agreed upon for
the 120 cavans or P120,000. But if B was not aware that full
delivery would not be made, he would be liable only for the
fair value to him of the goods at the time of delivery even if it
should be less than the contract price.
Of course, B cannot be liable, in any case, for more than the
contract price of P120,000.00 with respect to the 120 cavans actually
received by him.
ILLUSTRATIVE CASE:
Some of the goods contracted to be sold were missing through
fault of carrier.
Facts: S, a domestic corporation, alleges that B, a general
partnership, refused to pay the price of various automotive
products, with the latter claiming that it had not received the
merchandise. It appears that upon receipt of the Bill of Lading,
B initiated, but did not pursue, steps to take delivery as it was
advised by NN Company, owner of the vessel on which the
spare parts were loaded by S’s forwarding agent, that because
some parts were missing, they would just be informed as soon
as the missing parts were located.
It was only four years later when a warehouseman of NN
found in its bodega, parts of the shipment in question, but already
deteriorated and valueless.
228 SALES
Issue: Under the circumstances, can B be faulted for not accepting
or refusing to accept the shipment from NN four years
after shipment?
Held: No. NN could not produce the merchandise nor ascertain
its whereabouts at the time B was ready to take delivery.
From the evidentiary record, NN was the party negligent
in failing to deliver the complete shipment to B who was never
placed in the control and possession of the same. Where the
seller delivers to the buyer a quantity of goods less than he
contracted to sell, the buyer may reject them. (Chrysler Phils.
Corp. vs. Court of Appeals, 133 SCRA 567 [1984].)
Delivery of goods more than quantity
contracted.
Where the seller delivers a quantity larger than that contracted
for, the buyer may accept the quantity contracted for and reject
the excess. However, if he accepts all the goods delivered, he
makes himself liable for the price of all of them. (par. 2; see Art.
1540 re sale of immovable property.)
The offer of a quantity not contracted for is a manifestation of
the seller’s willingness to sell that quantity; and the act of the
buyer in knowingly taking them is sufficient evidence of assent.
If by the terms of the original contract, the price of the goods was
based on their number, weight, or measure, the same must be paid
for the larger quantity.
EXAMPLE:
In the preceding example, if S delivered 250 cavans of rice,
B may accept only 200 and reject the rest. If he accepts the entire
delivery, he may pay for them at the same contract rate of
P1,000.00 per cavan or P250,000.00 for the 250 cavans.
ILLUSTRATIVE CASE:
See facts.
Facts: The contract calls for the delivery of a quantity of
almaciga (mastic) of less than 500 piculs.
Issue: Is the delivery of 500 piculs sufficient compliance with
the contract?
Art. 1522
229
Held: Yes. As the law takes no account of trifles (de minimis
non curat les), it is obvious that the discrepancy may be disregarded,
and, therefore, the buyer cannot escape liability on account
of such trifling difference. (Matute vs. Cheong Boo, 67 Phil.
373 [1939].)
Delivery of goods mixed with others.
Where the goods delivered are mixed with goods of different
description not included in the contract, the buyer may accept
those which are in accordance with the contract and reject the rest.
The buyer, of course, may accept them all if he so desires.
This case is analogous to the preceding topic and the discussion
there suffices.
Effect of indivisibility of subject matter.
If the subject matter of the sale is indivisible, in case of delivery
of a larger quantity of goods (par. 2.) or of mixed goods (par.
3.), the buyer may reject the whole of the goods. (par. 4.)
It can be inferred from our law that the buyer has the right of
rejecting the whole of the goods delivered in the last two cases
mentioned only if the subject matter is indivisible.
EXAMPLES:
(1) S agreed to sell to B a live carabao with a weight of not
less than 100 kilos but not more than 120 kilos. S delivered a
carabao weighing 130 kilos. B may reject the carabao.
(2) If the agreement is for S to deliver “wagwag” rice mixed
with corn of a particular variety and the rice or corn delivered
is of a different variety, B may reject the whole of the goods.
Application of usage of trade, special
agreement, or course of dealing.
The provision of the 5th paragraph of Article 1522 permitting
evidence of usage of trade special agreement or course of dealing
between the parties is but a special application of the general rules
concerning contracts.
(1) A usage of trade is any practice or method of dealing having
such regularity of observance in a place, vocation or trade as
230 SALES
to justify an expectation that it will be observed with respect to
the transaction in question. The existence and scope of such a
usage are to be proved as facts. (Uniform Commercial Code, Sec.
205[2].)
(2) A course of dealing is a sequence of previous conduct between
the parties to a particular transaction which is fairly to be
regarded as establishing a common basis of understanding for
interpreting their expressions and other conduct. (Ibid., Sec.
205[1].)
Under modern methods of doing business especially in regard
to such fungible goods as grains and oil, and other commodities
which are dealt in the same way, it is very common to mingle
goods of different owners and to constitute a co-ownership in a
whole mass of a specified quantity. Where such method of business
prevails, it would be a natural consequence that a tender of
a right in the mass would be a good delivery. (see 2 Williston, op.
cit., p. 732.)
ART. 1523. Where, in pursuance of a contract of
sale, the seller is authorized or required to send the
goods to the buyer, delivery of the goods to a carrier,
whether named by the buyer or not, for the purpose
of transmission to the buyer is deemed to be a delivery
of the goods to the buyer, except in the cases provided
for in article 1503, first, second and third paragraphs,
or unless a contrary intent appears.
Unless otherwise authorized by the buyer, the
seller must make such contract with the carrier on
behalf of the buyer as may be reasonable, having regard
to the nature of the goods and the other circumstances
of the case. If the seller omits so to do, and
the goods are lost or damaged in course of transit,
the buyer may decline to treat the delivery to the carrier
as a delivery to himself, or may hold the seller
responsible in damages.
Unless otherwise agreed, where goods are sent
by the seller to the buyer under circumstances in
which the seller knows or ought to know that it is usual
Art. 1523
231
to insure, the seller must give such notice to the buyer
as may enable him to insure them during their transit,
and, if the seller fails to do so, the goods shall be
deemed to be at his risk during such transit. (n)
Delivery to carrier on behalf of buyer.
(1) General rule. — Where the seller is authorized or required
to send the goods to the buyer (Art. 1521, par. 1.), the general rule
is that delivery of such goods to the carrier6 constitutes delivery
to the buyer, whether the carrier is named by the buyer or not.
(see Behn, Meyer & Co., [Ltd.] vs. Yangco, 38 Phil. 602 [1918].) In
such case, the delivery of the goods on board the carrying vessel
partakes the nature of actual delivery since from that time, the
buyer assumes the risk of loss of the goods. (Filipino Merchant
Insurance Co., Inc. vs. Court of Appeals, 179 SCRA 638 [1989].)
(2) Exceptions. — They are those provided for in paragraphs
1, 2, and 3 of Article 1503 and when a contrary intent appears,
that is, the parties did not intend the delivery of the goods to the
buyer through the carrier. The seller is not responsible for misdelivery
by the carrier where the carrier was chosen and authorized
by the buyer to make the delivery. (Smith Bell and Co. [Phils.],
Inc. vs. Jimenez, 8 SCRA 407 [1963].)
Paragraphs 2 and 3 are in accordance with mercantile usages.
Seller’s duty after delivery to carrier.
The fact that the ownership in the goods may have passed to
the buyer does not mean that the seller has already fulfilled his
duty to the buyer.
(1) To enter on behalf of buyer into such contract reasonable under
the circumstances. — The seller must make such contract with the
6There is delivery to the carrier when the goods are ready for and have been placed
in the exclusive possession, custody and control of the carrier for the purpose of their
immediate transportation and the carrier has accepted them. Where such delivery has
thus been accepted by the carrier, its liability commences eo instanti. Ordinarily, a receipt
is not essential to a complete delivery of goods to the carrier for transportation but,
when issued is competent and prima facie but not conclusive evidence of delivery to the
carrier. (Saludo, Jr. vs. Court of Appeals, 207 SCRA 498 [1992].)
232 SALES
carrier on behalf of the buyer as may be reasonable under the circumstances.
If he omits to do so, the buyer may decline to treat
the delivery to the carrier as a delivery to himself in case the goods
are lost or damaged in course of transit, or the buyer may hold
the seller responsible in damages. (par. 2.) If the buyer exercises
the first right, the transfer of ownership will be deemed not to have
taken place.
The law does not make a carrier for all purposes the agent of
the buyer to whom goods are consigned. The agency relates to
the transmission of the merchandise only.
(2) To give notice to buyer regarding necessity to insure goods. —
The seller must give notice to the buyer as may enable him to insure
the goods during their transit if under the circumstances it
is usual to insure them. If the seller fails to do so, the risk will be
borne by him. But the seller who had failed to give notice is not
liable for loss of goods, if the buyer had all the information necessary
to insure.
The two preceding obligations of the seller are respectively
subject to specific instructions of the buyer or any agreement to
the contrary.
Definition of shipping terms.
Three commonly used terms are, namely:
(1) C.O.D. — The initials stand for the words, “collect on delivery.”
If the goods are marked C.O.D., the carrier acts for the
seller in collecting the purchase price. The buyer must pay for the
goods before he can obtain possession. C.O.D. terms do not prevent
title from passing to the buyer on delivery to the carrier where
they are solely intended as security for the purchase price (see Art.
1503.);
(2) F.O.B. — The initials stand for the words, “free on board”.
They mean that the goods are to be delivered free of expense to
the buyer to the point where they are F.O.B. In general, the point
of F.O.B., either the point of shipment or the point of destination,
determines when the ownership passes. (Behn, Meyer & Co. [Ltd.]
vs. Yangco, 38 Phil. 602 [1918].) Here, title presumably passes
when the goods are so delivered F.O.B.; and
Art. 1523
233
(3) C.I.F. — The initials stand for the words, “cost, insurance
and freight.” They signify that the price fixed covers not only the
cost of the goods, but the expense of freight and insurance to be
paid by the seller (ibid.) up to the point of destination. Title passes
to the buyer at the moment of delivery to the point especially
named.
Presumption arising from payment
of freight.
Both the terms “F.O.B.” and “C.I.F.” merely make rules of
presumption which yield to proof of contrary intention.
If the buyer is to pay the freight, it is reasonable to suppose
that he does so because the goods become his at the point of shipment.
On the other hand, if the seller is to pay the freight, the inference
is equally strong that the duty of the seller is to have the
goods transported to their ultimate destination and that title to
property does not pass until the goods have reached their destination.
(Ibid.; see General Foods Corp. vs. National Coconut Corp.,
100 Phil. 337 [1956].)
ART. 1524. The vendor shall not be bound to deliver
the thing sold, if the vendee has not paid him the
price, or if no period for the payment has been fixed
in the contract. (1466)
Delivery, simultaneous with payment
of price.
As a general rule, the obligation to deliver the thing subject
matter of a contract arises from the moment of its perfection and
from that time the obligation may be enforced. (see Art. 1315.) But
the contract of purchase and sale is bilateral and from it arises not
only the obligation to deliver the thing but also that of paying the
price. The obligations are reciprocal.
Consequently, if the vendor is bound to deliver the thing sold,
it is no less certain that the vendee must pay the price. If the vendee
does not pay the price, the consideration for the obligation of the
vendor is absent and if the consideration is absent, the obligation
234 SALES
likewise does not exist or at least is suspended. (10 Manresa 138;
see Lafont vs. Pascacio, 5 Phil. 391 [1905].) The vendor is not also
obliged to make delivery if no period has been fixed in the contract
and the vendee has not paid the price.
A vendor who continued to effect sales and deliveries to the
vendee even without promptly getting paid is considered for all
intents and purposes, to have sold on credit. (Castro vs. Mendoza,
44 SCAD 995, 226 SCRA 611 [1993].)
When delivery must be made before
payment of price.
The provisions of Article 1524 contain a rule and an exception:
the rule is that the thing shall not be delivered unless the price
be paid; and the exception is that the thing must be delivered
though the price be not first paid, if time for such payment has
been fixed in the contract. (see Warner, Barnes & Co. vs. Inza, 43
Phil. 505 [1922]; Ocejo, Perez & Co. vs. International Bank, 37 Phil.
631 [1918]; Lafont vs. Pascasio, supra.)
If this period was fixed, the vendor notwithstanding such
period has not terminated, nor, consequently, that he has not collected
the price, is obliged to deliver the thing sold. The vendor’s
obligation to convey the thing arises from the force and validity
of the contract. (Florendo vs. Foz, 20 Phil. 388 [1911]; 10 Manresa
131-134.) But even if a period has been fixed for the payment of
the price, the vendor is not bound to deliver in case the vendee
has lost the right to make use of the period and still has not paid
the price. (Art. 1536.)
EXAMPLE:
S sold to B the former’s horse for P10,000.00. No date is
fixed by the parties for performance of their respective obligations.
In this case, S is not bound to deliver the horse, if B himself
does not pay the price. But if a time of payment has been fixed
in the contract, say, within two (2) months, then S is obliged to
deliver the horse where the term of credit has not expired although
B has not paid the price.
Art. 1524
235
ART. 1525. The seller of goods is deemed to be an
unpaid seller within the meaning of this Title:
(1) When the whole of the price has not been paid
or tendered;
(2) When a bill of exchange or other negotiable
instrument has been received as conditional payment,
and the condition on which it was received has been
broken by reason of the dishonor of the instrument,
the insolvency of the buyer, or otherwise.
In articles 1525 and 1535 the term “seller” includes
an agent of the seller to whom the bill of lading has
been indorsed, or a consignor or agent who has himself
paid, or is directly responsible for the price, or
any other person who is in the position of a seller. (n)
Meaning of unpaid seller.
An unpaid seller is one who has not been paid or tendered the
whole price or who has received a bill of exchange or other negotiable
instrument as conditional payment and the condition on
which it was received has been broken by reason of the dishonor
of the instrument.
The term “unpaid seller” within the scope of Articles 1525 up
to 1535 includes: (1) an agent of the seller; (2) a consignor or agent
who has himself paid or is directly responsible for the price; or
(3) any other person in the position of the seller. A seller is unpaid
within the definition whether title has or has not passed. (see
Art. 1526.)
Where whole of price has not been paid.
(1) Tender of payment by buyer. — Although tender of payment
is not the same as performance, and a seller to whom the price of
goods has been tendered is strictly unpaid, and can, therefore,
bring an action subsequently for the price, which he has refused,
yet tender destroys the seller’s lien. Accordingly, so far as concerns
his rights against the goods, he is not an unpaid seller after
the tender of the price.
236 SALES
(2) Payment of part of price. — Payment of a part only of the
price does not destroy a seller’s lien. (2 Williston, op. cit., pp. 96-
97.) The seller remains an unpaid seller even if title has passed to
the buyer.
(3) Payment by negotiable instrument. — According to paragraph
2 of Article 1249 (Civil Code), “the delivery of promissory
notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they
have been cashed or when through the fault of the creditor they
have been impaired.”
notwithstanding that the ownership in the goods may
have passed to the buyer, the unpaid seller of goods,
as such, has:
(1) A lien on the goods or right to retain them for
the price while he is in possession of them;
(2) In case of the insolvency of the buyer, a right
of stopping the goods in transitu after he has parted
with the possession of them;
(3) A right of resale as limited by this Title;
(4) A right to rescind the sale as likewise limited
by this Title.
Where the ownership in the goods has not passed
to the buyer, the unpaid seller has, in addition to his
other remedies, a right of withholding delivery similar
to and co-extensive with his rights of lien and stoppage
in transitu where the ownership has passed to
the buyer. (n)
Special remedies of an unpaid seller
of goods.
Article 1526 gives the unpaid seller of goods certain remedies
but they do not cover an action for the purchase price. (see Art.
1595.) Even if the ownership in the goods has already passed to
the buyer, the unpaid seller may exercise the following rights:
Art. 1526
237
(1) A lien on the goods or right to retain them for the price
while in his possession (Arts. 1527-1529.);
(2) A right of stopping the goods in transitu in case of insolvency
of the buyer (Art. 1530.);
(3) A right of resale (Art. 1533.); and
(4) A right to rescind the sale. (Art. 1534.)
If the unpaid seller still retains ownership in the goods, he
cannot be said to have a lien (on his goods). But he does have, in
addition to his other remedies, right of withholding delivery. (Art.
1526, par. 2.)
Nature of unpaid seller’s possessory
lien on the goods.
The right given by this article though denominated as a lien,
is in truth greater than a lien.
The seller’s position is very nearly that of a pledgee (see Art.
2112.) with power to sell at private sale in case of default, and the
power survives till payment of the price. An action for the price
is not inconsistent with the later enforcement of the lien though
the buyer must be credited with any payment of the price in reduction
of the lien. (D’Oprile vs. TurnerLooker Co., 147 N.E. 15;
see Art. 1529, par. 2.)
Unpaid seller’s lien on the price.
The possessory lien referred to in Articles 1527 to 1529 should
be distinguished from the preferred claim or lien as provided for
in Article 2241(3) of the Civil Code.
The possessory lien entitles the seller to retain possession of the
goods as security for the purchase price. Where the goods are in
the possession of the buyer (see Art. 1529[2].), the seller has no
more possessory lien but his claim for the unpaid price is a preferred
claim or lien. Simply stated, upon delivery, the seller’s possessory
lien on the goods is lost, but his lien on the price remains.
Basis of rights of unpaid seller.
The ground upon which an unpaid seller is allowed a lien and
kindred remedies is the inherent injustice of depriving him of
238 SALES
goods with which he has not finally parted where it is evident
that he has not been or will not be paid the price for them when it
is due.
The same principle of justice is applicable in every case where
a possessor of goods is entitled to receive a price on the surrender
of the goods. Accordingly, the term “unpaid seller’’ has a
wider meaning than the literal language would import. (Art. 1525,
par. 2; 3 Williston, op. cit., p. 99.)
the unpaid seller of goods who is in possession of
them is entitled to retain possession of them until
payment or tender of the price in the following cases,
namely:
(1) Where the goods have been sold without any
stipulation as to credit;
(2) Where the goods have been sold on credit, but
the term of credit has expired;
(3) Where the buyer becomes insolvent.
The seller may exercise his right of lien notwithstanding
that he is in possession of the goods as
agent or bailee for the buyer. (n)
When unpaid seller’s possessory lien
may be exercised.
(1) Sale without stipulation as to credit. — In a credit sale, the
seller binds himself to give the goods over to the buyer without
receiving at that time payment for them. Where there is a “stipulation
as to credit” (No. 1.), a period for payment of the price has
been fixed in the contract. (see Art. 1193.)
In the absence of any stipulation as to the credit, the seller is
entitled to the payment of the price at the same time that he transfers
the possession of the goods. (Art. 1524; see Distributors, Inc.
vs. Flores, 92 Phil. 145 [1952].) Accordingly, the seller has always
a lien upon the goods which he sells until payment or tender of
the entire price. (3 Williston, op. cit., pp. 103-104.)
Art. 1527
239
(2) Expiration of term of credit. — Even where the parties agree
upon a sale on credit, the seller’s right of lien may be exercised.
By the nature of a credit sale, the buyer is entitled to possession
of the goods without paying the price; but if he fails to exercise
his right until the term of credit has expired and the price becomes
due, he loses the right which he theretofore had. (Ibid., p. 104.) In
this case, the obligation of the buyer to pay will also be governed
by Article 1524.
(3) Insolvency of the buyer. — The insolvency of the buyer is
another situation where the lien of the seller in possession is revived
even though the time for payment of the price has not yet
arrived. This doctrine is only an application of a general principle
in the law of contracts that when one party to a bilateral contract
is incapacitated from performing his part of the agreement,
the other party also is excused from performing. It should be
noticed that insolvency does not dissolve the bargain; it merely
revives the seller’s lien. (Ibid., p. 105.)
The insolvency of the debtor is one of the grounds for the loss
of the right to make use of the period fixed in an obligation. (Art.
1198[1].) A person is “insolvent” who either has ceased to pay his
debts in the ordinary course of business or cannot pay his debts
as they become due, whether insolvency proceedings have been
commenced or not. (Art. 1636[2].)
Unpaid seller as bailee for the buyer.
It is immaterial that the seller holds the goods as bailee for
the buyer. Indeed, this always is the situation where the seller’s
lien is in question: for the property having passed, the seller is
necessarily holding the buyer’s goods and, therefore, acting as
bailee for him. And though he has charged the buyer storage for
the goods, the lien may still be asserted.
ART. 1528. Where an unpaid seller has made part
delivery of the goods, he may exercise his right of
lien on the remainder, unless such part delivery has
been made under such circumstances as to show an
intent to waive the lien or right of retention. (n)
240 SALES
Lien generally not lost by part
delivery.
