CIVIL LAW REVIEW II
Sales, Lease, Agency, Partnership, Trust and Credit
Transactions
Atty. Crisostomo Uribe
SALES
Articles / Laws to Remember: 1458, 1467, 1477 transfer of
ownership, 1505, 559 who can transfer xxx, 1504, 1544, 1484
Recto Law, R.A. 6552, 1602, 1606, 1620, 1623, Redemption
xxx
Q: A obliged himself to deliver a certain thing to B. Upon
delivery, B would pay a sum of money to A. Is that a
contract of sale?
A: Not necessarily. Even if there is an obligation to deliver, if
there is no obligation to transfer ownership, it will not be a
contract of sale. It may be a contact of lease.
Even if there is transfer of ownership, the contract may be a
contract for a piece of work.
Memorize: Art. 1458
Note: Sale is a contract, so the general principles in oblicon
are applicable to sale but note that there are provisions which
are contrary.
Characteristics of Contract of Sale (COS)
1. Consensual (1475) – COS is consensual, it is perfected by
mere meeting of the minds of the parties as to the object and
price.
Note: There is 1 special law which requires a particular form
for the validity of a contract of sale – in that sale, it can be
said that kind of sale is a formal contract → Cattle Registration
Decree. In a sale of large cattle, the law provides that the
contract of sale of large cattle must be: in a public instrument,
registered and a certificate of title should be obtained in
order for the sale to be valid. An oral contract of sale of large
cattle is VOID. But otherwise, the other contracts are
perfected by mere consent or mere meeting of the minds.
2. Principal – sale is a principal contract, it can stand on its
own. It does not depend on other contracts for its existence
and validity.
3. Bilateral (1458) – necessarily in a COS, both parties will be
obligated. It is not possible that only 1 party is obligated
because a contract of sale is essentially onerous.
4. Onerous (1350) – COS is essentially onerous. Otherwise, it
may be another contract or any other act like it may be a
donation if there is no compensation for the transfer of
ownership to the other party.
5. Commutative (2010) – meaning there is equivalency in the
value of the prestation to be performed by both parties.
Normally, the thing sold would be equal to the price paid by
the other party (buyer).
Exception: a contract of sale which is an aleatory contract like
sale of hope. In sale of hope, the obligation of 1 party will
arise upon the happening of a certain event or condition.
Example Sale of Hope: Sale of a lotto ticket, PCSO will have
the obligation to pay you only if you got all the 4 or 6
numbers which are drawn
Another Example of Aleatory: Insurance
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6. Nominate (1458)
Classification of Contract of Sale
1. As to Nature of Subject Matter
a. Movable
b. Immovable
Q: Why there is a need to determine?
A: Because some concepts will apply if the object is movable
or some laws will apply if the object is immovable.
Examples: Under the Statute of Frauds, you have to
determine if the object if movable or immovable in order that
statute of frauds will apply. The Recto law will apply if the
object is movable. The Maceda law will apply if the object is
realty. Article 1544 or Double Sale will require you to
determine the nature of the subject matter.
2. As to Nature
a. Thing
b. Right
Q: Why there is a need to determine?
A: Relevant in the mode of delivery
Distinctions
1. Deed of Absolute Sale (DAS) vs. Conditional Sale (CS) vs.
Contract to Sell (CTS)
2. Dation in Payment (DIP) vs. COS
3. Contract for a Piece of Work (CPW) vs. COS
4. Barter vs. COS
5. Agency to Sell (ATS) vs. COS
Deed of Absolute Sale (DAS) vs. Conditional Sale (CS) vs.
Contract to Sell (CTS)
DAS – seller does not reserve his title over the thing sold and
thus, upon delivery of the thing, ownership passes regardless
of whether or not the buyer has paid.
CS - condition/s are imposed by the seller before ownership
will pass. Normally, the condition is the full payment of the
price. In CS, ownership automatically passes to the buyer
from the moment the condition happens. There is no need for
another contract to be entered into.
BE: Receipt was issued by A to B. The receipt’s tenor “Date
of the receipt xxx Received from B the sum of P75,000.00 as
partial payment for the car xxx the balance to be paid at the
end of the month xxx”. Contract to Sell?
SA: No. It does not pertain to a CTS because in a CTS
ownership is reserved by the seller despite delivery to the
buyer. The buyer does not acquire ownership. This is an
Absolute Sale.
Q: In a CTS, upon the happening of the condition/s imposed
by the seller, would ownership automatically pass to buyer?
A: No. While a CTS is considered a special kind of conditional
sale, it is a peculiar kind of sale because despite the
happening of the condition and actual delivery, the buyer
does not automatically acquire ownership. In CTS, if
condition/s happen, the right of the buyer is to compel the
seller to execute a final deed of sale. So ownership does not
automatically pass.
Dation in Payment (DIP) vs. COS
DIP (1245) – whereby property is alienated to the creditor. It
is provided that the law on sales shall govern such
transaction. It is specifically provided that the pre-existing
obligation must be in money. If not in money and there is DIP,
it will not be governed by the law on sales but by the law on
novation because practically there is a change in the object of
the contract.
Example 1: If A owes B P100,000.00 instead of paying
P100,000, he offers B and B accepts the car of A as an
equivalent performance → this is DIP and will be governed by
the law on sales.
Example 2: If the pre-existing obligation is to deliver a specific
horse but instead of delivering the horse, the debtor told his
creditor and the creditor accepted, that he will instead deliver
his car → it is still DIP but it will not fall on 1245 but on
novation because there is a change in the object of the
obligation which would extinguish the obligation.
Note: A guide to distinguish one concept from another is to
know the nature, requisites and effects.
1. As to Nature
DIP – a special form of payment
COS - it is a contract
2. As to Requisites
DIP – with a pre-existing obligation
COS – not a requirement
3. As to Effect
DIP – to extinguish the obligation either wholly or partially.
COS – obligation will arise instead of being extinguished.
Contract for a Piece of Work (CPW) vs. COS
BE: A team if basketball players went to a store to buy shoes
and out of the 10 members, 5 of them were able to choose
the shoes. They agreed to pay the price upon delivery. The
other 4 members were able to choose but the shoes were
not available at that time but they are normally
manufactured. The last member could not find shoes that
could fit his 16 inches feet and therefore he has to order for
such kind of shoes. What transactions were entered into by
these players?
SA: 1467 → the first 2 transactions involving a total of 9
players would be considered a COS because the shoes which
they ordered are being manufactured or procured in the
ordinary course of business for the general market. However,
the last transaction which will be manufactured only because
of the special order of the player and is not ordinarily
manufactured for the general market will be considered a
CPW which is known as the Massachusetts rule.
Massachusetts rule – rule in determining whether the
contract is a COS or a CPW.
Barter vs. COS
Q: A obliged himself to deliver a determinate car with a
market value of P250,000.00. B obliged himself to deliver his
watch and P150,000.00 in cash. What kind of contract?
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A: First, you have to consider the intention of the parties.
They may want this transaction to be considered as a sale or
barter and that will prevail. But if the intention of the parties
is not clear from their agreement then the nature of the
contract will depend on the value of the watch. If the value of
the watch is greater than P150,000 then this is barter. If the
value of the watch is equal or less than P150,000 then this is
sale. The value of the car is irrelevant. What is only relevant is
the value of the thing (watch) in relation to the cash to be
given by one of the parties.
Agency to Sell (ATS) vs. COS
BE: A gave B the exclusive right to sell his maong pants (he
has his own brand of maong pants) in Isabela. It was
stipulated in the contract that B has to pay the price of
maong within 30 days from delivery to B. It was stipulated
that B will receive 20% commission (discount) on sale. The
maong pants were delivered to B. However, before B could
sell the goods, the store was burned without fault of
anyone. Can B be compelled to pay the price?
From the wordings of the problem you may have an idea that
this is an agency to sell. If this is an ATS, the fact that the
agent has not yet sold the maong pants when they were
burned will not result in a liability on his part, there being no
negligence on his part because with the delivery of the thing
from the principal to the agent, ownership does not pass.
Under the principle in the Civil Code – res perit domino – it
will be the seller (owner) who will bear the loss. But if this
transaction is sale then with the delivery of the maong pants
to B, ownership passed to B because he did not reserve
ownership over the pants despite the fact that the other party
has not paid the price. So when the pants were burned, it
would now be B as the owner who will bear the loss.
SA: This is exactly the case of Quiroga vs. Parsons. Article
1466 – in construing a contract containing provisions
characteristics of both a COS and ATS, you have to go into the
essential clauses of the whole instrument. In this problem,
one of the clauses “B has to pay the price within 30 days” .
That would make the contract COS and not ATS because in 30
days from delivery, whether or not B has already sold those
pants to other persons, he is already obliged to pay a price.
That is not an ATS. Being a COS, therefore, after having been
delivered, ownership passed to the buyer and hence under
res perit domino rule, the buyer bears the loss and therefore
he can be compelled to pay the price.
Essential Elements of a Contract of Sale
1. Consent of the Contracting Parties
2. Object or Subject Matter – which is a determinate thing or
right
Note: Service cannot be the subject matter of sale.
3. Cause or Consideration – as far as seller is concerned, it is
the price in money or the equivalent of the payment of the
price.
CONSENT OF THE CONTRACTING PARTIES
A. No consent of one or both of the parties
→ the contract is void. Under the law on sales, it is a fictitious
contract where the signature of one of the parties was forged.
Normally, the seller’s signature is forged. If the signature of
the seller is forged, that would be a fictitious contract. The
alleged seller will not have participation in the execution of
the contract. But another kind of contract recognized in the
Civil Code is a simulated contract.
Simulated – parties to this contract actually would have
participation. They would voluntarily sign in the deed of sale.
However, they do not intend to be bound at all or they may
intend to be bound to another contract but they executed a
deed of sale. Thus, the law would ratify these contracts
considering there is a simulated sale.
Kinds of Simulated Contracts
1. Absolutely Simulated – they do not intend to be bound at
all.
Q: Why would they enter into this kind of sale?
A: (a) To defraud creditors. The debtor would sell his
remaining assets to make it appear that he has no more
assets which may be reached by his creditors.
(b) Applicants for residency abroad would normally be
required to present certificate of title over parcels of land so
that the applicant will appear to have assets. Therefore, hindi
mag TNT yung applicant. These applicants would normally ask
his brother or sister or friends na kunwari that land would be
sold to them. They will have the property registered in their
name. They will present the title to the Embassy. But actually
the parties do not intend to be bound. Take note that this
may be a root of a valid title as far as 3 rd persons are
concerned. These 3rd persons who relied on the transfer
certificate of title in the name of the seller even if that seller
is not the owner because the sale is simulated may acquire
ownership.
2. Relatively Simulated – sale where they actually intended
another contract which normally would be a donation.
Q: Why would they execute a deed of sale instead of
executing a deed of donation?
A: (a) To minimize tax liabilities. Donor’s tax is higher than
capital gains tax or final income tax and documentary stamp
tax.
(b) To circumvent the provisions on legitimes and
collation under succession. This may be questioned if you can
prove that there was no consideration.
B. If consent was given
→ If consent was given, it does not necessarily mean that the
COS is valid. The consent may be given by an incapacitated
person or one with capacity to give consent. If given by an
incapacitated person, consider the nature of the incapacity. It
may be:
a. Absolute Incapacity – the party cannot give consent
to any and all contracts.
b. Relative Incapacity – the party is prohibited from
entering sometimes with specific persons and
sometimes over specific things.
Kind of Capacity
1. Juridical Capacity – it is the fitness to be the subject of legal
relations. If a party to a sale has no juridical capacity, the
contract is void. Note that all natural living persons have
juridical capacity. Even if he is a 1 day old baby, he has
juridical capacity. The baby can be the subject of donation.
Even if he is conceived, he has provisional personality.
Example: One example of a party to a sale without juridical
capacity would be a corporation not registered with the SEC.
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The contract entered by this corporation is a void contract
because one of the parties has no juridical capacity to enter
into that contract.
2. Capacity to Act – it is the power to do acts with legal
effects. If the incapacity only pertains to capacity to act, the
contract would normally be voidable. Without capacity to act
or there are restrictions with one’s capacity to act such as
minority, insanity, deaf mute and does not know how to write
and civil interdiction.
Note: Under R.A. 6809 (December 1989) there is no more
creature known as “unemancipated minor”. Before 1989, the
age of majority was 21.
C. If both parties are incapacitated
→ not only voidable but unenforceable.
Q: What if one of the parties in a COS is a minor and the
minor actively misrepresented as to his age?
A: The SC said that the minor will be bound to such contract
under the principle of estoppel. Active misrepresentation, can
be seen from the deed itself. In a deed of sale, normally after
the name, the words “of age” were stated. If the minor signed
that contract, he will be bound. If no statement in the deed of
sale as to his age, in one case, the fact he misrepresented to
the notary public when he appeared before the notary public
for the notarization of the document and he was asked by the
notary public as to his age and he again misrepresented, he
will be bound to such contract.
Atty. Uribe’s Comment: Estoppel is not a good ground
because the minor is not aware.
Sale of Necessaries
In sale of necessaries such as food, clothing and medicine to a
minor, the minor has to pay a reasonable price. This contract
is not voidable. The sale of necessaries will bind the minor
and he will be compelled to pay not really the contract price
but only to reasonable price.
Relative Incapacity (Articles 1490 and 1491)
1. Sale between spouses – it is void except:
a. The spouses executed a marriage settlement and in
the marriage settlement they agreed for a complete
separation of property regime. Then they can sell to
each other.
b. If no marriage settlement, they may have obtained
judicial declaration of separation of property. After
that, they can sell to each other.
2. Those mentioned in Article 1491
a. A guardian cannot buy the property of the ward. The
guardian is not actually prohibited from entering into
any and all contracts. It is just that he cannot be the
buyer of a property of his ward.
b. An agent cannot buy without the consent of the
principal a property which he was supposed to sell or
administer.
c. The executors and administrators of the estate
cannot buy a property which is part of the estate.
d. Public officers, judges, their staff, clerk of court,
stenographers and lawyers are prohibited from
buying those properties which are the subject of
litigation during the pendency of the case.