When part of the goods are delivered, the unpaid seller has a
lien upon the remainder for the proportion of the price which is
due on account of the goods so retained. However, if the delivery
of the part is intended as symbolical delivery of the whole, and,
therefore, a waiver of any right of retention as to the remainder,
the lien is lost. (Art. 1529[3].)
The intent to make such waiver may be inferred from the circumstances.
ART. 1529. The unpaid seller of goods loses his
lien thereon:
(1) When he delivers the goods to a carrier or other
bailee for the purpose of transmission to the buyer
without reserving the ownership in the goods or the
right to the possession thereof;
(2) When the buyer or his agent lawfully obtains
possession of the goods;
(3) By waiver thereof.
The unpaid seller of goods, having a lien thereon,
does not lose his lien by reason only that he has obtained
judgment or decree for the price of the goods.
(n)
When unpaid seller loses possessory lien.
(1) Delivery to agent or bailee of buyer. — An unconditional delivery
to an agent or bailee for the buyer is, so far as the seller’s
lien is concerned, the same as delivery to the buyer himself. It is
true that the seller may stop the goods while on their way to the
buyer after delivery to a bailee for the buyer but it cannot be said
that the seller has still any lien upon them.
(2) Possession by buyer or his agent. — If the goods are already
in the possession of the buyer at the time of the bargain, it is plain
that when the ownership is transferred, the seller has no lien simply
because he has no possession necessary for a lien. The wrong-
Art. 1529
241
ful taking, however, of the goods by the buyer without the seller’s
consent does not destroy the lien. Thus, if the goods are put
into the possession of the buyer merely for the purpose of allowing
the latter to examine them, this would not amount to an assent
to a surrender of the lien. (3 Williston on Sales, op. cit., p. 111.)
(3) Waiver of the lien. — The seller may lose his lien either by
express agreement to surrender it. Thus, it has been held that
where the buyer was allowed to alter the character of the goods
and make them much more valuable, the seller could no longer
assert a lien. (Ibid., p. 115.)
Note that mere judgment by a court obtained by the unpaid
seller for the price of the goods is not a ground for the loss of his
lien. (Art. 1529, par. 2.)
Revival of lien after delivery.
(1) If the buyer refuses to receive the goods after they have
been delivered to a carrier or other bailee on his behalf, though
the seller has parted with both the ownership and the possession,
he may reclaim the goods and revest himself with his lien. (see
Art. 1531, par. 1[2].)
(2) Likewise, if the buyer returns the goods in wrongful repudiation
of the sale, the lien is revived.
when the buyer of goods is or becomes insolvent, the
unpaid seller who has parted with the possession of
the goods has the right of stopping them in transitu,
that is to say, he may resume possession of the goods
at any time while they are in transit, and he will then
become entitled to the same rights in regard to the
goods as he would have had if he had never parted
with the possession. (n)
Right of seller to stop goods in transitu.
If the unpaid seller has already parted with the possession of
the goods, he may still exercise the second right of stoppage in
transitu (Art. 1520[2].), that is, he may resume possession of the
242 SALES
goods while they are in transit, when the buyer is or becomes
insolvent. The right is exercised either by obtaining actual possession
of the goods or by giving notice of his claim to the carrier
or other bailee in possession. (Art. 1532.) The unpaid seller exercising
his right of stoppage in transitu becomes entitled to the same
rights to the goods as if he had never parted with the possession
thereof.
Take note that the buyer’s insolvency need not be judicially
declared. (see Art. 1636[2].) An insolvent debtor forfeits his rights
to the period stipulated for payment. (see Art. 1536.)
Requisites for the exercise of right
of stoppage in transitu.
The following are the requisites for the existence of the right:
(1) The seller must be unpaid (Art. 1525.);
(2) The buyer must be insolvent;
(3) The goods must be in transit (Art. 1531.);
(4) The seller must either actually take possession of the goods
sold or give notice of his claim to the carrier or other person in
possession (Art. 1532, par. 1.);
(5) The seller must surrender the negotiable document of title,
if any, issued by the carrier or bailee (Ibid., par. 2.); and
(6) The seller must bear the expenses of delivery of the goods
after the exercise of the right. (Ibid.)
Basis and nature of right of stoppage
in transitu.
(1) The essential basis of the right of stoppage in transitu is
clearly the injustice of allowing the buyer to acquire ownership
and possession of the goods when he has not paid and, owing to
his insolvency, cannot pay the price which was to be given in return
for the goods. In other words, the fundamental basis of the
right is the far-reaching principle allowing rescission and restitution
where there is actual or prospective failure of consideration.
(3 Williston, op. cit., p. 122.)
Art. 1530
243
(2) This right does not proceed from any agreement of the
parties but is independently conferred by law. It may be regarded
as a legal extension of the unpaid seller’s lien.
ART. 1531. Goods are in transit within the meaning
of the preceding article:
(1) From the time when they are delivered to a carrier
by land, water, or air, or other bailee for the purpose
of transmission to the buyer, until the buyer, or
his agent in that behalf, takes delivery of them from
such carrier or other bailee;
(2) If the goods are rejected by the buyer, and the
carrier or other bailee continues in possession of
them, even if the seller has refused to receive them
back;
Goods are no longer in transit within the meaning
of the preceding article:
(1) If the buyer, or his agent in that behalf, obtains
delivery of the goods before their arrival at the appointed
destination;
(2) If, after the arrival of the goods at the appointed
destination, the carrier or other bailee acknowledges
to the buyer or his agent that he holds the goods on
his behalf and continues in possession of them as
bailee for the buyer or his agent; and it is immaterial
that further destination for the goods may have been
indicated by the buyer;
(3) If the carrier or other bailee wrongfully refuses
to deliver the goods to the buyer or his agent in that
behalf.
If the goods are delivered to a ship, freight train,
truck, or airplane chartered by the buyer, it is a question
depending on the circumstances of the particular
case, whether they are in the possession of the
carrier as such or as agent of the buyer.
244 SALES
If part delivery of the goods has been made to the
buyer, or his agent in that behalf, the remainder of the
goods may be stopped in transitu, unless such part
delivery has been under such circumstances as to
show an agreement with the buyer to give up possession
of the whole of the goods. (n)
When goods are in transit.
The goods are not yet in transit until they are delivered to a
carrier or other bailee for the purpose of transmission to the buyer.
The goods are in transit —
(1) after delivery to a carrier or other bailee and before the
buyer or his agent takes delivery of them; and
(2) if the goods are rejected by the buyer, and the carrier or
other bailee continues in possession of them. (par. 1.)
When goods considered no longer
in transit.
The right of stoppage in transitu arises solely when an unpaid
seller has shipped goods to an insolvent buyer. The right to retake
continues only while the goods are in transit. The goods are
no longer in transit in the following cases:
(1) After delivery to the buyer or his agent in that behalf;
(2) If the buyer or his agent obtains possession of the goods
at a point before the destination originally fixed;
(3) If the carrier or bailee acknowledges to hold the goods on
behalf of the buyer; and
(4) If the carrier or bailee wrongfully refuses to deliver the
goods to the buyer. (par. 2.)
Attornment by the bailee.
The right to stop the goods may be terminated not simply by
delivery to the buyer, but by attornment of the bailee to the buyer.
(Art. 1531, par. 2[2].)
At the time when a carrier first receives goods consigned to
the buyer, the carrier is agent for the seller for the purpose of car-
Art. 1531
245
rying out the transit between the seller and the buyer. In order to
terminate the seller’s right to stop, the carrier must enter into a
new relation, distinct from the original contract of carriage, to hold
the goods for the buyer as his agent not for the purpose of expediting
them to the place of original destination, pursuant to that
contract, but in a new character for the purpose of custody on the
buyer’s account. (see 3 Williston, op. cit., pp. 134-135.)
Effect of refusal of carrier to attorn
or deliver the goods.
The carrier is not allowed to enlarge the seller’s right by
wrongfully refusing to deliver or attorn as the buyer’s agent. (Art.
1531, par. 2[3].) But a rightful refusal by the carrier, based for instance,
on the refusal of the buyer or his agent to pay the freight
will not terminate the right to stop. (Ibid., pp. 135-136.)
Delivery to a ship, etc., chartered
or owned by buyer.
(1) Chartered by the buyer. — The mere fact that the carrier is
chartered by the buyer does not make a delivery to the carrier a
delivery to the buyer. Whether delivery to a carrier chartered by
the buyer means possession by the carrier as such or possession
by the carrier as agent of the buyer, in which case, the goods are
no longer in transit, is a question depending on the circumstances
of the particular case. (par. 3.)
(2) Owned by the buyer. — As delivery to an agent, other than
one whose only duty is to forward the goods, is a delivery to the
principal, delivery to the buyer’s servant who is under a general
duty to obey his master’s order, is necessarily a delivery to the
buyer. Hence, delivery to a vessel belonging to the buyer is delivery
to the buyer. (see Ibid., p. 145.)
Effect of partial delivery.
The mere fact that part of the goods has been delivered does
not deprive the seller of the right to stop with respect to the remainder
(par. 4.) just as the seller may still exercise his right of
lien on the remainder after part of the goods had been delivered.
246 SALES
(Art. 1528.) However, it may be shown that the seller has an agreement
with the buyer to give up possession of the whole of the
goods.
ART. 1532. The unpaid seller may exercise his right
of stoppage in transitu either by obtaining actual possession
of the goods or by giving notice of his claim
to the carrier or other bailee in whose possession the
goods are. Such notice may be given either to the
person in actual possession of the goods or to his
principal. In the latter case, the notice, to be effectual,
must be given at such time and under such circumstances
that the principal, by the exercise of reasonable
diligence, may prevent a delivery to the buyer.
When notice of stoppage in transitu is given by
the seller to the carrier, or other bailee in possession
of the goods, he must redeliver the goods to, or according
to the directions of, the seller. The expenses
of such delivery must be borne by the seller. If, however,
a negotiable document of title representing the
goods has been issued by the carrier or other bailee,
he shall not be obliged to deliver or justified in delivering
the goods to the seller unless such document
is first surrendered for cancellation. (n)
Ways of exercising the right to stop.
The seller may exercise the right of stoppage in transitu either:
(1) by taking actual possession of the goods. — The seller’s power
to stop in transitu includes not only the power to counter delivery
to the buyer but to order redelivery to himself. (par. 2, 1st and 2nd
sentences.) The duty imposed on the carrier by the exercise of the
power is, however, qualified by the existence of a lien of the carrier
on the goods for charges due for their carriage. The seller has
the obligation to pay the freight on them and other necessary expenses
of the delivery (3 Williston, op. cit., pp. 156-157.); or
(2) by giving notice of his claim to the carrier or bailee. — To make
a notice effective as a stoppage in transitu, it must be given at such
Art. 1532
247
time, and under such circumstances that the principal, by the
exercise of reasonable diligence, may communicate it to his agent
to prevent the delivery to the buyer. There is no form of notice
which is essential; it is only necessary that the goods be sufficiently
described for identification.
Effect of outstanding bill of lading.
If the goods are covered by a negotiable document of title, the
carrier or bailee has no obligation to deliver the goods to the seller
unless such document is first surrendered for cancellation. (par.
2, 3rd sentence; see Art. 1519.)
Should the carrier surrender the goods to the seller and afterwards
the bill of lading be negotiated to an innocent purchaser
for value, the latter would be entitled to demand delivery of the
goods. (Art. 1518.) The only way in which the carrier can be assured
that no subsequent purchaser can arise is by requiring a
surrender of the document of title. The right of the purchaser for
value in good faith to whom such document has been negotiated
is superior to the seller’s unpaid lien or stoppage in transitu even
when such purchaser acquired the same after notice of stoppage
was given by the seller to the carrier. (see Art. 1535, par. 2.)
ART. 1533. Where the goods are of perishable nature,
or where the seller expressly reserves the right
of resale in case the buyer should make default, or
where the buyer has been in default in the payment of
the price for an unreasonable time, an unpaid seller
having a right of lien or having stopped the goods in
transitu may resell the goods. He shall not thereafter
be liable to the original buyer upon the contract of
sale for any profit made by such resale, but may recover
from the buyer damages for any loss occasioned
by the breach of the contract of sale.
Where a resale is made, as authorized in this article,
the buyer acquires a good title as against the original
buyer.
It is not essential to the validity of a resale that
notice of an intention to resell the goods be given by
248 SALES
the seller to the original buyer. But where the right to
resell is not based on the perishable nature of the
goods or upon an express provision of the contract
of sale, the giving or failure to give such notice shall
be relevant in any issue involving the question
whether the buyer had been in default for an unreasonable
time before the resale was made.
It is not essential to the validity of a resale that
notice of the time and place of such resale should be
given by the seller to the original buyer.
The seller is bound to exercise reasonable care
and judgment in making a resale, and subject to this
requirement may make a resale either by public or
private sale. He cannot, however, directly or indirectly
buy the goods. (n)
Unpaid seller’s right of resale.
(1) When resale allowable. — The third right of an unpaid seller
is the right of resale. (Art. 1526[3].) An unpaid seller can exercise
the right to resell only when he has either a right of lien (Ibid., [1].)
or a right to stop the goods in transitu (Ibid., [2].) and under any
of the three following cases:
(a) where the goods are perishable in nature;
(b) where the right to resell is expressly reserved in case
the buyer should make a default; and
(c) where the buyer delays in the payment of the price for
an unreasonable time. (see Hanlon vs. Haussermann and
Beam, 40 Phil. 796 [1920].)
Article 1533 provides that the seller having the right “may
resell the goods.” The language is permissive in nature rather than
mandatory.
(2) Effect of resale. — In case of resale, the seller is not liable
for any profit made by such resale; but if he sells for less than the
price, he has a right to sue for the balance. (par. 1.) As against the
original buyer, the new buyer acquires a good title to the goods.
(par. 2.)
Art. 1533
249
ILLUSTRATIVE CASE:
Seller resold tractor for failure of buyer to take delivery and pay
the price.
Facts: S sold to B a tractor, payable at P5,000.00 upon delivery
and the balance of P7,000.00 within 60 days. B failed to take
delivery of the tractor and pay the purchase price. S was forced
to sell the same to a third person for only P10,000.00.
Issue: Is B liable for the difference of P2,000.00?
Held: Yes. In a contract of sale which is executory as to both
parties, the vendor is entitled to resell the goods if the purchaser
fails to take delivery and pay the purchase price. If he is obliged
to sell for less than the contract price, he holds the buyer for the
difference; if he sells for as much as or more than the contract
price, the breach of contract by the original buyer is damnum
absque injuria.
There is no need of an action for rescission to authorize the
vendor, who is still in possession, to dispose of the property
where the buyer fails to pay the price and take delivery. (Katigbak
vs. Court of Appeals, 4 SCRA 243 [1962], citing Hanlon vs.
Hausserman, supra.)
(3) Notice of resale not essential. — The seller’s right to resell
the goods for the buyer’s account may depend to some extent upon
the length of time the buyer has been in default. A notice by the
seller of his intention to resell may operate to fix the time within
which it is reasonable that the buyer should perform his obligations.
It is, therefore, provided in paragraph 3, that except in the
case of perishable goods, which it is obvious may require an expeditious
sale, and where the right to resell is reserved, the failure
to give notice shall be relevant upon the question whether the
buyer has been in default for an unreasonable time. What is reasonable
time will vary according to the circumstances of the case.
Though the seller is not bound to give notice of his intention
to resell and of the time and place where the resale will be held
(par. 4.), it is however, prudent to give the buyer such notice, as
the giving or failure to give it may be important evidence in regard
to the fairness of the sale. (3 Williston, op. cit., p. 172.)
(4) Manner of resale. — Any absolute rule requiring the formality
of an auction sale might bear harshly on the seller in case where
250 SALES
the goods are of small value and the buyer is financially irresponsible.
The law “is satisfied with a fair sale made in good faith according
to the established business methods with no attempt to
take advantage of the vendee.” (Ibid., pp. 168-169.) The seller is
only required to exercise reasonable care and judgment in making
a resale. He cannot, however, directly or indirectly, buy the
goods. (see Art. 1491[6].)
ART. 1534. An unpaid seller having the right of lien
or having stopped the goods in transitu, may rescind
the transfer of title and resume the ownership in the
goods, where he expressly reserved the right to do
so in case the buyer should make default, or where
the buyer has been in default in the payment of the
price for an unreasonable time. The seller shall not
thereafter be liable to the buyer upon the contract of
sale, but may recover from the buyer damages for any
loss occasioned by the breach of the contract.
The transfer of title shall not be held to have been
rescinded by an unpaid seller until he has manifested
by notice to the buyer or by some other overt act an
intention to rescind. It is not necessary that such overt
act should be communicated to the buyer, but the giving
or failure to give notice to the buyer of the intention
to rescind shall be relevant in any issue involving
the question whether the buyer had been in default
for an unreasonable time before the right of rescission
was asserted. (n)
Unpaid seller’s right of rescission.
(1) When seller may rescind. — The fourth right of an unpaid
seller is the right to rescind the sale. (Art. 1526[4].) An unpaid seller
has a right to rescind only if he has either a right of lien (Ibid., No.
1.) or a right to stop the goods in transitu (Ibid., No. 2.) and under
either of two situations:
(a) where the right to rescind is expressly reserved in case
the buyer should make a default; or
Art. 1534
251
(b) where the buyer delays in the payment of the price for
an unreasonable time. (see Ocejo, Perez & Co. vs. International
Bank, 37 Phil. 631 [1918].)
(2) Effect of rescission. — In the case of rescission, the seller
resumes ownership in the goods. While the seller shall not be liable
to the buyer upon the contract of sale, the latter, however,
may be made liable to the seller for damages for any loss occasioned
by the breach of contract. (par. 1; see Art. 1533, par. 1.)
(3) Manner of rescission. — An election by the seller to rescind
may be manifested by notice to the buyer or by some other overt
act showing an intention to rescind. Communication of such election
to the buyer is not necessary. But, as in regard to resale (Art.
1533, par. 3.), the giving or failure to give notice is relevant in
determining the reasonableness of the time given the buyer to
make good his obligations under the contract. (par. 2.)
ART. 1535. Subject to the provision of this Title,
the unpaid seller’s right of lien or stoppage in transitu
is not affected by any sale, or other disposition
of the goods which the buyer may have made, unless
the seller has assented thereto.
If, however, a negotiable document of title has been
issued for goods, no seller’s lien or right of stoppage
in transitu shall defeat the right of any purchaser for
value in good faith to whom such document has been
negotiated, whether such negotiation be prior or subsequent
to the notification to the carrier, or other bailee
who issued such document, of the seller’s claim to a
lien or right of stoppage in transitu. (n)
Effect of sale of goods subject to lien
or stoppage in transitu.
(1) Where goods not covered by negotiable document of title. — It
is fundamental, as a general rule, that a seller can give no larger
right than he has. When, therefore, goods are subject to a legal
lien, as they are when an unpaid seller is in possession of them, a
purchaser from the original buyer can acquire only such right as
the buyer then had. (3 Williston, op. cit., pp. 188-189.)
252 SALES
(2) Where goods covered by negotiable document of title. — If,
however, the goods are covered by a negotiable document of title,
the seller’s lien cannot prevail against the rights of a purchaser
for value in good faith to whom the document has been indorsed.
(see Arts. 1506, 1518, 1532 [2nd par.].) The reason for this provision
rests upon the nature of a negotiable document of title which
in legal fiction operates as a delivery of the goods described
therein when indorsed. The rule protects a purchaser without
notice after the seller had stopped the goods either by virtue of
his right of lien or stoppage in transitu.
The term “purchaser,” as used in Article 1534, includes mortgagee
and pledgee. (Roman vs. Asia Banking Corporation, 46 Phil.
705 [1924].)
ART. 1536. The vendor is not bound to deliver the
thing sold in case the vendee should lose the right to
make use of the term as provided in article 1198.
(1467a)
Right of vendor to withhold delivery
in sale on credit.
In a contract of sale, the obligation to pay the price is correlative
to the obligation to deliver the thing sold. Accordingly, the
vendor is not bound to make delivery if the vendee has not paid
him the price. (Art. 1524.) If, however, a period has been fixed for
payment, the vendor must deliver the thing sold though the price
be not first paid. (see Art. 1527[1].) But even if the vendee was
given the benefit of a period, the vendor may not be compelled
to make delivery, in case the vendee should lose the right to make
use of the term as provided in Article 1198 of the Civil Code and
such vendee has not yet paid the price. Said article states:
“The debtor [vendee] shall lose every right to make use of
the period:
(1) When after the obligation has been contracted, he becomes
insolvent, unless he gives a guaranty or security for the
debt [price];
(2) When he does not furnish to the creditor [vendor] the
guaranties or securities which he has promised;
Art. 1536
253
(3) When by his own acts he has impaired said guaran-ties
or securities after their establishment, and when through a fortuitous
event they disappear, unless he immediately gives new
ones equally satisfactory;
(4) When the debtor [vendee] violates any undertaking,
in consideration of which the creditor agreed to the period;
(5) When the debtor [vendee] attempts to abscond.”
EXAMPLE:
S sold to B a car on credit. S has a right to withhold delivery
in any of the following situations:
(1) B becomes insolvent, unless B gives sufficient guaranty
or security; or
(2) B promised to mortgage his house to secure the purchase
price and he failed to furnish said security as promised;
or
(3) If the payment of the purchase price is secured by a
mortgage on the house of B, but the house was partially burned
because of B’s fault; or was totally destroyed without B’s fault,
unless B gives a new security, equally satisfactory; or
(4) Where in consideration of the sale on credit, B obliged
himself, say, to repair the piano of S, and B failed to comply
with such undertaking; or
(5) Where B shows an intent not to pay the price after the
car is delivered to him.
ART. 1537. The vendor is bound to deliver the thing
sold and its accessions and accessories in the condition
in which they were upon the perfection of the
contract.
All the fruits shall pertain to the vendee from the
day on which the contract was perfected. (1468a)
Condition of thing to be delivered.
In entering into a contract of sale, the parties take into consideration
not only the particular thing which is the subject matter
of the contract, but also its condition at the time such contract
254 SALES
was perfected. The vendor is, therefore, obliged to preserve the
thing pending delivery (see Arts. 1163, 1164.) because the thing
sold and its accessions and the accessories must be in the condition
in which they were upon the perfection of the contract. (Art.
1537, par. 1.)
It is the seller’s duty to deliver the thing sold in a condition
suitable for its enjoyment by the buyer for the purposes contemplated.
Thus, a subdivision lot seller should not shift to the buyer
the burden of providing access to and from the subdivision. It is
seller’s duty to construct the necessary roads in the subdivision
that could serve as outlets. Proper access to the residence is essential
to its enjoyment. (Consing vs. Court of Appeals, 177 SCRA
14 [1989].)
While a sale of a determinate thing (e.g., land) includes all its
accessions (e.g., house) and accessories even though they may not
have been mentioned (see Art. 1166.), a sale of the latter is not
sufficient to convey title or right to the former. (see Pornellosa vs.
Land Tenure Administration, 1 SCRA 375 [1961].)
Note: Accessions are the fruits of a thing; or additions to, or
improvements upon, a thing such as the young of animals, house
or trees on a land, etc.
Accessories are anything attached to a principal thing for its
completion, ornament, or better use such as picture frame, key of
a house, etc.
Right of vendee to the fruits.
(1) When vendee entitled. — The vendee has a right to the fruits
of the thing sold from the time the obligation to deliver it arises.
(Art. 1164.) The obligation to deliver arises upon the perfection
of the contract of sale. (see Art. 1475.)
EXAMPLE:
S sold his horse to B for P8,000.00. No date or condition
was stipulated for the delivery of the horse. While still in the
possession of S, the horse gave birth to a colt. Who has a right
to the colt?
(1) B is entitled to the colt which was born after the perfection
of the contract. This holds true even if the delivery is sub-
Art. 1537
255
ject to a suspensive period (e.g., next month) or a suspensive
condition (e.g., upon demand) if B has paid the purchase price.
(2) But S has a right to the colt if it was born before his
obligation to deliver the horse has arisen (Art. 1164.) and B has
not yet paid the purchase price. In this case, upon the fulfillment
of the condition or the arrival of the period, S does not have to
give the colt and B is not obliged to pay legal interests since the
colt and the interests are deemed to have been mutually compensated.
(see Art. 1187.)
(2) When vendee not entitled. — In the following cases, the
vendee is not entitled to the fruits:
(a) When the rule provided in Article 1537 (par. 2.) is
modified by agreement of the parties, their agreement shall,
of course, govern;
(b) If the vendee rescinds the contract of sale instead of exacting
the fulfillment thereof, he is entitled only to damages
like interest, attorney’s fees and costs but he may not also claim
the fruits of the thing sold (Hodges vs. Granada, 59 Phil. 429
[1934]; see Art. 1385.); and
(c) In a contract of promise to sell, the vendee is not entitled
to the fruits. The only right of the contracting parties is to
reciprocally demand the fulfillment of the contract. Prior to the
sale and conveyance of the subject matter of the contract, the
promisee or would-be vendee acquires no right to the fruits
thereof. (De Vera vs. De Vera, [C.A.] O.G. 3318, Sept., 1948.)
ART. 1538. In case of loss, deterioration or improvement
of the thing before its delivery, the rules in
article 1189 shall be observed, the vendor being considered
the debtor. (n)
Rules in case of loss, deterioration, or improvement
of thing before delivery.
Article 1189 of the Civil Code states:
“When the conditions have been imposed with the intention
of suspending the efficacy of an obligation to give, the
following rules shall be observed in case of the improvement,
256 SALES
loss or deterioration of the thing during the pendency of the
condition:
(1) If the thing is lost without the fault of the debtor, the
obligation shall be extinguished;
(2) If the thing is lost through the fault of the debtor, he
shall be obliged to pay damages; it is understood that the thing
is lost when it perishes, or goes out of commerce, or disappears
in such a way that its existence is unknown or it cannot be
recovered;
(3) When the thing deteriorates without the fault of the
debtor, the impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the
creditor may choose between the rescission of the obligation
and its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the
improvement shall inure to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall
have no other right than that granted to the usufructuary.”
A reading of the above article shows that it is in consonance
with Article 1480 (supra.) which provides for the rules governing
injury to, or benefit from, the thing sold after the contract has been
perfected but before its delivery. Both under Articles 1480 (pars. 1
and 2.) and 1538, the loss shall be at the risk of the vendee pending
delivery. As heretofore pointed out, Article 1504 (supra.), which
has been taken from the American law on sales, provides another
rule governing risk of loss which is contrary to Articles 1480 and
1538.
EXAMPLE:
S sold to B his car. If before delivery —
(1) the car is lost or destroyed without the fault of S (assuming
S is not guilty of delay and there is no contrary stipulation
that he shall be liable), the obligation to deliver is extinguished
and B shall be obliged to pay the price if he has not
paid the same;
(2) if the loss is through S’s fault, he shall be liable to pay
damages to B;
Art. 1538
257
(3) if the car suffers damages without the fault of S, B shall
have to suffer the impairment;
(4) if the damage was due to S’s fault, B may choose, between
the rescission (cancellation) of the contract with damages
or the delivery of the car also with damages;
(5) if the market value of the car increased, the increase
shall inure to the benefit of B inasmuch as he suffers the deterioration
in case of a fortuitous event;
(6) if S had the car painted and its seat cover changed at
his expense, he shall have the rights of a usufructuary with respect
to the improvements.7
ART. 1539. The obligation to deliver the thing sold
includes that of placing in the control of the vendee
all that is mentioned in the contract, in conformity with
the following rules:
If the sale of real estate should be made with a
statement of its area, at the rate of a certain price for
a unit of measure or number, the vendor shall be
obliged to deliver to the vendee, if the latter should
demand it, all that may have been stated in the contract;
but, should this be not possible, the vendee may
choose between a proportional reduction of the price
and the rescission of the contract, provided that, in
the latter case, the lack in the area be not less than
one-tenth of that stated.
The same shall be done, even when the area is the
same, if any part of the immovable is not of the quality
specified in the contract.
The rescission, in this case, shall only take place
at the will of the vendee, when the inferior value of
7Art. 579. The usufructuary may make on the property held in usufruct such useful
improvements or expenses for mere pleasure as he may deem proper, provided he does
not alter its form or substance; but he shall have no right to be indemnified therefor. He
may, however, remove such improvements, should it be possible to do so without damage
to the property.
Art. 580. The usufructuary may set off the improvements he may have made on the
property against any damage to the same.
258 SALES
the thing sold exceeds one-tenth of the price agreed
upon.
Nevertheless, if the vendee would not have bought
the immovable had he known of its smaller area or
inferior quality, he may rescind the sale. (1469a)
Sale of real property by unit
of measure or number.
(1) Entire area stated in contract must be delivered. — If the sale
of real estate should be made with a statement of its area, at the
rate of a certain price per unit of measure or number, the cause of
the contract with respect to the vendee is the number of such units
or, if you wish, the thing purchased as determined by the stipulated
number of units. The vendor must deliver the entire property
agreed upon. (pars. 1 and 2.) Thus, if the parcel of land is
stated in the contract as having an area of 500 square meters and
sold at P1,000.00 per square meter, the vendor must deliver the
entire area as stated. (see Santa Ana, Jr. vs. Hernandez, 18 SCRA
973 [1966].) Furthermore, the immovable must be of the quality
specified in the contract. (par. 3.)
(2) Where entire area could not be delivered. — If all that is included
within the stipulated boundaries is not delivered, then the
object of the contract, its cause as far as the vendee is concerned,
is not delivered. Hence, he is entitled to rescind it. He may, however,
enforce the contract with the corresponding decrease in price.
(Teran vs. Villanueva Viuda de Riosa, 56 Phil. 677 [1932].)
When vendee entitled to rescind
sale of real property.
Under the above article, the right of rescission is available to
the vendee in the following cases:
(1) If the lack in area is at least 1/10th than that stated or stipulated.
(par. 2.) The 1/10th mentioned must be based on the area
stipulated in the contract, and not on the real area which the thing
may actually have (see 10 Manresa 149-154.);
(2) If the deficiency in the quality specified in the contract
exceeds 1/10th of the price agreed upon (par. 3.); and
Art. 1539
259
(3) If the vendee would not have brought the immovable had
he known of its smaller area or inferior quality irrespective of the
extent of the lack in area or quality. (pars. 4 and 5.)
The above remedies are also available under the second paragraph
of Article 1542.
Note that in case of fulfillment, the vendee is entitled only to
a proportionate reduction of the price where there is a deficiency
in area or number. (par. 2; see Azarraga vs. Gray, 52 Phil. 599
[1928].) The rule is different where there is a violation of the warranty
against hidden defects. (Art. 1571.) The vendor is also liable
for damages. (Art. 1567; see Art. 1191, par. 2.)
ART. 1540. If, in the case of the preceding article,
there is a greater area or number in the immovable
than that stated in the contract, the vendee may accept
the area included in the contract and reject the
rest. If he accepts the whole area, he must pay for the
same at the contract rate. (1470a)
Where immovable of a greater area
or number.
If the area or number in the immovable is greater than that
stipulated in the contract, the vendee may accept the area included
in the contract and reject the rest. If he accepts the whole, he makes
himself liable for the price of the same at the contract rate. (see
comments under Article 1522, par. 2.)
The vendee may not withdraw from the contract.
ART. 1541. The provisions of the two preceding
articles shall apply to judicial sales. (n)
Application of Articles 1539 and 1540
to judicial sales.
The provisions of Articles 1539 and 1540 are applicable to both
private (voluntary) and judicial sales when the immovable sold
is lacking in area or is of inferior quality or is greater in area than
stated in the contract. (see Arts. 1552 and 1570.) The reason is that
260 SALES
the rules they contain are derived from the very nature of the
contract of sale.
The rules, however, may be varied or suppressed by agreement
between the contracting parties. (10 Manresa 138.)
ART. 1542. In the sale of real estate, made for a
lump sum and not at the rate of a certain sum for a
unit of measure or number, there shall be no increase
or decrease of the price, although there be a greater
or less area or number than that stated in the contract.
The same rule shall be applied when two or more
immovables are sold for a single price; but if, besides
mentioning the boundaries, which is indispensable
in every conveyance of real estate, its area or number
should be designated in the contract, the vendor shall
be bound to deliver all that is included within said
boundaries, even when it exceeds the area or number
specified in the contract; and should he not be able
to do so, he shall suffer a reduction in the price, in
proportion to what is lacking in the area or number,
unless the contract is rescinded because the vendee
does not accede to the failure to deliver what has been
stipulated. (1471)
Sale of real estate made
for a lump sum.
(1) Mistake in area stated in contract immaterial. — If the sale is
made for a lump sum, and not so much per unit of measure or
number, the cause of the contract is the thing sold independent
and irrespective of its number or measure. (see 10 Manresa 145.)
In this case, the law presumes that the purchaser had in mind a
determinate price for the real estate and that he ascertained its
area and quality before the contract was perfected. (Teran vs.
Villanueva, 56 Phil. 677 [1932].)
In other words, it is presumed that the purchaser intended to
buy a determinate object in its entirety and not just any unit of
measure or number, and the price is determined with relation to
Art. 1542
261
it; hence, its greater or lesser area cannot influence the increase or
decrease of the price agreed upon, whether the object be single
realty or whether they are two or more immovables. The boundaries
of the land stated in the contract determine the effects and
scope of the sale, not the area thereof. (Semira vs. Court of Appeals,
49 SCAD 93, 230 SCRA 577 [1994]; 10 Manresa 156-157.)
Hence, the vendor is obligated to deliver all the land included
within the boundaries, regardless of whether the real area should
be greater or smaller than that recited in the deed (Balantakbo vs.
Court of Appeals, 65 SCAD 74, 249 SCRA 323 [1995].) inasmuch
as it is the entirety thereof that distinguishes the determinate object.
(Roble vs. Arbasa, 152 SCAD 115, 362 SCRA 69 [2001], citing
Tolentino Civil Code of the Philippines, Vol. V, 1992 ed., p. 94.)
The possibility of error is a hazard which the parties must be
presumed to have assumed. This hazard is not one-sided but
works both ways. (Gonzales-Mondragon vs. Santos, 87 Phil. 471
[1950].) The rule in Article 1542, however, admits of exceptions.
(infra.)
(2) Where area or number stated together with boundaries. — If
the vendor cannot deliver to the vendee all that is included within
the boundaries mentioned in the contract, the latter has the option
to reduce the price in proportion to the deficiency or to set
aside the contract. (Art. 1542, par. 2.) The phrase “should he not
be able to do so” refers to a situation when the vendor, either because
a part or parcel of the real estate does not belong to him,
cannot deliver all that is included within the boundaries. (see 10
Manresa 145-154.)
EXAMPLE:
S sold to B a parcel of land for the lump sum (or a cuerpo
cierto) of P300,000.00. The contract states that the area is 500
square meters. Subsequently, it was ascertained that the area
included within the boundaries is really 600 square meters.
In this case, S is bound to deliver all the 600 square meters
which are included within said boundaries without increase in
price. If S does not deliver also the extra 100 square meters, B
has the right to rescind the contract or pay a proportionately
reduced price, namely: 5/6 of the original price or P250,000.00.
262 SALES
ILLUSTRATIVE CASES:
1. The area of land sold for a lump sum is less than that stated
in the contract.
Facts: S sold to B lot No. 20, Calle San Jose, Ermita, Manila
for the sum of P3,200.00. The document recites that the tract
contains 152.46 square meters. On the date assigned for the
execution of the final deed of sale, B refused to pay the agreed
price claiming that the land was actually less in area than that
stated in the contract.
B claimed a proportional reduction of the price or else he
would not buy. So S brought action for specific performance.
Issue: Is B relieved from the obligation of paying the price?
Held: No. The fact that the specified parcel of land bought
by B at the price of P3,200.00 is not as large as he thought, does
not relieve him from the obligation of paying its price. If he
intended to buy by the meter, he should have so stated in the
contract. (Goyena vs. Tambunting, 1 Phil. 490.) In the matter of
sales of land made for a lump sum and not so much a unit of
measure or number, the boundaries of said land stated in the
contract, not the area thereof, are the determining factor of the
effects, scope, or meaning of said contract. The real and true
area of the land must prevail over that given in the document.
(Pacia vs. Lagman, 68 Phil. 351 [1939]; see Gov’t. vs. Abaya, 52
Phil. 261 [1928]; Gov’t. vs. Abad, 47 Phil. 573.)
———— ———— ————
2. In a sale of land for a lump sum, the deficiency in the stated
area to which the parties paid particular attention when they entered
into that contract was almost 1/3.
Facts: S sold to B the hacienda Maria which, according to S,
contained an area of 25 hectares more or less, the standing crop
thereon capable of yielding not less than 2,000 piculs of sugar.
During the negotiations, B always doubted the correctness of
the area and the amount of crop given by S who always assured
B that they were correct.
In short, the parties made the sale with particular attention
to the area.
It turned out that the land contained only 18 hectares and
the crop yielded only 800 piculs of sugar.
Issue: Has B the right to ask for rescission of the sale or the
proportionate reduction of the price?
Art. 1542
263
Held: Yes. While it is true that in a sale of land for a lump
sum, the vendee may not ask for the rescission of the sale or
the proportional reduction in the price if the area delivered be
less than that stated in the contract, the rule does not apply if
the deficiency is so material as to go to the essence of the contract
for, under such circumstances, gross mistake may be inferred
which is the duty of a court of equity to correct. In the
case at bar, the parties paid particular attention to the area of
the land when they made the contract. The use of “more or
less” or similar words in designating quantity covers only a
reasonable excess or deficiency. The vendee does not thereby
ipso facto take all risks of quantity in the land. (Asian vs. Jalandoni,
45 Phil. 296 [1923].)
———— ———— ————
3. In a sale for a lump sum of a fishpond of which buyer had
been in possession as a lessee for two years, the deficiency is about 1/
4 of the stated area.
Facts: S sold to B a fishpond for the lump sum of P14,000.00.
The deed of sale recited that the area of the fishpond was “11
hectares, 38 ares, and 77 centares, more or less.” It was subsequently
discovered that its area was only 8 hectares or about
1/4 less than that stated in the contract. B had been leasing the
fishpond for about two years.
S brought action to recover the purchase price.
Issue: Is B relieved from paying the price?
Held: Although the shortage amounts to practically 1/4 of
the total area, B clearly intended to take the risk of quantity
and that the area has been mentioned in the contract merely for
the purpose of description, considering that B had been in possession
of the fishpond as a lessee for two years and, therefore,
can rightly be presumed to have acquired a good estimate of
its value and area. (Garcia vs. Velasco, 72 Phil. 248 [1941].)
Note: In other words, the parties in this case did not take
into consideration the area of the fishpond in question when
they made the contract.
(3) Where there is conflict between area stipulated and title to property.
— In case of conflict between the area included within the
stipulated boundaries and that which the title shows, the former
shall prevail when the boundaries are certain and no alteration
264 SALES
thereof has been proven. (Government vs. Abaya, 52 Phil. 261
[1928].) That which really defines a piece of ground is not the area,
calculated with more or less certainty mentioned in its description,
but the boundaries therein laid down as enclosing the land
and indicating its limits. It is not of vital consequence that a contract
on sale of land should disclose the area with mathematical
accuracy. It is sufficient if its extent is objectively indicated with
sufficient precision to enable one to identify it. An error as to the
superficial area is immaterial. (Erico vs. Heirs of Chigas, 98 SCRA
575 [1980]; Dichoso vs. Court of Appeals, 192 SCRA 169 [1990].)
(4) Where identity of erroneously designated property clearly established.
— Where the identity of the disputed property has been
clearly established by both parties’ pleadings, the mistake in designating
the property in the deed of sale “does not vitiate consent
of the parties or affect the validity and binding effect of the
contract. The reason is that when one sells or buys real property
— a piece of land, for example — one sells or buys the property
as he sees it in its actual setting and by its physical metes and
bounds, and not by the mere lot number assigned to it in the certificate
of title.” (Dihiansen vs. Court of Appeals, 153 SCRA 712
[1987]; Atilano vs. Atilano, 28 SCRA 231 [1969].) The remedy for
such a situation is to have the document reformed. (Art. 1359, et
seq.)
(5) Where words “about,’’ “more or less,” etc. are used. — The
words when used in connection with quantity or distance, are
words of safety and caution, intended to cover some slight or
unimportant inaccuracy, and, while enabling an adjustment to the
imperative demands of fixed monuments, they do not weaken or
destroy the statements of distance and quantity when no other
guides are furnished. The rule in measuring distances is that
words of qualification (e.g., “50 feet, more or less’’) should be disregarded
and the exact distance adopted. The words “about,’’
“approximately,” and “more or less’’ in connection with courses
and distances may be disregarded if not controlled or explained
by monuments, boundaries and other expressions of intention.