Q: What is the status of the contracts under 1491?
A: Prof. Tolentino – voidable
Justice Vitug & Prof. Baviera – void
Prof. Pineda & Prof. de Leon – the first 3 are voidable
and the last 3 are void.
The better answer is void because these persons are
prohibited from entering into these contracts. Under Article
1409, if the contract is prohibited, it is void.
Discussion of Prof. De Leon’s Answer
The first 3 are voidable because these contracts may be the
subject of ratification by means of and in the form of a NEW
CONTRACT. If you will read his discussion, he based his
discussion in the case of Rubias vs. Batiller wherein the
guardian bought the property of his ward. So the contract is
voidable because if the ward becomes of age, he can enter a
COS over the thing to his guardian and that sale would be a
valid sale. (Pls. read the full text of Prof. De Leon’s comment)
Atty. Uribe: It is correct that it is a valid sale. But does that
mean that the sale ratified the 1st contract? I disagree because
ratification under the Civil Code has the effect of cleansing the
contract from all its defects from the very beginning as if the
contract was entered into during the first agreement that the
agreement was valid from the very start. In fact, the SC said in
Rubias vs. Batiller “ratification” (quote and quote), because
the effect of the second contract will not retroact to the first
contract. It will only be valid from the time the second
contract was entered into. After all, there is no ratification in
that sense under the Civil Code. Thus, since it does not
retroact to the first, the second contract is void. Otherwise, if
voidable then it can be ratified. The defect on the first
contract would have been cleansed with the execution of the
second contract.
2. Aliens are prohibited from acquiring by purchase private
lands – Take note “acquiring” which means buying not selling.
They can sell.
Exceptions / when aliens can buy:
a. Former natural born Filipino citizen. Under the
Constitution they are allowed to buy small land
which they can use for residential purpose.
b. Another way of acquiring is by succession but this is
not a sale
D. Even if consent was given by one with capacity to give
consent but if the consent is vitiated
→ voidable. FIVUM
E. If the party gave such consent in the name of another
without authority of that person or no authority of law
→ unenforceable. Take note may be authorized by the person
or by law.
Example of authorized by law: notary public has the right to
sell in pledge because he has the authority to sell under the
law.
OBJECT OR SUBJECT MATTER
The requisites in sale as to thing would almost be the same as
the requisites of contracts in general.
1. The thing must be within the commerce of men
Examples: sale of a navigable river is void, sale of a cadaver is
void but donation of a cadaver is allowed, sale of human
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organs is void, things which are not appropriated like air is
void but if appropriated it can be the object of a valid sale.
2. The thing must be licit – not contrary to law
Examples: sale of prohibited drugs or shabu is void, sale of
marijuana is void, sale of wild flowers or wild animals is void
3. Must be determinate
Q: Sale of a car without agreement as to the features for
P1M. On the other hand, another transaction would be a
sale of Mitsubishi Lancer, 2007, GSL and color black for P1M.
Are these 2 transactions, valid sale?
Both would pertain to generic thing. Under the law, a thing is
considered determinate only when it is particularly
designated or physically segregated from all others of the
same class. Both transactions pertain to generic so both
transactions are void?
A: No. The first transaction is void. The second transaction is
valid because Article 1460 requires that the requirement of
the law that a thing should be determinate would be
sufficiently complied with if the thing which is the object of
the sale is capable of being made determinate without a need
of a new or further agreement.
Example: Sale of 1 gallon Minola pure coconut oil. Though
generic, it is valid under Article 1460.
RULES AS TO OBJECT OF COS
Q: A obliged himself to deliver and transfer ownership over
the palay that will be harvested from a specific parcel of rice
land in May 2008. What if by May 2008, no palay was
harvested?
a. What is the status of the sale?
b. May the seller “A” be held liable for damages for
failure to comply with his obligation?
A:
a. Always consider that in a COS there are only 3 requisites.
As long as these 3 were complied, there is a valid sale. In fact,
by express provision of law, sale of things having potential
existence (emptio rei sperati) is valid.
b. Not necessarily because there are excuses to non-
performance such as pestilence, typhoon, flood and therefore
his failure to comply is an excuse. But if the reason of the
seller is because of his negligence, he cannot find support
under Art. 1174.
Sale of Hope (Emptio Spei)
Example: Sale of a lotto ticket
Q: Assuming the sale of a lotto ticket happened the day
after it was drawn, what is the status of the sale?
A: It will depend whether the ticket is a winning or losing
ticket. What the law provides is that the sale of a vain hope is
a void sale. If the ticket is a winning ticket, it is not a vain hope
hence, it is a valid sale.
Q: Why would a person sell a winning ticket?
A: He may need the money immediately. Parang discounted
yung ticket. Nanalo ng P1M, ibebenta nya ng P990,000
because he needs the money immediately.
Q: Sale of a land to B with a right to repurchase within 1
year which A delivered. On the 3 rd month, B sold the land to
C. However, on the 9th month, A offered to repurchase the
land.
 (a) What is the status of the sale between A and C?
(b) Who will have a better right over the land?
(Sale with a right to repurchase)
A: (a) Be guided by the fact that a COS is a consensual
contract. The mere meeting of the minds as to the object and
the price, then there is a valid and perfected sale. Hence, this
is a valid sale even if the object of the sale is a sale with a
right to repurchase. Article 1465 provides that things subject
to a resolutory condition may be the object of a COS.
Atty. Uribe: Mas tamang sabihin – since the ownership
thereof is subject to a resolutory condition. Hindi naman yung
thing is the subject of resolutory condition, it is the ownership
over the thing.
If A exercises the right to repurchase and such would be a
valid exercise of such right then the ownership of B would be
extinguished. The exercise of the right is considered a
resolutory condition as to the ownership of B. The fact that
the object of the sale is subject to a repurchase will not affect
the validity of the sale.
(b) As a rule, it would be A as a seller a retro because he has
the right to repurchase assuming his repurchase is valid. C
may have a better right if he can claim that he is an innocent
purchaser for value. Example: maybe the right to repurchase
was not annotated at the back of the title of the land and he
has no actual knowledge. If that is the case, C may have a
better right.
SALE OF RIGHT / ASSIGNMENT OF RIGHT
Assignment of right is not necessarily a sale. If there is a
valuable consideration for the assignment, it is a sale. If there
is no valuable consideration, it may be a donation or dacion
en pago.
Examples of right: credit, shares of stock
Requisite of a right → the only requirement is that the right
must not be intransmissible
Q: Why or when a right would not be transmissible?
A: If it is intransmissible by nature or by stipulation or by
provision of law.
G.R.: As a rule, rights and obligations arising from contracts
are transmissible.
Exceptions:
1. Intransmissible by Nature – Examples: right as a legitimate
child cannot be sold. Any contract where the personal
qualifications has been considered .
2. Intransmissible because of Stipulation – Example: The
parties stipulated in a lease contract that the right to sublease
cannot be transferred if it is prohibited by the lessor.
3. Intransmissible because of Law – Example: In partnership,
the right in specific partnership property without all the
partners making the assignment cannot be validly assigned.
Q: Sale of a right, also perfected by mere consent?
A: Yes. To bind 3rd persons, it must be in a public instrument.
Recorded in the Registry of Property.
CAUSE OR PRICE CERTAIN IN MONEY OR ITS EQUIVALENT
Q: A deed of sale was entered into by A and B. The price
agreed upon was 1M yen.
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November 2008
(a) May that be a valid sale?
(b) Can the seller compel the buyer to pay in
yen?
A: (a) Yes, it is valid. Basis is Article 1458 because the
only requirement of the law is “in money”. Even Japanese yen
is in money. The law states that it may not even be in money,
it may be “equivalent” like promissory notes whether or not
negotiable or letters of credit.
(b) If the contract was entered into today, yes it is
valid because of R.A. 8183 which repealed R.A. 529 in 1996. If
COS was entered before R.A. 8183, the seller cannot compel
even though the contract is valid. The payment has to be
made in Philippine money.
Consider the date of the sale. If parties failed to stipulate as to
which currency, it has to be in Philippine currency.
Q: Can there be a valid payment in P10,000 - P1 coins?
A: Yes.
Q: Can you compel the seller to accept?
A: No. Under the Philippine law, P1 will have legal tender
power only up to P1,000. He may accept but he cannot be
compelled.
Note: P1, P5, P10 up to P1,000
less than P1 up to P100
Price Must be Certain
Q: Sale of shares of stocks but there was no date as to the
value of the share, valid?
A: The value of the shares as to what date is material because
the value of the shares changes almost everyday depending
on the shares. Shares of companies who are active in trading
would change every now and then. In fact, even if the date as
to the value of the shares has been fixed but the time was not
considered, maybe the opening or the closing in a particular
exchange would affect the validity of the sale. For example, in
the opening, the value of the share is P50 but in the closing it
is P39. So again, it has to be certain.
Q: If you will fix the price by considering the tuition fee of a
student per unit, would that be a certain price?
A: No because different schools would have different tuition
fees and even in a certain school, fees per college are
different.
Q: Who can fix the price?
A: (1) The best way is for the parties to agree as to the price.
(2) They may agree that one of them will fix the price.
Q: May the sale be perfected if the agreement of the parties
was for one of them to fix the price?
A: Yes, it may be perfected only if the price fixed by the party
who was asked to fix the price was accepted by the other
party. If not accepted, there was no meeting of the minds.
Note: The perfection will only be considered at the time of
the acceptance of the price fixed by the other party not from
the time of the first agreement of the parties.
Q: What if a 3rd person was asked to fix the price – A and B
agreed that X will fix the price, may the sale be void?
A: Yes, the sale may be void if the third person does not want
to fix the price or unable to fix the price. Hence, there was no
meeting of the minds.
Q: If the 3rd person fixed the price but it was too high or too
low or maybe there was fraud committed by the 3 rd person
or he was in connivance with one of the parties, may the
sale be void?
A: No, because the remedy of the other party is to go to court
for the court to fix the price.
Q: Sale of a car, the price of the car is P1, valid?
A: Yes, it is valid. It can be a valid sale. Lesion or gross
inadequacy of the price does not as a rule invalidate a
contract unless otherwise specified by law.
Exception: when otherwise provided by law.
Example: Article 1381 – when the guardian sells the property
of the ward and there is lesion of more than 25% or more
than ¼ of the value of the thing. Take note that the buyer
must not be the guardian otherwise 1491 will apply → void.
But if the guardian sold it to another person there being
lesion of more than ¼ like when the value of the property is
P100,000 was sold for P65,000, the contract is rescissible.
Note: Under the law on sales, if there is gross inadequacy, it
may reflect vitiation of consent so the SC would normally
enjoin the lower courts to be warned of the possibility of
fraud in case of lesion. Lesion must be proven as a fact. It is
not presumed.
If there is gross inadequacy, it maybe because actually they
intended another contract and that would make the sale a
simulated sale and therefore the sale is void.
Example: The value of the property is P1M but only P10,000
was written in the contract because they intended it to be a
donation → void.
TIME OF THE PERFECTION OF THE CONTRACT
Auction Sale
Auction sale is perfected upon the fall of the hammer or any
other customary manner. Thus, before the fall of the hammer
in an auction sale, the bidder even if he has already made a
bid, he can still withdraw the bid as long as he would do that
before the fall of the hammer. Otherwise, (if after the fall of
the hammer), there is already a perfected sale.
Q: Can the auctioneer withdraw the goods before the fall of
the hammer?
A: As a rule, yes because the sale has not been perfected at
the moment unless the bidding or auction has been
announced to be without reserve.
Note: Before perfection, there is one contract which maybe
perfected. Before perfection meaning in the negotiation stage
→ this contract is known as the option contract.
Option Contract
Sanchez vs. Rigos
Facts: Mrs. Rigos offered to sell her land to Sanchez for a
certain price. Rigos gave Sanchez 2 years within which to
decide. (Note: The optionee or promisee or offeree is not
bound to purchase but he has the option to buy or purchase).
In this case, Sanchez has the option. Before the lapse of 2
years, Sanchez told Rigos that he is buying and offered the
Page 6 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
price agreed upon but Rigos refused claiming that she was
not bound by the written option agreement because no
option money (consideration) was given by Sanchez.
According to Rigos, the option contract is void.
Held: Since Sanchez accepted the offer and decided to buy
within the period before the offer was withdrawn, a perfected
COS was created even without option money. In this case,
there was no option contract because it was merely an option
agreement. Therefore, there was merely an offer on the part
of Rigos and once the offer was accepted before it was
withdrawn, regardless of whether option money was given
and in this case no option money was given, a perfected COS
was created.
Note: Iba pag may option money
Q: 2 years within which to decide – assuming there was
option money, before the offeree could decide to buy, the
offeror withdraw on the 6th month.
(a) Can the offeree on the 10th month say “I would
like to buy”?
(b) Can the buyer compel the seller to sell?
A: (a) No.
(b) No, an action for specific performance will not prosper
because when he said he will but there was not more offer to
be considered. Na-withdraw na eh.
Q: If the offeree files an action for damages, may that action
prosper there being option money given?
A: Yes, because with the option money, an option contract is
perfected, the offeror is bound to give the offeree, 2 years
within which to decide and failure to that he is liable not
based on perfected COS but on perfected contract of option.
Option Money (OM) vs. Earnest Money (EM)
OM is not part of the price while EM is part of the price and
at the same time, it is a proof of the perfection of the
contract.
Q: Can the parties themselves agree that there would be a
perfected COS and then the OM would be treated as part of
the price?
A: The SC said that this is binding between the parties.
Though it is an OM, it can be considered as part of the price
as long as it is stipulated. Without stipulation, the OM cannot
be considered as partial payment because it is a consideration
for the option and therefore not part of the price.
Q: With EM, does it mean that there is already a perfected
COS?
A: Not necessarily. Under the law, it is only a proof of the
perfection of the sale. In fact, there may not be a perfected
sale even if there was EM given, being merely a part of the
purchase price or total contract price. The parties may not
have actually agreed as to the total price, therefore, even if
they agreed that a certain amount is part of the price, they
have not agreed on the total price or if they agreed on the
total price, they have not agreed on the object of the sale. So
no perfected COS. EM goes into only 1 of the essential
elements, that is not the only element in COS. That is only a
proof of the perfection of the contract. Take note, a proof
does not necessarily establish a fact, it may not be sufficient
to establish a fact.
Q: With a perfected COS, does it mean it is already
enforceable?
A: Not necessarily. Note that upon perfection, the parties may
compel the other party to perform their respective
obligations. But the perfection is subject to the formalities
prescribed by law for that contract. Therefore, even under
1475, the perfection of the contract is subject to the
provisions of law on the formalities of COS like the statute of
frauds. There may be meeting of the minds but if it is not in
the form prescribed by law, it may be unenforceable.
G.R.: A COS may be in any form. Article 1483 provides that a
COS may be in writing, partly in writing xxx. This provision is
exactly the same as Article 1356 in contracts which provides
that contracts may be obligatory in whatever form they may
have been entered into provided all the essential requisites
are present. But then again even Article 1356 just like Article
1475 would provide for exceptions.
Exceptions: The law may require a particular form for its
validity. The Cattle Registration Decree is an example - where
the law itself provides for a particular form for the validity of
the sale. But the law may require particular form for its
enforceability of the sale and that would be 1403 or the
statute of frauds. Concretely, the sale of a parcel of land if not
in writing is valid but unenforceable. It is not void. Note that
the price of the land is irrelevant if immovable.
Example: Before, the sale of a land for P300 is valid and
enforceable even if not in writing. But presently, it has to be
in writing to be enforceable. The price is still irrelevant.
If the object of the sale is movable, you have to consider not
the value of the thing but the price agreed upon. The value
may be different from the price. You can sell a thing worth
P1,000 for P400 but the law provides for the price. If the price
is at least P500 and the sale is not in writing, it will be
unenforceable.
Q: Sale of a watch P450, not in writing, may it be
unenforceable?
A: It may be unenforceable if by the terms of such agreement,
the obligation therein is not to be performed within 1 yea r. If
they agreed that the watch will be delivered 2 years after and
the payment will also be made upon delivery, it would be
unenforceable.
Paredes vs. Espino
Facts: Paredes was a prospective buyer. Espino owns a land in
Palawan. Paredes is from Northern Luzon. Their negotiation
was thru letters and telegrams. Espino sent a letter to Paredes
stating that he and his wife agreed to sell the land to Paredes,
that the deed of sale will be executed upon the arrival of
Paredes in Palawan. When Paredes arrived, Espino said he is
no longer interested in selling. Paredes filed a case to compel
Espino to sell the land. Espino contended that the contract is
unenforceable because it is not in writing. He contended that
under the statute of frauds it is unenforceable. His contention
was sustained by the trial court.
Held: This contract is no longer covered by the statute of
frauds because there was a letter. Article 1403 provides that
a note or memorandum signed by the part charged would
be sufficient to take that contract out of the operation of the
statute of frauds. In this case, the defendant wrote a letter
with his signature on it. The letter took that contract out of
Page 7 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
the operation of the statute of frauds and therefore he may
be compelled to execute the final deed of sale.
RIGHTS AND OBLIGATIONS OF THE VENDOR
In a deed of sale (DOS), there can be hundreds of
obligations of the vendor but those obligations would be
because of the stipulation. But there are only few obligations
imposed by law. The 3 most important:
1. To transfer ownership
2. To deliver
3. To warrant the thing
There are other obligations:
4. Obligation to take care of the thing sold with the
diligence of a good father of a family prior to
delivery.
5. From the time of the perfection up to the time of
delivery then there would be obligation to pay for
the expenses for the execution and registration of
the sale and obligation to pay the capital gains tax
would be on the seller as a rule.
6. Obligation to deliver the fruits which is related to the
obligation to deliver the thing
OBLIGATION TO DELIVER THE FRUITS
BE: A sold a mango plantation to B but they stipulated that
delivery will be after the signing of the deed of sale. After
the expiration of the 6-month period, B demanded for the
delivery. The vendor was able to deliver 1 month after the
date when he was supposed to deliver the mango
plantation. During this period, the vendor harvested mango
fruits and sold them to X. The vendor was able to deliver
only after the other fruits were harvested and sold to Y. Can
B recover the mango fruits from Y during the 6 th month
period?
SA: Determine first whether B is entitled to the fruits because
if he is not entitled, then he cannot recover the fruits. Is he
entitled to the fruits after 6-month period during the 1-month
period prior to delivery? Yes, in fact, under 1537, the fruits of
the thing sold from the time of perfection shall pertain to the
buyer.
Q: Does it mean that the fruits from the time of perfection
shall pertain to the buyer?
A: Hindi naman. 1537 should be considered in relation to
1164. Under 1164, the fruits shall pertain to the creditor only
from the time the obligation to deliver the thing arises. Thus,
B is entitled to the fruits only from the time of the expiration
of the 6-month period. Di ba may agreement sila that the
mango plantation will be delivered only after 6 months? Upon
the arrival of this period, the obligation to deliver the thing
arose, therefore, B, consistent with 1164 and 1537 will have
the right to the fruits.
Q: Can he recover the fruits from X?
A: No. Under 1164, 2nd paragraph, the buyer or the creditor
will have no real right over the fruits after the delivery of the
thing.
Q: What is the remedy of the buyer?
A: The remedy is to go after the seller for selling these fruits
na hindi naman sya entitled. The buyer is already entitled
although again he will have no real right over the fruits until
the delivery of the thing to him.
OBLIGATION TO TAKE CARE OF THE THING
G.R.: The thing sold should be determinate because if generic
(1460, 2nd paragraph) then there is nothing to be taken cared
of. It will become determinate only upon delivery.
Exceptions: There are sales transactions wherein the vendor
would not have this obligation:
a. Constructive delivery - brevi manu – There
would be no obligation on the part of the seller
to take care of the thing from the time of
perfection because at the time of perfection, the
buyer was already in possession of the thing.
Maybe he borrowed the thing. Example: he
borrowed the car and he decided to buy it – the
thing was already in his possession.
b. “Kaliwaan” ang bentahan → upon perfection
may delivery na then there is nothing to be
taken cared of.
OBLIGATION TO PAY EXPENSES / TAXES
These obligations may be the subject of stipulation.
By agreement, it would be the buyer who will pay xxx
Normally, dito hindi natutuloy ang sale dahil hindi
magkasundo kung sino magbabayad ng tax.
OBLIGATION TO TRANSFER OWNERSHIP
BE: May a person sell something which does not belong to
him? Would the sale be valid? Would the buyer acquire
ownership over the thing sold, if seller does not own the
thing?
SA: Yes. Ownership over the thing sold is not an essential
requisite for the sale to be valid. But if the seller does not
own the thing, he may have a problem on his obligation to
transfer ownership. The problem would be whether or not
the buyer would acquire ownership over the thing sold if the
person who sold the thing is not the owner.
Q: Who can transfer ownership by way of sales?
A: Only those who have the right to sell.
Q: Who would have the right to sell and therefore they can
transfer ownership by way of sale?
A: First, is the owner. Even if he is not the owner, he may have
the right to sell because:
(1) He was given the authority by the owner.
Example: Agent
(2) He may not be the owner but he may have the
authority of the law to sell, known as “Statutory
Power to Sell” (Article 1505). Examples: Notary
public in pledge, liquidators, guardians and
receivers.
(3) Those who have the authority of the court.
Example: Sheriff. Note: it is as if they have the
authority of law because not even the judge can
validly sell something if it is not consistent with
the law.
Q: May a buyer acquire ownership over the thing sold if the
seller has no right to sell?
A: The answer by way of exception is yes. But the general rule
here is under 1505 – the buyer acquires no better title than
what the seller had. If the seller is neither the owner nor does
he have the authority to sell, the buyer acquires no better
title than what the seller had. If his right is only as a lessee
Page 8 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
that is the most that can be transferred to the buyer. If he has
no title then no title can be transferred to the buyer.
Exceptions: (When the buyer can acquire a better title than
what the seller had. Even if the seller does not have the right
to sell, the buyer may acquire ownership over the thing sold
because the law so provides and not because the seller was
able to transfer ownership to the buyer.)
1. By Estoppel
2. Estoppel by Deed
3. Estoppel by Record
4. Sale by an Apparent Owner
5. Negotiable Document of Title
6. Purchases from a Merchant’s Store xxx
1. By Estoppel – by the principle of estoppel, a person is
precluded from denying that another person has authority to
sell because of his acts. Also known as “Estoppel in Pais”
which is a kind of equitable estoppel because of the acts /
representation of the owner, he may not later on deny the
authority of the 3rd person.
2. Estoppel by Deed
BE: A and B co-owners of land sold (sale is verbal) to X their
land. X subsequently sold the land to Y. Would Y be
considered to have acquired ownership over the land?
SA: Under 1434 which is considered as “Estoppel by Deed”
(technical estoppel) – when the seller who was not the
ownerat the time of the sale, acquires ownership,
automatically, ownership passes to the buyer by operation of
law. However, Article 1434 requires delivery to the buyer.
And under the facts, 1434 would not apply because:
a) There was no showing there was payment
b) No showing that there was delivery of the land to
X.
It cannot be said that by operation of law, Y likewise acquired
ownership by way of estoppel by deed.
3. Estoppel by Record
Jurisprudence: Sale by nephew of the owner of the land.
Since the nephew could not deliver the land, the buyer sued
the nephew for estafa. For the accused to be acquitted, he
asked his uncle to testify that he actually had the authority to
sell. When the uncle testified in court, the nephew is
acquitted. After acquittal, the buyer demanded from the
uncle the delivery of the land. The uncle refused, claiming
that “sa totoo land, I did not authorized my nephew”.
Q: Case was filed against the uncle, would that action
prosper?
A: SC said yes because he cannot be allowed now to claim
that his nephew was not authorize to sell after he testified in
court that he gave such authority.
This is estoppel by record which is considered a technical
estoppel.
4. Sale by an Apparent Owner
A. Factor’s Act
B. Recording Laws
C. Any other provision of law enabling the apparent owner of
the goods to dispose of them as if he was really the owner.
A. Factor’s Act
Factor is an old name for agent. Even if agent has no
right to sell, a third person may acquire ownership because he
may rely on the power of attorney as written.
Example: Special Power of Attorney (SPA) – agent was
authorized to sell a car. However, in a verbal instruction when
the SPA was delivered, the principal authorized the agent to
sell that car to 1 of the members of a certain organization but
the agent did not sell that car to one of the members of a
certain organization.
Q: Would the buyer acquire ownership?
A: Yes. Article 1900 provides that so far as 3 rd persons are
concerned, they only have to rely on the SPA as written, even
if agent has no authority or right to sell.
B. Recording Laws
*most common question in the bar exam
Mapalo vs. Mapalo
Facts: The elder brother, Miguel Mapalo, donated half of his
land to his younger brother, Maximo Mapalo, because the
latter will get married. But instead of the younger brother
asking his elder brother to sign a deed of donation over that
land, he asked his elder brother and the latter’s spouse to sign
a Deed of Sale over the entire parcel of land. He was able to
have the entire property registered in his name. Few years
after, he sold the land to the Narcisos. Obviously, he does not
have the right to sell the other half. The Narcisos claimed that
they are buyers in good faith from an apparent owner
because the entire property was in the name of Maximo.
Q: Did the Narcisos acquire ownership?
A: SC Said → no, because the law requires that the sale must
not only be a sale by an apparent owner but the buyer must
be a buyer in good faith. The buyers here were in bad faith
because before they bought the land, they went to the house
of Miguel and asked him whether he would allow Maximo to
sell the entire land. SC said they are in bad faith.
BE: The owner of a parcel of land covered by an OCT
mortgaged the land to a creditor. The owner delivered the
OCT to the creditor. The mortgagee forged the signature of
the owner in a deed of sale. He was able to register the
property in his name. He sold the land to a third person who
had no knowledge of the transaction. Did the mortgagee
acquire ownership?
SA: No. A forged deed is a void instrument and cannot convey
a valid title to the buyer but under the law the forged deed
may actually be the root of a valid title under the “Mirror
Principle” – when the buyer bought it from the mortgagee in
whose name the property was registered and relied on the
TCT, then if he bought the property in good faith, he will be
considered the owner under Article 1505 in relation to P.D.
529. He bought the land relying on the TCT and bought the
land in good faith then he would have a better right than the
real owner.
Q: When a buyer may be considered a buyer in good faith?
A: By the mere fact that he had no knowledge at the time of
the execution of the deed does not necessarily mean that he
is in good faith. The law further requires that he must have
fully paid without knowledge of the defect in the title of the
seller. So if after execution he is in good faith but before
payment he is in bad faith then he is in bad faith.
BE: A, the owner of a parcel of land entrusted to his clerk the
TCT of the land for safekeeping. This clerk instead forged the
signature in the DOS with him as the buyer. Thereafter, he
was able to have the property registered in his name. Then
Page 9 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
he sold the land to a third person. Did the clerk acquire title
over the land? Can the owner of the land have the property
registered in his name?
SA: The 3rd person being in good faith, he is considered to
have acquired ownership over the thing sold even if the seller
had no right to sell. By way of exception because the buyer
bought it from an apparent owner. An apparent owner who
disposed the thing as if it was owned by him.
5. Negotiable Document of Title
If goods are covered by a negotiable document of
title and it was thereafter negotiated. If the buyer bought it in
good faith and for value, he will be protected under the law.
He will acquire ownership even if the seller did not have the
right to sell.
Example: The seller may have acquired title by violence.
Binugbog nya yung owner ng goods. Pero kung negotiable
document of title yan and properly negotiated, lalo na kung
bearer document of title, then the buyer may acquire
ownership even if the seller has no right to sell.
6. Purchases from a Merchant’s Store / Markets / Fairs
Sun Brothers vs. Velasco
Facts: Sun Brothers was the owner of a refrigerator. Sun
Brothers was engaged in the business of selling refrigerator.
Sun Brothers sold a ref to Lopez on installment basis. As
stipulated, Sun Brothers reserved ownership until full
payment. Lopez only paid P300 out of P1,500. The balance to
be paid on installment. Lopez then sold the ref to Velasco.
Q: Would Velasco acquire ownership?
A: No because Article 1505 provides that the buyer acquired
no better title than what the seller had. However, Velasco was
the owner of a store. On the next day, Velasco sold the ref to
Ko Kang Chu who paid in full. When Sun Brothers learned this
transaction, it filed an action to recover the ref from Ko Kang
Chu.
Q: Can Sun Brothers recover the ref from Ko Kang Chu by
reimbursing the price?
A: SC Said no. Article 1505 provides that the ownership of the
buyer who bought the thing from a merchant’s store and he
bought it in good faith is absolute in character. Article 559
does not apply because Sun Brothers was not unlawfully
deprived of the ref and the ref was neither lost. 559 will apply
if the owner was unlawfully deprived (Example: the thing was
lost or stolen). Under 559 he can recover by reimbursing the
buyer who bought the thing in good faith. He has to
reimburse.
BE: The painting owned by F was stolen from her and later
she noticed the painting in the room of B. When asked how
he acquired the painting, B said he bought it from a gallery
auction. Can the owner F recover the painting from B?
SA: The first consideration here is the nature of the gallery
auction. Is it a public sale or not? Some suggested answers of
the UP Law Center would claim that a gallery auction is not a
public sale.
Atty. Uribe: I can agree that some gallery auctions are private
– “by invitation”. Thus, in that auction I would definitely
agree, hindi yan public sale.
If it is not a public sale then the owner who was unlawfully
deprived can recover that property even without
reimbursement. If the auction sale is considered a public
sale, he can recover as long as he is willing to reimburse the
buyer of the price paid in that sale. Article 559 is applicable
because the owner was unlawfully deprived.
BE: F lost her diamond ring in a hold-up. Later on, this ring
was an object of a public sale of one pawnshop. Can F
recover the ring from the buyer in that public sale?
SA: Yes, Article 559 provides that even if the buyer is in good
faith so long as the owner is willing to reimburse the buyer of
the price paid in that sale.
Note: Again in 1505, there is no right to recover as long as the
buyer bought it in good faith from a merchant’s store, there
can be no recovery as a matter of right.
Q: How transfer of ownership is effected?
A: Under the law, as far as things are concerned, it is effected
by delivery:
(a) Actual
(b) Constructive
There can be no transfer of ownership without delivery.
Q: Is it correct to say that every time there is delivery, the
buyer acquires ownership upon delivery?
A: Not necessarily. This is not an absolute rule. There are
kinds of sale where despite delivery the buyer does not
acquire ownership upon delivery:
(1) Conditional Sale – ownership is reserved by the seller
such that despite delivery, ownership does not pass.
Q: So when would the buyer acquire ownership in
conditional sale?
A: Not upon delivery but upon the happening of the
condition which is normally the full payment of the price.
(2) Sun Brothers Case
(3) Sale on Trial / Sale on Satisfaction / Sale on Approval –
upon delivery, even if there is actual delivery there is
no transfer of ownership at the time of delivery.
Q: When would the buyer acquire ownership?
A: From the moment he signifies his acceptance or approval
of the thing.
Q: What if he did not signify his acceptance or approval?
May he be considered to have accepted and therefore
ownership may be considered to have passed to him?
A: Yes. 2 Scenarios:
(a) There may be a period agreed upon by the parties
within which the buyer would have to decide. Even if
he failed to signify his acceptance by the mere lapse of
the period, he is deemed to have accepted (impliedly
accepted) hence, ownership passes to him.
(b) Even before the lapse of the period, he may be
considered to have accepted if he did an act wherein
he would be considered to have adopted the
transaction then ownership passed to him.
Example: Even if he has 10 days within which to decide
but on the 2nd day, he sold the car to another.
Obviously, he is deemed to have accepted the thing
because he did an act which is inconsistent with the
ownership of the seller like he donated or destroyed
the thing.
Page 10 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
(c) If there is no period agreed upon, the law says if he did
not signify his acceptance he will be considered to have
accepted after the lapse of a reasonable time.
Reasonable time will depend on the circumstances of
the sale, purpose of the sale, nature of the thing sold.
Example: Perishable goods.
Sale or Return
Q: Ownership passes upon delivery?
A: Yes. However, the buyer is given the right to revest the title
back to the seller normally within a certain period. Example:
Clauses in subscription magazine which says that you can
return within 30 days without payment.
BE: A car was sold for P150,000. P75,000 paid upon the
execution of DOS. The balance payable on a monthly basis.
P75,000 was paid. The car was delivered to the buyer.
However, before he could pay the balance, the car was
destroyed due to a fortuitous event or was burned xxx Can
he still be compelled to pay the balance?
SA: Yes. Upon the delivery of the car to the buyer, there being
no retention of ownership by the seller. (Note: Wala sa facts
na na-retain ng seller and ownership). Therefore, ownership
passed to the buyer. Under the principle of res perit domino –
Article 1504 – the owner bears the loss and hence it can be
compelled to pay the price.
G.R.: Res perit domino – 1504.
Note: Determination of when ownership passed is important
because if at the time of the loss, the buyer is not yet the
owner, as a rule, the buyer will not bear the loss like in sale on
approval and he has 10 days within which to decide and the
thing was lost through a fortuitous event within the 10-day
period without fault on his part, the seller will bear the loss.
Exceptions:
1. Lawyers’ Cooperative vs. Tabora
Facts: This pertains to a sale of American Jurisprudence to
Atty. Tabora. It was a sale on installment basis. Upon delivery
or on the day the books were delivered to the office of Atty.
Tabora, the entire block where Atty. Tabora’s office was
located (in Naga City) was burned. The office including the
books was burned. Atty. Tabora refused to pay the balance.
Lawyers’ Cooperative filed a case. Two defenses were raised
by Atty. Tabora: (1) Res perit domino – there was a stipulation
in the contract that Lawyers’ Cooperative will retain
ownership over the books until full payment. When the books
were lost, no full payment so Atty. Tabora was not yet the
owner. Hence, Lawyers’ Cooperative should bear the loss.
Q: Is this argument correct?
A: SC Said no. Although there was a stipulation that Lawyers’
Cooperative retains ownership over the books until full
payment, there was another stipulation in the contract which
states that the risk of loss shall pertain to the buyer from the
time the books are delivered whatever may be the cause of
the loss.
So with that stipulation, that is one of the exceptions.
2. Title was reserved by the seller only to secure the
payment of the price by the buyer
Q: But even assuming that there was such no stipulation
under the contract, would Atty. Tabora have to bear the
loss?
A: Yes because it would fall into the other exceptions under
1504 that when the title was reserved by the seller only to
secure the payment of the price by the buyer, then by law,
risk of loss will already be with the buyer. This title of the
seller is known as “Security Title” and therefore by law xxx
the buyer will bear the loss.
3. Delay in the Delivery
When there is delay in the delivery due to the fault
of one of the parties, whoever was at fault will bear the loss.
Note that either buyer or seller may be at fault.
Example 1: The buyer and the seller may have agreed that the
goods are to be obtained by the buyer at the warehouse of
the seller on a specific date. On the date agreed upon, the
seller demanded the buyer to get the goods. Despite such,
the buyer failed to get the goods. On the next day, the
warehouse was destroyed due to fortuitous event.
Q: Who is the owner at that time?
A: The seller but there was delay on the part of the buyer
hence under 1504 it is the buyer who will bear the loss.
Example 2: The seller himself maybe the one at fault. Thus, he
is in delay in delivering the goods to the buyer.
Q: Why would this be an exception to the res perit domino
rule?
A: Ang premise dito, the ownership has already passed to the
buyer but the goods are still with the seller. Can this happen?
Yes, because of constructive delivery. If there was constructive
delivery, ownership passes to the buyer but physical
possession is still with the seller. They may have agreed this
time that the seller will be the one to deliver the goods to the
buyer at a certain date. When the date arrived, despite
demand from the buyer, there was no delivery on the part of
the seller. Even if the goods are destroyed the next day due to
fortuitous event, take note ang owner ay ang buyer na but
who will bear the loss? The seller because he was in delay in
delivering the goods.
DOUBLE SALE (ARTICLE 1544)
BE: F sold a registered parcel of land to R who did not
register the sale. Thereafter, F sold the very same parcel of
land to C who registered and obtained a new TCT in his
name. Who would have a better right?
SA: Atty. Uribe: I fully agree with the UP Law Center’s answer.
It depends on whether or not C registered the sale in good
faith. Registration is only one of the requirements good faith
is equally an important requirement.
Note: In 1544 (double sale), as to which rule applies will
depend on the thing sold if movable or immovable.
Q: If the thing is sold twice, who would have the better
right?
A: If movable, the buyer who first took possession in good
faith will have the better right. If immovable, the buyer, who
first registered in good faith, will have the better right. If there
was no registration, it will be the first who took possession in
good faith. If no possession in good faith, the
buyer who has the oldest title in good faith.
Even the 1st buyer is required to be in good faith. Obviously,
the first buyer would have the oldest title. Yung good faith
ditto obviously would not pertain to absence of knowledge of
the 2nd sale kasi syempre 1st buyer sya. He is nonetheless
required to have bought the thing in good faith. Good faith
Page 11 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
means that he had no knowledge of the defect of the title of
the seller.
Warning: Please be careful when you recite – you register the
sale not the land.
BE: If a thing is sold to 2 or more persons, what would be
the effect of:
(a) The first buyer who registered the sale with
knowledge of the 2nd sale.
(b) The second buyer who first registered the sale with
knowledge of the prior sale.
Who would have a better right?
SA: (a) In the first scenario – the first buyer who registered
the sale with knowledge of the second sale would that make
him a registrant in bad faith? No. Yung knowledge would
pertain to the knowledge of the prior sale in order for him to
be a bad faith registrant. Eh una naman syang buyer eh so
even if he registered, it would not make him a bad faith
registrant.
(b) In the second scenario – the buyer there is in bad
faith. He has knowledge of the prior sale. Hence, he has no
right.
Q: If a person bought a thing without knowledge of the prior
sale, does that mean he is a registrant in good faith?
A: Not necessarily because from the sale he may have
acquired knowledge prior to the registration. What is
required by law is not being a buyer in good faith but a
registrant in good faith. Pwedeng at the time of the sale xxx
the buyer had no knowledge na nagkabentahan na pala nung
una but after 2 months nung magpaparegister na, the buyer
had the knowledge of the prior sale and therefore he will be a
registrant in bad faith.
Bautista vs. Sioson
Facts: The owner A sold a registered land to B who did not
register and neither did B take physical possession because
after the sale they executed a lease agreement in which B was
now the lessor. A continued to be in possession of the land.
After the sale and the contract of lease, A sold the land to C,
this time C took physical possession.
Can he do that? Yes. Kasi lessee sya eh, hence, he can transfer
possession to the 2nd buyer.
Who between B and C would have a better right? (C did not
also register the sale)
SC Said that B would have a better right because when he
executed a lease agreement with A, he is in contemplation
of law in possession which is legal possession over the thing
and thus making him a possessor in good faith. Kay C,
physical possession nga pero pangalawang possession lang.
Yung legal possession was with B.
Note: This decision was criticized because some authors said
that it should be actual possession but the SC said that legal
possession would suffice.
Carumba vs. CA
Facts: Sale of land to B who took physical possession but did
not register. He is the first buyer. However, the seller (A) is a
judgment debtor in one case to a certain creditor named C.
The land became the subject of an execution sale. The buyer
became C who registered the sale.
Q: Who would have a better right between C and B (C had
no knowledge of the sale)?
A: SC Said → B because this land was not registered under the
Torrens System. 1544 would not apply to unregistered lands.
Q: How would you know that the land is registered under
the Torrens System?
A: Pag may OCT or TCT na. Pero kung ibang documents lang
like tax declaration, it is not considered registered.
Q: But C registered the sale, does it mean that it is
registered under the Torrens System?
A: No because there are also systems of registration of sale of
land in which the lands are still considered as unregistered
lands. Sa ibang libro. Hindi libro under the Torrens System.
Q: If 1544 will not apply, who has the better right?
A: B because there was delivery to him which was actual
delivery and hence under the general rules on delivery,
ownership passes to the buyer and when ownership have
passed to the buyer, when the property was sold in an
execution sale, ano makukuha ng buyer sa execution sale?
Wala. He merely steps into the shoes of the judgment debtor
at the time of the sale then he did not acquire ownership by
virtue of that sale.
OBLIGATION TO DELIVER THE OBJECT OF THE SALE
Determine the subject matter if it is a thing or a right
because there are different modes of delivery as to thing and
as to right.
Things
Kinds of delivery of things as a consequence of sale known
as “tradition” – under the law:
1. Actual Delivery / Material Delivery / Physical Delivery / Real
Delivery – the thing is in the possession and control of the
vendee. Take note “control”. Take note “to the vendee”.
Q: What if the thing was delivered to a 3rd person?
A: Jurisprudence – SC said → yes, there maybe actual delivery
if the third person has authority to receive from the vendee.
Thus, making him an agent of the vendee and that would still
be actual delivery.
Note: Philippine law does not only require actual delivery –
constructive delivery may result in transfer of ownership.
2. Constructive – by the execution of a public instrument if
the contrary intention does not appear on the document. By
the mere execution of the public instrument that is equivalent
to delivery. Hence, ownership passes to the buyer.
Kuenzle & Streiff vs. Macke & Chandler
Facts: The original owner here Stanley and Griffindor (parang
Harry Potter ) and the property involved here are fixtures of
a saloon. Macke and Chandler are judgment creditor of
Stanley and Griffindor. Because of a judgment in favor of
Macke and Chandler, the sheriff levied upon these properties
which was still in the possession of Stanley and Griffindor. The
properties under execution were questioned by Kuenzle and
Streiff. Kuenzle and Streiff claimed that these things were sold
to them prior to the levy. If they claimed that the properties
were sold to them, the properties should be in their
possession. Take note that Stanley and Griffindor were still in
Page 12 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
possession of the goods physically. Hence, there was no
actual delivery.
Held: In order that ownership would pass, it has to be in a
public instrument if that would be by constructive delivery.
Note: The execution of a public instrument may be equivalent
to actual delivery if the contrary intention does not appear on
the DOS. Kasi pwedeng notarized but it is clear in the contract
that ownership will not pass until full payment of the price
then that is not equivalent to delivery. The intention is clear.
Kinds of Constructive Delivery
1. Delivery of the Keys – of the place where the goods are
located like a warehouse.
Prof. De Leon: this also called as symbolic delivery.
2. By Mere Consent or Agreement of the Parties – if at the
time of the sale, possession to the goods cannot be
transferred to the buyer. There must be a reason why it
cannot be transferred at the time of the sale. This is also
known as tradition longa manu.
Example 1: The thing was the subject matter of a lease with a
3rd person until the expiration of the lease, the thing cannot
be delivered.
Example 2: The thing was the subject matter of
commodatum. As a rule, period of commodatum has to be
respected.
3. Brevi Manu – this is a kind of constructive delivery because
the buyer was already in possession of the thing sold at the
time of the perfection of the sale so he will continue to be in
possession after the sale, no longer as a lessee but this time
as the owner. So dati lessee lang sya that is why he was in
possession or maybe depositary lang sya or maybe he was the
agent at the time prior to the sale.
4. Constitutum Possessorium – the seller will continue to be
in the possession of the thing after the sale but no longer as
an owner but in another capacity like lessee.
Bautista vs. Sioson
Because a lease agreement was entered into by the buyer and
seller after the sale then the buyer became the lessor and the
seller became lessee. Therefore, the lessee would continue
with the possession no longer as an owner.
Q: What if pursuant to their agreement the seller delivered
the goods to a common carrier. Upon delivery of the goods
to a common carrier, would that result in transfer of
ownership immediately? (This is important because in case
the goods were destroyed even due to a fortuitous event
while in transit, who will bear the loss?)
A: If delivery to a common carrier is delivery to the buyer,
then ownership passes to the buyer upon delivery to the
common carrier. That is the general rule.
Exceptions:
(1) If stipulated in the DOS that despite delivery to
common carrier ownership will not pass to the buyer
because ownership will pass upon full payment.
(2) Even if DOS does not provide for such stipulation, the
seller may have obtained a bill of lading which provides
that the goods are deliverable to the seller himself or
the agent of the seller.