In a case, the petitioner insists that there should have been an allowance
of around 300 meters since the technical description of
the land in question states that the boundary line should be for
around 16,000 meters more or less; held: The disputed gap of 300
Art. 1542
265
meters is not an insignificant distance. Thus, the petitioner cannot
capitalize on the phrase “around 16,000 meters more or less’’
for the words “more or less’’ only cover an incidental and insubstantial
inaccuracy. (Sta. Ines Melale Forest Products Corp. vs.
Macaraig, Jr., 299 SCRA 491 [1998].)
In another case, an area of “644 square meters more’’ was held
not a reasonable excess or deficiency, to be deemed included in
the deed of sale relating to a piece of land with an “approximate
area of 240 square meters more or less.’’ A vendee of land when
sold in gross or with the description “more or less’’ with reference
to its area, does not thereby ipso facto take all risk of quantity
in the land for such description or similar words in designating
quantity covers only a reasonable excess or deficiency. (Roble vs.
Arbasa, 152 SCAD 115, 362 SCRA 69 [2001].)
Conflict between area stated and boundaries.
(1) Where boundaries given are sufficiently certain. — The proposition
of law is to the effect that “where it appears that the land is
so described by boundaries as to put its identification beyond
doubt,” an erroneous statement relative to the area of the questioned
parcel may be disregarded because what really defines a
piece of ground is not the area mentioned in its description but
the boundaries therein laid down as enclosing the land and indicating
its limits. (Vda. De Tan vs. Intermediate Apppellate Court,
213 SCRA 95 [1992]; Loyola vs. Bartolome, 39 Phil. 546 [1919].) This
proposition, however, holds true only where the boundaries given
are sufficiently certain, and the identity of the land proved by the
boundaries clearly indicates that an erroneous statement concerning
the area can be disregarded or ignored. (Paterno vs. Salud, 9
SCRA 81 [1963].)
(2) Where boundaries do not identify land or overlapping of boundaries
exists. — The above rule is not applicable where the boundaries
relied upon do not identify the land beyond doubt. (Buiser
vs. Cabrera, 81 Phil. 669 [1948].) In such case, the area stated in
the document should be followed. (Paterno vs. Salud, supra.)
In a case, the deed of sale did not even indicate with particularity
the area of the land covered thereby. The parties merely
pointed at boundaries which were even beyond what could have
266 SALES
been bought by the vendee. An area delimited by boundaries
properly identifies a parcel of land. However, in controversial
cases, where there appeared to be an overlapping of boundaries,
the actual size of the property gains importance. It is well-settled
that anyone who claims that he has a better right to a property
must prove both ownership and identity of the said property.
(Oclarit vs. Court of Appeals, 52 SCAD 337, 238 SCRA 239 [1994].)
(3) Where discrepancy in measurement is so great. — In a case
where petitioner claimed in his application to be entitled for registration
of a parcel of land whose area after the survey turned
out to be 626 hectares while the grant given to him only mentions
92 hectares, the court rejected the claim ruling that “when the land
sought to be registered is almost seven times as much as that described
in the deed, the evidence as to natural boundaries must be
very clear and convincing before that rule (that natural boundaries
will prevail over area) can be applied.” (Pamintuan vs. Insular
Gov‘t., 8 Phil. 512 [1907]; see also Paras vs. Insular Gov‘t., 11 Phil.
378 [1908]; Carillo vs. Insular Gov‘t., 11 Phil. 379 [1908]; Waldorf
vs. Castañeda, 25 Phil. 50 [1913]; Sales vs. Director of Lands, 61
Phil. 759 [1935].)
In another case, the court properly rejected the contention of
the plaintiff that the property sought to be recovered was originally
a portion of a bigger portion of land belonging to him, it
appearing that “it is only on the north and south sides of the property
in question where the natural boundaries are identical because
on the east and west sides there are no natural boundaries.
. . The discrepancy in the measurement . . . is so great that there
could hardly be any room to suppose that a 30-hectare land area
might have been wrongly or inaccurately estimated to be only
1,200 square meters.” (Paterno vs. Salud, supra.)
ART. 1543. The actions arising from articles 1539
and 1542 shall prescribe in six months, counted from
the day of delivery. (1472a)
Prescription of actions.
The actions based on Articles 1539 and 1542 for either rescission
of the contract or proportionate reduction of the price
Art. 1543
267
must be brought within six months counted from the day of delivery.
ART. 1544. If the same thing should have been sold
to different vendees, the ownership shall be transferred
to the person who may have first taken possession
thereof in good faith, if it should be movable
property.
Should it be immovable property, the ownership
shall belong to the person acquiring it who in good
faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall
pertain to the person, who in good faith was first in
the possession; and, in the absence thereof, to the
person who presents the oldest title, provided there
is good faith. (1473)
Rules as to preference of ownership
in case of a double sale.
If the same property is sold by the same vendor to different
vendees, the conflicting rights of said vendees shall be resolved
in accordance with the following rules:
(1) If the property sold is movable, the ownership shall be
acquired by the vendee who first takes possession in good faith
(see Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 861 [1968].);
(2) If the property sold is immovable, the ownership shall
belong, in the order hereunder stated, to:
(a) The vendee who first registers the sale in good faith in
the Registry of Property (Registry of Deeds) has a preferred
right over another vendee who has not registered his title even
if the latter is in actual possession of the immovable property.
More credit is given to registration than to actual possession.
(see Paylago vs. Jarabe, 22 SCRA 1247 [1968]; Beatriz vs.
Cedeña, 4 SCRA 617 [1962]; Carbonell vs. Court of Appeals,
69 SCRA 99 [1976]; Barretto vs. Arevalo, 99 Phil. 771 [1956];
Nuguid vs. Court of Appeals, 171 SCRA 213 [1989]; Tañedo vs.
268 SALES
Court of Appeals, 67 SCAD 57, 252 SCRA 80 [1996]; Balatbat
When a conveyance has been properly recorded, such
record is constructive notice to the whole world of its contents
and all interests, legal and equitable, included therein. Because
of this principle of constructive notice, one who deals with
registered property which is the subject of an annotated levy
or attachment cannot invoke the rights of a purchaser in good
faith. (Biñan Steel Corporation vs. Court of Appeals, 391 SCRA
90 [2002].) However, the mere registration is not enough; good
faith must concur with the registration. To be entitled to priority,
the second purchaser must have also acted in good faith,
without knowledge of the previous alienation by the vendor
to another. (Bautista vs. Court of Appeals, 48 SCAD 629, 230
SCRA 446 [1994].) The defense of indefeasibility of torrens title
does not extend to a transferee who takes the certificate of
title in bad faith with notice of its flaw. (Occeña vs. Esponilla,
431 SCRA 116 [2004].)
The requirement of the law then is two-fold: acquisition
in good faith and registration in good faith. (Gabriel vs.
Mabanta, 399 SCRA 73 [2003]; San Lorenzo Development
Corporation vs. Court of Appeals, 449 SCRA 99 [2005].) The
rule applies to the annotation of an adverse claim in double
sales. (Bucad vs. Court of Appeals, 216 SCRA 423 [1992].)
The governing principle is prius tempore, patior jure (first
in time, stronger in right). Knowledge by the first buyer of the
second sale cannot defeat the first buyer’s right except when
the second first registers in good faith the second sale.
(Olivares vs. Gonzales, 159 SCRA 33 [1988].) Conversely,
knowledge gained by the second buyer of the first sale defeats
his rights even if he is first to register, since such knowledge
taints his registration with bad faith. (Astorga vs. Court of
Appeals, 133 SCRA 748 [1984]; Santiago vs. Court of Appeals,
63 SCAD 636, 247 SCRA 336 [1995].)
(b) In the absence of registration, the vendee who first
takes possession in good faith; and
(c) In the absence of both registration and possession, the
Art. 1544
269
vendee who presents the oldest title (who first bought the
property) in good faith.
Article 1544 has no application to lands not registered with
the Torrens system. If the sale is not registered, it is binding only
as between the seller and the buyer; it does not affect innocent
third persons.
Possession of property sold.
The taking of possession of the property sold may be in any
of the ways provided in Articles 1497 to 1501.
The phrase “who first took possession” is equivalent to tradition,
real or symbolic, such as that which is acquired by the execution
of a public instrument. Thus, after the sale of realty by
means of a public instrument, the vendor, who resells it to another
does not transmit anything to the second vendee, and if the latter,
by virtue of this second sale, takes material possession of the
thing, he does it as mere detainer, and it would be unjust to protect
this detention as against the rights to the thing lawfully acquired
by the first vendee. (Quimson vs. Rosete, 89 Phil. 159 [1950];
Navera vs. Court of Appeals, 184 SCRA 584 [1990].)
Registration of immovable sold.
(1) Sale merely presented for registration. — The mere presentation
to the office of the register of deeds of a document on which
acknowledgment of receipts is written is not equivalent to registration.
Registration in its juridical aspect must be understood as
the entry made in a book or public registry of deeds. (Po Sun Tun
vs. Price Prov. Gov’t. of Leyte, 54 Phil. 192 [1912].)
(2) Sale registered in bad faith. — Article 1544 does not declare
void a deed of sale registered in bad faith. It does not mean, however,
that said contract is not void. Article 1544 specifically provides
who shall be the owner in case of a double sale of an immovable
property. To give full effect to this provision, the status
of the two contracts must be determined and clarified. One contract
must be declared valid so that one vendee may exercise all
the rights of an owner, while the other contract must be declared
void to cut off all rights which may arise from said contract.
(Caram, Jr. vs. Laureta, 102 SCRA 7 [1981].)
270 SALES
Accordingly, where the second purchaser had knowledge of
the other sale, prior to or at the time of the sale to him, his knowledge
taints his purchase with bad faith. The applicable rule in this
case would be that the ownership shall pertain to the person who,
in good faith, first entered into possession of the property or in
the absence of possession, to the person who presents the oldest
title, provided there is good faith. (Gatmaitan vs. Court of Appeals,
200 SCRA 37 [1992]; Berico vs. Court of Appeals, 44 SCAD 84, 225
SCRA 469 [1993].)
(3) Issuance of transfer certificate of title noted/not noted on original
certificate of title. — In a case, it appears that the issuance of a
transfer certificate of title to the first buyers was never noted on
the original certificate of title which was not cancelled at all,
whereas the issuance of a transfer certificate of title to the second
buyers was noted in the original certificate of title which was cancelled
by virtue of said issuance. It was held that the second buyers
acquired ownership over the disputed lot since they were the
first to register in good faith their sale in the registry of property.
(Astorga vs. Court of Appeals, 133 SCRA 748 [1984].)
(4) Immovable registered/not registered. — Article 1544 (2nd and
3rd pars.) covers all kinds of immovables, including land, and
makes no distinction as to whether the immovable is registered
or not. But insofar as registered land is concerned, the rule is in
perfect accord with Section 508 of the Land Registration Law (Act
No. 496.) which provides that no deed, mortgage, lease or other
voluntary instrument, except a will, purporting to convey or affect
registered land shall take effect as a conveyance or bind the
land until its registration. (Revilla vs. Galindez, 107 Phil. 480
[1960].) One who buys from a person who is not the registered
owner of property is not a purchaser in good faith. (Liu vs. Lay,
Jr., 405 SCRA 316 [2003].)
The peculiar force of a title under Act No. 496 is exhibited only
when the purchaser has sold to innocent third parties the land
described in the conveyance. (Medina vs. Imaz and Warner Barnes
Co., 27 Phil. 314 [1914].) With respect to banks, the rule that persons
dealing with registered lands can rely solely on the certifi-
8Now Section 51 of the Property Registration Decree. (Pres. Decree No. 1529.)
Art. 1544
271
cate of title does not apply to banks because their business is one
affected with public interest keeping in trust money belonging to
their depositors. They are expected to exercise greater case and
prudence before entering into a contract involving registered
lands. (Navarro vs. Second Laguna Development Bank, 398 SCRA
227 [2003].)
Note: The defense of indefeasibility of torrens title refers to sale
of lands, and not to sale of properties situated therein. Thus, the
mere fact that the lot where a factory and disputed properties
stand is in a person’s name does not automatically make such
person the owner of everything found therein. (Tsai vs. Court of
(5) Property attached while still registered in the name of judgment
debtor. — A sale of real estate, whether made as a result of a private
transaction or of a foreclosure or execution sale, becomes
legally effective against third persons only from the date of its
registration. Consequently, where the property was actually attached
and levied upon at a time when said properties stood in
the official records of the Registry of Deeds as still owned by and
registered in the name of the judgment debtor, the attachment,
levy and subsequent execution sale made in favor of the judgment
creditor transferred to him all the rights of the judgment debtor
in the said property, unaffected by any prior transfer or
unencumbrance not so recorded therein.
While purchasers at execution sales should bear in mind that
the rule of caveat emptor applies to such sales (see Art. 1566.), that
the sheriff does not warrant the title to real property sold by him
as sheriff, and that it is not incumbent upon him to place the purchaser
in possession of such property, still the rule applies that a
person dealing with registered land is not required to go behind
the register to determine the condition of the property and he is
merely charged with notice of the burdens on the property which
are noted on the face of the register or the certificate of title.
(Campillo vs. Court of Appeals, 129 SCRA 513 [1984].) Accordingly,
in case of a conflict between a vendee and an attaching creditor
who registers the order of attachment and the sale of the property
to him as the highest bidder, the latter acquire a valid title to
the property as against the former who had previously bought
272 SALES
the same property from the registered owner but who failed to
register his deed of sale, but where the attaching creditor has
knowledge of a prior existing interest which is unregistered at a
time he acquired a right to the same land, his knowledge of that
prior unregistered interest has the effect of registration as to him.
(Ruiz, Sr. vs. Court of Appeals, 152 SCAD 86, 362 SCRA 40 [2001].)
(6) Unregistered property sold at execution sale was previously sold
by judgment debtor. — A sale of unregistered land which sale has
not been registered in the office of the register of deeds is valid
and binding as between the parties themselves. (Galasicao vs.
Austria, 97 Phil. 83 [1955].) The rule in Article 1544 applies to lands
covered by Torrens title, where the prior sale is neither recorded
nor known to the execution purchaser prior to the levy.
But where the land is not registered under the Torrens System,
the rule is different. While under Article 1544, registration
in good faith prevails over possession in the event of a double sale
by the vendor of the same piece of land to different vendees, said
article is of no application even if the latter vendee, at a sheriff’s
execution sale which was registered, was ignorant of the prior sale
made by his judgment debtor in favor of another vendee. The
reason is that the purchaser of unregistered land at a sheriff’s
execution sale only steps into the shoes of the judgment debtor,
and merely acquires the latter’s interest in the property sold as of
the time the property was levied upon. This is specifically provided
by Section 35 of Rule 39 of the Rules of Court. (Carumba
vs. Court of Appeals, 31 SCRA 558 [1970]; see Hernandez vs.
Katigbak, 69 Phil. 744 [1940]; Executive Commission vs. Abadilla,
74 Phil. 68 [1943].)
(7) Notice of adverse claim was registered previous to sale to possessor.
— Since the owner’s copy of the certificate of title was not
delivered in due time to the first buyer despite the promise by
the seller (attorney-in-fact) to deliver the same in a few days, the
buyer registered with the Register of Deeds on September 6, 1982
his notice of adverse claim as vendee over the property sold. The
second sale was registered only on November 11, 1982 whereby
a new title was issued in favor of the second buyer. The first buyer
has a superior right to the property in question. Article 1544 is
clear that a prior right is accorded to the vendee who first recorded
Art. 1544
273
his right in good faith over an immovable property. (Valdez vs.
(8) Sale was registered before the execution sale but after its levy.
— The doctrine is that a levy on execution duly registered takes
preference over a prior unregistered sale, and that even if the prior
unregistered sale is subsequently registered before the sale on
execution but after the levy was duly made, the validity of the
execution sale should be maintained because it retroacted to the
date of the levy. This rule applies by analogy as regards encumbrances
made after the registration of the levy on execution. The
reason therefor is that if the rule were otherwise, the preference
enjoyed by the levy on execution in a case would be meaningless
and illusory.
In short, the priority enjoyed by the levy on execution extends
with full force and affect to the buyer at the auction sale conducted
by virtue of such levy. (First Integrated Bonding & Insurance Co.
vs. Court of Appeals, 73 SCAD 731, 261 SCRA 203 [1996]; Biñan
Steel Corporation vs. Court of Appeals, 391 SCRA 90 [2002]; Du
vs. Stronghold Insurance Co., Inc., 432 SCRA 43 [2004].)
Requirement of good faith.
The fundamental premise of the preferential rights established
by Article 1544 is good faith (Bernas vs. Bolo, 81 Phil. 16 [1948];
see Manacop vs. Cansino, 1 SCRA 572 [1961]; Paylago vs. Jarabe,
22 SCRA 247 [1968].), that is to say, ignorance of the rights of the
first vendee. (Gallardo vs. Gallardo, [CA] 46 O.G. 5568.) He is
deemed a possessor in good faith who is not aware that there exists
in his title or mode of acquisition any flaw which invalidates it.
(Art. 526.)
(1) Mere registration of sale not enough. — Good faith is an essential
requisite of registration to acquire new title because “public
records cannot be converted into instruments of fraud and oppression
by one who secures an inscription thereon in bad faith.”
(Leung Yee vs. F.L. Strong Machinery Co., 37 Phil. 644 [1918];
Fernandez vs. Mercader, 43 Phil. 581 [1922]; Cagaoan vs. Cagaoan,
43 Phil. 554 [1922].) Bad faith renders the registration nothing but
an exercise in futility. (Cardente vs. Intermediate Appellate Court,
155 SCRA 685 [1987].)
274 SALES
It does not vest title to an immovable property, it is merely
evidence of such title. (Berico vs. Court of Appeals, 44 SCAD 84,
225 SCRA 469 [1993].) The law will not protect anything done in
bad faith. (Palanca vs. Director of Lands, 43 Phil. 149 [1922].)
It is presumed, however, that the registration of sale was made
in good faith.
(2) Purchase must be for valuable consideration. — And it is not
only required that the purchaser of real property who has registered
the same should have done so in good faith, but also for a
valuable consideration. (Arcenas vs. Del Rosario, 67 Phil. 238
[1939].) Thus, a “purchaser in good faith” is defined as one who
buys property of another, without notice that some other person
has a right to, or interest in, such property and pays a full and
fair price for the same at the time of such purchase, or before he
has notice of the claim or interest of some other person in the property.
(Cui vs. Henson, 57 Phil. 696 [1932]; David vs. Malay, 115
SCAD 820, 318 SCRA 711 [1999]; Tanongon vs. Samson, 167 SCAD
455, 382 SCRA 130 [2002]; Castro vs. Miat, 397 SCRA 271 [2003].)
One cannot close his eyes to facts that should put a reasonable
person on guard and still claim to have acted in good faith. Thus,
a person engaged in business would be wary of buying from a
company that is closing shop because it may be dissipating its
assets to defraud its creditors. (Tanongon vs. Samson, supra.)
(3) Continuation of good faith. — The mere fact that the second
contract of sale was perfected in good faith is not sufficient if,
before title passes, the second vendee acquires knowledge of the
first transaction. The good faith or innocence of the posterior
vendee needs to continue until his contract ripens into ownership
by tradition or registration. (Gallardo vs. Gallardo, supra; Palanca
vs. Director of Lands, 46 Phil. 149, supra.) The second buyer must
show that he acted in good faith throughout (i.e., ignorance of the
first sale and the first buyer’s right) — from the time of acquisition
until the title is transferred to him or registration or, failing
registration, by delivery of possession. (Cruz vs. Cabana, 129
SCRA 656 [1984]; Uraca vs. Court of Appeals, 86 SCAD 734, 278
SCRA 702 [1997]; Bautista vs. Court of Appeals, 118 SCAD 327,
322 SCRA 365 [2000]; Tan vs. Court of Appeals, 369 SCRA 255
[2001]; Consolidated Rural Bank, Inc. vs. Court of Appeals, 448
SCRA 347 [2005].) In other words, where title to the property is
Art. 1544
275
recorded in the Register of Deeds, the requirement of the law, as
mentioned before, is two-fold: acquisition in good faith and recording
in good faith. (Martin vs. Court of Appeals, 358 SCRA 38
[2001].)
(4) Burden of proof. — Good faith is always presumed. It is
upon those who allege the bad faith on the part of the possessor
rests the burden of proof. But the burden of proving the status of
one as a purchaser in good faith and for value lies upon him who
asserts that status where the seller had none to transmit to the
purchaser and the other claimant is himself a purchaser in good
faith from the successor-in-interest of the original title holder. In
discharging that burden, it is not enough to invoke the ordinary
or legal presumption of good faith, i.e., that every one is presumed
to act in good faith. The good faith that is essential here is an integral
part with the very status which must be proved. (Baltazar
vs. Court of Appeals, 168 SCRA 354 [1988]; see Mathay vs. Court
of Appeals, 98 SCAD 489, 295 SCRA 556 [1998]; Aguirre vs. Court
of Appeals, 421 SCRA 310 [2004].) Insinuations and inferences will
not overcome the presumption that a sale was concluded in all
good faith, for value, and without secret reservations. (see Naguit
vs. Deang, [C.A.] No. 6319-R, August 13, 1952.)
In a case, the first buyer failed to prove that the second buyer
knew of the prior sale to the former. Since the second buyer was
considered to have registered his deed of sale in good faith, it was
held that the ownership of the disputed property should belong
to them. (Bucad vs. Court of Appeals, 216 SCRA 423 [1992].)
(5) Good faith/bad faith, a question of intention. — “Good faith
or the want of it is not a visible, tangible fact that can be seen or
touched but rather a state or condition of mind which can only
be judged by actual or fancied tokens or signs.” (Leung Yee vs.
F.L. Strong Machinery Co., 37 Phil. 644 [1918]; Manacop, Jr. vs.
Cansino, 1 SCRA 572 [1961].) It consists in an honest intention to
abstain from taking any unconscientious advantage of another.
It is the opposite of fraud and bad faith and its non-existence may
be established by competent proof. (Cui vs. Henson, 57 Phil. 696
[1932]; Fule vs. De Legare, 7 SCRA 351 [1963]; Lizardo vs. Herrera,
98 Phil. 603 [1956].) Bad faith does not simply connote bad judgment
or negligence; it imputes a dishonest purpose, some moral
276 SALES
obliquity and conscious doing of a wrong. It partakes of the nature
of fraud. (Llorente, Jr. vs. Sandiganbayan, 92 SCAD 418, 287
SCRA 382 [1998].)
In ascertaining the intention by which one is actuated on a
given occasion, the courts are necessarily controlled by the evidence
as to the conduct and outward acts by which alone, the
inward motive may, with safety, be determined. (Dayao vs. Diaz,
91 Phil. 919 [1952].) The purchaser is obligated to make a reasonable
investigation as to the identity of the thing sold and the seller’s
title thereto. He cannot close his eyes to facts which should
put a reasonable man upon his guard and then claim that he acted
in good faith under the belief that there was no defect in the title
of the vendor. (see J.M. Tuazon & Co., Inc. vs. Court of Appeals,
93 SCRA 146 [1979]; Vital vs. Anore, 90 Phil. 855 [1952]; Cruz vs.
Pahati, 98 Phil. 788 [1956]; Conspecto vs. Fruto, 51 Phil. 144 [1927];
Leung Yee vs. F.L. Strong Machinery Co., supra; Republic vs. Court
of Appeals, 148 SCRA 480 [1987]; Cardente vs. Intermediate Appellate
Court, 155 SCRA 685 [1987].)
(6) Property purchased already peaceably possessed by another. —
A purchaser cannot close his eyes to facts which should put a reasonable
man upon his guard, and then claim that he acted in good
faith under the belief that there was no defect in the title of the
vendor. Thus, the vendee who purchased property which was
already peaceably possessed by another, without inquiring into
the status of the property or the vendor’s title thereto, takes the
risks and losses consequential to such failure. He is required to
go beyond the certificate of title and make inquiries concerning
the rights of the actual possessor. (Salvoro vs. Tanega, 87 SCRA
349 [1978]; Lucena vs. Court of Appeals, 111 SCAD 227, 313 SCRA
47 [1999]; see also Caram, Jr. vs. Laureta, 103 SCRA 7 [1981]; Heirs
of T. de Leon Vda. de Roxas vs. Court of Appeals, 422 SCRA 101
[2004].) The absence of such inquiry will remove him from the
realm of bona fide acquisition. (Bautista vs. Court of Appeals, 48
SCAD 629, 230 SCRA 446 [1994]; Heirs of Ramon Durano, Sr. vs.
Sps. Uy, 137 SCAD 111, 344 SCRA 238 [2000].)
A cautious and prudent purchaser would usually make an
ocular inspection of the premises, this being standard practice in
the real estate industry. Should such prospective buyer find out
Art. 1544
277
that the land he intends to buy is being occupied by anybody other
than the seller, who is not in actual possession, it would then be
incumbent upon him to verify the extent of the occupant’s
possessory rights. The failure of a prospective buyer to take such
precautionary steps would mean negligence on his part and
would thereby preclude him from claiming or invoking the rights
of a purchaser in good faith. (Dela Merced vs. GSIS, 365 SCRA 11
[2001]; Heirs of Amado Celestial vs. Heirs of Editha Celestial, 408
SCRA 293 [2003]; Occeña vs. Esponilla, 431 SCRA 116 [2004].)
(7) Purchaser with notice of right of repurchase which has already
elapsed. — Similarly, one who buys property with notice that it is
subject to right of repurchase from his vendor (the vendee a retro
in a previous sale of the property), although such right has already
elapsed and there is no annotation of any repurchase by the vendor
a retro but the title has not yet been cleared of the encumbrance,
without looking into the right of redemption inscribed on the title,
cannot be said to be a purchaser in good faith for he has notice
that some other person could have a right or interest in the
property. (Conde vs. Court of Appeals, 119 SCRA 245 [1982].)
Actual notice is equivalent to, and indeed more binding than,
presumed notice by registration. (Guzman, Bocaling & Co. vs.
Bonnevie, 206 SCRA 668 [1992].)
(8) Adverse claim previously annotated on title of property sold. —
A subsequent sale of land cannot prevail over an annotated adverse
claim which was previously annotated in the certificate of
title of the property. A prior judicial determination of the validity
of the adverse claim before it can flaw the title of subsequent transferees
is not required. A contrary rule contradicts the very essence
of adverse claims. The annotation of an adverse claim is a measure
designed to protect the interest of a person over a piece of real
property, and serves as a notice and warning to third parties dealing
with said property that someone is claiming an interest in the
same or has a better right than the registered owner thereof.
(Gardner vs. Court of Appeals, 131 SCRA 585 [1984].)
It has been held, however, that a buyer cannot be considered
as being aware of a flaw which invalidates his acquisition where
the alleged flaw, the notice of lis pendens, was already being ordered
cancelled at the time of the purchase. (Po Lam vs. Court of
Appeals, 347 SCRA 86 [2000].)
278 SALES
(9) Purchaser examined only the latest certificate of title. — In
order that a purchaser may be considered as a purchaser in good
faith, it is enough that he examines the latest certificate of title.
He is not bound by the original certificate of title but only by the
certificate of title of the person from whom he purchased the property.
(Cangas and Basco vs. Tan Chuan Leung, 110 Phil. 168 [1960].)
Good faith is presumed. (Art. 527.) Under the established principles
of land registration law, the presumption is that the transferee
of registered land is not aware of any defect in the title of
the property he purchased. (Lopez vs. Court of Appeals, 169 SCRA
271 [1989].) He may rely on the Torrens title of the seller. In the
absence of anything to excite suspicion, the buyer is not obligated
to look beyond the certificate to investigate the title of the seller
appearing on the face of the certificate. (Republic vs. Intermediate
Appellate Court, 209 SCRA 90 [1992]; Heirs of Spouses B.
Gavino and J. Euste vs. Court of Appeals, 95 SCAD 358, 291 SCRA
495 [1998]; AFP Mutual Benefit Association, Inc. vs. Court of
Appeals, 122 SCAD 389, 327 SCRA 203 [2000].) Where the seller
is not the registered owner himself, the law requires a higher degree
of prudence, even if the land object of the transaction is registered.
(Bautista vs. Court of Appeals, supra.) The principle under
the torrens system does not apply where the vendee has actual
knowledge of facts and circumstances that would impel a
reasonably cautious man to make an inquiry with respect to the
title in his vendor. (Domingo vs. Rocos, 401 SCRA 197 [2003].)
EXAMPLES:
(1) S sold to B a cash register. The register, however, was
allowed to remain in the hands of S. Subsequently, S sold the
same register to C who bought it in good faith and took possession
thereof. Under the first paragraph of Article 1544, C should
be considered as the owner of the property sold. (see Olsen vs.
Yearsly, 11 Phil. 178 [1908].)
(2) S sold a parcel of land to B. Later, S sold the same land to C
who, in good faith, first registered the deed of sale. In case of
double registration, the title should remain in the name of the
person first securing registration in good faith. (see Legarda
and Prieto vs. Laleeby, 31 Phil. 500 [1915]; Reyes & Nadres vs.
Director of Lands, 50 Phil. 791 [1927]; Granados vs. Monton, 86
Phil. 429 [1950].)
Art. 1544
279
The ownership belongs to C even if B is in actual possession
of the land. (see Paylago vs. Jarabe [1968].) The remedy of
B is to sue S for breach of warranty against eviction. (Art. 1548.)
If C had knowledge of the previous unregistered sale to B,
such knowledge is equivalent to registration. C is not a buyer
in good faith. (Leung Yee vs. F.L. Strong Machinery, 37 Phil.
644 [1918]; Winkleman vs. Veluz, 43 Phil. 604 [1922]; Bernas vs.
Bolo, 81 Phil. 16 [1948]; Cruz vs. Cabana, 129 SCRA 656 [1984].)
To be considered a purchaser in bad faith, it is not required that
C had actual knowledge of the sale to B. It is sufficient that he
has knowledge of facts which should put him upon inquiry
and investigation as to possible defects of title of S and he fails
to make such inquiry and investigation. (Paylago vs. Jarabe,
supra.)
If neither sale was registered and C first took possession of
the land, in good faith, the ownership shall also belong to him.
In the absence of registration and possession by B and C,
the ownership shall pertain to B, his title being older than that
of C.
(3) Suppose in the same example, S sold the parcel of land
to B and then to C, who both acted in good faith. After acquiring
knowledge of the second sale to C, B registered the sale. In
this case, B, as the first vendee, has still a better right. His good
faith when he purchased the land subsisted and continued to
exist when he registered the sale. (Carbonell vs. Court of Appeals,
49 SCRA 99 [1976], infra.)
Assume now that it is C who registered the sale to him, but
after he has acquired knowledge of the previous sale to B. As
second vendee, good faith at the time of purchase is not sufficient.
He must have also acted in good faith in recording his
sale. Here, the rule of caveat emptor applies. (see Art. 1566.)
Hence, the registration by C is considered registration in bad
faith and will not confer upon him any right. (Salvoro vs.
Tañega, 87 SCRA 349 [1978].)
ILLUSTRATIVE CASES:
1. Sale of land to vendee a retro who never took material possession
was executed in a public instrument which was not recorded,
while sale to second buyer who took material possession was made by
means of a private document after lapse of period for repurchase.
280 SALES
Facts: S sold a parcel of land to B under pacto de retro. The
sale was executed in a public instrument but was not recorded
in the registry of deeds. B never took material possession of the
land. The period for repurchase elapsed without S making use
of it. Later on, S sold the same land by means of a private document
to C, who immediately took material possession thereof.
B brought action for recovery of the land.
Issue: Who has a better right to the land, B or C?
Held: B. He was the first to take possession of the land, and
consequently, the sale executed in his favor is preferable. The
possession mentioned in Article 1544 includes not only material
but also the symbolic possession, which is acquired by the
execution of a public instrument. (Sanchez vs. Ramos, 40 Phil.
614 [1919].)
Note: In case of double sale, symbolical tradition is equivalent
to physical possession. (see Bautista vs. Sioson, 39 Phil.
615; Olsen vs. Yearsly, 11 Phil. 187 [1908]; Williams vs.
McMicking, 16 Phil. 412 [1910].) An unrecorded public instrument
transfers symbolic possession to the vendee. (Quimzon
vs. Rosete, 87 Phil. 159 [1950].) However, the execution of a
public instrument does not have the effect of symbolic delivery
where it contains a stipulation that the vendor is to continue in
possession. (Aviles and Villafuerte vs. Arcega and de Leon, 44 Phil.
924 [1923], infra.)
———— ———— ————
2. Second purchaser who first registered sale to him executed a
quitclaim and subsequently “cancelled” it.
Facts: S sold a parcel of land to two persons, first to B, and
then to C, who registered the sale to him ahead of B. Later, C
executed a quitclaim deed relinquishing his rights to the property.
Issue: Does the subsequent “cancelling” of the quitclaim revive
C’s preferential right as against B?
Held: No. C’s preferential right is extinguished and this is
true even if the quitclaim is not recorded in the registry of property.
(Casica vs. Villaseca, [Unrep.], 101 Phil. 1205 [1957].)
———— ———— ————
3. First buyer of land in a private document registered her adverse
claim such after learning of the second sale in a public instru-
Art. 1544
281
ment of same land to another but before registration of the second
sale.
Facts: S executed on January 27 a private memorandum of
sale of a land in favor of B who assumed and paid the mortgage
indebtedness of S with a bank, out of the purchase price.
On February 2, S sold the same property for a higher price to C,
this time executing a formal registerable deed of sale in favor
of the latter. When B saw S on January 31, bringing the formal
deed of sale for S’s signature and the balance of the agreed cash
payment, S told B that he could not proceed anymore with the
sale because had already formalized the sale of the lot to C.
On February 5, B saw C erecting a wall around the lot with
a gate. On the advice of a lawyer, B registered on February 8
her adverse claim as first buyer entitled to the property. C registered
the deed of sale in her favor ten days later on February
12, and, therefore, the transfer certificate of title issued in her
favor carried the duly annotated adverse claim of B as the first
buyer.
Issue: Who is legally entitled to the property, B or C?
Held: B. Under the first and third paragraphs of Article 1544,
good faith must characterize the prior possession. Under the
second paragraph, good faith must characterize the act of anterior
registration. If there is no inscription, what is decisive is
prior possession. If there is inscription, prior registration in good
faith is a precondition to superior title.
When B bought the lot in question from S on January 27,
she was the only buyer thereof and the title of S was still in his
name, solely encumbered by bank mortgage duly annotated
thereon. B was not aware — and she could not have been aware
— of any sale to C as there was no such sale to C. Hence, B’s
prior purchase of the land was made in good faith. Her good
faith subsisted and continued to exist when she recorded her
adverse claim four (4) days prior to registration of C’s deed of
sale. B’s good faith did not cease after S told her on January 31
of his second sale of the same lot to C. Because of that information,
B wanted an audience with C who refused to see her. So B
did the next best thing to protect her right — she registered her
adverse claim. Under the circumstances, this recording of her
adverse claim should be deemed to have been done in good
faith and should emphasize C’s bad faith when she registered
282 SALES
her deed of sale four (4) days later, on February 12. (Carbonell
vs. Court of Appeals, supra.)
Teehankee, J., concurring: Both these registrations were in
good faith.9 As the first registrant, B is legally entitled to the
property. The fact that she registered only an adverse claim is
of no moment. B had to register such claim as first buyer otherwise
the subsequent registration of C’s deed of sale would have
obliterated her legal rights and enable S to achieve his fraudulent
act of selling the property a second time for a better price
in derogation of her prior right thereto. The fact that S informed
B that the former had sold the property to C did not convert B’s
prior registration of her adverse claim into one of bad faith.
The fraudulent act of S of informing B that he has wrongfully
sold his property for a second time cannot work out to his own
advantage and to the detriment of the first buyer (by being considered
as an “automatic registration” of the second sale) and
defeat the first buyer’s right of priority, in time, in right, and in
registration.
Knowledge gained by the first buyer of the second sale cannot
defeat the first buyer’s rights except only as provided in
Article 1544 and that is where the second buyer first registers
in good faith the second sale ahead of the first. Such knowledge
of the first buyer does not bar her from availing of her rights
under the law, among them, to register first her purchase as
against the second buyer. But in converso knowledge gained by
the second buyer of the first sale defeats his rights even if he is
first to register the second sale since such knowledge taints his
prior registration with bad faith.
This is the price exacted by Article 1544 for the second buyer
being able to displace the first buyer; that before the second
buyer can obtain priority over the first, he must show that he
acted in good faith throughout (i.e., in ignorance of the first sale
and of the first buyer’s rights) — from the time of acquisition
until the title is transferred to him by registration or, failing
registration, by delivery of possession. The second buyer must
show continuing good faith and innocence or lack of knowledge
of the first sale until his contract ripens into full ownership
through prior registration as provided by law.
Art. 1544
9The majority opinion ruled that C was a buyer in bad faith in view of other circumstances
indicated in the decision.
283
Muñoz-Palma, J., dissenting: The two purchasers, B and C,
are both purchasers in good faith. That C is likewise a buyer in
good faith is supported by express findings of fact of the trial
court and the Court of Appeals which findings are generally
binding and conclusive. The question to be resolved is who of
the two first registered her purchase or title in good faith. This
requirement of good faith is not only applicable to the second
or subsequent purchaser but to the first as well.
The notation of B’s adverse claim was not accomplished in
good faith as she was cognizant of facts which impaired her
title to the property in question, to wit: that S informed her that
S had already given the lot to C; that B saw C erecting a wall
around the lot with a gate; that she consulted a lawyer who
advised her to present her adverse claim, and that being informed
that the sale in favor of C had not yet been registered,
the said lawyer prepared the notice of adverse claim which was
signed and sworn to and registered by B. The annotation of the
adverse claim did not produce any legal effects as to place her
in a preferential situation to that of C, for the simple reason
that a registration made in bad faith is equivalent to no registration
at all.
The act of registration of C’s deed of sale on February 12
was but a formality, in the sense that it simply formalized what
had already been accomplished earlier, that is, the registration
of C’s purchase as against B when the latter acquired knowledge
of the second sale on January 31. The long-accepted rule
is that knowledge is equivalent to registration. What would be
the purpose of registration other than to give notice to interested
parties and to the whole world of the existence of rights
or liens against the property under question?
———— ———— ————
4. Both first and second sales were made by means of a public
document but second buyer was first to take material possession, because
by virtue of stipulation in the first sale, vendor continued in
possession.
Facts: S sold the same house erected on a leasehold land
to B and subsequently, to C, in public documents. None of
the sales is registered. In the sale to B, it is stipulated that S
shall continue in possession of the house for four (4) months.
284 SALES
C took possession of the property immediately after the
sale to him, B never having taken possession thereof. Both sales
were not registered.
Issue: Who has a better right to the house?
Held: C. The execution of the public document in favor of B
does not have the effect of the symbolic delivery of the house
sold. (see Art. 1498.) In view of the stipulation in his document
of sale, B does not acquire any title to the property, unless he
should have taken possession of the same after the lapse of the
four (4)-month period. This being so, C, the second purchaser,
to whom the property was sold after the said period, acquired
title thereto, either by taking physical possession thereof, or by
virtue of the symbolic delivery which ordinarily takes place
upon the execution of the public document. (Aviles vs. Arcega,
44 Phil. 924 [1923]; Note: This is a 5 to 4 decision.)
———— ———— ————
5. First sale was made before registration of land under the Torrens
System in the name of the seller, while subsequent execution sale
in favor of seller’s judgment creditor took place after registration.
Facts: While his application for the registration of a parcel
of land under the Torrens System was pending, S sold the property
to B who thereafter took possession thereof and made substantial
improvements therein. A month later, an original certificate
of title covering the land was issued in the name of S
free from all liens and encumbrances. The following year, a levy
was made upon the land in favor of C, judgment creditor of S.
S did not exercise his right of redemption.
The corresponding notice of levy, certificate of sale, and the
sheriff’s certificate of final sale in favor of C were duly registered.
C sold all its rights and title to the property to DTC.
Issue: Who has a better right to the land, B or DTC?
Held: B. (1) Judgment creditor merely acquired right and interest
of judgment debtor. — If the property covered by the conflicting
sales were unregistered land, B would have a better right. If
duly registered land, DTC would have a better right because in
case of conveyance of registered real estate, the registration of
the deed of sale is the operative act that gives validity to the
transfer. The present case, however, does not fall within either
situation. Here, the sale in favor of B was executed before the
land was originally registered, while the conflicting sale in favor
of DTC was executed after the same property had been regis-
Art. 1544
285
tered. What should determine the issue are the provisions of
the last paragraph of Section 35, Rule 39 of the Rules of Court
to the effect that upon execution and delivery of the final certificate
of sale in favor of the purchaser of land sold in execution
sale, which purchaser “shall be substituted to and acquire
all the right, title, interest and claim of the judgment debtor to
the property as of the time of the levy.” S had no more interest
and claim on the property at the time of the levy which he had
already conveyed for a considerable time prior thereto to B
“fully and irretrievably.”