Rights
Kinds of Delivery of Incorporeal Property / Quasi – Tradition:
1. Execution of Public Instrument
2. Placing the Title of Ownership in the Possession of Vendee
– a right would normally be covered by a certificate.
Example: delivery of the certificate of shares of stocks.
3. Use by the Vendee of His Rights with the Vendor’s Consent
Example: Sale of shares of stocks → the vendee may not
always have the right to exercise his rights under the shares of
stocks. Concretely, if there is a stockholders’ meeting, the
books of the corporation will be closed for 30 days before the
meeting. Thus, if the sale occurred when the books are
already closed, no one will be recognized except those
registered owners. So if you are the buyer of those stocks, you
can only use your right with the consent of the vendor.
RULES ON SALE AS TO QUANTITY / QUALITY OF THE THING
SOLD
Q: In a sale involving 1,000 pairs of shoes with a specific
design as agreed upon. The seller delivered 1,200 pairs of
shoes instead of only 1,000. Can the buyer reject
everything?
A: No. He has the right to reject only the excess. Reject the
200 but he can be compelled to accept the 1,000.
Q: What if instead of 1,000, 800 was only delivered?
A: The buyer cannot be compelled to receive 800 because
partial performance is non-performance. You cannot compel
the creditor to accept partial fulfillment as a rule because (1)
it can be a subject of a stipulation that there can be partial
delivery.
Other Exceptions:
(2) When obligation pertains to obligation which is partly
liquidated and partly unliquidated. The debtor can compel
the creditor to accept the portion which was already
liquidated.
(3) When the obligation is subject to different terms and
conditions.
Q: The shoes per pair is P1,000. The seller only delivered 800
pairs out of 1,000 pairs. The buyer accepted. It turned out
that the seller can no longer deliver the balance (200 pairs).
How much can the buyer be compelled to pay? 800 x
P1,000?
A: Not necessarily. You have to make a distinction as to
whether the buyer was aware that the seller could no longer
deliver the balance or when he accepted, he was not aware. If
he was aware that the seller could no longer deliver the
balance then he can be compelled to pay at the contract rate
so 800 x P1,000 = P800,000. If he had no knowledge, he can
be compelled to pay only the fair value. Fair value siguro non
P700 each instead of P1,000.
Q: The obligation to deliver 1,000 cavans of Milagrosa rice.
Instead of delivering 1,000 cavans of Milagrosa, the seller
delivered 1,100 cavans of both Milagrosa and Burmese rice.
May the buyer reject everything?
A: Yes, if the goods are indivisible. Meaning each sack of rice,
Milagrosa and Burmese rice were mixed. However, if it is clear
that per sack it is Milagrosa rice and the 100 sacks, it is clear
that those are Burmese rice that would not be considered as
Page 13 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
indivisible. He can be compelled to accept 1,000 sacks
Milagrosa and he has the right to reject 100 sacks Burmese
rice.
SALE OF REALTY
Q: Sale of a parcel of land. Price agreed upon is P1M. More
or less 100 sqm. The actual area delivered by the seller was
only 95 sqm. What are the remedies of the buyer?
A: (1) Specific performance – would be a remedy if the seller
is still in the position to deliver the balance. Siguro yung
katabing lupa sa seller din, hence, he can afford to give
additional 5 sqm.
(2) Q: If specific performance is not possible, is proportional
reduction a remedy?
A: It depends on whether the sale is considered as a sale with
a statement of an area of a rate of a certain measure or if it is
a lump sum sale.
(a) If lump sum – even if the area delivered is less than the
area stated in the DOS, there is no right to demand for
the proportional reduction of the price. Q: Pero pag
sumobra – 120 sqm na deliver, can the seller demand
for the increase of the price? A: If lump sum sale, no.
(b) If the sale was based at a rate of a certain price per unit
of measure like it was so clear in the contract that the
land is being sold at P10,000 per sqm so P10,000 per
sqm x 100 = P1M, the remedy of proportional
reduction of the price or accion quanti minoris is
applicable.
(3) Q: Under the facts, 95 sqm was delivered, would
rescission be a remedy?
A: As a rule no because rescission would only be a remedy if
the area lacking is more than 10% of that area agreed upon.
So kung 100 sqm, dapat 11 sqm or 15 sqm ang kulang, so out
of 100 kung 85 lang ang na-deliver, then rescission is a matter
of right.
Q: But kung 95 lang ang na-deliver meaning the area
lacking is less than 10%, may rescission be a remedy?
A: Yes, by way of exception
(a) If the buyer can prove that he would not have
bought the thing or land hand he known that is less
than 100 sqm. It is a matter of proof.
This is consistent with a characteristic of rescission under
1191, that in order for rescission to prosper – the breach must
be a fundamental breach. Kung kulang lang ng 5sqm / 10 sqm
at malaki yung area, there can be no rescission as a matter of
right.
(b) The other one is even if the entire area was delivered
as stated, proportional reduction / rescission may be a
remedy if a part of the land delivered is of inferior
quality than that stipulated by the parties.
Example: Sale of rice field, it turned out about 20% of
the land is swamp, so hindi pwede taniman. Hence,
proportional reduction is possible if he still would want
the land or rescission would be a remedy because the
area of inferior quality is more than 10% of the total
land area unless he can prove that he would not have
bought the land had he known a portion of the land is
of inferior quality.
PLACE OF DELIVERY
Read 1524, 1525 and 1198
The seller delivered the goods to the place of business of the
buyer. If the buyer refuses to receive the goods, the buyer will
be considered in delay and therefore will be liable to the
seller because of unjust refusal.
Q: May the buyer be considered in delay for his refusal to
accept if there is no place stipulated in the contract?
A: It depends on the kind of thing. Determine if it is
determinate or generic. If the thing is determinate, the law
provides that it will be the place where the thing is located at
the time of the perfection of the contract.
Q: What if the object of the sale is a generic thing?
A: Seller’s place of business or residence.
Note: If there is no stipulation when to be delivered, the
seller cannot be compelled to deliver.
Q: What if at the time of the perfection of sale, though the
thing is determinate, it was on board a ship while in transit.
Where will be the place of delivery?
A: Depending on the shipping arrangement agreed upon by
the parties.
F.O.B. – Free on Board
C.I.F. – Cost, Insurance, Freight
F.O.B. and C.I.F are rules of presumption which would have to
give way to the real intention of the parties. So after all, the
F.O.B. or C.I.F. arrangements do not really determine the place
of delivery, they only make rules of presumption.
So in a C.I.F. arrangement, it is only presumed that the place
of delivery is the port of origin.
In a F.O.B. destination, it is only presumed that the point of
destination is the place of delivery.
Q: What really determines the place of delivery?
A: SC said this indication as to the intention of the parties as
to the place of delivery is the manner and place of payment. If
there is an agreement as to where and how the price is to be
paid that would be the place considered for purposes of
delivery and therefore for transfer of ownership.
Concretely, in one case which was C.I.F. arrangement
– it was stipulated that the seller can demand the payment of
the price upon the arrival of the goods at the port of
destination. (Supposedly, in C.I.F. arrangement, the place of
delivery is the port of origin). SC said the place of delivery
because of the stipulation is the port of destination. It is
where the payment is to be made.
Q: What was the purpose of fixing the delivery arrangement
as a C.I.F. but the place of delivery is the port of destination?
A: SC said the C.I.F. arrangement may have been agreed upon
only to fix the price. Example: They fixed the price for P2M
that would include the freight, insurance or cost but still the
place of delivery is the port of destination.
In another case, F.O.B. destination so based on the
presumption the place of delivery will be the port of
destination xxx the seller would have to bear all the expenses
for the delivery of the goods up to the port of destination.
However, it was stipulated in the contract that the seller may
Page 14 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
demand for the payment of the price by mere presentation of
the bill of lading (BOL).
Q: Where do you get the BOL?
A: At the port of origin. Hence, even in the port of origin he
can already present the BOL to the buyer and hence compel
the buyer to pay the goods. Again SC ruled in that stipulation,
the place of delivery is the port of origin. And the purpose of
the F.O.B. arrangement, it was only agreed upon in order to
fix the price meaning that the seller will still have to bear the
expenses for the transportation of the goods up to the
destination although the buyer can already be compelled to
pay the price even at the port of origin.
So consider always the manner and place of payment
which is determinative as to the place of delivery.
Read 1582
Obligations which cannot be Waived:
1. Obligation to transfer
2. Obligation to deliver
Obligation which can be Waived:
1. Obligation to warrant the thing
Kinds of Warranties under the Law:
1. Express
2. Implied
1. Express – any affirmation of fact or any promise by the
seller relating to the thing, the natural tendency is to induce
to purchase the thing.
Requisites:
(a) There is an affirmation of fact
(b) The fact must pertain to the thing either to the quality,
character or title of the thing
Any other matter may not be considered as an express
warranty.
The use of the words / terminologies is not conclusive as to
whether or not there is an express warranty.
Example: “I guaranty / warranty you that you will be happy if
you buy this car at P100,000”→ this does not result in an
express warranty
Again, if the affirmation of fact pertains to the quality of the
thing, it is an express warranty.
Example: These 10 sacks of fertilizer would result in 200
cavans of rice.
The statement of the seller’s opinion is not as a rule
considered an express warranty.
Example: “This is the best piña cloth” → it may turn out that
there are better piña cloth.
As long as the seller is not an expert on that field, that would
be treated merely as an opinion and there can be no liability
for breach of an express warranty.
BE: “A” sold a land to B for P1M in Antipolo. As agreed upon
P100,000 will be paid upon the signing of the DOS. The
balance will be paid within 30 days from the time the
occupants (squatters) of the land are evicted. It was so
stipulated that if within 6 months, the squatters have not
yet been evicted, the seller should return the P100,000.
Another stipulation states – within the 6-month period, the
value of the land doubled. Despite the filing of an eviction
suit by the seller and the lapse of the 6-month period, the
squatters were still occupying the land. The seller offers to
return the P100,000 to the buyer. The buyer refused to
accept the P100,000 and told the seller “never mind even if
the squatters are still there. I will still buy the land”. So the
buyer offered to pay the balance P900,000 and demanded
that a DOS be executed by the seller. The seller refused to
accept the P900,000. What he did is to file an action to
rescind the contract. Would the action prosper?
SA: 2 answers:
(1) If the answer is based on rescission, the action will not
prosper because rescission may only be invoked by the
aggrieved party. The seller is not an aggrieved party.
(2) However, under 1645 if the obligation is subject to the
happening of a certain condition, Atty. Uribe: Actually, here
the performance of the obligation is subject to the happening
of the condition.
If the condition did not happen, the buyer would have 3
options:
(a) Not to proceed with the contract, which is rescission.
(b) He may waive the condition (eviction of the squatters) and
proceed with the sale → this was the remedy chosen by the
buyer in this case.
(c) He can treat the non-happening of the condition as a
breach of warranty and claim damages.
Obviously, the buyer chose option (b) and therefore the seller
cannot rescind the contract.
2. Implied –
Prof. De Leon: because of this implied warranty, it cannot be
said that Philippine law does not adopt caveat emptor “buyer
beware”. (Faye’s Caveat : Please check the book of Prof. De
Leon regarding this statement. Thanks )
Even if there is no stipulation as to these warranties, the law
itself would provide for these warranties and hence if there
are hidden defects he would have remedies under the law or
even if he was deprived of the thing he bought he would have
a remedy against the seller. Hence, it is not correct to say that
Philippine law has adopted caveat emptor. But there are
certain instances when there would be no such implied
warranty against hidden defects. There may be warranty as to
title or against eviction but there is no warranty against
hidden defects under certain circumstances.
Warranty Against Eviction / Title
Q: If the seller was able to transfer ownership to the buyer
may the seller nonetheless be held liable for breach of
warranty against eviction?
A: Yes. These are 2 different obligations: the obligation to
transfer ownership and the obligation to warrant the thing.
Example: This warranty against eviction would include the
warranty that the buyer from the moment of the sale have
and enjoy the legal and peaceful possession over the thing
sold.
Page 15 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
He may be deprived of the thing by a 3 rd person even if he
would not lose ownership.
Q: When would this happen?
A: Maybe the 3rd person has a better right to the possession
of the thing. Maybe there was a lease agreement entered into
which has to be respected by the buyer.
Note: A contract of lease may last for 99 years.
Q: If there is a claim or a 3 rd person claims a right over the
thing bought, does it mean that the seller will already be
liable for breach of warranty against eviction?
A: No because there are requisites which must be complied
with.
Requisites:
1. There has to be final judgment depriving him of such thing
either wholly or partially. In other words, a case was filed by a
3rd person against the buyer which resulted in a favorable
decision as to the plaintiff resulting in the deprivation of the
property by the buyer.
Note: For the seller to be liable, he must have been notified
of this case against the buyer. In fact, he should be impleaded
as a co-defendant in the action because:
(a) The seller should have an opportunity to defend his
title.
(b) The seller would normally have the knowledge of the
defenses as to the property which is sold. If there is
one person who can mediate the claim of the
plaintiff between the seller and the buyer normally it
would be the seller.
Q: If there is a decision in favor of the plaintiff (3 rd person)
against the buyer in the trial court, is it required that the
buyer should appeal in order for him to be able to hold the
seller liable?
A: No because the party who should appeal if he is interested
should be the seller. If he does not want to be held liable, he
should appeal the case up to the SC. If the decision becomes
final, he may be held liable for breach of warranty.
2. Deprivation must be either:
(2.1) Based on a 3rd person’s prior right over the thing
prior to the sale or
(2.2) Based on an act after the sale but imputable to the
vendor.
Concretely, the reason for the deprivation maybe because of
non – payment of real property taxes by the seller and not the
buyer.
Example: If land was sold in an execution sale because of the
failure of the seller to pay real property taxes → this can be
the basis of liability for breach of warranty.
Based on an Act after the Sale but Imputable to the Vendor
Example: There was a first sale to A and then a 2 nd sale to B.
Under the law on double sale, B have a better right if this is a
sale involving immovable, if he was the first one who
registered the sale in good faith.
The first buyer even if he was in possession maybe evicted
from such property by the 2nd buyer because the 2nd buyer
would have a better right. This is based on an act of the
vendor after the sale or after the 1 st sale hence, there can be a
liability for breach of warranty against eviction.
Q: If during the sale a 3rd person was already occupying the
land by way of adverse possession so in an open, continuous
xxx for 7 years under the color of title. But after the sale, the
buyer did nothing. And hence, the occupants claiming a
right or ownership was able to complete the prescriptive
period of a minimum of 10 years. Thus, if a 3 rd person would
be able to deprive this buyer of ownership over the thing
because of acquisitive prescription, can the buyer hold the
vendor liable for breach of warranty?
A: No because it was his fault that the 3 rd person was able to
complete the period for acquisitive prescription. Had he done
something to interrupt the running of the prescriptive period
then he would not have been deprived of the ownership of
the thing.
3. There should be no valid waiver
4. The action to hold the vendor liable should be filed within
the period prescribed by law.
Q: If indeed the seller can be held liable for breach of
warranty against eviction, what will be the extent of liability
of the vendor?
A: The vendor can be held liable for the value of the thing at
the time of the eviction, income or fruits, cost of suit,
egixpenses of the contract and damages and interest.
Damages may only be claimed if the seller is a seller in bad
faith. As long as he sold the thing in good faith, he cannot be
held liable for damages regardless of whether there was a
waiver or not. In fact, if there is a waiver but the vendor is in
bad faith, the waiver is void and hence he can be held liable
for everything under the law. If there was no waiver and the
vendor is in bad faith, again he will not only be liable for
expenses xxx but also for damages, cost of suit xxx
everything!
Q: If the seller was aware of the defect of his title at the
time of the sale, hence, he is a seller in bad faith?
A: Not necessarily. He may be aware but he informed the
buyer of such defect in the title and hence he cannot be
considered bad faith vendor. Even if he did not inform the
buyer but if the buyer was already aware of the defect.
Q: Why would a buyer buy a thing if the title of the seller
has defect?
A: Maybe because the buyer needs the thing for his business.
If I am the vendor and I know there is a defect in my title, I
will ask the vendee to execute a waiver.
Q: Thus, if there is such a waiver and assuming the vendor
acted in good faith, can the vendor be held liable for breach
of warranty?
A: It depends on the kind of waiver.
(a) If waiver consiente – the buyer executed a waiver
without knowledge of the defect in the title of the
seller. Also, the vendor does not know of the defect.
The only liability of the vendor for breach of
warranty against eviction is the value of the thing at
the time of eviction.
(b) If the waiver is intentionada – when the vendee
executed the waiver with knowledge in the defect of
Page 16 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
the title of the seller, hence, he knew of the
possibility of being evicted and nonetheless bought
the thing the vendee cannot hold the vendor liable.
WARRANTY AGAINST HIDDEN DEFECTS
Requisites:
1. The defect must exist at the time of the sale. If the defect
started after the sale there can be no such liability.
2. The defect must be hidden. If the defect is patent and the
buyer nonetheless bought the thing then he can no longer
hold the seller liable.
If the seller is not aware of the hidden defects, he can be held
liable. If he was aware, his liability will be greater because
that makes him a bad faith seller.
Q: Even if there is such a hidden defect, is it possible that the
vendee cannot hold the vendor liable despite the fact that
there was hidden defect even if he was not informed
because maybe the seller was not aware?
A: Yes, he may not be able to hold the seller liable if he is an
expert on the thing. He is expected to know the defect.
3. The defect must result in the thing being unfit for the
purpose of the buyer or at least it diminish the fitness of the
thing such that the buyer would not have bought it at the
price had he known of such defect.
Q: If the thing which has a hidden defect was lost or
destroyed, can the vendee hold the vendor liable for this
breach of warranty? Does it matter if the loss was due to a
fortuitous event or maybe the loss was due to the fault of
the buyer himself, nonetheless, can he hold the vendor
liable?
A: Yes. The vendee can hold the vendor liable for breach of
warranty against hidden defects even if the thing was lost due
to fortuitous event or due to the fault of the vendee himself
because of the hidden defects. But of course, if the cause of
the loss was the defect itself, the liability is greater than if the
cause of the loss was a fortuitous event or fault of the buyer.
If there would be a problem here as to the extent of the
liability of the vendor, he should first consider the cause of
the loss, maybe it was lost due to the defect itself or lost
through fortuitous event or lost through the fault of the
vendee. After that, he should determine whether the vendor
was aware of the defects or he was not aware. Again, if he
was aware, damages may be recovered. If he was not aware,
he may not be held liable for damages unless he can only be
held liable for interest.
If the defect was the cause of the loss, the vendor would be
liable for the return of the price, not only the price less value
but also to refund the expenses and damages because the
vendor was aware of the defects.
If the vendor was not aware of the defects, he cannot be held
liable for damages but he would only be held liable for the
price.
Q: The price may be higher or lower than the value of the
thing?
A: Yes. It does not matter. It may be higher or lower. The thing
may depreciate or appreciate or maybe the thing was sold at
a price less than the value and therefore at the time of the
loss, the value is still greater than the price but he is only
obliged to return the price.
If the cause of the loss of the thing was a fortuitous event, he
can only be held liable for the price less value.
Example: If price is P100,000 and the value at the time of the
loss is P80,000. He can be held liable for P20,000 (P100,000 -
80,000 = P20,000)
Q: How would defect be proven if the thing was lost or
destroyed due to fortuitous event?
A: It is a matter of proof. The proof may have been obtained
already prior to loss. Pwedeng pina – examine na nya sa
expert so meron na syang evidence of the defects prior to the
loss.
If the cause of the loss was fortuitous event or fault of the
vendee and the buyer was not aware of the defects, is it
possible that the vendor may not be liable even for a single
centavo?
A: Yes, in this scenario because he only had the obligation to
return the price less value at the time of the loss. If it happens
that the value is greater than the price, the vendor has no
liability even there is hidden defect.
ANY CHARGE OR NON – APPARENT ENCUMBRANCE NOT
DECLARED OR KNOWN TO THE BUYER
Q: Would there be an encumbrance over an immovable
which is a form of easement or servitude?
A: An example of this is a road right of way.
Q: If the buyer bought the land which turned out to have a
road right of way in favor of a 3 rd person, can he claim
breach of warranty against any charge or non – apparent
encumbrance?
A: Of course there are requisites:
(1) The encumbrance or easement or burden or the road
right of way has to be non – apparent.
Q: May a road be non-apparent?
A: Yes, like in rural areas. In rural areas, yung road right of
way mga putik lang yan and normally the road will only be
used by the person having this right during harvest period.
Harvest period is once every 6 or 3 months. In the
meantime, during the 3 or 6 – month period, puro cogon
yan and hence the road maybe non – apparent.
If it is apparent, no liability.
Q: If the encumbrance is non – apparent does that
necessarily mean that the vendor can be held liable?
A: No because the encumbrance may be known to the buyer.
This liability would arise only if the encumbrance is not
known to the buyer.
Q: If he was not aware of this encumbrance and the
encumbrance is non – apparent, vendor will now be liable?
A: Not yet because the encumbrance may be registered or
annotated at the back of the title – negligence of the vendee
so he cannot hold the vendor liable.
Q: If there is an encumbrance, what are the remedies of the
buyer?
A: (a) He can seek for the reduction of the price.
Page 17 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: Can he rescind the contract?
A: (b) Yes but the law requires that the action for rescission
must be filed within 1 year from the date of the contract. If
after 1 year, no more rescission.
(c) If he became aware more than a year, he may file an
action for damages, But the law requires that the action for
damages has to be filed within 1 year also but from the time
of the discovery of encumbrance. If he filed it for example,
after 2 years from discovery – no recovery of damages.
WARRANTY OF QUALITY
Prof. Deleon, Prof. Vitug, Prof. Baviera: there is another
warranty which is WARRANTY OF QUALITY which includes:
(1) Warranty of Fitness
(2) Warranty of Merchantability
To some authors the warranty of quality is considered under
the warranty of hidden defects.
Atty. Uribe: I cannot agree that the warranty of quality is in
the warranty of hidden defects. I agree with Prof. De Leon,
Prof. Vitug and Prof, Baviera that there is a warranty of
quality.
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE
The thing bought may not actually have any defect and for 1
million buyers it would be fit for their purpose. However, it
may not be fit for the purpose of 1 buyer and if all the
requisites for this warranty are present, then he may hold the
seller liable for breach of warranty of fitness for a particular
purpose although there is no hidden defect but it is not fit for
the purpose of the buyer.
In order for the seller may be held liable:
1. The buyer has to inform the seller of the particular
purpose for which the thing is to be use and
2. The seller manifested that the thing would be fit for
the purpose and the buyer relied on such
representation of the seller.
Note: If the thing is sold under the trade name there can be
no warranty of fitness for a particular purpose.
WARRANTY OF MERCHANTABILITY
It pertains to the fact that it is fit for the general purpose. If
the thing was sold by description or by sample, it is
considered that there is such a thing as warranty of
merchantability.
SALE OF ANIMALS WITH DEFECTS – RULES:
1. The defect is a redhibitory defect – it is such kind of defect
that even by examination of expert it cannot be discovered.
Q: If one of the animals has redhibitory defect, can the
buyer rescind the entire contract pertaining to all the
animals?
A: G.R.: No. He can only rescind the contract pertaining to the
animal with redhibitory defect. He cannot rescind the entire
contract pertaining to all animals.
Exception: If he can prove that he would not have bought the
others had he known the defect of one then he can rescind
the entire contract.
Q: Who has the burden of proof that he would not have
bought the others had he known of the defect of one?
A: Normally, it would be the buyer. But the law under certain
circumstances would provide for this presumption that it is
presumed that he would have bought the others had he
known of the defect of one.
Examples: He bought the animals in teams or in pairs then the
presumption arises.
- Love birds (Ang mga love birds, kapag namatay yung
isa later on mamatay din yung isa. Minsan nga
mgsuicide pa sya pag mag isa na lang sya. Iuuntog
nya ulo nya sa cage nya. )
- Sledge dogs (Sa mga countries na may nyebe “snow”
may mga sledge dogs. Kailangan pag binili ang mga
dogs, team sila. May leader pa nga sila eh at
sumusunod sila sa leader nila )
Q: If the animal which was bought, died of a disease within
10 days, the disease existing at the time of the sale, may he
still have a remedy under the law?
A: Yes, if the disease turned out to be a contagious disease. In
fact, under the law, the sale is void. If he has already paid, he
can recover what he paid because the sale is void.
If the disease us not contagious, under the law he would only
have a remedy if the animal died within 3 days.
Instances whether there would be no warranty against
hidden defects and therefore caveat emptor may be
invoked:
1. Sale which is an “as is where is” sale which means as it is
found, where it is found xxx bahala ka sa buhay mo if you
want to buy the thing and you cannot later on claim that
there were hidden defects. (Faye: pls. research the complete
meaning of “as is where is” sale. Atty. Uribe will ask the
meaning. )
Q: Can there be a claim of breach of warranty against
eviction?
A: Yes because the seller would have or would still warrant
the title over the goods.
2. Sale of 2nd hand items
3. Sale of animals in fairs
4. Sale in public auction
Note: There would still be warranty against eviction.
Note: Rules on warranty also apply to judicial sale.
Q: In sale by authority of law or in execution sale, can there
be breach of warranty against eviction?
A: Yes. The judgment debtor and not the sheriff shall be
liable.
The law would specifically exempt certain persons from
liability for breach of warranty like sheriff, auctioneer,
mortgagee, pledge and other persons who sell by virtues of
an authority of law like notary public because they are not
really selling for themselves, they are selling on behalf of
another person.
RIGHTS AND OBLIGATIONS OF THE VENDEE
1. Obligation to accept the thing delivered.
Page 18 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
2. Obligation to pay the price (if warranted, with
interest)
1. Obligation to accept the thing delivered
Q: If the buyer received the goods delivered, does it mean
that he already accepted?
A: No because receiving is preliminary to accepting. In fact,
this is consistent to the right provided by law to the buyer
which is the right of inspection or the right of examination.
Thereafter, he may reject the goods if defective.
Q: When will he be considered to have accepted?
A: (1) When he intimated his acceptance to the seller.
(2) Even if he did not intimate his acceptance or
rejection, he will be deemed to have accepted if he did an act
which is inconsistent with the ownership of the seller. Again,
if he pledged the thing to another that is an act of ownership
or if he sold or donated the thing.
(3) If he did not do anything by mere lapse of a
reasonable time, he will be deemed to have accepted the
thing. What is reasonable time would depend on the
circumstances surrounding the sale.
Q: What if after an examination or before the examination,
the buyer refused to accept and informed the seller but the
goods are already in his place? What if the goods were lost
or destroyed in the possession of the buyer even due to
fortuitous event, who will bear the loss?
A: It will depend on the reason of the rejection. If there is a
just cause for the rejection, then the seller will have to bear
the loss because there will be no transfer of ownership and he
cannot be compelled to pay the price. However, if the reason
for the rejection is unjustified, ownership passes to the buyer
by operation of law then he will have to bear the loss under
the res perit domino rule.
2. Obligation to pay the price
Q: When?
A: (1) As stipulated
(2) If there is no stipulation, it would be at the time
and place of delivery.
Q: If the delivery was made a year ago but the payment of
the price was made today, would the buyer be liable for the
interest from the time of delivery up to the time of
payment?
A: G.R. No. Exceptions:
(1) Stipulation – the vendor may only agree for the
payment of the price for a certain time only because
there will be interest.
(2) Even if there is no stipulation – if the thing delivered
produces fruits or income.
Example 1: The object of sale is a rice land. Isang taon na
sa buyer yung rice land ibig sabihin he harvested twice
already. The buyer should be liable to pay interest.
Example 2: Apartment unit. Kumita na yung buyer sa
rentals.
(3) Even if no fruits, he may be liable for interest if he is
in delay. This delay would start from the time there is
judicial or extrajudicial demand.
A COS is a bilateral contract resulting in reciprocal obligations
under 1169 from the moment one of the parties in reciprocal
obligation performed his obligation and the other party has
not even without demand, the other party would be in delay
and therefore liable for interest and damages.
But in this provision, in order for the buyer to be considered
in delay there must be judicial or extrajudicial demand. This
article should be construed to mean that there was a period
fixed for the payment of the price. Nakalagay sa agreement
“today ang sale, after 1 year payment”. Upon the expiration of
the 1 year period, there has to be judicial or extrajudicial
demand which is different from 1169 when the SC interpreted
to mean that the obligation is already due and demandable at
the time of the perfection of the contract. Hence, no need for
demand anymore.
Right to Inspect or Examine
This right may not be present in all COS because you can
waive the right of inspection. Upon delivery and receiving the
goods, if you agree that you are deemed to have accepted –
no more right to inspect.
In C.O.D. arrangement, the delivery will not be made until
payment has already been made by the buyer so in that
scenario, he has to pay first even before delivery. This is a sale
transaction where the buyer would have no right of
examination prior to acceptance.
Example
The arrangement between a mining company and
NAPOCOR in the sale of coal. NAPOCOR will have no right to
inspect preliminary to acceptance, they will always accept.
But after acceptance, that there would be examination of the
quality of the coal not for the purpose of rejecting but for the
purpose of fixing the price. So this is not a right of
examination prior to acceptance. This is only an examination
for fixing the price.
MACEDA LAW
BE: What is the Maceda Law? Give its essential features.
A: R.A. 6552 “Realty Installment Buyer Protection Act”.
Realty – object of the sale is realty (not real estate).
Specifically, residential unit and not commercial or industrial.
Q: How about a condominium unit?
A: It is covered by the Maceda Law as long as it is residential
in character.
Q: Sale on credit, does it mean that the sale will be covered
by the Maceda Law?
A: No. There is such a sale on credit which is on a straight
term basis.
Example 1
1M – down payment of 500,000 today and the balance to be
paid at the end of the year → not covered by Maceda Law
Example 2
300,000 today, the balance of 700,000 to be paid on 10 equal
monthly installments → covered by the Maceda Law
All the provisions under the Maceda Law are for the benefit
of the buyer.
Page 19 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: Is it correct to say that in this law, the buyer cannot
invoke this law if he has not yet paid for at least 2 years?
A: No. Even if he has only paid for a month, there will be
rights already of such buyer under the Maceda Law. If he has
paid at least 2 years, he would have better rights.
Q: If he has paid less than 2 years of installment, what are
his rights?
A: (1) The grace period – he has a minimum of 60 days
grace period (the seller can give him more). During the 60-day
grace period, he can sell his rights under the contract, he can
assign his rights, he can update his account, he can pay the
balance.
(2) The right to recover a portion of what he has paid
– cash surrender value (CSV). This CSV is a minimum of 50% of
what he has totally paid. This includes installment payments,
deposit, downpayment – every amount paid – 50% of that. It
can be higher depending on the number of years that he has
already paid.
Hence, if he has paid only twice, he may be entitled
to CSV if the payment is on annual payments not monthly.
Q: The minimum of 50% - when higher?
A: 2 years – 50% 8 years – 60%
7 years - 55% 9 years – 65%
10 years – 70%
Every year thereafter, additional 5%.
Q: What if it is 20 years – 100%?
A: No. Upto 90% only. So if 15 years or 16 years, still it is 90%.
Q: Would the amount recoverable be bigger?
A: Yes. 90% depends on the total amount paid. 90% pa din
pero malaki ang base.
BE: Ayce bought a condo unit for 10M. 3M downpayment.
The balance of 7M payable in 60 equal monthly payments.
Ayce religiously paid until the 46 th installment. On the 49th
installment, she offered to update her account. The seller
Gerard said “I have already cancelled the sale”. Is this
cancellation valid?
A: No. Under the Maceda Law, if you have paid a minimum of
2 years, you are entitled to 30 days for every year of payment.
Under the facts, she has paid 3 years. Hence, she is entitled to
90 days grace period. Nung nag default sya nung 47 th,
magstart pa lang yung grace period. On the 48th installment –
she was only 30 days in default. 49 th installment – 60 days in
default. She was very much within the 90-day grace period
when she decided to update her account.
Q: What if the installment period is for 15 years. The buyer
defaulted on the 3rd year. Under the law, she is entitled to a
minimum grace period of 60 days. Thereafter, she was able
to update. But on the 5th year, she defaulted again. How
many days is her grace period?
A: None. The default must be once for every 5-year lifetime of
the contract.
Q: If there is a stipulation for the forfeiture of the payment
made – “the buyer will lose the house and lot and he will
not recover anything because all his payments will be
treated as rentals” – is this a valid clause?
A: No, the premise of course if he has already paid for 2 years
because by law he is entitled to 50% CSV.
Q: “Upon failure to pay 1 or more installments without need
of notice, the seller would have the right to cancel the sale”
– is this automatic cancellation clause valid?
A: Void. There has to be notice to the buyer but more than
that if the buyer is already entitled to the CSV, the
cancellation will take effect only upon full payment of the CSV.
Q: Are the remedies under the Maceda Law alternative? Can
the buyer be able to exercise 2 or more remedies all at the
same time?
A: Yes, remedies under the Maceda Law are cumulative.
REMEDIES FOR BREACH OF CONTRACT
REMEDIES OF AN UNPAID SELLER
(ARTICLE 1526)
1. Right to retain the thing in his possession
(possessory lien / withhold delivery)
2. Right of stoppage in transitu / right to resume
possession of the goods
3. Right of Resale
4. Right to Rescind
Q: Are there other remedies aside from Article 1526?
A: Yes, the seller may opt to file an action for specific
performance or action for damages.
Q: Under 1526, who may be considered an unpaid seller? If
the buyer has already paid 90% of the price, may the seller
invoke these remedies?
A: Yes, because an unpaid seller is one who has not been fully
paid of the price.
Q: May a person who was not a party to the sale be able to
claim any of these remedies?
A: Yes, because a seller need not only pertain to a party to the
contract. A person who is in the position of the seller is
actually a seller under the law.
Q: Who would be in the position of the seller?
A: The assignee or heirs of the seller or the agent to whom
the bill of lading was indorsed by the seller.
Q: In unpaid seller, are his remedies alternative?
A: Not necessarily, because in fact by express provision of the
law, the right of resale and the right to rescind may only be
exercised if the seller has possessory lien. Pag wala na syang
lien, he can no longer exercise the right of resale or right to
rescind so cumulative to that extent. But if there are 2
remedies that alternative and cannot exist at the same time,
these are the right of stoppage in transitu and possessory lien
because a requisite in order for the seller to have a right of
stoppage in transitu is that the seller must have already
parted possession over the goods.
Specific Remedies
1. Right to retain the thing in his possession (possessory
lien / withhold delivery)
Q: Why is it called possessory lien?
A: Because there is another lien in the law. This is the lien
under the rules on concurrence and preference of credit. This
is the lien of the seller for the price of the thing sold if the
Page 20 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
thing has already been delivered to the buyer and the buyer
became insolvent. While the thing is in the possession of the
buyer there is such a lien but that is not the lien under 1526.
1526 again is the right to retain the goods in his possession –
the possessory lien.
Q: When would the seller have this possessory lien? Is it
required that the buyer should be insolvent?
A: It is not required that the buyer should be insolvent but
this is one of the instances when the lien may be invoked
when the buyer is insolvent.
Other Instances Where Seller May Invoke Possessory Lien
1. When there is no stipulation as to the credit
2. Or there may be a stipulation as to the period of
credit but the period has already expired.
When would the Seller be Considered to have Lost his Lien
1. If he waives his right
2. If the buyer lawfully obtained possession over the
goods
3. When the thing is delivered to a common carrier and
the seller did not prefer his ownership and
possession over the goods.
If you remember the discussion on delivery – the rule here is
delivery to the common carrier is delivery to the buyer and
therefore when the seller delivered the goods to a common
carrier as a rule he loses his lien over the goods. The premise
of that is that he did not preserve his possession over the
goods.
Atty. Uribe’s Comment: With due respect to this article, the
article says “if he did not reserve his ownership or possession
over the goods”. I don’t think that phrase ownership is
accurate because it does not matter under the law regardless
of whether ownership has passed to the buyer, the seller
would have the right to exercise any of these 4 remedies,
notwithstanding ownership has passed pwede pa syang
magkaron ng possessory lien. In fact, by express provision of
law even if he is only holding the thing as a bailee, he will still
have possessory lien, hence, ownership is irrelevant even if
the seller did not reserve ownership, with or without
reservation he may or he may not be deemed to have lost his
lien. Pero kung na reserve nya ang kanyang possession,
definitely, he will not be considered to have lost his lien kasi if
under the bill of lading deliverable to the seller then he will
not be considered to have lost his lien thus there is no need
for him to exercise the right of stoppage in transitu.
Q: If the seller opted to file an action to compel the buyer to
pay the price and the court decided in favor of the seller. The
court ordered the buyer to pay the price. Can the buyer tell
the seller to deliver the goods so that he will pay the price?
Can the seller now be compelled to deliver because there
was a final judgment in his favor?
A: No, the very specific provision of the law – just because
there is a final judgment in favor of the plaintiff, that would
not mean he will lose his lien over the goods.
Atty. Uribe’s Comment: This is a very reasonable rule because
is there an assurance that the buyer will pay even with court
order?
2. Right of stoppage in transitu / right to resume possession
of the goods
Requisites:
1. Insolvency of the buyer is an essential requisite
2. The seller must have parted possession over the
goods
3. The goods must be in transit
Q: Should the debtor be insolvent already at the time of the
perfection of the sale?
A: No, as long as at the time the right is invoked, he is
insolvent. The insolvency may happen a day before or 2 days
before basta at the time the right is invoked, the buyer is
insolvent.
Q: How is the right exercised?
A: (1) By obtaining actual possession of the goods
(2) By mere notice to the common carrier.
Q: If such notice was sent to the common carrier but the
common carrier refused to deliver the goods back to the
seller, is the common carrier liable?
A: Not necessarily, if the goods are covered by a negotiable
document of title, the common carrier can be compelled to
deliver the goods pursuant to the exercise of the right of
stoppage in transitu back to the seller only if after the
negotiable document of title is surrendered to the common
carrier. It should be a negotiable document of title. This is a
protection to the common carrier. Kasi if not negotiable,
pwede yun i-negotiate sa 3rd person who may purchase the
goods in good faith and for value. That 3 rd person would have
a better right kaysa sa owner or seller.
Q: If the seller validly exercised the right of stoppage in
transitu, what is the effect?
A: He will be considered to have regained his possessory lien.
Q: In a scenario where the seller still has possessory lien, he
may have invoked the right of stoppage in transitu so he
regained possessory lien, in the meantime, the buyer sold
the same goods to another person, so tatlo na – the seller,
the buyer and the 3rd person. Can this 2nd buyer compel the
seller to deliver the goods to him as the 2nd buyer?
A: As a rule no because the seller’s lien over the goods will
not be affected by the disposition made by the buyer of the
goods to a 3rd person. He will retain his possessory lien. 2
exceptions:
1. If the seller assented to the disposition
2. Even if he did not give his consent to the sale, he will
lose his possory lien if:
a. the goods are covered by a negotiable
document of title
b. the negotiable document of title was
property negotiated to a 3rd person in good
faith and for value. Not negotiation to a
donee.
3. Right of Resale
Q: When would the seller have this right?
A: (1) If the goods are perishable
(2) The right is expressly reserved in the contract
(3) The buyer has been in default for an
unreasonable time
Page 21 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Note: In order to exercise this right, he must have at the same
time possessory lien.
Q: If necessary for the validity of resale that the seller
should send a notice of the intention to resell to the buyer
which means that if there is no notice of the intention to
resell and then the resale will be void. Is that correct? Is it
correct to say that for the resale to be valid, there should be
notice to the buyer of the date, time and place of resale?
A: The answers to both questions → No. They are not
necessary for the validity of the resale.
Q: So what is the relevance of these notices?
A: First, the notice of the intention to resell will only be
relevant if the ground relied upon by the seller is that the
buyer has been in default for an unreasonable time. Kasi from
the notice makikita how long the buyer has been in default.
Second, as to the notice of the date, time and place of resale,
this is not necessary for the validity of resale but may be
relevant in determining whether the sale was a good faith
sale. This is relevant as a consequence of resale, if there is still
a balance. For example, the total contract price is P100,000.
The buyer did not pay a single centavo. Out of the resale, ang
proceeds lang P60,000. So may balance pang P40,000, can
the buyer be compelled to pay the deficiency? Yes, but if the
sale is not a good faith sale, he may not be required to pay
the balance. Why? What has the letter got to do with good
faith? Because if a letter was sent, then the buyer could have
been present and could have determined for himself whether
in fact an actual sale conducted and there were actual bidders
in that sale. Kasi pwedeng gawa gawa lang ng seller na
kunwari may bumili.
Take note under the law, the resale may be a private sale. The
only limitation here is that the seller cannot buy directly or
indirectly.
Q: What if there was an excess? Example – out of the 100k
price the buyer paid 20k. balance 80k. What if in the
exercise of the right of resale, the seller was able to sell it at
130k? May the buyer be able to recover at least the amount
that he paid?
A: No, because under the law, the seller will not be
responsible for any profit that will derive from the resale. (See
Article 1533)
Q: Would there be unjust enrichment?
A: None, because it was precisely the fault of the buyer - his
failure to pay that the seller exercised the right of resale.
4. Right to Rescind
Would only be available under 2 instances na kapareho ng
resale. Di ba resale 3 instances- ang di lang present sa
rescission yung perishable goods. So the grounds in
rescission are:
a. The right is expressly reserved
b. The buyer has been in default for an
unreasonable time
Note: In resale, SC said - if the ownership of the thing has
already been transferred to the buyer, in order for the seller
to exercise the right of resale. Should he first rescind the
contract?
A: No, he can immediately sell the goods because the effect
of the resale is to terminate the ownership of the 1 st buyer
and that ownership would be vested upon the 2 nd buyer by
operation of law, hindi na kailangan mag-rescind.
In rescission, this cannot be exercised for casual breach.
Parang 1191.
Song Fo vs Hawaiian
Facts: The buyer failed to pay around 20 days from the time
the obligation to pay become due.
Held: The SC said, that it not a serious breach of his obligation
to pay which would entitle the seller the right to rescind the
contract. The number of days would depend on the
circumstances surrounding the sale. In Song Fo, the sale
pertains to molasses/ sugar.
RECTO LAW
- promulgated to protect the buyer
- pertains to the right of the buyer
- if you analyze the law, it only provided 3 remedies
- pertains to movable on installments
Q: Assuming this is a sale of diamond ring fro 1M payable in
10 equal annual. 100k each year payable Jan 1 each year.
The buyer was able to pay 1 st and 2nd installment. He failed
to pay the 3rd installment. Despite demand, the buyer failed
to pay. Can the seller cancel the sale?
A: No, under the Recto Law, cancellation of the sale and the
foreclosure of mortgage may only be invoked if the buyer has
failed to pay 2 or more installments. If the buyer failed to pay
only 1 installment the only remedy available to the seller is
exact fulfillment meaning specific performance.
Q: If after 2 months (despite demand the buyer failed to
pay) the seller filed an action to recover a sum of money
how much shall be recovered by the seller? Take note under
the facts he only paid 2 installments and hence the balance
800k. Can the seller recover the 800k?
A: As a rule none because in a sale in installments, this is
actually an obligation to pay with a period. Every time the
period would arrive only then the obligation will become due
and demandable. Ang nagiging due and demandable lang
yung 3rd installment. The 4th installment will be due only
another year and so on. What he can recover is only 100k
which became due on the third installment. That is the
general rule. By way of exception he may be able to recover
800k or everything if there is a clause known as acceleration
clause. Kung sa Maceda Law void ang acceleration clause, sa
Recto Law valid (sabi ni atty. Uribe valid pa rin daw yan sa
Maceda Law). Because normally sa Recto Law, maliit lang
binebenta so there can be an acceleration clause wherein that
would make the entire balance due and demandable and
therefore he can be compelled to pay the entire 800k.
Q: This time 3rd installment default sya. After few months he
was able to pay the 3 rd installment. Nakabayad sya ng 4 th,
6th. On the 7th he defaulted again. Would cancellation now
be a remedy? (Naka-dalawang default na sya eh)
A: No, under the Recto Law he should have failed to pay 2 or
more installments meaning 2 consecutive installments. Hindi
sinabi ng batas - 2. Rescission or cancellation will extinguish COS
”failed to pay twice”.
Page 22 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: If he failed to pay the 3 rd and 4th then cancellation would
now be a remedy. So what if the seller opted to cancel the
sale (this is rescission di ba?) and the effect of cancellation di
ba mutual restitution and hence the buyer should return the
thing delivered to him and the seller should return the
amount he received as payment. Would the seller really be
obliged to return the entire 200k (1st and 2nd installment)?
A: No, under the law, he is allowed to retain a reasonable sum
which may be considered as a form of rental. Example kung
yung car ang binili, 2 years na nyang ginagamit, hence laspag
na yun.
Q: Despite the cancellation of sale which normally result in
mutual restitution, may the seller this time be able to retain
everything which he received?
A: Yes, if there is a forfeiture clause (sabi ni Atty Uribe, VOID
daw ang stipulation) except if retaining everything would be
unconscionable. What is unconscionable would depend again
on the circumstances surrounding the sale. Example 200k is
not unconscionable for Danding Cojuanco. But if the sale is a
sale of machinery where the buyer is a poor farmer- 200k is
unconscionable.
Finally instead of cancellation another remedy is foreclosure
of mortgage.
Q: Buyer bought a car and to secure the payment of the
price, he mortgaged his diamond ring. The buyer failed to
pay 2 or more installments (3 rd and 4th installments). If the
seller foreclosed the mortgage and it turned out there was
still a deficiency, if payable amount is 500k and in the
foreclosure sale the proceeds was only 300k. May an action
for the recovery of balance prosper?
A: Yes, because under the facts what was bought was not the
one mortgaged. For 1484 (Recto Law) to apply, where there
can be no recovery of the deficiency of the foreclosure, the
thing bought must be the same thing mortgaged.
BE: Buyer bought a car to secure the fulfillment of the
obligation he mortgaged the car but the buyer gave another
security. He asked his brother to mortgage his brother’s
house and lot. The seller agreed. The buyer failed to pay 2 or
more installments. The seller foreclosed the mortgage but
there is a deficiency. So the seller filed an action for the
judicial foreclosure of the REM. May that action prosper?
A: No, the foreclosure of the 2nd mortgage is in fact a
deficiency judgment. The only purpose of the foreclosure is to
recover the deficiency and that is prohibited under the Recto
Law.
EXTINGUISHMENT OF SALE
Includes the ordinary causes of extinguishment of obligation:
1. Payment
2. Novation
3. Loss of the thing, etc…
Under the law on sales
1. The exercise of the right of resale will result in the
extinguishment of the 1st sale. The ownership of the
1st buyer will be terminated and such ownership will
be vested to the 2nd buyer.
3. Redemption either conventional or legal