(2) Unregistered sale, not cancelled by subsequent issuance of
Torrens title. — The unregistered sale and the consequent conveyance
of title in favor of B could not have been cancelled and
rendered of no effect upon the subsequent issuance of the Torrens
title over the land. “In the inevitable conflict between a right
of ownership already fixed and established under the Civil Law
— which cannot be affected by any subsequent levy or attachment
or execution — and a new law or system which would
make possible the overthrowing of such ownership on admittedly
artificial and technical grounds, the former must be upheld
and applied.” (Dagupan Trading Co. vs. Macam, 14 SCRA
179 [1965].)
———— ———— ————
6. Purchaser bought registered land from seller who is not the
registered owner and could not show any title or capacity to make the
transfer.
Facts: Pursuant to a free patent issued to S in 1956, an original
certificate of title was entered under her name. X entered
the land and cultivated it. In 1962, S sold the land to B. Subsequently,
X sold his rights to Y. When Y bought the land from X,
the latter could not and did not, at any time, produce any title
or application to said land.
Issue: Is Y a purchaser in good faith?
Held: No. Well settled is the rule that, “The law protects to
a greater degree a purchaser who buys from the registered
owner himself. Corollarily, it requires a higher degree of prudence
from one who buys from a person who is not the registered
owner, although the land object of the transaction is registered.
x x x.”
If such degree of prudence is required of a purchaser of
registered land from one who shows a certificate of title but
286 SALES
who appears not to be the registered owner, more so should
the law require the utmost caution from a purchaser of registered
land from one who could not show any title nor any evidence
of his capacity to transfer the land. Failing to exercise
caution of any kind whatsoever, as in the case of Y, is tantamount
to bad faith. (Barrios vs. Court of Appeals, 78 SCRA 477
[1977].)
Other rulings on application of rules.
(1) Contract to sell/promise to sell. — Article 1544 is applicable
not only to a contract of sale but also to a contract to sell because
in the Civil Law, where tradition is necessary for the transfer of
ownership, there is no real distinction between a contract of sale
and a contract to sell. (Alterado vs. Jimenez, [C.A.] 57 O.G. 9213;
see Dela Merced vs. GSIS, 154 SCAD 816, 365 SCRA 1 [2001].) It
has been held, however, that the provision does not apply to a
case where there was a sale to one party of the land itself while
the other contract was a mere promise to sell the land or at most
an actual assignment of the right to repurchase the same land.
There is no double sale of the same land in this case. (Dichoso vs.
Roxas, 11 Phil. 768 [1908]; San Lorenzo Development Corp. vs.
(2) Donation. — It applies to donations. A deed of donation
executed with all the formalities of the law is on the same footing
as a deed of sale in the form of a public instrument. (Cagaoan vs.
Cagaoan, 43 Phil. 554 [1922]; Ortiz vs. Court of Appeals, 97 Phil.
46 [1955]; see Art. 744.)
(3) Subsequent mortgage registered under Act No. 3344. — An
unrecorded sale of a house of a prior date is preferred to a recorded
mortgage of the same house of a later date for the reason that, if
the original owner had parted with his ownership of the thing
sold, then he no longer had the ownership and full disposal of
that thing so as to be able to mortgage it. The registration of a
mortgage under Act No. 3344 is without prejudice to the better
right of third parties. (Lanuza vs. De Leon, 20 SCRA 361 [1967].)
(4) Subsequent mortgage of land registered under the torrens system,
registered by mortgagee. — In a case, Z, after selling his land to
M (under a contract to sell) which sale was not registered, mort-
Art. 1544
287
gaged the same property to GSIS which registered the mortgage
and acquired the property as the highest bidder in the extrajudicial
foreclosure sale. The registered right of GSIS as mortgagee of
the property was held inferior to the unregistered right of M, the
previous buyer, the unrecorded sale between M as the vendee,
and Z, the original owner, is preferred for the reason that if Z had
parted with his ownership of the land sold, then he no longer had
ownership and free disposal of the same so as to be able to mortgage
it.10 (Dela Merced vs. GSIS, supra.)
(5) Sale of unregistered land. — A bona fide purchaser of a registered
land at an execution sale acquires a good title as against a
prior transferee, if such transfer was unrecorded. However, if the
land is unregistered, a different rule applies. Under Act No. 3344,
registration of documents affecting unregistered land is “without
prejudice to a third party with a better right.” The quoted phrase
has been held to mean that the mere registration of a sale in one’s
favor does not give him any right over the land if the vendor was
not anymore the owner of the land, having previously sold the
same to somebody else, even if the earlier sale was unrecorded.
Article 1544 has no application to land not registered under the
land registration law. (Pres. Decree No. 1529, formerly Act No.
496.) Thus, it cannot be invoked to benefit the purchaser at the
execution sale, though the latter was a buyer in good faith and
even if the second sale was registered. (Radiowealth Finance
Company vs. Palileo, 197 SCRA 245 [1991]; Carumba vs. Court of
Appeals, 31 SCRA 558 [1970].)
10“Respondents cannot even assert that as mortgagee of land registered under the
Torrens System, GSIS was not required to do more than rely upon the certificate of title.
As a general rule, where there is nothing on the certificate of title to indicate any cloud
or vice in the ownership of the property, or any encumbrance thereon, the purchaser is
not required to explore further than what the Torrens Title upon its face indicates in
quest for any hidden defect or inchoate right that may subsequently defeat his right
thereto. This rule, however, admits of an exception as where the purchaser or mortgagee
has knowledge of a defect or lack of title in the vendor, or that he was aware of
sufficient facts to induce a reasonably prudent man to inquire into the status of the
property in litigation. (Ibid., citing State Investment House, Inc. vs. Court of Appeals,
254 SCRA 368 [1996].) When the purchaser or mortgagee is a bank or financing institution,
the general rule that a purchaser or mortgagee of land is not required to look further
than what appears on the face of the title does not apply. (Sunshine Finance and
Investment, Corp. vs. Intermediate Appellate Court, 203 SCRA 210 [1991]; Philippine
National Bank vs. Office of the President, 252 SCRA 52 [1996].)
288 SALES
Registration, however, by the first buyer under Act No. 3344
can have the effect of constructive notice to the second buyer that
can defeat his right as such buyer in good faith (see Arts. 708-709;
Revilla vs. Galindez, 107 Phil. 480 [1960]; Taguba vs. Peralta, 132
SCRA 700 [1984]; Santiago vs. Court of Appeals, 63 SCAD 636,
247 SCRA 336 [1995], citing Vitug, supra.) On account of the registration
under Act No. 3344 by the first buyer, necessarily there
is absent good faith in the subsequent registration of the second
sale by the second buyer for said registration has the effect of
constructive notice to the second buyer that can defeat his right
as such buyer. (Bayoca vs. Nogales, 340 SCRA 154 [2000].)
If the property in dispute is already registered under the Torrens
system, the registration of the sale under Act No. 3344 is not
effective for purposes of Article 1544. (Abrigo vs. De Vera, 432
SCRA 544 [2004].)
(6) Sale to different vendees. — Clearly, Article 1544 applies to
a situation where the same property is sold to different vendees.
There must be at least two (2) deeds of sale over the same property.
It is not applicable where there is only one sale. (Remalente
vs. Tibe, 158 SCRA 138 [1988].) Thus, in a case, although the deed
of extra-judicial partition which merely mentioned the alleged sale
in favor of petitioners of the subject property was registered while
the pacto de retro sale in favor of private respondents was not, but
the alleged deed of sale was never offered in evidence by the petitioners,
it was held that such registration did not operate as a
registration of the deed of sale because insofar as third persons
are concerned, what could validly transfer or convey the vendee’s
right to the property to petitioners was the deed of sale and not
the deed of extra-judicial partition which only mentioned the
former. (Vda. de Alcantara vs. Court of Appeals, 67 SCAD 347,
252 SCRA 457 [1996].) There is, of course, no double sale where
after the sale of the property in favor of a person, the vendor did
not anymore execute another sale over the same property in favor
of another. (Land Authority vs. De Leon, 120 SCRA 128 [1983].)
Article 1544 cannot be involved when two different contracts
of sale are made to two different persons, one of them not being
the owner of the property sold, and even if the sale was made by
the same person, if the second sale was made when such person
Art. 1544
289
was no longer the owner of the property. (Consolidated Rural
Bank, Inc. vs. Court of Appeals, 449 SCRA 347 [2005].)
(7) Pacto de retro sale. — It is not applicable to a case which
involves an earlier pacto de retro sale of an unregistered land and
the subsequent donation thereof by the vendor a retro to another
who, in turn, sold it to a third party while the property was still
in the possession of the vendee a retro who had already acquired
title before the donation because of the failure of the vendor a retro
to repurchase the same. There being no title to the property which
the vendor a retro could convey to the supposed donee, since he
was no longer the owner thereof, no title could be conveyed by
the donee by the sale of the property. (De Guzman, Jr. vs. Court
of Appeals, 156 SCRA 701 [1987].)
(8) Contract of sale fictitious or forged, or seller without right to
sell. — It does not apply if the contract of sale first registered is
fictitious or forged or if the vendor is not the owner of the property
sold and had no right to sell the same. (see Espiritu vs. Valerio,
9 SCRA 761 [1963]; Cruzado vs. Bustos & Escolar, 34 Phil. 17
[1917].)
But a forged deed of sale of registered land can legally be the
root of a valid title when an innocent purchaser for value intervenes.
A deed of sale executed by an impostor without authority
of the owner of the land sold is a nullity, and registration will not
validate what otherwise is an invalid document. However, the
certificate of title was already transferred from the name of the
true owner to the forger, and, while it remains that way, the land
is subsequently sold to an innocent purchaser, the vendee has the
right to rely upon what appears in the certificate and, in the absence
of anything to excite suspicion, is under no obligation to
look beyond the certificate and investigate the title of the vendor
appearing on the face of said certificate. The remedy of the true
owner is to bring an action for damages against the one who
caused or employed the fraud and if the latter is insolvent, an
action against the Treasurer of the Philippines may be filed for
recovery of damages against the Assurance Fund. (Tenio-
Obsequio vs. Court of Appeals, 49 SCAD 68, 230 SCRA 550 [1994].)
(9) Sale of property to one party and assignment of right to the property
to another. — The provisions of paragraph 3, Article 1544 do
290 SALES
not apply to a case where the sale in favor of one party was the
property itself, while the transaction in favor of another was a mere
promise to assign or, at most, an actual assignment of the right to
repurchase the same property. (Dichoso vs. Roxas, 5 SCRA 781
[1962].)
(10) Sale of property subject of contract to sell/conditional sale to a
third person. — In a contract to sell, there being no previous sale
of the property, a third person buying such property despite the
fulfillment of the suspensive condition such as the full payment
of the purchase price, for instance, cannot be deemed a buyer in
bad faith and the prospective buyer cannot seek the relief of reconveyance
of the property. There is no double sale in such case.
Title to the property will transfer to the buyer after registration
because there is no defect in the owner-seller’s title per se, but the
latter, of course, may be sued for damages by the intending buyer.
In a conditional contract of sale, however, upon the fulfillment
of the suspensive condition, the sale becomes absolute and this
will definitely affect the seller’s title thereto. In fact, if there had
been previous delivery of the subject property, the seller’s ownership
or title to the property is automatically transferred to the
buyer such that, the seller will no longer have any title to transfer
to any third person. Applying Article 1544 of the Civil Code, such
second buyer of the property who may have had actual or constructive
knowledge of such defect in the seller’s title, or at least
was charged with the obligation to discover such defect, cannot
be a registrant in good faith. Such second buyer cannot defeat the
first buyer’s title. In case a title is issued to the second buyer, the
first buyer may seek reconveyance of the property subject of the
sale. (Coronel vs. Court of Appeals, 75 SCAD 141, 263 SCRA 15
[1996].)
— oOo —
Art. 1544
291
SECTION 3. — Conditions and Warranties
ART. 1545. Where the obligation of either party to
a contract of sale is subject to any condition which is
not performed, such party may refuse to proceed with
the contract or he may waive performance of the condition.
If the other party has promised that the condition
should happen or be performed, such first mentioned
party may also treat the non-performance of
the condition as a breach of warranty.
Where the ownership in the thing has not passed,
the buyer may treat the fulfillment by the seller of his
obligation to deliver the same as described and as
warranted expressly or by implication in the contract
of sale as a condition of the obligation of the buyer to
perform his promise to accept and pay for the thing.
(n)
Meaning of condition.
A condition, as used in Article 1545, means an uncertain event
or contingency on the happening of which the obligation (or right)
of the contract depends. In such a case, the obligation of the contract
does not attach until the condition is performed. (see Art.
1462, par. 2.)
(1) The term, in the context of a perfected contract of sale, pertains,
in reality, to the compliance by one party of an undertaking,
the fulfillment of which would beckon, in turn, the
demandability of the reciprocal prestation of the other party.
(Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223 [1995].)
291
292 SALES
(2) The term is not used in the sense of a “promise” with the
possible exception of the buyer’s promise to accept and pay for
the thing sold which is conditioned on the seller’s performance
of his promise to deliver the thing as described and warranted.
(Art. 1545, par. 2.)
Effect of non-fulfillment of condition.
A contract of sale may be absolute or conditional. (Art. 1458.)
(1) If the obligation1 of either party is subject to any condition
and such condition is not fulfilled, such party may either:
(a) refuse to proceed with the contract; or
(b) proceed with the contract, waiving the performance of
the condition.
(2) If the condition is in the nature of a promise that it should
happen, the non-performance of such condition may be treated
by the other party as a breach of warranty. (see Art. 1546.)
EXAMPLES:
(1) B (buyer) entered into a contract with S for the purchase
of certain machinery. The arrival of the goods to be
shipped from Japan is made a condition of the bargain, there
being no promise by S that the goods will arrive. If the machinery
does not arrive, S is not guilty of breach of contract.
But if S promises or warrants that the machinery will be
shipped or that it was already on its way, the non-arrival con-
1A distinction must be made between a condition imposed on the perfection of a
contract and a condition imposed merely on the performance of an obligation. The failure
to comply with the first condition would prevent the juridical relation itself from
coming into existence, while failure to comply with the second merely gives the option
either to refuse to proceed with the sale or to waive the condition. (Romero vs. Court of
Appeals, 65 SCAD 621, 250 SCRA 223 [1995]; Lim vs. Court of Appeals, 75 SCAD 574,
263 SCRA 560 [1996]; Babasa vs. Court of Appeals, 94 SCAD 679, 290 SCRA 532 [1998];
see Art. 1458.)
It has been held that a subdivision developer can rightly seek to ensure that the
property continues to meet the conditions and requirements, like building specifications
and easement provisions stipulated in, and made part of the individual contracts
which its buyers. As developer of the property, it has its own agreed undertakings in
favor of the buyers which could well survive the transfer of ownerships and provide it
with such genuine stake in the controversy as would sufficiently clothe it with personality.
(Fajardo, Jr. vs. Freedom to Build, Inc., 347 SCRA 474 [2000].)
Art. 1545
293
stitutes a breach of contract. B is entitled to claim damages. (see
McCullough vs. Berger, 43 Phil. 828 [1922]; Soler vs. Chesley,
43 Phil. 529 [1922].)
(2) S promised to sell his parcel of land to B, should S win
a case pending in the Supreme Court. S lost the case. S may
either refuse to sell the parcel of land or he may waive the performance
of the condition and sell the parcel of land.
(3) S sold to B certain subdivision lots, with S promising
to construct the necessary roads that would serve as outlets for
entrance and egress to and from the lots in accordance with the
requirements of existing laws and regulations. B may treat the
non-performance of S’s promise as a breach of warranty. It is
the seller’s duty to deliver the thing sold in a condition suitable
for its enjoyment by the buyer for the purposes contemplated.
In this case, proper access to his residence is essential to
the enjoyment by B of the lots purchased. (see Limus vs. De los
Santos, 8 SCRA 798 [1963].)
(4) S agrees to sell to B a parcel of land, subject to the condition
that the balance of the purchase price shall be paid by B
10 days after the removal of all squatters from the property by S
within 45 days after the signing of the contract. If after 45 days
from the signing of the contract, S shall not be able to remove
the squatters, the down payment made by B shall be returned
by S.
May S demand the rescission of the contract for the sale of
the land for his own failure to have the squatters evicted within
the stipulated period?
No. The ejectment of the squatters is a condition, the operative
act which sets into motion the period of compliance by B
of his own obligation. S’s failure to comply with the condition
does not result in the failure of the contract; it only gives B the
option either to refuse to proceed with the agreement or waive
that condition. This option clearly belongs to B and not to S
who is not the injured party.2
It would be the height of inequity for S to invoke the continued
occupation by the squatters of the property as a justification
to ignore his obligation to evict them. The performance
of his obligation should not be made subject to the will and
2The right of a party to rescind an obligation under Article 1191 of the Civil Code is
predicated on the non-compliance by the other party with what is incumbent upon him
that violates the reciprocity between them.
Conditions and Warranties
294 SALES
caprices of the occupants. (see Romero vs. Court of Appeals, 65
SCAD 621, 250 SCRA 223 [1995]; Lim vs. Court of Appeals, 75
SCAD 574, 263 SCRA 560 [1996]; Adalin vs. Court of Appeals,
88 SCAD 55, 280 SCRA 536 [1997].)
ART. 1546. Any affirmation of fact or any promise
by the seller relating to the thing is an express warranty
if the natural tendency of such affirmation or
promise is to induce the buyer to purchase the same,
and if the buyer purchases the thing relying thereon.
No affirmation of the value of the thing, nor any statement
purporting to be a statement of the seller’s opinion
only, shall be construed as a warranty, unless the
seller made such affirmation or statement as an expert
and it was relied upon by the buyer. (n)
Meaning of warranty.
A warranty is a statement or representation made by the seller
of goods, contemporaneously and as a part of the contract of sale,
having reference to the character, quality, or title of the goods, and
by which he promises or undertakes to insure that certain facts
are or shall be as he then represents them. (see Black L.D. vs. Estes,
122 Ga. 807.)
Terminology used by parties not controlling.
It is not necessary that the word “warranty” or “warrant” be
used by the seller to constitute a warranty. Any word is sufficient
to show the intention of the parties to consider the representation
or promise as an express warranty; and the fact that a stipulation
in the contract of sale is specially called a “warranty” does not of
itself establish that the agreement thus referred to is a warranty.
Kinds of warranty.
Warranties by the seller may be express, as in the above article,
or implied, as in Article 1547.
The seller is liable for his express warranties (Art. 1546.) and
for the implied warranties of title (Art. 1547.), absence of hidden
defects (Ibid.), fitness or merchantability (Art. 1562.), description
(Arts. 1481, 1562.), and sample. (Arts. 1481, 1565.)
Art. 1546
295
Meaning of express warranty.
An express warranty is any affirmation of fact or any promise
by the seller relating to the thing, the natural tendency of which
is to induce the buyer to purchase the thing and the buyer thus
induced, does purchase the same.
Effect of express warranty.
Under the definition, statements not only relating to quality
or title of the thing but relating to other incidents to it may be
warranties.
A warranty being a part of the contract of sale, it is immaterial
whether the seller did not know that it was true or false. No
intent is necessary to make the seller liable for his warranty. It is
the natural consequences of what the seller says and the reliance
thereon by the buyer that alone are important. (see 1 Williston,
op. cit., pp. 498-501.) Accordingly, where the seller (importer-assembler)
expressly intimated to the buyer that the taxes and customs
duties on two (2) assembled trucks were already paid, such
representation shall be considered, as a seller’s warranty under
Article 1546 which covers any affirmation of fact or any promise
by the seller which induces the buyer to purchase the object of
sale and actually purchases it relying on the affirmation or promise.
(Harrison Motors Corporation vs. Navarro, 125 SCAD 673,
331 SCRA 202 [2000].)
It has been held that where there is no dispute that the defendant
(seller), in bad faith and with gross negligence, infringed
the express warranty made by it to the general public with respect
to its products sold to and installed in the house of the plaintiff
(buyer), who relied on the warranty, the identity of the individual
who actually dealt with the defendant and asked the latter to make
the delivery and installation by its workers is pointless. (Del
Rosario vs. Court of Appeals, 78 SCAD 542, 267 SCRA 158 [1997].)