Kinds:
A. Conventional - it is because the right to repurchase is
expressly reserved in the contract and thus this right may only
arise in 1 kind of contract. This is a sale with a right to
repurchase or a pacto de retro sale.
B. Legal- may be exercised by co-owners or by owners of
adjacent lot
A. Conventional
If there was no stipulation as to the right of redemption then
no right of redemption
Q: In the exercise of this right, how much would have to be
offered by the seller in order to redeem the property? Would
the price paid by the buyer be sufficient in order to
repurchase the same?
A: Not necessarily, under the law, the amount which has to be
offered by the seller a retro in the exercise of the right of
redemption are: (1) price paid; (2) the expenses incurred by
the vendee for the execution of the contract; (3) necessary
and useful expenses incurred by the buyer.
Example
In the sale of land, in order to preserve the land which is
located beside the river, the buyer may have put up a wall in
order that it may not erode. The expenses incurred by the
buyer will be considered as necessary expenses for the
preservation of the thing sold and such expenses have to be
reimbursed by the seller, in the right of the seller to
repurchase the thing sold.
Growing fruits
Example
Q: In a mango plantation, there may be fruits at the time of
redemption. The value of the fruits is 100k. Can the seller be
compelled to pay for the value of the fruits?
A: The answer will depend on whether there are fruits at the
time of the sale. If there were fruits at the time of the sale,
the seller will only be obliged to pay for the fruits at the time
of redemption if at the time of the sale, the buyer paid for the
price of the value of the fruits.
So again, there were fruits at the time of redemption,
whether or not the seller would have to pay for the fruits at
the time of redemption would depend on whether or not
there were fruits at the time of the sale. Take note that the
sale may have been 2 years before that or 3 years before that
but if at the time of the sale there were fruits and the buyer
paid for the value of these fruits, it is reasonable that the
seller would also have to pay for the value of the fruits at the
time of repurchase.
But if at the time of the sale, there were fruits but the buyer
did not pay for the value of the fruits then the seller should
not likewise be compelled to pay for the value of the fruits at
the time of redemption.
There were no fruits at the time of the sale but there were
fruits at the time of redemption.
Q: If a COS was entered into in 2001 and there were no fruits
at the time of the sale. However, at the time of redemption
Page 23 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
April 1, 2005 there were fruits. The value of which is 100k.
How much can the seller be compelled to pay for these
fruits?
A: Under the law, the seller can be compelled to pay for the
value of the fruits in proportion to the period in which the
buyer was in counted from the anniversary date of this
contract. Yung anniversary date ay every Jan 1. Yung
anniversary date this year Jan 1, 2005, from Jan 1, 2005 up to
April 1, 2005 - the buyer would be in possession for 3 months
out of 12 months is ¼ of the entire year. Therefore, how
much can the seller be compelled to pay? 25,000 – ¼ of the
value. The longer the buyer is in possession of the goods, the
bigger the amount which has to be paid by the seller.
Atty. Uribe’s Comment: It is reasonable. If the buyer has been
in possession for a longer period of time then he would have
tend more for the preservation of the thing or fruits. In fact, if
the date of redemption period is July 1 and the seller would
have to pay 50% in proportion to the period when the buyer
was in possession counted from the anniversary date.
Period in conventional redemption
BE: Ariel sold a land to Jessica for 10k with a right to
repurchase expressly agreed upon between the parties.
Because they were friends, they did not provide for a period
within which the seller may exercise the right to repurchase.
But again, there was a reservation of the right to repurchase
only that the parties failed to fix the period.
a. When should the seller a retro exercise the
right to repurchase?
b. If the seller failed to repurchase within the
period agreed upon or the period
prescribed by law, what will be your advice
to the buyer in order to protect the buyer
more?
A: (a) The period is 4 years. Under the law, if there is a
right of redemption but the parties failed to provide for such
a period, the law itself says that right may be exercised only
within 4 years. However, if the parties stipulated as to the
period within which the right may be exercised like 20 years,
the law provides, it cannot exceed 10 years and hence the 20-
year period will be reduced. Hindi naman void yung 20 years
totally, it will just be reduced to 10 years because the law
provides that it should not exceed 10 years.
(b) To file an action for the consolidation of the title.
Q: In a sale with a right to repurchase, ownership passes
when? Upon the expiration of the period to repurchase?
A: No, it follows the general rule in sale that ownership passes
to the buyer upon the delivery as a rule.
Q: So what will be the effect of the expiration of the period
for repurchase without the seller exercising such a right? Or
even if he did exercise it was not valid exercise of a right, like
for example: a total amount which should have offered
500k. He only offered to pay 300k. Hence, the buyer can
refuse and therefore the right to repurchase was not validly
exercised. Thus, assuming there was no exercise of the right
to repurchase what is the effect on the ownership of the
buyer?
A: Buyers right or ownership over the thing becomes
absolute. During the period he has ownership but his
ownership is subject to a resolutory condition which is the
valid exercise of the right to repurchase. If the right to
repurchase, his ownership will be terminated.
Q: Would this be correct - that upon the lapse of the period
without the seller having exercised the right to repurchase
the ownership of the buyer becomes absolute? Is this true
also in sale of immovable? Or true only in sale of movable?
A: It does not matter, it is true in every COS with a right to
repurchase. From the moment by the fact that the seller was
not able to exercise the right to repurchase within the period
provided by law, the ownership of the buyer becomes
absolute.
Q: The law requires for an action for consolidation of title, is
this necessary in order the buyer to acquire ownership or at
least to acquire absolute ownership?
A: No, this action is only necessary if he would want the
property to be registered in his name. In a sale of immovable
with a right to repurchase and the period for repurchase has
already expired without the seller exercising such right, the
buyer can only have the property registered in his name by
filing such an action with the court. Thus, in order to protect
him further maganda yung action for consolidation of title
kaysa naman the thing will be sold by the seller to another
person.
Q: Assuming you are a lawyer, a client asked you to examine
a document which is denominated as a DOS with a right to
repurchase and that client was the seller was the seller a
retro (he would have the right to repurchase). However,
upon examination of the terms and conditions of the
contract, it appears that the right has long expired. Thus,
the client asked, may I still be able to recover this parcel of
land which is the subject matter of this contract?
A: Consider the possibility that the client may recover. Ask the
client of the circumstances surrounding the execution of that
document. Ask him “Why did you execute this DOS?” If the
answer is “kasi po atty. nagka utang ako sa kanya 150k tapos
sabi nya instead of executing a mortgage agreement, DOS
with a right to repurchase”. Anyway, from the DOS with a right
to repurchase, he may appear to be protected. Kasi if he owes
that person 1M and if he is given in the debt a period of 1
year within which to pay in the DOS with a right to
repurchase, he would also have 1 year within which to
repurchase. Diba parang pareho lang? But instead of
mortgage he was asked to sign a DOS. If that is the case,
clearly you can conclude that this is not an honest to
goodness sale with a right to repurchase. You can treat this
transaction merely as an equitable mortgage. Hence, he may
still be able to recover what was the subject matter of that
transaction.
Q: Why would the creditor ask his debtor to sign a DOS with
a right to repurchase instead of a mortgage to secure the
fulfillment of his obligation?
A: To ensure that the property will be owned by him
automatically upon the expiration of the period within which
to repurchase and the seller a retro failed to exercise the right
to repurchase which will not happen in a mortgage. There is a
principle in mortgage known as pactum commissorium. Upon
the default of the debtor the mortgagee, cannot validly
appropriate the thing for himself. Ownership will not
automatically pass by mere default of the principal debtor
because pactum commissorium is void because the remedy of
Page 24 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
the creditor is to have the property sold in a foreclosure sale
not to appropriate the thing. So to avoid those requirements
sa mortgage, ang gagawin ng seller/ creditor is to have the
debtor sign a DOS with a right to repurchase because the
moment the debtor failed to repurchase within the period,
absolute ownership goes to the creditor who is in that sale
the buyer (creditor) a retro. Wala na syang kailangan gawin.
If the instrument is a DOS with a right to repurchase it may
actually be considered as an equitable mortgage by just
examining the terms and conditions of that contract. There
are certain instances when the law itself provides for a
presumption that this is an equitable mortgage under 1602.
BE: What are those instances?
1. The price is grossly inadequate.
Example: If the value of land is 1M, the price stated
in the DOS is 100k which is grossly inadequate. Kaya
100k yun kasi ang utang nya talaga 100k.
Q: But is this presumption conclusive?
A: No, this is merely a disputable presumption. In fact, the SC
would sustain the validity of a sale with a right to repurchase
despite the gross inadequacy of price because somehow it
would be advantageous to the seller a retro. In the exercise of
the right to repurchase, it is more advantageous if the price is
small because he can easily come up with that amount and
repurchase the thing.
2. If the vendor a retro would continue to be in the
possession of the thing after the sale, which is
unusual because if indeed this is a sale then the
vendee should be in possession after the sale.
Note: This is only a disputable presumption.
Q: What if there was a stipulation in the COS that the seller
will shoulder the capital gains tax? Would the presumption
that this is an equitable mortgage will arise?
A: No, the presumption will only arise if the seller bound
himself to pay the tax on the thing not the capital gains tax.
That would be the real property tax.
Atty. Uribe’s Story: Hindi ako magaling sa tax. Sabi ni Justice
Vitug, he was our reviewer, kung sya raw ang examiner, he
would only ask questions on general principles on taxation
wala ung remedies or procedure. Naniniwala ako kay Justice
Vitug, it turned out yung mga questions talagang general
principles kaya naka-tyamba ako. He He He He 
Anyway, under the law on taxation it is the seller who has the
obligation to pay the capital gains tax unless otherwise agreed
upon with the buyer would have to pay the tax. The
presumption that this is an equitable mortgage will only arise
if the seller bound himself to pay on the tax of the thing even
after the sale. Kasi hindi sya owner, why should he pay for the
tax on the thing?
Note: Presumptions under 1602 would arise regardless of
whether the sale is denominated as a sale with a right to
repurchase or a DOS. It doesn’t matter. Even if it is a DOS if
there is doubt as to whether or not it is an equitable
mortgage. It has to be resolved as an equitable mortgage.
Q: Remedy of seller a retro?
A: Reformation because the contract as written did not reflect
the real intention of the parties. The real intention is to secure
the fulfillment of the obligation of the vendor a retro (debtor).
B. Legal Redemption
Q: Who have the right to redeem?
A: 2 groups
1. Co-owners
2. Owners of adjacent lots (object is lot)
- consider if rural or urban land
Co-owners
Q: Co-owners of what thing, movable or immovable?
A: It does not matter.
Q: A, B, C, D co-owners of land. D donated his interest in the
land to X. would A, B, C, have the right to redeem?
A: No, in legal redemption, the alienation by a co-owner must
be by onerous title (sale, dacion en pago, barter). This act
(donation) is gratuitous act. Hence, no right of redemption.
Q: What if B sold his interest in the land to D. would A and C
have the right to redeem?
A: No, because for A and C to have the right to reddem, the
alienation should be in favor of a 3rd person.
Q: What if B sold his interest in the land to X. A, D, C,
wanted to redeem. May they be able to exercise the right of
redemption? All of them?
A: Yes. All of them.
Q: Is this the same rule in adjacent lots? (rural areas)
A: No, in adjacent lots, there can be so many owners
depending on how it is big. The owner with the smallest land
area would have the right to redeem.
Q: What if the owners of adjacent lots would have equal
area? (rural areas)
A: The first one who manifested his desire to redeem.
As to Co - owners
reIn each DOS the specific area was already described. After
the execution of the DOS, these children would actually
harvest only their respective area. They wanted to have
their respective share registered in their own name. They
filed a petition for the cancellation of the title of their
parents for that property to be divided, they submitted their
individual DOS. But the petition was denied by the register
of Deeds because they failed to submit a subdivision plan.
The RD cancelled the TCT in the name of the parents issued
another TCT in the name of the 3 children in one TCT. One of
the children sold the land to a 3rd person. Can the 2 other
brothers redeem as co-owners?
A: No, because under the facts, they are no longer co-owners.
A TCT is not conclusive as to the rights of the parties to a
certain property. Pwedeng apparently co - owners sila but in
reality there has already been a partition of the property, yun
lang hindi pa naka-reflect sa TCT. In fact, a property may be
registered in a person who is not the owner kasi na - forge
lang yung signature ng real owner. Thus, the requirement of
the law that the co-owner would have the right to redeem is
not present therefore, there would be no right of redemption.
Page 25 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: A, B, C co-owners. A’s share ¼. B’s share ¼. C’s share ½. B
sold his interest in the land to X. However, A and C both
wanted to redeem. (As co-owners they may have the right
to redeem). If they cannot agree on the portion of the share
of B which will be redeemed by both of them - what would
be the final sharing?
A: C will have 2/3, A will have 1/3 because they will have the
right to redeem in proportion to their share in that property.
Note: they may stipulate as to the sharing.
Q: What if in the DOS executed between B and X, the price
stated in DOS was 3M. Hence, A and C can be compelled to
redeem by paying 3M?
A: Not necessarily, under the law, if the price stated in this
sale is unconscionable, the redemptioners can only be
compelled to pay the reasonable value. Ang posibleng value
could only be 1M pero ang nakalagay sa DOS 3M. Is it
possible that X did not pay 3M? Yes. Why would they do
that? The reason for that is to pre-empt A and C from
exercising the right of redemption. To discourage them from
redeeming the property kasi kung mura yan they can easily
exercise the right of redemption.
The law protects the redemptioners - if the price is
unconscionable - they may pay reasonable value.
Q: What if the value is 3M but DOS stated 1M but X actually
paid 3M (1M was stated to reduce tax liability). How much A
and C can be compelled to pay?
A: Doromal vs CA
Held: The co-owners can only be compelled to pay the price
stated in the deed of sale. The trial court sustained the claim
of the buyer that they be reimbursed the actual amount paid
because according to the trial court that would be immoral to
pay only the amount stated in the contract. SC said it was
more immoral yung ginagawa ng parties to pay only a small
amount where in fact the real amount paid is a much higher
amount. Because the only purpose of this is to defraud the
government.
Owners of Adjacent Lots
Make a distinction between a sale of an urban land and sale
of rural land.
Sale of Urban land
Requisites:
1. The land is so small and purchased only for
speculation
If that is the case, then the adjacent lot owners would
have the right not only right of redemption but also of right of
pre-emption. (Article 1622)
Dito sa rural wala right of pre-emption meaning even
before the perfection of the sale, the adjacent lot owners
would already have the right to redeem by way of pre-
emption. 30 days also 30 days from notice of such intention to
sell.
But in rural lands and alienation is by onerous title.
Another requisite: the land which was the object the sale
must not be greater than 1 hectare.
 Also, for the owners to have the right of redemption, the
buyer from whom the property will be redeemed must have
another rural land.
Another requisite - the land sold and the land of
redemptioner must not be separated by brooks, rivers in
order that these lot owners would have the right to redeem.
BE: Sisters A and B co-owners of land. B sold her interest in
the land to X a 3rd person. X sent a notice to the sister of the
seller, the other co-owner informing her of such sale and
giving her copy of the DOS. Despite notice, A did nothing.
After that, X requested for the annotation of the sale in the
title of that property in the RD. RD sent another notice to A.
A did not do anything. After so many months, X wanted the
property to be partitioned. A then give notice to X that she is
exercising the right to redeem. Does A have the right to
redeem? Right of redemption must be exercise within 30
days from what?
A: The co-owner still has the right to redeem. Under 1623, the
30-day period would start to run only from the time the co-
owner received a notice from the vendor. Sino nagbigay ng
notice from the facts? Una, yung vendee pangalawa yung RD.
so hindi yung vendor amd nagbigay. So 30-day period has not
started to run. Hence, he still has the right to redeem.
Atty. Uribe: Under the facts, she received 2 notices, not only
written notices but also copies of the DOS. Under the
principle of estoppel, she cannot claim that she still has 30
days. In fact, in a decision of SC involving a sale of a co-owner
share which sale was facilitated by the other co-owner. But
the latter claimed he can still redeem because he did not
receive notice. SC said sya ang nag-facilitate ng sale so why he
could not be given notice, hence he had knowledge of the
sale. This is still consistent in the case of Doromal. If you
consider the provision literally it says “30 days from the time
of notice in writing is given by the vendor to the co-owner”.
Ang nakalagay sa batas, notice in writing. Hence, apparently
even a letter written by the vendor would suffice and hence
the 30 day period would start to run? SC said: No, the co-
owner should be given a copy of the DOS and it is only from
that moment that the 30-day period will start to run. This is a
good ruling - not any ordinary notice but a copy of the DOS
because in redemption, the redemptioner is supposed to be
subrogated under the same terms and conditions as the
buyer. How would he know the terms and conditions of the
sale if he is not given a copy of the DOS. So he must have a
copy.
LEASE
Notes:
 Read the Definition of Lease under Articles 1643, 1644,
1713.
 Consider also on Formalities: Articles 1647, 1724 in
relation to 1403 on Statute of Frauds and 1403, 1878 on
Agency to Lease.
 Assignment and Sublease: Articles 1649, 1650
Page 26 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
 Implied new lease or tacita recunducion: Article 1670
(important)
 Rights and Obligation of the Lessor and Lessee: Articles
1673, 1678, 1680, 1723 (take note several questions in
the bar have appeared under these provisions)
 Period of the Lease if the parties failed to Fixed the
Period: Articles 1682, 1687
 Rights of Third Person: Article 1729 (ex: rights of owner
of materials against the owner of the building)
Note: The first thing to consider in lease is to consider the
kind of lease.
Kinds of Lease:
1. Lease of Things
2. Lease of Work or Service
3. Lease of Right
Note: Under the law, under 1642 only lease of things and
work or service are mentioned.
Note: In lease of Service, there are four (4) of them but three
(3) will not be covered by Civil Law, which are Household
Service and Contract of Labor (covered by Labor Law), and
Contract of Carriage (covered by Commercial Law). The only
kind of Lease of Service that will be discuss under the Civil
Law is the Contract for a Piece of Work.
Definition:
Q: If a party, binds himself to give another the enjoyment or
use of thing, does that make the contract one of lease of
things?
A: No, the most important distinction here with that of
commodatum is that in lease, it must be for a price certain,
otherwise if there is no valuable consideration for the use or
enjoyment of the thing it will be commodatum.
Q: If in the agreement one of the parties binds himself to
render service, for price certain would that be a lease of
service?
A: Not necessarily, because it may also be a contract of
agency, where a person binds himself to render service for
another person it may be a contract of agency, thus under
1644, in order for the contract to be considered as lease of
service, there must be no relation of principal and agent
existing between the parties.
Distinguish a Contract for Piece of Work from Contract of
Agency
Frensel vs. Mariano Ochaco
Facts: Mariano asked Merit to construct an edifice for him
and agreed that Merit was to supply not only Labor but also
Materials. Merit bought the materials from Frensel, however
the price of the materials remain unpaid so Frensel
demanded payment from Mariano, the ground relied upon by
Frensel is that Merit was an agent of Mariano therefore, for
failure to pay the price, Frensel claim that Mariano can be
held liable for the price of material.
Held: It is not a contract of agency, since from the terms and
condition of the contract it appears that the control of
Mariano over Merit does not go into the manner and method
of performance of the obligation but only goes into the result
of the product and therefore it cannot be considered an
Agency Contract.
Note: In Agency, the control of the principal over the agent is
so pervasive that the principal can control not only the result
but also the manner and method of the performance of the
obligation which is not present in this case and therefore
Merit was not considered an agent of Mariano.
Q: As to the relationship of the taxi driver with his operator,
is this a contract of lease?
A: SC ruled that this is in fact a lease but not a lease of thing,
but lease of service specifically an employment contract, this
is because of the control of the operator over the taxi driver,
as to when, what time the drive operates the vehicle.
Q: As to safety deposit boxes does this involve lease of
things?
A: No, in the latest decision of the SC, it considered the
contract as special kind of deposit. This cannot be considered
a lease of things because the lessee has no control over the
safety deposit box. In fact he cannot even enter the bank
where the safety deposit boxes are located if it not a banking
hour, like when the bank is close so he cannot enter therein.
Note: Again, to distinguish lease contract from other legal
relationship you have to consider the characteristic of the
contract. The best way to remember the kinds of contract is
to know by heart what are the real contract (mutuum,
commodatum, deposit, pledge) and formal contract
(antichresis, donation[akala ko ba donation is not a contract
but only an act]). Aside from that it may be safe to consider
as a rule all the other contract as consensual contract, where
no particular form is required except in exceptional case: e.g.
sale of large cattle.
As a rule lease, therefore is a consensual contract by
mere meeting of the mind as to the object and to the
consideration the contract is perfected.
A contract of lease of things is essentially onerous.
In fact in one case decided by the SC, involving an agreement
between the Bureau of Animal Industry and Mr. Bagtas,
where 3 bulls were delivered by the Bureau to Bagtas for
breeding purpose. There was a period agreed upon for one
(1) year, after the lapse, despite demand for the return of the
bull Bagtas failed to do so, thereafter he died and so his estate
was required to deliver to deliver the 3 bull but only the 2
were returned and the third bull could not be returned
allegedly on the ground that the said bull died in a crossfire
between the Hukbalahap and the AFP, so the claim was
fortuitous event.
Claiming that the agreement was commodatum it
was argued that since there was no transfer of ownership in
commodatum, then the risk of loss would still pertain to the
Bureau.
SC ruled that this cannot be commodatum, because
there was stipulation for the payment of breeding fee that has
Page 27 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
to be paid by Bagtas, it cannot be commodatum but a lease of
thing, because there was a compensation to be paid for the
use of the bull. Again a contract of lease of things is essential
onerous.
Note: Lease of things is not essentially personal.
Heirs of Fausto Dimaculangan vs. IAC
Held: Upon the death of parties like death of lessee, the
contract to occupy the premises by virtue of the lease
because it is not extinguish upon death of lessee.
Characteristic of Lease of is not thereby terminated. The
heirs of the lessee may continue things
1. Consensual Contract
2. Onerous (essentially onerous)
3. Bilateral
4. Nominate
5. Principal.
Essential Requisites of Contract of Lease
1. Consent
Note: As a contract again, you have to go into the essential
requisite of contract in general which would be applicable
also to lease.
But specifically as to consent in sale, there are
people who are prohibited from entering in specific kind of
lease, those mentioned in 1490, 1491. When spouses are
prohibited from selling to each other similarly they are also
prohibited from entering in contract of lease as spouses.
As 1491 is also applicable to lease, hence the
guardian cannot lease property of the ward as much as the
agent cannot lease the property of the principal which he is
suppose to administer.
2. Object
Q: In lease of things, may a consumable thing be the subject
matter of lease?
A: Normally when a consumable thing is use in accordance
with its nature it is consumed, as a rule therefore consumable
things cannot be the subject matter of lease of things. The
exception is, when the use of the things is only for exhibition,
or when they are accessory to an industrial establishment
then it may be a subject of lease.
3. Cause
Lease of thing – the consideration for the lessor is the
payment of rental
Lease of work or service - it is the compensation to be paid by
the other party
Lease of right – it is the payment of royalties which is the
cause and consideration of the one leasing the right to
another
FORMALITIES
Lease of Service – there is no particular form required by law
for the validity of the lease not even for the enforceability as a
rule.
Donald Dy vs. CA
Facts: The brother of Dy had a problem in one of the casino in
Las Vegas, so he ask Atty. Mutuc to help which when resolve
Atty. Mutuc now demanded for his Atty. Fees.
One of the defenses raised by Dy was that there was
no written contract between the parties and therefore he is
not entitled to Atty. Fees.
Held: Documentary formalism is not an essential element in
the contract. In fact the contract may be express or implied.
Thus, the absence of a written contract will not preclude a
finding that there was a professional relationship which merit
attorney’s fees for professional service rendered.
Lease of Things – certain provision of the law which requires
certain forms to be enforceable.
Under 1403, Statute of Fraud, when there is a
contract of lease over an immovable and it is for more than a
year, the contract of lease must be in writing in order for it to
be an enforceable contract.
In 1878, if a person is authorized to lease an
immovable property of another for more than 1 year, that
person or agent should have special power of attorney.
Note: the problem in lease would normally be a combination
of an agency and lease.
BE: Where a principal appointed an agent granting him
unlimited and general management over his properties
withholding no power from him and authorizing the agent
to act as may deemed appropriate. With this GPA the agent
entered in a contract of sale and two (2) contracts of lease.
The first lease pertains to a parcel of land in Kalookan for 4
years and rental to be paid annually for 60k a year. He also
lease a certain land in QC but they did not fixed the period
of lease but they agreed on payment of rentals on monthly
basis rate of 3k per month. These contracts were entered
into while the principal was in the hospital. Rule on the
validity and binding effects of the contracts upon the
principal.
A: The problem pertains to both lease and agency. However
in the problem itself there was no statement if the lease
agreement itself was in writing.
As suggested answer, in the first lease, since it was
for 4 years and involve as lease over an immovable and
pertains to an act under 1878, then the agent should have a
special power of attorney and under the facts he was only
given a general power of attorney, hence since armed only by
GPA, the contract is unenforceable as against the principal.
In the second lease, the agent represented the
principal did not fix the period of the lease but only fixed the
monthly rental of 3k, therefore under 1687, this will be
construed as a month to month lease. Since only month to
month, involve merely acts of administration therefore not
require SPA therefore the second lease will be valid and
binding upon the principal.
BE: Agreement for the repair of a private plane and for a
certain sum of money, however additional work was
requested by a person who has the authority of a duly
Page 28 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
recognize representative of the owner of the plane and the
request was merely verbal, when the additional work was
completed, the one who rendered the work demanded
additional payment, the defense raise was under 1724 in
order that a claim for additional payment for the additional
work, the agreement for the additional work must be in
writing and the changes should be authorized in writing.
A: The suggested answer of UP will sustain the defense
because of 1724; such change not being authorized in writing,
the request was merely verbal then the claim may not
prosper.
Atty. Uribe agrees more in the alternative answer
where in provides that, the person who requested though
verbal was the authorized representative of the owner, and
this is given already as a fact. If the defense would be sustain
under 1724 then there will be unjust enrichment on the part
of the plane owner.
1724 would give the proprietor the right to raise the
defense that testimony may not be admitted pertaining to a
change in the plans because it was only verbal change, but
the moment the fact is established already, you can no longer
invoke 1724 but you can raise it as a defense if there is a
witness that is being presented in the effect that there was
request or additional change by invoking 1724, the additional
change not being in writing then no person may testify as to
such fact.
But in the problem given it was mentioned as a fact,
that the verbal request was made by a person authorized by
the plane owner. Again the better answer is the alternative
answer, that, for the owner to be able to raise the defense
under 1724, would constitute unjust enrichment after he
actually requested for such change thru an agent.
RIGHTS AND OBLIGATIONS OF THE LESSOR
As to necessary repairs of the thing lease, this is an
obligation of the lessor, under the law the lessor is oblige to
make the necessary repairs.
Gonzales vs. Mateo
This involved a contract of lease over a cockpit. It was
stipulated in the contract that “ang lahat ng kailangang
gagawin sa bahay sabungan ay ipagagawang lahat ni Ginoong
Gonzales (lessee) sa kanyang sariling ukol, na ang samahan ay
walang sinasagot”. In other words the lessee, bound to do
the necessary repairs, so when the cockpit collapsed the
lessee was held liable, even if the lessor under the law has the
obligation to make the necessary repairs it is still subject to
stipulation of the parties.
BE: A lease contract was entered into between A and B over
a parcel of land for a period of 15 years wherein the lessee
conducted his business where he constructed a 3 storey bldg
for 300, 000. Upon the lapse of the 15 year period the
parties not having been able to agree on the extension of
the lease, the lessor demanded the lessee to vacate the
premises. Lessee refuse to vacate until he is reimburse the
300, 000 and arguing that since he is a builder in good faith
he therefore has the right to retain the thing until he is
reimbursed. What are the rights and obligation of the lessor
and lessee? Can the lessee be considered a builder in good
faith in the first place?
A: No, he cannot be considered a builder in good faith as he
was merely a lessee and he is not claiming ownership over
the parcel of land when he constructed the building therefore
he has no right of retention. In fact under the law the lessor
has the option of appropriating the improvement or requiring
the lessee to vacate the premises and remove the
improvement. But if he decides to appropriate the
improvement for himself he has to pay 50% of the expense
incurred by the lessee because it is a useful improvement. If
the lessor decides not to appropriate, the lessee may remove
the improvement even if that would cause damage to the
land as long as there is no unnecessary damage cause to the
land.
BE: Instead of building it was a chapel that is constructed by
the lessee, will the same rule apply?
A: Consider also as useful improvement by the UP Law Center.
Note: If the improvement however is an ornamental
improvement and the lessor wants to appropriate the same,
he has to pay for the value of the improvement not merely
50% but the value of the improvement itself.
BE: Pertain to construction of a building, where an architect
was authorized aside from designing of the building also to
supervise the work of the contractor. When completed it
was delivered to the owner however within 15 years, it
collapse because of the earthquake due to faulty
construction, and it was the only building that collapse no
other building. What are the rights of the owner against the
architect and contractor? Can the owner demand the
reconstruction of the building considering that the cost of
the construction of the building has tripled from the time of
construction up to the time of collapse?
A: Under 1723, the owner can hold the architect and
contractor solidarily liable. Because the architect not merely
designed the building but also supervise the construction
hence under 1723, they are solidarily liable.
Under 1167, in obligation to do, if what has been
poorly done may be undone at the expense of the debtor, in
fact he can have another person to do the work at the
expense of the debtor. Notwithstanding that the cost tripled
he may validly do so.
Under the present practices in the real estate
business this may no longer happen. The liability of the
architect and contractor normally may not happen because
the standard practice nowadays the architect would be totally
separated from the contractor. As of now there would be a
project construction manager that would represent the
owner in supervising the work of the contractor and no longer
the architect.
RIGHTS AND OBLIGATIONS OF THE LESSEE
Note: Two (2) favorite articles are 1649 pertaining to
assignment of lease, and 1650 on sublease.
Q: The question in the Bar may be as simple as may a lessee
sublease the property without the consent of the lessor and
what are the respective liabilities of the lessee and
sublessee?
Page 29 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
A: Articles 1649 and 1650 would tell us that a lessee may not
assign his right on the lease without the consent of the lessor
however he may sublease the property in whole or in part
even without the knowledge of the lessor as long as he was
not prohibited from subleasing the premises.
BE: In the contract the lessee was prohibited from assigning
the lease in one (1) floor of the building but what the lessee
did is sublease the property, would that sublease bind the
lessor?
A: Yes. He was only prohibited was assign the lease but was
not prohibited from subleasing the premises. In fact the
lessor need not prohibit the lessee from assigning because
under the law he is prohibited from assigning his interest as a
lessee without the consent of the lessor. If there is a
stipulation which must be state in the contract is the
prohibition to sublease the premises in order to bind the
lessee.
Ultimately therefore the problem here is if there is a
contract entered into by the lessee with a third person
involving his rights as a lessee, would that contract involve
assignment of the lease or merely sublease?
Malacat vs. Salazar
Facts: The lessor entered in a contract with the lessee for a
period of 20 years from 1947 to June 1, 1967. however
during the lease period, the lessee entered into agreement
with third person without consent of the lessor, thereafter the
lessor question the validity of the contract on the ground that
this was entered without his consent and claiming that this
was an assignment of lease, void therefore he can recover the
property from the sub-lessee. Does the contract involve
assignment of lease or merely sublease.
Held: Whether the contract is assignment of lease or
sublease, would depend on whether there was absolute
transfer of rights from the lessee to the third person, such
that he desist himself from the lease contract and his
personality, resulting now in two (2) persons the lessor and
the assignee, and the latter is now converted in to the new
lessee. However if the lessee retains interest no matter how
small in the contract of lease then it will be treated only as
sublease.
So again, in an assignment of lease there has to be
an absolute transfer of interest by the lessee of his rights and
he disassociated himself from the contract however if there is
reversionary interest retained by him then it will considered
merely as sublease.
In this contract, the SC merely treated it as a
sublease and therefore valid even without the consent of the
lessor, because, first the contract was with a period that
would last only until May 31, 1967, upon the termination of
the contract, there would still be one (1) day in the lease
agreement, therefore this lessee will be reverted back to his
rights, since he still has until June 1, so this made it merely as
sublease.
There were other stipulations in the contract which
made them to conclude that this is merely a sublease. Like, in
the contract, there was a prohibition by the lessee upon X
from cutting the trees on that land witout the consent of the
lessee, so why would he prohibit X from cutting the trees if he
would consider himself from being disassociated from the
lease contract. In other words, he still intervened in the
contract with respect to the subject land”.
There was stipulation also as to payment of taxes. If
the contract was really involve assignment of the lease, he
should have nothing to do anymore with the property. He
would have disassociated himself from the original contract of
lease such that, the parties that would remain bounded by
the contract was only between the lessor and the assignee.
Frensel vs. Mariano Ochaco
In this case, the theory of Frensel that Merit was
merely an agent was not sustained by the SC. SC sustained
that theory that the relationship of Merit and Mariano was
that of a employer or a principal an contractor in a contract of
piece of work. Thus, can the supplier of the material,
Frensel, recover from the employer in a contract of piece of
work? There appears to be no privity of contract. There
would be privity of contract between the owner of the edifice
Mariano and Merit in their construction agreement. And it
would be Merit and Frensel in the contract of sale. So
Mariano has no privity with the seller of the material Frensel.
Thus as a rule, there would be no cause of action. In fact SC
dismiss the case filed by Frensel. Although in fairness, the SC
ruled, in the absence of material mens lien the action may not
prosper.
This case was decided in 1960, if the action was
filed today, may the action of Frensel prosper? Yes, under
the theory of unjust enrichment, incorporated under Article
1729, that the supplier of material may recover such amount
owing to him by the contractor to the extent that the owner
of the edifice is still indebted to the contractor.
For example the owner of material is claiming 3
million, but the owner of the edifice is still indebted to the
contractor for 5 million and the project has been completed,
the supplier may recover from the owner of the edifice
himself instead of claiming from the contractor.
Again, on the basis of unjust enrichment principle,
since the owner of the edifice really owes the contractor and
this liability of the contractor may not excuse by the fact that
he already paid the contractor, if the payment was made in
advance. If his obligation was not due and yet he paid the
contractor the supplier of the material, can still recover the
price of the material from the owner of the edifice.
The liability of the owner may not also be excuse by
the fact that the contractor waived his claim against the
owner.
Ultimately even if the owner has already fully paid
the contractor at the time it is already due and demandable
he may still be held liable to the supplier of the material if he
did not demand for the delivery of a construction bond which
would answer for the claims of the laborer and suppliers of
materials.
BE: This pertains to the lease of fishpond. The agreement
was for five (5) years however after one (1) year period of
the lease, the lessee demanded from the lessor for (a)
reduction of the price and (b) extension of the lease for
Page 30 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
another 1 year because he was only able to harvest half of
what is normally being harvested in the fishpond due to
unlawful elements from the area, extorting money from
those leasing the property in that area.
A: If we are to consider the relevant provision on this matter,
the law provides that reduction of rental may only be
demanded by the lessee if he harvested less than half of what
normally would be harvested in that property. Normally it
can already be said that he is no longer entitled to the
reduction because under the facts, he was able to recover
one half. At any rate even if he was only able to harvest less
than one half this would not entitle him to reduction of
rentals, because under the law, this may only be claimed if it
was due to extra ordinary FE event as oppose to merely an
ordinary FE. Storm is an ordinary FE, what could be
considered as an extra ordinary FE event is pestilence,
unusual flood.
Thus, the presence merely of unlawful element may
be considered as extra ordinary FE under the law and may not
be considered as a basis for the claim of reduction of the
rental.
As to claim of extension of the lease, again for the
same reason, even if there is a FE in contract of lease of thing,
the happening of which would not give the lessee the right to
have the contract extended that would only result to
suspension of the lease during the happening of the FE.
Example, war as FE would only have the lease suspended and
the lessee may bot be compelled to pay the rentals during
that period but would not give the lessee the right to extend
the lease contract.
TERMINATION OF THE LEASE
BE: A building was constructed by A, for this B gave A 5
million pesos with the agreement that B will be the lessee of
the entire building for a period of 10 years for 1,000 rentals
a month. However, on the 5 th of the agreement the entire
building was burned due to FE without fault of anyone. A
reconstructed the building, just before the building is
completed, B notified A of his intent to continue the lease, as
to complete the 10 year period. A refuse, is A justified in
refusing B’s offer to continue the lease?
A: Yes. He was justified because by the destruction of the
lease due to FE the lease contract was terminated so it can no
longer be continued.
BE: Discuss the effect of death of lessee, lessor, agent and
principal.
A: In a lease of thing, death of the lessee does not terminate
the contract. A contract of lease is not essentially a personal
contract therefore upon the death of the lessee, it may be
continued until the expiration of period of the lease by the
heirs. (Case: Heirs of Dimaculangan vs. IAC)
IMPLIED NEW LEASE
Note: One of the most favorite in the bar exam.
BE: The question in the bar could be as simple as under what
circumstance would an implied new lease or tacita
recunducion arise?
A: Under the law, the only requirement is that
1. The lease period has expired and
2. The lessee continues to be in possession of the lease for at
least 15 days from the time of the expiration of the lease and
3. No notice to the contrary from the lessor and the lessee.

BE: Pertain to contract of lease entered into for period of 3

years Jan 1, 81 up to 1984. Rentals were paid on monthly
basis. It was stipulated that the lessee has the option to buy
property at a certain price within a certain period (option to
buy). Despite the lapse of the 3 year period, the lessee did
not exercise the option, but continued to be in possession of
the property and paying the monthly rentals and the lessor
accepting the same. This continued until June 1984 when
the lessee stated that he would now buy the property in
accordance with the option to buy. The lessor refuse,
caliming there was no more option. Was the lessor correct?
Yes. Was it correct to say that there was extension of the AGENCY
lease under the facts?
A: Yes, there was an extension known was implied new lease. Definition 1868, 1874 and 1878 - formalities
However, with the implied new lease it does not mean that all
the terms and condition of the contract in the original lease Because a form is required for the validity or for the
continue also. First as to the term, under the law, the term of enforceability of the contract entered by the agent-1878,
the renewed lease would not be the term agreed upon but 1874
only be of a period depending on the manner the rentals are
paid. If the payment is on annual basis, the renewal would 1892 - pertain to appointment of the substitute- effect- may
only be for a year and if monthly payment of rental is made, the agent nonetheless be held liable for the loss that incurred
the implied new lease would only last for 30 days. by the principal as the result of the appointment of the
substitute.
As to the option, it was renews, SC held, in an
implied new lease, only those terms and conditions which are Other provisions pertain to the right and obligations of
germane in a contract of lease are deemed renewed as to the commission agent or more importantly the guaranty
rest like option to buy, will not be considered renewed. Even commission agent – 1907 - 1908
in the facts of the case itself, it was stipulated that the option
may be exercise within the period agreed upon (3 years). Effect of death -1919, 1930 and 1931
Either of the agent or principal

Revocation - kind of agency - agency coupled with interest -

1927

BE: A asked her best friend to B buy for her certain items in a
grocery store. Is there a nominate contract created between
A and B?
A: Better answer, if B agreed to the request of A, an agency
relationship has been created, a nominate contract has been
created.
Alternative Answer: I can agree with the answer given by the
UP Law Center that a lease of service may have been created
so long as there was no principal agency created or existing
between A and B, although from the facts hindi ito lease of
service, bestfriend eh, good possibility, so that’s why I can
agree with the alternative answer of the UP Law Center the
absence of principal agency relationship may result in a lease
of service.

Q: I’m sure all of you or most of you must have been a proxy
in a baptismal or wedding ceremony, but also you may have
ask by a politician to represent in gathering because
probably he may be in another gathering in another place,
so if you’ve been a proxy in a wedding ceremony or
baptismal ceremony, actually accepted the request of the
real ninong or ninang then it mean an agency relationship
created between you and the actual ninong or ninang? Or if
you have accepted the request of the politician were for you

Page 31 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
to deliver the speech in a gathering would that result an
agency relationship?
A: In both instances, no. It may appear under the definition of
agency under 1868, that there is such an agency relationship
because as defined, a contract of agency at first bind himself
to render some service or to do something in representation
or on behalf another with the consent or authority of the
latter. So, kung proxy ka that would fall under 1868 di ba but
the definition has been criticized by some authors, one of
them is Justice Reyes, that the definition of a contract of
agency under 1868 does not contemplate social and political
representation, hindi kasama ang social representation,
political representation in order to have a contract of agency
under the New Civil Code, the purpose of the agency must be
the execution of the juridical act, the agent must ask or bind
himself to execute a juridical act, meaning the act that will be
executed by the agent on behalf of the principal should either
create, modify or extinguish a legal relationship between the
principal and a third person.
Concretely if the agent was authorized to buy, the
act - the contract entered into by the agent with the third
person would create a legal relationship between the
principal and the third person, that would be a seller-buyer
relationship, so it is a juridical act.
On the other hand, if the agent is authorized to pay
an indebtedness of the principal to a certain person or to a
bank and he in fact paid the said amount, the result of the act
is the extinguishment of the existing legal relationship, the
legal relationship would be the debtor-creditor relationship
between the principal and third person, which would be
extinguished by the act of the agent known as payment.
Again therefore for a contract of agency to arise the
subject matter or the object of the contract must be the
execution of the juridical act, mere social or political
representative would not result to a contract of agency.
Q: If a contract well first if the instrument is titled or
denominated as with agency does it mean that there is an
agency relationship between the parties entered into a
contract?
A: Not necessarily, again the contract is not the what parties
want to call it to be, but rather how the law will consider such
contract if it is the law determines the nature of the contact
depending on the stipulation of the parties.
Q: But what if the agency was used by the parties in the
stipulation? Does it mean that it is a contract of agency?
A: Not necessarily, in Quiroga vs. Parsons the word agency
appeared about 3 times in the contract but the word agency
does not pertain to a contract of agency but it pertains to
another concept of the word agency. You can use the word
agency several times in another concept like it may be an
instrumentality like a travel agency, security agency, or even a
government agency, but their is no agency relationship or it
may pertain to exclusive right to sell in a particular territory
diba, so there is an exclusive he is considered an exclusive
agenct to sell a particular brand in the province of Iloilo, there
is actually no agency relationship created, it is done only in an
exclusive right to sell a particular brand / product in a
territory .
Page 32 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Distinguishing Contact of Agency from other Contract and
other Legal Relationship
Consider the characteristics of a contract of agency as a
contract and as a legal relationship business organization.
CHARACTERISTICS OF A CONTRACT OF AGENCY
Q: Real? Formal?
A: Definitely it is not a real contract and also not a formal
contract.
1. Consensual - conclude that it is consensual contract. It is
perfected by mere meeting of the minds as to the object and
consideration of the contract.
2. Principal - Why it is a preparatory contract? This is a
distinct feature of agency similar to partnership, they are both
preparatory contracts, they can stand on their own don’t
depend on any other contract for their validity, which means
that even if the agent did not enter into another contract,
which means he did not perform their obligation it doesn’t
mean that the contract of agency is void, he may be held
liable to such other contract for not performing his
obligations, this is an agency in problems pertaining to
agency, you should always consider the facts that normally, 2
contracts involved, you have to deal with the requisite of both
contracts, in order to enable to reach the correct conclusion,
this is the principal - agent with the contract of agency and
second contract will be the contract entered into by the agent
with the third person, this other contract may be a lease, sale,
or any other contract an act made by the agent.
As of Principal contract, it can stand on its own even if
the agent did not enter into another contract
Q: Now, is this contract similar to sale as to cause, in that it
is also essentially an onerous contract?
A: No, but it is presumed to be for compensation, presumed
to be onerous, however it may be deemed gratuitous.
Gratuitous also different from partnership, because
partnership is essentially onerous, a partner will always have
to contribute something, now after this a nominate contract -
commutative contract.
As distinguished from other legal relation, you have to go
into the feature of a contract of agency, how it is created?
Then you will know, for example that is different from other
legal relationships, which are created by operation of law like,
negotiorum gestio, agency and negotiorum gestio may be
similar in the sense that there is representation in its legal
relationship but they can be distinguished as to their manner
of creation in that agency is created by mere agreement of
the parties, negotiorum gestio created by operation of law.
A feature of agency which is peculiar is representation.
No representative in a contract - he cannot be considered as
an agent.
Nielson vs. Lepanto Minning (LM)
Held: While there was a claim by LM that there is an agency,
the SC ruled that not a contract of agency. Nielson has no
power of representation to bind LM with third person even it
has power to buy certain items he still has to obtain or seek
the opinion or approval of the BOD of the LM in order to buy
certain items, which means he is not really an agent as to
their has no right of representation.
But a feature which would make agency similar to
partnership
It is based on trust and confidence that there are fiduciary
obligations of an agent as much as there are fiduciary
obligations of a partner unlike in sales or other legal
relationships which are not based on trust and confidence.
Another very important feature of Agency is the manner of
termination.
This is unusual for a contract that it can be
terminated at will by the principal agent, maski sino. If the
termination was made by the principal, it is called revocation.
if made by the agent it is called withdrawal.
Mariano Case
To extend the contract of one party over another - in agency
the principal has almost full control of the agent, he can give
specific instructions to the agent, on how the obligations are
to be performed, the manner of the obligations, the remedies
performed, with whom, where it is to be performed, lahat,
that would be the extent of the control of the principal over
the agent.
But as held in the case of control of one party over
another which only goes into the result, it cannot be
considered as a contract of agency but it may be considered a
contract for a piece of work.
Another important feature as to effect of delivery of the
thing
If there is a transfer of ownership upon delivery of one
party to the other party, that is not a contract of agency. In a
contract of agency, when the principal delivers the thing to
the agent, only possession is transferred to the agent,
ownership is retained by the principal (owner) in fact in
agency to sell, an agent who was not able to sell he has the
right to return the goods to the seller.
Whether there was a stipulation as to there would be no
transfer of ownership despite the delivery of the goods from
one party to another, and ownership of the goods, first party
will only be terminated upon the sale of the goods to a third
person, despite another stipulation stating that there is no
agency relationship created between the parties. The SC ruled
actually principal agent ang relationship nila.
2 concepts similar in agency and partnership Both of them
are business organizations, both are based on trust and
confidence, there would be normally a representation,
however the very important distinction between the two - in
partnership, there is a juridical personality created separate
and distinct from that of the individual partner. In agency,
despite the perfection of a contract of agency, wala sila pa rin,
the only personalities would be that personality of the
principal and the personality of the agent.
Some authors would classify contract of agency into three:
1. Actual agency
2. Apparent / Ostensible
3. Estoppel
Page 33 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
1. Estoppel
Kang Case
Facts: Flores appears to have full control in a restaurant
(Washington Café) owned by Kang and in the administration
of the restaurant he bought certain items from Mack - items
needed for restaurant. But a portion / price was not paid by
Flores. So Mack (seller) went after the owner of the
restaurant. The only defense raised by the owner was that
Flores was not his agent.
Take note: It is very difficult to prove actual agency, because
an agreement between 2 persons, eh kung verbal lang ang
agreement dun, how would you be able to prove?
Held: The owner of the restaurant can be held liable by
estoppel because he clothed Flores with full power as if he
had the authority to buy those items necessary for the
administration of the restaurant. Aside from that, Mack was
able to prove pieces of evidence - like in the lease agreement
over the building where the restaurant was located and
comes the owner of the restaurant as lessee and Flores
signed as an agent of the lessee with all these the SC ruled
that the owner of the restaurant is liable under the Principle
of Estoppel.
2. Apparent / Ostensible
Rallos Case
Facts: Letter was sent by B to X, informing X that A has the
authority to enter into a contract with X specifically to obtain
goods from X, like copra, abaca which goods will be sold by A.
After the sale a portion can be deducted as a commission and
the rest to be delivered to X. After a certain period, the goods
obtained by A from X remained unpaid. In other words, A will
get the goods from X. A did not deliver the proceeds of the
sale. X demanded payment from B. The defense of B was as of
that moment from that certain period he has already revoked
the authority of the agent and therefore be bound by any
contract entered into by A in representation of B with 3 rd
person. Is the claim of B tenable?
No, 1873 so far as 3 rd person are concerned, this notice itong
letter nya kay X remain in full force and effect until it is
rescinded in the same manner it was given.
Q: What if B was able to prove that he posted the notice in
Manila Bulletin - notice of fact of revocation of A. If there
was such publication of notice, would the ruling of the SC be
different?
A: No, still the same (Article 1873)
(See phraseology of 1873)
Q: What if in this problem he had actual knowledge of the
revocation even if he did not receive the letter eh under
1873 he should be sent a letter in order that the revocation
of authority of A will be effective as to third person?
A: If the 3rd person has actual knowledge of the revocation, it
is bad faith on his part to continue transacting with the agent.
The agent acting on behalf of the principal and thus he should
not be allowed to recover.
Pwede nabasa yung publication, informed by phone,
telephone conversation but it is very hard to prove because
the word of the principal is against the 3rd person.
As far as 3rd person are concerned they would have the right
to believe that the agency has the authority until they have
receive a notice in the same manner that he received notice
as to the authority of the agent.
Q: In agency by estoppel / apparent agency, is there really
an actual agency existing?
A: It does not matter, the principal can be held liable under
the Principle of Estoppel because it is very hard to prove the
existence of the actual agency. It can only be the principal in
estoppel that can be held liable. Just like in apparent /
ostensible agency sa totoo lng it is possible that he did not
revoke the authority pwede pa din diba, pwedeng kunwari
nirevoke na niya just to avoid liability to 3 rd person but that is
a matter or a claim that he already revoked. Pati mga letter,
halimbawa even assuming the principal held a letter to the
agent that letter can be easily denied kunwari, pinadala nya 3
months ago pero ngaun lng pinadala nilagay nya lng ung date
nung unang panahon. Thus, it only protects 3 rd person. Thus,
1873 is included in the law in agency.
3. Actual Agency
The law itself classifies actual agency into – as to manner of
creation, express or implied. There is no problem with express
agency.
A. Express Agency - it is a kind of agency wherein the
consent of both parties is expressly given.
B. Implied Agency - were the consent of one of the
parties was only impliedly given on the part of
principal.
Dela Pena vs. Hidalgo
Facts: Dela Pena authorized Hidalgo to administer his
properties in the Philippines, He has to leave the country.
Hidalgo managed the properties of Dela Pena, after a while he
has to leave the country also and go to Spain for health
reasons. So he appointed another person, another Hidalgo to
administer said properties of Dela Pena and wrote a letter to
Dela Pena informing him of the appointment of another
person to replace him as the administrator of his property.
Dela Pena received a letter, he did not reject the
appointment, he did not question the acts of the new
administrator. After a while he died and his heirs (Dela Pena
heirs) filed an action against Hidalgo (the 1 st agent) for
accounting, damages etcetera for the period after the
appointment of the other agent.
Issues: (1) Who was then the agent during the period?; (2)
Can the 1st agent be held liable after the appointment of
another administrator?
Held: From the silence of the principal, due to his inaction,
due to his failure to repudiate the acts of the substitute, he is
thereby deemed impliedly consented to the appointment of
another person as the new agent, therefore implied agency
was created.
Page 34 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
This goes to implied agency pertaining to the principal
because of the silence of the principal, because of lack of
action of principal, because of failure to repudiate the acts of
another principal, na alam nyang was acting on his behalf.
Q: However, is this rule applicable also to the agents or to
the other party? Concretely, if a person was asked to
administer the property of another or to sell the property,
and he said nothing - by his silence, by his inaction, may he
be deemed to have accepted agency?
A: Not necessarily, thus under the law, you have to make
distinction to determine the scenario under which the said
appointment was made, okie! The law would say when the 2
parties are absent, and when the 2 parties are present.
When 2 parties are absent - 1 is in Manila and the other is in
Cebu.
When 2 parties are present - present in the same room
(A) 2 persons present - present in the same conference hall
Q: When both parties are within the same conference hall, A
said to B that he would sell his (B) parcel of land in Cagayan
De Oro City but that B did not react, he just stared at the
speaker, nakatingin lng sya, he said nothing, by his silence
would have deemed the agency?
A: No.
Q: But if B delivered a special power of attorney to A, sabi
nya “Here is the SPA, I am authorizing you to sell my parcel
of land in Cagayan De Oro City”. The SPA was accepted by A
but he said nothing, basta tinanggap na lng nya, deemed
impliedly consented to that agency?
A: Yes.
(B) If 2 persons are in different place, one in Manila and the
other one in Cebu
Q: What if A was in Manila B in Cebu. A asked B to be his
agent to sell a parcel of land and B did not say anything,
wala lng, is B considered to have impliedly consented as an
agent?
A: No.
Q: But this time again a SPA was sent by A (Manila) through
DHL to B (Cebu) which was accepted / received by B, now he
did nothing by his inaction, by silence he is deemed to have
accepted the agency?
A: Not necessarily, it will depend on the nature of the
business of B, kung ang negosyo, again under the facts in the
Special Power of Attorney he was authorized to sell the
parcels of land of A, if B was in the business of piggery /
poultry ay walang kinalaman yan sa selling of a parcel of land.
He will not be considered to have impliedly accepted the
agency. However, if B is a real estate broker, talagang ganun
yung negosyo nya di ba, buying and selling parcels of land,
then and only then on his silence, he is deemed to have
impliedly consented to the agency.
COMPENSATION OF THE AGENT
Q: As to the compensation in a contract of agency consider
again if agency is gratuitous or onerous?
A: Agency is presumed to be for compensation. If that
principal is claiming that the agent agreed to render service
without compensation the burden is on him (the principal) to
prove that in fact it is gratuitous because the law presumes
that it is for compensation. But there is one other relevance in
this distinction - for example, due to the negligence of the
agent the principal suffered damages in the amount of 100k.
It was actually proven that the agency was gratuitous. The
agency in other words sa abogado, pro bono or libre ang
serbisyo nang agent, may the agent be held liable?
A: Of course sa abogado even if pro bono yan if he caused
damage to the principal or client due to his negligent acts, he
can be held liable. However, under the law if the contract of
agency is gratuitous in character, the court may mitigate the
liability of the agent, dahil gratuitous.
Atty. Uribe’s Comment: I definitely agree with the provision.
As to this, the only recognition of human nature, pag walang
sweldo mahirap mgtrabaho, in fact, mahirap gumising sa
umaga. Buti na lng nauna ang sweldo sakin ditto sa review
kaya ganado ako magsalita 
Article 1909 - The liability of the agent for causing damage to
the principal due to his negligence or even bad faith or fraud
committed against the principal may be mitigated if the
agency is gratuitous in character.
BE: What is the scope of authority of the agent - whether it
only pertains to the acts of administration or acts of strict
dominion?
A: Under Article 1877, if the agency is in general term this
only comprises acts of administration. Even if the principal
beholds power to the agent or it is stated that the agent may
execute any act as may be deemed appropriate, that will still
be an agency pertaining to act of administration.
FORM OF A CONTRACT OF AGENCY
As to form, the law is clear that it may be oral however, the
law may require a particular form or specific form for what?
for the validity of agency? Is there a law which requires a
particular form for the validity of the agency?
A: Wala, there is no such form.
Q: Is there a particular form required by law for the agency
to be enforceable?
A: At least one, under the statutes of frauds – if in the terms
or agreement if it is not to be performed within 1 year, it
should be in writing otherwise, it is unenforceable. The effect
of the agency if the authority of the agent it is not in writing
would go into the contract entered into by the agent with the
3rd person. 1874 and 1878 - formalities.
REQUISITES OF A CONTRACT OF AGENCY
Essential requisites of a contract of agency are like any other
contract - there are 3 essential elements:
(1) consent of the contracting parties; (2) as mentioned a
while ago, the object of a contact of agency is the execution
of the juridical act; (3) as to cause, as far as the principal is
concerned it is the service to be rendered by the agent and as
to the agent, it is the compensation to be paid by the
principal or it may just be liberality in gratuitous contract.
Rallos Case
Page 35 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Held: The SC enumerated the essential elements or the
alleged essentials elements of a contract of agency:
1. Consent
2. Execution of the juridical act - subject matter
3. Acts within the scope of authority
4. The acts must be in representation of the
principal
Atty. Uribe’s Comment: These are allegedly the essential
elements. Again, some authors would discuss in their books
that these are the essential elements. With due respect to the
ponente of this case, medyo mali mali ang enumeration, first
there was nothing mentioned about the cause or
consideration as a contract, a contract will never validly have
a cause or consideration. Well, it may be liberality, pwede
naman cause yan but there must have a cause. That the agent
act within the scope and that the agent must act in
representation are not essential elements of a contract of
agency. They are actually obligations of the agent which
means they have already perfected the contract of agency. No
obligation will arise kung void yung kontrata kung wala pang
valid contract. So the essential elements are only those
elements necessary for the validity of the contract. Once the
contract is valid then the obligations will arise.
Q: If the agent acted outside the scope of his authority, does
it mean that the contract of agency is void?
A: Of course not. He can be held liable for acting outside the
scope of his authority or if he acted not in representation of
the principal.
Q: Does it mean that there was no agency at all?
A: Of course not. There is a contract of agency. Under the
rule, there are consequences if the agent did not act in
representation of the principal.
PARTIES IN A CONTRACT OF AGENCY
Going to the consent of the parties, 1 author may
claim that there are 3 parties in a contract of agency that is
totally wrong!
There are only 2 parties in a contract of agency the
principal and the agent. However, in problems involving
agency, normally, there are three persons involved. The third
person with whom the agent transacted is no longer part of
the concept agency. The contract entered into between the
principal and the agent is the contract of agency. But when
the agent entered into another contract, it may be a sale,
lease or other contract and the 3 rd person is not a party to this
contract. The 3rd person is a party to a 2nd contract.
Again the parties are the principal and the agent.
They may be called in other names the principal may also be
called the employer, constituent, chief. The agent may be
called attorney-in-fact, proxy, representative.
1. Consent of the Contracting Parties
Q: What if the principal authorized an agent who was then
16 years old to sell a house and lot, giving him a Special
Power of Attorney. Pursuant to his mandate, the agent
(minor) sold the house and lot to X, a 3 rd person, thereafter X
filed an action to annul the contract of sale on the ground
that the agent is minor at the time of the sale, will the
action prosper?
A: It will not prosper. On 2 grounds:
(1) In that contract of lease entered into by the agent
and the third person or the contract of sale between
the third person and the agent, while A is considered
as the seller but only acting on behalf of the principal
still the real party in the contract is the principal and
not the agent
(2) The other reason is under the rules in contracts – In
annulment of contract, only the incapacitated
person has the right to have the contract annulled,
the party in the contract who is not otherwise
incapacitated has no right to institute an action for
annulment.
Either ground would be a valid ground to dismiss the
case.
2. Object of the Contract of Agency
As to the object of the contract of agency we have mentioned
already that this is the execution of juridical act.
Q: Is it correct to say that any act which a person can
lawfully do, he can delegate to a 3rd person or to an agent?
A: Not all. There are acts which are considered purely
personal acts. This he may not delegate to an agent – like the
execution of an affidavit, you cannot ask somebody to sign on
her behalf in an affidavit or even in succession you cannot
delegate the execution of a will to a 3rd person, note that it is
execution not drafting of the will. You can ask somebody to
sign for you, under certain circumstances, but the execution
per se cannot be left to a 3rd person, it is a purely personal act.
Q: The right to vote may be delegated to another person?
A: The answer is - it depends. Voting in national / local
election cannot at least be validly delegated. Well it may be
delegated, may have been delegated by other people, pero
pag nahuli ka, pag bad ka, kulong ka sabi ni Joker  But in a
corporation, as for corporation can there be a valid
delegation of the right to vote? Yes. In a stockholders’
meeting, this cannot happen but in a BOD’s meeting, in a BOD
meeting it is the personal presence of the Director which will
be counted for the purposes of quorum but for purposes of
voting, you can ask somebody to observe dun sa
proceedings. The members of the Board would normally not
exclude you as an observer, as a representative of the other
BOD.
But obviously if the person himself cannot lawfully do, cannot
delegate anyone like if the agent cannot buy a parcel of land
in the Philippines, he cannot also delegate such acts to
another person that is void sale.
FORM OF CONTRACT OF AGENCY
As mentioned earlier, agency may be oral. It doesn’t matter if
the contract of agency would be valid but the parties even if it
is by verbal agreement, any effect in the verbal authorization,
the agreement between the agent and the principal if it was
only verbal will only be in the contract entered into by the
agent. Concretely, under 1874, if the agent was authorized to
sell a parcel of land and his authority is not in writing, the sale
itself is void under 1874, however, if for example, the agent
was authorized to sell a car and his authority is not in writing,
what is the status of the sale? Would that be valid and
enforceable against the principal?
Page 36 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
A: No, it is unenforceable under 1878. San yung car sa 1878?
It falls under the last paragraph of 1878 - any other act of
strict dominion would require special power of attorney. So
1878 would enumerate cases, acts of contracts where the law
requires the authority of the agent in writing, it should have a
Special Power of Attorney, otherwise the contract entered
into by the agent is unenforceable against the Principal.
Q: Concretely, the agent was authorized to administer a rice
land. In the administration of the rice land, he had to buy
fertilizer, if he paid the sellers of fertilizer without Special
Power of Attorney, would the payment be binding against
the principal?
A: Yes because that payment is only considered as an act of
administration.
Q: However, kung na-harvest na ung palay then he used the
proceeds of the palay to pay the indebtedness of his
principal with a certain bank (PNB) without SPA, would that
payment be valid and binding as against the principal?
A: No because that would fall under the first paragraph of
1878 – to make such payment not in the matter of acts of
administration without SPA.
Other Acts / Contracts which Require a SPA
1. Entering into a compromise agreement with SPA. He
cannot submit the matter to the arbitrator without
another SPA, those are 2 and separate distinct
powers - the power to submit matters in the
arbitrator and the power to compromise.
BE: The agent of the principal entered into a contract of
lease (without SPA) with X and the period of lease is for 3
years. Would the contract of lease be valid and enforceable
as against the principal?
A: It depends on the object of the lease. If this lease involves
immovable like a parcel of land, for a period of 3 years
without a SPA, would that be valid and Binding?
Unahin natin ung car, if it would be a car for 3 years without
SPA, even if it is for 3 years this would be a valid and binding
contract of lease as against the principal. However, if this is
an immovable like a parcel of land, would this be valid and
binding against the principal? It depends on whether in this
contract of lease if the principal is the lessor or the lessee.
Under Article 1878, this contract is unenforceable as against
the principal only if: (1) in the contract of lease the principal is
the lessor; (2) the object is immovable and (3) the period is
more than 1 year. Take note of the 3 requirements.
Under 1878, it is to lease the property of the principal to
another. Therefore, if the principal is the lessee SPA is not
required, kasi ang burden wala naman sa principal, dun sa
lessor, kc property ng lessor yan di ba? Thus, the law only
required the SPA if the principal is a lessor, and the lease
contract involves immovable property and the period is more
than 3 years.
Q: Lease contract was entered into by A in representation of
B, with B as the lessor, the period of lease of a parcel of land
is 3 years. A has a SPA. May this contract be unenforceable
as against the principal?
A: Yes, it is possible if this lease is not in writing. This time
under the Statute of Frauds. Kanina ang discussion natin ay
under 1878 but if you remember the SOF, a lease over
immovable property for more than 1 year must be in writing
to be enforceable (Article 1403).
There is an author again who would claim that a Power of
attorney may be oral. He is really wrong. A power of
Attorney by its nature is in writing, by definition it is a written
authority. It cannot be called a power of attorney if it is not in
writing, in fact, if you consider the specific provision in the
agency all this provisions pertain to a power of attorney in a
written instrument. For example, Article 1871, pertains to the
delivery of a power of attorney; 1872 refers to transmittal of a
power of attorney; 1900 - power of attorney is written; 1902-
presentation of a power of attorney.
Obviously in a power of attorney, you cannot do that if it is
merely a verbal authorization. How can a third person
demand the presentation of a power of attorney if that
alleged power of attorney is verbal? By its nature, it is in
writing.
Q: Would that power of attorney be valid and binding as
against the principal if it is not in a public instrument?
A: Yes, even if a power of attorney is only in a private
instrument, the power of attorney is valid and binding against
the principal. The law does not require that it must be in a
public instrument.
Jimenez vs. Rabot
Facts: Jimenez was the owner of certain parcels of land in
Pangasinan. He was then in the province of North Luzon when
he sent a letter to his sister asking his sister to sell one of his
parcels of land. With that letter, the sister indeed sold one of
his parcels of land to Rabot. However, the sister did not remit
the proceeds of the sale, binulsa lng nya, so when Jimenez
went back to Pangasinan, he demanded the property, yun ay
na kay Rabot na, so he filed an action against Rabot, the
defense raised by him is that the letter would not be sufficient
a power of attorney to bind him as a principal in the sale of
the parcels of land.
Held: A letter suffices as a power of attorney. When you sent
a letter to your brothers or sisters you do not notarize such
letter.
OBLIGATIONS OF THE AGENT
1. To carry out the agency.
2. In carrying out the agency, there are 2 obligations of the
agent:
(a) To act within the scope of authority
(b) To act in behalf of the principal or in representation of the
principal.
3. To render an account of his transactions and to deliver to
the principal whatever he may have receive pursuant to an
agency even if it not owing to the principal.
1. Primarily, the obligation of the agent is to carry out the
agency. If he failed to carry out, he may be held liable.
Q: Should he carry out the agency after the death of the
principal?
A: As a rule no, because there is no one to be represented. In
fact under 1919, the agency is extinguished by the death of
the principal. However, the law provides for an exception - if
delay would impair danger for an already began but then
Page 37 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
unfinished contract, he should continue to carry out the
agency. Again, if it would cause danger.
Q: But if he did not carry out agency, he may not be held
liable?
A: As a rule, he is liable for not carrying out the agency.
Q: So what is the exception?
A: Professor de Leon gave an example of this, if the agent was
authorized to buy a specific car from a specific person. When
the agent was about to buy the car, he was informed by the
seller that there is a defect in the brake system of the car.
Nonetheless, without informing the principal he bought the
car. If damage was caused to the principal because of the
defective brake system and a claim is filed against the agent,
can the agent invoke that he merely carried out the agency?
No, here the law is very clear that he should not carry out
agency if it would result in loss / damage in the principal.
Another Example
An agency to buy a parcel of land before the Mt. Pinatubo
eruption. During that time, agents all over Luzon, will buy a
parcel of land not only in Metro Manila but also in Pampanga
and South CALABARZON but if the agent was given authority
and he bought parcels of land immediately after the eruption
somewhere in Porac / Bacolor Pampanga, mukhang you can
be held liable for buying those parcels of land. That it would
be a valid sale?
A: Yes, that would be a valid and binding sale as far as the 3 rd
person is concerned. If nakita naman na puro lahar, nakita mo
pa binili mo pa, the agent can be held liable because the act
definitely would result in loss or damage to the principal at
least for about 15 years.
2. In carrying out the agency, there are 2 obligations of the
agent, he should always remember:
(a) To act within the scope of authority
(b) To act in behalf of the principal or in representation of the
principal.
(a) To act within the scope of authority
Q: How would you know if the agent was acting within the
scope of authority?
A: You will be guided by the power of authority. In fact, as a
3rd person, you can demand the power of attorney, so that
you will know whether in fact he had authority to enter into a
contract. But sa totoo lng there are some SPAs which would
be subject of the case up to the SC pertaining to the scope of
authority of the agent.
Linal vs. Puno
Q: Was Puno authorized to sell the land or merely authorize
to administer the land?
A: There was a dissenting opinion.
Atty. Uribe: Mas magaling ang dissenting opinion. Sa
phraseology ng authority ni Puno he was only to buy, to sell,
etc…in the administration of land, so the buying and selling
should not be construed as a separate authority from the
administration and should be construed as a buying and
selling in relation to the administration. If you have to
administer a parcel of land, you have to buy so many things,
lalo na kapag agricultural land yan. You have to buy tools,
fertilizers, and therefore you have the authority to buy. Do
you have to authority to sell? Yes, the products of that land.
You have the authority to sell pero ung ginawa ni Puno,
binenta nya mismo yung land. When the case reached the SC,
the majority of the decision was – he has the authority to sell
under the power of authority.
One of the bases of the SC in the conclusion that
there was a power to sell also because the fact that the agent
acted in good faith, that is an incredible argument, by the
mere allegation that the agent acted in good faith he
already acted within the scope of the his authority? Parang
malabo yung dalawang yun. Even if I would claim that I
thought I am authorized, does it mean therefore that I was
authorized? Those are 2 different things - believing in good
faith that you have the authority is different from in fact
having the authority.
Nonetheless, again, as a rule you can be guided by
the power of attorney but even if without the power of
attorney or despite the fact there was a specific mandate of
the power of attorney, you should be guided by specific
provisions of law whether the act is within the scope of your
authority. For example: 1881 - the agent may do such acts as
may be conducive for the accomplishment of the purpose of
agency. This particular provision has been cited by the SC in
the case of Mack vs. Kang, if a person who is an agent has the
authority to manage the restaurant, necessarily, he must have
the authority to purchase items for the management of the
restaurant - the act of buying these items, like plates, these
are reasonable and necessary for the accomplishment of the
agency.
Another Article which would help you in determining
if the act is within the scope of the authority is Article 1882.
Example of this, the principal authorized his agent to sell his
car, a specific car for 300k. The agent sold the car for 400K. It
is possible for the principal to say that you acted outside the
scope of authority, galit pa cya 300k na binebenta pero 400k
nabenta. Technically, yes, the agent indeed may be
considered to have or may be claimed to have acted outside
or in excess of his authority because he told to sell the car for
300k.
Q: What is the reason that the principal would claim that
the agent acted outside the scope of his authority?
A: Many reasons: for example he asked to buy somebody to
sell his car because he expected sum money to arrive from
abroad to buy a brand new car but wala napornada, di binigay
ng kapatid yung pera. Therefore, if the car will be sold wala na
syang kotse and it is an excuse that the agent acted outside
the scope of his authority but the common reason would be
because the principal already talked to somebody else which
will really buy the car for 400k. When you may choose this 1?
Because dun sa isa, walang commission di ba sa 1 may
commission. He may not recognize this contract.
Article 1882 - the limits of the agent’s authority shall
not be considered exceeded should it have been performed in
a manner more advantageous to the principal than that
specified by him. So under the law, that the act is deemed not
in extent of his authority, even on its face parang in excess,
the law will consider it as not in excess merely because it is
advantageous to the principal.
Page 38 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
You distinguish these transactions from an agency to
sell 100 kilos of mangoes and there is a specific instruction
that the mangoes will be sold 30 pesos per kilo. If you sold
the mangoes for 50 pesos, 30 lang binenta 50 pesos per kilo
ang nangyari out of 100 kilos sisenta lng ang nabenta, 60
sisenta, 70 sitenta, so instead of 30 pesos per kilo he sold 50
per kilo. Actually, this is a violation of the instructions of the
principal kaya siguro di lahat nabenta ung mga mangga
binenta nya with a much higher price.
Another Article 1879 - the law specifically provides
that the special power to sell excludes the power to
mortgage. Even if the agent was authorized to sell, he cannot
mortgage that without another power of attorney, as much as
the power to mortgage does not include the power to sell as
mentioned a while ago the power to compromise does not
authorize for the submission to arbitration.
Q: However, if the principal authorized the agent to borrow
money without the authority of the principal can the agent
himself be the lender?
A: The law provides yes, as long as the interest rate will be the
market rate, so the agent may be the lender.
Q: The agent was authorized to lend money of the principal,
may the agent himself be the borrower of the money
without the consent of the principal?
A: This time hindi na pwede. He may be a good agent to lend
the money to other person but he may not be a good debtor.
Thus, the law would protect the principal in that case.
But also, be guided by the decision of the SC as to the extent
of the authority of the agent. For example in the case of
Insular Drug vs. PNB
Facts: The agent here was authorized to collect sums of
money including checks from the client of Insular. So may
agent ang Insular. He did collect the sums of money and the
checks, and the checks were payable to Insular but instead of
delivering the checks in the Insular, he encashed the check or
deposited the checks in his account in PNB.
Issue: Does the authority to collect the checks includes the
power to indorse the checks or even the power to encashed
the check?
Held: No, the power to collect does not include the power to
indorse or the power to encash the checks. So kasalanan ng
PNB kung bakit nila tinanggap ung check without the proper
indorsement samantalang ang payee ay Insula. Hindi naman si
agent.
Atty. Uribe: In fact, the money involved here is 18,000 and I
would still remember na Philippine Reports pa itong case.
The agent (Mr. Foster) committed suicide when that fraud
was committed. Sabi nung isang nagbasa for sure ahead pa sa
akin, encircle nya 18,000, gago naman ito 18,000 lng maliit lng
ang amount…. But there was another guy, sumunod dun sa
isa, sinagot nya, mas gago ka 1932 pa eto eh… 
Q: The obligation to act on behalf of the principal - If the
agent acted for himself and did not disclose his principal,
would that 3rd person has a cause of action against the
principal?
A: No.