EXAMPLE:
S sells to B an automobile for P90,000.00, telling the latter
that it is a 1977 model and that it is worth about P100,000.00. B
sees the automobile and after a test run, expresses satisfaction
296 SALES
over its condition. The automobile is really of 1976 vintage and
is only worth about P80,000.00.
In this case, B has no right of action for breach of warranty
because the inducing cause of the purchase is not the erroneous
statement as to its model and value, but B’s reliance on its
appearance and demonstrated condition. But the statement that
the automobile is in excellent running condition constitutes a
violation of warranty if such is not the fact.
Effect of expression of opinion.
A mere expression of opinion, no matter how positively asserted,
does not import a warranty unless the seller is an expert
and his opinion was relied upon by the buyer. Thus, assertions
that things are fine or valuable or better than products of rival
manufacturers are in their nature so dependent on individual
opinion that no matter how positive the seller’s assertion may be,
they are not held to create a warranty.
The tendency of the courts, however, is in the direction of
greater strictness against the seller’s untruthful puffing of his
wares. (see Ibid., pp. 517-518.)
The following provisions of law are pertinent:
“The usual exaggerations in trade, when the other party
had an opportunity to know the facts, are not in themselves
fraudulent.” (Art. 1340.)
“A mere expression of an opinion does not signify fraud
unless made by an expert and the other party has relied on the
former’s special knowledge.” (Art. 1341.)
“Misrepresentation made in good faith is not fraudulent
but may constitute error.” (Art. 1343.)
EXAMPLES:
(1) Expressions or advertisements like: “the cigarette that
will give you utmost smoking pleasure”, “the most effective
pain reliever”; “you like it, it likes you”, etc. are mere “sales
talk” or “seller’s puffing.”
They are not construed as warranties because the buyer
knows that they are mere exaggerations.
Art. 1546
297
(2) S, a farmer, found a ring which he sold to B, honestly
believing and representing to B that it was a diamond ring. It
turned out that the ring was ordinary glass.
Here, S merely expressed an opinion. Since the misrepresentation
was made in good faith, it is considered a mere error
or mistake. But if S is an expert, and his statement was relied
upon by B, the same shall be construed as a warranty even if
expressed in the form of an opinion.
ILLUSTRATIVE CASES:
1. The number of coconut trees is less than that stated in the
contract but it appeared that buyer inspected land and estimated
number of trees thereon.
Facts: B exchanged his property in Pasay City with S’s coconut
plantation. In the deed of exchange, S stated that there
were no less than 6,000 coconut trees in his plantation.
Issue: Is S liable for breach of warranty?
Held: No. Where it does not appear that defendant (S) deliberately
violated the truth when he stated his belief that there
were no less than 6,000 coconut trees on the land, and it appears
that the plaintiff (B) inspected said land and estimated
the number of trees thereon before the exchange, no action will
lie for the rescission of the contract or for damages. (Gochingco
vs. Dean, 47 Phil. 687 [1925].)
———— ———— ————
2. Sugar cane crops sold yielded less than that represented but
seller made no guarantee of yield.
Facts: S sold his sugar cane crop to B for P12,000.00. Previous
to the sale, S represented that the crop would yield 3,000
piculs. It yielded only 2,017 piculs instead. It was shown, however,
that S did not and in fact refused to guarantee the quantity
of sugar which would be produced.
S bought action for the balance of the purchase price.
Issue: Is S guilty of misrepresentation?
Held: No. The law allows considerable latitude to seller’s
statements, or dealer’s talk; and experience teaches that it is
exceedingly risky to accept it at its face value. The refusal of
the seller to warrant his estimate indicated that it was put forth
298 SALES
as a mere opinion. It is elementary that a misrepresentation upon
a mere matter of opinion is not an actionable deceit, nor is it a
sufficient ground for avoiding a contract as fraudulent. (Songco
vs. Sellner, 37 Phil. 254 [1917].)
ART. 1547. In a contract of a sale, unless a contrary
intention appears, there is:
(1) An implied warranty on the part of the seller
that he has a right to sell the thing at the time when
the ownership is to pass, and that the buyer shall from
that time have and enjoy the legal and peaceful possession
of the thing;
(2) An implied warranty that the thing shall be free
from any hidden faults or defects, or any charge or
encumbrance not declared or known to the buyer.
This article shall not, however, be held to render
liable a sheriff, auctioneer, mortgagee, pledgee, or
other person professing to sell by virtue of authority
in fact or law, for the sale of a thing in which a third
person has a legal or equitable interest. (n)
Meaning of implied warranty.
An implied warranty is that which the law derives by implication
or inference from the nature of the transaction or the relative
situation or circumstances of the parties (Black L.D. vs. Estes, 122
Ga. 807.), irrespective of any intention of the seller to create it.
Implied warranties in sale.
The term implied warranty is reserved for cases where the law
attaches an obligation to the seller which is not expressed in any
words. (1 Williston, op. cit., p. 498.) Implied warranties under
Articles 1547 and 1562 are:
(1) Implied warranty as to seller’s title. — that the seller guarantees
that he has a right to sell the thing sold and to transfer ownership
to the buyer who shall not be disturbed in his legal and
peaceful possession thereof (Art. 1548.);
Art. 1547
299
(2) Implied warranty against hidden defects or unknown encumbrance.
— that the seller guarantees that the thing sold is free from
any hidden faults or defects or any charge or encumbrance not
declared or known to the buyer (Art. 1561.); and
(3) Implied warranty as to fitness or merchantability. — that the
seller guarantees that the thing sold is reasonably fit for the known
particular purpose for which it was acquired by the buyer or,
where it was bought by description, that it is of merchantable
quality. (Art. 1562.)
The right of the seller to sell the thing need not reside in him
at the time the contract is perfected. It is sufficient that the vendor
has a right “at the time when the ownership is to pass.” (Art.
1547[1].) This complements Article 1459 that “the vendor must
have a right to transfer the ownership thereof at the time it is
delivered” and Article 1562 which allows the sale of “future
goods” or of goods the acquisition of which depends upon a contingency.
ILLUSTRATIVE CASE:
Seller of agricultural land warranted as “free from all liens and
encumbrances” was occupied by a tenant.
Facts: G sold a parcel of agricultural land to ID, Inc. warranting
that the land was “free from all liens and encumbrances.”
ID, Inc., in turn, sold the land to AA, Inc. to which
ID, Inc. warranted that the land was “free from all liens, adverse
claims, encumbrances, claims of any tenant and/or agricultural
workers, whether arising as compensation for disturbance
or from improvements.” When G bought the land from
the original owner, it was forced to stop cultivating the land
because of the bulldozing caused by AA, Inc.
G filed a complaint against ID, Inc., AA, Inc. for disturbance
compensation under the land reform law. ID, Inc. in return, filed
a cross-claim against G in case of a judgment adverse to it while
AA, Inc. filed a cross-claim against ID, Inc.
Issue: Did G violate his warranty to ID, Inc.?
Held: No. The term “hidden faults or defects” in Article 1547
pertains only to those that make the object of the sale unfit for
the use for which it was intended at the time of the sale. Since
300 SALES
the object of the sale by G to ID, Inc. is an agricultural land, the
existing tenancy relationship with respect to the land cannot
be a “hidden fault or defect.” It is not a lien or encumbrance
that the vendor warranted did not exist at the time of the sale.
It is a relationship which any buyer of agricultural land should
reasonably expect to be present and which it is his duty to specifically
look into and provide for. AA, Inc. saw to it that the
warranty was specific when it, in turn, purchased the land. The
difference in the phraseology of the two warranties is not an
idle one. (Investment & Development, Inc. vs. Court of Appeals,
162 SCRA 636 [1988].)
Nature of implied warranty.
An implied warranty is a natural, not an essential, element of
a contract, because it is presumed to exist even though nothing
has been said in the contract on the subject. It is, therefore, deemed
as incorporated in the contract of sale.
An implied warranty may, however, be waived or modified
by express stipulation. (see Arts. 1548, 1566.)
When implied warranty not applicable.
(1) “As is and where is” sale. — The phrase “as is and where
is” (which has been adopted from dispositions of army surplus
property) means nothing more than that the vendor makes no
warranty as to the quality or workable condition of the goods, and
that the vendee takes them in the conditions in which that they
are found and from the place where they are located. It does not
extend to liens or encumbrances unknown to the vendee and
could not be disclosed by a physical examination of the goods
sold. (Monfort vs. Willis, [C.A.] No. 6963-R, Oct. 15, 1951.)
The term “as is” in public auction of (imported) goods refers
to the physical condition of the merchandise and not to the legal
situation in which it was at the time of the sale. It has no bearing
at all on the obligation of the seller (Bureau of Customs) under
Article 1495 “to transfer the ownership and deliver, as well as
warrant the thing which is the object of sale.” This warranty is as
to the right to sell and capacity to deliver. (Auyong Hian vs. Court
of Tax Appeals, 109 SCRA 470 [1981].)
Art. 1547
301
(2) Sale of second-hand articles. — There is no implied warranty
as to the condition, adaptation, fitness or suitability for the purpose
for which made, or the quality of an article sold as and for a
second-hand article. But such articles might be sold under such
circumstances as to raise an implied warranty. A certification issued
by the vendor that a second-hand machine was in A-1 condition
is an express warranty binding on the vendor. (Moles vs.
(3) Sale by virtue of authority in fact or law. — No warranty of
title is implied in a sale by one not professing to be the owner.
Accordingly, the rule on implied warranty does not apply to a
sheriff, auctioneer, mortgagee, pledgee or other person who sells
by virtue of authority in fact or law. (see Art. 1570.) In other words,
they are not liable to a person with a legal or equitable interest in
the thing sold. (Art. 1547, par. 2.) They do not warrant the title of
the person who is supposed to own the thing sold. (see Art. 1552.)
The risk of defective title here is on the purchaser, the circumstances
surrounding such sales being sufficient to put him on
notice as to interests of third persons in the thing sold. (Babb &
Martin, op. cit., p. 94.) The persons enumerated are, however, liable for
actual representations, fraud or negligence in the exercise of their duties.
(1 Williston, op. cit., p. 567.)
(a) The purchaser of a property sold at public auction for
tax delinquency takes all the chances. There is no warranty on
the part of the state. (Government vs. Adriano, 41 Phil. 112
[1920].) The purchaser of real estate at a tax sale obtains only
such title as that held by the taxpayer. (Serfino vs. Court of
Appeals, 154 SCRA 19 [1987].)
(b) The rule of caveat emptor (buyer beware) applies to execution
sales. (see Art. 1570.) The sheriff does not guarantee
the title to real property sold by him as sheriff and it is not
incumbent upon him to place the purchaser in possession of
such property. (Pabico vs. Ong Pauco, 43 Phil. 572 [1922]; Juan
Lim vs. Laag, 51 Phil. 930 [1928].) It is elementary that a purchaser
at a sheriff’s sale acquires no better title or greater right
than the judgment debtor has. (Villegas vs. Tan, 57 Phil. 656
[1932]; Laxamana vs. Carlos, 57 Phil. 722 [1932]; Ruiz vs.
Fieldman’s Insurance Co., 9 C.A. Rep. 2d, 105 [1966].)
302 SALES
ILLUSTRATIVE CASE:
Lessor who, by virtue of stipulation in a contract of lease with
lessee, acquired ownership over jalousies sold on credit and delivered
to buyer (lessee) by seller, seeks nullification of sheriff’s sale of said
items levied upon by seller who was the highest bidder.
Facts: P leased to B a building with a stipulation in the lease
contract that all permanent improvements made by B on the
leased premises shall belong to P and as part of the consideration
of the monthly rental. Subsequently, B purchased on credit
from S glass and wooden jalousies which were delivered and
installed in the leased premises by S, replacing the existing windows.
For failure of B to pay for the items purchased, the same
was levied upon and sold at public auction with S as the highest
bidder. P filed an action to nullify the sheriff’s sale.
Issue: Will the action prosper?
Held: Yes. When the items in question were delivered and
installed in the leased premises, B became the owner thereof
even if the purchase price has been made on credit (see Arts.
1477, 1496, 1497.), and by virtue of the lease contract when levy
was made, B, the judgment debtor, was no longer the owner
thereof. The power of the court in execution of judgment extends
only to properties unquestionably belonging to the judgment
debtor only, and the purchaser acquires only the right as
the debtor has at the time of the auction sale. (Sampaguita Pictures,
Inc. vs. Jalwindor Manufactures, Inc., 93 SCRA 419 [1979].)
SUBSECTION 1. — Warranty in Case of Eviction
ART. 1548. Eviction shall take place whenever by
a final judgment based on a right prior to the sale or
an act imputable to the vendor, the vendee is deprived
of the whole or of a part of the thing purchased.
The vendor shall answer for the eviction even
though nothing has been said in the contract on the
subject.
The contracting parties, however, may increase,
diminish, or suppress this legal obligation of the vendor.
(1475a)
Art. 1548
303
Meaning of eviction.
Eviction may be defined as the judicial process, whereby the
vendee is deprived of the whole or part of the thing purchased
by virtue of a final judgment based on a right prior to the sale or
an act imputable to the vendor.
Essential elements of warranty
against eviction.
The essential elements are:
(1) The vendee is deprived in whole or in part of the thing
purchased;
(2) He is so deprived by virtue of a final judgment (Art. 1557.);
(3) The judgment is based on a right prior to the sale or an
act imputable to the vendor;
(4) The vendor was summoned in the suit for eviction at the
instance of the vendee (Art. 1558.); and
(5) There is no waiver on the part of the vendee.
EXAMPLES:
(1) S sells a parcel of land to B. Subsequently, C files an
action for the recovery of possession, claiming that he is the
owner of the land. At the instance of B, S was summoned to
defend his title. The court renders final judgment, declaring
that C has a better right. Accordingly, B is evicted.
In this case, S is liable to B for failure to comply with his
warranty against eviction. Here, the judgment is based on a
right of a third person prior to the sale.
(2) In the same example, suppose S was really the owner
of the parcel of land. However, B did not have the sale registered.
Immediately, S sold the same land to C who, in good
faith, registered the sale.
Here, the right upon which C based his claim is posterior
to the sale. Nevertheless, B can sue S for damages because of
the breach of warranty against eviction, the act giving rise to
C’s right being imputable to the vendor.
304 SALES
Trespass contemplated by warranty
against eviction.
Mere trespass in fact does not give rise to the application of the
doctrine of eviction. (see Art. 1590.) In such case, the vendee has
a direct action against the trespasser in the same way as the lessee
has such right. (Art. 1664.)
The disturbance referred to in the case of eviction is a disturbance
in law which requires that a person go to the courts of justice
claiming the thing sold, or part thereof, and invoking reasons.
If final judgment is rendered depriving the vendee of the thing
sold or any part thereof, the doctrine of eviction becomes applicable.
(10 Manresa 184.)
Vendor’s liability is waivable.
Warranty is not an essential element of a contract of sale and
may, therefore, be increased, diminished, or suppressed by agreement
of the parties. (Art. 1548, par. 3.)
Any stipulation, however, exempting the vendor from the
obligation to answer for eviction shall be void if he acted in bad
faith. (Art. 1553.)
ART. 1549. The vendee need not appeal from the
decision in order that the vendor may become liable
for eviction.
Vendee has no duty to appeal
from judgment.
The vendee’s right against the vendor is not lost because he,
the vendee, did not appeal. With a judgment becoming final
whatever be the cause of finality, the requirement of the law is
deemed satisfied.
Furthermore, the vendor, having been notified of the action,
could have very well followed up the case and made use of all
possible remedies. If he did not do that, he should suffer for his
omission. In reality, he does not have the right to demand of the
vendee such diligence that he himself did not have and which he
Art. 1549
305
was more obliged to observe, especially if the cause of eviction
was anterior to the sale. (Canizares Tiana vs. Torrejon, 21 Phil. 127
[1912].)
ART. 1550. When adverse possession had been
commenced before the sale but the prescriptive period
is completed after the transfer, the vendor shall
not be liable for eviction. (n)
Effect of prescription.
By prescription, one acquires ownership and other real rights
through the lapse of time in the manner and under the conditions
prescribed by law. In the same way, rights and actions are lost by
prescription. (Art. 1106.)
(1) Completed before sale. — The vendee may lose the thing
purchased to a third person who has acquired title thereto by
prescription. When prescription has commenced to run against
the vendor and was already complete before the sale, the vendee
can enforce the warranty against eviction. In this case, the deprivation
is based on a right prior to the sale and an act imputable to
the vendor.
(2) Completed after sale. — Even if prescription has started
before the sale but has reached the limit prescribed by law after
the sale, the vendor is not liable for eviction. The reason is that
the vendee could easily interrupt the running of the prescriptive
period by bringing the necessary action.
If the property sold, however, is land registered under the
Torrens system, Article 1550 will have no application. Under the
Torrens system, ownership of land is not subject to prescription.
EXAMPLES:
(1) S sold to B a parcel of land which is claimed by C, who
has been in possession of the property in the concept of owner
publicly and continuously for 30 years. Under the law, C is
deemed to have acquired ownership over the land by prescription
without need of title or of good faith. (see Art. 1137.)
In this case, S shall be liable to B in case of eviction.
306 SALES
(2) If, in the same example, C was in adverse possession
of the land for only 25 years at the time of the sale, and the
prescriptive period is completed after the sale, S shall not be
liable to B in case of eviction as B could have brought action
against C during the remaining five-year period to recover the
property.
ART. 1551. If the property is sold for nonpayment
of taxes due and not made known to the vendee before
the sale, the vendor is liable for eviction. (n)
Deprivation for nonpayment of taxes.
If the vendee is deprived of the ownership of the property
because it is sold at public for nonpayment of taxes due from the
vendor, the latter is liable for eviction for an act imputable to him.
It is required, however, that at the time of the sale, the non-payment
of taxes was not known to the vendee.
ART. 1552. The judgment debtor is also responsible
for eviction in judicial sales, unless it is otherwise
decreed in the judgment. (n)
Liability of judgment debtor.
While the rule on implied warranty does not apply to a sheriff
who sells by virtue of authority in law (Art. 1549, par. 2.), the
judgment debtor is responsible for eviction (Art. 1552.) and hidden
defects (Art. 1570.) even in judicial sales, unless otherwise
decreed in the judgment.
Article 1552 is based on the general principle that a person
may not enrich himself at the expense of another. Thus, if the
purchaser of real property sold on execution be evicted therefrom
because the judgment debtor had no right to the property sold,
the purchaser is entitled to recover the price paid with interest
from the judgment debtor. If the sale was effected by the judgment
creditor, the latter should not be permitted to retain the proceeds
of the sale, at the expense of the purchaser. (Bonzon vs.
Standard, Bill Co. & Osorio, 27 Phil. 142 [1942].)
Arts. 1551-1552
307
ART. 1553. Any stipulation exempting the vendor
from the obligation to answer for eviction shall be void,
if he acted in bad faith. (1476)
Stipulation waiving warranty.
(1) Effect of vendor’s bad faith. — The vendor’s bad faith under
Article 1553 consists in his knowing beforehand at the time of the
sale, of the presence of the fact giving rise to eviction, and its possible
consequence. (10 Manresa 194; Angelo vs. Pacheco, 56 Phil.
29 [1931].) Thus, if the vendor after selling his property to another,
sold it again to another purchaser, he cannot even by stipulation,
be exempt from warranty against eviction, because he acted in
bad faith.
(2) Effect of vendee’s bad faith. — It is a requisite, however, that
the vendee is not himself guilty of bad faith in the execution of
the sale. If he knew the defect of title at the time of sale, or had
knowledge of the facts which should have put him upon inquiry
and investigation as might be necessary to acquaint him with the
defects of the title of the vendor, he cannot claim that the vendor
has warranted his legal and peaceful possession of the property
sold on the theory that he proceeded with the sale with the assumption
of the danger of eviction. He is not, therefore, entitled
to the warranty against eviction, nor is he entitled to recover damages.
(J.M. Tuazon & Co., Inc. vs. Court of Appeals, 94 SCRA 413
[1979]; Aspiras vs. Dalon, [C.A.] 53 O.G. 8854.)
ART. 1554. If the vendee has renounced the right
to warranty in case of eviction, and eviction should
take place, the vendor shall only pay the value which
the thing sold had at the time of the eviction. Should
the vendee have made the waiver with knowledge of
the risks of eviction and assumed its consequences,
the vendor shall not be liable. (1477)
Kinds of waiver of eviction.