Q: Would that principal have a cause of action against the
3rd person?
A: Wala din. But there is an exception in this rule if the object
involved in the contract entered into by the agent and the 3 rd
person belongs to the principal - the law grants / gives a cause
of action to the 3rd person against the principal and vice-versa.
It is because of the possible collusion between the principal
and the agent di ba, so that sasabihin ng principal alam ko
yang kotse na yan sira sira na makina (may katok). Thus, in
actual case the SC said, the vehicle has a “knock” , SC
decicion yan! Hehehehehe  Kasi may katok ang kotse, the
principal would agree with the agent just to sell it by yourself
in your own name so that if there would be a complaint the
3rd person has no cause of action against me and the
principal. But to avoid such possibility the law would grant a
cause of action to the 3rd person if the object of the contract
belongs to the principal.
BE: A authorized B to borrow sum of money from any bank
and he also authorized B to mortgage a specific parcel of
land to secure that loan. What B did, he borrowed money
for himself from a certain bank without disclosing his
principal. Later on, he defaulted. Can the bank go after the
principal?
A: Of course no, the contract is between the agent and the
bank only. The principal has nothing to do with the contract.
Under the facts, the agent borrowed for himself.
However, if you have read the suggested answer,
may 2nd paragraph - to the effect that the bank can at least
foreclose the mortgage they can. If you remember the
question, di tinatanong ng examiner can the bank go after the
principal as far as the thing is concerned. The only question
pertains to the payment of loan.
Another thing in the suggested answer which is
totally wrong - under the facts, the principal authorized the
agent to mortgage the property for the loan that will be
obtained by the agent in the name of the principal. If indeed
he mortgaged the land for a loan in his name, would that
mortgage be valid?
A: Definitely not. If he mortgaged it as a mortgagor the
mortgage is void. The law requires that the mortgagor must
be the absolute owner of the thing mortgaged. On other
hand, even if the agent mortgaged the thing on behalf of the
principal, the principal is the mortgagor. Would that be a
valid and binding mortgage as against the principal?
A: Also not. His authority to have the property mortgaged to
secure a loan, not to secure any other person’s loan and that
therefore it cannot be within the authority of the agent and
therefore any foreclosure of such mortgage will not prosper.
Q: If the agent acted within the scope of his authority and in
representation of the principal, who will be bound in such
contract?
A: Aside from the 3rd person, it will be the principal because
again the agent is merely representing the principal.
Q: However, is it possible for the agent himself to be bound
in such contract or be held liable under such contract?
A: Yes. If he expressly binds himself to that contract, why he
would do that? Agent lang naman sya, when he would bind
Page 39 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
himself personally / expressly? In the very nature of the
agency the 3rd person actually knows that it is the agent and
not the principal. Ang nakikita lang ng 3 rd person sa palengke
eh ung nagtitinda baka ung principal nasa espana. Therefore,
the 3rd person to whom a thing is offered for sale for example
the agency to sell, the 3rd person will say that “I will buy that if
you also bind yourself as one of the sellers” because I don’t
know the principal. Eh ang agent gusto kumita, sige na din di
ba. He will bind himself personally in the contract as a seller
and not as an agent.
The agent may be held liable in the contract even if
he acted within the scope, acted in representation of the
principal, he acted negligently or in bad faith di ba.
Article 1909 is consistent also on the law on
obligations that every person who is guilty of fraud,
negligence, etc.. will be held liable for damages.
But aside from these 2 scenarios, of course, the agent may be
held liable if he acted beyond the scope of authority. Also, if
he acted beyond the scope of his authority, however, he may
not be held liable under such contracts and under certain
circumstances:
(a) The principal ratified - then the principal will be held
liable and be bound on such contract.
(b) Even if the principal did not ratify, if the 3rd person
was notified of the fact that the agent was in excess
of his authority or even if he was not notified, he was
aware of the fact that the agent was in excess of his
authority, the agent will not be held liable because
under 1898 that contract is void. So this contract
being void, the third person cannot hold him liable
for acting within the scope of authority.
3. One important obligation of an agent is to render an
account of his transactions and to deliver to the principal
whatever he may have receive pursuant to an agency even if
it not owing to the principal.
In fact, any stipulation exempting him from this obligation to
render an accounting is void.
Domingo vs. Domingo
Facts: The relationship between the principal and the agent
was not mentioned in this case but the agent Domingo was
authorized to sell a property of the principal Domingo but in
pursuant to this authority, he introduced a perspective buyer
to the principal Oscar de Leon. Oscar, just any other
prospective buyer wanted the price to be lowered. So he was
asking that the price be lowered. During the negotiation, this
Oscar de Leon bid 1,000 to the agent, which amount the
agent did not disclose to the principal. However, may violation
na ng obligation ang agent. The principal on the other hand,
somehow to only accommodate the demand of the
prospective buyer, nakaisip ng paraan, what he did, he had an
agreement with the prospective buyer that kunwari the sale
would no longer push through so they have this drama that
the prospective buyer was expecting money from abroad and
therefore the principal would have a reason to the agent na
hindi na matutuloy ang agency and therefore I am revoking
your authority as an agent.
Thereafter, the agent discovered that something is
wrong with what happened. He went to the register of deeds
and he discovered that in fact a sale was executed between
Domingo and Oscar de Leon. The agent demanded for his
commission. May sub agent pa sya dahil inintroduce cya kay
Oscar, did the action prosper?
Held: No, the SC ruled that for the failure of the obligation to
deliver to the principal for whatever he may have received
pursuant to the agency, even if that is not only to the
principal, that is a breach of fiduciary relation which resulted
in not giving the agent his commission. But is the 1,000
important? Supposedly, parang 10,000 ang marereceive nya
as commission?
A: The answer would be yes because why would the
prospective buyer give 1,000 sa agent? hindi dahil mahal nya
ang agent?! That would be because he wanted the agent to
continue with the principal to lower the price of the thing
which would be sold, which is inconsistent with the interest of
the principal. As an agent of the principal, he is supposed to
protect the interest of the principal not to lower the price to
be paid by the buyer. If only for this the SC will not dismiss
the case. In fact, ginawa pa syang liable for the share of the
sub-agent.
Obligation to deliver to the principal what he may have
receive
In fact this obligation is so serious. If the agent would fail to
perform this obligation, he may be imprisoned.
US vs. Reyes
Facts: The agent was authorized to collect sums of money for
convenience of the principal. More or less 800 lang yun or
800+ is the amount to be collected. Now he was able to
collect only 500 instead of 800. He claimed that he is entitled
to 20% as a commission (20% of 800 is 160). So hee only
remitted 340 to the principal, because of that the principal
demanded a greater amount than the 340. A criminal
complaint was filed (for estafa).
Held: Regardless of the commission whether 10% or 20%, the
agent was not entitled to retain 160 because even if 20% the
20% of the 500 and he is not entitled to the 20% of 800. The
commission should be based on the actual amount he
collected not the total amount which he is supposed to
collect. And because of his failure to deliver 400 to the
principal he was convicted.
Obligation to render an accounting
Q: The principal authorized the agent to sell a car for 300k,
the description of the car was mentioned in the SPA.
However, before the agent would sell the car, the principal
called him by phone and instructed him to sell the car in QC
to a member of IBP chapter. Instead of selling the car in QC
to an IBP member, he sold the car in Manila to a person not
known by the principal for 300k.
(1) Can the principal recover the car from the buyer if that
car is already delivered to the buyer?
(2) Any remedy provided by the law to the seller or to the
principal?
A: (1) It depends, if that buyer has no knowledge of that
instruction of the principal then he has all the right to retain
the car and that sale will be valid and binding as against the
principal. As provided under Art. 1900 so far as 3rd persons are
concerned they only rely on the SPA as written. They have no
obligation to inquire on the special instructions made by the
principal which are not mentioned in the SPA, eh wala naman
dun sa SPA na it will be sold to an IBP member chapter in QC.
Page 40 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
(2) To go after the agent for damages, if there is any damage
sustained by him for his failure to follow the instructions of
the principal.
Article 1898 - if the agent acted outside the scope of his
authority and this was known to the 3 rd person the contract is
void. Take note by the specific provision of the law this
contract is void and subject to ratification. This is only the void
contract which can be ratified under Article 1898.
Q: Is it possible that the agent be held liable to the 3 rd
person even if the 3rd person was aware of the fact that the
agent was in excess or outside his authority?
A: Yes, if the agent promised to obtain the ratification of the
principal and failed to obtain the ratification. Nagkwento sya
sa 3rd person
”you know I was acting in excess of my authority, but don’t
worry I will get the ratification of my principal”. If he failed to
get the ratification of the principal he will be held liable not
because of the contract itself is void but because of failure to
get the ratification of the principal. If the principal ratifies the
contract, he cannot be held liable even if it is a void contract
because the principal is bound to the contract.
APPOINTMENT OF SUBSTITUTE
Another possible obligation of an agent may result from an
appointment of substitute
BE: X appoints Y as his agent to sell his (X) products in Cebu
City. Can Y appoint sub-agent? And if he does what are the
effects of this appointment?
A: Yes, the agent may appoint a substitute or sub-agent, if the
principal does not prohibit him in doing so. But he shall be
responsible for the acts of the substitute (because he was not
given authority by the principal) especially if one appointed
turns to be incompetent or insolvent.
Atty. Uribe: Is this correct?
Mukhang mali. Mukhang confused ang sagot. Ang tanong
sub-agent? Can Y appoint sub-agent? Yes, the agent may
appoint substitute or sub-agent which means apparently
there is no distinction between a sub-agent and substitute.
With due respect to the answer of the UP Law Center,
Professor de Leon is really good on this matter, a sub-agent is
very much different from a substitute.
If it is in replacement (kapalit) that is a substitute
which means that the agent would be disassociating himself
from the agency (Aalis na sya or lalabas na sya ng Pilipinas
etc.) and somebody else must take over his functions.
An agent who appoints a sub-agent will continue to
be an agent in that agency relationship. He does not
disassociate himself from the relationship. He is still the agent
and therefore all the rights and obligations would still be
there even if he appointed a sub-agent. But if the agent
appointed a substitute, the answer will depend on Art 1892.
Kung ang tanong ay substitute and during the
management of the business by the substitute, losses were
incurred by the principal, mask isang taon pa lng ang
substitute 2M was incurred by the principal, may the
principal hold the agent liable? Iba ung can the principal
hold the substitute liable?
A: The first thing you have to consider is if he was prohibited
in appointing a substitute or not. If he was prohibited he will
be held liable because he appointed 1 despite the prohibition.
In fact, under the law all acts of the substitute appointed, if it
is against the prohibition, such acts are void. If he was not
prohibited under the law, he shall be responsible for the acts
of the substitute under certain circumstances. Take note that
the operative word here is responsible and not liable. You
may be responsible - there are consequences.
If he was not prohibited there are 2 scenarios:
(1) Not prohibited but he was neither given the power to
appoint or
(2) He was not prohibited precisely because he was given the
power to appoint.
Kung he was not prohibited he but he also lacks the power to
appoint, ang scenario dito wala lng namention sa SPA so
nothing was mentioned in the SPA regarding the appointment
of the substitute. Ang ibig sabihin nun he was not prohibited
and he was neither given the power to appoint. If that is the
case will he be liable necessarily because of losses which
were incurred by the principal?
A: Hindi naman. If the substitute acted within the scope of
authority in representation of the principal and the substitute
acted in good faith with the diligence of a good father of the
family, nonetheless losses were incurred by the principal -
Pwede bang mangyari un? Yes, ang negosyo ay negosyo kahit
na napakagaling mo pang negosyante kung palugi na talaga
negosyo, there are forces beyond the control of every person.
To be factual about this kapag ngcoconstruct ng LRT
halimbawa sa Aurora boulevard, during the construction stage
ilang taon yan 2 or 3 years, sa tingin nyo kung may
restaurant pa dyan buhay pa ba? Wala na kakain dyan puro
alikabok na.
As long as he acted within the scope of his authority,
in representation of the principal and he acted with good
faith, the agent cannot be held liable. He is responsible for
the acts of the substitute and if the substitute acted within
the scope of authority di ba. This is consistent to the principle
of agency - that the agent is not the insurer of the success of
the business of the principal. Otherwise, wala na mag-a-agent
dahil kapag nalugi liable sya.
However, if in the management of the business of
the principal losses were incurred because the substitute
misappropriated the income of the business or acted with
gross negligence, mga once a week lng nya dinadalaw ang
business, if that is the case, the agent will be responsible for
the acts of the substitute and he may be held liable for the
losses incurred by the principal because the substitute acted
negligently, outside the scope of the authority and in bad
faith.
However, if the agent was given the power to
appoint, there may be 2 scenarios:
(1) The person to be appointed as the substitute may have
been designated or (2) the person to be appointed was not
designated.
Sabi ng principal – “ok you can appoint a substitute
but if you will appoint a substitute, appoint Pedro”. If the
agent appointed Pedro, would he be held liable for the
losses incurred by the principal coz of the acts of Pedro?
Page 41 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
A: Hindi naman. The substitute was designated because the
principal said that he should appoint Pedro kaya inaapoint
nya si Pedro but this should be subjected to the provision of
agency that he should not carry out the agency if such would
manifest loss or damage to the principal.
Example
At the time of the appointment, the agent was at that time
fully aware that the person was notoriously incompetent. He
should have at least informed the principal that the substitute
is notoriously incompetent. If he failed to do so having the
opportunity to inquire, then he can be held liable.
If the person to be appointed was not designated, he
will only be liable if the substitute turns out to be notoriously
incompetent or insolvent. (Article 1892).
LIABILITIES OF 2 OR MORE AGENTS
Q: If the principal appointed 2 or more agents for a certain
transaction, what would be the nature of their liability? Can
they be held liable jointly or solidarily?
A: Agents can only be held jointly liable unless they expressly
bound themselves solidarily.
But in fact, even if they bound themselves solidarily and
damage was incurred by the principal due to the act of one of
the agents, it is still possible that they may not be held
solidarily liable despite that there is an express agreement, if
that agent who caused damage to the principal acted outside
the scope of his authority.
Commission Agent
Authorized to sell and he would have a commission as to the
price.
Q: If the agent sold a refrigerator on credit without the
consent of the principal – pag on credit, he can still sell it at
a higher price. Kung normally 10k ang sabi ng principal, he
may be able to sell it at 15k pero 4 gives. If payable every
other month, the next day after the sale, the principal
having been informed of the sale, he demanded for the
proceeds of the sale. Can the agent be compelled to pay or
deliver the proceeds of the sale kahit hindi pa nya na-
collect?
A: Yes, he can be compelled to deliver the proceeds as if it
was sold on a cash basis because he sold it on credit without
the consent of the principal.
Q: How much would the commission agent deliver if he was
able to sell it at 15k, payable in 4 months but under the
agreement of the principal and the commission agent, it
should be sold only at 10k? (Assuming that the agent’s
commission is 10%)
A: He should deliver 9,000 to the principal (10,000 x 10% =
1,000 commission... 10,000 – 1,000 = 9,000)
Q: What if 4 months after, he have already collected 15k,
can the principal claim “di ba you only gave me 9k which is
based on the 10k price but you were able to sell it at 15k, so
I should get 90% of the 15k”. Is that a valid claim?
A: No, under the law, if the commission agent sold the thing
on credit without the consent of the principal, he is entitled
to any profit which he would derive from such obligation.
Q: If he was obliged to collect or sell 10 refrigerators but he
was able to sell only 1 refrigerator, can he be held liable for
not selling the remaining refrigerator?
A: Normally, he would be because that is failure to comply
with his obligations as an agent. But he has a defense –
exercise of the diligence required. If there was no law or
stipulation, it will be diligence of a good father of a family. The
fact that he was able to prove that he exercised the diligence
of a good father of a family xxx nonetheless, he was not able
to sell, he can no longer be held liable. Again, he is not the
insurer of the success of the principal.
BE: The agent was authorized to sell 20 units of refrigerator.
He received in addition to his commission, a guaranty
commission. He was able to sell the refrigerators and
received his guaranty. However, the buyer failed to pay the
price of these refrigerators. The principal demanded from
the agent the money which he could have delivered to the
principal as a guaranty commission agent. The defense
raised by the agent is that he has no obligation to collect the
price. The agent said that his only obligation is to sell the
refrigerator. Is that correct?
A: No, as he received a guaranty commission, he is known as a
guaranty commission agent. He is also known as “del credere
agent” and as such, he bears the risk of collection.
OBLIGATIONS OF THE PRINCIPAL
(1) To comply with the obligations which the agent may have
contracted within the scope of his authority and in
representation of the principal.
(2) Obligation to advance the money necessary for the
accomplishment of the purpose of the agency.
(3) Obligation to Reimburse
(1) To comply with the obligations which the agent may have
contracted within the scope of his authority and in
representation of the principal.
This is the main obligation of the principal.
If the agent acted outside the scope of his authority, the
principal may not be bound to such contract. But even if the
agent acted beyond or outside the scope of his authority, the
principal may be bound if:
1. He ratified
2. He contributed to deceive the 3 rd person into
believing that the agent acted outside the scope of
his authority (estoppel). The principal and the agent
will be solidarily liable.
3. When the 3rd person could not have known of the
limitations on the power of the agent (Example:
Verbal limitation)
Article 1900 – the third person will only have to rely on the
power of attorney as written.
(2) Obligation to advance the money necessary for the
accomplishment of the purpose of the agency.
The principal, unless otherwise stipulated or unless the he is
already insolvent, must advance the money. Even if the agent
bound himself to advance, if the principal is already insolvent,
he need not advance the sum of money kasi wala ng mag-re-
reimburse sa kanya.
(3) Obligation to Reimburse
Page 42 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
G.R.: The principal
Exc: 1918
a. If the agent is acting in contravention of the
instructions of the principal.
Example: He sold items in Cebu instead in Cagayan.
However, if the principal wants to avail of the
benefits derived by the agent, the principal will be
obliged to reimburse.
b. Agent was at fault
TWO OR MORE PRINCIPALS APPOINTED AN AGENT
Q: An agent was appointed to a single and common
transaction and damage was incurred by the agent. What is
the nature of the liability of the principals?
A: Solidary.
Q: Ayce was authorized to lease a specific property
(warehouse). She entered into a lease contract with Dian.
However, the principal (Chato) also entered into a contract
of lease over the same property with another person named
Gerard. Which contract will be recognized?
A: Based on priority in time, priority in right. The prior date
should prevail. Take note that this is a lease of property.
In sale, priority in time is not applicable. See Article 1544
(double sale).
Q: What if the person filed an action for damages against
both principal and agent, who will be liable?
A: G.R.: The principal
EXC.: If agent acted in bad faith (incompatible
contracts)
MODES OF EXTINGUISHING AGENCY
E – xpiration of the period
D – eath, civil interdiction, insanity
W – ithdrawal
A – ccomplishment of purpose
R – evocation
D – issolution of the entity
Q: Is this enumeration exclusive?
A: No, the other modes of extinguishing obligations are
equally applicable to agency. Example: mutual dissent, loss of
the thing due to fortuitous event.
BE: Ariel authorized Jessica to sell a pendant with a diamond
valued at 5k. While Jessica was on her way home, 2 persons
snatched the bag containing the pendant. Thus, Jessica was
not able to sell the pendant. Ariel sued Jessica. Jessica raised
the defense that robbery is a fortuitous event and therefore
he cannot be held liable for the loss of the pendant. Ariel
claimed that before Jessica could invoke fortuitous event,
there has to be conviction of the perpetrators of the crime
and even though this is a fortuitous event, there was
negligence on the part of Jessica in walking alone with that
pendant. Decide.
A: The case is identical to Austria vs. CA. As to the contention
of Ariel, conviction is not required. Preponderance of
evidence is sufficient. Jessica cannot be held liable because
walking alone is not a negligent act.
Atty. Uribe’s Comment: The answer is erroneous. In the case
of Austria which was decided on June 10, 1971, the incident
happened in the 60’s. The SC said, we cannot consider the
agent negligent in going home alone. SC said that if the
incident happened today (referring to year 1971), the agent
can be held liable for concurring negligence, considering the
crime rate.
Problem Areas in Extinguishment
BE: What is the effect of the death of the agent?
A: G.R.: The agency is extinguished (Article 1919).
EXC.: Article 1930 – if the agency was constituted for the
benefit of both parties or for the benefit of a third person
who accepted the benefit, then that agency shall continue
even after the death of the agent.
BE: P authorized A to sell a land (14 hectares). In 1950,
before A could sell, P died. After P died, in 1954, the heirs
sold the land to X. In 1956, A sold it to Y. Who has a better
right?
A: If A has no SPA, this sale is void under Article 1874. X would
have a better right. If there was a SPA, it depends if A has
knowledge of the death of P or if he was in good faith. If A has
knowledge of the death, X has a better right. If Y is in bad
faith (he knows of the death of P), X has a better right.
Under Article 1931, the act of an agent after the death of the
principal will be valid if he had no knowledge of the death of
the principal and the third person is in good faith.
Q: What if A has no knowledge and Y is in good faith?
A: This will be incompatible contracts. Apply Article 1544 on
double sale.
Rallos vs. Felix
Facts: The agent was a brother of his two sisters. He was
authorized to sell the land. The brother sold the land only
after the death of one of the sisters. He sold it to Felix. The
administrator of his sister filed an action to recover the
property.
Issue: What is the effect of the death of one of the principals?
Held: As to the surviving sister’s portion, it is valid and
binding. But as to the deceased sister (Article 1919), the
authority of agent was terminated after the death. But if
agent has no knowledge of the death – it is valid. But
obviously, the brother had knowledge of the death of her
sister.
Note: Civil interdiction – accessory penalty (more than 12
years penalty)
Revocation
It is an act of the principal. The principal can revoke the
authority of the agent at will at any time.
Q: Would this be correct if the parties agreed for the period
of agency? Can the agent hold the principal liable for breach
of contract?
A: Baretto vs. Sta. Maria – the principal can revoke anytime
even when there is a period agreed upon because agency is
based on trust and confidence.
Q: If he has the power to revoke, may the principal be held
liable?
Page 43 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
A: Yes because even in the exercise of a right, it must be
exercised in good faith. If there is abuse of right, the liability
would be under the provisions on human relations.
Domingo vs. Domingo
The reason of the principal is that in order for him to avoid
payment of commission, that revocation is a bad faith
revocation. However, in this case, the agent is also in bad
faith.
BE: A sold a land to B at 100M. They agreed that it will be
paid in 10 years. The seller reserved title over the land. In
order for B to pay the price, A constituted B as his agent for
the development of the land – subdividing the land,
constructing houses and selling the house and lot. Proceeds
to be delivered to the seller who is also the principal as
payment of the price in the sale of land. However, in the 5 th
year, the principal revoked the authority of the agent. Was
the revocation valid?
A: Not valid, because this is an agency which is coupled with
interest. Here, (1) a bilateral contract depends upon the
agency and (2) the agency is the means of fulfilling an
obligation which has already been contracted.
Atty. Uribe: #2 is correct but #1 is not applicable to the
problem. Ang mas applicable is the case of Collongco vs.
Claparol.
Facts: Claparol was the owner of a nail factory and he needed
additional capital. Collongco offered to advance the money
needed by Claparol only on the condition that he will be
constituted as agent for some aspects of the business
(example: agent for advertisement).
Held: From that arrangement, it is clear that a bilateral
contract depends upon the agency. Bilateral contract which is
the contract of loan. He would not have advanced that
money, had he not been constituted as an agent by Claparol.
These contracts are considered agency coupled with interest.
Note: The SC said that for an agent to claim that the agency is
coupled with interest and hence cannot be revoked by the
principal, the interest must not be the usual compensation of
the agent which is commission and must be stated in the SPA.
Q: If agency coupled with interest – possible that it could be
revoked?
A: SC said in Collongco – Yes, if the revocation was with a just
cause. In the case of Collongco, there was a just cause
because the agent committed acts contrary to the interest of
the principal. Collongco attempted to ask the superintendent
of the factory to destroy the machinery by pouring acid.
Agent also sent derogatory letters to banks where Claparol
applied for a loan. The agent’s motive is because he had an
agreement with another person (Mr. So) that they wanted to
take over the business of Claparol.