Article 1554 treats of two kinds of waiver, namely:
(1) Consciente, that is, the waiver is voluntarily made by the
308 SALES
vendee without the knowledge and assumption of the risks of
eviction; and
(2) Intencionada, that is, the waiver is made by the vendee with
knowledge of the risks of eviction and assumption of its consequences.
Effect of waiver by vendee.
(1) If the waiver was only conscious, the vendor shall pay only
the value which the thing sold had at the time of eviction. This is
a case of solutio indebiti. The sole effect of a waiver unaccompanied
by the knowledge and assumption of the danger of eviction is to
deprive the purchaser of the benefits mentioned in Nos. 2, 3, 4, and
5 of Article 1555. (Ibid.; Lavina vs. Veloso, [C.A.] 40 O.G. 2331.)
(2) In the second kind of waiver, the vendor is exempted from
the obligation to answer for eviction, provided he did not act in
bad faith. (Art. 1553; see Andaya vs. Manansala, 107 Phil. 1151
[1960].)
Presumption as to kind of waiver.
From the terms of Article 1554, every waiver is presumed to
be consciente while the contrary is not proven, but to consider it
intencionada, it is necessary besides the act of waiver that it be
accompanied by some circumstance which reveals the vendee’s
knowledge of the risks of eviction and his intention to submit to
its consequences. (10 Manresa 180-181; Phil. National Bank vs.
Silo, 72 Phil. 141 [1941].)
ART. 1555. When the warranty has been agreed
upon or nothing has been stipulated on this point, in
case eviction occurs, the vendee shall have the right
to demand of the vendor:
(1) The return of the value which the thing sold
had at the time of the eviction, be it greater or less
than the price of the sale;
(2) The income or fruits, if he has been ordered to
deliver them to the party who won the suit against
him;
Art. 1555
309
(3) The costs of the suit which caused the eviction
and, in a proper case, those of the suit brought
against the vendor for the warranty;
(4) The expenses of the contract, if the vendee has
paid them;
(5) The damages and interests and ornamental
expenses, if the sale was made in bad faith. (1478)
Rights and liabilities in case eviction
occurs.
The provisions of the above article specify in detail the rights
and liabilities of the vendor and the vendee in the event eviction
takes place “when the warranty has been agreed upon or nothing
has been stipulated on this point,” that is, in the absence of
waiver of eviction by the vendee. (Art. 1554.)
(1) Return of value of thing. — If at the time of the eviction the
value of the property is really more or less than its value at the
time of the sale, by reason of improvements or deterioration, it is
but just that the vendor should pay the excess or not suffer the
damage. (see Sta. Romana vs. Imperio, 12 SCRA 625 [1965].) All
kinds of improvements whether useful or necessary or even recreational
expense voluntarily incurred by the vendee (Arts. 546-
548.) or caused by nature or time (Art. 551, ibid.) insofar as they
may affect the value of property, are taken into account in determining
the increase in value. (10 Manresa 199-200.) Note that the
law does not speak of interest. Undoubtedly, the law had intended
that the interest on the price shall be set off against the fruits received
by the vendee from the thing while in his possession. (Ibid.)
(2) Income or fruits of thing. — The vendee is liable to the party
who won the suit against him for the income or fruits received
only if so decreed by the court. The obvious inference from this
provision is that to the vendee belongs the use, free of any liability,
of the subject matter of the sale. And this benefit is not by any
means gratuitous. It is offset by the use without interest of the
money of the vendee by the vendor. (Ibid., 207; Lovina vs. Veloso,
[C.A.] 40 O.G. 2331.)
(3) Costs of the suit. — The vendee is also entitled to recover
310 SALES
the expense of litigation (see Rules of Court, Rule 142, Sec. 1.) resulting
in eviction, including the costs of the action brought
against the vendor to enforce his warranty. “Costs of the suit”
mentioned in No. (3) does not include travelling expenses incurred
by the vendee in defending himself in the action. (see Orense vs.
Jaucian, 18 Phil. 553 [1911].) He is not entitled to recover damages
unless the sale was made by the vendor in bad faith. (No. 5.)
(4) Expenses of the contract. — In the absence of any stipulation
to the contrary, the expenses in the execution and registration
of the sale are borne by the vendor. However, if the vendee
should have paid for such expenses, he shall have the right to
demand the same from the vendor.
(5) Damages and interests. — The right of the vendee to demand
“damages and interests and ornamental expenses” is qualified by
the condition that the sale was made in bad faith. If good faith is
presumed, the vendee is not entitled to recover damages unless
bad faith on the part of the vendor is shown in making the sale.
(see Pascual vs. Lesaca, 91 Phil. 920 [1952].) The word “interests”
does not cover interest on the purchase price as in lieu thereof the
vendee is entitled to the fruits of the thing, and in cases he has
been ordered by a court to deliver the fruits to the successful party,
the vendor must indemnify him. (see No. 2.)
ILLUSTRATIVE CASE:
Buyer purchased land after having been informed of prior right
of another to purchase the same based on prior occupancy.
Facts: In 1952, S executed in favor of B a contract to sell a
lot. At the time of the execution of the contract, the parties knew
that a portion of the lot was occupied by T. It was the understanding
of the parties that T would be ejected by S from the
premises. After the installments were paid, the deed of sale was
executed. In 1958, S filed a complaint for ejectment against T,
but the court ruled against S, owing to a compromise agreement
in another case between S and D.
B filed an action against S to enforce the vendor’s warranty
against eviction or recover the value of the land. It appears that
the compromise agreement with D was sanctioned by the court
and the prior right of T to purchase the lot in question was
based more on his prior occupancy of the same since 1949 about
Art. 1555
311
which B was informed by S. The execution of the compromise
agreement merely recognized this prior right of T.
Issue: Is B entitled to the vendor’s warranty against eviction
and damages under Article 1555?
Held: No. One who purchases real estate with knowledge
of a defect or lack of title in his vendor cannot claim that he has
acquired title thereto in good faith, as against the true owner of
the land or of an interest therein; and the same rule must be
applied to one who has knowledge of the facts which should
have put him upon such inquiry and investigation as might be
necessary to acquaint him with the defects in the title of his
vendor. A purchaser cannot close his eyes to facts which should
put a reasonable man upon his guard and then claim that he
acted in good faith under the belief that there was no defect in
the title of the vendor. Without being shown to be a vendee in
good faith, B is not entitled to the warranty against eviction,
nor is he entitled to recover damages.
“However, for justice’s sake, and in consonance with the
salutary principle of non-enrichment at another’s expense, S
should compensate B in the total sum of P126,000, representing
the aggregate value of the 1,050 square meters (which S was judicially
ordered to sell to T at the year 1958 at the prevailing rate
of P60 per sq.m.) at the value of P120 per square meter, doubling
the price, due to the reduced purchasing power of the peso with
the legal rate of interest from the date B filed his complaint.” (J.M.
Tuazon, Inc. vs. Court of Appeals, 94 SCRA 413 [1979].)
Right of second purchaser to whom
warranty assigned.
Where a warranty against eviction was expressly agreed upon
in a contract of sale and the vendee sold the same land to another
expressly assigning to him the right to warranty, the second purchaser
has a right of action against the first vendor to make good
the warranty against eviction.
The rule that a contract binds only the parties, their assigns
and heirs (see Art. 1311, par. 2.) is not applicable to this case. The
basis of the second purchaser’s action is the first vendee’s transfer
to him of the right to the warranty, a right which the latter had
against the seller and which the former exercises by virtue of the
transfer. (De la Riva vs. Escobar, 51 Phil. 243 [1927].)
312 SALES
ART. 1556. Should the vendee lose, by reason of
the eviction, a part of thing sold of such importance,
in relation to the whole, that he would not have bought
it without said part, he may demand the rescission of
the contract; but with the obligation to return the thing
without other encumbrances than those which it had
when he acquired it.
He may exercise this right of action, instead of
enforcing the vendor’s liability for eviction.
The same rule shall be observed when two or more
things have been jointly sold for a lump sum, or for a
separate price for each of them, if it should clearly
appear that the vendee would not have purchased one
without the other. (1479a)
Alternative rights of vendee in case
of partial eviction.
This article contemplates of partial eviction, while Article 1554
treats of total eviction. It states the rule that if there is partial eviction,
the vendee has the option either to enforce the vendor’s liability
for eviction (Art. 1555.) or to demand rescission of the contract.
The above rule is applicable —
(1) When the vendee is deprived of a part of the thing sold if
such part is of such importance to the whole that he would not
have bought the thing without said part (par. 1.); or
(2) When two or more things are jointly sold whether for a
lump sum or for a separate price for each, and the vendee would
not have purchased one without the other. (par. 2.)
EXAMPLE:
S sells to B a parcel of land, represented by S as containing
500 square meters, at the rate of P200.00 per square meter. B
needs a lot of at least 500 square meters on which to build a factory.
B is evicted from a 20-square-meter portion of the land. B
would not have bought the land had he known of its smaller area.
Under the facts, B can either sue for damages for breach of
warranty or demand rescission of the contract. He can also ex-
Art. 1556
313
ercise his alternative rights if these were two parcels of land
sold and he should lose one of them by reason of eviction.
Remedy of rescission not available
in case of total eviction.
In case the vendee is totally evicted from the thing sold, he
cannot avail of the remedy of rescission, because this remedy contemplates
that the one demanding it is able to return whatever
he has received under the contract. (Art. 1385.) This is not so when
the vendee loses only a part of the thing sold because there still
remains a portion of the thing.
In case of rescission, the vendee can return the thing but it must
not be subject to “other encumbrances than those which it had
when he acquired it.” (see Art. 1556.)
ART. 1557. The warranty cannot be enforced until
a final judgment has been rendered, whereby the
vendee loses the thing acquired or a part thereof.
(1480)
Final judgment of eviction
essential.
The above article merely reiterates two of the essential elements
for the enforcement of warranty in case of eviction, namely:
(1) deprivation of the whole or of a part of the thing sold; and (2)
existence of a final judgment. (Art. 1548.)
Eviction may take place by virtue of a final judgment of
an administrative office or board, and it is not indispensable
that it be rendered by a court, provided it was rendered by competent
authority and in conformity with the procedure prescribed
by law. (Bonzon vs. Standard Oil Co. of New York, 27 Phil. 141
[1914].)
ART. 1558. The vendor shall not be obliged to make
good the proper warranty, unless he is summoned in
the suit for eviction at the instance of the vendee.
(1481a)
314 SALES
Formal summons to vendor essential.
Another essential requisite before a vendor may be legally liable
for eviction is that, he should be summoned in the suit for
eviction at the instance of the vendee. (see Jovellano vs. Lualhati,
47 Phil. 371 [1975]; City of Manila vs. Lack, 19 Phil. 324 [1911].)
(1) Vendor to be made party in suit for eviction. — The phrase
“unless he is summoned in the suit for eviction” means that the
vendor should be made a party to the suit either by way of asking
that the former be made a co-defendant (Art. 1559.) or by the
filing of a third-party complaint against said vendor.
(a) Furnishing the vendor by registered mail with a copy
of the opposition the vendee filed in the eviction suit is not the
kind of notice prescribed by Articles 1558 and 1559. (Escaler
(b) It is evident that the notification must be given in the
action brought by the third party against the vendee, because
it is there that the vendor must defend the vendee’s peaceful
and legal possession, for which he is responsible, and not in
the action to enforce the warranty itself which already supposes
the eviction. (De la Riva vs. Escobar & Bank of P.I., 51
Phil. 243 [1928].)
(2) Object of the law. — The object is to give the vendor an
opportunity to intervene and defend the title that he has transferred,
for, after all, he alone would know the circumstances or
reasons behind the claim of the plaintiff and be in a position to
defend the validity of his title. (10 Manresa 219-220; De la Riva
vs. Escobar & Bank of P.I., supra.) In the absence of such opportunity,
the vendor is not bound to his warranty. (Jovellano vs.
Lualhati, supra; Angelo vs. Pacheco, 56 Phil. 70 [1931].)
ILLUSTRATIVE CASE:
In the eviction suit which was a mere incident in a land registration
proceedings for the cancellation of title, the vendee merely furnished
the vendor with a copy of the former’s opposition to the petition
for cancellation.
Facts: B, vendee, bought from S, vendor, 24 hectares of land
which S had purchased from R. At the time of the sale, the property
was still covered by OCT in the name of R. Subsequently,
Art. 1558
315
the Register of Deeds filed a petition for the cancellation of the
OCT in the name of R on the ground that the land in question
had been previously registered in the name of T.
B filed an opposition to the petition for cancellation furnishing
S and R by registered mail with copies of said opposition.
The lower court declared void the title of R and those derived
therefrom like the titles of S and B. B sued S to enforce the warranty
against eviction contained in the deed of sale executed by
S.
Issue: Could B enforce the warranty against S?
Held: No. The requisite — that of the vendor being summoned
in the suit for eviction (case for cancellation) at the instance
of the vendee — is not present. Furnishing the vendor S,
by registered mail, with a copy of the opposition the vendee B
filed in the eviction suit is not the kind of notice prescribed by
Articles 1558 and 1559.
R. Aquino, C.J., dissenting: It was not possible for B to comply
strictly with Articles 1558 and 1559. The eviction took place,
not in an ordinary suit wherein the vendor can be made a codefendant,
but as an incident in the cancellation of title in a
land registration proceeding. In such a case, the furnishing of
the vendor with a copy of the opposition was a substantial compliance
with Articles 1558 and 1559. It was notice to the vendor.
S’s vendor, R, was first notified of the cancellation proceeding.
It was not the fault of B that the eviction case assumed
the shape of a mere incident in the land registration proceeding
and not an ordinary contentious civil action. S could not be
made a co-defendant in that incident for cancellation of title, a
summary proceeding. A contrary view would enable S to enrich
himself unjustly at the expense of B. (Escaler vs. Court of
Appeals, 138 SCRA 1 [1985].)
ART. 1559. The defendant vendee shall ask, within
the time fixed in the Rules of Court for answering the
complaint, that the vendor be made a co-defendant.
(1482a)
Vendor to be made co-defendant.
As previously stated, the notification required by Article 1559
refers to a case where the vendee is the defendant in a suit instituted
to deprive him of the thing purchased.
316 SALES
The defendant vendee threatened with eviction who wishes
to preserve his right of warranty, should call in the vendor to
defend the action which has been instituted against him.
(Jovellano vs. Lualhati, 47 Phil. 371 [1925].) He should ask the
court within the time allowed him to answer (Rules of Court, Rule
11, Sec. 1.), that the vendor be made a co-defendant to answer the
complaint of the plaintiff who seeks to deprive him (the vendee)
of the property purchased.
ART. 1560. If the immovable sold should be encumbered
with any non-apparent burden or servitude,
not mentioned in the agreement, of such a nature that
it must be presumed that the vendee would not have
acquired it had he been aware thereof, he may ask for
the rescission of the contract, unless he should prefer
the appropriate indemnity. Neither right can be
exercised if the non-apparent burden or servitude is
recorded in the Registry of Property, unless there is
an express warranty that the thing is free from all burdens
and encumbrances.
Within one year, to be computed from the execution
of the deed, the vendee may bring the action for
rescission, or sue for damages.
One year having elapsed, he may only bring an
action for damages within an equal period, to be
counted from the date on which he discovered the
burden or servitude. (1483a)
Where immovable sold encumbered
with non-apparent burden.
(1) Right of vendee. — Although the vendee is not deprived of
the thing sold, totally or partially, the vendee may still rescind the
contract or ask for indemnity, if the thing sold should be encumbered
with any non-apparent burden or servitude, not mentioned
in the agreement of such a nature that the vendee would not have
acquired it had he been aware thereof.
The lack of knowledge on the part of the vendor is not a
defense. The contract can still be invalidated on the ground of
Art. 1560
317
mistake. (Art. 1331; see Arts. 1556, 1566; see Pineda vs. Santos, 56
Phil. 583 [1982].)
Note: A servitude (or easement) is an encumbrance imposed
upon an immovable for the benefit of another immovable belonging
to a different owner. (Art. 615.) An example of an apparent
servitude is a right of way establishing a permanent passage (Art.
649, par. 2.), which is continually kept in view by external sign.
An example of a non-apparent easement is a party wall (Art. 659.)
which has no exterior sign. (Art. 660.)
(2) When right cannot be exercised. — The alternative rights
granted by Article 1560 cannot be exercised in the following cases:
(a) If the burden or servitude is apparent, that is, “made
known and is continually kept in view by external signs that
reveal the use and enjoyment of the same’’ (Art. 615, par. 4.);
(b) If the non-apparent burden or servitude is registered;
and
(c) If the vendee had knowledge of the encumbrance,
whether it is registered or not.
The registration of the non-apparent burden or servitude in
the Registry of Property operates as a constructive notice to the
vendee. Hence, the vendor is relieved from liability unless there
is an express warranty that the immovable is free from any such
burden or encumbrance. If the burden is known to the vendee,
there is no warranty. (par. 1.)
(3) When action must be brought. — The action for rescission or
damages must be brought within one year from the execution of
the deed of sale. If the period has already elapsed, the vendee may
only bring an action for damages within one year from the date of
the discovery of the non-apparent burden or servitude. (pars. 2 and
3.)
SUBSECTION 2. — Warranty Against Hidden Defects
of, or Encumbrances Upon, the Thing Sold
ART. 1561. The vendor shall be responsible for
warranty against the hidden defects which the thing
sold may have, should they render it unfit for the use
for which it is intended, or should they diminish its
318 SALES
fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have acquired
it or would have given a lower price for it; but
said vendor shall not be answerable for patent defects
or those which may be visible, or for those which are
not visible if the vendee is an expert who, by reason
of his trade or profession, should have known them.
(1484a)
Definition of terms.
(1) Redhibition is the avoidance of a sale on account of some
vice or defect in the thing sold, which renders its use impossible,
or so inconvenient and imperfect that it must be supposed that
the buyer would not have purchased it had he known of the vice.
(Civil Code La., Art. 2406.)
(2) Redhibitory action is an action instituted to avoid a sale on
account of some vice or defect in the thing sold which renders its
use impossible, or so inconvenient and imperfect that it must be
supposed that the buyer would not have purchased it had he
known of the vice. (Cyc., Law Dictionary, 3rd ed., 945.) The object
is the rescission of the contract. If the object is to procure the
return of a part of the purchase price paid by the vendee, the remedy
is known as accion quanti minoris or estimatoris. (10 Manresa
226-227; see Art. 1567.)
(3) Redhibitory vice or defect is a defect in the article sold against
which defect the seller is bound to warrant. (see Cyc., Law Dictionary,
3rd ed., 1945.) The vice or defect must constitute an imperfection,
a defect in its nature, of certain importance; and a
minor defect does not give rise to redhibition. The mere absence
of a certain quality in the thing sold which the vendee thought it
to contain is not necessarily a redhibitory defect. One thing is that
the thing lacks certain qualities and another thing is that it positively
suffers from certain defects. (10 Manresa 227-228.)
Requisites for warranty against
hidden defects.
The following requisites must concur for the existence of the
warranty against hidden defects:
Art. 1561
319
(1) The defect must be important or serious;
(2) It must be hidden;
(3) It must exist at the time of the sale;
(4) The vendee must give notice of the defect to the vendor
within a reasonable time (Art. 1586.);
(5) The action for rescission or reduction of the price must be
brought within the proper period — 6 months from the delivery
of the thing sold (Art. 1571.) or within 40 days from the date of
the delivery in case of animals (Art. 1577, par. 1.); and
(6) There must be no waiver of warranty on the part of the
vendee. (Art. 1548, par. 3.)
When defect important.
The defect is important if: (1) it renders the thing sold unfit for
the use for which it is intended; or (2) if it diminishes its fitness
for such use to such an extent that the vendee would not have
acquired it had he been aware thereof or would have given a lower
price for it. (see Bryan vs. Hankins, 44 Phil. 87 [1922]; Gochangco
vs. Dean, 47 Phil. 687 [1925].)
The use contemplated must be that stipulated, and in the absence
of stipulation, that which is adopted to the nature of the
thing and to the business of the purchaser. (see 10 Manresa 227-
280.)
An imperfection or defect of little consequence does not come
within the category of being redhibitory. But where an expert
witness categorically established that a printing machine sold is
in A-1 condition, required major repairs before it could be used,
plus the fact that the buyer never made appropriate use of the
machine from the time of purchase until an action was filed, attest
to the major defects in said machine justifying rescission of
the contract. (Moles vs. Intermediate Appellate Court, 169 SCRA
777 [1989].)
When defect hidden.
The defect is hidden (or latent) if it was not known and could
not have been known to the vendee. (see McCullough vs. Aenille

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