Partnership
BE: Chato, using all his savings in the total amount of 2,000,
decided to establish a restaurant. Faye, however, gave 4,000
as “financial assistance” with the agreement that Faye will
have 22% share of the profits of the business. After 22 years,
Faye filed an action to compel Chato to deliver to her the
share in the profits claiming that she was a partner. Chato
denied that Faye was her partner. Is Faye a partner of
Chato?
A: Yes, Faye was a partner in the business because there was
a contribution of money to a common fund and there was an
agreement to divide the profit among themselves.
Atty. Uribe’s Comment: I do not agree with the answer. I’d
rather agree with the alternative answer. WHY? In the
alternative answer as can be seen from the facts, Faye gave
4,000 only as a financial assistance. It was not a contribution
to a common fund. As such, she actually became a creditor of
Chato. Therefore, she did not contribute to a common fund.
Q: What about the stipulation that Faye will have 22% share
of the profits?
A: The law on partnership is very clear that a sharing in the
profits does not necessarily result in a partnership contract
because the sharing of the profits may only be a way of
compensating the other person, in fact that can be a mode of
Page 44 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
payment of the loan. Kasi yung loan, supposedly pwede
payable every month with a fixed amount. But mas maganda
ang agreement na ito, 22% of the profits, so that if walang
profit sa isang taon, wala munang bayad. ‘Di ba that’s
reasonable agreement. Only kung may profit, saka lang
babayaran. Kumbaga, friendly loan ito. The sharing in the
profits as expressly provided by law does not necessarily
result in a partnership contract. Thus, it can be said that really
Faye was not a partner but is actually a creditor of Chato.
DEFINITION OF PARTNERSHIP
Q: What if two or more persons agreed to put up a
partnership but they never intended to divide the profits
among themselves, would that still be considered a valid
partnership contract?
A: Yes, under the second paragraph of the article, two or
more persons can form a partnership for the exercise of a
profession.
Partnership vs. Co-ownership
Consider the essential features:
Creation:
Partnership is obviously created by agreement. Co-ownership
may be created by agreement, but it may also be created by
operation of law. In fact, by express provision of the law, the
fact that there is co-ownership does not necessarily mean
that there is a partnership existing between two persons.
Example: Two persons may inherit a property from their
father or mother, and under the law, they may be considered
as co-owners of the same property.
Purpose:
Partnership: either to divide profits or exercise a profession.
Co-ownership: Common enjoyment of the thing or right
owned in common; merely to enjoy the property, thus they
may have different purposes.
A very important feature of partnership in relation to co-
ownership: it has a juridical personality, separate and distinct
from the individual partner which is obviously not present in
co-ownership. In co-ownership, they have their respective
personalities and no new personality will be created.
Powers of the Members:
Partnership: Unless otherwise agreed upon, each partner is
an agent of the other partners and of the partnership.
Co-ownership: As a rule, a co-owner cannot act as an agent of
the other co-owners unless otherwise agreed upon between
the co-owners.
PROFITS:
Co-owner: Mas malaki ang profits, mas malaki ang interest.
But not necessarily in partnership, because the sharing in the
profits may be stipulated upon by the parties. Pero kung
walang stipulation, it may be based on the capital
contribution.
Q: Will death extinguish co-ownership?
A: No, Kapag namatay ang isang co-owner, his heirs will be the
co-owners of the surviving co-owners at pwedeng tulou-tuloy
lang yan. However in partnership, if it is a general partnership,
if one of the partners dies, the partnership is dissolved.
ESSENTIAL ELEMENTS OF PARTNERSHIP
Like any other contract, it should have the three essential
requisites:
1.) Consent
2.) Object: to engage to a lawful activity, whether a
business or profession.
3.) Cause or consideration: the promise of each partner
to contribute money, property or industry
Note: From the definition alone, it can be known that a
contract of partnership is essentially onerous-each partner
has to contribute either property, money or industry. Walang
free rider sa partnership.
1. Consent of the contracting parties:
The rules in contract would be equally applicable but, just like
in sales and lease, there are persons who are prohibited from
entering into a contract of partnership:
1.) Spouses:
BE: May the spouses enter into a limited partnership to
engage in a realty business, with the wife as a limited
partner?
A: Yes, because spouses are only prohibited, under the New
Civil Code, to enter into a universal partnership. Therefore, if
they form a limited partnership, they can constitute only
Php100,000 each, and that will not be a universal partnership
because that would be a particular partnership.
2.) Corporations:
BE: Can a corporation enter into a contract of partnership
with an individual? Can a corporation enter into a contract
of partnership with another corporation?
A: To these two questions, the answer is no.
Ruled by the Supreme Court in the Case of Tuazon,
while a corporation may enter into a joint venture, it cannot
validly enter into a contract of partnership. Under the
Corporation Code, the business of the corporation is
supposed to be governed by the board of directors, and if
such a corporation will enter into a contract of partnership,
the other partners may bind the corporation in certain
activities without the consent of the board of directors.
Another reason is that the properties r investments of the
stockholders may be exposed to a risk not contemplated by
the stockholders.
3.) Those persons who are prohibited from giving
each other any donation or advantage cannot enter into a
UNIVERSAL partnership:
a.) those guilty of adultery or concubinage at the
time of the execution of the contract because it would be
easy to circumvent the provision on donation if they would
enter into a universal partnership, kasi pwede’ng yung
paramour ang na-contribute lang Php10.00, while yung isa
ang na-contribute Php10 Million, however, pagdating ng
sharing, kabaligtaran. Yung paramour, 90%, while yung nag-
contribute ng Php10 Million, 10% lang ng profit. In fact, sa
dissolution, pwedeng ganun din ang agreement. That would
be a circumvention of the provision on donation.
Other persons prohibited are those mentioned in
Art. 739, those persons mentioned in the law on donation.
2. Object of Partnership:
To engage in a lawful activity.
Page 45 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: If the object is to engage in a lawful activity, necessarily
the partnership is valid?
A: No. There are specific business activities wherein the law
would require particular business organization which may
engage in such business activity, specifically the Corporation
Code which provides that only corporation may engage in
insurance and banking business, therefore there can be no
partnership engaging in such business: banking and
insurance.
3. Cause of Partnership
The promise of each partner to contribute either money,
property or industry.
Q: What would be the effect if either the cause or the object
of the partnership is illegal or if the partnership has an
unlawful cause or object?
A: The contract of partnership is void and under the law,
when the contract is void, it produces no legal effects
whatsoever, therefore, action to compel a party to the
contract to distribute the profits will never prosper. In fact,
under the law on partnership, the State will confiscate the
profits of such illegal partnership.
Q: Will an action to compel a partner to render an
accounting prosper?
A: No. Any action to enforce a void contract will never
prosper.
Q: May a party to such void contract at least be able to
recover what he contributed or delivered pursuant to that
void contract?
A: As a rule, no, because of the in pari delicto rule under
Article 1411.
EXCEPTIONS: Article 1411, 1412, 1414,1415 and 1416. Under
these circumstances, a party to a void contract may be able to
recover what he contributed.
Atty. Uribe: I would always consider one of these provisions
as a very practical one:
In a contract that is void, it is so provided that a party to such
contract may recover what contributed if he repudiated the
contract before the consummation of the contract and before
damage is incurred by a third person.
FORMALITIES:
Q: If the agreement of the parties to a contract of
partnership was only a verbal agreement, would that be a
valid and binding contract? Will there be a juridical
personality created?
A: As a rule, yes. Even if under Art. 1772, the law provides
that every contract of partnership, having a capital of more
than Php3,000 or more, shall be in a public instrument and
must be registered with the SEC.
The 2nd paragraph of Art. 1772 provides that despite
failure to comply with the requirements in the preceding
paragraph, this is without prejudice to the liability of the
partnership and the individual partners to third persons. From
that article alone, it is clear that despite non-compliance with
the requirements of the law as to form, there is a partnership
created, because this is without prejudice to the liability of
the partnership (kung may partnership). But more directly,
Art. 1768, the law provides, the partnership has a juridical
personality separate and distinct from that of each if the
partners, even in case of failure to comply with the
requirements of Art. 1772, par.1.
After all, a verbal partnership contract is valid and binding
between the parties.
Q: Is there a partnership agreement which would require a
particular form for the validity of the partnership
agreement?
A: Yes. There is only one scenario here: if one of the
contracting parties promised to contribute an immovable,
there has to be an inventory of such immovable and signed by
the contracting parties. If there is no inventory, the law is very
clear, the partnership is void.
Q: What if there was an agreement to contribute an
immovable and there was an inventory signed by all the
partners, however, the partnership agreement itself was not
put into writing, what is the status of that partnership
contract?
Atty. Uribe: I agree with the position of Professors Agbayani
and Bautista that, despite Art. 1771, as long as there is an
inventory of such immovable, the partnership agreement is
valid and binding and the juridical personality will be created.
Why?: As ruled by the SC consistently, like in the case of
Dauden-Hernaez vs. delos Angeles, for a contract to be void
for non-compliance with the requirements of the law as to
form, the law itself must provide for the nullity of the
contract. If the law only required a form, but the law itself did
not provide for the nullity of the contract, if the parties failed
to comply with that form, then that form is not necessary for
the validity. It may be necessary for the enforceability of the
contract or greater efficacy of that contract. Thus, in
partnership, it is said that this requirement as to form will
only be necessary for the greater efficacy, kasi kailangan naka-
register sa SEC. That is apparently the only reason why the
law would require a particular form in partnership where
there is an immovable contributed by one of the contracting
parties.
Atty. Uribe: The position of Prof. Agbayani is well-supported
by the SC.
A partnership has a juridical personality which is
separate and distinct. This is consistent with the “legal person
theory,” as opposed to the partnership in the United States
which adheres to the “aggregate theory” which states that
their partnership has n juridical personality separate and
distinct from the contracting parties.
Consequences: separate and distinct personality
1.) It can own its properties;
2.) It can sue and be sued;
3.) It may be found guilty of an act of insolvency;
4.) It may be dissolved for committing an act of
insolvency.
Concretely, in the case of Campos-Rueda vs. Pacific
Commercial
Facts: The partnership here filed a petition for the dissolution
of the partnership, but one of the creditors opposed the
petition for dissolution on the ground that there was no
showing that the individual partners are already insolvent.
Page 46 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Held: The solvency or insolvency of the individual partners is
irrelevant as to the petition of the dissolution of the
partnership. The partnership itself, having a separate and
distinct personality may be dissolved or may commit acts of
insolvency regardless of the solvency or insolvency of the
partners.
Actually, if one of the partners in a general
partnership is insolvent, there is already dissolution of the
partnership by operation of law, if the same be proven.
CLASSIFICATION OF PARTNERSHIP:
As to the object of the partnership is only to determine
whether a person may enter such partnership, there is a need
to distinguish whether a partnership is a UNIVERSAL or
PARTICULAR partnership.
2 Kinds of Universal Partnership:
1.) Universal Partnership of Property
2.) Universal Partnership of Profit
Under the law, if the partners agreed to form a universal
partnership, however, they failed to state what kind of
universal partnership, it shall be treated merely as a universal
partnership of profit, meaning, it shall comprise only the
result of their work and industry. In universal partnership of
property, the partners are deemed to have contributed all
their property, not literally all, for there some properties
which are exempt from execution and under the law may not
be considered as having been contributed by the partners.
TERM OF PARTNERSHIP
Q: If the partners failed to fix a period, does it mean that the
partners agreed a partnership at will and may be dissolved
at any time without any liability so long as they acted in
good faith?
A: No, because a partnership may be a partnership for a
particular undertaking even if no period was fixed by the
parties.
In one case, a partner, dissolved a partnership,
claiming it to be a partnership at will, the partnership being
involved in a bowling business. The SC ruled that even if the
partners failed to fix a period, the partnership cannot be
considered as a partnership at will because there was a
stipulation in the partnership agreement that the debt of the
partnership shall paid out of the profits that will be obtained
by the bowling business. Thus, after all, it cannot be dissolved
at will, for the debts will have to be paid. Therefore, the SC
ruled that the said partnership is a partnership for a particular
undertaking.
CLASSIFICATION OF PARTNERS:
According to the liability of the partners:
1.) General
2.) Limited
This classification is relevant only in limited partnership.
In general partnership, partners are general partners
and they are liable for partnership obligations up to their
personal property. Each one of them has the right to
participate in the management of the partnership unless
otherwise agreed upon by the partners.
In limited partnership, while a limited partner cannot
be held liable up to his personal property, the liability of a
limited partner will only be up to his capital contribution. He
also would not have the right to participate in the
management of the business of the partnership.
G.R.: A limited partner cannot be held personally liable for
partnership obligations.
EXC: Instances when a limited partner may be held liable up
to his personal property:
1.) If he participates in the management of the business
of the partnership.
2.) If his surname appears in the firm name.
Except: a.) even if a limited partner’s name appears
in the firm name, if the surname of a general partner
is the same as that of the limited partner. b.) such
surname was already in the firm name prior to his
entry in the partnership.
3.) When he is a general partner and a limited partner in
the same partnership at the same time.
Who? A person who is both a general and limited
partner at the same time and in the same
partnership would have all the rights and obligations
of a general partner, however, he would have a right
as to his contribution as against the other partners,
which he would not have, had he not been a limited
partner. When it comes to division of assets upon
dissolution he has the priority as a limited partner.
That is the only edge, otherwise, he has all the rights
and obligations of the general partner.
4.) When there is failure to comply substantially as to
the formalities prescribed by law in the formation of
a limited partnership.
Under the law, if there is a failure to comply
substantially with the formalities for the creation of a
limited partnership, that agreement will be valid
among the partners, however, all of them can be
treated as general partners by third persons.
Therefore, a third person, in this scenario, can hold a
limited partner liable up to his personal properties.
The limited partner’s remedy is to seek
reimbursement from his other partners.
As to the contribution:
1.) Capitalist
2.) Industrial
Q: An industrial partner, may be a general partner?
A: Yes. A capitalist partner may either be an industrial or
general partner.
Q: May an industrial partner be a limited partner?
A: No. A limited partner can only contribute money or
property. He cannot contribute service.
Q: But can a partner be both capitalist and industrial?
Page 47 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
A: Yes, he can contribute both money and industry. He can be
both capitalist and industrial and there will be consequences
to that.
BE: A and B formed a partnership to operate a car repair
shop. A contributed money, B contributed industry. While
the car repair shop was already in operation, A operated a
coffee shop beside the car repair shop. B also operated a car
accessories store on the other side of the shop. May these
partners engage in those business activities?
A: As far as A is concerned, he can validly engage in such
business because the law would only prohibit him from
engaging in a similar activity. As far as B, an industrial partner,
is concerned, he cannot engage in any business activity
without any express authority or grant by the partnership for
him to engage in such business. Thus, if A did not give his
consent, B cannot validly engage in ANY business, not only
similar business, for B, as industrial partner, is supposed to
give his time in the said partnership business.
Incoming Partner:
Q: ABC Partnership is composed of A, B and C. Thereafter, D
became a member of the partnership. Six months after D’s
entry as a member, a certain obligation, 3 Million became
due and demandable. For this partnership obligation, can D
be held liable?
A: As was provided in the facts, the 3 Million became due and
demandable. Thus, this obligation may have been incurred
after D’s entry or before his entry, although it became due
after his entry or admission to the partnership.
If the obligation is incurred after his entry, there is no
question that, if he is a general partner, he can be held liable
up to his personal properties.
Q: If this obligation is incurred prior to his entry as a partner,
can he be held liable?
A: Yes. As a rule, he may be held liable, but only to the extent
of partnership property which would include his capital
contribution, unless there is a stipulation to the contrary.
Even if the obligation was incurred prior to his entry, however,
if in the partnership agreement, he agreed to be bound by
those obligations, then he can be held liable even to the
extent of his personal property, though he is a new partner.
Q: X is indebted to ABC Partnership which may be limited.
The same debtor of the partnership is also a debtor of one of
the partners. The debt to the partnership is 100,000, while
the debt to the partner is 50,000. X delivered 30,000 to A.
Should this 30,000 be distributed in proportion to the debts
to the partnership and to A, meaning, 20,000 will go to the
partnership and 10,000 will go to A.
A: If A is a limited partner, there shall be no distribution in
proportion to the credit of these two creditors. The law which
requires that payment be distributed in proportion to the two
credits will only apply if the partner to whom the amount is
delivered is a managing partner. If he is a limited partner,
normally, he would not have any participation in the
management of the partnership business. Thus, if he is a
limited partner, then he can have the right t receive
everything he received.
Q: Assuming that A is in fact a managing partner and he
received the 30,000 from X, is it possible still for A to retain
everything which he received?
A.: Yes, if this debt is already due and demandable. In this
scenario, the debt is not yet due and demandable. Such debt
MUST be due and demandable in order for the law on the
proportional distribution to apply to both debts.
Q: A is a managing partner and both debts are due and
demandable. 30,000 was delivered to A. Is it possible for the
partnership to have the right to the entire 30,000?
A: If A receipted the amount in the name of the partnership.
By specific provision of the law, if the managing partner who
received such amount, receipted the same in the name of the
partnership, the partnership will be entitled to the entire
amount.
Q: If A, as managing partner, and both debts being due and
demandable, he received the amount of Php30,000 and
receipted the same in his own name, may he be entitled to
retain everything?
A: Yes, if X’s debt to A is more onerous and X chose to have
this amount paid to this debt. Under the law, the debtor has
the right to choose to pay the debt which is more onerous.
Again, the premise is the debt to A is more onerous than the
debt to the partnership.
If A, as managing partner, received the same amount,
receipted in the name of the partnership, both debts are due
and demandable and are of the same burden, there will be a
proportional distribution of the amount, 20,000 will go to the
partnership, and 10,000 will go to A, the debt to the
partnership being 100,000 and the debt to A being 50,000.
PROPERTY RIGHTS
3 Major property rights of a partner:
1.) Right in specific partnership property;
2.) Interest in the partnership; and
3.) The right of the partner to participate in the management
of the business of the partnership.
Property rights considered as minor:
1.) Right to have access to the books of the partnership;
2.) Rght to demand for a formal accounting.
Q: Can a partner demand for a formal accounting at any
time?
A: No. The law will only give a right to a formal accounting
under very specific circumstances. Why? Because a partner
already has access to the books, thus, it may be unnecessary
to demand for a formal accounting at any time.
Right in specific partnership property:
Under the law, a partner is a co-owner with the
other partners as to specific partnership property. Again, he is
a co-owner with his partners and NOT with the partnership
over specific partnership properties.
Q: How could a person be a co-owner of a property owned
by another if he is not a co-owner of that other person? The
owner is the partnership. How can a partner be a co-owner
of that property if he is not a co-owner with the
partnership?
Page 48 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
A: Other authors would say that the problem with this
provision is that it was copied from the Uniform Partnership
Act of the United States, where a partnership has no separate
and distinct personality, thus making them merely co-owners.
But, in fairness with the Code commission, the 2nd
sentence would tell you that this co-ownership has its own
incidence. In other words, this is no ordinary co-ownership
under the property law. That’s why some authors would call it
co-ownership sui generis.
Q: Concretely, in property law, if two persons are co-owners
of a parcel of land, can a co-owner sell his interest over the
parcel of land without the consent or even knowledge of the
other co-owner? Would that be a valid assignment of
interest?
A: Yes. However, in specific partnership property, there can be
no valid assignment of interest by one partner. The
assignment of interest of a specific partnership property
would only be valid if all the partners would likewise assign
their interests.
Q: May a creditor of a co-owner of a parcel of land levy
upon such portion of the land interest over that land owned
by the debtor / co-owner?
A: Yes, there can be such valid levy.
Q: In partnership, can a creditor of a partner levy upon the
rights of the partner over a specific partnership property?
A: That is not possible. Only partnership creditors can levy
upon partnership assets or partnership property. This is
different in the partner’s interest in the partnership for this
interest in the partnership can be validly assigned by one of
the partners even without the consent or knowledge of the
other partners.
Interest in the Partnership
Simply put, this is a partner’s share in the profit and surplus.
Whatever is his share in the profit or surplus is his interest in
the partnership.
Q: What would be the share of a partner in a partnership?
1.) Stipulation. For instance, in a partnership of 3
persons, they can agree that one may have 95% of
the profits, while the 2 other partners may have 5%
of the same respectively.
Q: What if, in such agreement, one of the partners was
excluded in sharing in the profits?
A: Such stipulation is void. Take note that only such stipulation
is void and not the whole partnership agreement.
Q: Thus, if the stipulation as to the sharing of the profits is
void, or that there is no stipulation with this regard, what
would be the sharing in the profits of the partners?
A: It will depend on their capital contribution.
Q: What if one of the partners is an industrial partner?
A: By express provision of the law, he shall be given his share
by determining the value of the service rendered. Thus,
determine first the value of the service rendered, give the
same to the industrial partners, then the balance will be
distributed to the capitalist partners in accordance to their
capital contribution.

BE: A, B and C are partners. In their partnership agreement,
they agreed in the equal sharing of the profits. Thereafter, C
assigned his whole interest in the partnership to X. X now
demanded that he be allowed to participate in the
management of the business of the partnership and also his
share in the profits in the business of the partnership. Are
the claims f X valid?
A: As to X’s claim t participate in the management of the
business, he has no such right as an assignee. By express
provision of the law, an assignee has no right to participate in
the management of the business of the partnership, unless
otherwise agreed upon. He will not even have the access to
the books of the partnership. His only right would be to
receive whatever the assigning partner may receive as share
in the profits and in the surplus.
Q: If profits were declared, for instance, in the amount of
360,000, would the assignee have the right to share in the
profits?
A: Yes. X is entitled to share of Php120,000, since the
agreement is equal sharing of profits.
Right to participate in the management of the business of
the partnership
BE: W, X, Y and Z formed a partnership. W and X contributed
industry; Y contributed 50,000; Z contributed 20,000. In a
meeting, the partners unanimously agreed to designate W
and X as managing partners, such appointment having no
stipulation as to their respective duties nor was there any
statement that neither can act without the consent of the
other. Thereafter, 2 persons applied for two positions: 1.) as
secretary; and 2.) as an accountant. As far as the secretary is
concerned, it was W and X who appointed the secretary,
opposed by Y and Z. The accountant was appointed by W
concurred by Z, which was opposed by X and Y. Whose
appointment would bind the partnership?
A: This management arrangement is known as joint
management. Any managing partner may execute acts which
are merely acts of administration even if opposed by all the
other partners, kung mag-isa lang sya. But, if there are two or
more managing partners, they have to decide by a majority
vote.
Q: Is the appointment of the secretary an act of
administration?
A: Yes.
Q: Would it bind the partnership?
A: Yes, even if opposed by the other partners, the capitalist
partners, the latter would not have any right for this is merely
an act of administration well- within the powers of a
managing partner.
Q: With regard to the accountant, take note that the
appointment by W was opposed by another managing
partner. How will this tie be resolved?
A: Under the law, this will be resolved by all the partners with
the controlling interest. The partners with controlling interest
will prevail.
Q: In this case, who has the controlling interest?
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November 2008
A: Y. The determination as to who has controlling interest
depends on the capital contribution. Thus, an industrial
partner is excluded in such cases. In this case, it is obvious
that 50,000 is more than the capital contribution, and
because Y opposed to the appointment, such appointment
will not bind the partnership.
Other management arrangements are provided in Articles
1800, 1801, 1802, 1803.
TYPES OF MANAGEMENT:
1.) Solidary Management:
-without specification as to each other’s duties or
without stipulation that one of them shall act without the
consent of all.
2.) Joint Management:
-two or more managing partners with the stipulation
that none of them shall act without the consent of all others.
The incapacity of one of the partners, or his absence will not
be a valid ground not to obtain his consent to a contract. It
has to be by unanimous consent, unless, in obtaining his
consent (he is absent or incapacitated) it would result in
irreparable damage to the partnership, then the consent of
the absent or incapacitated managing partner may be
dispensed with. This is also known as management by
consensus.
3.) If there was no management arrangement agreed
upon between the partners, each partner is considered as an
agent of the partnership.
Into these arrangements, if only one partner is appointed as a
manager, he can execute any acts of administration even if
opposed by all the other partners.
Q: In a partnership of which the business is into buying and
selling cars, the managing partner decided to buy a vintage
Mercedes Benz, to the opposition of the other partners for
they consider it bad investment, will the decision or the act
of the managing partner in buying the said car bind the
partnership?
A: Yes, because such act is merely an act of administration.
The problem is, if the managing partner continues to not
consider the sentiments of the other partners, he may be
removed as a managing partner.
Q: The question now is, can he be easily be removed?
A: No. The requirements for the removal of a managing
partner would depend on whether he was constituted as such
in the articles of partnership or he was merely appointed as
managing partners after the constitution of the partnership.
If he was constituted as a managing partner in the
articles f partnership, he can only be validly removed under
two conditions:
1.) There has to be just cause; and
2.) by those partners having controlling interests.
Absent one of these conditions, he cannot be validly
removed. In fact, even if there is just cause, if the managing
partner controls 51% of the partnership, he can never be
removed.
 However, if he was appointed as a managing partner
only after the constitution of the partnership, he can be
validly removed even without just cause, so long as it was
done by those partners having controlling interests.
OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES AND
AS TO THE PARTNERSHIP AND IN CASE OF NON-
PERFORMANCE OF THE OBLIGATION
3 Obligations of the partners:
1.) To make good his promised contribution;
2.) Fiduciary duties; and
3.) To participate in the losses incurred by the partnership
business.
1. To make good his promised contribution:
A. Money:
In order to know the remedies that may be availed of
by the non-defaulting partners and the partnership, it must
be known first what was promised by the partner, whether he
promised to contribute money, property or industry.
If the partner promised to contribute money, for
instance, the partners agreed to contribute 1 Million with 4
partners, without an agreement as to respective amount to
be contributed, the law provides that they will have to share
equally. Thus, in this example, 1 Million will have to be
divided into 4 or the respective contribution will be 250,000.
If one partner failed to make good his promised contribution
which is a sum of money, he can be held liable by the non-
defaulting partners up to the amount promised plus interest.
If no rate was stipulated by the parties, it will be the legal rate
of 12%, because this is forbearance in money. Aside from
paying the interest, which is unusual, not only will that
defaulting party be held liable to pay interest, he will also be
liable to pay damages.
Normally, in obligations involving money, in case of
damage incurred by another party, the liability will only be
payment of interest. In partnership, not only will he be liable
to pay interest, but also of damages.
Remedies that may be invoked by the non-defaulting
partners:
1.) Specific performance - the other partners can
compel him to make good his promised
contribution.
2.) Dissolution - may be an option by the non-
defaulting partners, if that is the only amount that
they are expecting for the partnership.
Q: Can a non-defaulting partner rescind the partnership
agreement?
A: In a SC decision, it held that rescission is not a remedy of
the non-defaulting partners. Under the law, the defaulting
partners are treated as a debtor of the partnership by specific
provision of the law. Therefore, the SC held that provision
prevails over the general rule in obligations and contracts
under Art. 1191, wherein rescission may be a remedy in case
of serious breach.
B. Property:
Page 50 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
If a partner promised to contribute property, it must
be determined as to what was really contributed: was it the
property itself or the use of the property.
If it was the ownership of the property that was
contributed then he would have the obligation to deliver and
transfer ownership, aside from that, under the law, he would
have the obligation to warrant the thing.
Before the delivery of the thing to the partnership,
who will bear the loss? The partner will bear the loss. The
partnership will bear the loss when the thing is already in its
possession
If what was contributed was merely the use of the
property, the risk of loss will be with the contributing partner
for there was no transfer of ownership in this case. Under the
res perit domino rule, even if possession of the thing is with
the partnership, so long as there is no fault on the part of the
partnership, then the contributing partner-owner will bear
the loss.
EXCEPTIONS:
1.) When the thing contributed is fungible;
2.) or it cannot be kept without deteriorating;
3.) If contributed by the partner to be sold; and
4.) When it has an appraised value of such property.
In all these circumstances, it is the partnership which will
bear the loss if the thing was lost or destroyed while in the
possession of the partnership.
Again, if the contributing partners fails to make good his
promise to contribute property, he will be treated as a debtor
of the partnership, thus specific performance will likewise be
a remedy.
C. Industry
If a partner fails to render service as promised, will
specific performance be a remedy?
Ans.: Definitely not. It would be a violation of his rights
against involuntary servitude. The remedy would be to
demand for the value of the service plus damages. It can be
easily done because there is an industry rate.
2. Fiduciary Duties:
The duty to observe utmost good faith, honesty, fairness,
integrity in being with each other. This duty commences even
during the negotiation stage.
Test to determine whether there was a violation of this duty:
Whether the partner has an advantage himself at the expense
of the partnership. If he has such advantage at the expense of
the partnership, then there is a breach of the fiduciary duty.
There need not be a proof of evil motive so long as he has this
advantage at the expense of the partnership.
This duty lasts, normally, until the termination of the
partnership.
Q: May a partner may be held liable for breach of fiduciary
duty even after the termination of the partnership?
A: Yes. The SC held that even if the act of a partner was made
after the termination of the partnership, if the foundation of
that act was made during the existence of the partnership
that can still be considered as a breach of fiduciary duty. In
other words, pinaghandaan na nya yun act during the
existence of the partnership, however, it was executed only
after the termination of the partnership.
3. Participate in the Losses:
Q: What will be the share of the partner in the losses
incurred in the partnership?
A: Consider first whether there was a stipulation as to losses
or there was no stipulation.
If there was a stipulation as to losses, the first
scenario would pertain to, for instance, A, B and C agreed to
share 50%, 30% and 20% of the losses. This will be a valid and
binding stipulation among the partners.
Q: Would this still be a valid stipulation if one of them is an
industrial partner?
Atty. Uribe: Yes, this would still be a valid stipulation. If the
industrial partner agreed to share in the losses, then who are
we to deny him that?
Q: What if in the stipulation regarding losses, one or more
of the partners is excluded in sharing with the same, what
will be the status of the stipulation?
A: It depends on who was excluded. If the excluded partner is
a capitalist partner, that stipulation is definitely void, 100%.
If the partner excluded is an industrial partner, it
depends. As among the partners, this stipulation is valid,
however, this is void among third persons. In other words,
despite the stipulation among partners, in excluding the
industrial partner in sharing in the losses, the creditors of the
partnership can still hold such industrial partner liable for his
contractual obligations. The remedy of the industrial partner,
if held liable, is to go after his partners, for the agreement is
valid among themselves.
Q: What if there is no stipulation as to the sharing of the
losses, or that the stipulation in void?
The first scenario is, there is an agreement as to
profits. If there is an agreement as to profits, then the sharing
in the profits will be the same basis in the sharing of the
losses which is a very reasonable rule. Thus, for instance, if A,
in the agreement, is entitled to 90%, B-% and C-5%, then it
would also be reasonable that A share 90% of the loss, B&C
5% of the loss respectively.
The last scenario, there is no stipulation as to losses and there
is also no stipulation as to profits. In this case, it would
depend on their capital contribution. Their share in the losses
would depend on their capital contribution.
Thus, in this scenario, would the industrial partner share in
the losses?
A: Wala, kasi wala syang capital contribution.
Note: Under Art. 1816, even if he is excluded by the
partners/partnership in sharing in the losses, that is a void
stipulation as to third persons and can still hold the industrial
partner liable as to the contractual obligation of the
partnership.
Page 51 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: If indeed a partner, assuming that the assets of the
partnership are not sufficient to cover the obligations of the
partnership, what would be the nature of the obligation of
the partner? Would the partners be held solidarily liable? Or
would they only be held jointly liable?
A: It would depend on the nature of the liability. For
contractual obligations, as a rule, the partners would only be
jointly liable, unless they bound themselves solidarily, for
contractual obligations. However, under Art. 1824, if the
obligation arose from a tortuous act or a wrongful act under
Arts. 1822 and 1823, for example, while in the performance
of his obligation, a partner received a sum of money from one
of its clients which sum of money was misappropriated that
partner, such partner will be held solidarily liable with his
partners and with the partnership. Also, if a sum of money
was delivered, even if it was delivered to the partnership,
however, one of the partners misappropriated the same, all
the partners will be considered solidarily liable among
themselves and with the partnership.
In the United Pioneers General Construction Case,
the creditor filed a collection suit impleading the 5 general
partners. During the pendency of the case, the creditor asked
for the dismissal of the action as against one of the partners.
Ultimately, the court decided in favor of the plaintiff.
Assuming the amount which was found to be the liability of
the partnership was Php100,000, the court ruled that the
partnership will have to pay the said amount and in case that
the assets of the partnership will not be sufficient to cover
this indebtedness, the partners will be liable to pay equally.
So, naging issue yung “equally,” meaning silang apat na lang?
for the case as against one of the partners was dismissed. If
the amount of the obligation is 100,000, should they be liable
25,000 each or 20,000 each including the 5th partner?
The SC ultimately held, in this case, that the liability
of the partners is only joint, therefore, the condonation of the
liability of one partner will not increase the liability of the
other partners. Even if the partnership has no assets
remaining, each partner shall only be held liable up to his
share in the partnership indebtedness. Thus, if the debt is
100,000 and there is no agreement as the share in the losses,
they have to share in the losses, equally into 20,000, yung
apat na lang na defendants, kasi yung isa, condoned na yung
obligation.
OBLIGATIONS OF PARTNER RE: 3RD PERSONS
Q: When would a contract entered into by a partner bind the
partnership?
Ex.: If a partner went to a furniture shop to buy furniture the
of which is Php100,000, and such amount remained unpaid,
can the seller demand payment from the partnership?
A: It depends as to whether the contract was entered into in
the name of the partnership, for the account of the
partnership, under its signature, by a partner who is
authorized to enter into that contract to bind the partnership.
Thus, in this example, if in the agreement the buyer was the
partner himself and not the partnership, that partner should
be held liable, for the furniture was not bought in the name of
the partnership.
The problem, if the contract would be binding in the
partnership, then would be, whether the partner who
represented the partnership had the authority to bind the
partnership.
Normally, if a partner would enter into a contract, a
partnership resolution is not necessary. Whether or not a
contract would bind the partnership would depend on the
nature of the act of such partner and the nature of the
business of the partnership.
Q: Concretely, if a partner bought a complete set of SCRA in
the name of the partnership and signed by that partner,
would that contract bind the partnership for the set was
bought in the name of the partnership?
A: It would depend on the nature of the act and the nature of
the business of the partnership. In this example, the partner
bought the set of SCRA, pero naman, and business ng
partnership ay restaurant, hindi naman ata na i-bind nya ang
partnership to such contract, ang negosyo nila restaurant. 
Q: But the seller would raise the defense, “hindi ko naman
alam na restaurant yung business, e ang nagrepresent ng
partnership si Atty. ABC, so akala law firm.” Is that a valid
defense?
A: No. The SC would tell that the third party contracting with
the partnership has the obligation to know at least the nature
of the business of the partnership. In fact, he can demand for
the presentation of the articles of partnership in order for the
third party to know the nature of the business of the
partnership. For, if this time, the partnership is a law office,
and the partner bought a set of SCRA, that act of buying a set
of SCRA will be considered apparently for carrying the
business of the partnership the usual way. Therefore, that
contract will bind the partnership.
Q: Even if he had no authority from the partners?
A: Yes.
Q: Even if there was a resolution among partners that he
should not be the one who will enter into the contract? For
instance, A,B,C,D, and E did decide to buy the set, but
designated A to buy the same and not E, but the E bought
the SCRA, would that contract bind the partnership?
A: Yes, as long as the third person was not aware of that
agreement of the partnership because such act is an act
apparently for carrying on the business of the partnership the
usual way. So, if the partnership is a law office, but the
partner bought certain things for a restaurant, then such act is
not apparently for carrying on the business the usual way,
thus such act would require the consent of the partners in
order to bind the partners.
Under Article 1818, there are certain acts which law requires
the unanimous consent of the partners for such a contract or
act to bind the partnership, like, disposing the goodwill of the
partnership or to contest a judgment against the partnership
or renounce a claim of the partnership.
DISSOLUTION, WINDING UP AND TERMINATION
These are three different concepts. Upon dissolution of the
partnership, it is NOT DEEMED dissolved. It will still have to go
through the process of winding up of the affairs of the
business of the partnership before the partnership itself will
be terminated.
Page 52 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: When would there be a dissolution of a partnership?
A: Under the law, there will be a dissolution if there is a
change in the relation of the partners caused by any of the
partners ceasing to be associated in the carrying on of the
business of the partnership. That will result in the dissolution
of the partnership. Again, if one of the partners ceased to be
associated in the carrying on of the business of the
partnership, that will result in the dissolution of the
partnership.
Q: May there be a dissolution even if none of the partners
ceased to be associated with the carrying on of the business
of the partnership despite the definition of dissolution under
Art. 1828?
A: Yes. One scenario is the admission of a new partner. With
the admission of a new partner, under Art. 1840, the
partnership is dissolved.
Q: What is the effect of the dissolution?
A: Again, it will not result in the termination, it will only start
the winding up process, effectively, this will terminate the
authority of all partners to bind the partnership, EXCEPT, if
that act is necessary for the winding up of the partnership or
necessary to complete a business which was then began but
was not yet finished at the time of the dissolution of the
partnership.
CAUSES OF THE DISSOLUTION
1.) Extrajudicial;
2.) Judicial.
Extrajudicial causes:
1.) Voluntary;
2.) Involuntary.
Judicial causes are necessarily voluntary because it is by
application.
Under voluntary causes would fall, the cause of the
dissolution may result on the violation of the agreement or it
may be without violation of the partnership agreement.
Concretely, the expiration of the period would be voluntary,
extrajudicial but without violation of the agreement. The
fixing of the term is an agreement of the parties therefore, it
is voluntary.
Termination of a definite term or a particular
undertaking: voluntary but without violation.
By the will of one of the partners: the partnership
may be dissolved without liability on the part of the partner, if
the partnership is a partnership at will and he dissolved the
partnership in good faith. Those are the two requirements, in
order for a partner to be able to dissolve the partnership
without liability on his part. Again, in an express will of any
partner who acted in good faith, when no definite term or
particular undertaking is specified, which means, again that a
partnership is a partnership at will.
BE: A, B and C agreed to form a partnership for a period of
five years. After 2 years of business, C assigned his whole
interests to Philip. The two other partners, realizing that
they would not be able to deal with Philip, decided to
dissolve the partnership. Philip, not knowing of the
dissolution done by the 2 partners, filed a petition for the
dissolution of the partnership with the court. Was the
partnership dissolved by the act of the two partners? May
the action filed by Philip to dissolve the partnership prosper?
A: As already mentioned, by the express will of all the
partners who have not assigned their interest is a cause for
the dissolution of the partnership. Therefore, the 2 partners
validly dissolved the partnership by mere will of the partners.
Q: As far as Philip was concerned, will his petition prosper,
even assuming that no dissolution was made by the 2
partners?
A: No. With the assignment of the interest of a partner to
another person that does make the assignee a partner of the
partnership without the consent of the other partners,
therefore, he has no personality to file a petition for the
dissolution of the partnership.
Expulsion of any partner in good faith, it maybe
because the grounds for expulsion was agreed upon by the
partners and one of the partners violated such agreement,
thus he may be expelled in good faith, therefore it may be
voluntary and without violation.
In contravention, because one of the partners may
dissolve a partnership, even if the partnership has a fixed
period or it is a partnership for a particular undertaking and
that particular undertaking has not yet been completed, that
would be in contravention of the agreement of the partners.
INVOLUNTARY CAUSES:
Q: If one of the partners in a partnership was elected a
Senator, would this dissolve the partnership by operation of
law?
A: No.
Q: Even if it is a partnership of lawyers or a law office?
A: No.
Under the Constitution, these elected officials are prohibited
only from appearing before tribunals and not from private
pratice.
Q: If a lawyer was appointed in the cabinet, for instance as
Presidential Legal Counsel, would that result in the
dissolution of the partnership by operation of law?
A: Yes. Under the Constitution, Cabinet Secretaries are
prohibited from private practice of their profession.
Classic ex.: The Firm (Carpio Villaraza Cruz Law) This also
includes appointment in the judiciary.
Q: What if the law partner was elected as governor of his
province will it result in the dissolution of the partnership?
A: Yes. Under the Local Government Code, chief executives
are also prohibited from the private practice of their
profession.
Q: What if the partner who died is a partner in a limited
partnership? Would that dissolve automatically the
partnership?
A: It depends as to who is the partner.
Page 53 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
If he is a general partner, as a rule, it dissolves the
partnership, unless there was an agreement in the articles of
partnership that they would continue with business of the
partnership even after the death of the partner. Or even
without such agreement in the articles of partnership, if the
surviving partners decide to continue with the business of the
partnership, then the partnership is not deemed dissolved
even if the partner who died is a general partner.
If the partner who died is a limited partner, that
does not result in the dissolution of the partnership. In fact,
the executor or administrator of the estate of the deceased
limited partner will the right to choose or to appoint a
substitute limited partner in the said partnership.
Insolvency or civil interdiction of any partner will result in the
dissolution of the partnership.
Judicial Causes: Grounds:
1.) Insanity or incapacity:
-The courts require that it should be permanent in
character; and
-such incapacity or insanity must affect the performance
of such partner of his obligations with respect to the
partnership business. In other words, kung wala syang
pakialam sa management ng business ng partnership,
insanity or incapacity is not a valid ground.
2.) Gross misconduct:
a.) wrongful expulsion;
b.) if one partner would refuse to allow another
partner in the management of the partnership business, if he
has such right to participate in the management ;
c.) if the managing partner would refuse to distribute
the profits of the partnership when there is such obligation to
distribute the profits;
d.) misappropriation of the income of the
partnership business.
Note: If a limited partner becomes a limited partner in
another partnership, that is not a valid ground to file a
petition for the dissolution of the partnership. Limited
partners has nothing to do with the management of the
partnership business, thus, there is no conflict of interest.
Note: The fact that the partnership incurred losses for the
past three years is not necessarily a ground for dissolution.
However, even if the partnership incurred losses
once and it can be shown by the partners that there is no
prospect for recovery, it can be a valid ground for the filing of
the petition for the dissolution of the partnership.
Q: Quarrels among partners, valid ground?
A: Normally, no. However, if such quarrels give rise to
dissension among the partners, affecting the conduct of the
business of the partnership, this can also be a valid ground,
falling under “other circumstances” which would render the
dissolution equitable.
Q: Upon the dissolution of the partnership, and there were
assets left, how will these be distributed? To whom these
assets be given?
A: As far as partnership assets are concerned:
 1.) Partnership creditors who are not partners.
2.) Partnership creditors
3.) If there are remaining assets, to the capitalist
partners;
4.) Excess - profits based on their agreement as to
profits.
Q: What if, in their agreement, Partner A contributed
100,000; Partner B, 50,000; Partner C, industrial partner. The
total assets of the partnership is 1 Million at the time of
dissolution, however, there were partnership creditors
obligation of which amounted to 900,000. Would the
industrial partner have a share in that 1 Million asset?
A.: No. Since the amount of the obligation is Php900,000, the
remaining Php100,000 should be given back to the capitalist
partners for their capital contribution.
Q: Assuming that there was no agreement as their share in
the losses, also there was no agreement as to their share in
the profits, what if one of the partners became insolvent,
will the other partner’s liability be increased?
A: No, because their liability is JOINT.
Q: For instance A, a partner is insolvent, his assets being
100,000. A is indebted X and Y. The partnership also has its
creditors. To whom shall this 100,000 be given?
A.: It should be given to the separate creditors of the
individual partner.
For a limited partnership to be formed, there has to be at
least one limited partner and one general partner.
For the establishment of a limited partnership, the
law requires certain formalities. Concretely, under Art. 1844,
there has to be a certificate signed and sworn to by the
contracting parties which has to be filed with the SEC. So long
as there was substantial compliance with the formalities
required by law, a limited partnership will be valid and
binding.
Q: What if there was no substantial compliance as to these
formalities?
A: Even if there was no substantial compliance, the
agreement will be valid and binding among themselves. As to
third persons, all of them may be held liable as general
partners, as if all of them are general partners. Thus, even a
limited partner may be held liable even up to his personal
properties.
Page 54 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
TRUST
2 KINDS:
1.) Express;
2.) Implied.
Implied Trust: 2 Kinds:
1.) Resulting trust;
2.) Constructive trust
The classification of trust into two kinds (express and
implied) and implied trust into two kinds (resulting and
constructive) would be relevant in two concepts:
1.) Applicability of the parole evidence rule; and
2.) Prescription, specifically, acquisitive
prescription.
Note: An express trust over an immovable may not be proven
by parole evidence. This means that implied trust over an
immovable may be proven by parole evidence or express trust
over a movable, may be proved by parole evidence.
EXPRESS TRUST
Q: May an express trust over an immovable be proven by
mere testimony of the witness?
A;Yes, if the lawyer of the other party did not object to the
presentation of the witness.
BE: In an agreement between A and B, a property of A was
to be registered in the name of B, with an agreement the B
will reconvey the property to A’s son upon the graduation of
the said son (A’s son). This agreement was entered into in
1980. The property was in fact registered in the name of B
the following yea, 1981. In 1982, A died. In 1983, A’s son
graduated. Despite that fact, B did not reconvey the
property. He had no knowledge of this agreement until
1993, when accidentally, the son of A discovered such
instrument pertaining to the agreement of A and B. Thus, he
demanded that the land be conveyed to him. B refused
raising the defense of prescription. Is this claim tenable?
A: Definitely not. This pertains to an express trust. In an
express trust, trustee will be holding the property only in the
name of the beneficiary or the cestui que trust, therefore, he
cannot acquire the said property by acquisitive prescription
unless there would be adverse possession over the property.
Q: When would there be adverse possession?
A: It may only start with repudiation. Without repudiation,
the period for acquisitive prescription will not start to run.
Such act of repudiation should be made known to the
beneficiary.
IMPLIED TRUST
Resulting Trust:
BE: A and B, brother and sister respectively, inherited two
identical parcels of land. For purposes of convenience, B,
sister of A, agreed to have the land registered in the name
of A. However, when the parcels of land were registered in
the name of A, A sold one of the parcels of land to a buyer in
good faith and for value. Can B recover the land from the
buyer? What would be the remedy of B?
A: This question clearly pertains to a resulting trust. This is
specifically, Art. 1451 of the NCC.
B cannot recover the land from the buyer. As
discussed in Sales, a buyer who had bought the property from
a seller who has no right to sell, but he has apparent authority
to sell, who appears to be the owner and the buyer bought
the property in good faith, he will acquire ownership over the
thing even if the seller has no right to sell.
B’s remedy would be to go after her brother for
breach of trust in selling the property without her consent.
BE: A property was bought by a father and was registered in
the name of his illegitimate daughter. The illegitimate
daughter occupied the said parcel of land and constructed a
house where she and her husband and their children lived.
Several years thereafter, her father died. The other heir of
her father (his legitimate children) demanded for the
delivery of the said property to the estate for distribution to
the other heirs, claiming that a trust relationship was
established between the father and the illegitimate child. Is
this a valid claim?
A: Under the law, there is no presumption as to trust
relationship under 1448, because the donee in this situation
is a child, even if illegitimate, of the father. Therefore, it may
be a donation as provided under Art. 1448.
parcel of land from the 3 rd person who bought the property
in good faith and for value?
A: No.
Q: Let’s assume that the remedy here is conveyance, the
cousin has not yet been able to sell the property to the 3 rd
person, however the same in registered in the name of the
cousin. If the cousin would raise the defense that the action
was filed more than one year from the time of registration
of the property in his name, is that claim tenable?
A: Untenable. The one year period provided by law is relevant
only if the action filed is for the re-opening of the registration
case because of fraud. Thus, if the action is for reconveyance,
it does not matter of the one year period has already lapsed.
N.B.: Art. 1456, 1455.
Q: In constructive trust, may the trustee acquire the
property by prescription by mere lapse of time, without
repudiation?
A: Yes, because from the very start, he was already claiming
ownership over the thing. Iba don sa resulting trust or express
trust. When this trust was constituted, the trustee was
holding the property in the name of another person. Pero sa
constructive trust, itong pinsan at yung abogado in one case,
would be claiming ownership over the property, right from
the very start and therefore without need of repudiation,
yung prescriptive period will start to run in a constructive
trust.

Q: Can the other heirs recover that property?

A: It depends, considering that it is a donation, if the donation
is inofficious. If the same be inofficious, the other heirs may
demand for the return of the property or at least the value of
the property.

Resulting trust includes Articles 1448, 1451, 1449,

1450,1452,1453,1454.

Constructive Trust:
BE: A applied for the registration of a parcel of land in his
name. However, he was called in New York to be a chef in a
hotel. So, he asked his cousin to follow up his application for
registration of land while he was in New York. Instead of
ensuring the registration of the property in the name of A,
he had the property registered in his (cousin) name. After
which, he sold the property to a thi4rd person who bought
the land relying on the TCT. When A returned to the Phils.,
he learned of what his cousin had done. May A recover the
Credit transactions

Page 55 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
 1316 – Commodatum, deposit and pledge Mutuum
Q: Why credit transactions? (memorize these 4 examples)
A: Because these transactions all involved credit meaning
there is a belief in the capacity of one of the parties to Note: Perfection is subject to the formalities of the law. Even
perform his obligation in the future. if the contract has already been perfected, the contract may
be unenforceable because it is not in the form prescribed by
Note: Credit transactions ang tawag but they are not all law for the enforceability of the contract. Example – contract
contracts. There can be legal relationship even without an of sale (subject to the provisions of the statute of frauds)
agreement – examples – legal pledge, judicial deposit. But the
others are contracts – there are contractual deposit and Note: There are different rules in mutuum and commodatum.
pledge by agreement. There are also different rules in judicial and extrajudicial
deposit. But all these are principal contracts. All the other
Transactions: credit transactions are accessory contracts – guaranty,
A. Kinds of Loans suretyship, pledge, CM, REM, antichresis – they depend on
1. Mutuum other contracts for their existence or their validity.
2. Commadatum (memorize)

B. Kind of Deposits Note: An accepted promise to loan is consensual.

1. Judicial
2. Extrajudicial Saura vs. DBP – when the loan application of Saura was
accepted or approved by the bank, there was already a
C. Guaranty perfected contract but it is not mutuum. SC said, it is
perfected consensual contract of loan because the loan itself
D. Suretyship will only be perfected upon the delivery of the amount to the
borrower. Until the amount is delivered, there is no perfected
E. Real Guaranty – favorite in the bar exams mutuum rather there was only a perfected consensual
1. Pledge contract of loan. Thus, with that perfected contract, the
2. Chattel Mortgage (CM) borrower can already demand for the delivery of money. That
3. Real Estate Mortgage (REM) is his right but until then the mutuum itself will not yet be
4. Antichresis perfected. Ganun din sa commodatum, ganun din sa deposit.

Focus on the following provisions: Commodatum

1933, 1962, 2047, 2132, 2140
Obligations of the bailee – 1942
Obligations of depositary - 1979
Right to demand for interest – 1956
Requisites of pledge and mortgage - 2085
Pactum Commissorium – 2088
Indivisibilty Principle
Right to recover the deficiency / excess – 2115
Mutuum vs. Commodatum
1. C – a thing is delivered to the bailee for the use of the
property and therefore ownership is not transferred.
M – a consumable thing is delivered and therefore ownership
thereof is transferred to the bailee or borrower.
2. M – only consumables are the object
C – may be immovables (house, rice field)
Usufruct vs. Commodatum
1. U – is a right to enjoy the property which means that the
usufructuary will not only have the right to possess but he
would have the right to the fruits of the thing.
C – no right to the fruits but only right to use the thing but it
may be expressly stipulated that he can also use the fruits.
Consensual vs. Real Contracts
1. C – are perfected by mere consent thus upon meeting of
the minds as to the object and the cause there is already a
perfected contract
RC – are perfected upon delivery of the thing which is the
object of the contract.
Examples of Real Contracts
It is essentially gratuitous contract. If there is compensation, it
is not commodatum. In the case of Republic vs. Bagtas, SC
said it is lease not commodatum because there was an
obligation to pay breeding fee.
Loan
Loan is normally gratuitous (utang mo sa friend mo) unless
there is an express stipulation in writing. Take note under
Article 1956, a creditor in a contract of mutuum cannot
demand for interest unless it was expressly stipulated in
writing. Take note that we are talking here a kind of interest
known as compensatory interest for the use of the money. So
if you borrowed money in January payable at the end of the
year, during that period, the creditor may be entitled to an
interest known as compensatory interest but after the
obligation became due and there was demand for the
payment nonetheless the borrower failed to pay, this time
there will be a liability to pay interest by way of damages not
compensatory interest. And this kind of interest (damages)
need not be in writing. This interest by way of damages is the
effect of delay because of the failure to pay despite demand
when the obligation was already due, he will be liable for
damages. In monetary obligations, the liability for damages is
in the form of interest.
In monetary obligations, if there was a stipulation that there
is liability to pay interest but the interest rate was not fixed, it
will be the legal rate that can be invoked (12%) – loan or
forbearance of money. If there is a stipulation like 6% per
month or 72% per annum, the SC ruled in Solamon vs. CA,
that although the usury law has already been suspended and
therefore apparently the parties can stipulate any interest

Page 56 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
rate is not true. The interest rate agreed upon may be
unconscionable and therefore the SC will strike down the
stipulation and the interest will be the legal rate. The SC had
struck down interest above 60% per annum. Below 50% per
annum, the SC allowed this interest.
There is still no decision if what is the status if the interest is
between 50% to 60% per annum
Commodatum
In commodatum, the object is movable or immovable.
Usually, it is non-consumable because the very thing
borrowed should also be the very thing that should be
returned. If it is consumable it will be consumed in
accordance with its nature. But the law provides for
exception, if the purpose of the commodatum is not for
consumption – examples – for display or exhibit – then there
can be a valid commodatum over a consumable item. But it is
non – fungible because it cannot be replaced with a similar
kind. The very thing borrowed should be the same thing that
should be returned.
BE: R upon request loaned his passenger jeepney to F to
enable to bring his wife from Tarlac to PGH for treatment.
On the way back to Tarlac after leaving his wife in PGH,
people stopped the passenger jeepney and R allowed them
to ride accepting payments from them just as in the case of
ordinary passenger jeepney. As he was crossing Bamban,
Tarlac, there was an on rush of lahar from Mt. Pinatubo. The
jeep was wrecked. What do you call the contract that was
entered into by R and F? Is F obliged to pay R for the use? Is
F liable to R for the loss of the jeep?
SA: This is commadatum. In commadatum, it is essentially
gratuitous (no payment). Take note the jeep was lost due to a
fortuitous event. If you follow the general rule under 1174, he
should not be held liable. But by express provision of the law
in commodatum, the borrower is liable. Under 1942, when
the borrower devotes the thing to other purpose not agreed
upon (the purpose is to bring the wife to the hospital), the
borrower is liable even if the loss is due to fortuitous event.
Note: Bailor need not be the owner himself because there is
no obligation to transfer ownership.
BE: M borrowed B’s truck. During a fire that broke out in M’s
garage, M had time to save only 1 vehicle and M saved his
car instead of B’s truck. Is he liable for the loss of B’s struck?
SA: Yes. This is an exception to the res perit domino rule. It
would also fall under 1942 that he chose to save his thing
when he had the opportunity to save one of two things, the
other being a borrowed item.
Yung iba – if you kept it longer, it is consistent with delay
under 1165 - in an obligation to deliver a determinate thing
and the thing was lost due to a fortuitous event, that debtor
will still be liable for the loss if he was in delay.
Republic vs. Bagtas
Held: Even if this is commadatum under Article 1942, it will be
the bailee or the borrower who will bear the loss.
Deposit
The same rule in deposit – in deposit, ownership does not
pass to the depositary. Thus, under the res perit domino rule,
Page 57 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
it will be the depositor who will bear the loss if the thing was
lost due to a fortuitous event. In robbery, the depositor will
bear the loss unless there is negligence on the part of the
depositary or if it is stipulated that the depositary will be
liable. (If you are the depositary, demand for a higher rental
so you have money to pay for insurance)
If he uses it without compensation, he will be liable because
in deposit the purpose of the delivery is for safekeeping, the
depositary is not supposed to use the thing. So if he uses the
thing, he will be liable for the loss of the thing.
Loan
There is a special kind of commodatum known as precarium.
Precarium – in this kind of commodatum the bailor has the
right to demand for the return of the thing at will at any time.
Q: When would there be a precarium?
A: There would be a precarium if there was no stipulation as
to duration nor the use of the thing unless there is a custom.
So no agreement as to period or no agreement as to
particular use then the bailor would have the right to demand
the thing at any time or the use of the thing is merely
tolerated.
From this rule, you should be able to conclude that even if
commadatum is essentially gratuitous, if there was a period
agreed upon as a rule the bailor should respect the period. He
cannot demand for the return of the thing just because there
is no payment. But there are exceptions:
1. Even if there was a period, he can demand for the
return if there is an urgent need on the part of the
bailor. But in that scenario, the commadatum is not
extinguished, it is only suspended. After the bailor
have used the thing, he should return the thing to
the bailee so the latter could finish the period.
2. When the bailee committed an act of ingratitude.
The grounds will be similar to donation.
Deposit
Q: Are checking accounts, savings account, dollar accounts
irregular deposits?
A: No. They are not deposits under the law because they are
governed by the rules on mutuum (loan). The bank is the
debtor. SC called these deposits “in the nature of irregular
deposits” but not regular deposits because the banks use the
money that is why it is in the nature of irregular deposits.
Irregular Deposits – these are deposits where the depositary
has the right to use the thing because normally in an ordinary
deposit, the depositary has no right to use because the
purpose is safekeeping. But if he has the right to use, that
deposit may be called an irregular deposit, the limitation of
the law is that the use must not be the principal purpose (the
principal purpose should be the safekeeping).
Examples: Car was delivered to you as depositary. Kung
pwede mo gamitin araw araw sa paghatid
sundo sa mga anak mo, hindi ito deposit, mukhang
commodatum ito kung walang bayad for the use. But if the
delivery is for safekeeping but the depositor allowed you to
use the car for an occasion – that is an irregular deposit
because the depositary has the right to use the thing with the
permission of the depositor.
Another scenario where the depositary would have the right
to use and therefore the deposit is an irregular deposit - when
the preservation of the thing deposited delivered to
depositary requires the use of the thing like using the car to
preserve it.

BE: The parties in a contract of loan of money agreed that

the yearly interest rate is 12% and it can be increased if
there is a law that would authorize the increase of interest
rates. Suppose the lender would increase the rate by 5% to
be paid by the borrower without a law authorizing such
increase. Would the lender’s action be just and valid? What
is the remedy of the borrower?
SA: Not valid because by the agreement of the parties, the
increase in the rate will only be made if there is a law that
would authorize the increase.

SC Case: There can be no valid increase without a law

authorizing it but in this case the Bangko Sentral issued a
resolution increasing the maximum rate. The SC said the
banks cannot increase the interest rates because a Monetary
Board Resolution is not the same as a law. It may have the
effect of a law but that is not a law and therefore that could
not be a basis.

Credit Transaction notes is incomplete. Refer to

your codal.

Page 58 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
CREDIT TRANSACTIONS
Quiz

1. Deposit is a real contract – TRUE

2. A contract of deposit is not covered by the statute of frauds – FALSE
3. If deposit has been made by capacitated person, if perfected with another who is not a depositor shall only have an action
to recover the thing deposited while it is still in the possession of the depositary - FALSE
4. Depositary is obliged to keep the thing safely and to return it to the depositor – FALSE
5. If deposit with a third person is allowed, the depositary shall not be liable for the loss – FALSE
6. The depositary cannot make use of the thing deposited without the express permission of the depositor – FALSE
7. When depositary has permission to use the thing deposited the contract loses the concept of deposit and becomes a loan -
FALSE
8. Depositary cannot demand that the depositor prove his ownership of the thing deposited – TRUE
9. The thing deposited must be returned to the depositor even though there is a specified period or time for such – FALSE
10. The deposit of effects made by travelers of inns is a necessary deposit – TRUE
11. Contracts of loan and deposit are essentially gratuitous – FALSE
12. The bailor in commodatum acquires the use of the thing loaned without compensation but not the fruits, if there is a
stipulation to the contrary, the contract ceases to be commodatum
13. Bailee shall not be liable for loss of thing if it should be through fortuitous event. –FALSE
14. A contract of deposit is a consensual contract, thus xxx to deliver arise. – FALSE
15. An escalation clause is void if there is no de-escalation clause – FALSE (true only if loans in banks)
16. While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot
pay. The one is the insurer of the debt, the other is the insurer of the solvency of the debtor. – TRUE
17. Guaranty is essentially gratuitous. – FALSE
18. A guaranty may be constituted to guaranty the performance of a voidable contract. - TRUE
19. A guaranty may also be given as security for future debts, the amount of which is not yet known. – TRUE
20. The guarantor cannot be compelled to pay the credit unless the latter has exhausted all the properties of the debtor and has
resorted to all the legal remedies against the debtor. - FALSE

Page 59 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008